Anonymised, illustrative composite. A different provision from transfer-at-undervalue, a shorter clock, and a presumption of intent the seller could not simply argue away — decided not by the window, but by what the secured creditor was already entitled to.
At a glance
A buyer acquired substantially all of the assets of a commercial printing and signage company for $1,050,000: presses, cutting and finishing equipment, a customer list and the trading name. The target’s largest single asset, a large-format digital press, was subject to a purchase-money security interest held by a national equipment leasing company, with $180,000 still owing on it. To deliver the press free of that lien, the buyer agreed to have $180,000 of the purchase price paid directly to the leasing company at closing, against a discharge — an entirely ordinary mechanic for clearing title to a specific piece of secured equipment.
Ten weeks after closing, the vendor made an assignment in bankruptcy, driven by a large unrelated commercial dispute. The trustee reviewed the closing funds flow and focused on the $180,000 payment to the leasing company. The buyer’s first reaction was the same one that had worked on a prior file: an arm’s-length purchase at a fair price should not be reopened. That defence answers a transfer-at-undervalue attack. It does not answer the attack the trustee actually made.
The trustee was not arguing the sale itself was for too little. It was arguing that paying a specific creditor — the leasing company — out of the purchase price, on the eve of a bankruptcy the vendor’s other creditors knew nothing about, gave that one creditor an advantage over the rest. That is a different statutory question, with a different clock, and it does not require proof that the price paid for the business was too low.
Purchase price $1,050,000, of which $180,000 was directed to the leasing company against the press lien and the balance to the vendor. Ten weeks — inside three months — separated closing from the bankruptcy filing. An independent equipment appraisal obtained during diligence had valued the press at $195,000, $15,000 more than the amount paid to clear the lien against it.
Because there was an actual bankruptcy this time — unlike the sibling file, where the injured creditor sued under Ontario’s own preference statute precisely because no bankruptcy had happened — the trustee’s tool was the federal Act. Section 95, marginal note Preferences, is a different provision from s.96’s transfer at undervalue, with its own windows: “A transfer of property made, a provision of services made, a charge on property made, a payment made, an obligation incurred or a judicial proceeding taken or suffered by an insolvent person (a) in favour of a creditor who is dealing at arm’s length with the insolvent person…with a view to giving that creditor a preference over another creditor is void as against…the trustee if it is 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.” Three months at arm’s length, not the one year s.96 gives a transfer-at-undervalue claim — and the leasing company, an unrelated national finance company, was squarely arm’s length. Ten weeks put the payment inside the window.
Being inside the window does not by itself win the trustee’s case, but s.95 makes proving intent easier than s.96 does. Marginal note Preference presumed, subsection (2): “If the transfer, charge, payment, obligation or judicial proceeding referred to in paragraph (1)(a) has the effect of giving the creditor a preference, it is, in the absence of evidence to the contrary, presumed to have been made…with a view to giving the creditor the preference — even if it was made…under pressure — and evidence of pressure is not admissible to support the transaction.” Unlike s.96(1)(a)’s arm’s-length test, which makes the trustee prove the debtor’s actual intent to defraud, defeat or delay a creditor, s.95(2) flips the burden the moment an “effect” of preference is shown, and takes the ordinary commercial-pressure explanation off the table entirely.
The whole claim therefore turned on a question upstream of both the window and the presumption: did paying the leasing company have the effect of giving it a preference over the vendor’s other creditors at all? A secured creditor with a validly perfected interest in specific collateral is already entitled, in a bankruptcy, to be paid out of that collateral’s value ahead of the unsecured creditors the preference provisions exist to protect. Paying that creditor an amount no greater than what its own security already secured does not improve its position relative to what it would have received through the bankruptcy process regardless — it is not, in substance, a preference over anyone, whatever the timing looks like on its face. The press appraisal, obtained months before anyone was thinking about a bankruptcy, showed the collateral was worth $195,000 against a $180,000 payout: the leasing company received less than the value of what already secured it, not more.
The trustee’s preference claim was dropped once the appraisal and the security’s registration history were produced. The window and the presumption were real, but they did not decide the file — the substance of what the leasing company actually received, measured against its own entitlement, did. The trustee’s recovery effort moved to other, unrelated parts of the estate.
Had the leasing company’s security been imperfect — late-registered, or otherwise vulnerable — or had the payout exceeded the collateral’s actual value, the analysis would have come out the other way. Paying more than a secured creditor’s true entitlement, or paying a creditor whose security would not itself have survived scrutiny, does confer a real benefit at other creditors’ expense, and s.95(2)’s presumption would then have run against the buyer with no pressure defence available to answer it. The appraisal is what turned a payment that looked, on its timing alone, exactly like the transaction s.95 is written to catch, into one that was not a preference in substance.
The tell is a payoff figure taken straight from the lender’s own demand letter, never checked against an independent value for the specific asset securing it. A payout that has not been reconciled to the collateral’s actual worth is a number nobody has tested — and inside a three-month window, at arm’s length, that is the one test that decides whether a “secured creditor” defence to a preference claim will actually hold.
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