The operation of a corporate entity is highly tied to its directors’ decisions. As such, Ontario law has developed the “corporate attribution doctrine” to allow individuals’ actions to be attributed to the corporation they represent. The doctrine is typically applied in civil liability, criminal law, and regulatory enforcement.
However, the Ontario Court of Appeal refined the test and applied it in bankruptcy and insolvency last year, marking the doctrine’s first application in this context. Furthermore, the Supreme Court of Canada (“SCC”) recently granted leave to determine the doctrine’s application based on the Court of Appeal’s ruling. The corporate attribution doctrine may now apply to bankruptcy and insolvency in light of these legal developments.
The Development of the Corporate Attribution Doctrine
The test for corporate liability under the corporate attribution doctrine in Ontario was developed in 1985 in the SCC’s decision of Canadian Dredge & Dock Co. v. The Queen. The case involved charges of violating pollution control laws against Canadian Dredge & Dock Co., a corporation that operated a ship that discharged pollutants into the water. The Court was asked to determine whether the corporation could be held liable for the actions of the ship’s captain.
In its decision, the Court established a two-part test for determining corporate liability under the doctrine. The first part of the test requires determining whether the individual whose actions are at issue acted within the scope of their employment or authority. This includes consideration of the individual’s role within the corporation, their duties and responsibilities, and the nature of the conduct in question.
The second part of the test requires determining whether the individual’s conduct can be attributed to the corporation. This involves considering whether the conduct was sufficiently connected to the corporation’s business that it can be said to have been carried out on behalf of the corporation. Factors that may be relevant in making this determination include the nature of the corporation’s business, the degree of control exercised by the corporation over the individual, and the extent to which the individual acted in pursuit of the corporation’s interests.
Since Canadian Dredge, the two-part test has been applied in numerous criminal and civil liability decisions. As mentioned above, the Ontario Court of Appeal recently expanded the doctrine’s applicability.
Corporate Attribution Doctrine in Bankruptcy and Insolvency
In Ernst & Young Inc. v. Aquino, the Court of Appeal considered whether the corporate attribution doctrine could be applied under s.96 of the Bankruptcy and Insolvency Act. This section enables a court to set aside transactions considered transfers at undervalue if an asset was offloaded for less than it was worth. The purpose of the section is to prevent creditors from being defrauded. The critical consideration is whether “the debtor intended to defraud, defeat or delay a creditor,” which is required under s.96(1)(b)(ii)(B).
In this case, John Aquino was the directing mind of Bondfield Construction Company Limited and its affiliate, Forma-Con. In an illegal scheme over several years, he and other associates siphoned off tens of millions of dollars from both debtors. The application judge imputed John Aquino’s fraudulent intention to Bondfeild and Forma-Con and found that the trustee and monitor could pursue repayment. Thus, the application judge found John Aquino and the other participants jointly and severally liable, requiring them to repay the money taken through the false invoicing scheme.
John Aquino and the associates appealed the decision on several grounds, one of which being that:
the application judge erred legally because John Aquino’s fraudulent intent cannot be imputed to Bondfield or Forma-Con as a matter of law, even though he was one of their directing minds. They assert that the binding principles of the common law doctrine of corporate attribution set out in Canadian Dredge & Dock Co. v. The Queen, do not permit the imputation of his intention to either defrauded company. Accordingly, s. 96(1)(b)(ii)(B) of the BIA cannot be used to require John Aquino, or his associates as “privies” to the impugned transactions, to repay the money they took.
The Court of Appeal ultimately dismissed the appeal and, in doing so, applied the doctrine. Lauwers J.A., in his reasoning, extensively discussed the doctrine and its applicability to this case and bankruptcy and insolvency matters in general. He lists multiple examples of common law doctrine being used in the context of the Bankruptcy and Insolvency Act. He posits that “common law doctrine can be enlisted by a court to interpret and supplement the BIA where necessary to achieve its purposes better, one of which is to protect the interests of the bankrupt’s creditors.”
Policy Considerations of the Court of Appeal
Turning to the applicability of the corporate attribution doctrine to the case, Lauwers J.A. extracted three principles:
- The 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 Court recognizes that the attribution exercise is grounded in public policy.
- The above principles “provide a sufficient basis to find that the actions of a directing mind be attributed to a corporation, not a necessary one.”
Considering these principles, Lauwers J.A. reframed the test in the bankruptcy context:
“The underlying question here 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?”
He identified that allowing fraudsters to get the benefit at the expense of creditors would be “perverse,” and the only way to avoid the outcome is to attach the intentions of John Aquino to the debtor companies. This reasoning is in line with the aim of s.96 of the Bankruptcy and Insolvency Act. Ultimately, Lauwers J.A. found that the application judge did not err in their finding concerning imputing John Aquino’s intention.
SCC Grants Leave to Consider Corporate Attribution Doctrine in Bankruptcy and Insolvency
Following the case, the SCC granted leave to appeal the above decision. This discussion will be updated as we follow the case.
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