Transfers to family members upheld following bankruptcy

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A transfer of a car to a family member, within one year of the transferor’s bankruptcy. Such transactions are regularly set aside in bankruptcy. Even where the transfer was on account of a previous debt owed to the family member, such a transfer would normally be an invalid “preference” under s. 95 of the Bankruptcy and Insolvency Act.

In Pereira (Re), the transfer was rescued by a one-page loan document which included the borrower’s promise to put up the car as collateral if the loan was not repaid on time. The car was transferred following default in repayment, and the court held that this created a valid security interest which survived the borrower’s bankruptcy and took the transfer outside s 95. Although a security interest in something like a vehicle is usually registered in the Personal Property Security Registry, it need not be: the security interest can be “perfected” by possession, which is what happened in this case.

Lending to relatives can be risky for all sorts of reasons, and proper advice is strongly recommended.

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