The SCC looked at the doctrine in the bankruptcy and insolvency context for the first time Friday
In two decisions Friday, the Supreme Court of Canada attributed fraudulent intent to a set of construction companies but declined to do the same to a property business, stating in both cases that the corporate attribution doctrine cannot be rigidly interpreted and instead “must be applied purposively, contextually, and pragmatically” to promote the law under which the attribution is sought.
The cases represent the first time the high court has looked at the corporate attribution doctrine in the context of bankruptcy and insolvency litigation.
The decision in the first case, Aquino, et al. v. Ernst & Young Inc., et al., “is going to make it easier for insolvent companies to collect on behalf of their creditors from corporate insiders who defraud,” said Torys LLP partner Jeremy Opolsky, who represented the trustee in the case.
“The reason why we have a corporate attribution or corporate identification doctrine is that corporations don't have a mind of their own. They act through people. They think through people,” Opolsky adds. “The question at the heart of the doctrine in this case is, what does a company know? What does it think? What does it mean? What does it intend?
“What this case says is, the starting point for that consideration is not a rigid test, but instead, you have to look at why you're asking the question in the first place.”
Aquino involved the president of two family-owned construction companies that began restructuring and bankruptcy proceedings in 2019.
The bankruptcy monitor and trustee discovered that for years, the president and others had taken tens of millions of dollars from the two construction companies, Bondfield Construction Company Limited and Forma-Con Construction, by submitting fake invoices for fake suppliers and having the companies pay them out.
The monitor and trustee sought to recover the stolen money under the Bankruptcy and Insolvency Act, which allows such recovery if the debtor – in this case, the companies – intended to “defraud, defeat or delay a creditor.”
An application judge permitted the monitor and trustee to recover the funds by attributing the president’s fraudulent intent to the companies. The judge ordered the president and others to pay the monitor and trustee the funds they stole under the fake invoicing scheme, and the Ontario Court of Appeal affirmed her ruling.
The SCC agreed with the lower courts in a unanimous decision. Writing for the court, Justice Mahmud Jamal wrote that there was “no basis to interfere with the application judge’s conclusion that [the president] intended to defraud, defeat or delay a creditor under the false invoicing scheme.”
Under the common law doctrine of corporate attribution, the actions, knowledge, and intent of a company’s “directing mind” can be attributed to the company itself under certain circumstances. According to the SCC, an individual’s fraudulent acts can be attributed to a company if they meet two conditions: the individual was the company's directing mind at relevant times, and the individual’s wrongful acts were “performed within the sector of corporate responsibility assigned to them.”
The construction companies’ president met both criteria, so “fraudulent intent should be attributed to the debtor companies,” Jamal wrote.
The SCC’s decision in the second case, Scott, et al. v. Doyle Salewski Inc., et al., was also unanimous, with a concurring opinion penned by Justice Suzanne Côté. The case involved the sole shareholder, officer, and directing mind of Golden Oaks Enterprises Inc., a purported rent-to-own residential property business that turned out to be a Ponzi scheme.
After collapsing in 2013, the company and its owner went into receivership. In 2015, the bankruptcy trustee appointed to their estates filed actions against the company’s lenders. These included 17 actions to recover illegal interest and commissions the company paid to investors before it went bankrupt.
A trial judge ruled that the company was a Ponzi scheme and attributed the knowledge of Golden Oaks’ owner to the company. However, she disagreed with the investors’ arguments that the trustee’s actions were statute-barred and ordered the investors to give back the illegal interest payments. The judge also rejected the investors’ request to set off the interest amounts they owed the company’s estate against the principal of loans owed to them.
The Ontario Court of Appeal agreed with the trial judge’s ruling that the trustee’s actions were not statute-barred. However, the appellate court said the trial judge should have used her discretion to not attribute the Golden Oaks’ owner’s knowledge to the company.
Justice Jamal wrote for the majority on Friday, agreeing with the lower courts that the trustee’s actions were not statute-barred. He added that the principles of the corporate attribution doctrine applied to one-person corporations like Golden Oaks.
Jamal agreed with the OCA that the knowledge of Golden Oaks’ owner should not be attributed to the company, reasoning that “this would not have promoted the purposes of the laws under which attribution was sought.”
Referencing Aquino, Jamal wrote that “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.”
Attributing the owner’s knowledge to Golden Oaks would effectively make the trustee’s claims statute-barred before the trustee could assert them. It would also undermine the Bankruptcy and Insolvency Act by allowing the investors to retain the proceeds of their wrongful conduct.
This would reduce the amount of assets available to Golden Oaks’ creditors and would “not be in the public interest,” Jamal said.
In her concurring opinion, Côté said that while she agreed with her colleagues’ ruling, the question they should have addressed was not how the corporate attribution doctrine should be applied to a one-person corporation but whether the trustee’s claims of unjust enrichment against the investors were time-barred.
“There is no need to resort to the corporate attribution doctrine to answer this question – be it in connection with a one-person corporation or a different type of corporation,” Côté wrote. “This is especially so given that, as the appellants contend and as my colleague states, ‘the same principles apply to one-person corporations’ as to other types of corporations.’”
Charles Daoust, a founding member of David | Sauvé LLP who represented the investors in the case, said in a statement, “It is a disappointing result for our clients, all of whom were victims and lost money in the Ponzi scheme and have been involved in this litigation for close to a decade.”
Daoust added, “More generally, the court’s answers to the question left open in Deloitte in relation to the corporate attribution doctrine are not as reassuring as we would have hoped. The result is a more flexible approach, but as with other areas of the law, an approach of this nature often introduces some uncertainty into the law.”
Counsel representing the other parties in both cases did not respond to requests for comment.
