On Oct. 11, 2024, the Supreme Court of Canada dismissed 7-0 the appeals of defendants in two unrelated Ontario bankruptcy and insolvency cases that, among other issues, raised the legal question of whether the intent of a person, who is the operating mind of a company, to defraud, defeat or delay a creditor under s.96(1)(b)(ii)(B) of the federal Bankruptcy Act, may be imputed to the corporate debtor under the corporate attribution doctrine: Aquino v. Bondfield Construction Co., 2024 SCC 31; Scott v. Golden Oaks Enterprises Inc., 2024 SCC 32.
The top court’s unanimous affirmative answer marks the first time the Supreme Court has applied the corporate attribution doctrine in the bankruptcy and insolvency contexts. Previously the court applied the common law doctrine in a criminal case, Canadian Dredge & Dock Co. v. The Queen, [1985] 1 S.C.R. 662, and in the civil context in Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63, and Christine DeJong Medicine Professional Corp. v. DBDC Spadina Ltd., 2019 SCC 30.
Supreme Court of Canada Justice Mahmud Jamal
“The corporate attribution doctrine must be applied purposively, contextually and pragmatically to give effect to the policy goals of the law under which a party seeks to attribute to a corporation the actions, knowledge, state of mind or intent of its directing mind,” Justice Jamal explained.
“Rules of attribution that may be appropriate in one context for one purpose may be inappropriate in another context for another purpose,” he wrote. “When the rules of attribution undermine the purpose of the law under which attribution is sought, the court should adapt the attribution rules to promote the purpose of the relevant law.”
The Supreme Court’s lead judgment on the law, Aquino v. Bondfield Construction Co., indicates that the courts below faced a situation where the appellants stole tens of millions of dollars from two construction companies by using a false invoicing scheme.
As the president of the two family-owned construction companies that worked on large-scale construction projects, the appellant John Aquino was the companies’ directing mind. When his companies began to experience serious financial difficulties, it was discovered that the companies had been directed to pay fake invoices from fake suppliers for services that were never provided.
The respondent trustee in bankruptcy and the monitor of the companies went to court to challenge the false invoicing scheme and sought to recover some of the money.
Under BIA s.96(1)(b)(ii)(B), a bankruptcy trustee or a monitor (via s. 36.1 of the Companies’ Creditors Arrangement Act [CCAA]) may apply to a court to impugn and recover from a non-arm’s length party to a transaction some or all of the amount of the transfer at undervalue, if the trustee can show that the debtor intended to “defraud, defeat or delay a creditor.”
(A “transfer at undervalue” is a transaction in which a debtor transfers property or provides services to another person for no consideration or conspicuously less than fair market value.)
The application judge at first instance and the Ontario Court of Appeal accepted that the false invoice payments were transfers at undervalue and applied the doctrine of corporate attribution to attribute Aquino’s fraudulent intent to the debtor companies.
The appellants were ordered below to pay the trustee and monitor the monies they received under the false invoicing scheme. (At first instance, all but one of the applicants were held jointly and severally liable to pay the monitor and the trustee monetary damages totalling $33,174,583 — plus costs, which are under appeal, in excess of $3 million).
On appeal, the appellants asserted that the principles of the common law doctrine of corporate attribution set out in Canadian Dredge & Dock Co. did not permit the imputation of Aquino’s fraudulent intention to either debtor company. In particular, they invoked the “fraud” and “no benefit” exceptions to corporate attribution previously recognized in Canadian Dredge and Livent — asserting that there could be no attribution because Aquino acted in fraud of the debtor companies and his actions did not benefit the companies.
The Supreme Court disagreed. “As the trustee notes, this position amounts to saying that the common law doctrine of corporate attribution allows ‘a fraudulent directing mind and his accomplices to avoid liability because they defrauded the company they ran,’” Justice Jamal observed.
“The corporate attribution doctrine does not countenance — much less require — such a perverse result,” he wrote.
Justice Jamal went on to rule that the “fraud” and “no benefit” exceptions to corporate attribution do not apply in the context of a transfer at undervalue under s. 96 of the BIA. “These exceptions would undermine rather than promote the purpose of this statutory provision,” Justice Jamal explained.
Justice Jamal held that Aquino’s fraudulent intent should be attributed to the debtor companies because he was their directing mind and acted in the sector of corporate responsibility assigned to him.
The purpose of BIA s. 96 “is to protect creditors from harmful actions by a debtor that would diminish the assets available for recovery,” the judge reasoned. “That purpose is served by attributing the actions, knowledge, state of mind or intent of the corporation’s directing mind to the corporation, even if the directing mind acted in fraud of the corporation, and even if the corporation did not benefit from the actions of the directing mind. By contrast, applying the fraud and no benefit exceptions would deny third-party creditors a statutory remedy that Parliament intended would be available to protect them.”
