Trusts – Asset Protection & Bankruptcy Law

By Andrew Rogerson LLB (Hons) TEP

Historically, trusts evolved as a means of protecting assets. This was achieved   by having another trusted person hold legal title of assets on behalf of (or   in trust for) another. Tax considerations aside, asset protection is still by   far and away the most important reason for establishing an offshore trust. Persons   of substantial means who are, or may be, at risk in the future from unwelcome   litigation should give consideration to establishing a trust. Once assets are   transferred into the name of the trustees then, after a prescribed period, creditors   are no longer able to execute against such assets. This is because the settlor   has divested himself of legal ownership. Asset protection may be obtained by   establishing trusts both in Canada and offshore. The advantage of establishing   a trust in one of the offshore finance centres is their prevalent debtor friendly   regimes.

Putting assets out of harm’s way can help to discourage frivolous lawsuits   and to encourage reasonable settlement offers from more legitimate complainants

Unless skill is utilised in establishing asset protection structures, they   may be at risk of being set aside under the following legislation: Bankruptcy   and Insolvency Act (1985) (“BIA”); Fraudulent Conveyances Act    (1990) (“FCA”) and Assignments and Preferences Act (1990   (“APA”).

Where the debtor is not bankrupt, creditors may attack fraudulent conveyances   pursuant to FCA and unjust preferences pursuant to APA. Where   the debtor is bankrupt, the trustee may use BIA (ss91-3) as well as FCA and   ABA to attack fraudulent conveyances as well as BIA (ss94-6) to attack unjust   preferences. A brief traverse of the relevant provisions of these Acts appears   below.


Section 91(1) provides that any settlement of property within one year of   the settlor being adjudged bankrupt falls into the bankrupt’s estate. This is   regardless of his solvency at the time. Secondly, s91(2) voids any such transaction   within 5 years of bankruptcy, if the trustee can prove that settlor was unable   to pay his debts without the aid of the property comprised in the settlement.

Section 95(1) provides that any preference granted to an arms length creditor   within 3 months of bankruptcy shall be deemed fraudulent and shall be void against   the trustee. Section 96 extends this period to 12 months in respect of a preference   granted to a person related to the bankrupt.


Renders voidable any conveyance made with intent to defeat, hinder, delay   or defraud creditors or others. The intent is normally inferred from circumstances   known as ‘badges of fraud’. The list is non exhaustive but includes conveyances   that are: secret, made in the face of a law suit, made with power to revoke,   non arms-length transactions, deeds containing false statements, and those where   the transferor retained possession and used the goods as his own. The provisions   do not render voidable, conveyances to bona fide purchasers without notice.   Limitation Period is 6 years.


This renders voidable transfers by the debtor, when the debtor is in insolvent   circumstances, is unable to pay his debts in full or is on the eve of bankruptcy   and that are made with the intent to give the transferee an unjust preference   over other creditors. Again there are exceptions for bona fide transactions.   The Limitation Period is unclear. For many years, it was thought to be 6 years,   but since a 2001 Court of Appeal decision, it is believed to be either 20 years   or that there is no limitation period at all.

The way to avoid asset protection settlements being set aside, is to plan   well in advance and structure them for purposes unconnected to asset protection.   This is so, even if asset protection is an inevitable and beneficial consequence   of the transaction. The settlement should be made at a time when the settlor   is clearly not insolvent ,or on the eve of insolvency. See the article elsewhere   on this website on the case of Ramgotra.