Enhancing the Bankrupt Estate

AuthorRoderick J. Wood
Pages188-235
188
CHAPTER 7
ENHANCING THE
BANKRUPT ESTATE
Anticipating a bankruptcy, a debtor will sometimes transfer assets to
another person in a pre-bankruptcy transaction. Gifts of property may
be given to friends or relatives. Assets may be sold at a price that is
signif‌icantly less than their value. Favoured creditors may be selectively
paid off, leaving less property to be shared in bankruptcy among the
remaining creditors. As the debtor no longer owns these assets at the
date of bankruptcy, they cannot vest in the tr ustee. The possibility that
a debtor will engage in such activities threatens the integrity of the
bankruptcy process, since the creditors will be prejudiced by these ac-
tions. Bankruptcy law gives the trustee extensive powers to impeach
pre-bankruptcy transactions. The trustee can use these powers to claw
back the asset or its value from the recipient. This will swell and en-
hance the bankrupt estate, and ensure that more assets will be available
for division among the participating creditors.
A. IMPEACHING PRE-BANKRUPTCY
TRA NSAC TIO NS
The trustee has a variety of powers that can be used to impeach pre-
bankruptcy transactions. There are many different terms that are used
to describe the exercise of these powers. Judges and commentators
have referred to this process as “avoiding,” “annulling,” “reversing,”
“rescinding,” “setting aside,” “reviewing,” “impugning,” or “impeaching”
Enhancing t he Bankrupt Estate189
the transaction in question. This usage is misleading to the extent that
it suggests that the process, when successful, necessarily results in the
avoidance of the transaction and a recovery of the property that was
transferred. Some of the powers do not have this effect but respond by
giving the trustee a personal right against the recipient of the property.
In order to capture the full ar ray of outcomes, these powers are referred
to collectively as impeachment powers. Below, terms that refer to an
avoidance of the underlying transaction will be used only in connec-
tion with impeachment powers that specif‌ically provide this type of
remedy.
1) The Sources of the Impeachment Powers
Several of the impeachment powers that are available to trustees have
their source in provisions of the BIA. However, a trustee is not limited
to these provisions when seeking to impeach pre-bankruptcy trans-
actions. The BIA expressly provides that the trustee may invoke laws
or statutes relating to property and civil rights that are not in conf‌lict
with the BIA “as supplementary to and in addition to the rights and
remedies provided by this Act.1 The Supreme Court of Canada in Rob-
inson v Countrywide Factors Ltd2 held that provincial legislation that
gave creditors the right to impeach a transfer of property as a fraudu-
lent preference is not rendered inoperative by the fact that the BIA also
contains preference provisions. As a result, a trustee may impeach a
transaction by using the BIA provisions, provincial law, or both.
The Bankruptcy Act of 1919 gave the trustee the power to impeach
preferences and settlements. In 1961 amendments to the bankruptcy
statute gave the trustee additional impeachment powers against distri-
butions to shareholders and against reviewable transactions with relat-
ed persons or other non–arm’s length parties. The 2009 amendments
to the BIA eliminated the settlement and reviewable transaction provi-
sions and substituted a provision dealing with transfers at undervalue.
There are now four distinct impeachment powers contained in the
BIA. A pre-bankruptcy transaction may be impeached as:
a transfer at undervalue;
a preference;
a post-initiation transfer; or
a distribution to a shareholder.
1 BIA, s 72 .
BANKRUPTCY AND INSOLVENC Y LAW190
The f‌irst two powers have the widest potenti al application and therefore
are the most signif‌icant. The third power is limited in scope, covering
only transactions that occur after insolvency proceedings are initiat-
ed but before the date of bankruptcy. For example, in an involuntary
bankruptcy it would cover transactions that occur after an application
for a bankruptcy order is f‌iled by a creditor but before the court grants
a bankruptcy order.
Provincial law gives creditors avoidance powers in respect of
fraudulent preferences and in respect of fraudulent conveyances. In
all provinces, fraudulent preferences law is derived from a provincial
statute. The source of the avoidance powers in respect of fraudulent
conveyances varies somewhat from one province to another. Fraudu-
lent conveyances law is derived from the Statute of Elizabeth3 of 1571.
This Act was received into the law of the var ious provinces. Some of the
provinces have re-enacted its provisions in a provincial statute called
the Fraudulent Conveyances Act.4 The matter is complicated by the fact
that the provincial fraudulent preferences legislation also contains a
single provision covering fraudulent conveyances. Courts have held
that this was not intended to impliedly repeal the Statute of Elizabeth.5
As a result, there are three bases upon which a transfer may be im-
peached through use of provincial law. First, it may be challenged as a
fraudulent conveyance under the Statute of Elizabeth or the provincial
statutes that re-enact it. There are no substantive differences between
these two sources of fraudulent conveyances law, and hereafter refer-
ences to the Fraudulent Conveyances Act will encompass both. Second,
a transfer may be challenged as a fraudulent conveyance under the
special provision found in provincial fraudulent preference legisla-
tion. Third, it may be challenged as a f raudulent preference pursuant to
provincial fraudulent preference legislation.
2) The Objectives of the Provisions
The general objectives of the impeachment powers are easy to iden-
tif y. The provisions are directed again st transactions that diminish the
value that would otherwise be available for distribution to the credit-
ors, or that undermine the statutory scheme of distribution among the
creditors. The f‌irst kind of transaction results in less for all creditors.
The second kind of transaction does not affect the total amount avail-
3 13 Eliz I, c 5.
4 See, for exa mple, Fraudulent Conveyance Act,RSBC 1996, c 163.
5 Bank of Montreal v Re is,[1925] 3 DLR 125 (Sask KB); Bank of Montreal v Crowell

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