Once a Fraud, Always a Fraud

For some in the construction industry, the information included in the within article may not change a single thing, but for those who are business owners, you may want to continue reading and pay close attention, as your assets may be at risk.

As with most things, the law is in a constant state of evolution, sometimes we may welcome change, but as a savvy business owner, you will want to be aware of the changes in order to make sure you are not unknowingly breaking any laws or putting yourself at risk. Unfortunately for those who chose to stop reading here, ignorance is not a great defence in the eyes of the law.

At the time of incorporation of your company, you may have been suggested to transfer your assets, such as your house, to your marital partner for example. This was most likely done in order to prevent potential future creditors from seizing your assets due to your personal liability. Personal liability for directors can be for things like unpaid HST, source deductions, breach of trust claims, etc.

Until recently, as long as the creditors did not exist at the time the asset was transferred, most understood that a transfer was deemed to be safe from creditors on the basis that the transfer was completed without the intent to defraud them, thus depriving them of the ability to collect the amounts owed. Note that I wrote deemed. Common advice and common practice was to hold property in a person’s name who was not involved in the company.

In the 2023, Ontario Court of Appeal case, Ontario Securities Commission v. Camerlengo Holdings Inc., following a request made by the Ontario Securities Commission (OSC) to set aside the transfer of a property that took place in 1996, agreed to set aside the transfer. In the case, Mr. Camerlengo, a retired electrician, owner and sole director of the corporation, Camerlengo Holdings Inc., conveyed his interest in his family home to his spouse. Mr. Camerlengo continued to live in the family home and his spouse intermittently mortgaged the property to fund Mr. Camerlengo’s business activities. It appears that Mr. Camerlengo fell on some hard times after a client failed to pay $1.3 million in construction draws.

The Court of Appeal came to a conclusion that the transfer of the property that was made between Mr. Camerlengo and his wife was made with the intent to “defraud creditors generally, whether present or future.” As stated above, the general consensus prior to the Court of Appeal decision was that the creditor needed to be in “existence” at the time of the transfer in order to conclude that there was an intent to defraud, and therefore, allow the creditor to successfully set aside the transfer.

The notion that an entity which became a creditor more than 20 years after the transfer of the asset would have grounds to void that transaction, is contrary to how most legal practitioners have interpreted the Fraudulent Conveyance Act. The ultimate goal behind the request to set aside the transfer is to seize the property in order to collect on a judgment. This represents a game changer for people who believe they were essentially judgment proof and protected from potential creditors should their businesses ever encounter difficult times. On the other side of the coin, it’s also a game changer for those of us who help creditors collect on judgments against business owners and directors that transfer all of their assets in someone else’s name, as such transaction could rarely be set aside in the past.

The takeaway is that just because a transfer was made at a time that the person did not have current creditors, that transfer could be set aside if it was made to defeat any potential creditor in the future.

This article was written by Félix Boutin, an associate with MBC Law. Félix can be reached at [email protected] and 613-288-4289.

Read More in the April Edition of the Construction Comment here