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Insolvency (BIA) - 'Transfers at Undervalue'. Aquino v. Bondfield Construction Co.
In Aquino v. Bondfield Construction Co. (SCC, 2024) the Supreme Court of Canada considers the evidentiary status of 'badges of fraud', here in an insolvency context:[43] Section 96(1)(b)(ii)(B) of the BIA requires the party seeking to reverse a transfer at undervalue to prove the debtor’s intent to defraud, defeat, or delay a creditor. This is a question of fact to be decided based on all the circumstances that existed at the time of the transfer (Urbancorp, at para. 53; Montor Business Corp. (Trustee of) v. Goldfinger, 2016 ONCA 406, 36 C.B.R. (6th) 169 (“Montor CA”), at para. 72).
[44] Because it is often difficult to adduce evidence of a debtor’s subjective intent, the intent requirement is often proved through the evidentiary shortcut of badges of fraud. Badges of fraud are suspicious circumstances from which a court may infer the debtor’s intent to defraud, defeat, or delay a creditor (Urbancorp, at para. 52; Montor CA, at para. 72; Wood (2018), at p. 24). The badges of fraud approach to inferring a debtor’s intent to defraud creditors is of ancient vintage, dating back to Twyne’s Case in 1601 (Wood (2018), at p. 24; Twyne’s Case (1601), 3 Co. Rep. 80b, 76 E.R. 809).
[45] Case law has recognized the following non-exhaustive examples of badges of fraud: (a) the debtor had few remaining assets after the transfer; (b) the transfer was made to a non-arm’s length party; (c) the debtor was facing actual or potential liabilities, was insolvent, or was about to enter a risky undertaking; (d) the consideration for the transaction was grossly inadequate; (e) the debtor remained in possession of the property for their own use after the transfer; (f) the deed of transfer had a self-serving and unusual provision; (g) the transfer was secret; (h) the transfer was made with unusual haste; and (i) the transaction was made despite an outstanding judgment against the debtor (Montor CA, at para. 73; see also Wood (2018), at p. 24; Wood (2015), at pp. 223-25 (in the fraudulent conveyance context)).
[46] A badge of fraud must be considered in the context of the surrounding circumstances and in relation to the question of the debtor’s intention at the time of the transfer (Urbancorp, at para. 65). A court must avoid analyzing the debtor’s actions with the benefit of hindsight; it “must resist the temptation to inject back into the circumstances surrounding the impugned transaction knowledge about how events unfolded after that time” (Montor Business Corp. (Trustee of) v. Goldfinger, 2013 ONSC 6635, 8 C.B.R. (6th) 200, at para. 272, aff’d 2016 ONCA 406, 36 C.B.R. (6th) 169). The presence of one or more badges of fraud does not require the court to infer an intent to defraud, defeat, or delay a creditor, nor does the absence of a particular badge of fraud prevent the court from inferring this intent (Urbancorp, at paras. 53 and 55; Montor CA, at para. 72; see also Wood (2018), at pp. 24-25).
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[50] I would not give effect to this submission. The application judge did not misapply the badges of fraud approach to inferring fraudulent intent. It is no answer to an application under s. 96(1)(b)(ii)(B) of the BIA to say that the debtor was not insolvent and was paying its creditors in full and on time at the time of the transfers. The BIA is clear that insolvency is not a prerequisite to finding a debtor intended to defraud, defeat, or delay a creditor. Section 96(1)(b)(ii) is disjunctive: the debtor must either be insolvent at the time of the transfer (s. 96(1)(b)(ii)(A)) or intend to defraud, defeat, or delay a creditor (s. 96(1)(b)(ii)(B)). The appellants’ argument would effectively introduce an insolvency requirement into the latter provision, contrary to Parliament’s decision not to do so.
[51] The appellants’ argument would also give a potentially determinative role to one factor, namely, the debtor’s financial condition at the time of the transfer. Although the debtor’s financial condition at the time of the transfer is one badge of fraud that may be relevant in inferring an intent to defraud, defeat, or delay a creditor (Urbancorp, at para. 64), whether that intent exists must be determined based on all the circumstances. Again, the presence of a particular badge of fraud does not require a court to infer an intent to defraud, defeat, or delay a creditor, nor does the absence of a particular badge of fraud require the court to refrain from inferring that intent (Urbancorp, at paras. 53 and 55; Montor CA, at para. 72). A court may find that a debtor intended to defraud, defeat, or delay a creditor under s. 96(1)(b)(ii)(B) even if the debtor was not insolvent at the time of the transfer at undervalue. . Aquino v. Bondfield Construction Co.
