What is the fraudulent conveyance risk if I buy a business below value?

Paying less than a business is worth is not unlawful by itself. The risk arises if the seller is later bankrupt, or owes creditors who say the sale left them unpaid. Two sets of law matter: the federal Bankruptcy and Insolvency Act (BIA) and provincial statutes. This page describes what those laws say. Whether a particular sale is exposed is a question for a lawyer who has seen the facts.

The federal rule under the BIA

Under BIA s.96, on application by the trustee, a court may declare a transfer at undervalue void as against the trustee. It may instead order a party to the transfer, or any other person who is privy to it, or all of them, to pay the estate the difference in value. Section 2 defines a transfer at undervalue as a disposition of property or provision of services for which no consideration is received, or for which the consideration received is conspicuously less than the fair market value of what was given.

The conditions and time windows

If the parties deal at arm’s length, s.96(1) requires a transfer in the period beginning one year before the date of the initial bankruptcy event and ending on the date of the bankruptcy, and that the seller was insolvent or was rendered insolvent by it, and intended to defraud, defeat or delay a creditor. If they are not at arm’s length, a transfer in that one-year period is enough on its own. A transfer in the earlier period beginning five years before the initial bankruptcy event also qualifies if the seller was insolvent or was rendered insolvent by it, or intended to defraud, defeat or delay a creditor. For s.96(1)(b), s.4(5) deems related persons not at arm’s length in the absence of evidence to the contrary.

Provincial law and what a buyer can ask

Each province has its own statute. Ontario’s Fraudulent Conveyances Act s.2 makes a conveyance made with intent to defeat, hinder, delay or defraud creditors or others void as against them. Section 3 says that does not apply to an interest conveyed upon good consideration and in good faith to a person without notice or knowledge of that intent. Section 4 adds that s.2 applies even where valuable consideration was given, unless the conveyance is protected under s.3. A buyer can ask how the price was set and whether a valuation stands behind it. BDC says it is important to engage a Chartered Business Valuator to get a realistic market-perceived price.