As we enter 2025, we look back on five important decisions that made the news in 2024. Here is the the first case.
On October 11, 2024, the Supreme Court of Canada released two decisions, Aquino v Bondfield Construction Co. (Aquino) and Scott v Golden Oaks Enterprises Inc (Golden Oaks), concerning the liability of corporations for the fraudulent actions of their directors and officers. As a corporation is a separate legal entity from the persons running it, the corporate attribution doctrine is a mechanism used to impute a mental state to a corporation, which is in turn important for establishing liability of the corporation.
The leading case in a criminal law context is Canadian Dredge & Dock Co. v. The Queen where the Supreme Court established a two-part test for applying the corporate attribution doctrine:
- The wrongdoer must be the directing mind of the corporation; and
- The wrongful actions of the directing mind must have been done within the scope of their authority.
The two exceptions established by the Supreme Court to the application of the corporate attribution doctrine are when: (1) the directing mind acted totally in fraud of the corporation (the fraud exception); or (2) the directing mind’s actions were not by design or result partly for the benefit of the corporation (the no benefit exception).
In Aquino, there was an alleged fraudulent diversion of millions of dollars through a false invoice scheme orchestrated by the president of the two family-owned construction companies, Bondfield and Forma-Con. An application was brought after the two companies became insolvent to set aside the transactions relying on the transfer under value provisions found in section 96 of the Bankruptcy and Insolvency Act (BIA) and the equivalent provision under the Companies’ Creditors Arrangement Act. Generally, a transfer at undervalue is a transaction where there is no consideration or for which the consideration received by the debtor is conspicuously less than fair market value. Among the elements that must be established to set aside a transaction is that the insolvent debtor intended to “defraud, defeat or delay a creditor.”
The central question in this case was whether the defendant corporations themselves had the necessary intent to defraud, defeat or delay a creditor to qualify as transfers at undervalue when the president of the corporations used them to divert millions to himself. It was argued that the fraud or no-benefit exceptions applied such that the insolvent companies lacked the requisite intent. However the application judge found that the president’s conduct could be attributed to the two companies, ruling that the corporate attribution exceptions set out in Canadian Dredge did not apply for reasons of public policy.
In a unanimous decision, the Supreme Court upheld the application judge’s finding that the intent of the president could be attributed to the two companies through the corporate attribution doctrine ruling that the fraud and no benefit exceptions to corporate attribution do not apply to the provisions under s. 96 of the BIA.
In Golden Oaks, the Supreme Court addressed how the corporate attribution doctrine should be applied to a one-person corporation that had been used to run a Ponzi scheme through its sole officer, shareholder, and directing mind. After the collapse of the scheme, Golden Oaks’ bankruptcy trustee brought claims against investors who received interest payments and commissions from the company prior to its bankruptcy on the basis that they were preferential payments or constituted unjust enrichment. Among the various defences advanced, the investors argued that the trustee’s claims were time-barred, stating that the sole shareholder’s intent should be attributed to Golden Oaks under the corporate attribution doctrine triggering the discoverability rule under the applicable Limitations Act and barring the trustee’s claims.
Consistent with Aquino, the Supreme Court held that there is no one-size-fits-all rule in considering when the knowledge or state of mind of the directing mind must be imputed to a corporation, regardless of whether it is a one-person corporation or otherwise. In this specific context if the sole officer, shareholder and directing mind’s knowledge was attributed to the company it would have created an injustice by barring the trustee’s claims on behalf of creditors even before the trustee was able to assert them. In these circumstances, attributing the directing mind’s knowledge to the company would undermine the purposes of the BIA and would allow certain investors to retain proceeds of their wrongful conduct to the detriment of the other creditors.
In these two decisions, the Supreme Court clarified the guiding principles of the corporate attribution doctrine:
- an individual’s fraudulent acts may be attributed to a corporation where the wrongdoer was the directing mind of the corporation at the time and the wrongful actions were performed within their scope of corporate responsibility;
- applying the corporate attribution doctrine is inappropriate where the directing mind acted in fraud of the corporation and where the directing mind’s actions were not designed to benefit the corporation;
- courts have the discretion to refuse to apply corporate attribution if it would be contrary to the public interest; and
- in all cases, the court must apply the doctrine purposively, contextually and pragmatically.
Takeaway
The key takeaway is that the corporate attribution doctrine is not an inflexible principle of law and must be considered in the broader context of each particular case.