Aquino v. Bondfield Construction Co.

Aquino v. Bondfield Construction Co.
Collection
Supreme Court Judgments
Date
2024-10-11
Neutral citation
2024 SCC 31
Case number
40166
Judges
Wagner, Richard; Karakatsanis, Andromache; Côté, Suzanne; Rowe, Malcolm; Martin, Sheilah; Jamal, Mahmud; O’Bonsawin, Michelle
On appeal from
Ontario
Subjects
Bankruptcy and insolvency
Notes
Case in Brief SCC Case Information
Decision Content
SUPREME COURT OF CANADA
Citation: Aquino v. Bondfield Construction Co., 2024 SCC 31
Appeal Heard: December 5, 2023 Judgment Rendered: October 11, 2024 Docket: 40166
Between:
John Aquino, 2304288 Ontario Inc., Marco Caruso, Giuseppe Anastasio, also known as Joe Ana and Lucia Coccia, also known as Lucia Canderle Appellants
and
Ernst & Young Inc., in its capacity as Court-Appointed Monitor of Bondfield Construction Company Limited, and KSV Kofman Inc., in its capacity as Trustee in Bankruptcy of 1033803 Ontario Inc. and 1087507 Ontario Limited Respondents
- and -
Attorney General of Ontario and Insolvency Institute of Canada Interveners
Coram: Wagner C.J. and Karakatsanis, Côté, Rowe, Martin, Jamal and O’Bonsawin JJ.
Reasons for Judgment: (paras. 1 to 100)
Jamal J. (Wagner C.J. and Karakatsanis, Côté, Rowe, Martin and O’Bonsawin JJ. concurring)
Note: This document is subject to editorial revision before its reproduction in final form in the Canada Supreme Court Reports.
John Aquino,
2304288 Ontario Inc.,
Marco Caruso,
Giuseppe Anastasio, also known as Joe Ana and
Lucia Coccia, also known as Lucia Canderle Appellants
v.
Ernst & Young Inc., in its capacity as court-appointed
monitor of Bondfield Construction Company Limited, and
KSV Kofman Inc., in its capacity as Trustee in Bankruptcy
of 1033803 Ontario Inc. and 1087507 Ontario Limited Respondents
and
Attorney General of Ontario and
Insolvency Institute of Canada Interveners
Indexed as: Aquino v. Bondfield Construction Co.
2024 SCC 31
File No.: 40166.
2023: December 5; 2024: October 11.
Present: Wagner C.J. and Karakatsanis, Côté, Rowe, Martin, Jamal and O’Bonsawin JJ.
on appeal from the court of appeal for ontario
Bankruptcy and insolvency — Transfers at undervalue — Intent to defraud, defeat, or delay creditor — Corporate attribution doctrine — Fraud exception — Directing mind of debtor companies engaged in false invoicing scheme — Monitor and trustee in bankruptcy of debtor companies applying under federal bankruptcy and insolvency legislation to recover monies paid to individuals involved in scheme on basis that transactions were transfers at undervalue and that debtors intended to defraud, defeat or delay creditors — Applications allowed and repayment of monies ordered — Whether trustee and monitor established directing mind’s intent to defraud, defeat, or delay creditors — Whether intent of directing mind to defraud, defeat, or delay creditors can be attributed to debtor companies — Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 96(1)(b)(ii)(B).
A was the president and directing mind of two family‑owned construction companies that worked on large‑sale construction projects. When the companies began experiencing serious financial difficulties, restructuring and bankruptcy proceedings were commenced. The monitor and trustee in bankruptcy’s investigations revealed that for years A and several others had been fraudulently taking tens of millions of dollars from the debtor companies through a false invoicing scheme. The monitor and trustee in bankruptcy challenged the transactions and sought to recover the monies on the basis of s. 96(1)(b)(ii)(B) of the Bankruptcy and Insolvency Act (“BIA”). This provision provides that a trustee in bankruptcy or, through s. 36.1 of the Companies’ Creditors Arrangement Act, a monitor, may apply to a court to impugn and recover from a non-arm’s length party to a transaction some or all of the amount of the transfer at undervalue (defined in s. 2 of the BIA as a transaction in which a debtor transfers property or provides services to another person for no consideration or conspicuously less than fair market value), if the trustee can show, among other things, that the debtor intended to “defraud, defeat or delay a creditor”.
