We recently wrote about the Court of Appeal’s decision in Golden Oaks Enterprises Inc. v. Scott, which considered the principle of corporate attribution in the context of limitation periods and bankruptcy.

The Supreme Court of Canada has now issued a decision on an appeal of that decision in Scott v. Golden Oaks Enterprises Inc.

Case Involved a One-Person Corporation That Was Implicated in a Ponzi Scheme

In brief, the case concerned Golden Oaks Enterprises Inc. (“Golden Oaks”) with a sole director and shareholder named Lacasse. It operated a Ponzi scheme, borrowing funds from investors in exchange for high-interest promissory notes and providing commissions to investors that persuaded others to make loans to the company. The interest rates payable on the notes eventually exceeded sixty percent as the company’s financial picture worsened, with loans from new investors being used to repay existing loans. Eventually, the company and Lacasse made assignments in bankruptcy.

After a trustee in bankruptcy was appointed for the company, the trustee commenced multiple legal actions to recover illegal interest and commissions paid by the company to some of its investors before the bankruptcy. Some investors argued those actions were statute-barred under the Limitations Act 2002. Specifically, they argued that because the company was deemed to know Lacasse through corporate attribution, the two-year limitation period to bring claims against the investors began to run when Lacasse knew the company had such claims. As such, the applicable two-year limitation period has expired.

The issue eventually reached the Court of Appeal, which found in favour of the trustee, and then the Supreme Court of Canada.

A Primary Issue Before the Court Concerned the Discoverability Rule and When Knowledge is Deemed to Be Imputed to a Corporation for That Purpose

The Supreme Court of Canada’s decision involved section 5 of the Limitations Act, 2002, which is largely a codification of the common law rule of discoverability. That rule holds that a cause of action arises for the purpose of a limitation period “when the material facts on which it is based have been discovered or ought to have been discovered by the plaintiff by the exercise of reasonable diligence” (see Grant Thornton LLP v. New Brunswick).

Section 5 of the Limitations Act, 2002 expressly sets out the situations in which a claim is deemed to be discovered. For example, a claim is discovered on “the day on which the person with the claim first knew” that the damage had occurred.

The appellant investors raised a variety of arguments before the Supreme Court of Canada; however, one of the primary questions was whether it was appropriate to apply the doctrine of corporate attribution to determine discoverability under section 5.

The Court Reviewed the Guiding Principles of the Doctrine of Corporate Attribution

Most of the Court referenced its earlier decision in Aquino v. Bondfield Construction Co., which set out the general principles surrounding corporate attribution. In summary, those principles are:

1. Generally, if two conditions are met, a person’s fraudulent acts may be attributed to a company: (i) the wrongdoer must have been the “directing mind” of the company at the relevant time and (ii) the wrongdoer’s wrongful acts must have been “performed within the sector of corporate responsibility assigned to them;”
2. Generally, attribution will not be appropriate where (i) the directing mind acted “totally in fraud” of the company or (ii) their actions “were not by design or result partly for the benefit” of the company;
3. Courts also have discretion to refuse attribution “when this would be in the public interest, in the sense that it would promote the purpose of the law under which attribution is sought;” and
4. In all cases, the doctrine must be applied “purposively, contextually, and pragmatically,” with the focus being on determining “whether the actions, knowledge, state of mind, or intent of a person” should be treated as those of the company for the purpose of “the law under which attribution is sought.”

Court Considered Whether These Same Principles Applied in the Context of a One-Person Corporation

The appellant investors argued that a different approach should be taken to attribution in the context of a one-person corporation since, in such situations, the corporation and the individual/”directing mind” are not distinguishable. They argued that a company’s sole director/shareholder could not commit fraud on that company, and therefore, the discretion afforded to a court “not to attribute the knowledge of a directing mind to a corporation” should never be exercised in that context.

A majority of the Supreme Court of Canada disagreed. They stated that there was no “principled basis” to apply different principles to situations involving one-person corporations, noting that even those corporations “have an existence that is separate from that of their sole owner and directing mind.” Accordingly, the Court emphasized it is not a rule that the knowledge or state of mind of the “directing mind” of a one-person company must always be imputed to that company. Instead, “context and purpose always serve as the primary considerations.”

In Determining Whether to Apply the Corporate Attribution Doctrine, Consideration Should Be Given to the Purposes of the Laws Engaged

The appellant investors argued that Lacasse’s knowledge should be attributed to Golden Oaks, such that the two-year limitation period under the Limitations Act, 2002 began to run even before the trustee was appointed in bankruptcy. However, in considering whether this was an appropriate application of the doctrine of corporate attribution, the Court first considered the purposes of the statutes engaged – specifically, the Limitations Act, 2002 and the Bankruptcy and Insolvency Act.

The Court noted the various purposes underlying the former statute, including to provide fairness to those who might have to defend against claims “based on stale evidence.” It also noted the purpose of the discoverability rule, which is “to avoid the injustice of precluding an action before the person can raise it.” It concluded that attributing Lacasse’s knowledge to his company in the circumstances would undermine that purpose since Lacasse was uninterested in suing the appellant investors on behalf of the company while he was in charge. Doing so “would have exposed the Ponzi scheme.”

The Court also said that attributing Lacasse’s knowledge to Golden Oaks would undermine the purposes of the Bankruptcy and Insolvency Act, which included preserving and maximizing the value of a bankrupt’s assets and equitably distributing them among creditors.

Accepting the appellant investors’ argument would allow them “to retain the proceeds of their wrongful conduct and reduce the value of the debtor’s assets available for distribution to other creditors.”

Accordingly, the Court found it was appropriate to exercise judicial discretion in the circumstances and refuse to attribute Lacasse’s knowledge to his company, Golden Oaks.

Toronto Corporate Commercial Litigation Lawyers Handling Complex Litigation Matters

The Court’s decision underscores the importance of understanding the nuances of corporate attribution and its potential impact on legal proceedings. The litigation team at Milosevic & Associates in Toronto can navigate these complexities and protect your interests. Our litigation lawyers regularly represent clients in complex commercial litigation matters ranging from straightforward contract and partnership disputes to complex multi-party commercial claims. Contact us online or by phone at (416) 916-1387 for a confidential consultation today.