What if the seller transferred assets to insiders before going bankrupt?

The Bankruptcy and Insolvency Act does not use the word insiders. It asks whether the person who received an asset dealt at arm’s length with the seller, and it gives the trustee in bankruptcy, a professional licensed and regulated by the Office of the Superintendent of Bankruptcy, tools to reverse some earlier transfers. A buyer has two worries: assets moved to insiders may be missing from what you are buying, and assets bought from an insider may face a claim.

Who counts as an insider

Related persons are deemed not to deal at arm’s length while so related, and for the trustee’s challenges to preferences and transfers at undervalue that holds in the absence of evidence to the contrary. They include individuals connected by blood, marriage, common-law partnership or adoption, and a company and the person who controls it. For anyone else, such as a friend or a long-time supplier, it is a question of fact.

What a trustee can reverse

The Office of the Superintendent of Bankruptcy describes preferential treatment as a payment or security that benefits one or more creditors over others, and for a creditor not at arm’s length the Bankruptcy and Insolvency Act reaches back 12 months from the initial bankruptcy event. A transfer at undervalue is a disposition of property or provision of services for which the debtor receives nothing, or consideration conspicuously less than the fair market value of what the debtor gave. Under the Act, where a party to it was not at arm’s length it can be challenged back one year, and back five years if the debtor was insolvent at the time or rendered insolvent by it, or meant to defraud, defeat or delay a creditor; how long a trustee can challenge a sale sets out the windows.

How a claim can follow the assets

A court can declare a transfer at undervalue void against the trustee, or order a party to it, or anyone privy to it, to pay the estate the difference between the value of what the debtor received and what it gave. A person is privy if they are not at arm’s length with a party to the transfer and, because of it, receive a benefit or cause another person to receive one. Where property was acquired under a transaction that is set aside, the trustee may also recover it, its value or its proceeds from the person who acquired it or anyone it was passed on to. Someone who paid or gave adequate valuable consideration for the property in good faith is outside that rule, and the trustee’s recourse is then against the person who dealt with the bankrupt.

What to check before you sign

Ask the seller to list every sale, payment, loan or transfer to an owner, director, relative or related company in the last five years, the longest window the Act sets for a transfer at undervalue. Compare the assets in your agreement with what the company can show it owns.