The Broader Context: Key Takeaways From the SCC Rulings in Aquino and Golden Oaks

On October 11, 2024, the Supreme Court of Canada (SCC) released its long-awaited decisions in Aquino v. Bondfield Construction Co. (Aquino) and Scott v. Golden Oaks Enterprises Inc. (Golden Oaks). The appeals were heard jointly on December 5, 2023. Both decisions consider the application of the corporate attribution doctrine in the context of insolvency. 

These rulings mark a pivotal moment in Canadian insolvency law concerning the liability of corporations for the fraudulent actions of their principals in the insolvency context. By dismissing the appeals in both Aquino and Golden Oaks, the SCC rejected a mechanical application of static rules that could shield bad corporate actors. Instead, these decisions reflect a purposive and contextual application of the corporate attribution doctrine, ensuring it remains a tool to achieve just outcomes.

The Principles of Certainty and Flexibility

Aquino and Golden Oaks continued the judicial conversation about the competing legal principles of certainty and flexibility, particularly within the nuanced context of insolvency law.

On the one hand, the consistent application of clearly defined legal rules fosters predictability and consistency of outcomes. This predictability allows market participants to make informed risk assessments, govern their actions accordingly and then live with or suffer the expected consequences of those actions.

Conversely, flexibility affords the judiciary greater latitude to fashion remedies based on fairness and equity in a particular case. This approach also allows the law to evolve in response to social, economic, technological or other changes.

The SCC decisions in Aquino and Golden Oaks highlight the importance of this balance, particularly in insolvency proceedings where issues relating to bedrock principles like corporate separateness are at stake.

The Corporate Attribution Doctrine

The corporate attribution doctrine is a mechanism by which the intent or actions of a directing mind of a corporation can be attributed to the corporation itself. This doctrine plays a critical role in determining when a corporation can be held responsible for the fraudulent or wrongful actions of its leadership, impacting both corporate criminal and civil liability.

The leading case in the criminal context is the 1985 SCC decision in Canadian Dredge & Dock Co. v. The Queen (Dredge). In Dredge, the SCC established a two-part test to determine whether the corporate attribution doctrine should be applied:

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 their authority. 

The SCC recognized two exceptions to this rule: (i) when the action was taken totally in fraud of the corporation (the fraud exception) and (ii) when the action did not benefit the corporation (the no-benefit exception).

In the 2017 case of Deloitte & Touche v. Livent Inc. (Receiver of) (Livent), the SCC adopted the Dredge principles in the civil context but recognized that the judiciary retains the discretion not to attribute a directing mind’s actions or intent to a corporation when, in the circumstances of the case, declining attribution would be in the public interest.

Case Backgrounds

Aquino

John Aquino was the directing mind of Bondfield Construction Company Limited (Bondfield) and its affiliate Forma-Con Construction (Forma-Con, and together with Bondfield, the Bondfield Companies). He and his associates (the Bondfield Principals) carried out a false invoice scheme between April 2014 and April 2019, in which invoices were issued for services that were never provided. The Bondfield Companies then paid the false invoices at the direction of Mr. Aquino or the Bondfield Principals.  

Facing severe financial difficulties, Bondfield commenced proceedings under the Companies’ Creditors Arrangement Act (CCAA), and Forma-Con filed for bankruptcy under the Bankruptcy and Insolvency Act (BIA). The trustee of Forma-Con and Bondfield’s court-appointed monitor challenged the false invoicing scheme and sought to recover funds pursuant to section 96 of the Bankruptcy and Insolvency Act (BIA) and section 36.1 of the CCAA (which incorporates section 96 of the BIA by reference). These sections provide for the recovery of transfers at undervalue. Transfers at undervalue are essentially transfers made by a debtor company for conspicuously less than the fair market value received by the debtor company for such transfer. To be impugned, the transfers must have been made within statutorily prescribed periods before the insolvency filing. 

Given the timing of the false invoicing scheme, the transfers could only be impugned where (i) the transferee was not dealing at arm’s length with the debtor, and (ii) the debtor had the intent to defraud, defeat or delay a creditor. The relevant look-back period for related party transactions is five years.

In response, the Bondfield Principals asserted, among other things, that the Bondfield Companies were financially strong and healthy enough to sustain the frauds and, accordingly, the requisite intent to defeat or defraud creditors was not present. 

The Ontario Superior Court (ONSC) rejected this argument and concluded that although it may be a relevant factor, insolvency was not a necessary prerequisite to establish fraudulent intent. The ONSC imputed the requisite fraudulent intent of the Bondfield Principals to the Bondfield Companies by applying the corporate attribution doctrine. 

The Bondfield Principals appealed the decision of the ONSC. The Ontario Court of Appeal (ONCA) dismissed the appeal, reframed the Dredge/Livent test for the insolvency context, and held that the underlying question is “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 Bondfield Principals appealed the ONCA’s decision to the SCC. At the SCC, they, among other things, invoked the fraud and the no-benefit exceptions and noted that the application judge found that Mr. Aquino intended to defraud both companies and that the companies did not benefit from his fraud. The Bondfield Principals argued that SCC jurisprudence imposed minimal criteria for corporate attribution that must be met in every case, regardless of the context, and that the courts below erred by reframing the corporate attribution doctrine to allow for attribution where those minimal criteria were not met.

