How long can a trustee challenge a business sale as a transfer at undervalue?

When a business owner or their company later goes bankrupt, the trustee can ask a court to undo an earlier sale that left value behind. A licensed insolvency trustee administers the estate, under the supervision of the Office of the Superintendent of Bankruptcy. How far back the trustee may look under the Bankruptcy and Insolvency Act depends largely on whether the buyer was at arm’s length.

What counts as a transfer at undervalue

The Act defines it as a disposition of property, or provision of services, for which the debtor receives nothing or a price conspicuously less than the fair market value of what the debtor gave. A business sold to a relative for a token amount fits; a price that is not conspicuously below fair market value does not.

The one-year and five-year windows

The period is measured from the date of the initial bankruptcy event, not from the sale. With an arm’s-length buyer, the sale must fall within the period that begins one year before that date and ends on the date of the bankruptcy, and the trustee must show the seller was insolvent or made insolvent by it, and intended to defraud, defeat or delay a creditor. With a buyer not at arm’s length, a sale in that period is enough, and an earlier one, back to five years before the initial bankruptcy event, is caught if the seller was insolvent or had that intent.

When the clock starts and who is related

The initial bankruptcy event is the earliest of several filings, among them an assignment, a proposal, a notice of intention to make a proposal, an application for a bankruptcy order, or Companies’ Creditors Arrangement Act proceedings, so it can precede the formal bankruptcy date. Related persons, including individuals connected by blood, marriage, common-law partnership or adoption, are deemed not to deal at arm’s length. For unrelated persons it is a question of fact.

What the court can order

The court may declare the transfer void against the trustee, or order a party to it, or a non-arm’s-length person who benefited, to pay the estate the difference in value. The trustee states what it believes the fair market value was, and unless there is evidence to the contrary the court works from those figures. Buyers should also read buying from a trustee versus a receiver.