It is not uncommon, in circumstances of a breach of trust claim under the Construction Act, for the claimant to also advance the claim against the officers and/or directors of the defendant corporation on the basis that they assented to, or acquiesced in, conduct that he or she knew or reasonably ought to have known amounted to breach of trust by the corporation. While it is well-established that simply holding the status of officer or director does not in and of itself prove this level of knowledge, there is comparatively little case law on what, specifically, assent and acquiescence mean in this context.
The Ontario Superior Court in Re Fakoori, 2025 ONSC 3956 ("Fakoori") therefore provides a helpful reminder on this issue. In Fakoori, the Court specifically considered the question on a motion to lift a stay in the context of bankruptcy proceedings, in order to permit certain creditors to pursue a breach of trust claim against the debtor under the Construction Act. Below, we review the case.
Background
The creditors in this action were seeking damages against HiLife Builders Corporation ("HiLife"), as well as against the debtor Fakoori (the "Debtor") and her former spouse, Jaypour. The claim arose from the renovation of one Creditor's residential property by HiLife (the "Project"). The Creditors alleged that HiLife and Jaypour made misrepresentations and misappropriations while the Debtor was the sole director of HiLife.
Following the alleged misconduct, however, the Debtor made an assignment into bankruptcy, which consequently resulted in an automatic stay of creditor actions against the Debtor. As a result, the Creditors sought an order pursuant to section 69.4 of the Bankruptcy and Insolvency Act (the "BIA") to lift the stay, in relevant part due to the Debtor's alleged liability for breach of trust under sections 8 and 13 of the Construction Act.
As readers will know, section 13 of the Construction Act extends liability for a breach of trust to officers and directors as follows::
13 (1) In addition to the persons who are otherwise liable in an action for breach of trust under this Part,
(a) every director or officer of a corporation; and
(b) any person, including an employee or agent of the corporation, who has effective control of a corporation or its relevant activities,
who assents to, or acquiesces in, conduct that he or she knows or reasonably ought to know amounts to breach of trust by the corporation is liable for the breach of trust. [emphasis added]
This reliance on the Construction Act was in conjunction with subsections 178(1)(d) and (e) of the BIA. These subsections deal with debts not released by an order of discharge in the context of:
- debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity; or
- debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability arising from an equity claim.
Under section 69.4 of the BIA, a creditor affected by section 69.3 of the BIA can apply to the Court for a declaration that the stay no longer operates against that creditor. The Court has the discretion to make such a declaration if it is satisfied either that:
- the creditor is likely to be materially prejudiced by the continuing operation of section 69.3; or
- it is equitable on other grounds to make such a declaration.
The Creditors claimed that Jaypour and the Debtor assented to, or acquiesced in, conduct that they knew or reasonably ought to have known would amount to breach of trust by HiLife, for uses that were inconsistent with the Debtor's trust obligations under section 8 of the Construction Act.
As well, the Creditors claimed that Jaypour, the Debtor, and the Vice President of HiLife were all people with effective control of HiLife, and as such, each was a trustee and fiduciary to the Creditors. Therefore, the co-defendants were jointly and severally liable for any particular breach of trust by HiLife with respect to the Project.
The Debtor argued in relevant part that she had no knowledge or involvement of the issues raised by the Creditors, and had not been kept informed by the co-defendants on any of the circumstances raised by the plaintiff. She claimed to be a "straw" director for HiLife, while Jaypour assumed all functions of managing HiLife to her exclusion.
The Superior Court's Decision
The Court rejected the Debtor's position, finding that a fiduciary who ignores their obligations does so at their own peril, and lifted the stay imposed by the BIA in order to permit the Creditors to proceed with the breach of trust action.
The Court first noted that section 13 of the Construction Act imposes a lower standard than the 'wilful blindness' used test in the criminal context, which requires demonstrating intent on the part of the director to look further (in order words, a deliberate intent to preserve their ignorance).1 By contrast, section 13 of the Construction Act does not require the demonstration of such an intent.
Instead, where a director assents to or acquiesces in conduct that they knew or reasonably ought to know would defeat the trust, they are statutorily liable for the breach of trust.2 Thus, negligence, or simply permitting other directors to breach a trust, can give rise to liability.3
Bearing the foregoing in mind, the Court observed that a breach of trust under the Construction Act, if proven on the facts, would constitute a claim under section 178(1)(d) of the BIA.4 On that point, the Debtor admitted to the following (among other admissions):
- knowingly taking on the role of Director of HiLife, which she knew was building homes;
- Knowingly agreeing to be a "straw" director because Jaypour was an undischarged bankrupt and could not be a director of a corporation while bankrupt, such that she knew her directorship was for the purpose of assisting Jaypour in circumventing this prohibition;
- having signing authority on accounts and loan facilities that she obtained for HiLife; and
- filing the Debtor's Statement of Defence for both herself and
These points appear to have significantly influenced the Court's decision to lift the stay, although the Court was not explicit on this point.
