Many business owners structure their affairs so as to protect their assets, which is known as "creditor-proofing".
This often includes transferring ownership of property to a spouse. Creditor-proofing is subject to legislation like, the Fraudulent Conveyances Act1 ("FCA"), which allow careful scrutiny of such transfers to determine if they were made with intent to defeat, hinder, delay or defraud creditors.
An example of a fraudulent conveyance is where a business owner, unable to meet their debts as they become due, transfers the family home to their spouse for no consideration.
But what if the business owner transferred the family home at the outset of the business venture when there were no creditors? A recent Ontario Court of Appeal decision has found that this type of creditor-proofing may be attacked under the FCA.
In Ontario Securities Commission v. Camerlengo Holdings Inc., the Ontario Securities Commission (the "OSC") appealed a decision striking their fraudulent conveyance claims. The Court of Appeal allowed the claims to proceed.2
Fred Camerlengo was a retired electrician and the sole directing mind and shareholder of Camerlengo Holdings Inc. His wife, Mirella, was a retired teacher. They purchased their family home as joint tenants in 1988.3
Fred and a business partner carried on electrical contracting using various corporations. The first company was incorporated in 1996. Four months later, Fred and his partner conveyed their interests in their respective family homes to their spouses for no consideration.4 Fred continued to live in the family home and his wife mortgaged it from time to time to fund Fred's business activities.
The OSC alleged that at the time of the transfer, Fred and Mirella were concerned about potential exposure to personal liability resulting from the rapidly expanding business working on million-dollar high risk projects and that the transfer was made with "the intent and purpose of defeating... Fred's existing and future creditors..."5
The motion judge held that the OSC did not come within the class of persons contemplated by s. 2 of the FCA, as they were not "creditors or others" at the time of the 1996 transfer.
On appeal, the OCA held that the motion judge erred as a subsequent creditor, one who was not a creditor at the time of the transfer, can still attack a transfer if it was made with the intent to "defraud creditors, generally, whether present or future".6 This could include taking steps to judgment proof oneself when starting a new business venture.7 To survive a motion to strike, it is sufficient to plead facts that support the allegation that at the time of the conveyance, the transferor perceived a risk of claims from a general class of future creditors and conveyed the property with the intention of defeating such creditors should they arise.8 Whether the pleaded facts are sufficient to establish fraudulent intent is a matter left for the evidentiary record and trial.9
Lawyers and business owners should be aware of this decision as it could result in more creditor-proofing transactions being attacked even where no creditors existed at the time of the transaction.
Footnotes
1. Fraudulent Conveyances Act, RSO 1990, c. F.29.
2. Ontario Securities Commission v. Camerlengo Holdings Inc., 2023 ONCA 93 at para 1.
3. Camerlengo, supra at para 2.
4. Camerlengo, supra at para 3.
5. Camerlengo, supra at para 4.
6. Camerlengo, supra at para 11.
7. Ibid.
8. Ibid.
9. Camerlengo, supra at para 13.
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