Transfer at undervalue (BIA s. 96)

A buyer of assets from a seller in financial trouble meets this term when a later bankruptcy puts the sale under review. The Act defines the term in s. 2, and s. 96 lets the trustee apply to a court about one. The Office of the Superintendent of Bankruptcy lists preferences or transfers at undervalue among the dealings that can be set aside after a bankruptcy.

What a court can do

On the trustee’s application, a court may declare the transfer void as against the trustee (in Quebec, that it may not be set up against the trustee). It may instead order a party to the transfer, or any other person privy to it, to pay the estate the difference between the value of the consideration the debtor received and the value of the consideration the debtor gave. The trustee states both values, and they stand in the absence of evidence to the contrary (s. 96(2)). A person is privy if they are not dealing at arm’s length with a party to the transfer and, by reason of it, receive or cause another person to receive a benefit (s. 96(3)).

What to check or ask

• Whether the buyer deals at arm’s length with the seller, because s. 96(1) sets different conditions and periods for parties at arm’s length and parties who are not.
• Whether the price was close to fair market value, since the Act speaks of consideration conspicuously less than it.
• Whether the seller was insolvent when it sold, or was rendered insolvent by the sale, a condition the Act uses in some of its cases.

For the buyer’s side, see the fraudulent conveyance risk when buying below value and the trustee in bankruptcy.