What is a fraudulent preference and can a lender's security interest be undone if granted shortly before insolvency?

Yes, potentially. Canadian insolvency law includes protections designed to stop a struggling corporation from unfairly favouring one creditor over others in the period leading up to its insolvency — sometimes described as a fraudulent preference or a reviewable transaction. If a corporation grants a new security interest to a particular creditor shortly before becoming insolvent, in circumstances suggesting the real purpose was to prefer that creditor ahead of others rather than to secure genuine new financing, that security interest can potentially be challenged and set aside later.

Whether a specific transaction actually qualifies as a preference depends heavily on the surrounding facts — the timing relative to insolvency, whether new value was actually advanced in exchange for the security, the relationship between the corporation and the creditor, and the corporation's intent. This is a fact-intensive area of insolvency law rather than a simple bright-line rule, and it's a real risk both for a corporation trying to shore up a favoured creditor and for a lender accepting new security from a corporation already showing signs of financial distress. Anyone on either side of a security arrangement granted close to a corporation's insolvency should get legal advice specific to the circumstances.