A struggling seller offering a steep discount looks like the deal of the year — right up until a later trustee argues the price was never fair value to begin with, and asks a court to unwind it.
Key takeaways
A business under real financial pressure sometimes needs to sell before a formal insolvency proceeding starts — and a buyer who moves quickly and pays a fair price can genuinely help everyone involved, including the seller's creditors, by avoiding a value-destroying formal process altogether. The risk isn't buying from a distressed seller. It's buying too cheaply from one, in a way a later trustee can undo.
BIA s. 96, the transfer-at-undervalue provision, lets a court declare a transfer void or order payment of the difference between the consideration paid and the property's fair market value, where specific conditions are met. The conditions differ depending on whether the buyer dealt with the seller at arm's length. For a non-arm's-length transfer, the lookback runs up to five years before the initial bankruptcy event, and the test is simply whether the debtor was insolvent at the time, was rendered insolvent by the transfer, or intended to defraud, defeat or delay a creditor. For an arm's-length transfer — the position most third-party buyers are actually in — the lookback shortens to one year, but the transfer can still be unwound if the debtor was insolvent (or rendered insolvent) at the time and intended to defraud, defeat or delay a creditor. Being a genuine stranger to the seller narrows the exposure considerably; it does not eliminate it.
The valuation mechanics matter as much as the test itself. Under s. 96(2), the trustee states the property's fair market value and the actual consideration received, and “the values on which the court makes any finding under this section are, in the absence of evidence to the contrary, the values stated by the trustee.” That default puts the burden of proof on whoever wants to contest the trustee's numbers — which in practice means a buyer with no independent valuation of its own, obtained at the time of the transaction, has very little to push back with later. A buyer with a contemporaneous, professionally prepared valuation showing the price paid was fair market value at the time has real evidence to contradict the trustee's figures.
The two lookback windows
Non-arm's-length transfer: up to five years before the initial bankruptcy event, where the debtor was insolvent, was rendered insolvent, or intended to defraud, defeat or delay a creditor.
Arm's-length transfer: one year before the initial bankruptcy event, where the debtor was insolvent (or rendered insolvent) and intended to defraud, defeat or delay a creditor.
A genuine third-party buyer sits in the second, narrower window — but the window still exists, and it runs from the seller's later bankruptcy, a date the buyer doesn't control and may not see coming at the time of closing.
A distressed seller's own secured lender leaves a visible trail before enforcing. BIA s. 244(1)–(2) requires a secured creditor intending to enforce against “all or substantially all” of an insolvent person's inventory, receivables or other property to send a formal notice of that intention, and the creditor “shall not enforce the security… until the expiry of ten days after sending that notice,” unless the insolvent person consents — and s. 244(2.1) specifically bars that consent from being obtained before the notice is sent. For a buyer doing diligence on a distressed target, confirming whether the seller's lender has already sent a s. 244 notice is a direct, checkable signal of how close the seller actually is to a forced enforcement, independent of anything the seller's own management says about its timeline.
Where the seller's business is federally regulated or based in British Columbia, employment continuity through a subsequent receivership works differently than it does in Ontario — BC's Employment Standards Act s. 97 deems employment “continuous and uninterrupted” through a disposition or receivership automatically, a broader and more automatic rule than Ontario's employer-conditional continuity. That distinction matters if the buyer's plan involves the target continuing to operate, with the same workforce, through any period of financial uncertainty before closing.
Where the discount being offered looks too steep to be comfortable, or the seller's own timeline suggests a formal proceeding is close, the cleaner route is often to let the process start and buy through it instead — see acquiring assets through a court-supervised process for how a CCAA sale gives a buyer a court order clearing the assets, rather than a private transaction a later trustee can still challenge. The same discipline used to keep a healthy business's real estate insulated from its own operating liabilities — see separating property into a distinct holding company — runs in reverse here: a seller who tries to move valuable assets out of the operating company on the eve of insolvency, for inadequate consideration, is the fact pattern s. 96 exists to catch, and a buyer on the other side of that specific transaction inherits the exposure along with the asset.
A buyer is approached directly by a manufacturing business owner facing a cash crunch, offering the company's equipment and inventory at a price the buyer's own quick estimate puts well below replacement value. Rather than closing immediately on the seller's own numbers, the buyer's counsel confirms the parties are genuinely at arm's length, commissions an independent appraisal of the assets before closing, and checks whether the seller's asset-based lender has sent a s. 244 notice — it hasn't, but the seller confirms a forbearance period is close to expiring. The buyer proceeds, structured as an asset purchase that excludes the seller's cash, receivables and an unassignable municipal contract, at a price the independent appraisal supports as within a defensible range of fair market value — not simply the lowest number the seller was willing to accept. If the seller does end up in a subsequent bankruptcy within the following year, the buyer's contemporaneous appraisal is exactly the “evidence to the contrary” s. 96(2) contemplates against any later argument that the price was an undervalue.
No — the risk under BIA s. 96 turns on whether the transfer was for less than fair market value, not on the seller's financial condition alone. A buyer who pays a defensible fair-market-value price, supported by its own independent valuation, is in a materially different position than one who simply accepted the lowest number a desperate seller offered.
One year from the date of the seller's initial bankruptcy event under BIA s. 96(1)(a) — which is a date the buyer doesn't control and may occur well after closing. There is no way to shorten that statutory window; the practical protection is having genuine, documented fair-value evidence in place at the time of the transaction.
It's a useful signal, not a guarantee. BIA s. 244 requires ten days' notice before a secured creditor enforces against substantially all of an insolvent debtor's property, so the absence of a notice on file suggests enforcement isn't imminent — but it doesn't mean the seller isn't already insolvent for the separate purposes of a later s. 96 analysis.
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