The second case before the court involved a Ponzi scheme that collapsed in 2013. The scheme was carried out through Golden Oaks Enterprises Inc., a rent-to-own residential property company founded by Joseph Gilles Jean-Claude Lacasse, who was the company’s principal and directing mind. Both Golden Oaks and Lacasse went into receivership and made assignments in bankruptcy. The trustee in bankruptcy launched more than 80 separate legal actions against creditors in 2015. Seventeen of the suits were against individuals and companies who received payments from Golden Oaks in 2012 and 2013, which included commission payments and interest on promissory notes.
The theory of the 17 actions was that, as a Ponzi scheme, Golden Oaks was by definition insolvent, it never had enough money to pay what it owed to legitimate creditors, and the commission payments and usurious interest payments to the appellants deprived legitimate creditors of their share of the company’s remaining equity. The 17 actions were heard together in a summary trial. The trial judge granted a claim under BIA s. 95(1)(b) against appellant Lorne Scott, a real estate agent who was paid interest and commissions to recruit new investors, for repayment of $72,575 in preferences, but dismissed other claims against that appellant. As against other appellants, who were investors, the trial judge granted interest repayment claims in varying amounts between $4,000 and $67,500.
The investors had argued that the trustee’s actions were statute-barred under Ontario’s Limitations Act, 2002 because Lacasse knew of the illegal payments when they were made (an argument rejected by the trial judge). The Limitations Act, 2002 says that legal proceedings generally can’t start more than two years after the person making the claim knew, or ought to have known, of the claims. The trustee also appealed the trial judge’s decision that Lacasse’s knowledge should be attributed to Golden Oaks.
The Ontario Court of Appeal did not accept the investors’ arguments and also agreed with the trustee that the trial judge should not have attributed Lacasse’s knowledge to the company.
The Supreme Court unanimously dismissed the investors’ appeal (Justice Suzanne Côté wrote a separate concurrence). The investors’ appeal rested largely on the ground that Lacasse’s knowledge was attributable to Golden Oaks because it is a one-person corporation and he and the company are essentially the same. Consequently, they urged, Lacasse’s knowledge of the interest and commission payments should be imputed to Golden Oaks and then attributed to the trustee, with the result that the trustee’s actions are statute-barred because they were not started within two years after the payments were made.
Justice Jamal held that the same corporate attribution principles outlined in Aquino apply to one-person corporations. “These principles provide sufficient flexibility to address most if not all situations of corporate attribution, including for one-person corporations,” he reasoned. “Moreover, accepting the appellants’ argument that the knowledge of a sole directing mind must always be attributed to the corporation would effectively disregard the bedrock principle of corporate separateness.”
Justice Jamal remarked that the Court of Appeal below properly exercised its discretion to decline to attribute Lacasse’s knowledge to Golden Oaks “because attribution of that knowledge would undermine the purposes of the limitations and bankruptcy provisions at issue.”
“Attribution would create an injustice by precluding the trustee’s claims to recover the unlawful payments before the trustee was even able to assert them,” Justice Jamal said. “It would also allow the appellants to retain the proceeds of their wrongful conduct of entering into illegal agreements and reduce the value of the debtor’s assets available to the other creditors in bankruptcy.”
Jeremy Opolsky, Torys LLP
“The narrow lens is that this cleans up and clarifies an incredibly important issue for bankruptcy and insolvency law, and the ability to recover assets taken by corporate insiders through potentially fraudulent means,” he told Law360 Canada.
Opolsky said Justice Jamal’s decision refutes and firmly shuts down the argument that the appellants “could rely effectively on their own fraud as a way to block recovery of those assets from them.”
Looking at the decision through a broader lens, he said the court has sent a general message that judges must apply the common law corporate attribution doctrine “purposefully, contextually and pragmatically.”
“You have to look at what the purpose of the statute and rules are in order to understand why you would attribute, or you wouldn’t attribute to the corporation,” he advised.
Alfonso Nocilla, Western University
“The Supreme Court of Canada’s decisions in Aquino and Golden Oaks have clarified the application of the corporate attribution doctrine in the insolvency context,” Nocilla said. The Supreme Court was clear that the doctrine “does not prescribe rigid rules” and that courts have discretion to “adapt the attribution rules” based on the relevant law in each case, he noted.
“In the insolvency context, this means examining the purposes of the provisions of the BIA or the CCAA under which attribution is sought. Golden Oaks confirms that the same framework applies equally to one-person corporations as to corporations with multiple officers, directors and shareholders.”
Photo of Justice Mahmud Jamal: SCC Collection
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