Preferential payment (BIA preference)

Sellers and buyers meet the term when a business that later goes bankrupt paid one creditor ahead of others, or when a trustee reviews earlier deals. See what to do if a trustee says the sale price was too low and the entries on trustee in bankruptcy and arm’s length.

What section 95 says

Section 95(1) covers a transfer of property, provision of services, charge, payment, obligation incurred or judicial proceeding by an insolvent person in favour of a creditor, or a person in trust for that creditor. If the creditor deals at arm’s length with the insolvent person, it must be made with a view to giving that creditor a preference over another creditor, and it is void as against the trustee if made in the three months before the date of the initial bankruptcy event up to the date of the bankruptcy. If the creditor does not deal at arm’s length, it must have the effect of giving a preference, and the period starts 12 months before that date. In Quebec the wording is that it may not be set up against the trustee. Under s. 95(2), an arm’s-length step that has the effect of a preference is presumed, in the absence of evidence to the contrary, to have been made with a view to giving it; s. 95(2.1) sets exceptions to that presumption.

What to ask

The Office of the Superintendent of Bankruptcy summarizes the arm’s-length part of the rule for creditors. This entry covers the federal Bankruptcy and Insolvency Act only. Ask:

• Did the seller pay particular creditors shortly before the sale or filing?
• Were any of those creditors related to the seller or otherwise not at arm’s length?
• Has a trustee been appointed, or could one be?