E. Post-Initiation Transfers

• Author: Roderick J. Wood
• Profession: Faculty of Law. University of Alberta
• Pages: 214-215

Page 214

Canadian bankruptcy law originally used a relation-back doctrine borrowed from English bankruptcy law. Under this doctrine, an involuntary bankruptcy was deemed to occur at the time that proceedings were first initiated by the creditors, rather than at the date that a bankruptcy court granted a bankruptcy order. One consequence of this doctrine was that the debtor’s property was deemed to have vested in the trustee at the date of the filing of the creditor’s application. Persons who dealt with the debtor during the period following initiation of the proceedings but before the granting of a bankruptcy order were therefore placed in a very difficult position. Any transfer or transaction that

Page 215

occurred in this period would be liable to be invalidated by virtue of the relation-back doctrine. The property of the debtor was deemed to have vested in the trustee, and the debtor lacked the capacity to dispose of the assets. The severity of this rule was tempered by a provision in the bankruptcy legislation that protected bona fide transactions that occurred during this period.¹⁶⁴The relation-back doctrine was eventually abolished in 1992. The protective provision was then transformed into an impeachment provision.¹⁶⁵The reformulated provision starts by stating that no transaction entered into between the date of the initial bankruptcy event and the date of the bankruptcy is valid. The provision then provides a very wide exception that validates the following transactions if they are made in good faith:

· a payment to a creditor;

· a payment or delivery to a bankrupt;

· a conveyance or transfer by the debtor for adequate valuable consideration; and

· a contract, dealing, or transaction, including the giving of security, for adequate valuable consideration.

A transaction is considered to be for adequate valuable consideration if it is for fair and reasonable money value with relation to the known or reasonably anticipated benefits of the contract, dealing, or transaction.¹⁶⁶It is unnecessary to show intent to defraud on the part of either the debtor or the party dealing with the debtor. If the transfer or transaction is not for adequate valuable consideration, it will not be protected and therefore will be invalid as against the trustee.

The trustee is not limited to a judgment for the difference between the consideration paid and the fair value in the case of a transfer of property to a person for less than fair value. Since the...