CANADA Law and Practice Contributed by: Scott Hyman, Anthony Spadaro and David Wilson, Davies Ward Phillips & Vineberg LLP
financial assistance to another person unless certain corporate formalities are observed. However, there are broad exceptions for finan- cial assistance provided to holding companies and subsidiaries, so these restrictions are not meaningful in practice. The federal corporate statute and Ontario’s corporate statute do not contain any restrictions on financial assistance. However, please see 5.6 Other Restrictions regarding undervalue transfers and fraudulent conveyances and preferences. 5.6 Other Restrictions While Canada does not have general “corpo- rate benefit” tests that must be satisfied before a security can be granted, and common law con- sideration is sufficient to support the enforce- ability of the contract between the lender and borrower or guarantor, attention should be paid to voidable transaction issues that can arise upon the insolvency of a borrower or guaran- tor. There are basically three types of voidable transaction issues: • transfers at undervalue; • fraudulent conveyances; and “transfer at undervalue” can include the granting of security for no consideration or for which the consideration received by the borrower or guar- antor is conspicuously less than the fair market value of the security provided. Such transac- tions may be subject to review after a formal bankruptcy. A court may give judgment to the trustee against the other party to the transac- tion, against any other person who is privy to the transfer (which may arguably include the directors and officers), or against all of those persons to pay to the bankrupt estate the dif- ference between the value of the consideration • fraudulent preferences. Transfers at Undervalue
received by the debtor and the value of the con- sideration given by the debtor. The “claw-back” period varies from one year to five years, depending on whether the bankrupt was dealing at arm’s length with the other party to the transaction and whether the bankrupt was insolvent at the time of the transaction. The Bankruptcy and Insolvency Act (Canada) (BIA) Under the BIA, every grant of security made by an insolvent person in favour of any creditor (or person in trust for any creditor) with a view to giving that creditor a preference over the other creditors is void as against a trustee if such trans- action was made within three months of the date of bankruptcy; when such a transaction is with a related party, the period is one year instead of three months. When such a transaction has the effect of giving any creditor a preference over other creditors, or over any one or more of them, it is presumed, in the absence of evidence to the contrary, to have been made with a view to giving the creditor a preference, whether or not the transaction was made voluntarily or under pressure, and evidence of pressure is not admis- sible to support the transaction. There is consid- erable case law on the circumstances that may be permitted as an acceptable rebuttal to the presumption of the preference. The Fraudulent Conveyances Act (Ontario) (FCA) This Ontario statute stipulates that every con- veyance (which can include the granting of security) of real property or personal property made with the intent to defeat, hinder, delay or defraud creditors is void as against such per- sons and their assigns, unless the conveyance was made upon good consideration and in good faith to a person not having, at the time of the
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