Anonymised, illustrative composite. Buying cheaply from a struggling seller is a risk of its own, separate from any preference analysis — and the people the section reaches are narrower, and more specific, than deal teams assume.
At a glance
A Lower Mainland buyer with a cabinet-installation business bought the assets of an architectural millwork shop — CNC routers, edge-banders, a spray line, work in progress and the shop’s name — for $1,150,000. The vendor was two years into a decline caused by a residential-construction slowdown and a fixed-price contract that had gone badly wrong.
The buyer had done the work. A third-party equipment and going-concern appraisal supported $1,850,000; the shop had been listed for fourteen months at $1,795,000 without a single offer; three other approaches had gone nowhere.
Eleven months after closing the vendor company made an assignment in bankruptcy with $2,300,000 of unsecured claims, most of it a disputed judgment on the fixed-price contract.
The trustee wrote to the buyer seeking $700,000 — the gap between the appraised $1,850,000 and the $1,150,000 paid — and named as a second respondent a numbered company owned by the buyer’s spouse, which had invoiced $150,000 as a finder’s fee on the transaction and been paid out of the closing funds.
The buyer’s first reaction was that an arm’s-length purchase at a negotiated price cannot be reopened. That is not what the section says.
The trustee’s claim was built on its own valuation opinion, and that matters procedurally. Under BIA s.96(2) the trustee states what in its opinion was the fair market value of the property and the value of the actual consideration given, 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”.
The buyer’s evidence to the contrary was the appraisal, the fourteen-month listing history at $1,795,000 with no offer, and a broker’s file recording three declined approaches. Against that, the trustee’s $1,850,000 opinion — which valued the equipment on a going-concern basis for a shop that had no work booked past ten weeks — did not hold.
The $150,000 was a different problem. It was not consideration to the vendor at all. It came out of the price and went to a company owned by the buyer’s spouse.
BIA s.96(1) lets a court, on the trustee’s application, “declare that a transfer at undervalue is void as against, or, in Quebec, may not be set up against, the trustee”, or order the party or a person privy to it to “pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor”.
The two limbs are not symmetrical, and the difference is what saved the purchase. Where “the party was dealing at arm’s length with the debtor”, the trustee must establish all three of: a transfer inside the year before the date of the initial bankruptcy event; a debtor insolvent at the time or rendered insolvent by the transfer; and that “the debtor intended to defraud, defeat or delay a creditor”. Where the party was not at arm’s length, a transfer inside that same one-year window needs none of that, and a transfer in the outer window — one that “occurred during 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” — needs insolvency or intent, but not both.
So the widely repeated shorthand — one year at arm’s length, five years otherwise — is a description of the windows, not of the test. At arm’s length the window is the easy part and the debtor’s intent is the hard part.
Two units are worth pinning. The clock runs from “the date of the initial bankruptcy event”, which BIA s.2 defines as “the earliest of the day on which any one of the following is made, filed or commenced” — an assignment, a proposal, a notice of intention, and the other listed events. It is not the date the trustee applies, and it is not the closing date. And the intent that matters is the debtor’s, not the buyer’s: a buyer who negotiated hard has not thereby supplied the element.
The reach of the remedy is the part most often overstated. Section 96(3) defines it: “a person who is privy means a person who is not dealing at arm’s length with a party to a transfer and, by reason of the transfer, directly or indirectly, receives a benefit or causes a benefit to be received by another person”. Both elements are required. An independent lawyer, accountant or broker earning a fee on the deal deals at arm’s length with the buyer and is not privy. A company owned by the buyer’s spouse, paid out of the purchase price, satisfies both elements exactly.
The application settled. The purchase stood: the trustee could not carry s.96(1)(a)(iii) on a vendor who had marketed the business openly for fourteen months and taken the only offer made.
The numbered company repaid the $150,000 to the estate with costs. The buyer had treated that payment as a private arrangement about how the price was split. Under s.96(3) it was a benefit received by a non-arm’s-length person by reason of the transfer, and it was the only part of the transaction that was.
For the adjacent analysis where the recipient is a creditor rather than a purchaser, see one creditor paid at closing, and a payment set aside.
If the trustee’s $1,850,000 opinion had gone unanswered, s.96(2) would have made it the court’s starting figure and the claim would have been $700,000 on a business the buyer paid $1,150,000 for.
What defeated it was not argument. It was a dated third-party appraisal, a listing history and a broker’s file — all of which existed at closing and cost about $6,500, and none of which could have been created afterwards.
The tell was the finder’s fee. Any payment out of the purchase price to someone connected to the buyer is the one element of a bargain purchase that does not need the debtor’s intent to be attacked.
The second tell is quieter: a vendor whose distress is caused by a single disputed liability is a vendor whose bankruptcy is eleven months away and whose creditor body will be dominated by the disputing party. That is the profile in which a trustee looks hardest at what left the estate.
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