OVERVIEW

On October 11, 2024, the Supreme Court of Canada (the SCC) rendered a decision clarifying the corporate attribution doctrine in the bankruptcy and insolvency context. Aquino v. Bondfield Construction Co.¹ involved a dispute regarding the recovery of money by a trustee and monitor of two companies on the basis that certain transactions were transfers at undervalue under s. 96(1)(b)(ii) of the Bankruptcy and Insolvency Act² (the BIA). The parties disagreed as to whether the companies (as defined below) met the requisite test of intent to “defraud, defeat or delay a creditor” to establish a transfer at undervalue and whether the intent of a directing mind of the companies could be attributed to the companies under the doctrine of corporate attribution. These questions were dealt with at the Ontario Superior Court of Justice and Ontario Court of Appeal, and were subsequently appealed to the SCC. The SCC found that the directing mind of the companies met the requisite intent for a transfer at undervalue, even though the companies were not insolvent at the time of the transfer. The SCC also held that the corporate attribution doctrine must be applied purposively, contextually, and pragmatically and that the rules must be tailored to the legal context of the case. The exceptions of “fraud” and “no benefit” to corporate attribution, as established in previous jurisprudence, did not apply because the exceptions undermine the purpose of the provision in the BIA. Attribution in this case would advance the public policy objectives underlying s. 96 of the BIA.

BACKGROUND 

Bondfield Construction Company Limited (Bondfield) and its affiliate, 1033803 Ontario Inc. known as Forma-Con Construction (Forma-Con and together with Bondfield, the companies) were family-owned companies in Ontario that worked on large-scale construction projects. Mr. Aquino was the president and directing mind of both companies. The companies experienced financial difficulties, resulting in restructuring proceedings for Bondfield and bankruptcy proceedings regarding Forma-Con in 2019. The monitor and trustee determined that for several years, Mr. Aquino had fraudulently taken tens of millions of dollars from the companies through a false invoicing scheme by issuing false invoices from suppliers for services that were never provided. The monitor and trustee challenged the transactions and applied to the Ontario Superior Court of Justice to recover the monies under s. 96(1)(b)(ii)(B) of the BIA on the basis that the false invoice transactions were transfers at undervalue. A transfer at undervalue is defined under s. 2 of the BIA as 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 of the consideration given by the debtor.”³ Section 96(1)(b)(ii)(B) of the BIA permits a trustee to apply to the court to recover money from a non-arm’s length party as a result of a transfer at undervalue if the trustee can demonstrate that the debtor intended to “defraud, defeat or delay a creditor.” The same is permitted to a monitor under s. 36.1 of the Companies’ Creditors Arrangement Act, where a monitor may apply to a court to recover from a non-arm’s length party some or all of the amount of the transfer at undervalue.⁴

The Ontario Superior Court of Justice held that the false invoice payments were transfers undervalue and the amounts could be recovered by the trustee and monitor. Among other things, the Ontario Superior Court of Justice found that:

• The companies made these payments with the intent to defraud, defeat or delay a creditor;
• Rejected the argument that the companies could not have met the requisite intent because they were not insolvent or risk of insolvency at the time the payments were made; 
• Several badges of fraud were established to demonstrate that Mr. Aquino had fraudulent intent at the time the false invoice payments were made;
• That Mr. Aquino’s fraudulent intent could be attributed to the companies; and 
• The corporate attribution doctrine set out by the Supreme Court of Canada in Canadian Dredge did not apply under s. 96 of the BIA. 

This decision was appealed to the Ontario Court of Appeal. The Court of Appeal dismissed the appeal and affirmed the decision that Mr. Aquino intended to defraud, defeat or delay the companies and attributed Mr. Aquino’s fraudulent intent to the companies under the BIA. The Court of Appeal commented that the doctrine of corporate attribution has been historically addressed in the criminal and civil context, but differs from the bankruptcy context. The Court of Appeal reframed the test for corporate attribution in the context of “who should bear the responsibility for the fraudulent company’s directing mind that are done within the scope of his or her authority — the fraudsters or the creditors?”

