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:

  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 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.

With thanks to Andie Hoang, Daniel Dai and Amy Bing for their assistance with this article.
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Photo of Michael Nowina Michael Nowina

Michael Nowina’s litigation practice focuses on a broad range of commercial disputes including advising on the recovery from fraudulent investment schemes, mortgage fraud and credit fraud. Michael’s fraud-related and investigations experience includes representing victims of a Canada-wide investment fraud and ultimately securing recovery…

Michael Nowina’s litigation practice focuses on a broad range of commercial disputes including advising on the recovery from fraudulent investment schemes, mortgage fraud and credit fraud. Michael’s fraud-related and investigations experience includes representing victims of a Canada-wide investment fraud and ultimately securing recovery of a majority of the proceeds from the fraud, advising numerous creditors in proceedings commenced to recover fraudulent conveyances and preferential payments in multi-jurisdictional litigation, and representing financial institutions in identity fraud cases and in proceedings to recover funds from fraudulent borrowers. Michael also frequently advises clients on insolvency matters involving fraud.

Photo of John Pirie John Pirie

John Pirie leads Baker McKenzie’s Canadian litigation and government enforcement group and is a member of the North American group’s Steering Committee. A Chambers ranked trial lawyer, he handles complex business disputes, investigations and white-collar matters, particularly those with multi-jurisdictional aspects. John’s focus…

John Pirie leads Baker McKenzie’s Canadian litigation and government enforcement group and is a member of the North American group’s Steering Committee. A Chambers ranked trial lawyer, he handles complex business disputes, investigations and white-collar matters, particularly those with multi-jurisdictional aspects. John’s focus includes a significant fraud and financial recovery component, having pursued and defended a range of leading cases in the area. He has deep experience with emergency relief measures, including global asset freeze orders and remedies available in bankruptcy and receivership. John has acted for governments, banks, investors, multinational corporations, officers and directors, a stock exchange, a securities regulator, members of the judiciary and an array of professionals. Clients interviewed by Chambers Global say: “John Pirie has an excellent command of the law and clients’ needs and expectations” and “he is an experienced courtroom advocate who is particularly well regarded for his civil fraud expertise.”

Photo of Ahmed Shafey Ahmed Shafey

Ahmed Shafey practices commercial litigation, providing advice in the context of fraud/misrepresentation claims, contractual disputes, professional liability actions, shareholder disputes, government procurement litigation, international commercial arbitrations and bankruptcy and insolvency proceedings. Ahmed has been engaged in a number of civil fraud and asset…

Ahmed Shafey practices commercial litigation, providing advice in the context of fraud/misrepresentation claims, contractual disputes, professional liability actions, shareholder disputes, government procurement litigation, international commercial arbitrations and bankruptcy and insolvency proceedings. Ahmed has been engaged in a number of civil fraud and asset recovery matters as well as complex business crime investigations, including in tracing preferential payments, investigating complex investment frauds and moving for emergency injunctive relief to preserve and protect assets in Canada and beyond.

Photo of Anton Rizor Anton Rizor

Anton Rizor is an Associate in Baker McKenzie’s Litigation & Government Enforcement Practice Group in Toronto. Anton joined the Firm as a summer student in 2021 and completed his articles in 2023. Anton is fluent in English and German. Anton is developing a…

Anton Rizor is an Associate in Baker McKenzie’s Litigation & Government Enforcement Practice Group in Toronto. Anton joined the Firm as a summer student in 2021 and completed his articles in 2023. Anton is fluent in English and German. Anton is developing a broad arbitration, class action and litigation practice, including in civil fraud and asset recovery matters.

Photo of Bryan Hsu Bryan Hsu

Bryan Hsu is an Associate in Baker McKenzie’s Litigation & Government Enforcement Practice Group in Toronto. He joined the firm as a summer student in 2021 and completed his articles in 2023. Bryan is developing a broad litigation and arbitration practice, with interest…

Bryan Hsu is an Associate in Baker McKenzie’s Litigation & Government Enforcement Practice Group in Toronto. He joined the firm as a summer student in 2021 and completed his articles in 2023. Bryan is developing a broad litigation and arbitration practice, with interest in civil fraud and asset recovery matters.