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Insolvency (BIA) - Arm's-Length. Scott v. Golden Oaks Enterprises Inc.
In Scott v. Golden Oaks Enterprises Inc. (SCC, 2024) the Supreme Court of Canada dismissed a civil litigation appeal, here where the main question was "how the common law doctrine of corporate attribution should be applied to a “one-person” corporation controlled by its sole officer, shareholder, and directing mind".
The court considers 'arm's-length' dealings, here in a BIA insolvency context:(1) General Principles of Non-Arm’s Length Dealing Under Section 95(1)(b) of the BIA
[125] Preferences occur when a debtor with insufficient assets to satisfy all its creditors pays one creditor preferentially over other creditors. Such payments are unfair because they undermine the scheme of distribution that would otherwise prevail in bankruptcy (Wood, at pp. 205-6; Honsberger and DaRe, at p. 375). Section 95(1)(b) of the BIA provides that transactions that have the effect of giving one creditor a preference over other creditors are void as against the trustee when they involve a non-arm’s length creditor within a specified period of time surrounding the bankruptcy. Section 95(1)(b) provides:95 (1) A transfer of property made, a provision of services made, a charge on property made, a payment made, an obligation incurred or a judicial proceeding taken or suffered by an insolvent person
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(b) in favour of a creditor who is not dealing at arm’s length with the insolvent person, or a person in trust for that creditor, that has the effect of giving that creditor a preference over another creditor is void as against — or, in Quebec, may not be set up against — the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is 12 months before the date of the initial bankruptcy event and ending on the date of the bankruptcy.
(See also Wood, at p. 215; Honsberger and DaRe, at p. 387.) [126] The BIA does not define an arm’s length transaction. It does, however, stipulate that “[i]t is a question of fact whether persons not related to one another were at a particular time dealing with each other at arm’s length” (s. 4(4)). A finding of non-arm’s length dealing attracts a high level of appellate deference and is reviewable only for palpable and overriding error (Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 36).
[127] Courts generally examine the following criteria in determining whether unrelated persons are dealing at arm’s length: (i) whether there was a common mind that directed the bargaining for both parties to a transaction; (ii) whether the parties to a transaction were acting in concert without separate interests; and (iii) whether there was de facto control (Canada v. McLarty, 2008 SCC 26, [2008] 2 S.C.R. 79, at paras. 43 and 62; Montor Business Corp. (Trustee of) v. Goldfinger, 2016 ONCA 406, 36 C.B.R. (6th) 169, at para. 68, citing Piikani Nation v. Piikani Energy Corp., 2013 ABCA 293, 86 Alta. L.R. (5th) 203, at para. 29; Wood, at pp. 204-5).
(2) The Trial Judge Did Not Err in Finding Non-Arm’s Length Dealing
[128] The trial judge correctly addressed the question of non-arm’s length dealing under s. 95(1)(b) of the BIA. I agree with the Court of Appeal that although the trial judge was required to focus on the transactions at issue between Golden Oaks and Mr. Scott, it was appropriate for her to consider these transactions in the overall context of the parties’ relationship, including the Ponzi scheme that these transactions facilitated and Mr. Scott’s role in that scheme. In McLarty, this Court rejected a “restrictive approach” under which a trial judge could examine only an impugned transaction, but not the parties’ relationship at any other time or the facts relating to any other transaction (para. 65). Likewise, here, the trial judge was entitled to consider the totality of the evidence in determining whether parties were dealing at arm’s length (see National Telecommunications Inc., Re, 2017 ONSC 1475, 45 C.B.R. (6th) 181, at para. 48; National Telecommunications v. Stalt, 2018 ONSC 1101, 59 C.B.R. (6th) 263, at para. 41).
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