Enhancing the Bankrupt Estate

AuthorRoderick J. Wood
Anticipating a bank ruptcy, a debtor will sometimes transfer assets to
another person in a pre-bankr uptcy 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 bank ruptcy among the
remaining cred itors. As the debtor no longer owns these assets at t he
date of bankruptcy, they cannot vest in the tr ustee. The possibility th at
a debtor will engage in such activities t hreatens the integr ity of the
bankruptcy process, since the creditors will be prejudiced by t hese ac-
tions. Bankr uptcy law gives the trustee extensive powers to impeach
pre-bankruptcy transactions. The trustee ca n use these powers to claw
back the asset or its value from the recipient. This w ill swell and en-
hance the bankr upt estate, and ensure that more assets will be avail able
for division among the participating creditors.
The trustee has a var iety of powers that can be used to i mpeach pre-
bankruptcy t ransactions. There are many different terms that are used
to describe the exerci se 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 Estate 189
the transact ion in question. This usage is misleading to the extent that
it suggests that the process, when successful, necessar ily results in the
avoidance of the transaction and a recover y of the property that was
transferred. Some of the powers do not have this effect but respond by
giving the tr ustee 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 t hat specif‌ically provide th is type of
re me dy.
1) The Sources of the Impeachment Powers
Several of the impeachment powers t hat are available to trustee s have
their source in provisions of the BI A. However, a trustee is not limited
to these provisions when seek ing to impeach pre-bankruptcy trans-
actions. The BIA expressly provides that the trustee may invoke laws
or statutes relating to property and civil rights th at are not in conf‌lict
with the BIA “as supplementary to and in addition to the right s and
remedies provided by this Act.1 The Supreme Court of Canada in Rob-
inson v Countrywide Factors Ltd2 held that provinci al 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 re sult, a trustee may impe ach a
transaction by using the BIA provi sions, provinci al law, or both.
The Bankruptcy Act of 1919 gave the trustee the power to impeach
preferences and settlements. In 1961 amendments to the bankr uptcy
statute gave the trustee additional impeachment powers against di stri-
butions to shareholders and against reviewable tr ansactions with rel at-
ed persons or other non–ar m’s length parties. The 2009 amendments
to the BIA eliminated t he settlement a nd reviewable t ransact ion provi-
sions and substituted a provision deali ng with transfers at under value.
There are now four distinct impeachment powers contained in the
BIA. A pre-bankr uptcy 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 .
The f‌irst two powers have the widest potenti al application and therefore
are the most signif‌icant. The th ird power is limited in scope, covering
only transactions that occur after insolvency proceedi ngs are initiat-
ed but before the date of bankruptcy. For example, in an involuntary
bankruptcy it would cover tran sactions that occur after an applicat ion
for a bankruptcy order is f‌iled by a cred itor but before the court grants
a bankruptcy order.
Provincial law g ives creditors avoidance powers in respect of
fraudulent preferences and in respect of fraudulent conveyances. In
all provinces, fraudulent preferences law is der ived 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 prov isions 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. Court s have held
that this wa s not intended to impliedly repeal the Statute of Elizabeth.5
As a result, there are three bases upon which a tran sfer 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 provi ncial
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 provinci al fraudulent preference legisla-
tion. Third, it may be challenged as a f raudulent preference pursuant to
provincia l fraudulent preference leg islation.
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 tran saction results in less for all cred itors.
The second kind of transaction does not af fect 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

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT