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Are you protected against creditor claims?

By Hogarth Clauzel and Mark Borkowski   

Financing Risk Management

A creditor-proofing plan can be an effective way to protect assets and avoid litigation.

PHOTO: Adobe Stock/Zolnierek

Creditor proofing is a legal strategy that aims to protect your assets from creditors or litigants. It involves a range of legal and financial strategies that are designed to make it difficult for creditors or claimants to seize and sell assets to recover their debts or successful claims.

A well-executed plan can be an effective way to avoid or settle litigation claims. Since most litigants will be hesitant to pursue a claim if the defendant does not have assets available to satisfy a successful claim, having no assets to go after as the result of a creditor-proofing plan makes a claimant less likely to proceed with litigation.


Why the need for creditor proofing?

Unfortunately, the more successful we become, the greater our risk of getting sued or involved in a contentious dispute. Our society can be litigious and is becoming increasingly so. As a result, we should always ask ourselves whether we are doing everything we can to protect our wealth, assets and businesses in today’s world.



Strategies for creditor proofing

Although no one creditor-proofing plan is completely foolproof, there are some general strategies that can be used to better protect assets. The best strategy for an individual will depend on that person’s level of wealth, acceptable costs, and acceptable risk. Some common strategies include incorporation, use of retirement structures like savings plans and funds, trusts, insurance, and possibly even using offshore companies.

Incorporating a business may limit the liability of a business owner or shareholder, however this protection is not absolute, and there are certain circumstances in which the shareholders, directors or employees can be held personally liable for third-party claims.

Placing funds in a retirement structure a Retirement Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or a Retirement Compensation Arrangement (RCA) trust can offer some protection. Again, however, these products are not completely foolproof and should be discussed with a professional.

Setting up a trust in Canada can be an effective way to protect assets from creditors. This legal arrangement in which a trustee holds property for the benefit of a beneficiary may protect the assets held in the trust from the creditors of the beneficiary, if the trust is properly structured.

A less complex option is insurance. For example, life insurance policies or insurance products that have an investment component can provide a level of protection from creditors.

In Ontario, it is also possible to use the Personal Property Security Act (PPSA). This allows for the creation and enforcement of security interests in personal property and can be used to secure intercompany or shareholder loans, which can be an effective creditor-proofing strategy.

Looking outside of Canada is also an option. Setting up an offshore structure usually involves creating a limited liability company or an offshore trust in a creditor-proof friendly jurisdiction. Offshore strategies generally make it more difficult for litigants or creditors to access defendants’ assets and will require plaintiffs to pursue their claims in a foreign jurisdiction that has specific laws that help protect assets.

For example, a creditor challenging a Nevis asset protection trust or a disposition of funds or assets into the trust must prove not only that the settlement or disposition was made with the principal intent to defraud the creditor, but also that at the time it took place it rendered the person advancing the funds insolvent or without property to satisfy the creditor’s claim, if successful. The plaintiff has the burden of proving its case by satisfying the higher “beyond a reasonable doubt” standard.


Potential pitfalls

While creditor proofing can be an effective way to protect assets from creditors and litigants, there are several potential pitfalls that must be considered, including the risk of fraudulent transactions, negative tax implications and the costs associated with some strategies.

One of the biggest pitfalls when trying to structure a protection plan is the risk of setting up what is deemed to be a sham or fraudulent transaction. Federal and provincial laws prohibit fraudulent conveyances, and the courts can deem certain types of transactions to be fraudulent if they are made with the intent to defeat, delay or hinder creditors. It should be noted that a claimant who was not even a creditor at the time that a transaction took place may be able to attack a past fraudulent transfer.

In the recent case of the Ontario Securities Commission v. Camerlengo Holdings Inc. et. al. (2023 ONCA 93), the Ontario Court of Appeal ruled that a transaction can be overturned if, at the time of the transaction, the transferring party thought that there would be a risk of future creditor claims and the transfer was made with the intention of defeating such creditor claims.

In the ruling, the court referenced “badges of fraud” associated with a conveyance, meaning that timing, paying reasonable consideration for a conveyance, ensuring that there is a proper business purpose relating to a transaction as well as several other factors must be considered when structuring the creditor-proofing plan. A proper plan that avoids or minimizes the badges of fraud is required in order to reduce the chance of a court deeming a creditor-proofing transaction to be fraudulent.

Creditor-proofing strategies can also have significant tax implications. For example, setting up an offshore structure can result in layers of complexity to one’s tax reporting and tax planning structures, and should not be ignored or taken lightly when exploring options.

And while creditor-proofing strategies are intended to reduce costs from litigation, they can be expensive to implement and maintain. Setting up a plan will normally involve obtaining professional legal and tax advice.

Creditor proofing is a complex process that requires careful planning and execution. While there are several common strategies that can be used to protect assets from creditors, it is important to consider the potential pitfalls and to seek professional advice before implementing any creditor-proofing strategy.



Hogarth Clauzel is a senior counsel and consultant who has been in practice in Ontario for over 28 years with a focus on corporate, commercial, IT, and securities law. Mark Borkowski is president of Toronto-based Mercantile Mergers & Acquisitions Corporation, a mid-market M&A broker selling privately owned businesses since 1987.





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