Court of Appeal Refines the Corporate Attribution Doctrine

March 15, 2022

Written By Jonathan Bell and Jason Berall

The corporate attribution doctrine concerns the attribution of the actions of a corporation’s directing mind to the corporation itself.  On March 10, 2022, in Ernst & Young Inc. v. Aquino [Aquino], the Court of Appeal released what it described as a decision of first impression in which the Court considered the doctrine in the bankruptcy and insolvency context.  In particular, the Court held that the fraudulent intent of a directing mind could be imputed to a bankrupt corporation for the purpose of voiding transfers at undervalue under section 96 of the Bankruptcy and Insolvency Act (BIA).

The debtor corporations were Bondfield Construction Company Limited and its affiliate Forma-Con Construction.  The trustee and monitor of the debtors alleged that John Aquino, the directing mind of the debtors, carried out a false invoicing scheme through which he and his associates siphoned off tens of millions of dollars.  The trustee and monitor sought various forms of declaratory relief, including under section 96 of the BIA.

Section 96 of the BIA permits trustees to seek a court order voiding a transfer by a debtor at undervalue.  The criteria set out in the BIA include the following: the debtor was not dealing with the recipient at arm’s length; the transfer occurred within five years of the bankruptcy; and the debtor intended to defraud, defeat or delay a creditor. At issue in the appeal was whether Mr. Aquino’s fraudulent intent could be imputed to the debtor corporations.

The Supreme Court of Canada has articulated the following test to consider in applying the doctrine of corporate attribution:

To attribute the fraudulent acts of an employee to its corporate employer, two conditions must be met: (1) the wrongdoer must be the directing mind of the corporation; and (2) the wrongful actions of the directing mind must have been done within the scope of his or her authority; that is, his or her actions must be performed within the sector of corporate operation assigned to him. For the purposes of this analysis, an individual will cease to be a directing mind unless the action (1) was not totally in fraud of the corporation; and (2) was by design or result partly for the benefit of the corporation.

Even where those factors are satisfied, courts retain the discretion to refrain from applying the doctrine where, in the circumstances of the case, it would not be in the public interest to do so.

Canadian courts have considered the corporate attribution doctrine in the fields of criminal and civil liability.  In those fields, courts have generally held that it is just to impose liability on the corporation where the corporation benefited from the directing mind’s conduct. Where the corporation did not benefit, there is generally no attribution.

In Aquino, the factors considered by the Court in deciding whether to impute Mr. Aquino’s conduct to the debtor corporations included the following:

• “[T]he court is sensitive to the context established by the field of law in which an imputation of intent to a corporation is sought to be made.”
• “The policy factors that weigh in favour of imputing to a corporation the wrongdoing intent of its directing mind flow from the ‘social purpose’ of holding the corporation responsible.”
• The policy considerations are different in the bankruptcy field: “attributing the intent of a company’s directing mind to the company itself can hardly be said to unjustly prejudice the company in the bankruptcy context, when the company is no longer anything more than a bundle of assets to be liquidated with the proceeds distributed to creditors. An approach that would favour the interests of fraudsters over those of creditors seems counterintuitive and should not be quickly adopted.”

In light of those considerations, the Court reframed the test for attributing the intent of the directing mind to a debtor corporation in the bankruptcy context as follows: “who should bear responsibility for the fraudulent acts of a company’s directing mind that are done within the scope of his or her authority—the fraudsters or the creditors?”

The Court ultimately found that the way to avoid Mr. Aquino benefitting at the expense of creditors would be to impute his intent to the debtor corporations.  While this approach appears to be at odds with the historical approach to corporate attribution since the debtor corporations did not benefit from Mr. Aquino’s fraudulent scheme, the Court found that this approach achieved the social purpose of providing proper redress to creditors in this context.

If you require assistance in respect of issues relating to corporate attribution or related matters, please contact a member of the Bennett Jones Litigation Group.

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