Canadian Preference Law Reform

I. INTRODUCTION The preference provisions in the Canadian Bankruptcy and Insolvency Act1 (BIA) have been virtually unchanged since the legislation was enacted in 1919,2 and many of their features derive from the nineteenth century and earlier English law. There have been various reform proposals over the years, but until now they have come nothing. Most recently, in 2003 a Senate Committee recommended amendments to ensure consistent and simplified rules for challenging fraudulent preferences, but without explaining what was wrong with the current laws and how they should be changed.3 Recently enacted amendments aim put the Senate Committee's recommendation into effect, but is still no clear sense of the underlying objective.4 In any event, are drafting problems, which will be explained later, and these will have be fixed if the amendments are have any impact at all. The drafting problems were at least in part a function of the failure address policy objectives. This paper argues that: (1) the current Canadian preference provisions are deficient because: (a) they lack a clear policy foundation, (b) judicial glosses on the statutory text mean that the statute itself is an incomplete statement of the law; and (c) the amount of discretion the provisions give the courts results in inconsistent and unpredictable case outcomes; (2) these problems should be fixed, but meaningful reform is impossible unless we first decide what we want the preference laws achieve;5 and (3) Canada's lawmakers should address the policy choices before proceeding further with the current reform initiative. Part II surveys the evolution of preference law in common law countries and the competing policy objectives. Part III provides an overview of the current Canadian provisions and critically analyzes them with reference the policy objectives identified in Part II. Part IV describes the most recent reform initiative and critically analyzes it with reference the policy objectives identified in Part II. Part V concludes. II. THE EVOLUTION OF PREFERENCE LAW AND POLICY A. The Debtor Deterrence Rationale Broadly speaking, a preference is a payment of money or a transfer of property made by a debtor a creditor on the eve of the debtor's bankruptcy, representing more than the amount the creditor would recover in the debtor's bankruptcy distribution. Early preference law developed through case authority. In The case of Bankrupts (Smith v. Mills), Lord Coke stated the rationale for the avoidance of preferences in terms of the need preserve the principle of equal distribution underlying the bankruptcy laws: there ought be an equal distribution ..... .[for] if, after the debtor becomes a bankrupt, he may prefer [a creditor] and defeat and defraud many other poor men of their true debts, it would be unequal and unconscionable, and a great defect in the law.6 Lord Mansfield expressed a similar view in Alderson v. Temple? According Dickson J. in Hudson v. Benallack, this is still the policy of Canadian preference law: The object of the bankruptcy law is ensure the division of the property of the debtor rateably among all his creditors in the event of his bankruptcy .... . . .The Act is intended put all creditors upon an equal footing. Generally, until a debtor is insolvent or has an act of bankruptcy in contemplation, he is quite free deal with his property as he wills and he may prefer one creditor over another but, upon becoming insolvent, he can no longer do any act out of the ordinary course of business which has the effect of preferring a particular creditor over other creditors. If one creditor receives a preference over other creditors as a result of the debtor acting intentionally and in fraud of the law, this defeats the equality of the bankruptcy laws.8 The following statement from Re Norris, an Alberta Court of Appeal decision, makes the point even more clearly: . …