In Orion Industries Ltd. (Trustee of) v Neil’s General Contracting Ltd. (2013 ABCA 330), the Alberta Court of Appeal (the “ABCA”) gave guidance on when a payment to a creditor on the eve of the debtor’s bankruptcy will be void against the debtor’s trustee in bankruptcy under the Bankruptcy and Insolvency Act (Canada) (the “BIA”).
Neil’s General Contracting Ltd. (“Neil’s”) dismantled a piece of equipment owned by Orion Industries Ltd. (“Orion”) at Orion’s request, and transported the disassembled equipment to a storage site owned by Neil’s. Orion planned to sell this disassembled equipment to generate much needed revenue. Neil’s, however, refused to release the disassembled equipment to Orion until it was paid for its services. Orion paid Neil’s for its services to get the equipment released. Within 3 months of this payment, Orion went bankrupt.
Orion’s trustee in bankruptcy (the “Trustee”) sought to set aside the payment made to Neil’s on the eve of bankruptcy as being void. The Trustee relied on section 95(1)(a) of the BIA which provides that a payment made by an insolvent person to a creditor within 3 months of the date of bankruptcy with a view to giving that creditor a preference is void as against the trustee in bankruptcy. Further, section 95(2) of the BIA creates a rebuttable presumption; if a payment to a creditor has the effect of giving that creditor a preference, such payment is presumed to have been made with a view of giving such creditor a preference. There is also a limitation on the evidence admissible to rebut this presumption; pursuant to section 95(2) of the BIA, evidence of the payment being made under pressure from the creditor is inadmissible to rebut the presumption.
The impugned payment made to Neil’s was acknowledged to have given Neil’s a preference over other creditors of Orion. This triggered the rebuttable presumption in section 95(2) of the BIA. The issue, thus, was whether Neil’s had rebutted this presumption by proving that the payment was not intended to be preferential.
The ABCA dismissed the Trustee’s challenge to the impugned payment because the payment was held to have been made to further a commercial imperative. The payment to Neil’s was necessary to get the equipment released and to sell it to generate revenue, and the amount of revenue expected from the sale of the equipment was much higher than the impugned payment. Further, the chief financial officer of Orion testified that the impugned payment was made in the belief that if Neil’s was not paid, it could and would cause a major client of Orion to quit doing business with Orion, so as to put Orion out of business.
This evidence of a commercial imperative behind the impugned payment rebutted the presumption created by section 95(2) of the BIA. Further, there was no other evidence to establish that Orion made the payment to Neil’s with a view of giving Neil’s a preference.
The Trustee argued that the evidence of Neil’s refusing to release the equipment until it was paid and the ability of Neil’s to cause Orion to go out of business was evidence of pressure from Neil’s; and such evidence of pressure is inadmissible to rebut the presumption created by section 95(2) of the BIA. The bankruptcy judge and the ABCA, interestingly, dismissed this argument. The bankruptcy judge characterised the evidence as evidence of a commercial imperative which justified the payment; and not as evidence of pressure. The ABCA gave deference to the bankruptcy judge’s characterization of evidence. Therefore, the Trustee’s challenge to the impugned payment failed.
This ABCA decision, therefore, suggests that a preferential payment made by a debtor that appears to have been made under pressure from the recipient creditor may nevertheless withstand challenge by a trustee, provided there is evidence that the payment was made in furtherance of a commercial imperative.
