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Insolvency (BIA) - Anti-Preference. RPG Receivables Purchase Group Inc. v. American Pacific Corporation
In RPG Receivables Purchase Group Inc. v. American Pacific Corporation (Ont CA, 2025) the Ontario Court of Appeal allowed a bankruptcy trustee's appeal, here where considering the BIA's 'anti-preference' provisions - where pre-bankruptcy transactions can be voided:A. Overview
[1] The equitable treatment of creditors is one of the goals of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”). In furtherance of that purpose the BIA permits a trustee in bankruptcy, in defined circumstances, to treat a pre-bankruptcy transaction that advantaged one creditor over others as void.
[2] One example is a payment made by an insolvent debtor to an arm’s length creditor within three months of the debtor’s bankruptcy. Such a payment is void against the trustee if the payment was made with the intention of giving the recipient a preference over other creditors. In pursuing recovery of such a payment from the recipient, the trustee is given the benefit of a rebuttable presumption that if the payment had the effect of giving the recipient creditor a preference, it was made with that intention even if made under pressure: BIA, ss. 95(1)(a) and (2).
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[7] An insolvent debtor’s intention to pay past indebtedness to one creditor to enable the continuation of the debtor’s business is inconsistent with an intention to give that creditor a preference only if the plan to continue in business has a reasonable basis. What constitutes a reasonable basis is informed by the purpose of the anti-preference provisions of the BIA, which is to prevent frustration of the bedrock principle of bankruptcy law that all ordinary creditors should rank equally. The debtor’s plan must therefore be more than simply a desire to keep going, heedless to whether doing so will continue or deepen the already existing insolvency. There must be a reasonable basis for the debtor to believe that continuing in business will enhance the value of the enterprise for the benefit of all creditors.
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(1) The Anti-Preference Provisions of the BIA
[25] Section 95 of the BIA provides, in relevant part:95 (1) A transfer of property made, a provision of services made, a charge on property made, a payment made, an obligation incurred or a judicial proceeding taken or suffered by an insolvent person
(a) in favour of a creditor who is dealing at arm’s length with the insolvent person, or a person in trust for that creditor, with a view to giving that creditor a preference over another creditor is void as against — or, in Quebec, may not be set up against — the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy; and
(b) in favour of a creditor who is not dealing at arm’s length with the insolvent person, or a person in trust for that creditor, that has the effect of giving that creditor a preference over another creditor is void as against — or, in Quebec, may not be set up against — the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is 12 months before the date of the initial bankruptcy event and ending on the date of the bankruptcy.
(2) If the transfer, charge, payment, obligation or judicial proceeding referred to in paragraph (1)(a) has the effect of giving the creditor a preference, it is, in the absence of evidence to the contrary, presumed to have been made, incurred, taken or suffered with a view to giving the creditor the preference — even if it was made, incurred, taken or suffered, as the case may be, under pressure — and evidence of pressure is not admissible to support the transaction. ....
[28] In both respects the appellant is raising questions of law. The scope of the BIA prohibition on the use of evidence of pressure is a question of statutory interpretation, which is reviewed on a correctness standard: Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, [2019] 4 S.C.R. 653, at para. 37. Similarly, whether there is a requirement that a business continuation plan have a reasonable basis to be legally capable of rebutting the statutory presumption raises a question of law because it addresses the components of a legal standard to be applied to the facts: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paras. 27, 31.
[29] The appellant does not challenge the bankruptcy judge’s findings of fact, which are, of course, entitled to deference on appeal.
(3) The Bankruptcy Judge Did Not Improperly Rely on Evidence of Pressure
[30] Section 95(2) of the BIA creates a rebuttable presumption. It provides that a payment which had the effect of conferring a preference is “in the absence of evidence to the contrary, presumed to have been made ... with a view to giving the creditor the preference”. The section restricts what evidence may be relied on to rebut the presumption. The presumption applies “even if [the payment] was made … under pressure – and evidence of pressure is not admissible to support the transaction”.
[31] I do not view the restriction in s. 95(2) as rendering inadmissible any evidence that the debtor was put under pressure. What the section prevents is a particular use of that evidence.
[32] A statutory provision is interpreted “in a textual, contextual and purposive way”: Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601, at para. 11. The text of s. 95(2) prevents evidence of pressure being used as support – in the sense of justification – for the transaction. When a justification for the transaction is proffered other than pressure, evidence that the debtor was under pressure may be considered so that the court has a proper understanding of the entire circumstances; the text does not suggest otherwise.
[33] The context of the provision supports this view. The statutory presumption as to an insolvent debtor’s intent is rebuttable by evidence to the contrary. Parliament would know that an insolvent debtor would often be under pressure yet would want the full circumstances to be considered in determining whether there was an intention behind a transaction other than the presumed intent to give the recipient a preference.
