Can I be sued for buying from a company that was already going under?

A purchase from a struggling company is not unlawful, but it can be reviewed later. If the seller goes bankrupt, the Bankruptcy and Insolvency Act (BIA) lets the trustee ask a court to look back at certain transactions, and provincial statutes give creditors a separate route. Which one applies, and whether the buyer is exposed, depends on the price paid, who the buyer is and the timing. Another page covers buying before a business becomes insolvent; this one is about who can sue the buyer and what they must show.

What a trustee can ask a court to do

Under s.96 of the BIA, on the trustee’s application a court may declare a transfer at undervalue void as against the trustee, or order a party to the transfer, or any other person privy to it, to pay the estate the difference between the value of what the debtor received and the value of what it gave. A transfer at undervalue is a disposition of property or services for which the debtor received nothing, or consideration conspicuously less than fair market value. A price that is not conspicuously less than fair market value does not fit that definition.

Which look-back period applies

If the buyer deals at arm’s length with the seller, s.96(1)(a) requires the transfer to fall in the period beginning one year before the date of the initial bankruptcy event and ending on the date of the bankruptcy, and requires the debtor to have been insolvent or rendered insolvent, and to have intended to defraud, defeat or delay a creditor. If the buyer does not deal at arm’s length, a transfer in that one-year window can be challenged without those two conditions, and one between five years and one year back can be challenged if the debtor was insolvent or had that intent. Related persons are deemed not to deal at arm’s length while so related (s.4(5)); for others it is a question of fact (s.4(4)).

Creditors under provincial law

Ontario’s Fraudulent Conveyances Act makes a conveyance made with intent to defeat, hinder, delay or defraud creditors or others void as against those persons and their assigns. Section 3 says that rule does not apply to property conveyed upon good consideration and in good faith to a person who, at the time of the conveyance, had no notice or knowledge of that intent. Other provinces have their own statutes, so check the rule in the seller’s province. If the buyer was a creditor of the seller, ask a lawyer whether the BIA’s preference rule in s.95 could also apply.