In Aquino v. Bondfield Construction Co. (SCC, 2024) the Supreme Court of Canada extensively considers the insolvency concept of 'transfers at under-value' (akin to fraudulent conveyance):[3] A “transfer at undervalue” is a transaction in which a debtor transfers property or provides services to another person for no consideration or conspicuously less than fair market value (BIA, s. 2). Section 96(1)(b)(ii)(B) of the BIA provides that a trustee in bankruptcy may apply to a court to impugn and recover from a non-arm’s length party to a transaction some or all of the amount of the transfer at undervalue, if the trustee can show that the debtor intended to “defraud, defeat or delay a creditor”. Section 96 of the BIA applies in a corporate restructuring through s. 36.1 of the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (“CCAA”).
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IV. Relevant Statutory Provisions
[25] Section 2 of the BIA defines a “transfer at undervalue”:transfer at undervalue means a disposition of property or provision of services for which no consideration is received by the debtor or for which the consideration received by the debtor is conspicuously less than the fair market value of the consideration given by the debtor; [26] Section 96 of the BIA governs transfers at undervalue:96 (1) On application by the trustee, a court may declare that a transfer at undervalue is void as against, or, in Quebec, may not be set up against, the trustee — or order that a party to the transfer or any other person who is privy to the transfer, or all of those persons, pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor — if
(a) the party was dealing at arm’s length with the debtor and
(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and that ends on the date of the bankruptcy,
(ii) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, and
(iii) the debtor intended to defraud, defeat or delay a creditor; or
(b) the party was not dealing at arm’s length with the debtor and
(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and ends on the date of the bankruptcy, or
(ii) the transfer occurred during the period that begins on the day that is five years before the date of the initial bankruptcy event and ends on the day before the day on which the period referred to in subparagraph (i) begins and
(A) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or
(B) the debtor intended to defraud, defeat or delay a creditor.
(2) In making the application referred to in this section, the trustee shall state what, in the trustee’s opinion, was the fair market value of the property or services and what, in the trustee’s opinion, was the value of the actual consideration given or received by the debtor, and the values on which the court makes any finding under this section are, in the absence of evidence to the contrary, the values stated by the trustee.
(3) In this section, a person who is privy means a person who is not dealing at arm’s length with a party to a transfer and, by reason of the transfer, directly or indirectly, receives a benefit or causes a benefit to be received by another person. [27] Section 36.1 of the CCAA applies the BIA’s provisions on transfers at undervalue to the CCAA “with any modifications that the circumstances require”:36.1 (1) Sections 38 and 95 to 101 of the Bankruptcy and Insolvency Act apply, with any modifications that the circumstances require, in respect of a compromise or arrangement unless the compromise or arrangement provides otherwise.
(2) For the purposes of subsection (1), a reference in sections 38 and 95 to 101 of the Bankruptcy and Insolvency Act
(a) to “date of the bankruptcy” is to be read as a reference to “day on which proceedings commence under this Act”;
(b) to “trustee” is to be read as a reference to “monitor”; and
(c) to “bankrupt”, “insolvent person” or “debtor” is to be read as a reference to “debtor company”. ....
[29] The key question in this appeal is whether the trustee and monitor established Bondfield and Forma-Con’s intent to defraud, defeat, or delay a creditor under s. 96(1)(b)(ii)(B). When the debtor is a corporation, the court must determine whether the corporate debtor’s directing mind intended to defraud, defeat, or delay a creditor having regard to the transactions completed by the corporation, and then consider whether the directing mind’s intent can be attributed to the corporation. Thus, the Court must first determine whether the evidence established Mr. Aquino’s intent to defraud, defeat, or delay a creditor, and then determine whether his intent should have been attributed to Bondfield and Forma-Con. The appellants claim that the courts below erred on both points.
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(1) Transfers at Undervalue Under the BIA
(a) General Principles
[32] A “transfer at undervalue” is defined under s. 2 of the BIA as “a disposition of property or provision of services for which no consideration is received by the debtor or for which the consideration received by the debtor is conspicuously less than the fair market value of the consideration given by the debtor”. Transfers at undervalue reduce the value of the debtor’s estate and diminish the value of the creditors’ realizable claims (A. Duggan and T. G. W. Telfer, “Gifts and Transfers at Undervalue”, in S. Ben-Ishai and A. Duggan, eds., Canadian Bankruptcy and Insolvency Law: Bill C-55, Statute c. 47 and Beyond (2007), 175, at p. 191).