THE SUPREME COURT OF CANADA’S ANALYSIS

The Court of Appeal’s decision was appealed to the Supreme Court of Canada. There were two questions posed to the SCC: 

1. Is the debtor’s financial condition relevant or determinative in establishing the debtor’s intent to defraud, defeat or delay a creditor under s. 91(1)(b)(ii)(B) of the BIA? 
2. When can the intent of the directing mind of a corporation to defraud, defeat, or delay a creditor be attributed to the corporate debtor under s. 96(1)(b)(ii)(B) of the BIA?

The key question was whether the trustee and monitor established the companies’ intent to defraud, defeat, or delay a creditor under s. 96(1)(b)(ii)(B). To do this, the SCC must first determine whether the evidence established Mr. Aquino’s intent to defraud, defeat, or delay a creditor and then determine whether his intent should be attributed to the companies. 

Issue 1. Is a debtor’s financial condition relevant or determinative in establishing the debtor’s intent to defraud, defeat, or delay a creditor under section 96(1)(b)(ii)(B) of the BIA? 

The appellants argued that the application judge made an extricable error of law in finding that the companies intended to defraud, defeat, or delay a creditor because the companies paid their creditors in full and on time and because the court could not determine the companies’ financial position at the time. The appellants claimed that the application judge should have determined the companies’ financial position at the time of the transactions. The SCC rejected the appellants’ submission and found that there was no reviewable error in the finding that the requisite intent under s. 96(1)(b)(ii)(B) of the BIA had been established.

In its analysis, the SCC reviewed caselaw and various texts to discuss the meaning and purpose of transfers at undervalue and of the BIA. Section 96 of the BIA provides a mechanism to reverse transfers at undervalue that occurred in a specific period of time. The purpose of s. 96 of the BIA is to protect creditors and the remedy is directed against the person who received the transfer of property from the debtor and others who were privy to the transfer. 

The court discussed that: 

Transfers at undervalue undermine the integrity of the bankruptcy process. Transfers at undervalue frustrate the purposes of the BIA. The purpose of the BIA is the equitable distribution of the bankrupt’s assets among his or her creditors and the bankrupt’s financial rehabilitation. Transfers at undervalue prejudice creditors by diminishing the value of a debtor’s estate and reducing the funds available for distribution.

The debtor’s intent to defraud, defeat, or delay a creditor can be proved through the badges of fraud. To prove a debtor’s intent to defraud, defeat, or delay a creditor under s. 96(1)(b)(ii)(B) of the BIA is a question of fact to be decided based on all of the circumstances that existed at the time of the transfer. The requisite intent is often proved through badges of fraud. The presence of one or more badges of fraud does not require courts to infer an intent to defraud, defeat, or delay a creditor, nor does the absence of a particular badge of fraud prevent a court from finding this intent.

Insolvency is not a pre-requisite to finding a debtor intended to defraud, defeat, or delay a creditor. The SCC found that s. 96(1)(b)(ii) is disjunctive — the debtor must either be insolvent at the time of the transfer (subsection A) or intend to defraud, defeat or delay a creditor (subsection B). The debtor’s financial condition at the time of the transfer is one badge of fraud that may be relevant. 

In considering the appellants’ argument, the SCC noted that the application judge considered the debtor’s financial condition, among other badges of fraud and found “no innocent explanation for a false invoicing scheme.”⁵ The SCC saw no basis to interfere with the conclusion that Mr. Aquino intended to defraud, defeat, or delay a creditor under the false invoicing scheme.

Issue 2. When can the intent of the directing mind of a corporation to defraud, defeat, or delay a creditor be attributed to the corporate debtor under section 96 of the BIA?

In order to meet the requirements under s. 96(1)(b)(ii) of the BIA, the trustee and monitor must show that the companies intended to defraud, defeat, or delay a creditor. Once finding that Mr. Aquino, the directing mind of the companies, met the requisite intent, the SCC turned to the next question of whether Mr. Aquino’s fraudulent intent could be attributed to the companies.