In reviewing the case law, the Court offered the important clarification that the relevant case law under the Construction Act established a different standard than that typically required on a section 69.4 motion under the BIA, in which context claims of "wilful blindness", knowing receipt" and "knowing assistance" entail a different, more onerous standard.
On this point, the Court observed that claims for knowing receipt, knowing assistance, and wilful blindness claims in relation to trust funds would be common law claims that operate in addition to the statutory remedies available under the Construction Act. As a result, the standard applicable to knowing receipt, knowing assistance, and wilful blindness does not apply to section 13 claims.
The Court explained that the breach of trust provisions under section 13 of the Construction Act did not require actual knowledge, recklessness, or wilful blindness – constructive knowledge (i.e. the "reasonably ought to know" standard) would suffice. In that regard, the class of individuals captured by section 13 of the Construction Act are deemed to have knowledge of the trust's existence, such that it is unnecessary to prove they know of its existence.
For a director to be liable under section 13, it would therefore only be necessary to demonstrate that they assented to or acquiesced in conduct that they knew, or reasonably ought to have known, amounted to a breach of trust by the corporation. Here, the Court observed that the threshold of assenting to or acquiescing in conduct amounting to breach of trust by the corporation is a lower standard than common law liability imposed on a stranger to a trust.
Given the foregoing, the Court accepted the Creditors' position – including with respect to the lower standard applicable to proving assent and/or acquiescence – and consequently lifted the stay in respect of their breach of trust action in order to allow that matter to proceed.
Commentary
As noted, Fakoori offers a helpful reminder of the applicable standard of knowledge in respect of a commonly relied-upon provision of the Construction Act. In that regard, there are three main takeaways.
First, no actual knowledge is required for a claim under section 13 of the Construction Act – assent or acquiescence constitutes a lower standard. Merely permitting other directors to breach a trust may give rise to liability under section 13 of the Construction Act.
Arguably, this is a sensible approach, as it means that claiming to be a 'straw' director with no knowledge or involvement of the issue does not assist a defendant in avoiding liability – in other words, ignorance will not be bliss. Rather, the Court may analyze what the director knew when taking on the role for the corporation, which includes the purpose of the corporation. The director's authority within the corporation may also be considered.
However, while Fakoori provides clarity on what the test under section 13 of the Construction Act is not, it does not offer specific guidance on what constitutes assent or acquiescence on the part of a director. In that sense, additional guidance from the Courts would be of value.
Second, and relatedly since the individuals captured by section 13 of the Construction Act (i.e. directors and officers) will have deemed knowledge of the trust by virtue of their position,5 this underscores the importance of a director remaining informed about the corporation. Again, ignorance will not be a defence, and may in fact work to their detriment.
In fact, the Court provides the following guidance regarding the statutory duty of directors under section 13 of the Construction Act:6
- to discharge their duties under sections 8 and 13 of the Construction Act, the director has a positive fiduciary obligation to ensure they are actually carrying out their duties;
- the director's fiduciary duties cannot be delegated to others unless the director ensures the fiduciary obligations are being satisfied;
- evidence must be provided that the director did oversee the work of others, and the director cannot distance themselves from those fiduciary obligations;
- attempting to pass off fiduciary obligations to another, whether that person is a fiduciary of not, is not allowed and amounts to wilful blindness and liability under section 13;
- a trustee under section 13(a) (i.e. a director) must ensure that they comply with their fiduciary duties from the time they become a fiduciary, not when they discovered the problem; and
- a trustee under section 13(a) has the burden at trial to show that the Construction Act trust funds were used properly.
It is therefore clear that while fiduciary duties may be delegated, this does not mean that a director can pass off their fiduciary obligations entirely and divest themselves of any engagement in the corporation. Best practice for officers and directors accordingly remains to stay informed of the corporation's operations.
Finally, claims under section 13 of the Construction Act are in addition to common law claims of knowing receipt, knowing assistance, or wilful blindness. As a result, section 13 expands on protections provided to contractors and subcontractors, rather than limiting them.7 On one hand, this can create additional avenues of liability for an unwary director. At the same time, it may create additional opportunities for recovery for contractors and subcontractors. Parties uncertain about the nature and applicability of these various tests would be well-advised to consult legal counsel to determine their respective rights and responsibilities.
Footnotes
1 Re Fakoori at para 72.
2 Re Fakoori at para 103; referencing Baltimore Aircoil of Canada Inc v ESD Industries Inc, 2002 CanLII 49492 at para 23.
3 Re Fakoori at para 103; referencing Baltimore Aircoil of Canada Inc v ESD Industries Inc, 2002 CanLII 49492 at para 33.
4 Re Fakoori at para 88.
5 Re Fakoori, at para 104(b)(ii).
6 Re Fakoori at para 104(c).
7 Electro-Works Ltd v Fogler, Rubinoff LLP, 2021 ONSC 626 at para 22.
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