Royal Bank of Canada v. North American Life Assurance Co. and Ramgotra

A "settlement", as the term is used in s. 91 of the Bankruptcy and Insolvency Act, is a gift or transfer of property without consideration or for nominal consideration. If the settlement took place within one year of bankruptcy, it is void as against the trustee in bankruptcy. If it took place within 5 years of bankruptcy, it may be void if the bankrupt could not have paid all of his debts at the time of the transfer without the use of the property being transferred, or if the interest of the settlor did not pass at the time of execution. The obvious purpose of the provision is to bring back to the bankrupt estate for the benefit of creditors any property that has been removed to their detriment.

The BIA, s. 67(1)(b) also provides that property that is exempt from execution under provincial law does not comprise property divisible amongst creditors. Therefore, the bankrupt is entitled to retain all such exempt property. One such piece of exempt property is an insurance contract where the designated beneficiary is a spouse, parent, child or grandchild. As most lawyers are aware, this provision allows a person to protect an RRSP by ensuring that it is under an insurance contract. But can a person convert a non-exempt asset to an exempt asset merely by changing the designation of the beneficiary?

In February 1996, the Supreme Court of Canada in the case of Ramgotra v. Northamerican Life Assurance Co., 37 C.B.R. (3d) 141, considered the issue of settlements for the first time since 1942. In this case the Saskatchewan trial judge found as facts that Dr. Ramgotra was solvent at the time he transferred his RRSP funds into a RRIF under which his wife was designated as beneficiary, and that the transfer was made in good faith and not for the purpose of defeating creditors.

The Supreme Court of Canada recognized that there was an apparent conflict in the principles of settlements and exempt property. Mr. Justice Gonthier on behalf of the court noted from the recent Husky Oil decision the two fundamental purposes underlying the BIA: firstly, to ensure the equitable distribution of a bankrupt debtor's assets among the estate creditors, and secondly, the financial rehabilitation of insolvent persons.

The court concluded that, notwithstanding the fact that the designation change was a settlement, the trustee could not use s. 91 to attack property which was exempt under s. 67(1)(b). If the provincial legislatures considered an asset to be essential to the well-being of a debtor and his/her dependents and thus rendered it exempt from seizure, it would be going too far to allow creditors to attach it under the BIA.

In coming to this conclusion, the court also made the following observations:

(i) Good faith is not relevent as to whether a settlement has been made under s.91;
(ii) In line with the Bozanich decision, a settlement must involve a transfer to another person, rather than a "self-settlement" creating an exempt asset;
(iii) A change of designation of a beneficiary under a life insurance policy is a transfer of property which may constitute a settlement;
(iv) Unless there is a non obstante clause as in s. 68, s. 67(1)(b) overrides all other provisions of the BIA.

Lest you think that a new loop-hole has developed in bankruptcy legislation permitting a bankrupt to defraud creditors by creating exempt property, the court at the end of the decision stated that in order to qualify as exempt property under s. 67(1)(b), it was a precondition that the property be exempt under provincial law. Therefore, it was still open to attack a transfer under the fraudulent conveyance legislation of the province.