A Comprehensive Analysis of Transfers at Undervalue Under Section 96 of the Bankruptcy and Insolvency Act – Part I

1. Introduction and Overview

This is the first in a series of articles examining the Transfer at Undervalue provisions set out in section 96 of the Bankruptcy and Insolvency Act[1] (which I'll refer to in these articles as the "BIA"). A Transfer at Undervalue in BIA parlance includes both: (i) a pre-bankruptcy gift of property (by the now bankrupt debtor); and (ii) a pre-bankruptcy sale of property (by the now bankrupt debtor) for a price that is conspicuously less than the fair market value of that item; in either case (iii) that was made to an arm's length transferee within one year of the bankruptcy or (iv) that was made to a non-arm's length transferee within five years of the bankruptcy. In these articles, I will call the third party transferee of the Transfer at Undervalue, the "Recipient".

In this author's experience, the Transfer at Undervalue provisions of the BIA are both very powerful and yet, underutilized. Powerful, because the BIA provisions impugning a Transfer at Undervalue give a trustee (or a creditor with a section 38 Order[2]) the ability to ask a court to divest a non-bankrupt Recipient of her or his property (that was recently acquired from the bankrupt under a Transfer at Undervalue) in many scenarios without proving that the bankrupt had any fraudulent intention at the time that the Transfer at Undervalue was made. The elimination of the need to prove fraudulent intent (on the part of the bankrupt transferor) is a significant lowering of the threshold that is found in provincial fraudulent conveyance statutes. It appears to be a significant policy shift away from the intent of the debtor/transferor (which has always been the backbone of the provincial fraudulent conveyance legislation) towards the effect of the impugned transfer (being the diminution of the assets in the bankrupt estate to the prejudice of the creditors of the estate). This is a radical departure from the historic norms of common law jurisdictions, where property ownership has always been jealously protected by Parliament, the legislatures and the courts.

And yet, despite being legislation allowing trustees and creditors to deprive a Recipient of her or his vested property rights, without having to prove fraudulent intent, Transfer at Undervalue litigation is still not commonplace. One can only presume that trustees are slow to initiate Transfer at Undervalue litigation because there are often few, if any, assets available in the estate to fund any...