Fraudulent Conveyances and Fraudulent Preferences

This information applies to British Columbia, Canada. Last reviewed for legal accuracy by Alison Ward in August 2018.

It is against the law for a debtor to avoid a creditor’s claim by transferring an interest in property (a fraudulent conveyance) or making payments to (“preferring”) another creditor (a fraudulent preference).

Client problems

• Client asks if it is permissible to “hide” assets from creditors or a court bailiff.

• Client asks if it is permissible to pay off a relative who is a creditor, but not other creditors.

• Client asks if they can avoid creditors coming after the client’s house by transferring it into the name of their spouse, who is not legally liable for the debts of the client.


 

Summary of the law

Many debtors actively try to avoid creditors’ claims against them, either legally (by an assignment in bankruptcy, for example) or illegally. This section briefly outlines the basic legal and ethical issues to watch for when clients ask “what if” questions. (See also the comments on ethics at the beginning of this publication.)

Fraudulent conveyances

Under the Fraudulent Conveyance Act, disposing of property to delay, hinder or defraud creditors is illegal. The law still sees it as the debtor’s property and so allows creditors to continue to get at that property.

The most common disposal of property of interest to the Fraudulent Conveyance Act is the transfer of property to a relative, such as a spouse. If a husband and wife jointly own a house for many years and suddenly the husband transfers it to his wife just as a creditor begins a legal action against the husband, the transfer might be considered a fraudulent conveyance. Transferring chattels (personal, moveable possessions; see the section on Enforcing Judgments Against Chattels) under the same circumstances might also be considered fraudulent.

If a creditor feels that a disposition was fraudulent within the meaning of the Fraudulent Conveyance Act, it can bring a court action against the debtor and attempt to get at the asset as part of its enforcement steps.

Fraudulent preferences

Under the Fraudulent Preference Act, if a debtor cannot pay their creditors and makes a transfer or payment favouring one particular creditor, that transfer or payment is considered a fraudulent preference and is void. The debtor is said to have “preferred” that one creditor over the others. This situation is probably more likely to arise in commercial situations than in consumer situations. However, it may arise, for example, in situations where the debtor borrows money from a relative and pays off the relative but does not pay any other creditor.

If a creditor feels that a transfer is fraudulent according to the Fraudulent Preference Act, it can bring a court action against the debtor and attempt to get at the money (or other asset) transferred as part of its enforcement steps.

Solving the problem

Fraudulent conveyances and fraudulent preferences are among the most troubling situations for lawyers who advise debtors. The Law Society has repeatedly expressed concern that lawyers be extremely careful when clients ask for legal advice in this area of law. A debtor may ask questions about ordering their financial affairs when a creditor or creditors are pressing the debtor, or ask the lawyer to carry out a transfer for the debtor (such as a conveyance of an interest in land) under similar circumstances.

If you encounter a client who has already made what appears to be a fraudulent conveyance or fraudulent preference, tell the client to seek the advice of a lawyer.

It is unlikely that a client will ask you to actually assist in a fraudulent conveyance or transfer. More likely are the “what if” questions from clients who want to know the legal limits of ordering their affairs to avoid creditors.

Since this area of the law is a difficult one from both a substantive and an ethical viewpoint, you should probably decline to answer a client’s questions in this area and seek the assistance of a lawyer. At the same time, ensure that the client is aware of their options for practical, appropriate remedies.

Related topics and materials

See the other sections on legal actions:

• Recovery of Goods

• Tort Actions


See related topics:

• Assignments in Bankruptcy

• Court Process in Consumer and Debt Matters

• Debtor’s Options for Getting Out of Court

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