What if a trustee says the sale price was too low after I bought assets?

When a business owner or company goes bankrupt, a licensed insolvency trustee takes over the debtor’s assets, except those exempt by law, and, under the Bankruptcy and Insolvency Act, can ask a court to review certain earlier transfers, including sales of business assets. The trustee cannot simply cancel a sale it thinks was cheap. It has to apply to a court and meet the Act’s tests, which turn on the price, the timing and whether you dealt at arm’s length with the seller.

What the trustee has to say about the price

The Act defines a transfer at undervalue as a disposition of property or provision of services for which the debtor received no consideration, or consideration conspicuously less than the fair market value of the consideration the debtor gave. The wording is conspicuously less, not merely less. On its application the trustee must state what it believes the fair market value was and what consideration was actually given, and the values the court relies on are, in the absence of evidence to the contrary, the ones the trustee stated.

Timing and who the buyer is

With an arm’s-length buyer, under section 96 of the Bankruptcy and Insolvency Act the sale must fall in the period that starts one year before the initial bankruptcy event and ends on the date of the bankruptcy, and the seller must have been insolvent at the time of the sale or made insolvent by it, and must have intended to defraud, defeat or delay a creditor. Where the buyer was not dealing at arm’s length, the Act reaches back further and asks for less proof. This answer on the look-back periods sets them out.

What a court can order against a buyer

If the trustee succeeds, the court may declare the sale void as against the trustee (in Quebec, that it may not be set up against the trustee), or order a party to the sale, or another person privy to it, to pay the estate the difference between the value of what the debtor received and the value of what the debtor gave. So the result can be a payment rather than the return of the assets. A person is privy if not dealing at arm’s length with a party to the transfer and, by reason of the transfer, directly or indirectly receives a benefit or causes a benefit to be received by another person.

What a buyer can do now

Because the trustee’s stated values stand in the absence of evidence to the contrary, evidence of how the price was reached matters: any independent valuation, the listing or offer history, the purchase agreement and proof of payment. Under section 97, no payment, contract, dealing or transaction with a bankrupt made between the initial bankruptcy event and the bankruptcy is valid except those on a short list, and then only if made in good faith. The list includes a transfer by the bankrupt for adequate valuable consideration, which the Act defines, for a transfer, as consideration of fair and reasonable money value in relation to the property transferred. Even then, section 97 is subject to the provisions on transfers at undervalue. Compare the trustee and receiver routes if you are still buying.