When A Debtor Puts Assets Out of Reach: Use of Fraudulent Conveyance Proceedings to Recover Debts

Getting a judgment isn’t the only challenging aspect of a legal dispute; collecting on a judgment can present a whole new set of challenges. Some parties actively make efforts to judgment proof themselves by alienating their assets. While such conduct can be appropriate, in certain circumstances it can trigger the Fraudulent Conveyance Act (the “Act”). The Act serves as a tool to help creditors get to assets that debtors have inappropriately alienated from themselves.

The Act, in its entirety, is as follows:

1)  If made to delay, hinder or defraud creditors and others of their just and lawful remedies

(a)   a disposition of property, by writing or otherwise,

(b)   a bond,

(c)   a proceeding, or

(d)   an order

is void and of no effect against a person or the person’s assignee or personal representative whose rights and obligations are or might be disturbed, hindered, delayed or defrauded, despite a pretence or other matter to the contrary.

2) This Act does not apply to a disposition of property for good consideration and in good faith lawfully transferred to a person who, at the time of the transfer, has no notice or knowledge of collusion or fraud.

The recent decision of Jasmur Holdings Ltd. v Callaghan, 2019 BCSC 1966 (CanLII) turned on whether the Act applied. The underlying dispute was the intended development of land that went sideways. The result included a claim against the defendant by the plaintiffs, investors in the project, for fraud, misrepresentation and breach of contract. The plaintiffs, seeking to get to the assets of the defendant, applied to have the transfer of the defendant’s interest in his family home to his wife for $1 declared void for breaching the Act.

The court citing the following applicable principles from Abakhan & Associates Inc. v. Braydon Investments Ltd., 2009 BCCA 521 (CanLII):

1. the Act is to be construed liberally;
2. an intent to put one’s assets beyond the reach of creditors is all that is required to void a transaction;
3. a dishonest intent or mala fides is not a necessary element to avoid a transaction under the Act;
4. intent is a state of mind and a question of fact;
5. intent can be proven by direct evidence of the transferor’s intent as well as by inferences from the transferor’s conduct, the effect of the transfer and other circumstances;
6. where a transfer of property has the effect of delaying, hindering or defeating creditors, the necessary intent is presumed;
7. inadequate consideration paid for the transferred property may be indicative of fraudulent intent;
8. it is not necessary to show the transferor was insolvent at the time of the transfer;
9. it is not necessary for the applicant to show he/she was a creditor at the time of the transfer, future creditors are also protected; and
10. it is no defence that the transfer was also in furtherance of a legitimate business objective.

Similarly, the court cited Prima Technology Inc. v. Yang, 2018 BCSC 94 (CanLII) which in turn held that circumstances which indicated fraudulent intent were set out in Banton v. Westcoast Landfill Diversion Corp. et al, 2004 BCCA 293 (CanLII) and included:

1. the state of the debtor’s financial affairs at the time of the transaction, including his income, assets and debts;
2. the relationship between the parties to the transfer;
3. the effect of the disposition on the assets of the debtor, i.e. whether the transfer effectively divests the debtor of a substantial portion or all of his assets;
4. evidence of haste in making the disposition;
5. the timing of the transfer relative to notice of debts or claims against the debtor; and
6. whether the transferee gave valuable consideration of the transfer.

In applying this analysis, the court in Jasmur Holdings Ltd. v Callaghan found that there was no need to imply intent as there was direct evidence of it including admissions that the intent of the transfer was to protect the home from potential judgment creditors and to protect it from litigation. Nonetheless, the court also found that the requisite fraudulent intent could be established in the circumstances of the case including the transfer being for nominal consideration, the transfer being not at arm’s length, the transfer being made in advance of the defendant entering a risky business venture and the property being the defendant’s only significant asset.

Beyond the most immediate benefit of putting assets back in the hands of debtors which a judgment can then be enforced against, establishing that a conveyance was in breach of the Act also has consequences in respect of bankruptcy and insolvency proceedings. Under the Bankruptcy and Insolvency Act debts or liabilities arising out of fraud are not discharged as a part of bankruptcy or insolvency proceedings. Similarly the automatic stay of proceedings that ordinarily applies when someone enters bankruptcy or a consumer proposal can be lifted in respect of fraudulent conveyance proceedings.

Parties must very carefully plan their arrangements so as to avoid the application of the Act and having any planning to limit their exposure to litigation be declared void. Similarly, parties that find themselves with a seemingly hallow judgment ought to consider whether the judgment debtor has engaged in any conduct which might trigger the Act and make additional assets available for seizure and sale. Good legal advice can assist in both respects.