In our recently published Key Developments in Canadian Insolvency Case Law in 2022, the Supreme Court of Canada (SCC) has granted leave to appeal the decisions of Ernst & Young Inc. v. Aquino (Aquino) and Golden Oaks Enterprises Inc. v. Scott (Golden Oaks). Both Aquino and Golden Oaks contemplate the application of the corporate attribution doctrine in the insolvency context, however, there are several key differences that readers should note. This bulletin outlines these key differences, in addition to preliminary intervenor arguments provided by the Insolvency Institute of Canada (a leading non-profit industry association promoting thought leadership in the commercial insolvency practice) (IIC) and the Attorney General for Ontario (AGO). The cases are scheduled to be heard by the SCC on December 5, 2023. We will continue to provide updates on the progress of this important development in Canadian case law.
The Corporate Attribution Doctrine
The corporate attribution doctrine imputes the actions, intent and/or knowledge of a corporation's "directing mind" to the respective corporation. The SCC in Deloitte & Touche v. Livent Inc. (Livent) summarized the relevant test as follows:
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. 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.
Key Differences between Aquino and Golden Oaks
The key differences between the Aquino and Golden
Oaks decisions of the Court of Appeal for Ontario (Court) are
that the Court applies the corporate attribution doctrine in
Aquino, refrains from applying such doctrine in Golden
Oaks, and relies on different points of emphasis in reaching
these two conclusions.
In Aquino, the Court applies the corporate attribution
doctrine to impute intent from the principal into the relevant
corporations. The main emphasis in Aquino is the
reformulation of the corporate attribution test summarized in
Livent in the context of the transfer at undervalue
provision contained in section 96 of the Bankruptcy and
Insolvency Act (BIA) and section 36.1 of the
Companies' Creditors Arrangement Act (CCAA). In
confirming the reformulated corporate attribution test, the Court
in Aquino stated that strictly applying the corporate
attribution doctrine can lead to achieving results which are
incompatible with the remedial purpose of section 96 of the BIA.
The application of the corporate attribution doctrine should always
be sensitive to the applicable field of law in the circumstances
and grounded in public policy, with the Court ultimately having the
discretion to refrain from applying the doctrine if it would not be
in the public interest to do so. Aquino confirms that the
policy considerations in the bankruptcy context are far different
than in the traditional corporate context given that the corporate
attribution of the directing mind's intent may be necessary to
avoid unfair results for creditors. The Court in Aquino,
therefore, reformulates the corporate attribution test to
specifically determine whether "the fraudsters or the
creditors" should bear the responsibility of a directing
mind's fraudulent actions within the scope of their authority,
which resulted in the Court in Aquino applying the
corporate attribution doctrine.
Golden Oaks contrasts with Aquino because it
instead emphasizes the Court's use of discretion to
prevent the application of the corporate attribution
doctrine in the context of insolvency-related policy factors
militating against the strict application of such rule. The Court
confirms that in addition to public policy considerations, courts
should also carefully consider the result of applying the corporate
attribution doctrine in the context of fraud. If applying the
corporate attribution doctrine were to enlarge recoveries for one
victim of fraud at the expense of another, or if a party that
committed fraud would be able to shield themselves from
accountability, then it would be improper to apply the corporate
attribution doctrine. The Court ultimately confirmed that the
corporate attribution doctrine did not apply in this case because
of the result of its application. Imputing Golden Oaks Enterprises
Inc. (Golden) with the knowledge of its principal would lead to the
bankruptcy trustee's claim being statute-barred. This would
undermine the insolvency proceedings by (i) allowing Golden's
principal to avoid the consequences of his fraudulent actions, (ii)
providing the bankruptcy trustee with no civil remedy for the
benefit of Golden's creditors, and (iii) failing to uphold the
social policy goals of corporate responsibility and regulatory
compliance.
Golden Oaks can also be differentiated from
Aquino with respect to the applicability of the corporate
attribution doctrine to a "one-person" corporation, and
with respect to the specific statutory provisions applied by the
Court. Golden Oaks confirms that the Court's
discretion to refrain from applying the corporate attribution
doctrine was in the context of a one-person corporation, while the
Court in Aquino does not consider this contextual
situation. Golden Oaks also involves a bankruptcy trustee
pursuing an unjust enrichment claim, and the interplay of such
claim with the Limitations Act, 2002. By contrast,
Aquino addresses a situation that engages section 96 of
the BIA and section 36.1 of the CCAA due to one of the debtors
filing for bankruptcy, and the other filing for CCAA
protection.
Intervenor Arguments
In the IIC's leave to intervene motion materials in
Aquino, the IIC submits guidance for the SCC's
consideration as to how the corporate attribution doctrine should
be applied in the insolvency context, and more specifically, with
respect to section 96 of the BIA. The IIC argues that determining
whether to apply the corporate attribution doctrine is "not a
box-checking exercise," and that public policy factors should
guide the flexible use of this doctrine. Preserving debtor assets
and ensuring fair treatment of creditor claims are key public
policy factors that the IIC believes should be considered in
applying the corporate attribution doctrine in the insolvency
context. The IIC notes that different categories of insolvency
cases may necessitate a different application of the corporate
attribution doctrine based on such public policy factors.
Ultimately, the IIC views this appeal as an excellent opportunity
for the Court to create a clear, over-arching approach to applying
the corporate attribution doctrine in the insolvency context.
By contrast, the AGO submits guidance for the SCC's
consideration, contained in its leave to intervene motion materials
in both Aquino and Golden Oaks, with respect to
the general application of the corporate attribution doctrine in
novel civil statutory contexts. The AGO argues that any application
of the corporate attribution doctrine in the context of a statutory
provision must account for established principles with respect to
parliamentary supremacy and statutory interpretation, such as the
principle that any "gap" within a given statute filled by
the common law is done so to further the relevant legislative
purpose and scheme. Accordingly, if a statute does not expressly
contain corporate attribution provisions, the corporate attribution
doctrine must be applied in a manner that gives effect to the
relevant statute's statutory purpose.
Status of Appeals
The SCC dockets for Aquino and Golden Oaks confirm that the appeals
will be heard together on December 5, 2023. The IIC was granted
leave to intervene in Aquino, while the AGO was granted
leave to intervene in both Aquino and Golden
Oaks. However, since both Aquino and Golden
Oaks will be heard together, it is anticipated that the Court
will consider the IIC's arguments in both cases.
Intervenor factums are required to be served on or before July 31,
2023. Such intervenor factums will undoubtably provide further
commentary on the efficacy of the public policy-oriented approach
towards corporate attribution in the insolvency context taken by
the Court in both Aquino and Golden Oaks.
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