The application judge held that the false invoice payments were transfers at undervalue and could be recovered by the monitor and trustee in bankruptcy under s. 96(1)(b)(ii)(B) of the BIA. First, the debtor companies had paid the monies to certain suppliers who provided nothing in return. Second, the debtor companies made the payments with the intent to defraud, defeat, or delay a creditor, as revealed by several badges of fraud. She rejected the argument that the debtor companies could not have had this intent because the payments were made at a time when the companies were not insolvent or at risk of insolvency. She attributed A’s fraudulent intent to the debtor companies and ordered A and the others to pay the monitor and trustee in bankruptcy the monies they received under the false invoicing scheme. The Court of Appeal affirmed the application judge’s ruling.
Held: The appeal should be dismissed.
The application judge did not misapply the badges of fraud approach to inferring fraudulent intent. A court may find that a debtor intended to defraud, defeat, or delay a creditor under s. 96(1)(b)(ii)(B) of the BIA even if the debtor was not insolvent at the time of the transfer at undervalue. There is therefore no basis to interfere with the application judge’s conclusion that A intended to defraud, defeat or delay a creditor under the false invoicing scheme. Furthermore, A’s fraudulent intent should be attributed to the debtor companies because he was their directing mind and acted in the sector of corporate responsibility assigned to him. The corporate attribution doctrine must be applied purposively, contextually, and pragmatically to give effect to the policy goals of the law under which a party seeks to attribute to a corporation the actions, knowledge, state of mind, or intent of its directing mind. In the context of a claim under s. 96 of the BIA, the “fraud” and “no benefit” exceptions to corporate attribution should not apply because these exceptions would undermine the purpose of this provision; accordingly, the test for corporate attribution under s. 96 is simply whether the person was the directing mind and whether their actions were performed within the sector or corporate responsibility assigned to them.
Section 96(1)(b)(ii)(B) of the BIA requires the party seeking to reverse a transfer at undervalue to prove, among other things, the debtor’s intent to defraud, defeat, or delay a creditor. This is a question of fact to be decided based on all the circumstances that existed at the time of the transfer. Because it is often difficult to adduce evidence of a debtor’s subjective intent, the intent requirement is often proved through the evidentiary shortcut of badges of fraud, which are suspicious circumstances from which a court may infer the debtor’s intent to defraud, defeat, or delay a creditor. Badges of fraud might include: (a) the debtor had few remaining assets after the transfer; (b) the transfer was made to a non‑arm’s length party; (c) the debtor was facing actual or potential liabilities, was insolvent, or was about to enter a risky undertaking; (d) the consideration for the transaction was grossly inadequate; (e) the debtor remained in possession of the property for their own use after the transfer; (f) the deed or transfer had a self-serving and unusual provision; (g) the transfer was secret; (h) the transfer was made with unusual haste; and (i) the transaction was made despite an outstanding judgment against the debtor. The presence of a particular badge of fraud does not require a court to infer an intent to defraud, defeat, or delay a creditor, nor does the absence of a particular badge of fraud require the court to refrain from inferring that intent.
The BIA is clear that insolvency is not a prerequisite to finding a debtor intended to defraud, defeat, or delay a creditor. Section 96(1)(b)(ii) is disjunctive: the debtor must either be insolvent at the time of the transfer (s. 96(1)(b)(ii)(A)) or intend to defraud, defeat, or delay a creditor (s. 96(1)(b)(ii)(B)). It is therefore no answer to an application under s. 96(1)(b)(ii)(B) of the BIA to say that a corporate debtor was not insolvent and was paying its creditors in full and on time at the time of the transfers. Although the debtor’s financial condition at the time of the transfer is one badge of fraud that may be relevant in inferring an intent to defraud, defeat, or delay a creditor, whether that intent exists must be determined based on all the circumstances.
In the instant case, A intended to defraud, defeat, or delay a creditor under the false invoicing scheme. The transfers were made between non‑arm’s length parties; the debtor companies received no value; the truth about the transfers was hidden behind false invoices describing services that were never provided; the transfers were made with unusual haste; and at the time of the transfers the companies had significant long‑term and off‑balance sheet liabilities and potential liabilities as guarantors for other companies. However, to satisfy s. 96(1)(b)(ii)(B), the monitor and trustee in bankruptcy must show that the debtor companies intended to defraud, defeat, or delay a creditor. This requires showing why it is appropriate to attribute A’s fraudulent intent to the debtor companies.
