What’s the difference between a fraudulent preference and a transfer at undervalue?

Two provisions, built the same way

Inside a bankruptcy, the two claims sit next to each other and are structured almost identically. Section 95 voids a payment, charge or transfer “in favour of a creditor who is dealing at arm’s length with the insolvent person” where it is made “with a view to giving that creditor a preference over another creditor”, if made “during the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy”. Where the creditor is not at arm’s length, s.95(1)(b) drops the intent language — “that has the effect of giving that creditor a preference over another creditor” is enough — and the window extends to twelve months. Section 96 runs the same arm’s-length/non-arm’s-length structure over one and five years for a transfer at undervalue instead of a preferential payment. Same architecture, two different acts being attacked.

The trigger is the difference that matters

A preference needs an existing debt: the payment goes to someone the debtor already owed, and the question is whether it gave them more than the general pool would have. A transfer at undervalue needs no pre-existing debt at all — it asks only whether what came back into the estate was worth less than what went out, most often a sale, and the buyer need not have been a creditor of anything before the deal. A single closing can raise both claims at once and against different people: a purchase price that was too low is a s.96 problem for the buyer, and a slice of that same price routed to a supplier who was owed money is a separate s.95, or provincial preference-act, problem for the supplier.

Outside a formal bankruptcy, the source of law changes

Sections 95 and 96 are BIA provisions, available to a trustee once there is a bankruptcy. If the vendor never files — no assignment, no trustee, no proposal — a preference is instead attacked under the provincial fraudulent-preference statute (British Columbia’s and Ontario’s run different tests on the same sixty-day idea; see the first question in this set), and a bargain sale is attacked as a fraudulent conveyance under the equivalent provincial statute, by a creditor rather than a trustee. The federal and provincial regimes overlap in purpose but are not the same cause of action, and which one is live depends on whether anyone has actually gone bankrupt yet.

Case Files

A British Columbia creditor sued inside sixty days, and the preference attack needed no proof of intent at all is the preference side of this line, run entirely under a provincial statute because the vendor never went bankrupt. The bargain price that became a transfer at undervalue is the undervalue side, run under BIA s.96 because a trustee was eventually appointed. Reading them together is the fastest way to see the trigger fact — a payment to a creditor, versus a price paid for the asset — that keeps the two claims apart.

Sources

• • Bankruptcy and Insolvency Act, s.95 — marginal note Preferences: (1)(a) arm’s-length, intent, three-month window; (1)(b) non-arm’s-length, effect only, twelve-month window; (2) the preference presumption.
• • Bankruptcy and Insolvency Act, s.96 — marginal note Transfer at undervalue, discussed in the previous question.
• • Treadstone Law — fraudulent conveyance vs. fraudulent preference in Ontario — the same distinction under Ontario’s provincial law, outside a formal bankruptcy.