Can a creditor undo a payment made just before a business sale closes?

The two tests, and why the window matters

British Columbia’s ordinary rule, s.3, needs proof of intent: a disposition by an insolvent person is void as against an injured creditor only if made with intent to prefer. But s.4 does something different inside a fixed window: “if, without intent, the disposition gives the creditor a preference over some or all of the other creditors”, the effect test in s.3(b) applies anyway, in a proceeding brought within 60 days of the disposition. Section 5(1) then defines the effect that matters: a disposition is deemed to give a preference if the creditor recovers “greater proportionately than could be recovered by unsecured creditors generally” out of what is left. No correspondence, no motive, no state of mind from anyone — only arithmetic.

Where the answer flips: the province

Ontario runs the same sixty-day number to a different question. Its Assignments and Preferences Act s.4(3) provides that a preferential transaction attacked within sixty days “shall…be presumed, in the absence of evidence to the contrary, to have been made with the intent mentioned in subsection (2)”. That is a rebuttable evidentiary shortcut, not a substitute for intent — the recipient can still win by showing the payment was not meant to prefer anyone. Outside British Columbia’s window, or under Ontario’s Act at any time, the claimant carries the full burden of proving intent from the start. Whether your file runs on the BC test or the Ontario test therefore turns on one fact: which province’s statute governs the disposition, not how the deal was structured.

A buyer can be pulled in too

This is not only a risk between a vendor and its own creditor. British Columbia’s s.6(2) reaches “a payment or transfer of some or all of the consideration by the purchaser to a creditor of the vendor” the same way it would reach a payment by the vendor directly — a common mechanic on an asset purchase where part of the price is routed at closing to pay off a supplier or lender the target needs kept onside. The sale itself is not attacked; the routed payment is, if the underlying disposition meets either branch of the Act.

Case Files

A British Columbia creditor sued inside sixty days, and the preference attack needed no proof of intent at all is this mechanic end to end: a $150,000 closing payment to a vendor’s supplier, unwound under s.4 and s.5(1) with no inquiry into anyone’s intent. For the related but different attack on a price that was simply too low rather than a payment routed to a creditor, see The bargain price that became a transfer at undervalue.

Sources

• • Fraudulent Preference Act, R.S.B.C. 1996, c. 164 — s.3 (the ordinary intent test); s.4 (the no-intent effect test inside 60 days); s.5(1) (what counts as a preference); s.6(2) (a purchaser’s payment to a creditor of the vendor).
• • Assignments and Preferences Act, R.S.O. 1990, c. A.33 — s.4(3), the rebuttable 60-day presumption of intent.
• • Treadstone Law — can a security interest granted before insolvency be undone as a preference — general Ontario-oriented background on preference claims; it does not address British Columbia’s separate no-intent branch, which is the rule this page turns on.
• • Not addressed: whether other provinces run a comparable no-intent effect test was not independently verified here. Treat the BC/Ontario contrast above as specific to those two provinces.