Two provisions of the Bankruptcy and Insolvency Act reach a purchase that has already closed. Section 96 lets a court unwind a transfer at undervalue or order the shortfall paid into the estate. Section 95 voids a preference given to a creditor. Paying fair market value answers the first and answers nothing at all under the second.
Key takeaways
SECTION 01 OF 10
Section 95(1), marginal note Preferences, catches a transfer made “by an insolvent person” that runs “in favour of a creditor”. The vice is favouritism among creditors, and the transfer is void as against the trustee by force of the section, with no application required.
Section 96(1), marginal note Transfer at undervalue, needs a court and reaches anyone. On the trustee’s application a court may void the transfer “or order that a party to the transfer or any other person who is privy to the transfer… 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 first question about your deal is therefore not the price but whether you were a creditor too — Treadstone Law on conveyance versus preference.
SECTION 02 OF 10
Where “the party was dealing at arm’s length with the debtor”, paragraph 96(1)(a) needs all three subparagraphs. The transfer “occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and that ends on the date of the bankruptcy”; “the debtor was insolvent at the time of the transfer or was rendered insolvent by it”; and “the debtor intended to defraud, defeat or delay a creditor”.
The third element is the seller’s state of mind, not the buyer’s, and is proved by inference: in Montor Business Corporation v. Goldfinger, 2016 ONCA 406 (docket C57879), the Court of Appeal for Ontario recorded that “An inference of intent may arise from the existence of one or more badges of fraud. However, the presence of such indicia does not mandate a finding of intent.”
SECTION 03 OF 10
The asymmetry in paragraph 96(1)(b) is the point of this page. Inside one year the trustee shows the undervalue and the date and stops: insolvency is not an element, intent is not an element. Past that year subparagraph (b)(ii) reaches a transfer that “occurred during the period that begins on the day that is five years before the date of the initial bankruptcy event”, on proof of either insolvency or intent, not both.
The same purchase, at the same price, on the same day, is exposed for one year on three elements at arm’s length and five years on one or two if the parties are connected. Management buyouts, sales to a supplier on the board and family transitions start on the wrong side. Treadstone Law, from the seller’s chair, on selling below market value to a relative.
SECTION 04 OF 10
The threshold is not a bargain price. Section 2 defines the term as “a disposition of property or provision of services for which no consideration is received by the debtor or for which the consideration received by the debtor is conspicuously less than the fair market value of the consideration given by the debtor”. A discount for declining revenue is a price, not a gift.
Subsection 96(2) decides who speaks first: “the trustee shall state what, in the trustee’s opinion, was the fair market value of the property or services”, 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”. So paying a fair price is an evidentiary job, not an assertion, done years later against a number already before the court.
SECTION 05 OF 10
Section 4(2) relates individuals connected by blood relationship, marriage, common-law partnership or adoption, and an entity to whoever controls it. Subsection (5) deems related persons not to deal at arm’s length, and adds that “For the purpose of paragraph 95(1)(b) or 96(1)(b), the persons are, in the absence of evidence to the contrary, deemed not to deal with each other at arm’s length.”
Being unrelated does not end it. Subsection (4): “It is a question of fact whether persons not related to one another were at a particular time dealing with each other at arm’s length.” In Montor the Court of Appeal took from Piikani Energy Corporation (Trustee of) v. 607385 Alberta Ltd., 2013 ABCA 293, this guidance: “was there a common mind which directed the bargaining for both parties to a transaction; were the parties to the transaction acting in concert without separate interests; and was there de facto control?”
SECTION 06 OF 10
A preference is not about what you paid. Paragraph 95(1)(a) catches a transfer to a creditor “with a view to giving that creditor a preference over another creditor” in the three months before the initial bankruptcy event. For a creditor “who is not dealing at arm’s length”, paragraph (b) drops the state of mind and catches a transfer “that has the effect of giving that creditor a preference” across twelve months.
