Business owners often use a strategy to protect their assets from potential creditors seeking to realize on their debts. To protect themselves, business owners can transfer ownership of property to family members or create other legal structures to shield assets. However, these strategies (often referred to as “creditor-proofing”) are subject to scrutiny under legislation like the Fraudulent Conveyances Act (the “FCA”), which is designed to prevent transferring assets with the intent to defraud creditors.
An example of a fraudulent conveyance would be a business owner who transfers their family home to their spouse without any consideration when they are unable to pay their debts. A transfer like that would be deemed to be a fraudulent conveyance under the FCA and could be unwound as a result. However, a recent Ontario Court of Appeal decision suggests that creditor-proofing actions may be challenged even when no creditors or debts exist at the time of the transfer.
Ontario Securities Commission v. Camerlengo Holdings Inc., Fred Camerlengo, a retired electrician and sole directing mind and shareholder of Camerlengo Holdings Inc., had transferred ownership of his family home to his wife, Mirella, in 1996. At the time, Fred and a business partner were operating electrical contracting companies, and they both transferred ownership of their respective family homes to their spouses without consideration. Fred continued to live in the home, and his wife used the property to secure mortgages to fund his business activities.
The Ontario Securities Commission (the “OSC”) commenced claim alleging that the transfer was made with the intent to defraud existing and future creditors, as the business was rapidly expanding and taking on high-risk projects. The OSC’s fraudulent conveyance claim was initially struck out by a motions judge. It was ruled that the claim was insufficient to support a claim under the FCA because “[i]t sets out no specifics with respect to the names of creditors, actual debts, or a precarious financial position. No creditors with a liquidated, or unliquidated debt at the time of the 1996 transfer are identified.” In other words, there were no creditors identified at the time of the transfer, which took place decades ago.
However, the Court of Appeal held that the motion judge was too hasty in ruling that the claim should be struck out on a motion. The court held that the OSC’s claim, did “identify, with sufficient particularity, the facts that could support the inference of an intention to defraud future creditors, including the general class of creditors – creditors arising out of Fred’s electrical contracting business, which was poised to bid on much larger contracts than had previously been the case.” It was therefore held that subsequent creditors, even those who were not creditors at the time of the transfer, could conceivably still challenge a transfer if it was made with the general intent to defraud creditors, whether present or future.
Accordingly, the motion judge’s order was set aside and the OSC’s claim was permitted to proceed to trial.
It remains to be seen whether the OSC will be successful in having the transfer set aside as a fraudulent conveyance. But the mere fact that the claim was allowed to proceed on the existing facts has been raised as a cause for concern. If it is ruled that the claims could ultimately be challenged, this decision could have significant implications for lawyers and business owners who engage in creditor-proofing transactions.
The Court of Appeal’s ruling means that even where no creditors exist at the time of the transaction, it may still be possible to challenge the transfer if there is a perceived risk of claims from creditors and the conveyance was made with the intention of defeating such creditors, should they arise. This could hold true even if creditor claims arise literally decades after the transfer was made.
The case also highlights the need for business owners and their legal advisors to carefully consider the potential implications of creditor-proofing transactions. While these transactions can provide valuable asset protection, they must be conducted in compliance with relevant legislation and with a full understanding of the potential consequences.
To avoid legal challenges, seeking professional advice and conducting thorough due diligence before engaging in creditor-proofing transactions is essential. This may involve reviewing applicable legislation and case law, assessing the potential risks and benefits of the transaction, and developing a comprehensive strategy to achieve the desired outcome while minimizing legal exposure.
About the Author:
Daniel Waldman is Of Counsel in the firm’s Toronto office. He has a broad commercial litigation practice with an emphasis on real property litigation, including commercial leasing, commercial real estate, construction law, and debt collection. Daniel can be reached at 416-644-2838 or firstname.lastname@example.org. To read his full bio, please click here.