Professionals who advise their clients to enter into creditor-proofing transactions need to think twice in light of Abakhan & Associates Inc. v. Braydon Investments Ltd., 2009 BCCA 521. In this case, the B.C. Court of Appeal dismissed an appeal from a judgment that, in effect, set aside a species of butterfly transaction under the Fraudulent Conveyance Act, 1996, R.S.B.C. c.163, even though the principal of the distributing corporation “had no dishonest intent, or mala fides, and acted on professional advice to effect legitimate business purposes” [¶2].
The facts are outlined in ¶¶4–6 of the opinion. Briefly, Botham Holdings Ltd. (“BHL”), the distributing corporation, had received significant proceeds on a sale of real property, and it wished to enter into a new business venture. BHL expected that the new venture would generate losses initially that might be available to offset the gains realized on the sale of the real property. BHL, then, became a general partner of a partnership that operated the new business. BHL did not wish to risk the money received on the sale, however, and so, not long after it became a partner in the new venture, BHL transferred the property tax-free to another related corporation, Braydon Investments Ltd. (“Investments”).
The new venture was a disaster, and so BHL, within a relatively short period of time, was bankrupt with debts of $20 million. The trustee-in-bankruptcy brought an action under the Fraudulent Conveyance Act to in effect set aside the butterfly, which action was successful. Some of the key conclusions of the Court of Appeal were as follows:
- As is mentioned above, the court held that the butterfly could be set aside even though “BHL’s and [Investment’s] principal, William Botham, had no dishonest intent, or mala fides, and acted on professional advice to effect legitimate business purposes.” That is, an honest attempt to defeat one’s creditors is no better than a dishonest one.
- Mr. Botham, on examination-for-discovery, admitted that “The purpose and intent and effect of the transaction was to make sure that the assets of BHL were removed from BHL so that creditors of JW Auto [the new business venture] couldn’t have access to them to satisfy their claim”. The court also had before it lawyers’ letter that referred to creditor-proofing in connection with the transaction.
- The court agreed that, if BHL had incorporated a wholly-owned subsidiary and the subsidiary had become the general partner in the new business venture, no question of a fraudulent conveyance would have arisen. The court responded, in effect, that it was required to apply the law to what was done rather than what could have been done. BHL could have incorporated a new corporation but did not because it wanted to obtain the tax advantages associated with the losses.
- It did not matter that, at the time of the butterfly, BHL owed no debts that it could not satisfy and that no creditor advanced funds in reliance on BHL’s ownership of assets that it transferred to Investment under the butterfly.
- It did not matter that Botham had other business objectives when he effected the transactions in question.
- The Fraudulent Conveyance Act provides a defence to an action under the Act, if three conditions are met, one of which is whether the conveyance was made for valuable consideration. The parties disagreed on whether Investments gave valuable consideration for the property it received from BHL, but the court found that it did not need to decide the issue because the other two conditions had not been met.
The Supreme Court of Canada dismissed Investments’ application for leave to appeal (2010 CanLII 34795).