The common law doctrine of corporate attribution provides guiding principles for when the actions, knowledge, state of mind, or intent of the directing mind of a corporation may be attributed or imputed to the corporation. Although a corporation is a separate legal person, it has no mind or will of its own. A directing mind must be identified because a corporation can only act through a human agent. The guiding principles for the common law doctrine of corporate attribution provide that as a general rule, a person’s fraudulent acts may be attributed to a corporation if two conditions are met: the wrongdoer was the directing mind of the corporation at the relevant times; and the wrongful actions of the directing mind were performed within the sector of corporate responsibility assigned to them. Attribution will generally be inappropriate when the directing mind acted totally in fraud of the corporation or the directing mind’s actions were not by design or result partly for the benefit of the corporation — known as the “fraud” or “no benefit” exceptions. In addition to these exceptions, courts have discretion to refrain from attributing the actions, knowledge, state of mind, or intent of the directing mind to the corporation 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. In all cases, courts must apply the common law corporate attribution doctrine purposively, contextually, and pragmatically. The corporate attribution doctrine is not a standalone principle; there is no one‑size‑fits‑all approach. The court must always determine whether the actions, knowledge, state of mind, or intent of a person should be treated as those of the corporation for the purpose of the law under which attribution is sought. This may require the court to tailor the general rule of attribution or its exceptions to the particular legal context. Attribution may be appropriate for one purpose in one context but inappropriate for another purpose in another context.
The fraud and no benefit exceptions to corporate attribution do not apply in the context of a transfer at undervalue under s. 96 of the BIA. These exceptions would undermine rather than promote the purpose of this statutory provision. The purpose of s. 96 is to protect creditors from harmful actions by a debtor that would diminish the assets available for recovery. That purpose is served by attributing the actions, knowledge, state of mind, or intent of the corporation’s directing mind to the corporation, so long as those actions were performed within the sector of corporate responsibility assigned to them. This is so even if the directing mind acted in fraud of the corporation, and even if the corporation did not benefit from the actions of the directing mind. By contrast, applying the fraud and no benefit exceptions would render the transfer at undervalue remedy meaningless and would deny third‑party creditors a statutory remedy that Parliament intended would be available to protect them.
In the instant case, the fraud and no benefit exceptions are inappropriate and inapplicable and as a result A’s intent should be attributed or imputed to the debtor companies. Attributing A’s fraudulent intent to the debtor companies would advance the public policy underlying s. 96 of the BIA as attribution would allow creditors to recover fraudulently transferred assets that unlawfully reduced the value of the estate available for distribution to creditors.
Cases Cited
Applied: Canadian Dredge & Dock Co. v. The Queen, [1985] 1 S.C.R. 662; Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63, [2017] 2 S.C.R. 855; Christine DeJong Medicine Professional Corp. v. DBDC Spadina Ltd., 2019 SCC 30, [2019] 2 S.C.R. 530; considered: Meridian Global Funds Management Asia Ltd. v. Securities Commission, [1995] 2 A.C. 500; referred to: Urbancorp Toronto Management Inc. (Re), 2019 ONCA 757, 74 C.B.R. (6th) 23; Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68, [2004] 3 S.C.R. 461; Estate of Gavin v. Gavin, 2023 PECA 8, 10 C.B.R. (7th) 30; Pitblado LLP v. Houde, 2015 MBQB 85, 318 Man. R. (2d) 39; Orphan Well Association v. Grant Thornton Ltd., 2019 SCC 5, [2019] 1 S.C.R. 150; Alberta (Attorney General) v. Moloney, 2015 SCC 51, [2015] 3 S.C.R. 327; Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453; Poonian v. British Columbia (Securities Commission), 2024 SCC 28; 9354-9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10, [2020] 1 S.C.R. 521; Montor Business Corp. (Trustee of) v. Goldfinger, 2016 ONCA 406, 36 C.B.R. (6th) 169, aff’g 2013 ONSC 6635, 8 C.B.R. (6th) 200; Twyne’s Case (1601), 3 Co. Rep. 80b, 76 E.R. 809; Salomon v. Salomon & Co., [1897] A.C. 22; Chevron Corp. v. Yaiguaje, 2015 SCC 42, [2015] 3 S.C.R. 69; Lennard’s Carrying Co. v. Asiatic Petroleum Co., [1915] A.C. 705; Bilta (UK) Ltd. v. Nazir, [2015] UKSC 23, [2016] A.C. 1; Singularis Holdings Ltd. v. Daiwa Capital Markets Ltd., [2019] UKSC 50, [2020] A.C. 1189; DBDC Spadina Ltd. v. Walton, 2018 ONCA 60, 78 B.L.R. (5th) 183.
Statutes and Regulations Cited
Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3, ss. 2 “transfer at undervalue”, 4, 96.
