Reviewable Transactions

• Author: Stephanie Ben-Ishai; Thomas G. W. Telfer
• Pages: 152-202

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CHAPTER 5

Reviewable Transactions

I. INTRODUC TION

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.

II. THE PROVINCIAL FRAUDULENT CONVEYANCE LAWS

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 .

 BANKRUPTCY AND INSOLVENCY LAW IN CANADA: CASES, MATERIALS, AND PROBLEMS

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