[34] This interpretation is also consistent with the purpose of the provision. The statutory language abolished a doctrine that a debtor was not considered to have acted voluntarily, and therefore did not intend to give a preference, when it paid one creditor due to pressure: Orion Industries Ltd. (Trustee of) v. Neil’s General Contracting Ltd., 2013 ABCA 330, at paras. 31-32. In other words, the purpose of the section was to prevent evidence of pressure being used as the justification for the transaction; the purpose does not extend to preventing consideration of the entire circumstances confronting the debtor in evaluating a different justification.
[35] The bankruptcy judge relied on Mr. Griffiths’ evidence to find that Specialty made the payments “out of commercial necessity and to preserve Specialty’s relationship with its only customer”. This was not a finding that the payments were supportable because Specialty was under pressure and did not make a voluntary choice. Rather, the bankruptcy judge used this evidence to situate the demands of AmPac – that its prior invoices had to be paid as a condition of supplying additional product – within the overall circumstances that bore on the intent of Specialty. He found, in all the circumstances, that the payments were made because Specialty’s intent was to continue in business.
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[42] .... In my view, where the insolvent debtor’s actual intent in making a preferential payment to one creditor is to continue in business, that will displace the presumption that the payment was made with a view to giving the recipient creditor a preference over others only where there is a business continuation plan that a reasonable debtor could believe will achieve benefits for the creditors generally. This conclusion flows from the case law and a purposive approach to the anti-preference provisions of the BIA.
(i) Case Law
[43] Orion is an example of a case where the presumed intent to confer a preference was displaced by a plan that was reasonable in the sense described above. Although the debtor made a payment to a creditor holding its equipment to free up the equipment so that it could be sold, the debtor entertained the reasonable belief that the equipment could be sold for more than the payment necessary to obtain it. The payment, although in effect a preference, was not intended as such because it simply recognized the financial imperative the debtor faced to implement a plan to obtain the equipment and realize proceeds that would exceed the payment, which would go “a long way toward saving the insolvent company from bankruptcy”: at para. 35.
[44] The Court of Appeal of New Brunswick took a similar approach in St. Anne-Nackawic Pulp Co. (Trustee of) v. Logistec Stevedoring (Atlantic) Inc., 2005 NBCA 55, 255 D.L.R. (4th) 137. In that case, the debtor had paid, among other things, overdue invoices for past services to obtain the release of goods the creditor was holding. The goods could be used to fulfill contracts that would generate revenues many times greater than the amount of the payment ($5 of benefit for every $1 paid to the creditor). The Court of Appeal of New Brunswick found that the lower court erred in considering that the payment was made with the intent of giving the creditor a preference. The debtor’s dominant intent was to generate income exceeding the payment to be applied against debts, and in doing so the debtor was acting in a commercially reasonable manner: at paras. 1, 17-18.
[45] In both of these cases, making the payment to obtain expected benefits was found to be reasonable because, among other things, it was a course of action a trustee would be expected to pursue if it had the opportunity: Orion, at para. 22, St. Anne-Nackawic, at para. 17. This reinforces the view that the reasonableness of a debtor’s plan is to be assessed from the point of view of its substantive effect on creditors as a whole. A trustee is expected to adopt courses of action that are reasonable from the standpoint of maximizing recoveries for creditors: L.W. Houlden, G.B. Morawetz, and Janis Sarra, Bankruptcy and Insolvency Law of Canada, loose-leaf (2025-Rel. 2), 4th ed (Toronto: Thomson Reuters, 2009) at §2:36; Rassell (Re), 1999 ABCA 232, 177 D.L.R. (4th) 396, at paras. 12-13.
[46] The same conclusion can be drawn from other cases where the debtor’s hope to carry on business as a result of the preferential payment was assessed as objectively reasonable having regard to factors including whether there was a sensible business plan (Holt Motors Ltd.,(Re) (1966), 1966 CanLII 437 (MB KB), 57 D.L.R (2d) 180 (Man. Q.B.), at p. 187); whether to a reasonable person the debtor’s situation was hopeless (Spectrum Interiors (Guelph) Ltd., Re (1979), 29 C.B.R. (N.S.) 218 (Ont. H.C.), at paras. 5, 7), or whether the debtor’s plan was reasonable in terms of satisfying creditor claims (Excavation Boyer & Frères inc., Re, 1997 CanLII 10459 (QC CA), [1997] R.J.Q. 866 (Que. C.A.), at pp. 870-71).
