On May 11, federal government announced a COVID-19 loan program for larger businesses, intended to provide bridge financing to companies with revenues of over $300 million who due to the society-wide shutdown are unable to obtain sufficient financing to meet their obligations and carry on business.
While details of the program, called the Large Employer Emergency Financing Facility (“LEEFF”), remain sparse, Prime Minister Trudeau has made it clear that companies will have to meet certain conditions in order to qualify. Companies hoping to receive a loan through the program may not be in bankruptcy proceedings already, and may not use the funds to resolve financial strains that predate the pandemic.
Whether the government will be able to investigate loan applicants thoroughly enough to discover whether and to what extent their financial difficulties predate the pandemic will be a key issue in protecting the program from being used as a vehicle for fraud. For example, it is still unclear if an audit will take place to examine whether the directors or officers of the applicant companies transferred the companies’ property to a third party, and how long before the pandemic this occurred.
To determine whether a debtor facing insolvency has fraudulently transferred property in order to prevent the property from falling into the hands of creditors, courts have traditionally looked for indicators of fraudulent intent, or “badges of fraud”. The badges of fraud originate in the early 17th-century Twyne’s Case (1601) 76 E.R. 809 and include, among other things, a transfer of property for consideration at below market value. The badges of fraud are to be considered at the time of the impugned transfer (CIBC v Boukalis 1987 CarswellBC 513, at p. 4 (BCCA)).
According to s. 96 of Ontario’s Bankruptcy and Insolvency Act, a court can declare void a transfer made up to five years before the date of the initial bankruptcy event. It remains to be seen whether the government will conduct in-depth investigations of all transfers of property made by every applicant company before the beginning of the pandemic, and for how long before. Such investigations would certainly require an investment of government resources over and above the amount of the bridge funding itself.
A company discovered to have made a fraudulent conveyance would most likely be pushed into bankruptcy proceedings, and the receiver would be made aware of the conveyance, which would be subject to being clawed back in order to satisfy some of the company’s debts. This process may in turn trigger a stream of lawsuits from creditors.
It is thus quite possible that LEEFF will have far-reaching consequences for applicant companies with any history of removing assets from the company other than in the ordinary course of their business – even if at the time they could not have foreseen the COVID-19 closure of the economy and the resulting financial strain.