A debtor who is indebted to a creditor, or a person who anticipates becoming indebted, may convey his or her property to another with the intention of thwarting any efforts by his or her present or future creditors to satisfy their claims from the debtor’s property. 

 If they do, the transaction may be reviewed pursuant to either or both of the Fraudulent Conveyance Act (“FCA”) and the Fraudulent Preference Act (“FPA”).

 1.      Distinction between Fraudulent Preference and Fraudulent Conveyance:

 

a)      Preference

i)        Was the debtor insolvent or “on the eve of insolvency”?; and

ii)       Did the transaction have the effect of conferring a preference on the party receiving the property relative to other creditors of the debtor?

Then it can be reviewed under the FPA.

 

b)      Conveyance

i)        If the property was transferred to a party who was NOT a creditor[1]; and

ii)       If the property was not conveyed for good consideration;[2] and

iii)     There was an intention to defraud the debtor’s creditors;[3]

Then it may be reviewed under the FCA.[4]

 

c)      If an action under either of these statutes is successful, then one remedy available to the Court is that the transactions will be declared void and will grant such remedies as may be available in order to assist the creditor in realizing the amount owed from the property.

 

2.      FCA: 

 

a)      Types of Interests

i)        Those subject to review: any beneficial interest in property, whether real or personal may be the subject of a review under the FCA.  The courts have even pierced the “corporate veil” in the case of a closely held company that was found to simply be an extension of the individual.[5]

ii)       Those not subject to review: 

(1)   Bare Trustee: Where the transferor held title to the property as bare trustee only, it shall not be subject to review.  The rationale is that since the transferor does not have any beneficial interest in the property they cannot have the requisite intent to defraud, because the property could not have been attached by the creditor in the first place.  These would be cases where the property had been acquired entirely with funds from a spouse or relative but legal title had been held entirely or partially in the name of the debtor.[6]  Similarly, if the property can be shown to be have been held as a result of resulting or constructive or express trust, then it will not be subject to review.  Of course, the requisite elements would need to be present in these cases in order to establish the existence of the trust relationship on the facts(eg. that money, labour etc was contributed to the property, in the case of a constructive trust claim).[7]

 

b)      Property Not subject to FCA:

i)        There is not a lot of caselaw on this point because of the fact that, until 1997 amendments to s. 71 of the COEA, there was no exemption with respect to any interest in land, it was strictly limited to personalty with a value less than $2000.

 

c)      Manner of Disposition:  It doesn’t matter how you do it; all that matters is the intent.  In a case where a debtor allowed property to be sold for payment of back taxes, and it was bought by an associate, the Court set aside the sale on the grounds that the intent was to defraud.  It made no difference if it was sold pursuant to another statutory power, or not.[8]  Similarly, the changing of a beneficiary in an insurance policy so as to render the proceeds non-exigible has also been found to be a fraudulent conveyance.[9]

 

d)      Transactions that are NOT Dispositions:  A person who becomes entitled to receive property under a will or trust or intestacy, however, is not required to accept it.[10]  A will or a trust may, rather than transfer property, provide them with the power to appoint beneficiaries to the trust, including themselves.  The courts have considered whether the appointment of someone other than the debtor was a “disposition” under the FCA in Rosenfeldt v. Olson (BCCA, 1984).  The families of the victims of Clifford Olson brought an action claiming that the appointment of his wife as the beneficiary of the trust of $100,000 he received in return for telling authorities the whereabouts of his victims bodies was a “disposition” under the FCA.  The Court disagreed.  It found that Olson had never had a proprietary interest in the money and, as a result, there was no disposition.  Similarly, dying isn’t a disposition.  If you’re a joint tenant, your interest in the property passes with you.  The surviving joint tenant is not potentially liable to your debtors.

 

e)      Consideration:  The fact that there is good consideration for the transfer does not necessarily mean it cannot be attacked.  If there is good consideration, then the creditor needs to show that there was fraudulent intent on the part of the transferee as well.  If he does, the fact that there is good consideration will not save the transfer.   And the creditor will be assisted in this if he can show that one or more of the “badges of fraud” exists.[11]  Badges of fraud refers to the fact that evidence of intent will almost always be entirely circumstantial.  This means that the Court will infer the intent from the facts of the case.  Those badges include:

i)        Secrecy:  where a disposition that would normally be filed or registered is not, or where the disposition has not been revealed.

ii)       Continuance of Possession by Debtor: where the debtor continues in possession after it was supposedly disposed of, will be evidence of fraud.

iii)     Benefit retained by Transferor: Where the debtor continues to earn income from a property, including rent or other income.

iv)     Generality of Conveyance:  When a debtor conveys all or most of her assets over a period of time, that will be evidence of fraud.

v)      Antedated Transfer:  Where a transfer of property is dated prior to the debtor’s claim, but only takes effect after the debtor’s claim, that will be evidence of fraud.

vi)     Transfer to Related person or company:  Where transfer is to related person or company, that will be circumstantial evidence of fraud.

vii)   No, or Inadequate, Consideration:  Any transfer without consideration, or where the consideration is grossly inadequate, will be evidence of fraud.  It does not mean that consideration need be fair market value, however.  It just cannot be marginal.[12]    “Mutual love and affection”, however, is not sufficient.

