In this age of litigation, are you (and your assets) creditor-proofed?

Article content

Unfortunately, the more successful we become, the greater our risk of being sued or involved in a contentious dispute. Our society is litigious and is becoming increasingly litigious.

As a result, we should always ask ourselves whether we are doing everything we can to protect our wealth, assets and business in today’s world.

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

A well executed plan can be an effective way to avoid or settle litigation claims. If there are no assets to go after, given the creditor-proofing plan, then a claimant is less likely to proceed with litigation. Litigants will be hesitant to pursue a claim if the defendant does not have assets available to satisfy a successful claim.

Creditor-proofing strategies

Although no single creditor-proofing plan is foolproof, certain strategies can help protect your 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:

• Incorporating a business that will limit the liability of a business owner or shareholder. This protection is not absolute, however, 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. Registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and Retirement Compensation Arrangements (RCAs) can offer some protection. However, these products are not completely foolproof and should be discussed with a professional.
• Setting up a trust in Canada. This can be an effective way to protect assets from creditors. A trust is a legal arrangement in which a trustee holds property for the benefit of a beneficiary. If the trust is properly structured, the assets held in the trust can be protected from the creditors of the beneficiary.
• Purchasing insurance. Insurance can be a simple and effective way to protect assets from creditors. For example, life insurance policies or insurance products that have an investment component can provide a level of protection.
• Utilizing Personal Property Security Act (PPSA) law in Ontario. The PPSA allows for the creation and enforcement of security interests in personal property. Using it to secure intercompany or shareholder loans can be an effective creditor-proofing strategy.
• Setting up an offshore structure. This usually involves creating a limited liability company (LLC) 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 may have 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, a few potential pitfalls must be considered. Among them:

• Fraudulent transactions: One of the biggest pitfalls is setting up what is deemed to be a shame 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. The Ontario Court of Appeal in the recent case Ontario Securities Commission v. Camerlengo Holdings Inc. et. al. (2023 ONCA 93) 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.
• Badges of fraud: The Ontario Court of Appeal in the Camerlengo case referenced “badges of fraud” associated with a conveyance that could help a court determine whether a transaction was to be considered fraudulent. 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 to reduce the chance of a court deeming a creditor-proofing transaction to be fraudulent.
• Tax implications: Creditor-proofing strategies can 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.
• Cost: Creditor-proofing strategies 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. Several common strategies can be used to protect assets from creditors, but it is important to consider the potential pitfalls and to seek professional advice before implementing any such strategy.

Hogarth Clauzel is a senior counsel and consultant who has been practicing law in Ontario for more than 28 years with a focus on corporate commercial, IT and securities law. Hogarth’s unique set of skills, experience and knowledge make him a sought-after international practitioner and business consultant. His clients range from businesses in the construction, nuclear or finance industries to foreign governments. By providing efficient and strategic consulting, risk mitigation analysis and practical business support, Hogarth has a proven track record of assisting clients seeking comprehensive guidance in complex domestic and international transactions.

Mark Borkowski is president of Mercantile Mergers & Acquisitions Corp. Mercantile, based in Toronto, has been a mid-market M&A intermediary selling privately owned businesses since 1987.

More from Canadian Family Offices:

• After the gold rush: Family offices approach tech investing with caution
• Canso CEO John Carswell on the allure and risks of private markets
• Hotelier Sukhdev Toor came as immigrant and now gives back
• Should you minimize tax by selling your real estate before you die?

Please visit here to see information about our standards of journalistic excellence.