Corporate Attribution in Insolvency: Key Differences Between Aquino and Golden Oaks

In our recently published Key Developments in Canadian Insolvency Case Law in 2022, the Supreme Court of Canada (SCC) has granted leave to appeal the decisions of Ernst & Young Inc. v. Aquino (Aquino) and Golden Oaks Enterprises Inc. v. Scott (Golden Oaks). Both Aquino and Golden Oaks contemplate the application of the corporate attribution doctrine in the insolvency context, however, there are several key differences that readers should note. This bulletin outlines these key differences, in addition to preliminary intervenor arguments provided by the Insolvency Institute of Canada (a leading non-profit industry association promoting thought leadership in the commercial insolvency practice) (IIC) and the Attorney General for Ontario (AGO). The cases are scheduled to be heard by the SCC on December 5, 2023. We will continue to provide updates on the progress of this important development in Canadian case law.

The Corporate Attribution Doctrine

The corporate attribution doctrine imputes the actions, intent and/or knowledge of a corporation’s “directing mind” to the respective corporation. The SCC in Deloitte & Touche v. Livent Inc. (Livent) summarized the relevant test as follows:

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.

Key Differences Between Aquino and Golden Oaks

The key differences between the Aquino and Golden Oaks decisions of the Court of Appeal for Ontario (Court) are that the Court applies the corporate attribution doctrine in Aquino, refrains from applying such doctrine in Golden Oaks, and relies on different points of emphasis in reaching these two conclusions. 

In Aquino, the Court applies the corporate attribution doctrine to impute intent from the principal into the relevant corporations. The main emphasis in Aquino is the reformulation of the corporate attribution test summarized in Livent in the context of the transfer at undervalue provision contained in section 96 of the Bankruptcy and Insolvency Act (BIA) and section 36.1 of the Companies’ Creditors Arrangement Act (CCAA). In confirming the reformulated corporate attribution test, the Court in Aquino stated that strictly applying the corporate attribution doctrine can lead to achieving results which are incompatible with the remedial purpose of section 96 of the BIA. The application of the corporate attribution doctrine should always be sensitive to the applicable field of law in the circumstances and grounded in public policy, with the Court ultimately having the discretion to refrain from applying the doctrine if it would not be in the public interest to do so. Aquino confirms that the policy considerations in the bankruptcy context are far different than in the traditional corporate context given that the corporate attribution of the directing mind’s intent may be necessary to avoid unfair results for creditors. The Court in Aquino, therefore, reformulates the corporate attribution test to specifically determine whether “the fraudsters or the creditors” should bear the responsibility of a directing mind’s fraudulent actions within the scope of their authority, which resulted in the Court in Aquino applying the corporate attribution doctrine.

Golden Oaks contrasts with Aquino because it instead emphasizes the Court’s use of discretion to prevent the application of the corporate attribution doctrine in the context of insolvency-related policy factors militating against the strict application of such rule. The Court confirms that in addition to public policy considerations, courts should also carefully consider the result of applying the corporate attribution doctrine in the context of fraud. If applying the corporate attribution doctrine were to enlarge recoveries for one victim of fraud at the expense of another, or if a party that committed fraud would be able to shield themselves from accountability, then it would be improper to apply the corporate attribution doctrine. The Court ultimately confirmed that the corporate attribution doctrine did not apply in this case because of the result of its application. Imputing Golden Oaks Enterprises Inc. (Golden) with the knowledge of its principal would lead to the bankruptcy trustee’s claim being statute-barred. This would undermine the insolvency proceedings by (i) allowing Golden’s principal to avoid the consequences of his fraudulent actions, (ii) providing the bankruptcy trustee with no civil remedy for the benefit of Golden’s creditors, and (iii) failing to uphold the social policy goals of corporate responsibility and regulatory compliance. 

Golden Oaks can also be differentiated from Aquino with respect to the applicability of the corporate attribution doctrine to a “one-person” corporation, and with respect to the specific statutory provisions applied by the Court. Golden Oaks confirms that the Court’s discretion to refrain from applying the corporate attribution doctrine was in the context of a one-person corporation, while the Court in Aquino does not consider this contextual situation. Golden Oaks also involves a bankruptcy trustee pursuing an unjust enrichment claim, and the interplay of such claim with the Limitations Act, 2002. By contrast, Aquino addresses a situation that engages section 96 of the BIA and section 36.1 of the CCAA due to one of the debtors filing for bankruptcy, and the other filing for CCAA protection.

Intervenor Arguments

In the IIC’s leave to intervene motion materials in Aquino, the IIC submits guidance for the SCC’s consideration as to how the corporate attribution doctrine should be applied in the insolvency context, and more specifically, with respect to section 96 of the BIA. The IIC argues that determining whether to apply the corporate attribution doctrine is “not a box-checking exercise,” and that public policy factors should guide the flexible use of this doctrine. Preserving debtor assets and ensuring fair treatment of creditor claims are key public policy factors that the IIC believes should be considered in applying the corporate attribution doctrine in the insolvency context. The IIC notes that different categories of insolvency cases may necessitate a different application of the corporate attribution doctrine based on such public policy factors. Ultimately, the IIC views this appeal as an excellent opportunity for the Court to create a clear, over-arching approach to applying the corporate attribution doctrine in the insolvency context.

By contrast, the AGO submits guidance for the SCC’s consideration, contained in its leave to intervene motion materials in both Aquino and Golden Oaks, with respect to the general application of the corporate attribution doctrine in novel civil statutory contexts. The AGO argues that any application of the corporate attribution doctrine in the context of a statutory provision must account for established principles with respect to parliamentary supremacy and statutory interpretation, such as the principle that any “gap” within a given statute filled by the common law is done so to further the relevant legislative purpose and scheme. Accordingly, if a statute does not expressly contain corporate attribution provisions, the corporate attribution doctrine must be applied in a manner that gives effect to the relevant statute’s statutory purpose.   

Status of Appeals

The SCC dockets for Aquino and Golden Oaks confirm that the appeals will be heard together on December 5, 2023. The IIC was granted leave to intervene in Aquino, while the AGO was granted leave to intervene in both Aquino and Golden Oaks. However, since both Aquino and Golden Oaks will be heard together, it is anticipated that the SCC will consider the IIC’s arguments in both cases.

Intervenor factums are required to be served on or before July 31, 2023. Such intervenor factums will undoubtably provide further commentary on the efficacy of the public policy-oriented approach towards corporate attribution in the insolvency context taken by the Court in both Aquino and Golden Oaks.

For more information, please contact:

Daniel Loberto            +1-416-863-2937

or any member of our Restructuring & Insolvency group.