 

f)        “Others”:  In addition to the discussion about future creditors note 1 above, subsequent creditors may also bring an action to undue a conveyance that occurred prior to their debt arising, if there is still remains an unsatisfied debtor whose debt arose prior to the conveyance.[13]  Guarantors of a debt cannot transfer property with impunity simply because it was transferred prior to the demand on the guarantee being made.[14]

 

g)      Defences:  There are cases in which even all of the above facts may still not constitute a fraud conveyance.

i)        Pre-existing Debt or Obligation:  If assets are transferred to a creditor to satisfy a pre-existing debt or obligation that is bona fide, then it will not have the fraudulent intent and will not be subject to review.  Where, for instance, the debtor pledged his security for financing used to pay off other debtors, that pledging was not a fraudulent conveyance.  There is nothing wrong with preferring one creditor over the other, as far as the FCA is concerned, provided it is bona fides.[15]

ii)       Prospective Spouses:  Your future creditors may be protected, but not your future spouse.  Where you transfer property to someone prior to getting married with the intent of keeping it out of hi/her possession, the FCA will not help him/her.  You can do it.

 

 

3.      FPA:

 

a)      There is nothing wrong with preferring one creditor over another under the FCA.  Provided it is not done with the intent to defraud, you can do it.  Under the provisions of the FPA, however, if you are insolvent you may not transfer property to a creditor with the intent of preferring them over other creditors.[16]

 

b)      When is a benefit conferred:  S. 5 of the FPA provides that a preference is conferred on a creditor when that creditor recovers or is placed in a position to recover, all or part of the indebtedness owed to them in a greater proportionate amount than could be recovered by the unsecured creditors generally from the assets left available to judgement.

 

c)      “Insolvent circumstances”:  To be insolvent, the courts have held that you must meet the requirements of both the Legal and Commercial test of insolvency:

i)        Legal Test:  when he has not sufficient property subject to execution to pay all his debts if sold under legal process;

ii)       Commercial Test: when he has not the means to pay off and discharge his commercial obligations as they become due in the ordinary course of business.

iii)     The courts have also held that “insolvent circumstances” also is synonymous with being “unable to pay your debts in full”.[17]

 

d)      “On the eve of insolvency”:  The courts have also found fraudulent preferences to have occurred when a debtor was on the eve of insolvency and made the transfers of property.   In that case, evidence of the inability to pay debts was sufficient to show such as state.[18]

 

e)      Dispositions Not Covered: All dispositions of property are covered by the Act, other than two:

i)        Property Held as Bare Trustee:  As with the FCA, if property is held by someone as bare trustee, that is not an interest that is exigible, and thus no relief under this Act can be obtained.

ii)       Property otherwise not exigible:  If a debtor voluntarily assigns a portion of his wages that is not exigible,[19] it may not be attacked. 

 

f)        Judgement Obtained Against Debtor:  S. 2 of the FPA provides that where there is any collusion with another to permit judgement to be taken against the Debtor, that the judgement is void as against the Debtor’s creditors. 

i)        By Consent:  Any order obtained against the Debtor by consent is a fraudulent preference.[20]

ii)       By Default:  A mere failure to defend an action, however, does not constitute “agrees to judgement” under s.2.[21]

 

g)      Intent to Prefer Creditor:  Generally, it must be proven that both the transferor and the transferee had the intent to prefer a benefit.  It is not sufficient that only one had the intent.[22]   And the debtor must have made the payment voluntarily, without active influence from the creditor, provided the creditor has knowledge of the insolvency.[23]  There is an express exception to the general rule set out at s.4 of the FPA.  It is not necessary to prove intent if:

i)        If the lawsuit is commenced within 60 days of the disposition of the property, or of the registration of a document evidencing the disposition; or

ii)       The debtor makes a general assignment for the benefit of his or her creditors within 60 days after the disposition of the property.

 

h)      Proving Intent:  Intent may be proved either by direct or circumstantial evidence, as with the FCA.  The evidence is generally circumstantial.

 

i)        Defences: 

i)        Receipt of money or property by the Debtor:  S. 6 provides (in this case, in 6(1)(a) & (b), that where the debtor received payment in either money or property “in good faith”, there will not be an assumption of intent to prefer on the part of the parties.  The rationale here is that whether it is property or the monetary equivalent of it, the debtor still has it in his possession and it is still exigible, so the other creditors have lost nothing.[24]

ii)        Receipt of other consideration:  s. 6 also provides that other consideration may be permitted, provided it bears a fair and reasonable relative value to the consideration.  In this section, it is intended to permit such exchanges as a guarantee for a loan in return for the transfer of property that is roughly equal in value to it.  Similarly, the debtor is permitted to give bona fide security in return for the actual advance of money, in good faith.  This ensures the debtor is able to continue to borrow money, even though insolvent, without running afoul of the statute unintentionally.

iii)     Substitution of Security:  S. 6(5) of the Act provides that you may also substitute one form of security for another, without offending the Act, provided the value of the estate is not lessened in value as a result.

iv)     Payment in Ordinary Course to Innocent Creditor:  This section provides for a defence to an allegation of fraudulent preference where:

(1)   The disposition was a payment of money;

(2)   The payment was “in the ordinary course”[25]; and

(3)   The payment was to an innocent creditor.[26]

v)      Payment to a Creditor:  This is the most notable “anomaly” of the Act.  The effect of this section is that you can prefer one creditor over another, provided you do so in cash.  You cannot transfer property, but if you liquidate the property first, you can avoid the sanctions of the Act by simply paying them in cash.[27] 

 

j)        Standing to bring the Lawsuit:  Creditors who either have a judgement or a liquidated claim against the debtor at the time of the disposition may commence a an action under the FPA.  As with the FCA, if you are fully secured at the time of the disposition are not creditors.  Neither are those whose claims were not liquidated claims at the time of the disposition.  Neither do those whose claims arose after the alleged disposition.