Two decisions of the Ontario Court of Appeal made in the past year have the potential to significantly diminish the effectiveness of creditor-proofing techniques commonly used by companies and businesspeople.
FNF Enterprises Inc. v Wag and Train Inc.
The first such case was FNF Enterprises Inc. v Wag and Train Inc. The company Wag and Train Inc. was the tenant of the landlord FNF Enterprises Inc. pursuant to the commercial lease.
Before the end of the lease, the sole owner of Wag and Train Inc. engaged in a creditor-proofing technique known as “asset-stripping” or “value-stripping”. She set up a new corporation and transferred all the assets of Wag and Train Inc. to that new corporation. The new corporation then carried on the same business in another location and abandoned the rented premises before the end of the lease. The prior corporation (Wag and Train Inc.) thus became a shell corporation with no assets, and FNF Enterprises Inc. had no way of recovering damages from Wag and Train Inc. for breach of the commercial lease.
The Court of Appeal ruled that the landlord could not pierce the corporate veil and bring a claim against the owner of Wag and Train Inc. in her personal capacity, but could bring an oppression claim against the owner of Wag and Train Inc. in her capacity as a director of the corporation. The landlord had standing under the Business Corporations Act to bring an oppression claim against the corporate director because, as a creditor of the defendant corporation, it qualified as a “complainant” within the meaning of the Act.
Ontario Securities Commission v Camerlengo Holdings Inc.
The second case was Ontario Securities Commission v Camerlengo Holdings Inc. The defendant Camerlengo Holdings Inc. was owned by Fred Camerlengo. Back in 1996, when he first set up his company, Fred transferred his house to his wife for nil consideration. A reasonable assumption to draw from this transaction is that Fred was attempting to put the house out of reach of his and his company’s creditors. In so doing, Fred was doing only what many similarly-situation businesspeople have done for decades: moving assets into the name of family members to protect them from potential seizure.
It should be noted that Camerlengo Holdings was not in trouble with the Securities Commission: it had borrowed $200,000.00 from an entity called Bluestream—and Bluestream was in trouble with the Securities Commission. In this lawsuit, which it commenced in 2019, the Securities Commission was trying to recover that $200,000.00 loan from Camerlengo Holdings so that it could seize those funds in partial satisfaction of the moneys that were owed by Bluestream to the Ontario Securities Commission.
Reversing the motion judge’s decision, the Ontario Court of Appeal ruled that a creditor could, under the Fraudulent Conveyances Act, attack a prior transfer of assets from a co-owner to his wife, even though the transfer of the property had taken place many years before the creditor became a creditor of that company. Obviously, when Mr. Camerlengo transferred his house to his wife in 1996 he did not do so to protect his asset from the Ontario Securities Commission, because his company did not owe any money to the Ontario Securities Commission at that time. Nevertheless, the Court of Appeal held that a subsequent creditor who was not a creditor at the time of the transfer can still attack a transfer under the Fraudulent Conveyances Act if it was made with the intent to “defraud creditors generally, whether present or future”.
It is important to note that in both these cases, the creditor has not yet recovered against the respective defendants: the Court of Appeal simply ruled that FNF enterprises Inc could proceed with a claim under the Business Corporations Act and the Ontario Securities Commission could proceed with a claim under the Fraudulent Conveyances Act.
These legal precedents mean that, in this future, these commonplace creditor-proofing techniques are likely to be considerably less effective. While they may delay creditors, they will likely not ultimately defeat motivated and well-resourced creditors.