Go Rogue, Go Broke: Refining Corporate Responsibility in Insolvency: Aquino v Bondfield Construction Co., 2024 SCC 31 and Scott v Golden Oaks Enterprises Inc., 2024 SCC 32

When corporate leaders go rogue, engaging in self-dealing or fraud, the legal question often arises: who bears the blame—the directors or the company they lead?

In Canada, the “corporate attribution doctrine” helps answer this question. It allows the actions and intentions of a director to be attributed to the corporation in certain circumstances. Recently, the Supreme Court of Canada provided clarity on the circumstances where this doctrine applies, particularly when a director’s misconduct has driven the company into insolvency.

In Aquino v Bondfield Construction Co., 2024 SCC 31 [Aquino], and Scott v Golden Oaks Enterprises Inc. [Golden Oaks], 2024 SCC 32, the Supreme Court addressed cases where fraudulent actions by senior officers were attributed to their companies. These decisions refine the scope of the corporate attribution doctrine, emphasizing a purposive, contextual approach to deciding whether a director’s intent or knowledge can be imputed to the corporation itself.

This analysis is critical for corporate directors and legal practitioners navigating the complicated intersection of corporate fraud, bankruptcy, and creditor rights. The Supreme Court’s rulings will likely influence how lower courts will handle cases involving corporate officers in insolvency proceedings where misconduct is alleged. Let’s explore these decisions.

The Corporate Attribution Doctrine: A Brief Overview

The corporate attribution doctrine has long been a fundamental principle of company law. Since a corporation is a distinct legal entity—but one which cannot think or act on its own—the actions and intentions of its directors, working within their sphere of corporate responsibility, are attributed to the corporation.

For example, if a director signs a contract or dismisses an employee on behalf of the company, the corporation is deemed to have taken those actions. But what happens when a director engages in fraud? Does the company share the blame?

Previous decisions from the Supreme Court recognized an important exception to corporate attribution in cases of fraud. If a director committed fraud against the company, and the company did not benefit from it, the corporation wouldn’t be held responsible for the director's actions. This fairness-based exception prevented the company from being penalized when it was also a victim.

However, the Supreme Court has clarified that the doctrine’s application must be contextual. So what happens when a director’s fraudulent actions lead to the company’s insolvency? Can creditors recover funds misappropriated by directors when the creditors must prove that the corporation also committed fraud?

Aquino v Bondfield Construction Co.: Fraudulent Intent and Corporate Attribution

In Aquino, John Aquino, the president of two family-owned construction companies, created and paid false invoices, funnelling millions of dollars out of the companies. Although the companies remained solvent for years, they ultimately went bankrupt. The trustee in bankruptcy sought to recover the funds on application pursuant to section 96 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (BIA), which allows trustees to, among other things, challenge transfers that were made by an insolvent person: (i) within certain timeframes prior to the bankruptcy; and (ii) with the intent to defraud, defeat, or delay creditors.

Aquino argued that, because he had defrauded the companies and they did not benefit, his fraudulent intent should not be attributed to them under the fairness exception to the ordinary attribution rule. This would mean that the companies hadn’t intended to defeat their creditors, even if Aquino did; consequently, Aquino's fraudulent intent could not be attributed to the companies, and section 96 of the BIA therefore did not apply. However, both the lower courts and the Supreme Court rejected this defense.

Justice Jamal, writing for the unanimous Court, held that the key issue was Aquino’s role as the directing mind of the companies and the scope of his corporate responsibilities. But what about the fact that the companies were defrauded by their director and received no benefit from this?

The Court emphasized that the corporate attribution doctrine must be applied purposively, contextually, and pragmatically, particularly in bankruptcy proceedings under the BIA. Justice Jamal made clear that applying the “fraud” or “no benefit” exceptions to corporate attribution in these circumstances would undermine the core objectives of the BIA. Since Aquino’s actions were conducted within the scope of his corporate role, his intent could be attributed to the companies even though they did not benefit from the fraud, thereby allowing the trustee to claw back funds that the “companies” had transferred with the intent of defeating their creditors.

The Court’s decision clarified that applying the “fraud” and “no benefit” exception in these circumstances would undermine the BIA’s core objective of protecting creditors. Justice Jamal affirmed that fraudulent intent can be attributed to a corporation under section 96 of the BIA, even if the company itself was defrauded.

Scott v. Golden Oaks Enterprises Inc.: Knowledge and Attribution in a One-Person Corporation

In Golden Oaks, the Court considered when the knowledge of a sole director and shareholder can be attributed to the corporation. Normally, such a director would be the corporation’s only source of knowledge and intent—but what about when they act fraudulently?

Joseph Lacasse, the sole owner and director of Golden Oaks Enterprises Inc., operated the company as a Ponzi scheme, paying returns to investors from the investments of others. When Golden Oaks collapsed, the trustee in bankruptcy sought to recover those illegal payments made while the company was insolvent—since a Ponzi scheme is, technically, never solvent.

The profiting investors argued that the trustee’s claim was time-barred under Ontario’s Limitations Act, 2002, SO 2002, c 24, Sch B, as Lacasse had known about the fraud more than two years before the action was filed. They reasoned that, under the corporate attribution doctrine, Lacasse’s knowledge should be imputed to the corporation, barring the claim.

The lower courts disagreed with the investors, but for conflicting reasons. On further appeal, the Supreme Court concluded that attributing Lacasse’s knowledge to the corporation would have unfairly barred the trustee’s claim, especially since Lacasse was the only person who knew about the fraud and had no motivation to sue himself. As in Aquino, Justice Jamal emphasized that corporate attribution must be applied in a way that advances the purposes of bankruptcy law. In this case, attributing Lacasse’s knowledge to Golden Oaks would have unjustly harmed the creditors while shielding investors who had benefitted from a Ponzi scheme.

The Court reinforced that corporate attribution is not automatic, even in one-person corporations. In situations where attributing the director’s knowledge would defeat the purposes of the law, the doctrine should be applied flexibly.

The Corporate Attribution Doctrine in Bankruptcy: A Refined Approach

The Supreme Court’s rulings in Aquino and Golden Oaks represent a significant development in the application of the corporate attribution doctrine in the bankruptcy and insolvency context. These decisions stress a purposive and policy-driven approach to corporate attribution, particularly under the BIA.

The Court has confirmed that a director’s fraudulent intent may be attributed to the corporation, even if the company was itself defrauded and received no benefit. At the same time, the Court has clarified that corporate attribution should not apply when it would undermine bankruptcy law’s core objectives. With corporate insolvencies, context matters more than inflexible rules.

These decisions highlight the Court’s focus on ensuring fairness for creditors and preventing executives from shielding fraudulent transactions behind corporate formalities. By taking a contextual approach, the Court has refined the corporate attribution doctrine to uphold the broader goals of bankruptcy law.

For corporate directors, shareholders, and legal practitioners, these decisions provide important guidance on navigating corporate responsibility and insolvency proceedings. McDougall Gauley LLP’s Insolvency and Restructuring team has extensive experience acting for creditors, court officers, and other stakeholders in insolvency matters. To learn more, contact a member of our team.