Canadian Bankruptcy Considerations In The Context Of A Sale Of Receivables

Factoring is a common way for businesses to monetize current assets. Typically, in a factoring transaction, an enterprise sells its accounts receivable to a third party (commonly a bank, but not always), which, in exchange for a discount on the value of the receivables, takes on the effort and time commitment related to collecting the accounts.

But what happens if the seller of the accounts receivable goes bankrupt? Could creditors of the seller, or a trustee in bankruptcy, liquidator, monitor or administrator of the seller, attempt to recover from the purchaser the accounts receivable that were transferred?

In certain circumstances, yes.

Pursuant to Canadian insolvency statutes (including the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act, and applicable provincial laws governing creditors' rights generally), the sale and assignment of certain assets of a debtor during particular 'look-back periods' could be declared "void" or "voidable" and overridden or set aside by a Canadian court.1 Most relevant is section 96 of the BIA, which provides that a transfer at undervalue - meaning, a disposition of property for which the seller received either no consideration or consideration that was conspicuously less than the fair market value of the property that was transferred - could be found to exist by a Canadian court if:

in the case of a determination that the seller was dealing with the purchaser at arm's length, the transfer occurred in the year prior to the date of the initial bankruptcy event, the debtor was insolvent at the time of the transfer (or rendered insolvent by it), and the debtor intended to defraud, defeat or delay a creditor; or in the case of a determination that the seller was not dealing with the purchaser at arm's length, if the transfer at undervalue occurred in the twelve months prior to the initial bankruptcy event (with no need to prove the debtor's intent or insolvency) or, if the transfer occurred within the five years prior to the initial bankruptcy event and the debtor was insolvent at the time of the transfer and intended to defraud, defeat or delay a creditor.2 If, pursuant to a BIA proceeding, a court determines that a transfer of accounts receivable was a transfer at undervalue, the court may give judgment against the purchaser for the difference between the consideration received by the seller and the fair market value of the property transferred, or the court may declare the transaction...