How long after closing can a trustee attack a business sale as a transfer at undervalue?

The two windows are not symmetrical

The shorthand — one year at arm’s length, five years otherwise — describes the windows, not the test. Where the buyer “was dealing at arm’s length with the debtor”, s.96(1)(a) requires the trustee to prove all three of a transfer inside the one-year window, a debtor insolvent at the time or rendered insolvent by it, and “the debtor intended to defraud, defeat or delay a creditor”. That last element is the seller’s state of mind, not the buyer’s, and a buyer who negotiated hard has not thereby supplied it. Where the parties were not at arm’s length, s.96(1)(b) drops the intent requirement inside the same one-year window, and extends to a second window — “the period that begins on the day that is five years before the date of the initial bankruptcy event and ends on the day before the day on which the period referred to in subparagraph (i) begins” — needing only insolvency or intent, not both.

The clock runs from a defined event, not from closing

Both windows run from “the date of the initial bankruptcy event”, which s.2 defines as the earliest of an assignment, a proposal, a notice of intention and the other listed events — not the closing date, and not the date the trustee applies to court. A sale that closes well outside what looks like a one-year window from the bankruptcy filing can still be inside it once you measure from the right date.

Who else can be reached

The remedy is not limited to the direct counterparty. Section 96(3) lets the court also reach anyone “privy” to the transfer, defined as a person “not dealing at arm’s length with a party to a transfer and, by reason of the transfer, directly or indirectly, receives a benefit”. Both elements are required — an independent adviser earning a fee on the deal is not caught, but a payment out of the purchase price to a company connected to the buyer is. And under s.96(2), the trustee’s stated fair-market-value opinion governs the court’s finding “in the absence of evidence to the contrary” — so a contemporaneous independent appraisal and a documented marketing history, both dated at closing, are what actually answer a s.96 claim later.

Case Files

The bargain price that became a transfer at undervalue is this exact fact pattern: an arm’s-length purchase that survived a s.96(1)(a) attack because the trustee could not prove the seller’s intent, next to a $150,000 side payment to a non-arm’s-length recipient that s.96(3) reached without any intent element at all. For the different, no-intent-required attack on a payment routed to an existing creditor rather than a purchase price, see A British Columbia creditor sued inside sixty days, and the preference attack needed no proof of intent at all — and for how the two remedies differ, see the next question.

Sources

• • Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s.96 — marginal note Transfer at undervalue: (1)(a) and (b) the two limbs and windows; (2) the trustee’s stated values; (3) meaning of “person who is privy”.
• • Bankruptcy and Insolvency Act, s.2 — definition of “date of the initial bankruptcy event”, which the s.96 windows run from.
• • Treadstone Law — fraudulent conveyance risk when buying a business below value — the buyer-side risk of a bargain purchase; it is written to Ontario’s general law and does not walk through the BIA s.96 windows, which are the federal rule this page turns on.
• • No provision sets a percentage discount at which a price becomes an undervalue — it is a finding of fact under s.96(2), not a bright line.