Reviewable Transactions

AuthorStephanie Ben-Ishai; Thomas G. W. Telfer
Reviewable Transactions
This chapter deals with the trustee’s powers to claw assets back into the bankrupt’s estate.
These are assets the bankrupt may have disposed of in pre-bankruptcy transactions. These
transactions fall into two categories: preferring certain creditors over others and conveying
assets to keep them out of the reach of creditors. The Bankruptcy and Insolvency Act, RSC
, c B- (BIA) preference provision, section , catches the rst category, and the provin-
cial assignments and preferences laws supplement it. The second category is caught by the
BIA provisions relevant to gifts and transfers at undervalue, section  (transfers at under-
value) and section  (dividends and redemptions of shares), which are supplemented by
the provincial fraudulent conveyance laws.
The trustee can use any or all these provisions to overturn pre-bankruptcy transactions.
In some cases, the provincial laws are the exclusive or predominant basis for challenging
a pre-bankruptcy transaction; in other cases, there is substantial overlap between the BIA
and the provincial provisions. Where there is no overlap, section  of the BIA appears to
envisage continued application of provincial law. This is supported constitutionally by the
provincial jurisdiction over property and civil rights.
In Robinson v Countrywide Factors Ltd, []  SCR , the Supreme Court, over a strong
dissent by LaskinCJ, upheld the constitutional validity of the provincial fraudulent prefer-
ence laws. The key passage from the judgment of SpenceJ (for the majority) reads as follows:
I have dealt with what, in my view, are the main cases upon the subject in Canada. Upon
considering them all, as well as the decision of the Judicial Committee in AG of Ontario
v AG for Canada, [[] AC ], I have come to the conclusion that the better view is
to conne the eect of what is now s. of the Bankruptcy Act [now s] t o providing
for the invalidity of transactions within its exact scope. To that extent, the Parliament of
Canada, by valid legislation upon “bankruptcy” and “insolvency,” has covered the eld
but has refrained from completely covering the whole eld of transactions avoided by
provincial legislation. I am of the opinion that the enactment in  of the provisions
now found in s. () [now s ()] of the Bankruptcy Act is a plain indication that
Parliament recognized that provisions in provincial statutes dealing with preferential
transactions were still valid provincial enactments in reference to “property” and “civil
rights” and were valuable aids to trustees in bankruptcy in attacking the validity of such
transactions and should be available to the said trustees in bankruptcy.
Constitution Act,  (UK),  &  Vict, c , s ().
Chap ter : Reviewable Transactions 
The practical implication of the decision is that a trustee may rely on either the BIA anti-pref-
erence provisions or the provincial laws, or both, depending on which system of law is more
favourable to the trustee in the particular case.
These topics are discussed under the following four headings: ()the provincial fraudu-
lent conveyance laws; ()the BIA transfers at undervalue provision; ()the BIA preference
provisions; and () the provincial preference provisions.
A. Introduction
The origins of the fraudulent conveyance laws lie in the Statute of Elizabeth. The Statute of
Elizabeth was received into Canadian provincial law at the time of settlement and it still applies
in most parts of Canada on that basis. Four provinces (British Columbia, Manitoba, New-
foundland and Labrador, and Ontario) have enacted fraudulent conveyances laws codifying
the Statute of Elizabeth. It is not settled whether the Statute of Elizabeth still applies in these
provinces, but the question may not matter much because the provincial fraudulent con-
veyance statutes are, in substance, the same as the Statute of Elizabeth (see further below).
The provincial assignments and fraudulent preferences laws (in force in all provinces except
Manitoba, Newfoundland and Labrador, and the Northwest Territories), which apply primarily
to fraudulent preferences (discussed below), also contain fraudulent conveyance provisions,
but these apply only if the debtor is insolvent or near insolvency at the date of the transaction.
Neither the Statute of Elizabeth nor the fraudulent conveyances laws are limited in this way.
The Statute of Elizabeth prohibits a conveyance of property by A to B if it is made for
the purpose of defeating A’s creditors. A creditor can sue to have the conveyance set aside.
There are two main kinds of cases: () where A transfers an asset to B by way of gift; and ()
where A transfers an asset to B at an undervalue.
There is an evidentiary presumption that applies in case (), arising from Freeman v Pope,
[]  WLUK  (Eng). The “rule in Freeman v Pope” says that, in case (), the courts will
presume A’s intention to defeat creditors if A was insolvent at the date of the transaction or
the transaction caused A to become insolvent. This rule is a substantial evidentiary conces-
sion in favour of a creditor who is attempting to have the transaction set aside. A can rebut
the presumption by showing that they had an honest purpose while making the transaction.
