United States: Canadian Bankruptcy Considerations In Factoring Transactions

Factoring transactions, in which a buyer purchases outright or acquires an interest in a seller's accounts receivable, are becoming increasingly common. Initially, the buyer must determine whether the transaction is to be recourse or non-recourse to the seller. In other words, can the buyer seek a remedy against the seller if the receivable is bad, or doesn't pay, or does the buyer bear the entire credit risk of the deal, irrespective of whether the receivable is good? Both recourse and non-recourse transactions raise a handful of interesting considerations in bankruptcy situations. What happens if the seller in a factoring transaction goes bankrupt? Can creditors of the seller look to the third party purchaser for recovery? Factors are at risk under the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA), which allow for such recovery in certain circumstances.

Canadian legislation empowers courts to declare a "transfer-at-undervalue" void during specific "look-back periods". As well, a trustee in bankruptcy may apply to a court for payment by a transferee of the difference between the actual consideration given and the fair market value of the assets transferred.

A transfer-at-undervalue is defined as a disposition of property for which no consideration is received or for which the consideration received is conspicuously less than the fair market value.

Where a transfer-at-undervalue occurs between parties dealing at arm's length, a transfer may be set aside if (1) it occurred in the year prior to the date of the initial bankruptcy; (2) the debtor was insolvent at the time or rendered insolvent by it; and (3) the debtor intended to defraud, defeat or delay a creditor.

Where a transfer-at-undervalue occurs between parties not dealing at arm's length, a transfer may be set aside if (1) the transfer occurred in the 12 months prior to the initial bankruptcy event; or (2) the transfer occurred within the five years prior to the initial bankruptcy event and the debtor was: (i) insolvent at the time, or rendered insolvent by it and (ii) the debtor intended to defraud, defeat or delay a creditor.

What does "conspicuously less" mean?

The phrase "conspicuously less" is not defined in either the BIA or the CCAA. Canadian jurisprudence, while providing some guidance, does not explicitly set out the percentage at which a discount will render the consideration received to be "conspicuously less" than fair market value.

The Supreme Court of Canada in Peoples Department Stores Inc. (Trustee of) v Wise, commenting on s. 100 of the BIA as it was written at the time, stated that the "conspicuously less" test is not "whether the [difference] is conspicuous to the parties at the time of the transaction, but whether it is conspicuous to the court having regard to all the relevant factors." It went on to say that "there is no particular percentage that definitively sets the threshold for a conspicuous difference, [but that] the percentage difference is a factor [to be taken into consideration]." In that case, the SCC held that a disparity of slightly more than six percent between the fair-market value and the consideration received by the bankrupt corporation did not constitute a conspicuous difference within the meaning of the BIA. Similarly, in Re Mendenhall, which involved a disparity of 6.67 percent, the Ontario Superior Court (Bankruptcy and Insolvency Division) held that the conspicuous difference threshold was not met.

Canadian courts have, in some cases, held discounts to be conspicuous. The British Columbia Court of Appeal in Skalbania (Trustee of) v Wedgewood Village Estates Ltd. held that a discount of 17.5 percent resulted in a conspicuous difference. The Court explained that a decision as to whether a difference is conspicuous should be made in light of an examination of the particular circumstances in the case. It went on the say that the word "conspicuous" should be considered in its plain and ordinary meaning, namely, "plainly evident, attracting notice; hence eminent, remarkable, [or] noteworthy." In 2013, the Alberta Court of Queens Bench in Re Mihalich held that discounts of 55 percent, 71 percent, 77 percent and 82 percent on the transfer of certain chattels between common law spouses did result in a conspicuous discount.

What should factors be aware of?

Due diligence of potential sellers and transactions should result in a detailed understanding of a seller's corporate structure and who is originating the receivable.

A buyer's underwriting team needs to be sensitive to the seller's financial condition and its corporate-related parties, other creditors and the seller's overall ability to pay its obligations as they fall due. In particular, buyers should be aware of the definition of "insolvency" as it may be applied to a seller or its related parties. Buyers should not merely rely on the business condition of the seller, where affiliates and related parties may affect any potential claw back.

Finally, buyers of accounts receivable dealing with Canadian businesses should avoid discounts that are disproportionate to the fair-market value of the receivables being acquired, or market practice generally. To avoid negative consequences, factors should use a discount rate that is generally accepted as standard practice in the industry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.