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

2. Legislative History and Evolution of Section 96

This is the second in a series of articles examining the Transfer at Undervalue provisions set out in section 96 of the Bankruptcy and Insolvency Act (which I'll refer to in these articles as the "BIA"). This article will examine the purpose of section 96 within the context of the BIA.

The law has long recognized the need to protect creditors from insolvent debtors who give away assets to third parties instead of using those assets to repay their debts. In fact, legislation prohibiting debtors from fraudulently dissipating their assets when heavily indebted was first enacted in England during the reign of Queen Elizabeth I in the 1500s and has been embodied into the Fraudulent Conveyances Act[1] of Ontario since the late 1800s. The principle underpinning the prohibition against fraudulent conveyances was poetically expressed in the oft quoted 1870 case of Freeman v Pope[2] in which Lord Hatherley LC said that "A debtor must be just before he can be generous - and that debts must be paid before gifts can be made."

Sections 95 and 96 of the BIA codify this "just before generous" rule. Preferential debt repayment by a debtor on the verge of bankruptcy is dealt with in section 95 of the BIA; which is sufficiently complex to warrant a series of articles on its own. Gifts and asset sales at reduced prices by a debtor on the verge of bankruptcy are called Transfers at Undervalue in the BIA and are dealt with in section 96 of the BIA.

But section 96 of the BIA is a relatively new section; having been enacted in 2009. Before then, the BIA included provisions that were also intended to prevent debtors from gifting assets and from selling assets at less than fair market value prior to bankruptcy. These now repealed provisions (section 91 prohibited 'Settlements' and section 100 prohibited 'Reviewable Transactions') were generally considered to be cumbersome and difficult to use in a practical manner. Case law under these sections 91 and 100 focused on good faith and intent - but those considerations were based on the subjective intention of the bankrupt and as such, were often illusive concepts which were difficult to prove[3]. These sections were repealed and replaced in 2009 with section 96 - both to combine and simplify these provisions and also to eliminate redundancies that were inherent in their provisions. The new section 96 was enacted to promote fairness, uniformity and predictability into...