Dredge-ing Up New Law: Court Of Appeal Reframes Corporate Attribution Doctrine For Bankruptcy Matters

• Published date: 18 March 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy
• Law Firm: Torys LLP
• Author: Mr Scott Bomhof, Jeremy Opolsky and Craig Gilchrist

In the recently released decision of Ernst & Young Inc. v. Aquino¹, the Ontario Court of Appeal upheld a decision of the Ontario Superior Court's Commercial List that found $33 million transferred out of Bondfield Construction and its affiliate Forma-Con through a false invoicing scheme to be "transfers at undervalue" under the Bankruptcy and Insolvency Act. In doing so, the Court of Appeal has reframed the test for corporate attribution in the bankruptcy context to better protect creditors' interests.

Torys acted for the respondent, KSV Restructuring Inc., in its capacity as the Trustee-in-Bankruptcy of Forma-Con in this matter.

What you need to know

• Under section 96 of the Bankruptcy and Insolvency Act, a court may order the return of property that a debtor transferred to another party if insufficient value was given and the debtor transferred the property with the intent to defraud defeat, or delay a creditor.
• In this case, the appellants, including the directing mind of the debtor companies, conceded the existence of a false invoicing scheme (i.e., that the debtor companies received no value for the transfers that were made) but argued that the debtor companies did not intend to defeat their creditors because the directing mind of the corporation was not acting for the corporation's benefit in carrying out the scheme. To support this argument, the appellants relied on the Supreme Court of Canada's decision in Canadian Dredge, which held that a corporation's directing mind's intent cannot be attributed to the corporation if the directing mind was acting in fraud of the corporation or without benefit to the corporation.
• In a unanimous decision, the Court of Appeal rejected the strict application of the Canadian Dredge doctrine and instead reframed the test for imputing the intent of a directing mind to a corporation in the bankruptcy context to ask: "who 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?"

Key facts

Bondfield Construction Co. Ltd. was one of Ontario's largest public infrastructure construction companies that worked on major projects including Toronto's Union Station and St. Michael's Hospital. Forma-Con Construction was an affiliate of Bondfield that performed concrete forming services. Both companies began experiencing serious financial difficulties in 2018 and were subsequently placed into bankruptcy protection...