Court of Appeal clarifies the doctrine of attribution to companies | Bennett Jones LLP

The doctrine of corporate attribution concerns the attribution of the shares of the directing mind of a corporation to the corporation itself. On March 10, 2022, at Ernst & Young Inc. v. Aquino [Aquino], the Court of Appeal released what it described as a first impression decision in which the Court considered the doctrine in the context of bankruptcy and insolvency. In particular, the Court held that the fraudulent intent of a directing mind could be attributed to a bankrupt company for the purpose of reversing undervalued transfers under Section 96 of the Bankruptcy and Insolvency Law (BAI).

The debtor companies were Bondfield Construction Company Limited and its affiliate Forma-Con Construction. The trustee and debtors’ comptroller alleged that John Aquino, the directing mind of the debtors, executed a false invoicing scheme through which he and his associates embezzled tens of millions of dollars. The trustee and the monitor sought various forms of declaratory judgment, in particular under section 96 of the BIA.

Section 96 of the BIA allows trustees to seek a court order setting aside a transfer by an undervalued debtor. The criteria set out in the BIA include the following: the debtor did not deal at arm’s length with the beneficiary; the transfer took place within five years of the bankruptcy; and the debtor intended to defraud, frustrate or delay a creditor. The issue in the appeal was whether Mr. Aquino’s fraudulent intent could be attributed to the debtor companies.

The Supreme Court of Canada has set out the following test to be considered in applying the corporate attribution doctrine:

To attribute the fraudulent acts of an employee to his employer company, two conditions must be met: 1° the culprit must be the directing mind of the company; and (2) the wrongdoings of the directing mind must have been committed within the limits of his authority; that is to say that his actions must be performed in the sector of activity of the company assigned to him. For the purposes of this analysis, an individual will cease to be a directing mind unless the act (1) was not wholly fraudulent to society; and (2) was intentionally or as a result partly for the benefit of the company.

Even when these 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 corporate attribution theory in the areas of criminal and civil liability. In these areas, the courts have generally held that it is fair to impose liability on the corporation when it has benefited from the conduct of the directing mind. Where the company has not benefited, there is generally no attribution.

In AquinasThe factors considered by the Court in deciding whether or not to attribute Mr. Aquino’s conduct to the corporate debtors included the following:

  • “The court is sensitive to the context established by the area of ​​law in which one seeks to make an attribution of intent to a corporation.”
  • “The political factors that favor attributing the wrongful intent of its directing mind to a corporation stem from the ‘social purpose’ of holding the corporation accountable.”
  • The political considerations are different in the field of bankruptcy: “the attribution of the intention of the directing mind of a company to the company itself can hardly be regarded as unjustly prejudicing the company in the context of bankruptcy, when the business is no more than a collection of assets to be liquidated with the proceeds distributed to creditors. An approach that favors the interests of fraudsters over those of creditors seems counter-intuitive and should not be adopted quickly.

In light of these considerations, the Court reframed the test for attributing the intent of the directing mind to a corporate debtor in the context of bankruptcy as follows: “who should bear responsibility for the fraudulent acts of the directing soul of a company who are committed under its authority, fraudsters or creditors? »

The Court ultimately concluded that the way to avoid Mr. Aquino benefiting at the expense of the creditors would be to impute his intention to the corporate debtors. Although this approach appears to be at odds with the historical corporate attribution approach since the corporate debtors did not benefit from Mr. Aquino’s fraudulent scheme, the Court found that this approach achieved the corporate purpose of providing appropriate relief to creditors in this context.

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