A preferential transaction occurs where an insolvent person or debtor makes a transfer of property or a payment that has the effect of favouring one creditor over another. Creditors and bankruptcy trustees can use federal or provincial legislation to attack preferential transactions. A recent Ontario Court of Appeal decision, Golden Oaks Enterprises Inc v Scott, 2022 ONCA 509, upheld the finding that certain transactions were an unlawful preference under section 95(1)(b) of the Bankruptcy and Insolvency Act, RSC 1985 c B-3 (“BIA”). As a result, the Court ordered the monies be repaid to the bankruptcy estate.
Reasons for Setting Aside Transactions
The bankruptcy arose from the collapse of a Ponzi scheme that benefitted Golden Oaks’ principal, directing mind, and early investors. During its operational period, Golden Oaks issued promissory notes to investors, with early investors earning commissions for persuading new investors to make loans. The initial interest rates on the promissory notes were attractive, but as company’s financial situation worsened, it began issuing notes with criminal interest rates. After the scheme collapsed in 2013, the bankruptcy trustee began actions against individuals and companies who received payments from Golden Oaks. The basis of the actions was that, as a Ponzi scheme, Golden Oaks was by definition insolvent, and it never had enough money to pay out.
The bankruptcy trustee successfully applied to set aside payments made to 17…