[47] More recently, in Keith G. Collins Ltd., as Trustee of the Estate of Dubois-Vandale, a Bankrupt v. MBNA Canada Bank, 2006 MBQB 258, 209 Man R (2d) 268, at paras. 16-18, the court summed up the matter this way, distinguishing between the debtor’s actual intent and the requirement that the intent be objectively reasonable as a matter of substance:To rebut the presumption, MBNA must show on a balance of probabilities that Ms Dubois-Vandale’s dominant intention was not to prefer a creditor. The court must look at all of the circumstances and determine if there was in fact an intention on her part to give MBNA a preference. Where, as here, a bankrupt asserts that it was her intention to reorganize her affairs and avoid bankruptcy, her intention must also be objectively reasonable. See Re Holt Motors Ltd. (1966), 1966 CanLII 437 (MB KB), 9 C.B.R. (N.S.) 92 (Man. Q.B.).
MBNA has failed to show, on a balance of probabilities, that Ms Dubois-Vandale’s dominant intention was not to prefer it. Ms Dubois-Vandale selected the accounts which she wanted to pay in full on January 28, 2004. She paid these accounts knowing that other debts would receive only a minimal payment or no payment whatsoever.
While I am satisfied Ms Dubois-Vandale’s plan was to try to secure financing to consolidate the remainder of her debts and avoid bankruptcy, her plan was not objectively reasonable. She was hopelessly insolvent. Her debts greatly exceeded her liabilities and she did not have sufficient income to service a loan of the magnitude she required to consolidate her debts. [Emphasis added.] See also Andrews (Trustee of) v. Canada (Minister of National Revenue), 2011 MBQB 50, at para. 48, where the court put the question as follows: “whether the Debtor was so far underwater at the time of the payment that her intention, however honestly held, to repay her other creditors in the fullness of time was simply not a viable option”.
(ii) Purposive Approach to the BIA
[48] Requiring that an insolvent debtor’s intention to continue in business have a reasonable basis before it can displace the presumed intent to give a preference flows from the purpose of the anti-preference provisions of the BIA themselves.
[49] One of the two main purposes of the BIA is the “equitable distribution of the bankrupt’s assets among his or her creditors[2]: Aquino v. Bondfield Construction Co., 2024 SCC 31, at para. 36. Section 141 of the BIA enshrines the basic rule that all unsecured creditors rank equally and share rateably in the bankrupt’s assets.
[50] In furtherance of the purpose of putting, keeping, and treating creditors on an equal footing, s. 95 of the BIA provides a remedy for conduct by an insolvent debtor “which has the effect of preferring a particular creditor over other creditors” thus defeating “the equality of bankruptcy laws”: Hudson v. Benallack, 1975 CanLII 158 (SCC), [1976] 2 S.C.R. 16, 59 D.L.R. (3d) 1, at pp. 175-176; BDO Dunwoody Ltd. v. Canada (Minister of National Revenue), 2011 MBCA 93, 270 Man. R. (2d) 246, at para. 18.
[51] Thus, together with s. 96 of the BIA, which addresses pre-bankruptcy transfers at undervalue, s. 95 is “a means of carrying into effect the principle of the [BIA] contained in s. 141 that all ordinary creditors should rank equally”: Houlden, Morawetz, and Sarra, at §5:487. As Jamal J. noted in Aquino, at para. 37, in relation to s. 96, “[t]ransfers at undervalue frustrate the purposes of the BIA. They prejudice creditors by diminishing the value of the debtor’s estate and reducing funds available for distribution.” The same is true of preferences.
[52] Making a preferential payment to enable the continuation of the debtor’s business, where there is a reasonable basis to believe that doing so will benefit the business and creditors generally, rebuts the presumption that the debtor’s payments were made with a view to giving one creditor a preference over other creditors because it is inconsistent with an intent to prejudice creditors. The preferential payment, in such a situation, enables activity that will benefit creditors, and the latter is properly considered to be the debtor’s dominant intent (in the language of St. Anne-Nackawic).
[53] However, making a preferential payment to facilitate carrying on business without a reasonable basis to believe that doing so will benefit creditors generally does not rebut the presumption, because there is no reasonable basis to believe that the harm caused by the preference will be ameliorated by the continuation of the business. The harm to creditors might instead be accentuated by the enabled activity. Assessed objectively, there is no “dominant intent” that can displace the presumed intent consistent with the purpose of avoiding prejudice to creditors.
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[56] It is one thing to conclude that making the payments could be reasonably expected to allow the business to continue. It is another to conclude that there is a reasonable basis to believe that the business continuation would yield a net benefit to creditors. I agree with the appellant that the bankruptcy judge did not consider whether there was a reasonable basis for a belief on the part of Specialty that making the preferential payments and staying in business would generate net revenues and thus benefit, rather than harm, creditors generally, as was the case with the specific transactions in Orion and St. Anne-Nackawic.
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