A trustee in bankruptcy, bankrupts' creditors or superintendent in bankruptcy may apply for cancellation of fraudulent preferences and disposition of property transactions that were made by the bankrupt within legislatively specified period of time and to return the transferred property to the bankruptcy estate for distribution among the creditors.
Ontario Fraudulent Conveyances Act and Ontario Assignments and Preferences Act. Badges of Fraud.
Under s.2 of the Ontario Fraudulent Conveyances Act (“the OFCA”), every conveyance of property and every bond, suit, judgment and execution made with the intent to defeat hinder, delay or defraud creditors of their just and lawful actions are void as against such persons. The similar provision can be found in the Ontario Assignments and Preferences Act.
Creditors claiming a fraudulent conveyance must prove the intent to defraud. The courts have presumed the intent where the transaction is gratuitous, i.e. without payment from the recipient of the property (Freeman v. Pope). The presumption of fraud in gratuitous transaction can be rebutted by the debtor who must disprove that there was intent to defraud creditors. (Mandryk v. Merko). If the transaction is not gratuitous, the claimant must show the court, so called badges of fraud. Some badges of frauds are:
- Secrecy of the transaction
- The transaction is made just before court order is to be issued
- Debtor retained possession of the property and used the property after transferring legal title
- Clear attempts to conceal fraudulent nature of the transaction
- Inadequate payment for the property transferred
- Use of cash rather than banking accounts
- Unreasonable haste in completing transaction
- Close relationship between transferor and transferee
Under s.3 of the OFCA, the transaction made in good faith, for good payment, to a person who made a purchase in good faith without knowing the intention to defraud creditors are not void.
Fraudulent conveyances and preferences under the BIA
Bankruptcy scheme disallow the “to be bankrupt” to dispose their property within certain period of time before the bankruptcy. Section 91(1) renders void every “settlement” that is made within one year before declaring bankruptcy. Similarly, s.91(2) makes any “settlement that is made within 5 years of bankruptcy is void if the transfer rendered the bankrupt to be unable to pay his debts. Section 2(1) basically defines settlement as a transfer of property for nominal payment made gratuitously.
In the same way, the bankruptcy scheme disallows the bankrupts to give a preference in payment to some creditors contrary to priority of distribution scheme in s.136 of the BIA. Under s.95 of the Act, the transfer of property to any creditor triggers the presumption of fraudulent preference to defraud the priority of distribution in the BIA. If the presumption is not rebutted, the transaction is void. In cases, where the creditors of the bankrupts are relatives, the presumption is increased from 3 months to one year. The definition of “related person” can be found in s.4(2) of the Act.
s.91, 95 of the BIA.
Ontario Fraudulent Conveyances Act
Ontario Assignments and Preferences Act.