Secured Creditors May Assert Priority Over Proceeds Of A Fraudulent Preference Action

In the decision of Justice Morawetz of the Ontario Superior Court of Justice (Commercial List) (the "Court") in In the Matter of Aero Inventory (UK) Limited and Aero Inventory PLC, the Court held that proceeds of a fraudulent preference action recovered by a trustee in bankruptcy under section 95 of the Bankruptcy and Insolvency Act ("BIA") may be subject to the rights of secured creditors, to the extent secured creditors had rights in the collateral in question at the time of the impugned transaction. Hence, in some cases the benefit of a preference action may accrue primarily to a secured creditor. There may be significant value available to secured creditors if they do not have to share with unsecured creditors.