Anonymised, illustrative composite. Federal preference law needs an initial bankruptcy event and a trustee. Provincial law needs neither — and the provision that reaches a business sale is not the one most people cite.
At a glance
A buyer acquired the assets of a commercial flooring contractor — vans, installation equipment, an inventory of underlay and adhesive, a work-in-progress book and the trading name — for $890,000. The vendor was slow but not visibly failing: two years of thin profits, an overdraft at its limit, and payables running at ninety days.
The business depended on one materials supplier holding an aged payable of $214,000 and refusing further credit. Nobody would have bought the business without that relationship restored, so the buyer agreed to pay that $214,000 out of the price, direct to the supplier at closing, against a release and a fresh trading agreement. See aged payables and stretched supplier terms for how the exposure was identified.
Seventy-seven days after closing a flooring subcontractor with a $96,000 default judgment against the vendor found the vendor to be an empty shell. The proceeds had gone: $214,000 to the supplier, $310,000 to discharge the bank, and the remainder to the vendor’s principal.
The subcontractor did not petition the vendor into bankruptcy. It sued the supplier, in the Ontario Superior Court, under the province’s own preference statute — and named the buyer as a party as well.
The buyer had assumed no bankruptcy meant no preference risk. That assumption is about the wrong statute.
Purchase price $890,000, applied as $214,000 to the supplier, $310,000 to discharge the bank’s registered security, $52,000 to accrued vacation and payroll obligations at closing, and $314,000 to the vendor.
The subcontractor’s claim was $96,000 plus interest and costs. It did not attack the $310,000: the bank held registered security and was paid on a discharge, which is a different transaction. It attacked the $214,000, because that was a payment to an unsecured trade creditor made at a moment when the vendor could not pay its debts in full.
Timing mattered. Had the proceeding been brought within sixty days, a statutory presumption would have carried the intent element. At day 77 it did not, and the subcontractor had to prove intent affirmatively — which it did, from the vendor’s own emails discussing which creditors “need to be looked after to get this away” and which would “have to wait”.
Ontario’s Assignments and Preferences Act, R.S.O. 1990, c. A.33 has two operative subsections in s.4 and they do different jobs. Subsection 4(1), under the marginal note Nullity of gifts, transfers, etc., made with intent to defeat or prejudice creditors, voids a transfer of property “made by a person when insolvent or unable to pay the person’s debts in full or when the person knows that he, she or it is on the eve of insolvency, with intent to defeat, hinder, delay or prejudice creditors, or any one or more of them… as against the creditor or creditors injured, delayed or prejudiced”.
Subsection 4(2), whose marginal note is Unjust preferences, is narrower and is the one that decided this file. It voids such a transfer where it is made “to or for a creditor with the intent to give such creditor an unjust preference over other creditors or over any one or more of them”.
That is the unit distinction the deal team missed. A buyer paying a purchase price is not a creditor of the vendor, so s.4(2) does not reach the purchase. It reaches the supplier — and the bridge from the sale to the supplier is s.5(2): “In case of a valid sale of goods or other property and payment or transfer of the consideration or part thereof by the purchaser to a creditor of the vendor under circumstances that would render void such a payment or transfer by the debtor personally and directly, the payment or transfer, even though valid as respects the purchaser, is void as respects the creditor to whom it is made.”
In other words the statute expressly contemplates exactly this closing mechanic and expressly preserves the sale while striking the payment. The buyer’s own position was protected by s.5(1), which takes out of s.4 “any sale or payment made in good faith in the ordinary course of trade or calling to an innocent purchaser or person” and transfers made for a present actual payment where the money paid and the property transferred “bear a fair and reasonable relative value to the consideration therefor”.
On the sixty days: s.4(3) provides that where a transaction with or for a creditor has the effect of a preference, then in a proceeding “that, within sixty days thereafter, is brought, had or taken to impeach or set aside such transaction”, it 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 presumption window, not a limitation period. Missing it costs the claimant a presumption; it does not end the claim.
The sale was not disturbed. The payment was declared void as against the injured creditor, and the supplier paid the $96,000 judgment plus costs.
The supplier had one real answer and used it in negotiation. Section 5(4) provides that where a payment is void under the Act and valuable security was given up in consideration of it, “the creditor is entitled to have the security restored or its value made good to him before, or as a condition of, the return of the payment”. The supplier had discharged a registered purchase-money position over undelivered stock as part of the release. Quantifying it took two months and reduced the settlement.
The buyer’s loss was not money paid twice. It was a supplier relationship that had cost $214,000 to secure and was now hostile, and an indemnity claim against a vendor with nothing left.
The whole exposure was created by the payment route, not by the payment. A price of $676,000 with the buyer negotiating its own opening terms with the supplier — or a holdback of $214,000 released once the vendor had dealt with its own payables — produces the same commercial outcome and puts no purchaser-directed payment into a creditor’s hands.
The diligence step that was missing cost nothing: an execution and judgment search against the vendor would have shown the $96,000 default judgment before closing.
The tell is a vendor who tells you which creditors must be paid at closing. That is a solvency statement in commercial clothing, and close to the “eve of insolvency” language the Act uses.
The second tell is structural: any closing direction that sends part of the price to an unsecured trade creditor rather than to the vendor is the exact transaction s.5(2) is written about.
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