Business Corporations Act, CQLR, c. S‑31.1, s. 10.
Business Corporations Act, R.S.A. 2000, c. B‑9, s. 16(1).
Business Corporations Act, R.S.O. 1990, c. B.16, s. 15.
Business Corporations Act, R.S.P.E.I. 1988, c. B‑6.01, s. 22(1).
Business Corporations Act, R.S.Y. 2002, c. 20, s. 18(1).
Business Corporations Act, S.B.C. 2002, c. 57, s. 30.
Business Corporations Act, S.N.B. 1981, c. B‑9.1, s. 13(1).
Business Corporations Act, S.N.W.T. 1996, c. 19, s. 15(1)).
Canada Business Corporations Act, R.S.C. 1985, c. C‑44, s. 15.
Companies Act, R.S.N.S. 1989, c. 81, s. 26(8).
Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C‑36, s. 36.1.
Corporations Act, R.S.N.L. 1990, c. C‑36, s. 27(1).
The Business Corporations Act, 2021, S.S. 2021, c. 6, s. 3‑1(1).
The Corporations Act, C.C.S.M., c. C225, s. 15(1).
Authors Cited
Bennett, Frank. Bennett on Bankruptcy, 26th ed. Toronto: LexisNexis, 2024.
Duggan, Anthony, and Thomas G. W. Telfer, “Gifts and Transfers at Undervalue”, in Stephanie Ben‑Ishai and Anthony Duggan, eds., Canadian Bankruptcy and Insolvency Law: Bill C-55, Statute c. 47 and Beyond. Markam, Ont.: LexisNexis, 2007, 175.
Ferran, Eilís. “Corporate Attribution and the Directing Mind and Will” (2011), 127 Law Q. Rev. 239.
Honsberger, John D., and Vern W. DaRe. Honsberger’s Bankruptcy in Canada, 5th ed. Toronto: Thomson Reuters, 2017.
Houlden, L. W., G. B. Morawetz and Janis Sarra. Bankruptcy and Insolvency Law of Canada, 4th ed. rev. Toronto: Thomson Reuters, 2024 (loose‐leaf updated April 2024, release 4).
MacPherson, Darcy L. “The Civil and Criminal Applications of the Identification Doctrine: Arguments for Harmonization” (2007), 45 Alta. L. Rev. 171.
McGuinness, Kevin P., and Maurice Coombs. Canadian Business Corporations Law, 4th ed., vol. 1. Toronto: LexisNexis, 2023.
Payne, Jennifer. “Corporate Attribution and the Lessons of Meridian”, in Paul S. Davies and Justine Pila, The Jurisprudence of Lord Hoffman: A Festschrift in Honour of Lord Leonard Hoffman. Portland, Or.: Hart Publishing, 2015, 357.
Rappos, Sam. “A Reframing of the Corporate Attribution Doctrine in the Bankruptcy and Insolvency Context”, in Jill Corraini and D. Blair Nixon, eds., Annual Review of Insolvency Law 2022. Toronto: Thomson Reuters, 2023, 1.
Wood, Roderick J. Bankruptcy and Insolvency Law, 2nd ed. Toronto: Irwin Law, 2015.
Wood, Roderick J. “Ernst & Young Inc. v. Aquino: Attributing Fraudulent Intent to a Defrauded Corporation” (2022), 66 Can. Bus. L.J. 250.
Wood, Roderick J. “Transfers at Undervalue: New Wine in Old Wineskins?”, in Janis P. Sarra and Barbara Romaine, eds., Annual Review of Insolvency Law 2017. Toronto: Thomson Reuters, 2018, 1.
APPEAL from a judgment of the Ontario Court of Appeal (Lauwers, Coroza and Sossin JJ.A.), 2022 ONCA 202, 160 O.R. (3d) 284, 100 C.B.R. (6th) 18, 473 D.L.R. (4th) 571, [2022] O.J. No. 1181 (Lexis), 2022 CarswellOnt 3170 (WL), affirming a decision of Dietrich J., 2021 ONSC 527, 88 C.B.R. (6th) 60, [2021] O.J. No. 1595 (Lexis), 2021 CarswellOnt 4221 (WL). Appeal dismissed.
Terry Corsianos, George Corsianos and Jacob Lee, for the appellants.
Alan Merskey and Stephen Taylor, for the respondent Ernst & Young Inc., in its capacity as court‑appointed monitor of Bondfield Construction Company Limited.
Jeremy Opolsky and Alex Bogach, for the respondent KSV Kofman Inc., in its capacity as Trustee in Bankruptcy of 1033803 Ontario Inc. and 1087507 Ontario Limited.