Case () is dierent; there is no presumption of A’s intention that arises in case (). In case
(), the courts require actual proof of A’s intention to defeat creditors. They also read the
statute as requiring proof of B’s collusion in A’s illegal purpose. Requiring proof of A’s inten-
tion and B’s collusion places a signicant evidentiary burden on the parties, and it is for that
reason that the courts look to “badges of fraud” in case (): if the transaction displays one
or more of the badges of fraud that have been developed in caselaw, an inference will arise
as to A’s illegal purpose unless A provides an innocent explanation. The badges of fraud
include the transaction being carried out in secret or in great haste, A and B being related to
one another, there is litigation pending against A, or the consideration is grossly inadequate.
See FL Receivables Trust -A (Administrator of ) v Cobrand Foods Ltd,  ONCA . The
next case, Prole United Industries Ltd v Coopers & Lybrand, deals with case (), where the
 The Statute of Fraudulent Conveyances  (UK),  Eliz I, c .
 See Royal Bank of Canada v North American Life Assurance Co, []  SCR  at para .
presumption in Freeman v Pope does not arise. The court found two categories of badges of
fraud to support the shared intention between the parties to defeat the creditor.
These laws are not specically bankruptcy laws. Neither the Statute of Elizabeth nor the
provincial fraudulent conveyance statutes are limited to eve-of-bankruptcy transactions. The
policy behind the provincial fraudulent conveyance laws is the prevention of debtor dishon-
esty. It is the equivalent of theft for A, having made a promise of payment to C, to deprive
herself of the capacity for performance by transferring her assets to B. Theft is theft whether
it occurs inside or outside bankruptcy. Outside bankruptcy, the provincial fraudulent con-
veyance laws give judgment creditors a weapon to attack fraudulent transfers. Inside bank-
ruptcy, the weapon passes to A’s trustee to exercise on behalf of all unsecured creditors.
The corresponding provision in BIA, section , applies only inside bankruptcy, but this is
not because the policy is dierent. It is simply because the BIA is a bankruptcy statute. If A
makes a gift to B when A is insolvent or near insolvency, the transfer is still voidable under
the Statute of Elizabeth and the provincial fraudulent conveyance laws. It is important to be
clear about the reason why. The reason is not that bankruptcy policy dictates this outcome.
It is that, in the circumstances, the courts presume A’s intention to defeat creditors. In other
words, the policy is still to prevent dishonesty.
Prole United Industries Ltd v Coopers & Lybrand (1987), 64 CBR (NS) 242 (NBCA)
STRATTON CJNB: This appeal raises two questions: whether a payment made by one
related company to another was a “settlement” within the meaning of s. of the Bank-
ruptcy Act [now BIA, s], RSC , c. B-; and whether the payment was made in con-
travention of the Statute of Elizabeth (Fraudulent Conveyances Act), ,  Eliz. I, c. .
In  the appellant, Prole United Industries Limited (“Prole”), Associated
Freezers of Canada Limited (“Freezers”) and Associated Fisheries of Canada Limited
(“Fisheries”), were associated companies, all controlled by one Joseph Yvon Robichaud.
Fisheries operated a sh processing plant at Shippegan, New Brunswick. On Feb-
ruary , , Fisheries sold its sh-processing business to Connors Bros. Ltd. for
,,.. After the payment of several encumbrances Fisheries’ solicitors paid the
balance of the sale price in the amount of ,. to Prole. Prole then proceeded
to liquidate Fisheries’ remaining assets, collect its receivables and pay its outstanding
accounts. Among Fisheries’ outstanding accounts was one due Prole of ,.,
one due Metrocan Leasing Ltd. of ,. and one due Excel Packaging Ltd. of
,.. Prole o-set against the sums it received its own account with Fisheries
while Freezers assumed payment of the Metrocan account.
When the sale by Fisheries to Connors Bros. took place, Excel Packaging Ltd. had
commenced legal action in the courts of Quebec to collect its account with Fisheries.
In that litigation Fisheries had counterclaimed against Excel for substantially the same
amount as was claimed against it. But the counterclaim was unsuccessful and Excel
was awarded judgment against Fisheries for the full amount of its account. On July ,
, Excel registered its judgments against Fisheries in New Brunswick. The registered
judgment was for ,.. On December , , Excel petitioned for a receiving
order against Fisheries. On January , , a receiving order was made and Coopers &
Lybrand Limited was appointed Trustee of the Estate of Fisheries.
The Trustee commenced the present action against Prole claiming that the sum of
,. that was paid to it by Fisheries’ solicitors was paid at a time when Fisheries

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