Intent is largely supplied even at arm’s length. subsection 95(2) presumes it where the transaction has that effect, “even if it was made… under pressure — and evidence of pressure is not admissible to support the transaction”. And “creditor includes a surety or guarantor for the debt due to the creditor”, so a buyer who advanced bridge money, set the price off against a loan or guaranteed the seller’s bank line is inside subsection 95(3). Treadstone Law, lender side, on security granted shortly before insolvency.
SECTION 07 OF 10
The two orders under section 96(1) are alternatives, and the money judgment is not confined to the buyer. Subsection (3) says “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”.
Section 98 follows the money if the assets moved on, and subsection (3) protects the next buyer rather than the first: someone who “has paid or given therefor in good faith adequate valuable consideration” is not caught, “but the trustee’s recourse shall be solely against the person entering into the transaction with the bankrupt”. And section 97 is no defence: it validates good-faith dealings only “subject to the provisions of this Act respecting preferences and transfers at undervalue”.
SECTION 08 OF 10
Every window runs from the “date of the initial bankruptcy event”, which section 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 or an application for a bankruptcy order. A notice of intention filed in March starts the clock in March, whatever happens the next January.
They also operate outside bankruptcy. Section 101.1(1): “Sections 95 to 101 apply, with any modifications that the circumstances require, to a proposal made under Division I of Part III unless the proposal provides otherwise.” CCAA section 36.1(1) extends the same sections to a compromise or arrangement, reading “trustee” as “monitor”. So a seller that is restructuring rather than failing is no comfort.
SECTION 09 OF 10
A trustee is not the only one who can attack the transfer, and the federal clocks do not bind a creditor suing alone. Ontario’s Fraudulent Conveyances Act section 2 voids a conveyance “made with intent to defeat, hinder, delay or defraud creditors”, with no review period at all. Section 3 shelters property “conveyed upon good consideration and in good faith” where the buyer had no “notice or knowledge of the intent”, and section 4 applies section 2 “despite the fact that it was executed upon a valuable consideration” unless section 3 protects it. A real price and no knowledge; neither alone.
The Assignments and Preferences Act carries the provincial preference rule, with intent presumed under subsection 4(3) where proceedings begin within sixty days, and section 5(1) protecting a good-faith sale “in the ordinary course of trade” to an innocent purchaser. Subsection 5(2) is the trap in a distressed deal: paying the price straight to one of the seller’s creditors can be “valid as respects the purchaser” and still “void as respects the creditor to whom it is made”. Ontario only.
SECTION 10 OF 10
The elements are about the seller, so a buyer’s protection is evidentiary. Get a valuation before closing and keep the workings, because subsection 96(2) makes the trustee’s numbers the starting point. Keep the negotiation record, pay by traceable means, and write down what the seller says about demands and arrears. See Treadstone Law on buying a business below market value.
Price solvency representations honestly: a promise is a claim against a seller who by hypothesis has no money — see whether an indemnity survives bankruptcy.
Nothing above says any transaction would or would not be set aside: these sections say what a court may do on facts proved to it. And this is the clawback on a completed private purchase — a court-supervised sale is a different transaction with a different vendor — see buying from a trustee, buying from a receiver, selling out of insolvency, buying before insolvency and, for the tax route, section 160.
It answers the transfer-at-undervalue question under BIA s.96, since that section turns on consideration conspicuously less than fair market value. It answers nothing under BIA s.95, the preference provision, where the question is which creditor got paid rather than what price was paid.
Section 96 runs one year against an arm’s-length buyer, requiring the trustee to prove undervalue, insolvency and intent to defraud. Against a non-arm’s-length buyer it runs five years, and inside the first year the trustee only has to prove the undervalue and the date — insolvency and intent are not elements at all.
No. Section 101.1 carries sections 95 to 101 into a proposal, and CCAA section 36.1 carries them into a restructuring, so a seller that is restructuring rather than being adjudged bankrupt still exposes the buyer to the same provisions.
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