Corporate identification in the bankruptcy context

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The common law “corporate identification” test to attribute wrongful acts of an individual to a corporation requires: (1) the wrongdoer to be the directing mind of the corporation; and (2) the wrongful actions to be within the scope of the individual’s authority. If an individual did not “by design or result” benefit the corporation, or the individual acted “totally in fraud of the corporation,” the individual’s acts will not be attributed to the corporation.

In Ernst & Young Inc. v. Aquino, 2022 ONCA 202, the Ontario Court of Appeal confirmed that in the bankruptcy context, fraudulent intent of an individual can be attributed to a corporation regardless of whether the individual intended to defraud the corporation itself.

Mr. Aquino, the directing mind of two insolvent companies (one of which was bankrupt, and the other the subject of a CCAA proceeding), carried out a false invoicing scheme that diverted tens of millions of dollars from the companies. Mr. Aquino and other participants in the scheme appealed from an order holding them jointly and  personally liable under section 96 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 and section 36.1 of the Companies’ Creditors Arrangement Act, RSC 1985, c C-36, which are provisions that allow the court to declare an insolvent person’s “transfers at undervalue” void. Fraudulent intent of a debtor is required to set aside a transfer at undervalue under section 96(1)(b)(ii), which concerns transfers to non-arm’s length parties within five years before an initial bankruptcy event.

The Court noted that the application of the corporate identification test is sensitive to the context in which it is applied. The doctrine is grounded in public policy, and courts retain a discretion to refrain from attributing acts to a corporation when it would not be in the public interest to do so. Unlike in other contexts, in the bankruptcy context the attribution of the intent of a directing mind to a company does not unjustly prejudice the company, which is at that point “a bundle of assets to be liquidated with the proceeds distributed to creditors.” The underlying question to answer in the bankruptcy context is “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?”

Aquino confirms that – at least in the context of a bankrupt corporation – individuals who were directing minds cannot rely on a strict application of the common law corporate identification test to escape liability under section 96 of the BIA.

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