Dona Salmon and Jennifer Boyczuk, for the intervener the Attorney General of Ontario.
Natasha MacParland, Chanakya A. Sethi, Rui Gao and J. Henry Machum, for the intervener the Insolvency Institute of Canada.
The judgment of the Court was delivered by
Jamal J. —
I. Introduction
[1] The common law doctrine of corporate attribution provides guiding principles for when the actions, knowledge, state of mind, or intent of the directing mind of a corporation may be attributed or imputed to the corporation. This Court applied the corporate attribution doctrine in the criminal context in Canadian Dredge & Dock Co. v. The Queen, [1985] 1 S.C.R. 662, and in the civil context in Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63, [2017] 2 S.C.R. 855, and Christine DeJong Medicine Professional Corp. v. DBDC Spadina Ltd., 2019 SCC 30, [2019] 2 S.C.R. 530. This appeal requires the Court to apply the corporate attribution doctrine in the bankruptcy and insolvency contexts.
[2] The appellants stole tens of millions of dollars from two construction companies through a false invoicing scheme. One of the appellants, John Aquino, was the companies’ directing mind. The respondents, in their capacities as trustee in bankruptcy and monitor of the companies, applied to the Ontario Superior Court of Justice to recover some of this money on the basis that the false invoice transactions were “transfers at undervalue” under s. 96(1)(b)(ii)(B) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”).
[3] A “transfer at undervalue” is a transaction in which a debtor transfers property or provides services to another person for no consideration or conspicuously less than fair market value (BIA, s. 2). Section 96(1)(b)(ii)(B) of the BIA provides that a trustee in bankruptcy may apply to a court to impugn and recover from a non-arm’s length party to a transaction some or all of the amount of the transfer at undervalue, if the trustee can show that the debtor intended to “defraud, defeat or delay a creditor”. Section 96 of the BIA applies in a corporate restructuring through s. 36.1 of the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (“CCAA”).
[4] The application judge and Court of Appeal for Ontario accepted that the false invoice payments were transfers at undervalue. They applied the doctrine of corporate attribution to attribute Mr. Aquino’s fraudulent intent to the debtor companies and ordered the appellants to pay the trustee and monitor the monies they received under the false invoicing scheme.
[5] The appellants now revive before this Court two arguments that were rejected by the courts below. First, the appellants argue that the application judge had no basis to conclude that the debtor companies, through the actions of Mr. Aquino, intended to defraud, defeat, or delay a creditor. They say that the companies were paying their creditors in full and on time when the false invoicing scheme was underway and that the companies’ financial condition at those times could not be determined on the record before the court. I do not accept this submission. A court may find that a debtor intended to defraud, defeat, or delay a creditor under s. 96(1)(b)(ii)(B) even if the debtor was not insolvent at the time of the transfers at undervalue. I also see no basis to interfere with the findings of the application judge, affirmed by the Court of Appeal, that the record contains many indicia or badges of fraud showing that Mr. Aquino misled stakeholders as to the companies’ true financial condition, reduced the funds available to pay long-term creditors, and increased the companies’ debts.
[6] Second, the appellants argue that Mr. Aquino’s fraudulent state of mind cannot be attributed to the debtor companies under the corporate attribution doctrine. They invoke the so-called “fraud” and “no benefit” exceptions to corporate attribution previously recognized by this Court (Canadian Dredge, at pp. 681-82 and 712-13; Livent, at para. 100). They claim that there can be no attribution in this case because Mr. Aquino acted in fraud of the debtor companies and his actions did not benefit the companies. I do not accept this submission either. As the trustee notes, this position amounts to saying that the common law doctrine of corporate attribution allows “a fraudulent directing mind and his accomplices to avoid liability because they defrauded the company they ran” (R.F., at para. 1 (emphasis in original)). The corporate attribution doctrine does not countenance — much less require — such a perverse result.
[7] This Court has established that the corporate attribution doctrine is not a “standalone” principle (Livent, at para. 97); there is no one-size-fits-all approach. The corporate attribution doctrine must be applied purposively, contextually, and pragmatically to give effect to the policy goals of the law under which a party seeks to attribute to a corporation the actions, knowledge, state of mind, or intent of its directing mind. Rules of attribution that may be appropriate in one context for one purpose may be inappropriate in another context for another purpose. When the rules of attribution undermine the purpose of the law under which attribution is sought, the court should adapt the attribution rules to promote the purpose of the relevant law.
