COVID-19 is not an excuse for a fraudulent conveyance

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A strategy not-uncommonly considered by insolvent individuals, entities and the directing minds of those insolvent entities is to transfer assets from the insolvent to keep them out of the reach of the insolvent’s creditors. For this reason, the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 contains sections 95 and 96 which prohibit the transfer of assets by an insolvent debtor on the eve of their bankruptcy. There are also certain provincial statutes such as the Fraudulent Conveyance Act [RSBC 1996] Chapter 163 and the Fraudulent Preference Act [RSBC 1996] Chapter 164, that have this same aim of preventing the improper transfer of assets by debtors that keeps those assets out of the reach of the debtor’s creditors. 

In BTA Real Estate Group Inc. v Family Fitness Inc. and SM Fitness Inc. 2021 SKQB 107, the debtor, a fitness center, was way behind in paying its rent to its landlord and the parties eventually entered into a forbearance agreement. The terms of the forbearance agreement included a consent order to the appointment of a receiver if the debtor did not comply with its obligations under the forbearance agreement. In September 2020, the debtor defaulted on its obligations under the forbearance agreement and in October 2020, the court ordered that a receiver be appointed. 

The receiver undertook to sell the debtor’s assets and the landlord put forward a stalking horse bid, which ended up being the bid ultimately deemed acceptable by the receiver. Following the sale by the receiver to the landlord it was discovered that the debtor had previously transferred its interest in certain gym memberships to a related company. It did not disclose this transfer to the receiver. The landlord, who ended up purchasing the debtor’s assets from the receiver, brought an application before the court to void the transfer of the gym memberships on the basis that the transfer was a fraudulent conveyance. 

Following an analysis of the law regarding fraudulent conveyances, including cases from B.C., the court agreed and found the circumstances compelling and the secrecy surrounding the transfer indicative of bad faith. The court further held that the pandemic and the forced closure of gyms was not a factor to be considered that would remove the taint of a fraudulent conveyance. The court did not agree that the pandemic forced the debtor to sell the memberships for less than fair market value to a non-arm’s length purchaser. There was no objective valuation of the present value of the memberships and the court could only conclude that the consideration for the memberships was inadequate. The transfer was declared to be void and the sale agreement from the receiver to the landlord was ratified to specifically include the memberships and any funds derived from those memberships.

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