An Oppression Remedy v Fraudulent Conveyance Legislation: Which Legislative Scheme Better Protects Creditors from Opportunistic Debtors?
Annual Review of Insolvency Law 2019
31 Pages Posted: 13 Mar 2020
Date Written: 2019
Canada’s regime governing fraudulent conveyances is deficient. It is based on legislation enacted in the sixteenth century; it focuses on the debtor’s intention; it is criminal in origin; and it has generated confusing, unpredictable and inconsistent case law. Overall, it does not offer creditors much protection. But this is not a novel critique.
The regime has been the subject of endless criticism over the decades, all of which culminated in proposed legislation to replace it. In 2012, the Uniform Law Conference of Canada recommended the adoption of the Uniform Reviewable Transactions Act to replace our current fraudulent conveyance and preferences legislation. However, the proposed legislation is not the only solution; other legislation could also replace current fraudulent conveyance laws. This paper argues that legislation like the oppression remedy, but applicable to individual debtors as well as corporations, should take the place of fraudulent conveyance laws. The structure of this remedy would better address improper transfers by debtors.
Intention-based legislation is problematic. It attempts to achieve an effects-based purpose by applying an intention-based test. An effects-based test is also not the answer, as it would be too broad. It would protect creditors but would also unduly restrict debtors from carrying out legitimate transactions. The answer, rather, is to replace the current intention-based provisions with an oppression remedy, as in, an equitable effects-based test which requires not just prejudice, but unfair prejudice. The requirement of unfairness provides a notable limitation: a remedy is contingent on whether the impugned behaviour is consistent with the parties’ reasonable expectations when they entered into the contract.
By determining creditors’ reasonable expectations when they entered into the transaction, the legislation protects both creditors and debtors. It reverses transactions the creditors would not have reasonably expected when they entered into the lending agreement, and in so doing, it prevents debtors from moving assets out of creditors’ reach while also allowing them to take risks, possibly even gamble with the company’s money. In other words, the remedy protects creditors while also preventing them from benefiting ex-post, from a failed transaction they agreed to ex-ante.
Keywords: oppression remedy, fraudulent conveyances legislation, fraudulent transfers, reasonable expectations, debtors, creditors, opportunism, creditor protection,
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