Bankruptcy and insolvency | Avoidance of transactions prior to bankruptcy | Settlements of property
Bankrupt's corporations leased commercial premises from plaintiff creditor, bankrupt personally guaranteed leases, leases went into default, creditor sued bankrupt and was granted summary judgment. Bankrupt had previously invested $1 million in music company started by K in exchange for common shares. Bankrupt wanted money out of company but he did not want to exercise his withdrawal rights so loan was agreed to, and K and bankrupt executed letter agreement, promissory note, share pledge agreement and consent to pledge of bankrupt's shares. When loan came due bankrupt did not repay loan, K exercised his right to foreclose under share pledge agreement, and shares were transferred to K. Bankrupt filed assigned in bankruptcy. Trustee in bankruptcy brought action, assigned to creditor, under s. 96(1) of Bankruptcy and Insolvency Act (BIA) to set aside transfer of shares in company on basis that transfer was at undervalue or that it was fraudulent conveyance made with intent to defeat creditors under s. 2 of Fraudulent Conveyances Act. Action dismissed. Bankrupt was dealing with K at arm's length, at all times they acted in their separate, adverse interests, there was no common mind directing bargaining for both parties, and one did not control other or outcome of bargain. K's evidence was accepted that he was not acting in concert with bankrupt but was trying to accommodate bankrupt's desire to recover capital while at same time trying to minimize impact of that return of capital on operations of company. Bankrupt's desire to monetize his investment promptly and his willingness to accept discount was opportunity that K took. Bankrupt's financial trouble did not negate his independent economic interest in his shares or his ability to negotiate at arm's length. Lack of any consultation with accountants was not evidence of lack of independent economic interest. As bankrupt and K were dealing at arm's length, for impugned transaction to be invalid under s. 96(1) of BIA, it must have occurred within one year of initial act of bankruptcy, which was January 2013. Relevant date was date loan agreement, promissory note and share pledge agreement were executed, which was end of March 2011, as at that time contract was made and obligation to advance funds became operative, as did obligation to repay or forfeit shares upon failure of repayment. Only other relevant date was December 2011 when shares were actually transferred by right of forfeiture upon non-payment of loan, and both dates occurred more than one year before bankrupt made assignment in bankruptcy. Transaction was outside reach of s. 96(1) and could not be set aside under BIA.
1085372 Ontario Limited v. Kulawick (2019), 2019 CarswellOnt 6882, 2019 ONSC 2344, Penny J. (Ont. S.C.J. [Commercial List]).
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