Did I do that? SCC considers corporate attribution doctrine in bankruptcy and insolvency context

 
The Supreme Court of Canada’s recent decision in Aquino v. Bondfield Construction Co. is a landmark decision on the doctrine of corporate attribution and the “transfer at undervalue” provisions of the Bankruptcy and Insolvency Act.

The case arises from a “false invoicing scheme” spearheaded by corporate insiders that siphoned tens of millions of dollars out of two debtor construction companies, Forma-Con and Bondfield. Forma-Con’s trustee and Bondfield’s monitor applied to recover these amounts, relying on the transfer at undervalue provisions codified in section 96 of the Bankruptcy and Insolvency Act.

In a 7-0 decision authored by Justice Jamal, the Court sided with the respondent trustee and monitor.

Aquino crystallizes the Supreme Court’s corporate attribution doctrine. It also provides a comprehensive treatment of the meaning and purpose of the transfer at undervalue provisions in the Bankruptcy and Insolvency Act. It is now the leading decision in Canada on both issues.

The Court simultaneously released its decision in Aquino’s companion appeal, Scott v. Golden Oaks Enterprises Inc., which confirms that the corporate attribution principles from Aquino apply equally in the context of a “one-person corporation”.

What you need to know

• Aquino is now the leading decision on the corporate attribution doctrine in Canada. The Court found that the corporate attribution doctrine—how the law determines the knowledge, intention, or state of mind of a company—must be applied purposively, contextually, and pragmatically. The rules must be tailored to the particular legal context.
• Aquino clears the path for insolvent companies to recover funds from company insiders who defrauded or diverted money out of the company leading up to its insolvency. The Court’s decision sharpens the powerful transfer at undervalue tool, which will increase the likelihood of creditor recovery. 
• Aquino’s companion appeal—Golden Oaks—confirms that the principles from Aquino apply to all corporate attribution cases, even to so-called “one-person companies” (i.e., where one seeks to attribute to a company the knowledge, intent, or state of mind of its sole shareholder and director).

Background

Key facts

Bondfield Construction Co. Ltd. was one of Ontario’s largest public infrastructure construction companies. Forma-Con Construction was an affiliate of Bondfield that performed concrete and forming work. Both companies were placed into insolvency proceedings in 2019, with a monitor being appointed for Bondfield and a trustee appointed for Forma-Con.

The monitor and the trustee discovered that in the years leading up to the companies’ collapses, the president and directing mind of the companies, along with several associates, ran a false invoicing scheme. This involved fake invoices from illegitimate suppliers, approved by an insider and paid by the now-insolvent companies.

To recover these funds, the monitor and trustee commenced applications under section 96 of the Bankruptcy and Insolvency Act (the BIA) seeking declarations that the payments made to these illegitimate suppliers were “transfers at undervalue”.

Under section 96 of the BIA, a court may order a party to transfer at undervalue return any property that it improperly received under certain conditions. Aquino focuses on one of those requirements: that the debtor—Bondfield and Forma-Con—intended to defraud, defeat, or delay a creditor.

Corporate attribution doctrine

Companies are not human beings. They do not have “knowledge” or “intent”. However, statutes, regulations, and other legal rules often turn on a corporation’s knowledge, intent, or state of mind. The corporate attribution doctrine seeks to solve this problem: it creates rules for how the intention and knowledge of a company’s directing mind can be attributed to the company itself.

The seminal Canadian decision on the corporate attribution doctrine is Canadian Dredge, a criminal law case that sought to determine a company’s state of mind for the purpose of criminal bid-rigging charges. Canadian Dredge generally attributes the knowledge or intention of a company’s directing mind to the company. But it also created two exceptions: a directing mind’s state of mind could not be attributed to the company (1) where the directing mind was acting in fraud of the corporation; and (2) if their acts did not benefit the corporation. As Canadian Dredge explained, without these exceptions, a company could suffer a penalty in circumstances where it was the victim of a rogue and fraudulent actor.

The Supreme Court subsequently applied the corporate attribution doctrine in the civil context in 2017 in Livent, and in 2019 in DeJong¹.

The corporate attribution doctrine and transfers at undervalue

The trustee and monitor relied upon a section of the BIA that requires the applicant to show that the debtor intended to defeat, delay or fraud creditors². Despite the trustee and monitor establishing that “badges of fraud” supported a finding of intent, the corporate insiders argued that the trustee and monitor could not attribute the intention of the humans running the false invoicing scheme to the debtors, Bondfield and Forma-Con.

Relying on Canadian Dredge and its progeny, the appellants—the perpetrators of the false invoicing scheme—argued that because the transfers had been effected by a directing mind who was acting in fraud of the debtor companies, his intent to defeat, delay or defraud creditors could not be imputed to Bondfield and Forma-Con (as a result, shielding them from any obligation under BIA section 96 to repay to the company amounts they had improperly received).

While Canadian courts had used the corporate attribution doctrine in the criminal and civil contexts, Aquino presented the first opportunity for courts to expressly grapple with the doctrine in the context of bankruptcy and insolvency.

