Saturday, April 11, 2009

Transfers Between Spouses to Avoid Debts: Royal Bank v. Clarke

Sometimes a business person will attempt to insulate the main family assets from business risks. For example, the family home might be held in only the businessperson’s spouse’s name. The theory is that if the business goes under, the creditors will not be able to have the home sold to pay the business debts.

In British Columbia, there are legitimate ways of protecting your assets and ways that are not. The line between what you can legally do and what you cannot is not always clear.

In Royal Bank of Canada v. Clarke, 2009 BCSC 481, a married couple, Mr. and Mrs. Clarke owned a house together. In 2003, when they bought the land on which they built their house, they talked about buying the land in Mrs. Clarke’s name only to insulate it from Mr. Clarke’s business. But they decided to register the land in both names.

In 2004, Mr. Clarke’s business borrowed funds from the Royal Bank. He personally guaranteed the loan.

In 2008, Mr. Clarke transferred his interest in the family home to Mrs. Clarke gratuitously. At the time the business debt was over $146,000, but was in good standing.

After the transfer of the house, no further payments were made on the business loan, which went into default.

The Royal Bank sued Mr. and Mrs. Clarke seeking to set aside the transfer of Mr. Clarke’s interest in the house to Mrs. Clarke. If the Royal Bank were successful, it could then register any judgment against Mr. Clarke pursuant to his guarantee against the house, and then apply to sell the house to apply Mr. Clarke’s share of the sale proceeds to the business debt.

The Royal Bank relied on section 1, of the Fraudulent Conveyance Act, R.S.B.C. 1996, c. 163, which says (in not-so-plain language):

1 If made to delay, hinder or defraud creditors and others of their just and lawful remedies
(a) a disposition of property, by writing or otherwise,
(b) a bond,
(c) a proceeding, or
(d) an order
is void and of no effect against a person or the person's assignee or personal representative whose rights and obligations by collusion, guile, malice or fraud are or might be disturbed, hindered, delayed or defrauded, despite a pretence or other matter to the contrary.

Mr. and Mrs. Clarke acknowledged that Mr. Clarke transferred the property to insulate the house from his business. But he acted honestly, and was not acting “by collusion, guile, malice or fraud.” He had never identified the family house as a source of security for the business loan.

Madam Justice Griffin held that it was not necessary for the Royal Bank to show that Mr. Clarke had acted dishonestly. Fraud, as that term is used in the Fraudulent Conveyance Act, does not require criminal fraud. It is sufficient if the transfer was done for the purpose of hindering a creditor. She relied on an earlier decision of the Supreme Court of British Columbia, Abakhan & Associates Inc. v. Braydon Investments Ltd., 2008 BCSC 1547.

The Court ordered that the transfer of Mr. Clarke’s interest to Mrs. Clarke be set aside. Mr. Clarke’s interest in the house will be available to satisfy his guarantee to the Royal Bank.

What if Mr. and Mrs. Clarke had purchased the land in Mrs. Clarke’s name alone, before Mr. Clarke’s business incurred the debt?

According to Madam Justice Griffin at paragraph 13,

Couples commonly arrange their affairs so that family assets are not at risk of business creditors. As fairly conceded by counsel for RBC, there would have been no problem for the Clarkes had they purchased the property in Mrs. Clarke’s name alone for the reason of trying to keep their residence out of reach of Mr. Clarke’s creditors. The problem is, having purchased the property in their names jointly, the subsequent transfer of Mr. Clarke’s interest was a “disposition”, thereby engaging the Fraudulent Conveyance Act.

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