[8] In my view, the fraud and no benefit exceptions to corporate attribution do not apply in the context of a transfer at undervalue under s. 96 of the BIA. These exceptions would undermine rather than promote the purpose of this statutory provision. The purpose of s. 96 is to protect creditors from harmful actions by a debtor that would diminish the assets available for recovery. That purpose is served by attributing the actions, knowledge, state of mind, or intent of the corporation’s directing mind to the corporation, even if the directing mind acted in fraud of the corporation, and even if the corporation did not benefit from the actions of the directing mind. By contrast, applying the fraud and no benefit exceptions would deny third-party creditors a statutory remedy that Parliament intended would be available to protect them.
[9] Applying these principles to this appeal, Mr. Aquino’s fraudulent intent should be attributed to the debtor companies because he was their directing mind and acted in the sector of corporate responsibility assigned to him. I would dismiss the appeal.
II. Background
[10] Bondfield Construction Company Limited (“Bondfield”) and its affiliate, 1033803 Ontario Inc., known as Forma-Con Construction (“Forma-Con”), were family-owned construction companies that worked on large-scale construction projects in Ontario. At all relevant times, Mr. Aquino was the president and directing mind of Bondfield and Forma-Con.
[11] By 2018, Bondfield and Forma-Con were experiencing serious financial difficulties. The respondent Ernst & Young Inc. was retained to review their financial situation, which led to the commencement of restructuring proceedings regarding Bondfield in April 2019 and bankruptcy proceedings regarding Forma-Con in December 2019. The court appointed Ernst & Young Inc. as the monitor of Bondfield, and the respondent KSV Restructuring Inc. as the trustee in bankruptcy of Forma-Con.
[12] The monitor and trustee’s investigations revealed that, for years, Mr. Aquino and several other appellants had been fraudulently taking tens of millions of dollars from Bondfield and Forma-Con through a false invoicing scheme. The scheme was simple. Mr. Aquino and his accomplices made up false invoices from certain suppliers — including Mr. Aquino’s holding company — for services that were never provided. Bondfield and Forma-Con then paid the false invoices promptly, often within a few days, at the direction of Mr. Aquino or other appellants. Bondfield paid more than $21.8 million and Forma-Con paid more than $11.3 million towards false invoices in the five years before the commencement of insolvency proceedings, the period within which alleged transfers at undervalue to non-arm’s length parties are reviewable.
[13] The trustee and monitor each commenced proceedings before the Ontario Superior Court to challenge the false invoice transactions as transfers at undervalue. Section 96 of the BIA provides a trustee and, through s. 36.1 of the CCAA, a monitor, with a remedy to unwind or claim reimbursement of some or all the value of the assets transferred from a debtor in circumstances that qualify as a transfer at undervalue.
[14] In this case, the applications of the trustee and monitor were brought under s. 96(1)(b)(ii)(B) of the BIA, which required them to show that: (a) the false invoice transactions were transfers at undervalue; (b) the transfers occurred in the five-year period preceding the initial bankruptcy event; (c) the recipients of the transfers were not dealing at arm’s length with the debtor companies; and (d) the debtor companies intended to defraud, defeat, or delay a creditor.
III. Judicial History
A. Ontario Superior Court of Justice, 2021 ONSC 527, 88 C.B.R. (6th) 60 (Dietrich J.)
[15] The application judge held that the false invoice payments made by Bondfield and Forma-Con were transfers at undervalue under s. 96(1)(b)(ii)(B) of the BIA and could be recovered by the monitor and trustee. The transfers were at undervalue because Bondfield and Forma-Con had paid tens of millions of dollars to certain suppliers who provided nothing in return. In a separate costs endorsement, the application judge found the payments involved “serious corporate malfeasance and corporate looting” and “reprehensible and scandalous behaviour” (2021 ONSC 7514, at paras. 29 and 33, reproduced in A.R., at pp. 66-67). She also found the appellants were not dealing at arm’s length with Bondfield or Forma-Con because they collaborated with them in orchestrating the false invoicing scheme.
[16] The application judge ruled that Bondfield and Forma-Con made these payments with the intent to defraud, defeat, or delay a creditor. She rejected the appellants’ argument that Bondfield and Forma-Con could not have had this intent because the payments were made at a time when they were not insolvent or at risk of insolvency. When evaluating a corporate debtor’s intent to defraud, defeat, or delay a creditor, the corporate debtor’s financial health at the time of the transfer is a relevant but not determinative consideration.
