Payments void as transfers at undervalue when no commercial basis for transactions

Ontario civil | Bankruptcy and Insolvency | Avoidance of transactions prior to bankruptcy | Fraudulent preferences

N Inc. operated as re-seller of data communications equipment. Respondent S Inc. was incorporated to help out N Inc.. Receiver was appointed in April 2015 and N Inc. was assigned into bankruptcy in July 2015. Trustee noticed that N Inc. received two separate payments from S Inc. in 2013 and 2014 totalling $497,000. Following payments, N Inc. made number of payments to S Inc. in period immediately preceding receivership totaling over $1,055,581. There was no documentation to explain reason for payments. Trustee claimed transactions were transfers at undervalue to extent of excess monies received by S Inc. over and above monies paid by S Inc. to N Inc.. Trustee brought motion for declaration that transactions between N Inc. and S Inc. were transfers at undervalue and order that S Inc. pay estate of N Inc. amount of $334,841. Motion granted. There was no generally accepted commercial basis for transactions. N Inc. and S Inc. were not acting at arm’s length. By entering into transactions, N Inc. intended to defraud or delay major creditor by falsifying receivables and payables in order to mislead creditor, who was monitoring N Inc.’s financial position closely. Payments by N Inc. to S Inc. were void as transfers at undervalue. S Inc. ordered to pay estate amount of $334,841.

National Telecommunications v. Stalt (2018), 2018 CarswellOnt 5360, 2018 ONSC 1101, L.A. Pattillo J. (Ont. S.C.J.).

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