SCC to hear case on how corporate attribution doctrine applies to bankruptcy and insolvency

The Supreme Court of Canada has granted leave to an appeal which will determine how the corporate attribution doctrine applies in the bankruptcy and insolvency context.

The appeal in John Aquino, et al. v. Ernst & Young Inc. comes to the court via the Ontario Court of Appeal, where the court refined the test for corporate attribution in its first application to the bankruptcy and insolvency field. To address the public policy interests on which the Court of Appeal had based its ruling, the SCC may confirm the change to the test, says Dr. Anna Lund, an associate professor in the faculty of law at the University of Alberta.

There are “two big conversations that are colliding here,” Lund says. “One is: How do we attribute intent from people – flesh-and-blood people – to the artificial person of the corporation? And it is running into this difficult conversation around: What role should intent play when we're setting aside transactions that either don't look right, people were up to no good or just has had the effect of denying creditors access to property that they otherwise would have had?”

John Aquino was a director of Bondfield Construction and its affiliate Forma-Con, both put into insolvency. He had been involved, with associates, in a fraudulent invoicing scheme through which they siphoned off tens of millions of dollars from the companies.

In a bankruptcy, insolvency professionals have the power under the transfers at undervalue provision in s. 96 of the Bankruptcy and Insolvency Act to set aside transactions where the debtor offloaded an asset for less than it was worth.

“When I'm teaching this section to students, I say that if you're about to go into insolvency, you can't give away your family cottage to your nephew beforehand to keep it out of your creditors’ hands,” says Lund. “The goal of a section like this is to claw back property that should be available to the creditor.”

She says that this section and other “impeachable transaction provisions” are intended to ensure that creditors are not defrauded but provide some commercial certainty. One way the Bankruptcy and Insolvency Act provides certainty is by making it more challenging to set aside transactions made with an arm’s-length party and setting a limit of five years before the date of bankruptcy.

In Aquino, the insolvency professionals sought to set aside the fraudulent payments as impeachable transactions. They had to demonstrate that the debtor intended to defraud, defeat, or delay a creditor.

“The debtor here is a corporation,” says Lund. “And a corporation is an abstract legal entity. It doesn't have any intention. So, why this becomes an interesting case is because it engages with the corporate law doctrine about when we will attribute intent to a company.”

While Aquino intended to defraud creditors, she says, the case will turn on whether that intent can be attributed to the companies where he was a director.

The test for corporate attribution comes from the 1985 SCC case, Canadian Dredge & Dock Co. v. The Queen. In Canadian Dredge, the court set out a test it used to assign criminal intent to the company. Two conditions must be met: the offender must be “the directing mind” of the corporation, acting “within the scope of his[/her] authority.”

The “big issue” in Aquino, says Lund, is that the rule has been that the court would not attribute the intent of the directing mind to the corporation if they were defrauding that corporation and their actions did not benefit the corporation.

Aquino is arguing that insolvency professionals cannot succeed in their s. 96 application and recover the money he paid to himself because Canadian Dredge binds them. Since he defrauded the corporation, they cannot attribute his intent to it.

Before Aquino, courts had only applied the corporate attribution doctrine to the criminal and civil liability fields. The application judge ordered Aquino and his associates to repay the money they took, and the Ontario Court of Appeal dismissed their appeal.

In finding that corporate intent can be attributed to Aquino, the Court of Appeal said that while the Canadian Dredge principles “are sufficient to attribute corporate intent… they’re not necessary,” says Lund. Despite not satisfying the principles, the court could attribute intent because that was the route most consistent with the policy behind s. 96 that the property should be available to the debtors’ creditors. “If we're deciding between John Aquino getting this property and the debtor’s creditors getting this property, it should be going to the debtor’s creditors,” she says of the court’s reasoning.

“That is the question that was appealed by John Aquino, and that is what the Supreme Court of Canada has granted leave on. John Aquino is saying that this is a huge change to the law around corporate liability, and there's not sufficient reasons here to make it.”

“I could see the court being willing to change the law in this situation,” says Lund. “And that's the beauty of the common law. It's constantly being adapted. But I also think it supports the policy-based reasons that the court offered for its change of law here. If the law is resulting in an absurd result, then it might be time to modify it. That is part of the beauty and the strength of the common law.”