The SCC Clarifies the Corporate Attribution Doctrine and Creditor Protection Tools in Insolvency Law

October 17, 2024

Written By Kelsey Meyer, Jesse Mighton, Preet Gill, Adam Williams, Kaamil Khalfan, Sarah Paull and Shawn Kirkman

In the unrelated companion cases of Aquino v Bondfield Construction Co, 2024 SCC 31 (Aquino) and Scott v Golden Oaks Enterprises Inc, 2024 SCC 32 (Golden Oaks), the Supreme Court of Canada (the SCC or the Court) applied the common law doctrine of corporate attribution to bankruptcy and insolvency law through a purposive, contextual, and pragmatic approach.

In this post, we summarize the top takeaways from these decisions, focusing on the SCC’s application of the corporate attribution doctrine and statutory creditor protection tools. These findings are of interest and relevant to directors of Canadian businesses, stakeholders impacted by corporate distress and industry observers more broadly.

Background

Aquino Overview and Key Facts

In Aquino, the appellants stole tens of millions of dollars from two family-owned construction companies, Bondfield Construction Company Limited (Bondfield) and its affiliate, 1033803 Ontario Inc. (Forma-Con and together with Bondfield, the Companies), through a false invoicing scheme. At all relevant times, John Aquino was the president and directing mind of the Companies.

The Companies experienced serious financial difficulties, and insolvency proceedings were commenced. Specifically, Ernst & Young Inc. was appointed as the monitor (the Monitor) of Bondfield under the Companies’ Creditors Arrangement Act, RSC 1985, c C-36 (CCAA), and KSV Restructuring Inc. was appointed as the trustee in bankruptcy (the Trustee) of Forma-Con under the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (BIA). The Monitor’s and the Trustee’s (collectively, the Respondents) investigations revealed that Mr. Aquino and his accomplices made up false invoices from certain suppliers for services that were never provided and were paid over $30 million in the five years before the commencement of insolvency proceedings.

The Respondents each commenced proceedings to challenge the false invoice transactions. Under s. 96(1)(b)(ii)(B) of the BIA, a bankruptcy trustee (and under s. 36.1 of the CCAA, a monitor) may ask a court to review a suspected “transfer at undervalue” and have it reversed if it can prove the debtor’s intent to “defraud, defeat or delay a creditor”. A transfer at undervalue is a disposition of property or provision of services for which no consideration is received by the debtor, or for which the consideration received by the debtor is conspicuously less than fair market value (BIA, s. 2).

The application judge found the requirements in s. 96 of the BIA for a transfer at undervalue were met and ordered Mr. Aquino and his associates to repay the money taken through the false invoicing scheme. The Ontario Court of Appeal upheld the judge’s order and dismissed the appeal.

The key issue before the SCC was the application of the corporate attribution doctrine: whether Mr. Aquino’s fraudulent intent could be imputed to the Companies to establish the requisite intent to defeat, defraud or delay a creditor (a necessary element of relief under BIA, s. 96). 

Golden Oaks Overview and Key Facts

In Golden Oaks, Golden Oaks Enterprises Inc. (Golden Oaks), a single shareholder, single director corporation led by Mr. Lacasse, functioned as a rent-to-own residential property business in Ottawa from 2009 to 2013. Golden Oaks was a “classic Ponzi scheme” and did not generate any legitimate revenue. In 2013, Golden Oaks and Mr. Lacasse went into receivership and bankruptcy. In 2015, the trustee initiated legal proceedings against the company's investors to reclaim illegal interest and commissions paid to investors prior to the company's bankruptcy. The trustee contended that there was no legal justification for these payments, and that the investors had unjustly profited at the company's expense. In response, the investors attempted to attribute Mr. Lacasse’s knowledge to Golden Oaks to trigger the discoverability rule under the Limitations Act, 2002, SO 2002, c 24, Sch B (the Limitations Act), thus barring the trustee’s claims under the BIA. The investors denied any unjust enrichment on their behalf, asserting there was a legal basis for retaining the commissions they had earned.

The trial judge granted the trustee’s claims for the repayment of interest payments. The Ontario Court of Appeal upheld the order and dismissed the appeal.

The key issue before the SCC was whether the corporate attribution doctrine applied to impute Golden Oaks with Mr. Lacasse’s knowledge of the payments at the time they were made, which would result in the trustee’s claims being statute-barred for violating the limitation period and the investors retaining illegal proceeds.

Key Takeaways

1. SCC Confirms the Purposive Application of Corporate Attribution in Insolvency Proceedings

The corporate attribution doctrine imputes the knowledge of the directing mind of a corporation to the corporation itself, making it an exception to the bedrock principle that a corporation is a “separate legal person, distinct from its founders, shareholders and directors.”