Lower court decisions

At first instance, the Ontario Superior Court of Justice held that the traditional framework for corporate attribution from Canadian Dredge ought not to apply in applications made pursuant to section 96 of the BIA, because the BIA is concerned with providing proper redress to creditors. The payments made by Bondfield and Forma-Con in the false invoicing scheme were found to be transfers at undervalue.

This decision was upheld by the Ontario Court of Appeal. Writing for a unanimous Court, Justice Lauwers concluded that the corporate attribution doctrine is grounded in public policy. He reframed the test for corporate attribution in the bankruptcy context as: “who should bear responsibility for the fraudulent acts of a company’s directing mind that are done within the scope of his or her authority—the fraudsters or the creditors?”

The appellants obtained leave to appeal the Ontario Court of Appeal’s decision to the Supreme Court of Canada.

The Supreme Court’s decision

In a 7-0 decision penned by Justice Jamal, the Supreme Court dismissed the appeal. There are two key takeaways from the Supreme Court’s decision: first, the Court concluded that the corporate attribution doctrine must be applied in a purposive, contextual and pragmatic fashion; and second, its decision will sharpen the transfer at undervalue provisions of the BIA.

Corporate attribution must be applied contextually

The Supreme Court rejected the appellants’ argument that because the directing mind had been acting in fraud of the companies, and because the companies received no benefit from his fraud, his intention to defeat, delay or defraud creditors could not be attributed to the companies. Instead, the Court concluded that the exceptions in Canadian Dredge should not apply in the context of a transfer at undervalue application under the BIA.

The Court accepted the trustee’s and monitor’s arguments that articulations of the doctrine of corporate attribution in the criminal context (Canadian Dredge) or in the civil context (Livent and DeJong) should not be imported wholesale into the bankruptcy and insolvency context. The Court explained that the doctrine must be applied in a manner sensitive to the context. This means that there is no “one-size-fits-all” approach, and courts must “tailor the general rule of attribution or its exceptions to the particular legal context”³.

In the case of a transfer at undervalue application, allowing corporate insiders to use their own fraud to shield themselves from recovery would be incompatible with the remedial purpose of the transfer at undervalue provisions. The Court’s overview explains the perversity of the appellants’ position:

[The appellants] claim that there can be no attribution in this case because Mr. Aquino acted in fraud of the debtor companies and his actions did not benefit the companies. I do not accept this submission either. 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” (R.F., at para. 1 (emphasis in original)). The corporate attribution doctrine does not countenance—much less require—such a perverse result⁴.

As a result, the corporate insiders’ intention could be attributed to the debtors, even if they were acting in fraud of the company, or without any view to the company’s benefit.

Sharpening and strengthening the transfer at undervalue provisions

Aquino provides the Supreme Court’s most extensive analysis of the transfer at undervalue power in section 96 of the BIA. In addition to ensuring that the corporate attribution doctrine does not inhibit transfer at undervalue claims, the Court’s analysis further solidifies section 96 as a powerful provision for trustees and monitors to protect value for creditors. The Court explained that:

• Transfers at undervalue undermine the integrity of the bankruptcy process. Fraudulent debtors abuse the bankruptcy process when they can place assets beyond the reach of creditors.
• Intent to defraud, defeat or delay can be proven through “badges of fraud”. The Court affirmed the ability to infer an intent to defeat, delay or defraud creditors through indications of suspicious activity, known as “badges of fraud”.
• The debtor’s financial health at the time of the transfer is not determinative. The appellants argued that the debtors were, in large part, paying their creditors in full and on time during the applicable period of time and, therefore, it could not be inferred that they intended to defeat their creditors. The Court rejected this submission, noting that the debtor’s financial condition at the time of the transfer is just one factor in determining the badges of fraud.

Golden Oaks: Corporate attribution and “one-person corporations”

Aquino was heard and decided at the same time as another appeal, Scott v. Golden Oaks Enterprises Inc.

In Golden Oaks, the company, Golden Oaks, ran a Ponzi scheme through its sole officer, shareholder and directing mind, Mr. Lacasse. Following the scheme’s collapse, Golden Oaks’ trustee in bankruptcy sought to advance claims against lenders who gained from the Ponzi scheme. In response, the appellant lenders argued that the trustee’s claims were time-barred, saying that Mr. Lacasse’s knowledge of the claim should be attributed to the company for the purpose of the applicable limitation period.

Specifically, the lenders argued that Mr. Lacasse’s intention must be attributed to the company on the basis that Golden Oaks was a “one-person company”. They argued that because Mr. Lacasse was the sole shareholder and director, his intention should be automatically attributed to the company. In its 2017 decision in Livent, the Supreme Court of Canada expressly left open the question of how the doctrine of corporate attribution applies in the context of a one-person corporation⁵.

Golden Oaks resolves this loose thread from Livent. In his decision, Justice Jamal rejected the lenders’ “one-person company” arguments. Consistent with the contextual approach adopted in Aquino, the majority explained that there are no ironclad rules surrounding one-person corporations and that, instead, “[c]ontext and purpose always serve as the primary considerations”. The Court confirmed that “the principles for corporate attribution outlined in Aquino apply to all corporations, including one-person corporations”⁶.