Can a creditor undo a payment made before my business sale closes?

A payment made before closing looks final, but insolvency law lets a later trustee look back at it. If the seller goes bankrupt after the sale, or a proposal to creditors is annulled, the Act measures its look-back for unfair payments and cheap transfers from the date of the initial bankruptcy event, the earliest of steps such as an assignment, a proposal or a notice of intention. This page covers the federal Act only; provincial creditor-protection rules are a separate question for a lawyer.

Why the challenge belongs to the trustee

The Act makes a preferential payment void as against the trustee, and it lets a court act on the trustee’s application when a transfer was made for too little. The Office of the Superintendent of Bankruptcy notes that only a creditor can apply for a bankruptcy order. An unpaid creditor’s route is therefore indirect: apply to have the seller declared bankrupt, after which a licensed trustee reviews what was paid out beforehand. If a trustee refuses to take a proceeding that would benefit the estate, a creditor can ask the court for an order authorizing it to take the proceeding itself.

Payments that favour one creditor

A preference is a payment, transfer or charge by an insolvent person that puts one creditor ahead of the others. Where the creditor deals at arm’s length with the seller, the Act voids it if it was made with a view to preferring that creditor, and presumes that intent from the effect unless there is evidence to the contrary, even where the debtor paid under pressure. Where the creditor is not at arm’s length, such as a related company, only the effect matters, and the look-back is longer.

Sales for far less than value

A transfer at undervalue is a disposition for which nothing was received, or for which the price was conspicuously less than fair market value. On the trustee’s application a court may declare it void, or order the other party, or anyone privy to the transfer, to pay the estate the difference. How far back the Act looks, and what must be shown, depends on whether the other party was at arm’s length with the seller.

What a seller can do before closing

Sellers in a stretched position commonly keep a written record of why and when each payment was made, treat creditors evenhandedly where they have a choice, and take particular care before paying relatives or related companies first from the proceeds. If the business is struggling, ask a licensed insolvency trustee and a lawyer to review closing payments before the sale completes.