C. Fraudulent Conveyances

Author:Roderick J. Wood
Profession:Faculty of Law. University of Alberta

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The impeachment of a transaction as a fraudulent conveyance is governed by provincial law. There are two different fraudulent conveyances provisions that can be found in most provinces. The first is through use of the Statute of Elizabeth or the provincial Fraudulent Conveyances Acts that have re-enacted it. The second is through a provision found in provincial fraudulent preferences legislation. On the surface, the two types of provisions seem very similar; however, there are a number of subtle but important differences in their operation. The former are subject to less restrictive conditions, and thus they usually offer a better route for impugning a transaction as a fraudulent conveyance. Yet there is one situation where the latter may offer a superior means of impeachment.

1) The Fraudulent Conveyances Act

A conveyance or other disposition of property may be avoided under the Fraudulent Conveyances Act if it was made with intent to defeat, hinder, delay, or defraud creditors or others. The classic example of a fraudulent conveyance is a gift by the debtor to a friend or relative that was made with the intention of defeating the claims of creditors. Unlike many of the other impeachment provisions, it is not necessary to show that the debtor was insolvent at the time of the transaction. The focus of the inquiry is on the intent of the debtor and, in certain cases, on the intent of the recipient as well.

a) Standing to Bring the Action

The statute confers its benefits on "creditors and others" who are defeated, hindered, delayed, or defrauded of their just and lawful actions. This wording has been interpreted broadly so as to include persons who had unliquidated claims at the date of the transaction.119It also covers subsequent creditors - claimants whose claims were not in existence at the time of the transaction.120A secured creditor whose obligation was fully secured at the date of the transaction is also given standing to avoid the transaction, since its unsecured claim for a deficiency is considered to be equivalent to a claim by a subsequent creditor.121

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b) Voluntary Transactions

Fraudulent conveyances law draws a distinction between voluntary transactions - i.e., transactions for no consideration or for nominal consideration - and transactions for valuable consideration. A transaction is referred to as voluntary because the transfer is to a volunteer who has not given good consideration for it. A voluntary transaction typically takes the form of a gift to the recipient. A more stringent set of conditions is imposed when seeking to impeach a transaction for valuable consideration. The law is more protective of good faith purchasers for value in order to produce stability and finality in commercial dealings between parties.

In order to avoid a voluntary transaction as a fraudulent conveyance, it is only necessary to inquire into the intent of the debtor. The knowledge or intent of the recipient of the property is irrelevant. The treatment of voluntary transactions can be subdivided into two classes of cases. The first is when the debtor is insolvent before or immediately after the disposition of the property. Courts have held that there is a legal presumption that the debtor intended to defraud his or her creditors. Whether the presumption is rebuttable or not is a matter that has attracted considerable debate.

The controversy began with two English decisions. The first was Freeman v. Pope,122which appeared to support an irrebuttable presumption. The second was Re Wise; Ex parte Mercer,123 which held that the presumption was rebuttable. The Supreme Court of Canada in Sun Life Assurance Co. v. Elliott124 held that, if the debtor was insolvent, the transaction was void regardless of the intent of the debtor. The decision therefore seems to support an irrebuttable presumption. Some Canadian courts have interpreted this to be obiter because there appeared to be evidence that the debtor possessed the required intent.125Other courts have held that the statement of law forms the ratio of the decision and is therefore binding authority.126

The second class of cases involves a debtor who is solvent both before and immediately after the disposition of the property. In such cases, the person who is impeaching the transaction must adduce evidence to show that the debtor intended to defeat, hinder, delay, or defraud creditors or others.

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c) Transactions for Good Consideration

The Fraudulent Conveyances Act does not apply to a disposition of property for good consideration and in good faith to a person who did not know of the fraud at the time of the transfer.127There are three elements that the purchaser of the property must satisfy in order to shelter within this protection.

The first is that the transaction must be for good consideration...

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