[17] In the application judge’s view, the record revealed several badges of fraud establishing that Mr. Aquino, as the directing mind of Bondfield and Forma-Con, had a fraudulent intent at the time of the false invoice payments. Bondfield and Forma-Con made the payments secretly, in haste, to non-arm’s length persons, for no consideration, based on “phony invoices” for “services that were never delivered” (para. 157). Bondfield and Forma-Con also had several actual or potential long-term and off-balance sheet liabilities and were expanding their activities, even though they knew their lender was not willing to lend them more. In addition, Mr. Aquino was injecting capital into Bondfield to disguise its true financial condition from stakeholders, and unusual accounting practices made it impossible to determine the companies’ financial condition. Based on all the circumstances, the application judge found that the false invoice payments reduced the funds available to pay the companies’ long-term creditors.
[18] Finally, the application judge held that Mr. Aquino’s fraudulent intent could be attributed to Bondfield and Forma-Con. The application judge ruled that, as a matter of statutory interpretation and public policy, the corporate attribution doctrine set out in Canadian Dredge does not apply under s. 96 of the BIA. In her view, because a purpose of the BIA is to provide proper redress to creditors, the “intention of the debtor” in s. 96 “should be interpreted liberally to include the intention of individuals in control of the corporation, regardless of whether those individuals had an intent to defraud the corporation itself” (para. 229).
[19] The application judge determined that when Mr. Aquino authorized the false invoice payments, he was acting within his area of responsibility of engaging with suppliers and overseeing the provision of services and materials. The appellants, either as bogus suppliers or facilitators of the false invoicing scheme, were all parties or privies to the transfers at undervalue. They were therefore jointly and severally liable to repay the amounts transferred from Bondfield and Forma-Con.
B. Court of Appeal for Ontario, 2022 ONCA 202, 160 O.R. (3d) 284 (Lauwers J.A., Coroza and Sossin JJ.A. concurring)
[20] The Court of Appeal affirmed the application judge’s ruling that Mr. Aquino intended to defraud, defeat, or delay Bondfield and Forma-Con’s creditors, and attributed Mr. Aquino’s fraudulent intent to Bondfield and Forma-Con under s. 96(1)(b)(ii)(B) of the BIA. Accordingly, the court dismissed the appeal.
[21] The court rejected the appellants’ attempt to relitigate their position that Mr. Aquino did not intend to defraud, defeat, or delay Bondfield and Forma-Con’s creditors because the fraudulent payments were made at times when the companies were financially stable. The court noted that the application judge “mustered a phalanx of facts in support of her conclusions” and “took a pragmatic view on the totality of the evidence” (paras. 38 and 46). The Court of Appeal affirmed that “the interests of creditors were imperilled by the transfers because Bondfield and Forma-Con were already experiencing mounting financial difficulties”, and concluded that it would have been “entirely unreasonable” for Mr. Aquino “to believe that, during that time, the interests of the companies’ creditors would not be endangered by this fraudulent scheme” (para. 45). The Court of Appeal deferred to the application judge’s findings that Mr. Aquino intended to defeat the companies’ creditors. At a minimum, Mr. Aquino was reckless as to whether the scheme would have this effect, which also established his fraudulent intent under s. 96.
[22] The court attributed Mr. Aquino’s fraudulent intent to Bondfield and Forma-Con under the common law corporate attribution doctrine. It distilled three principles from Canadian Dredge, Livent, and DeJong: (1) courts must be sensitive to the legal context in which a directing mind’s intent is sought to be imputed to a corporation; (2) corporate attribution is an exercise grounded in public policy, and policy factors that favour imputing a directing mind’s wrongdoing to a corporation are based on the social purpose of holding the corporation responsible; and (3) courts have discretion to refrain from attributing the directing mind’s intent to the corporation when this would be in the public interest.
[23] The court observed that the criminal and civil contexts in which the corporate attribution doctrine has traditionally been applied differ from the bankruptcy context. In the criminal and civil contexts, attributing the directing mind’s intent to the corporation might be justified if the corporation benefits from the improper activities of the directing mind, but would be unjustified if the corporation does not benefit. In the bankruptcy context, the court noted, “the policy currents flow rather differently. . . . [A]ttributing the intent of a company’s directing mind to the company itself can hardly be said to unjustly prejudice the company . . ., when the company is no longer anything more than a bundle of assets to be liquidated with the proceeds distributed to creditors” (para. 77). The court found that it would make little sense to adopt an approach that would favour fraudsters over legitimate creditors.