[33] Section 96 has been described as “a tool to address ‘asset stripping’ by a debtor” (Urbancorp Toronto Management Inc. (Re), 2019 ONCA 757, 74 C.B.R. (6th) 23, at para. 40; see also Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68, [2004] 3 S.C.R. 461, at para. 91, on the predecessor provision, s. 100 of the BIA). Section 96 of the BIA provides a remedy to reverse transfers at undervalue that occurred within a specified period of time before the date of bankruptcy (Urbancorp, at para. 48; Estate of Gavin v. Gavin, 2023 PECA 8, 10 C.B.R. (7th) 30, at paras. 14 and 142; Pitblado LLP v. Houde, 2015 MBQB 85, 318 Man. R. (2d) 39, at para. 35).
[34] Section 96 of the BIA allows a trustee in bankruptcy to ask a court to review a suspected transfer at undervalue. When the conditions of s. 96 are met, the court may declare the transfer void as against the trustee or grant judgment against the parties or privies to the transfer for the amount of the difference between the consideration given by the debtor and the consideration received. Section 36.1 of the CCAA incorporates s. 96 of the BIA by reference and allows a monitor to impugn a transfer at undervalue in a corporate restructuring.
[35] Because the purpose of s. 96 is to protect creditors rather than to punish debtors, the remedy is directed against the person who received the transfer of property from the debtor and others who were privy to the transfer (R. J. Wood, Bankruptcy and Insolvency Law (2nd ed. 2015), at p. 191). A “person who is privy” to the transfer is defined under the BIA as “a person who is not dealing at arm’s length with a party to a transfer and, by reason of the transfer, directly or indirectly, receives a benefit or causes a benefit to be received by another person” (s. 96(3)).
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[37] Transfers at undervalue frustrate the purposes of the BIA. They prejudice creditors by diminishing the value of a debtor’s estate and reducing the funds available for distribution. They can also involve fraudulent debtors abusing the bankruptcy process by seeking a fresh start after trying to place assets beyond the reach of creditors, thereby undermining the integrity of the bankruptcy process (see, generally, Wood (2015), at pp. 188 and 190-91; L. W. Houlden, G. B. Morawetz and J. Sarra, Bankruptcy and Insolvency Law of Canada (4th ed. rev. (loose-leaf)), vol. 2, at p. 5-959; J. D. Honsberger and V. W. DaRe, Honsberger’s Bankruptcy in Canada (5th ed. 2017), at pp. 8-9).
(c) Section 96 of the BIA Establishes Three Classes of Impeachable Transactions
[38] Section 96 of the BIA establishes three classes of impeachable transactions (R. J. Wood, “Transfers at Undervalue: New Wine in Old Wineskins?”, in J. P. Sarra and B. Romaine, eds., Annual Review of Insolvency Law 2017 (2018), 1, at p. 4).
[39] The first class of impeachable transaction involves arm’s length dealing between the debtor and a party or privy to the transfer (s. 96(1)(a)). This class of transaction has the most stringent requirements to reverse a transfer. The trustee must show that the transfer at undervalue occurred within one year of the bankruptcy, the debtor was insolvent at the time of the transfer or was rendered insolvent by it, and the debtor intended to defraud, defeat, or delay a creditor.
[40] The second class of impeachable transaction involves a transfer at undervalue to a party who was not dealing at arm’s length with the debtor and which occurred within one year of the bankruptcy (s. 96(1)(b)(i)). In this context, “the concept of a non-arm’s length relationship is one in which there is no incentive for the transferor to maximize the consideration for the property being transferred in negotiations with the transferee” (Houlden, Morawetz and Sarra, at p. 5-966; see also Wood (2015), at p. 204; BIA, s. 4). The trustee need not show that the debtor was insolvent at the time of the transfer or that the debtor intended to defraud, defeat, or delay a creditor.
[41] The third class of impeachable transaction involves a transfer at undervalue to a party who was not dealing at arm’s length with the debtor, which occurred more than one year but less than five years before the bankruptcy (s. 96(1)(b)(ii)). In this class, the trustee may obtain a remedy by proving that the debtor was insolvent at the time of the transfer or was rendered insolvent by it (s. 96(1)(b)(ii)(A)), or by proving that the debtor intended to defraud, defeat, or delay a creditor (s. 96(1)(b)(ii)(B)).
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