On October 11, 2024, the Supreme Court of Canada released their decision in Aquino v. Bondfield Construction Co., 2024 SCC 31.
The decision concerns section 96 of the Bankruptcy and Insolvency Act, which allows a Monitor or Trustee in Bankruptcy to recover from persons who were “privy” to transfers at undervalue with an insolvent corporation. In the circumstances, the application of the statute required that the debtor company intended to defraud, defeat or delay a creditor. The main question was whether the intent of debtor’s directing mind could be attributed to the debtor itself.
The appellants argued that since the debtor’s directing mind’s actions were entirely fraudulent and were not for the benefit of the debtor, the corporate attribution doctrine could not apply. The respondents argued that, especially in the context of section 96, the corporate attribution doctrine should be applied pragmatically, as the appellants interpretation would “flout the purpose of s.96”.
The Court thoroughly canvassed authorities and previous decisions on corporate attribution, along with the exceptions to the doctrine. Agreeing with the respondents, the Court reinforced that the doctrine should be applied “purposively, contextually, and pragmatically” and that it is within the court’s discretion to “tailor the general rule of attribution or its exceptions to the particular legal context”.
The Court also rejected the appellants’ submissions that a debtor needs to be insolvent at the time of the transfer at undervalue and held that “insolvency is not a prerequisite to finding a debtor intended to defraud, defeat, or delay a creditor”. The Court further clarified that the test for a related party is disjunctive and that the debtor must either be insolvent at the time of the transfer or intend to defraud, defeat or delay a creditor. The debtor’s financial condition at the time of the transfer is one badge of fraud that may be considered in determining whether there was an intent to defraud, defeat or delay a creditor, but its absence as a badge of fraud is not determinative of it. The Court accordingly dismissed the appeal.
The decision clarifies the corporate attribution doctrine, namely, that it does not require a “one-size-fits-all” approach but instead must be approached having regard to the context and purpose of attributing intent. The decision also prevents the application of the fraud or no benefit exceptions from undermining the purpose of section 96 and significantly narrowing its scope. More broadly, the Court further reinforced the importance of advancing public policy considerations and upholding the integrity of the Canadian bankruptcy system and its legislation.
As co-counsel, Cassels represented the respondent, Ernst & Young Inc., in its capacity as court-appointed monitor.