Golden Oaks

Joseph Lacasse was the sole founder, principal and directing mind of Golden Oaks Enterprises Inc. (Golden Oaks). Between 2009 and 2013, Golden Oaks engaged in a Ponzi scheme where later investor funds were used to pay earlier investors and insiders. As Golden Oaks’ financial position worsened, it began issuing high-interest promissory notes exceeding the criminal rate of interest. The scheme collapsed in 2013. Both Lacasse and Golden Oaks filed for bankruptcy. 

In 2016, the trustee commenced actions against 17 individuals and companies (Defendants) who received payments from Golden Oaks, including payments on promissory notes with interest rates above the criminal interest rate. In response, the Defendants raised the two-year limitation period under the Ontario Limitations Act, 2002 (Limitations Act). 

Subject to certain exceptions, the Limitations Act provides that a claimant has two years from the day it “discovered” a claim to commence a legal proceeding. The trustee advanced statutory claims under the BIA as well as unjust enrichment claims, among others. As Lacasse knew of the payments when they were made between June 6, 2011, and April 3, 2013, the Defendants submitted Lacasse’s knowledge should be attributed to the company under the doctrine of corporate attribution. If the Defendant’s position was correct, the limitation period would have expired, and the actions to recover the payments would have been statute-barred.

The ONSC applied the corporate attribution doctrine and found that the trustee’s actions were statute-barred. The trustee appealed this judgment.

On appeal, the ONCA reversed the decision of the ONSC, invoking the discretion described in Livent to refrain from attributing Lacasse’s knowledge to the corporation on public policy grounds. The Defendants appealed this decision to the SCC, including on the basis that the Livent exception should not apply to a corporation with a sole directing mind. 

In short, in Aquino, the appellants were asking the SCC not to apply the corporate attribution doctrine so that the company would not have the requisite intent to establish liability for a transfer at undervalue. In Golden Oaks, the appellants asked the SCC to apply the corporate attribution doctrine so that the legal actions commenced by the trustee would be statute-barred. For an analysis of the key differences in the attribution doctrine’s interpretation and application before the ONCA, see the June 2023 Blakes Bulletin: Corporate Attribution in Insolvency: Key Differences Between Aquino and Golden Oaks. 

The SCC Decisions

Aquino

The SCC dismissed the appeal of the Bondfield Principals. 

In doing so, the SCC restated the test for corporate attribution, setting out four guiding principles:

1. As a general rule, a person’s fraudulent acts may be attributed to a corporation if two conditions are met: (1) the wrongdoer was the directing mind of the corporation at the relevant times, and (2) the wrongful actions of the directing mind were performed within the sector of corporate responsibility assigned to them;
2. Attribution will generally be inappropriate when: (1) the directing mind acted totally in fraud of the corporation, or (2) the directing mind’s actions were not by design or result partly for the benefit of the corporation;
3. In addition to the fraud and no benefit exceptions, courts have the discretion to refrain from applying the corporate attribution doctrine when this would be in the public interest and
4. In all cases, courts must apply the common law corporate attribution doctrine purposively, contextually and pragmatically. 

Principle (iv) is best understood as interpretive guidance for the application of the other three principles rather than a standalone principle in an enumerated list. The SCC appears to be emphasizing that these governing principles are not to be applied in a vacuum. Context not only matters but, in many circumstances, may be determinative. 

The addition of principle (iv) is consistent with the recommendations of the Insolvency Institute of Canada (IIC), an intervenor in the cases, that the context and purpose of a specific statutory provision at issue should guide the corporate attribution analysis. For more information on the IIC’s recommendations, see the November 2023 Blakes Bulletin: Corporate Attribution in Insolvency: Recent Developments in Aquino and Golden Oaks.

Consistent with principle (iv), the SCC concluded that the fraud exception and the no-benefit exception were not applicable in the context of determining liability under section 96 of the BIA and attributing the directing mind’s fraudulent intent to the Bondfield Companies would advance the public policy goals of section 96 by allowing creditors to recover fraudulently transferred assets that unlawfully reduced the value of the estate available for distribution to creditors. 

Golden Oaks

Relying on the principles established in Aquino, in Golden Oaks, the SCC found that there is no principled basis to apply different guiding principles for corporate attribution to one-person corporations. The guiding principles set out in Aquino provide sufficient flexibility to deal with one-person corporations and most other situations of corporate attribution. Additionally, automatically attributing the knowledge of a sole directing mind to its corporation would effectively disregard corporate separateness. 

Takeaways

The SCC’s decisions in Aquino and Golden Oaks reaffirm the doctrine of corporate attribution as a flexible, purposive tool. Courts must weigh the specific context and purpose of the law under which corporate attribution is sought rather than adhering rigidly to predetermined rules. 

For insolvency practitioners, these rulings emphasize the need for context-sensitive legal strategies. Whether arguing for or against corporate attribution, practitioners must consider the broader public interest and the specific legal purposes at play. The decisions signal a clear preference for flexibility over rigidity, allowing the law to evolve in response to complex, fact-specific scenarios. Flexibility, of course, does not dictate that rules be ignored; rather, that rules be interpreted and applied in such a way as to give effect to the principles that animate them.  

For further information, please contact the authors of this bulletin or any other member of our Restructuring & Insolvency group.