In a recent decision[1], the Ontario Court of Appeal clarified how payments made shortly before a company’s bankruptcy are to be treated under Canadian bankruptcy law, particularly when one creditor appears to be favoured over others.
Background
Specialty Chemical Industries Inc. (“Specialty”) was a company that bought chemicals from suppliers and sold them to its only customer. In 2018, Specialty was in financial distress. It owed millions of dollars to various suppliers, including over USD $400,000 to American Pacific Corporation (“AmPac”), one of its three main suppliers.
Faced with pressure from AmPac, Specialty paid AmPac USD $400,000 just over a month before making an assignment into bankruptcy. This payment enabled Specialty to secure one last shipment of about $100,000 in product from AmPac to fulfill an order for Autoliv. But this effort was in vain—Autoliv terminated its relationship with Specialty shortly thereafter, and Specialty filed for bankruptcy.
The Legal Issue
Under the Bankruptcy and Insolvency Act (BIA), payments made shortly before bankruptcy can be declared void if they are made with the intention of giving one creditor an unfair advantage (called a “preference”). The law creates a rebuttable presumption that if such a payment had that effect, it was made with that intent – unless there is compelling evidence to the contrary.
In this case, the trustee in bankruptcy (the “Trustee”), whose rights were assigned to the appellant, commenced proceedings against AmPac, arguing that the payment to AmPac was a preference and should be voided and returned to the bankruptcy estate.
The Motion Judge disagreed. The Court found that the payment was made to preserve Specialty’s only customer relationship and keep the business alive. Therefore, the Court ruled that the payment was not intended to favour AmPac unfairly.
The Appeal
The Ontario Court of Appeal disagreed with the Motion Judge. The Court said that even if Specialty’s goal was to continue operating, that intention can only rebut the presumption of preferential treatment if it was objectively reasonable to believe the business could be saved in a way that benefits all creditors—not just one.
In this case, the Court found no reasonable basis for believing that Specialty’s business could be turned around. Specialty was deeply insolvent, and the $400,000 payment was wildly disproportionate to the benefit it hoped to receive. The Court ruled that the payment was a preference, and AmPac must repay the money.
Takeaway
If you’re a business owner struggling with debt, this case is a warning: trying to “save” your business by paying off one supplier while ignoring others – especially right before bankruptcy – can backfire. Even if you are under pressure and hope to keep the business afloat, the law will look closely at whether your plan made sense for all your creditors, not just the one you paid. If you are a creditor who succeeds in extracting payment from a failing business, there is a serious risk that the Court will void the transaction and order you to repay the funds to benefit all creditors.
The Court’s message is clear: all creditors must be treated fairly. You cannot favour one just because you are hoping to survive – especially if that hope isn’t backed by a legitimate, solid plan based on objective evidence that the business is salvageable.
[1] RPG Receivables Purchase Group Inc. v. American Pacific Corporation, 2025 ONCA 371