Timing Considerations and Ethics
When creditors are around the corner it may be too late to protect the assets you have worked so hard to accumulate. Success in protecting assets depends in large part on when such asset protection strategies are undertaken. Asset protection strategies undertaken by debtors who are insolvent or on the eve of insolvency, are far more likely to be successfully challenged than asset planning strategies and plans undertaken by solvent businesses which are able generally to meet their debts as they become due, and there is no real threat of seizure of the business’ assets.
The Fraudulent Conveyances Act bears the broadest application and has the most far-reaching limitations on successful asset protection1. The Act defines a “conveyance” as any “gift, grant, alienation, bargain, charge, encumbrance, limitation of use or uses of, in, to or out of real property or personal property by writing or otherwise”, and precludes any conveyance of real or personal property “…made with intent to defeat, hinder, delay or default creditors…”2, regardless of whether the transferor is insolvent or on the eve of insolvency. Where a transfer is made with the intent to defeat, hinder, delay or default creditors, such transfer is deemed by the Act to be invalid against both the transferor and the transferee.
While the act does require an “intent” to defeat, hinder, delay or default creditors, the Courts readily assume such an intention exists when the debtor is bankrupt or on the eve of bankruptcy. If, on the other hand the conveyance is made at a time when the transferor did not have creditors, it will be difficult, if not impossible, for a creditor to establish an intent to defeat or hinder creditors. Therefore, consideration of asset protection strategies at the early stage when the business is starting up and there are few or no claims outstanding is most prudent, and much more likely to be successful and effective.
If the asset protection strategies and plans are not implemented at the start-up of the business, at the very least, to be effective, they should be undertaken at a time when the business is solvent and able to meet its debts generally as they become due, and at a time when there are no specific claims, the responsibility for which the owner/manager is seeking to avoid. The most obvious inflection points at which asset protection should be considered are:
(a) the establishment of the business;
(b) a significant expansion of the business, such as the addition of a new product or new assets;
(c) a significant change in the business, such as a change in location, or the implementation of a new trademark;
(d) a financing event or major capital expenditure;
(e) estate planning for the owner/manager.
For most owner/managers, asset protection may not be at of paramount importance while the business is prosperous but that is exactly the time at which it should be implemented. In effect, a somewhat contrarian mindset is needed: asset protection planning should be done when the business is new, or when the business is prosperous and the future looks bright, and the possibility of business failure or insolvency seems remote.
1 R.S.O. c. F-29
2 Ibid at sections 2 and 3.