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Context: Canadian Law; contractor; fraud

Would it be considered fraudulence on behalf of the director (specifically CEO) of a company if they were to lie about being unable to pay a contractor, but instead chose to spend the money on other purchases? If that company later went bankrupt/insolvent,

  1. Could this impact pro-rata payment to creditors (i.e. give preference to the creditor)?
  2. Make the director personally-liable (if this is considered fraud) and allow the contractor to sue the director personally?
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  • People so often use "unable" to mean "don't want to" that I'm not sure how this could be considered fraud. – Nate Eldredge Jul 10 '19 at 2:08
  • True, though I'm most interested in the case where a business gives preferential payment on debts pre-bankruptcy and how/if that impacts payment distribution during insolvency. – JVillella Jul 10 '19 at 2:35
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Lying is not fraud

There is no general law that prevents people from lying. Fraud is using deception to receive an advantage - if the director said the would pay by a certain date in order to get something from the contractor and at that time they had no intention of doing so, then that could be fraud. However, you can see how difficult it would be to prove that circumstances hadn't changed.

Trading while Insolvent

Its pretty much universal in insolvency law that trading while you are insolvent is unlawful and possibly criminal. In this context, "trading" means incurring debts an "insolvent" means being unable to pay your debts as and when they fall due. Again, unless it is egregious, its hard to prove. Insolvent trading only occurs when a reasonably prudent director knows that the company is insolvent. Marginally solvent companies can slip over the edge into insolvency due to any number of factors beyond the company's control - a bad debt, an audit, litigation, a denied insurance claim etc.

This doesn't usually expose the director to the creditors but it does open them up for prosecution.

Preferential payments

A liquidator has the power to claw back payments that have been made preferentially while the company was insolvent. Enforcement is difficult because most creditors won't hand the money back voluntarily and most companies in liquidation don't have the financial resources to pursue them in court.

Write it off and move along

From personal experience, unsecured creditors in a liquidation usually receive nothing or maybe 4 cents in the dollar three years latter. Details vary by jurisdiction but in the distribution is 1) liquidator's fees, 2) employee wages & entitlements, 3) secured creditors, 4) unsecured creditors and 5) shareholders. The money usually runs out at step 1) or 2).

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  • It would be worth giving details of this preference to the liquidator, who might then pursue the director and get more for creditors (though not for one in particular as OP is hoping). – Tim Lymington Jul 13 '19 at 19:44

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