Can I buy a business before it becomes insolvent?

Buying from an owner who is struggling but has not filed anything is a different deal from buying out of a formal process, and the Bankruptcy and Insolvency Act treats the two differently. The risk for an early buyer is not a ban on the purchase but a later review of it if the seller goes bankrupt.

Insolvent is a financial test, not a filing

The Act’s definition of an insolvent person covers a person who is not bankrupt, requires a link to Canada and a minimum amount of provable debt, then turns on three alternatives: the person cannot meet obligations as they generally become due, has ceased paying current obligations in the ordinary course of business as they generally become due, or has property that, at a fair valuation or if disposed of at a fairly conducted sale under legal process, would not be sufficient to pay all obligations, due and accruing due. The Office of the Superintendent of Bankruptcy, which supervises estates under the Act, summarizes it as a debtor who cannot pay debt as it becomes due. A business can meet one of those tests before anyone files.

What a later bankruptcy can reach

If the seller goes bankrupt, the trustee can apply to court about a transfer at undervalue, which the Act defines as a disposition of property or provision of services for which the debtor receives no consideration, or consideration conspicuously less than the fair market value of what the debtor gave. If section 96’s conditions are met, the court can declare the transfer void as against the trustee, or order a party to it, or others privy to it, to pay the estate the difference between the value of the consideration the debtor received and the value of the consideration it gave. For a buyer dealing at arm’s length, the transfer must fall within a look-back period, and the debtor must have been insolvent at the time (or rendered insolvent by it) and have intended to defraud, defeat or delay a creditor; the conditions differ for a buyer not at arm’s length, as this answer on transfers at undervalue explains.

What changes once the seller files

An insolvent person who has filed a notice of intention or a proposal may not sell assets outside the ordinary course of business unless a court authorizes it, and the court weighs, among other things, whether the process leading to the sale was reasonable. A buyer who waits for that stage gets a court-authorized sale, described in how to buy assets through a BIA process. An earlier buyer has no such order behind the purchase.