Bankrupt was engaged in effort to defraud?

Ontario civil | Bankruptcy and Insolvency

Avoidance of transactions prior to bankruptcy

Recovery of proceeds or property

Bankrupt was engaged in effort to defraud?

Bankrupt re-sold telephone equipment. In May 2012, bankrupt began paying consultant, C, and C’s company $10,000 per month. In November 2013, bankrupt began receiving loans from new lender it reported as revenue. In March 2015, bankrupt’s old lender brought application for bankrupt’s receivership. In April 2015, receiver and manager were appointed. In July 2015, bankrupt was assigned into bankruptcy. At October 2015 examination under s. 163 of BIA, C testified he had no contact with and could not name any of bankrupt’s customers or suppliers. Trustee in bankruptcy brought motion for order requiring C and C’s company to repay $159,330 transferred during year prior to March 2014 (relevant period) to estate of bankrupt under s. 96 of Bankruptcy and Insolvency Act (BIA). Motion granted; C and C’s company ordered to pay estate $159,330. Payments to numbered company during relevant period fell within s. 96(1)(b)(i) of BIA. Although applications were generally to be brought as motions, judge had discretion to order trial or use summary process if it would yield fair result. No trial was necessary as issue was narrow, parties’ complete evidence was before court, protagonists had been cross-examined, and there was relatively small amount of money in issue. Section 96 did not require trustee to prove bankrupt was engaged in scheme to defeat its creditors generally or as group. C’s affidavit evidence from his knowledge of bankrupt’s customers to how he brought bankrupt millions of dollars in sales was contradictory. Value of consideration C and C’s company gave to bankrupt were presumptively what trustee opined, which was zero. There was no legal or persuasive burden on C or C’s company but, in absence of credible evidence to contrary, trustee proved on balance of probabilities that C and C’s company provided no services of any value to bankrupt during relevant period and that all payments bankrupt made to C or C’s company from that date were “payments at undervalue.” It was clear and undisputed that during relevant period, bankrupt was engaged in effort to defraud and delay bank from learning it was insolvent and borrowing from different lender. Three badges of fraud were found and gave rise to presumption that bankrupt intended to defraud, defeat, or delay old lender. There was no evidence of bona fide value flowing from C or C’s company to bankrupt even before relevant period. While solvent company was entitled to make payments for non-commercial or uneconomic motivations, insolvent company making such payments for no consideration while actively defrauding its principal lender could not be said to be acting in ordinary course of business.
National Telecommunications Inc., Re (2017), 2017 CarswellOnt 3184, 2017 ONSC 1475, F.L. Myers J. (Ont. S.C.J. [Commercial List]).

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