THE DOCTRINE OF CORPORATE ATTRIBUTION 

The appellants argued that intent could not be attributed to the companies the fraud and no benefit exceptions applied, as established in Canadian Dredge. The SCC analyzed and discussed the principles in three decisions on corporate attribution: Canadian Dredge in the context of corporate criminal liability, Livent in the context of civil liability, and DeJong in the context of civil liability. The SCC further discussed U.K. jurisprudence on the issue. Upon completion of its analysis of the jurisprudence, the SCC summarized the general principles of the doctrine of corporate attribution under Canadian law:

a. “As a general rule, a person’s fraudulent acts may be attributed to a corporation if two conditions are met: (1) the wrongdoer was the directing mind of the corporation at the relevant times; and (2) the wrongful actions of the directing mind were performed within the sector of corporate responsibility assigned to them (Canadian Dredge, at pp. 681-82; Livent, at para. 100).

b. Attribution will generally be inappropriate when: (1) the directing mind acted totally in fraud of the corporation (the fraud exception); or (2) the directing mind’s actions were not by design or result partly for the benefit of the corporation (the no benefit exception) (Canadian Dredge, at pp. 712-13; Livent, at para. 100).

c. In addition to the fraud and no benefit exceptions, courts have discretion to refrain from attributing the actions, knowledge, state of mind, or intent of the directing mind to the corporation when this would be in the public interest, in the sense that it would promote the purpose of the law under which attribution is sought (Livent, at para. 104; DeJong, at para. 2).

d. In all cases, courts must apply the common law corporate attribution doctrine purposively, contextually, and pragmatically. The corporate attribution doctrine is not a “standalone principle” (Livent, at para. 97); there is no one-size-fits-all approach. The court must always determine whether the actions, knowledge, state of mind, or intent of a person should be treated as those of the corporation for the purpose of the law under which attribution is sought (Livent, at paras. 102-3). This may require the court to tailor the general rule of attribution or its exceptions to the particular legal context. Attribution may be appropriate for one purpose in one context but may be inappropriate for another purpose in another context.”⁶

APPLYING THE CORPORATE ATTRIBUTION DOCTRINE IN THE CONTEXT OF SECTION 92 OF THE BIA

The SCC rejected the appellants’ submissions based on the following: 

Applying the doctrine of corporate attribution: The doctrine of corporate attribution must be applied purposively, contextually, and pragmatically to promote the purpose of the law under which attribution is sought 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.

Remedial purpose of s. 96: Section 96 of the BIA serves as a remedial tool for asset stripping by a debtor by clawing back assets that were improperly transferred to others before a bankruptcy to protect the assets available for creditors. This remedial purpose is served by attributing the actions, knowledge, state of mind, or intent of the directing mind to the corporation. This applies 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.  

Of exceptions to corporate attribution on s. 96. The fraud and no benefit exceptions to corporate attribution should not apply to a transfer at undervalue claim under s. 96 of the BIA. The fraud and no benefit exceptions were inappropriate and inapplicable to transfers at undervalue under s. 96 because these exceptions undermine the creditor protection purpose of s. 96 of the BIA.

For corporate attribution: The SCC disagreed with the test for corporate attribution as set out by the Court of Appeal. The SCC held that the test for corporate attribution under s. 96 is whether the person was the directing mind and whether their actions were performed within the sector or corporate responsibility assigned to them. If this test is met, the actions, knowledge, state of mind, or intent of the directing mind should be attributed to the corporation, regardless of whether the fraud and no benefit exceptions are met. Mr. Aquino was the directing mind of the companies and acted in the sector of corporate responsibility assigned to him.

The SCC ultimately found that Mr. Aquino intended to defraud, defeat, or delay creditors of the companies. While conducting the false invoicing scheme, Mr. Aquino acted in his assigned sector of corporate responsibility of engaging with suppliers and overseeing the provision of services and materials. The SCC therefore attributed Mr. Aquino’s intent to the companies.

Based on the foregoing, the SCC dismissed the appeal with costs.

CONCLUSION

This decision provides guidance as to how courts apply the corporate attribution doctrine to the bankruptcy and insolvency context and clarifies the applicability of transfers at undervalue in this context. This case serves as a tool to distinguish the corporate attribution doctrine from criminal and civil cases, as previously decided in the jurisprudence, and demonstrates how the doctrine applies to bankruptcy and insolvency proceedings. Finally, this decision demonstrates the purposive, contextual and pragmatic approach to the corporate attribution doctrine to give effect to the underlying policy objectives of the BIA.