In Aquino and Golden Oaks, the SCC confirmed that the corporate attribution doctrine must be applied “purposively, contextually, and pragmatically to give effect to the policy goals of the law” under which the doctrine is proposed to be applied—in these cases, in the context of insolvency law.

In Aquino, the SCC provides a clear summary of the guiding principles of corporate attribution:

• Generally, an individual’s fraudulent acts may be attributed to a corporation where (1) the wrongdoer was the directing mind of the corporation at the relevant time, and (2) the wrongful actions were performed within the scope of corporate responsibility assigned to them.
• Applying the corporate attribution doctrine is generally inappropriate where (1) the directing mind acted in fraud of the corporation (the fraud exception), and (2) the directing mind’s actions were not designed to benefit the corporation in whole or in part (the no benefit exception).
• Courts have the discretion to refuse to apply corporate attribution where doing so would be contrary to public interest.
• In all cases, the court must apply the doctrine purposively, contextually and pragmatically: there is no one-size-fits-all approach. The doctrine is not a “standalone principle” and must be considered in the broader context in which it is sought in each case.

In Golden Oaks, the SCC clarified that these principles apply equally to one-person corporations (i.e., where the directing mind is the sole principal and shareholder).

Application of the above principles to the facts in Aquino and Golden Oaks yielded consistent yet different outcomes:

• In Aquino, corporate attribution was applied to impute the intention of the principal to the company, with the result that the recipients of transfers at undervalue were required to pay back the funds they received.
• In Golden Oaks, the discretion not to apply the corporate attribution doctrine was upheld with the result that the knowledge held by the principal of the company was not imputed to the corporation, meaning the trustee’s claims were not limitation barred.

2. SCC Confirms Creditor Protection Mechanisms in Insolvency Law

In both Aquino and Golden Oaks, the SCC used a discretionary and purposive approach to creditor protection tools, and the outcome reached had the effect of confirming the protections available to the affected creditors.

Aquino

The Court noted that s. 96 of the BIA is a tool to remedy asset stripping by a debtor by clawing back assets that were improperly transferred to others before bankruptcy to protect the pool of assets available for creditors. The Court explained the remedial purpose of s. 96 of the BIA is served by attributing the actions, knowledge, state of mind, or intent of the 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.

The SCC agreed with the Court of Appeal’s conclusion in Aquino that the fraud and no benefit exceptions to corporate attribution do not apply under s. 96 of the BIA for a transfer at undervalue. The Court reasoned that applying the fraud and no benefit exceptions under s. 96 would deny third-party creditors the benefit of a statutory remedy intended to protect them from asset stripping and would diminish the pool of assets available for their claims. In other words, it would allow “a fraudulent directing mind and his accomplices to avoid liability because they defrauded the company they ran.”

Golden Oaks

After examining the purpose of the Limitations Act, the SCC found that attributing Mr. Lacasse’s knowledge to Golden Oaks would undermine the legislative purpose of both the Limitations Act and the BIA. Attribution of Mr. Lacasse’s knowledge to Golden Oaks in this instance would have created an injustice, preventing the trustee from recovering unlawful payments from the Ponzi scheme, and allowing the investors to retain proceeds of illegal agreements, ultimately reducing the value of the debtor’s assets available to the other creditors in bankruptcy.

3. The Focus in Transfer at Undervalue Actions Under Section 96 of the BIA is on the Debtor’s Intent

The SCC highlighted that transfer at undervalue actions are not a contest between alleged fraudsters and creditors; rather, the focus is between creditors and the recipient(s) of the impugned transfer, who may be just as innocent. Therefore, consistent with the language of the statute, the court must focus on whether the debtor possessed the requisite intention under s. 96 of the BIA.

While the SCC highlighted that the focus is on the debtor’s intention at the time of the transfer, it also stated that a court must avoid analyzing the debtor’s actions with the benefit of hindsight.

Parties preparing to receive larger than expected or extra-contractual payments from a distressed company should consider taking steps to perform diligence in situations where such payments have the potential to be considered a preference or transfer at undervalue. These considerations should be heightened where the recipient is not operating at arm’s length from the payor. 

Conclusion

The SCC decisions in Aquino and Golden Oaks provide welcome clarity to the application of the doctrine of corporate attribution in the insolvency context. Individually and taken together, these decisions uphold existing creditor protections by promoting a purposive and flexible approach consistent with the legislative purpose of the provisions of the BIA and the CCAA in the totality of the circumstances in insolvency proceedings. In both cases, the SCC rejected arguments that may have seen the perpetrators of fraudulent activity, or the beneficiaries of fraudulent payments, shielded from actions seeking to unwind the impugned transactions for the benefit of affected creditors.    

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