What is the test for attributing a principal’s fraudulent intent to the company?
John Aquino was the directing mind of Bondfield Construction Company Limited and its affiliate, Forma-Con Construction. Bondfield was a construction company that operated in the Greater Toronto Area and elsewhere. Its affiliate was in the concrete forming business. Over a number of years, Aquino and his associates were alleged to have carried out a false invoicing scheme by which they siphoned off tens of millions of dollars from both companies.
The monitor and the trustee of Bondfield challenged the false invoicing scheme and sought to recover some of the money under s. 96 of the BIA and s. 36.1 of the CCAA. They asserted that the false invoicing schemes were implemented by means of “transfers at undervalue” by which John Aquino “intended to defraud, defeat or delay a creditor”. Aquino and the other participants denied an intent to defraud, defeat, or delay Bondfield’s actual creditors because the company was not then insolvent or in danger of insolvency. They also argued that Aquino’s intent could not be imputed to either Bondfield or Forma-Con, so that s. 96(1)(b)(ii)(B) of the BIA could not be used to require them to repay what they took.
The application judge granted the declarations the monitor sought concerning the Bondfield false invoicing scheme and required the Bondfield parties to repay tens of millions of dollars on a joint and several liability basis. Her Honour imputed the fraudulent intention of John Aquino to Bondfield and Forma-Con, and found that the trustee and the monitor could pursue the repayment of the funds taken from the fraudsters under the BIA.
On appeal, the appellants argued that the application judge erred legally because Aquino’s fraudulent intent could not be imputed to Bondfield or Forma-Con as a matter of law, even though he was one of the companies’ directing minds. They asserted that the binding principles of the common law doctrine of corporate attribution set out in Canadian Dredge & Dock Co. v. The Queen did not permit the imputation of his intention to either defrauded company. Accordingly, s. 96(1)(b)(ii)(B) of the BIA could not be used to require Aquino or his associates, as “privies” to the impugned transactions, to repay the money they took.
Corporations are not natural persons. In view of separate corporate personality, it is no small thing to impute to a corporation the intention of its “directing mind”. On the other hand, there is the spectre that corporations might commit criminal acts and civil delicts with impunity because these engage mental elements relevant to intentions. The corporate attribution doctrine creates a bridge between the corporation and the natural person whose “directing mind” caused the corporation to act as it did. The doctrine attributes the intent of the corporation’s directing mind to the corporation itself, whose conduct is then evaluated against the legal standard that applies to the implicated criminal or civil area of law.
To attribute the fraudulent acts of an employee to its corporate employer, two conditions must be met: (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 his or her authority; that is, his or her actions must be performed within the sector of corporate operation assigned to him or her. For the purposes of this analysis, an individual will cease to be a directing mind unless the action (1) was not totally in fraud of the corporation; and (2) was by design or result partly for the benefit of the corporation. However, courts retain discretion not to apply the test in circumstances where attributing the actions of a directing mind to a corporation would not be in the public interest.
The Court of Appeal held that attributing the intent of a company’s directing mind to the company itself could hardly be said to unjustly prejudice the company in the bankruptcy context, when the company is no longer anything more than a bundle of assets to be liquidated with the proceeds distributed to creditors. An approach that would favour the interests of fraudsters over those of creditors is counterintuitive and should not be quickly adopted.
Accordingly, the test for imputing the intent of a directing mind to a corporation in the bankruptcy context should be reframed this way: 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?
Permitting the fraudsters to get a benefit at the expense of creditors would be perverse. The Court concluded that the way to avoid that perverse outcome is to attach the fraudulent intentions of John Aquino to Bondfield and Forma-Com in order to achieve the social purpose of providing proper redress to creditors, which is the core aim of s. 96 of the BIA. The application judge did not err in finding that the “intention of the debtor” under s. 96 can include “the intention of individuals in control of the corporation, regardless of whether those individuals had any intent to defraud the corporation itself.”
The Court dismissed the appeals with costs.
Judges: Lauwers, Coroza and Sossin JJ.A.
Counsel: Michael Citak and Chris Junior of Gardiner Roberts for the appellants John Aquino and 2304288 Ontario Inc.; George Corsianos of Corsianos Lee for the appellant Marco Caruso; Terry Corsianos of the Law Office of Terry Corsianos for the appellants Giuseppe Anastasio and Lucia Coccia-Canderle; Brian Belmont of Belmont Lawyers for the appellant 2104664 Ontario Inc.; Alan Merskey of Cassels Brock and Evan Cobb and Stephen Taylor of Norton Rose for the respondent Ernst & Young Inc., in its capacity as Court-Appointed Monitor of Bondfield Construction Company Limited; Jeremy Opolsky and Craig Gilchrist of Torys for the respondent KSV Restructuring Inc. in its capacity as Trustee-in-Bankruptcy of 1033803 Ontario Inc. and 1087507 Ontario Limited
By Matilda Lici