Court File and Parties
COURT FILE NO.: 31-2014067 DATE: 20170613
ONTARIO SUPERIOR COURT OF JUSTICE (IN BANKRUPTCY AND INSOLVENCY) (COMMERCIAL LIST)
IN THE MATTER OF THE BANKRUPTCY OF NATIONAL TELECOMMUNICATIONS INC. OF THE TOWN OF VAUGHAN, IN THE PROVINCE OF ONTARIO
BEFORE: F.L. Myers, J.
COUNSEL: James Clark for Deloitte Restructuring Inc., trustee in bankruptcy of the estate of National Telecommunications Inc., a bankrupt Bryan C. McPhadden for 1219172 Ontario Inc. and Brian Coones
HEARD: February 21, 2017
Supplementary Reasons
[1] There is an error in my Reasons dated March 3, 2017 reported at 2017 ONSC 1475. Counsel advise that the parties take no exception to a brief endorsement correcting the error. The correction is to just ensure that the law is expressed correctly in my decision. This does not require any change to the issued and entered order giving effect to my Reasons. I am not changing the path to my decision which remains as originally stated. R. v. Arnaout, 2015 ONCA 655.
[2] This application involves the interpretation and application of s. 96(1) of the Bankruptcy and Insolvency Act, RSC 1985, c. B-3 that provides:
Transfer at undervalue
96 (1) On application by the trustee, a court may declare that a transfer at undervalue is void as against, or, in Quebec, may not be set up against, the trustee — or order that a party to the transfer or any other person who is privy to the transfer, or all of those persons, pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor — if
(a) the party was dealing at arm’s length with the debtor and
(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and that ends on the date of the bankruptcy,
(ii) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, and
(iii) the debtor intended to defraud, defeat or delay a creditor; or
(b) the party was not dealing at arm’s length with the debtor and
(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and ends on the date of the bankruptcy, or
(ii) the transfer occurred during the period that begins on the day that is five years before the date of the initial bankruptcy event and ends on the day before the day on which the period referred to in subparagraph (i) begins and
(A) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or
(B) the debtor intended to defraud, defeat or delay a creditor.
[3] Under s. 96(1)(b)(ii) a transfer at undervalue made between one and five years prior to the bankruptcy to a person who was not at arm’s length from the bankrupt can be declared void if either of the following conditions apply: (A) when the transfer was made the bankrupt was or was rendered insolvent; or (B) the bankrupt made the transfer with the intent to defraud, defeat or delay a creditor. The test is disjunctive. Relief is available against a non-arm`s length transfer that occurred between one and five years before the bankruptcy upon proof of just one of the two alternatives.
[4] In paras. 7 and 50 of my Reasons, I required the trustee to prove both conditions under s. 96(1)(b)(ii). I did not give effect to the disjunctive “or” in s. 96(1)(b)(ii)(A).
[5] Parliament has created important gradations depending on the degree of impropriety and the timing of the impugned transaction. In light of the need for and benefit of certainty in commercial transactions, as time passes avoiding less offensive transactions becomes more difficult. On the most severe end of the spectrum, under s. 96(1)(b)(i), a transfer at undervalue to a non-arm’s length party made within one year of the bankruptcy is voidable per se. At the other end of the spectrum, under s. 96(1)(a), an arm’s length transfer can only be avoided if it occurred within one year of the bankruptcy and then only if the trustee proves both the insolvency of the bankrupt and the bankrupt’s fraudulent intent. The mid-point, under s. 96(1)(b)(ii), allows an older transfer to a non-arm’s length party to be challenged for up to five years. But in order to overcome the time elapsed, proof is required of one or the other of the contemporaneous insolvency of the bankrupt or that it had fraudulent intent.
[6] To obtain relief against this bankrupt’s transfers to the respondents between one and five years prior to the bankruptcy, the trustee needed to prove only the existence of one of conditions under 96(1)(b)(ii)(A) or (B). Having found on the facts that the trustee proved both conditions, the issue of whether the trustee needed to prove only one of them is only of jurisprudential interest.