Protecting creditors and the public interest: Ontario Court of Appeal modifies the corporate attribution doctrine
In its unanimous decision, Ernst & Young Inc. v. Aquino, the Ontario Court of Appeal modified the common law doctrine of corporate attribution in the bankruptcy and insolvency context to uphold a decision of Ontario Superior Court’s Commercial List, which ordered a corporate officer and his associates, whom collectively orchestrated a fraudulent invoicing scheme, to repay over $30 million to company creditors pursuant to s. 96 of the Bankruptcy and Insolvency Act (“BIA”).
Background
Bondfield Construction Company Limited (“BCCL”) and its affiliate, Forma-Con Construction (“FCC”), were placed into bankruptcy protection due to ongoing financial difficulties. After conducting an investigation into the companies’ finances, the appointed monitor and trustee-in-bankruptcy discovered BCCL and FCC had illegitimately paid out tens of millions of dollars by way of false invoices issued by corporations controlled by the president of BCCL and FCC, John Aquino, and his associates (the “Appellants”). The invoices were approved and paid by BCCL under the supervision of Mr. Aquino.
Two legal principles are central to the Court’s analysis in this case:
- Transfers at undervalue
- Common law corporate attribution doctrine
The Supreme Court of Canada has held that in order to attribute the actions of a director, officer, or key employee of a company to the corporation itself under the corporate attribution doctrine, the following criteria must be established:
Section 96 of the BIA permits a trustee-in-bankruptcy to impeach pre-bankruptcy transfers of property at undervalue by a debtor corporation to another party if the debtor corporation intended to defraud, defeat, or delay a creditor in doing so.
As now recognized by the Ontario Court of Appeal, the purpose of s. 96 shares the same purpose as fraudulent conveyance law, which is to “ensure that creditors may set aside a broad range of transactions involving a broad range of property interests, where such transactions were effected for the purpose of defeating the legitimate claims of creditors.”
- The wrongdoer must be the directing mind of the corporation; and
- The action taken by the directing mind was:
- within the field of operation assigned to them;
- not totally in fraud of the corporation; and
- by design or result, partly for the benefit of the company.
If the above criteria are established, courts maintain a degree of discretion to refrain from applying corporate attribution where it would not be in the public interest to do so.
Intersection between common law doctrine and the BIA
The Appellants argued that s. 96 of the BIA was inapplicable because, although the Appellants intended to defraud BCCL and FCC, neither of BCCL and FCC (as debtor corporations) intended to defraud, defeat, or delay their creditors. Accordingly, the determination of whether the Appellants could be held liable under s. 96 of the BIA to repay the money they had received through the false invoicing scheme fell on whether the fraudulent intention of Mr. Aquino (as the directing mind of BCCL and FCC) could be imputed to those corporations under the corporate attribution doctrine.
Holding: Common law is adaptable
In the unanimous decision, the Ontario Court of Appeal took into account three factors to guide the novel application of the corporate attribution doctrine to s. 96 of the BIA:
- First, the Court noted that it is “sensitive to the context established by the field of law in which an imputation of intent to a corporation is sought to be made.”
- Second, the Court highlighted that the “attribution exercise is grounded in public policy”, and that the “policy factors that weigh in favour of imputing to a corporation the wrongdoing intent of its directing mind flow from the ‘social purpose’ of holding the corporation responsible.”
- Third, the Court noted that, while although it must take the elements of the corporate attribution doctrine seriously, the “genius of the common law is in its robust circumstantial adaptability.”
In light of the remedial nature of s. 96 of the BIA, the Court addressed the unique policy considerations inherent in the bankruptcy context, and emphasized that “an approach that would favour the interests of fraudsters over those of creditors seems counterintuitive and should not be quickly adopted.”
Accordingly, the Court reframed the test for applying the corporate attribution doctrine in the bankruptcy context, by asking: “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?”
In applying this test, the Court held that the fraudulent intentions of Mr. Aquino ought to attach to BCCL and FCC for the purposes of s. 96 of the BIA, in order to “achieve the social purpose of providing proper redress to creditors.” By doing so, the lower court’s decision to hold the Appellants liable to repay the more than $30 million was upheld.
Takeaway
As a result of this decision, the fraudulent intent of the directing mind of a debtor corporation can now be attributed to that corporation for the purpose of obtaining remedies pursuant to the “transfers at undervalue” scheme under the BIA. This is an illustrative example of how courts can adapt common law principles in order to give effect to the purpose of remedial legislation.
Depending on whether this case is granted leave to appeal to the Supreme Court of Canada, we anticipate that the Ontario Court of Appeal’s decision will act as an authority for guiding the application of the corporate attribution doctrine to other areas of bankruptcy and insolvency law.
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