Bankruptcy law in Canada serves two fundamental purposes: equitable distribution of assets among creditors and providing debtors with the opportunity for financial rehabilitation. However, these principles face serious challenges when a corporation’s insolvency results from fraud perpetrated by its leadership. In the landmark case of Aquino v. Bondfield Construction Co., the Supreme Court of Canada (SCC) clarified when a senior officer’s fraudulent intent can be attributed to a corporation under the Bankruptcy and Insolvency Act (BIA).
The decision not only sets a precedent for corporate attribution in bankruptcy but also strengthens the application of the “transfer at undervalue” provisions. Below, we break down the Court’s reasoning, its implications for creditors, and what this means for businesses navigating insolvency and fraud.
The Facts: A Fraudulent Scheme Behind Corporate Collapse
Bondfield Construction Company Limited (Bondfield) and its affiliate, Forma-Con Construction (Forma-Con)—once major players in Ontario’s public infrastructure industry—collapsed into insolvency in 2019. Investigations revealed that John Aquino, both companies’ president and director, had orchestrated a massive false invoicing scheme.
For years, Mr. Aquino and his associates submitted fake invoices from non-existent suppliers for services never rendered. The companies then paid these invoices, siphoning tens of millions of dollars out of the businesses, leaving creditors at a significant loss.
Recovering the Diverted Funds
Bondfield’s monitor and Forma-Con’s trustee in bankruptcy applied under section 96 of the BIA to recover the diverted funds, which allows the recovery of “transfers at undervalue”. This provision applies where property or services are transferred for little or no value, and the debtor intended to “defraud, defeat, or delay a creditor.”
The Legal Issue: Can Fraudulent Intent Be Attributed to a Corporation?
The heart of the case revolved around the doctrine of corporate attribution. Since corporations are legal entities without human minds, the law often attributes the intent or knowledge of a corporation’s “directing mind” (such as senior officers) to the corporation itself.
In the first court proceedings, the application judge granted the monitor and trustee’s request, finding Mr. Aquino’s fraudulent intent should be attributed to the companies, Bondfield and Forma-Con. As a result, she ordered Mr. Aquino and his associates to pay the money they received through the fraud scheme back to the companies (via their monitor and trustee).
Understanding Corporate Attribution
Historically, in Canadian Dredge & Dock Co. v. The Queen, the SCC established two exceptions to corporate attribution:
- Fraud Against the Corporation: When the directing mind acts “in fraud of” the company.
- No Benefit to the Corporation: When the fraudulent act does not benefit the company.
The appellants (Mr. Aquino and his associates) argued that Mr. Aquino’s fraudulent scheme fell squarely within both exceptions. They claimed that because Mr. Aquino acted to defraud the companies (and not on their behalf), his fraudulent intent could not be attributed to Bondfield and Forma-Con. Without attribution, the transfers could not be voided under section 96 of the BIA.
The Supreme Court’s Decision
In a unanimous 7-0 ruling, the Supreme Court rejected the appellants’ arguments. The Court emphasized that the doctrine of corporate attribution must be applied purposively, contextually, and pragmatically. Simply put, exceptions that make sense in criminal or civil cases do not necessarily apply in the bankruptcy context.
The Court identified several key considerations:
1. The Remedial Purpose of Bankruptcy Law
The Bankruptcy and Insolvency Act is designed to ensure fairness for creditors by allowing them to recover funds improperly transferred by an insolvent debtor. Allowing corporate insiders to rely on their fraud to shield those transfers would defeat the remedial purpose of section 96.
As Justice Jamal put it: “The doctrine of corporate attribution does not countenance—much less require—such a perverse result.”
2. Context Is Critical in Corporate Attribution Considerations
The SCC explained that corporate attribution cannot follow a “one-size-fits-all” approach—context matters. In bankruptcy, the focus is on protecting creditors and recovering assets for equitable distribution.
The Court clarified that fraudulent intent can be attributed to the corporation even if the fraud was committed “in fraud of” the company or provided no benefit to it.
3. Badges of Fraud and Intent
The SCC reaffirmed that fraudulent intent can be inferred from “badges of fraud”—suspicious circumstances that indicate dishonest conduct. Examples include:
- Transfers to related parties;
- Lack of documentation for transactions;
- No legitimate purpose for payments;
- Financial distress preceding the transfers.
The false invoicing scheme presented numerous “badges of fraud”, supporting the finding that Mr. Aquino intended to defraud creditors. By extension, this intent was properly attributed to Bondfield and Forma-Con.
Sharpening the “Transfer at Undervalue” Provisions
The Court’s ruling also provided significant clarity on section 96 of the BIA, reinforcing its power as a tool for insolvency professionals seeking to recover assets.
Key takeaways from the Court’s decision on this point include:
- Intent to Defraud Can Be Inferred: Direct evidence of fraudulent intent is not always necessary. Courts can rely on circumstantial evidence and “badges of fraud” to draw reasonable inferences.
- Financial Health Is Not Determinative: The appellants argued that Bondfield and Forma-Con were paying creditors on time when the transfers occurred. The SCC rejected this as irrelevant—the companies’ solvency at the time does not negate the fraudulent intent behind the transfers.
- Creditors’ Rights Are Paramount: Section 96 must be interpreted to uphold creditors’ ability to recover funds, even where the fraudulent acts of corporate insiders are involved.
Implications for Businesses and Creditors
The Aquino decision is a watershed moment for insolvency law, with important implications for businesses, creditors, and insolvency professionals:
- Strengthened Recovery Tools for Creditors: The SCC’s purposive interpretation of section 96 ensures that creditors can recover funds lost to fraudulent transfers, even where insiders argue that their fraud cannot be attributed to the company.
- Heightened Accountability for Corporate Insiders: Corporate leaders engaging in fraudulent activity cannot hide behind technical exceptions to evade liability. Their intent will be attributed to the corporation where necessary to protect creditors.
- Practical Guidance for Insolvency Professionals: Trustees, monitors, and creditors now have clearer guidance on pursuing claims under section 96. The decision reinforces that suspicious transfers will face close scrutiny, and fraudulent intent can be inferred from circumstantial evidence.
Clarity in the Face of Fraud
The SCC’s decision in Aquino provides much-needed clarity on corporate attribution and the “transfer at undervalue” provisions under the Bankruptcy and Insolvency Act. By rejecting rigid applications of the corporate attribution doctrine, the Court ensured that bankruptcy law fulfills its remedial purpose: protecting creditors and preserving the integrity of the insolvency process.
The decision highlights the importance of transparency, accountability, and robust governance for businesses navigating insolvency. For creditors, it strengthens their ability to recover funds lost to fraud.
Contact Milosevic & Associates in Toronto for Strategic Counsel in Complex Civil Fraud Cases
At Milosevic & Associates, we provide experienced, practical legal counsel in a variety of complex fraud cases, including those involving receivership, investment loss, and injunctions. Our innovative commercial and civil fraud lawyers excel at seeing through the dense forest of complicated disputes and cutting through the underbrush to a creative, cost-effective solution. To schedule a consultation, please contact us online or call (416) 916-1387.