[24] Based on these considerations, the Court of Appeal reframed the test for corporate attribution in the bankruptcy context as turning on the following question: “[W]ho 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?” (para. 78). The court held that it would be perverse and counter to the purpose of s. 96 of the BIA to allow the appellants to benefit at the expense of Bondfield and Forma-Con’s creditors. It therefore found that Mr. Aquino’s fraudulent intent must be imputed to Bondfield and Forma-Con, even though both companies were also victims of Mr. Aquino’s fraud.
IV. Relevant Statutory Provisions
[25] Section 2 of the BIA defines a “transfer at undervalue”:
transfer at undervalue means a disposition of property or provision of services for which no consideration is received by the debtor or for which the consideration received by the debtor is conspicuously less than the fair market value of the consideration given by the debtor;
[26] Section 96 of the BIA governs transfers at undervalue:
96 (1) On application by the trustee, a court may declare that a transfer at undervalue is void as against, or, in Quebec, may not be set up against, the trustee — or order that a party to the transfer or any other person who is privy to the transfer, or all of those persons, pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor — if
(a) the party was dealing at arm’s length with the debtor and
(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and that ends on the date of the bankruptcy,
(ii) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, and
(iii) the debtor intended to defraud, defeat or delay a creditor; or
(b) the party was not dealing at arm’s length with the debtor and
(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and ends on the date of the bankruptcy, or
(ii) the transfer occurred during the period that begins on the day that is five years before the date of the initial bankruptcy event and ends on the day before the day on which the period referred to in subparagraph (i) begins and
(A) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or
(B) the debtor intended to defraud, defeat or delay a creditor.
(2) In making the application referred to in this section, the trustee shall state what, in the trustee’s opinion, was the fair market value of the property or services and what, in the trustee’s opinion, was the value of the actual consideration given or received by the debtor, and the values on which the court makes any finding under this section are, in the absence of evidence to the contrary, the values stated by the trustee.
(3) In this section, a person who is privy means a person who is not dealing at arm’s length with a party to a transfer and, by reason of the transfer, directly or indirectly, receives a benefit or causes a benefit to be received by another person.
[27] Section 36.1 of the CCAA applies the BIA’s provisions on transfers at undervalue to the CCAA “with any modifications that the circumstances require”:
36.1 (1) Sections 38 and 95 to 101 of the Bankruptcy and Insolvency Act apply, with any modifications that the circumstances require, in respect of a compromise or arrangement unless the compromise or arrangement provides otherwise.
(2) For the purposes of subsection (1), a reference in sections 38 and 95 to 101 of the Bankruptcy and Insolvency Act
(a) to “date of the bankruptcy” is to be read as a reference to “day on which proceedings commence under this Act”;
(b) to “trustee” is to be read as a reference to “monitor”; and
(c) to “bankrupt”, “insolvent person” or “debtor” is to be read as a reference to “debtor company”.
V. Issues
[28] This appeal raises two issues:
(1) Is a debtor’s financial condition relevant or determinative in establishing the debtor’s intent to defraud, defeat, or delay a creditor under s. 96(1)(b)(ii)(B) of the BIA?
(2) When can the intent of the directing mind of a corporation to defraud, defeat, or delay a creditor be attributed to the corporate debtor under s. 96(1)(b)(ii)(B) of the BIA?
VI. Analysis
[29] The key question in this appeal is whether the trustee and monitor established Bondfield and Forma-Con’s intent to defraud, defeat, or delay a creditor under s. 96(1)(b)(ii)(B). When the debtor is a corporation, the court must determine whether the corporate debtor’s directing mind intended to defraud, defeat, or delay a creditor having regard to the transactions completed by the corporation, and then consider whether the directing mind’s intent can be attributed to the corporation. Thus, the Court must first determine whether the evidence established Mr. Aquino’s intent to defraud, defeat, or delay a creditor, and then determine whether his intent should have been attributed to Bondfield and Forma-Con. The appellants claim that the courts below erred on both points.
A. Is a Debtor’s Financial Condition Relevant or Determinative in Establishing the Debtor’s Intent to Defraud, Defeat, or Delay a Creditor Under Section 96(1)(b)(ii)(B) of the BIA?
[30] The appellants assert that the application judge made an extricable error of law by concluding that Bondfield and Forma-Con intended to defraud, defeat, or delay a creditor under s. 96(1)(b)(ii)(B) of the BIA because the companies were paying their creditors in full and on time and because the court found that it could not determine the companies’ financial condition at the time of the transfers at undervalue. The appellants say that the application judge could not make an order under s. 96(1)(b)(ii)(B) of the BIA without first determining the companies’ financial condition at the time