Fraudulent Conveyances - Do You Have to Prove Dishonesty?

A recent decision of the British Columbia Court of Appeal confirms that a creditor does not have to prove that a debtor acted dishonestly to set aside a conveyance as a fraudulent conveyance. It is sufficient for the creditor to prove that the debtor did so with intent to delay or hinder creditors, including future creditors.

William Botham was a shareholder and the principal of Botham Holdings Ltd, which held $20 million worth of real estate. After the company sold some of its real estate at a substantial profit, Mr. Botham decided to go into a joint venture car leasing business with a friend.

On the basis of legal and tax advice, Mr. Botham incorporated a new company, Braydon Investments Ltd., and through a series of transactions transferred Botham Holdings Ltd.’s assets to Braydon. Botham Holdings Ltd. went into the joint venture car leasing business. The reason Mr. Botham did not simply incorporate a new company for the car leasing business was that there were tax advantages in using Botham Holdings Ltd.

Unfortunately, the car leasing business failed. Botham Holdings Ltd. went bankrupt. The trustee in bankruptcy sought to set aside the transfer of assets to Braydon so that those assets would be available to the creditors of Botham Holdings Ltd.

The trustee in bankruptcy relied on section 1 of the British Columbia Fraudulent Conveyance Act, which says:

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. Botham acknowledged that the assets were transferred out of Botham Holdings Ltd. to insulate them from creditors of the car leasing business. But he argued that there were legitimate business and tax planning purposes for the transactions.

At trial, in Abakhan & Associates Inc. v. Braydon Investments, 2008 BCSC 1547, Mr. Justice Kelleher found that Mr. Botham had not acted dishonestly. But the court held that the transfer of assets was a fraudulent conveyance and was of no effect against the trustee in bankruptcy.

Braydon Investments Ltd. appealed to the British Columbia Court of Appeal. The reasons for judgment are at 2009 BCCA 521.

Chief Justice Finch upheld Mr. Justice Kelleher's decision and dismissed the appeal. He held that it was sufficient if one of the reasons for the transactions were to delay or hinder creditors, including future creditors. The court found that the words “by collusion, guile, malice or fraud” in the Fraudulent Conveyance Act were meaningless. They were likely a holdover from when the Act had penal sanctions. These sanctions were held to be unconstitutional and have been repealed.

Although Mr. Botham could have incorporated a new company to carry out the joint venture car leasing business--in which case the assets of Botham Holdings Ltd. would have been insulated from creditors of the car leasing business—having chosen to use Botham Holdings Ltd. because of some tax advantages, he could not then transfer the assets to delay or hinder creditors.

The result is that the assets Botham Holdings Ltd. transferred to Braydon Investments Ltd. will be available to satisfy the claims of Botham Holdings Ltd.’s creditors.