Supreme Court of Canada clarifies when fraud by senior management will be attributed to a corporation
In Aquino v. Bondfield Construction Co. 2024 SCC 31, the Supreme Court of Canada provided clarity about when fraud by a corporation’s directing mind can be attributed to the corporation. Early last year, The Litigator reported that the Supreme Court had granted leave to appeal the Ontario Court of Appeal’s decision that fraudulent transfers to a directing mind were done to evade creditors (2022 ONCA 202). The Supreme Court of Canada essentially agreed with the decisions below, and clarified the test for when fraud can be attributed to a corporation.
Aquino had been taking millions of dollars from his two companies via a fraudulent invoice scheme. When the companies eventually went bankrupt, their creditors argued that the payments to Aquino were fraudulent transfers made with the intent to evade the companies’ creditors and sought to claw back those payments under s.96(1)(b)(ii)(B) of the Bankruptcy and Insolvency Act (“BIA”). That section allows the trustee in bankruptcy to challenge transactions where it can show that the debtor (i.e. the company) intended “to defraud, defeat or hinder a creditor.” Aquino had argued that the companies were meeting their debt obligations when the payments were made, and so the transfers could not have been intended to evade creditors – and therefore the transfers were not a fraud that could be attributed to the corporations themselves. In other words, Aquino argued that he had been stealing from the companies, but it did not amount to a situation in which the corporations were themselves were trying to evade their creditors.
The lower courts ruled against Aquino. Both the trial judge and the Court of Appeal held that Aquino must not be permitted to benefit from the fraud, though the appeal court acknowledged that a rigid application of the current law may have led to a different result. In particular, the Court of Appeal attributed Aquino’s actions to his corporations, even though the facts of the case fell within the normal exceptions to corporate attribution under the BIA. In particular, actions of a directing mind will normally not be attributed to the corporation when the actions were fraudulent and there was no benefit to the corporation. Both of those conditions applied in this case.
The Supreme Court of Canada generally followed the reasoning of the lower courts, and held that the application of the Bankruptcy and Insolvency Act to fraudulent transfers must be applied purposively. Refusing to attribute Aquino’s actions to his corporations because of the fraud exception would allow Aquino to escape liability, and he would escape liability because he had committed fraud. Strictly applying the existing law in that way would lead to an absurd result that rewards fraudsters and frustrates the purposes of the BIA.
To avoid such results, Justice Jamal, writing for a unanimous court, held that “the corporate attribution doctrine does not prescribe rigid rules to be applied regardless of legal context,” and must instead be applied in a way that respects the purposes of the legislation.
Jamal J. listed the general principles of the common law doctrine of corporate attribution:
a) A fraudulent act can generally be attributed to a corporation if 1) the wrongdoer was the directing mind of the corporation, and 2) the wrongful actions were performed within the scope of the corporate responsibility assigned to the wrongdoer;
b) Corporate attribution will generally be inappropriate when 1) the directing mind defrauded the corporation, and 2) the directing mind’s actions posed no benefit to the corporation;
c) The courts have discretion to refrain from corporate attribution when doing so is in the public interest and promotes the purpose of the law under which attribution is sought;
d) The court must apply the corporate attribution doctrine purposively and pragmatically, recognizing that attribution may be appropriate in some contexts but not others.
Applying these principles to corporate attribution under section 96 of the BIA, Jamal J. held that the test is “simply whether the person was the directing mind and whether their actions were performed within the sector of corporate responsibility assigned to them”. Where these criteria are met, the actions of the directing mind can be attributed to the corporation, even where there was fraud and no benefit to the corporation. Given the attribution of the actions of Aquino to his bankrupt corporation, s.96(1)(b)(ii)(B) of the BIA applied and the trustee was entitled to pursue Aquino to reverse the payments to him and claw them back for the benefit of the corporation’s creditors.
This decision provides clarity about the options available to creditors where a directing mind has removed money from a corporation, even if the corporation was solvent at the time of the transfer. It also provides more general guidance about corporate attribution, stressing that overly technical arguments against corporate attribution will not be accepted if they lead to absurd results that flout the purposes of relevant legislation.
