The principal advantage of incorporating a business is that the corporation becomes a separate legal person from its directors and shareholders. It can own property, enter contracts, and incur debts in its own name. In the ordinary course, that separation protects shareholders and directors from personal liability for the company's obligations and is a key reason many founders choose to incorporate.
However, the corporate form's protection of the individuals behind it is not absolute. Aquino v. Bondfield Construction Co., 2024 SCC 31, shows that, depending on the legal context, a court may choose to attribute wrongdoing to a corporation or an individual, with the ultimate goal being to prevent the individuals responsible from benefitting from such wrongdoing. In practical terms, the corporate form protects legitimate business activity; it does not reliably protect misuse of corporate authority.
What happened in Aquino
John Aquino was the president and directing mind of two family‑owned construction companies—Bondfield Construction and Forma-Con Construction. The companies began experiencing financial difficulties and became subject to insolvency proceedings. The bankruptcy trustee's investigations revealed that, for years, Aquino and several associates had funnelled tens of millions of dollars out of the companies by paying fabricated invoices from suppliers who had done no work at all. The trustee and monitor challenged the transactions and sought to recover the money under provisions of the Bankruptcy and Insolvency Act ("BIA") and the Companies' Creditors Arrangement Act that permit recovery of transfers at undervalue. To be successful, the trustee and monitor had to show that the debtor companies intended to "defraud, defeat or delay a creditor."
Aquino argued the trustee and monitor could not recover those funds because the debtor companies never intended the fraudulent acts. Drawing on earlier Supreme Court authority, he relied on a long-recognized exception to attributing acts of an individual to a corporation: where a corporation's directing mind commits fraud against the corporation itself, and the corporation receives no benefit from the fraud, the corporation is treated as the victim rather than the participant. Aquino argued that, because the fraudulent acts should be attributed to him personally rather than to the debtor companies, fraudulent intent could not be attributed to the debtor companies and the transactions could not be unwound.
What the Court decided
The Supreme Court unanimously disagreed with Aquino's position. Writing for the Court, Justice Jamal held that, under what is known as the corporate attribution doctrine, a person's fraudulent acts may be attributed to a corporation if two conditions are met: (i) the wrongdoer was the directing mind of the corporation at the relevant times; and (ii) the wrongful actions of the directing mind were performed within the sector of corporate responsibility assigned to them. Justice Jamal went on to state that the corporate attribution doctrine cannot be mechanically applied regardless of legal context. It must instead be applied purposively, contextually, and pragmatically, in light of what the specific law being invoked is trying to achieve.
The applicable provision in the BIA exists to protect creditors from transactions that strip value out of a company on the eve of insolvency, not to protect the company's own interests as against its directing mind. Applying the fraud-and-no-benefit exception in that setting, as argued by Aquino, would have defeated the very purpose of the provision, since it is almost always the directing mind who benefits from this kind of scheme, at the company's and its creditors' expense. The Court held that where the above two conditions of the corporate attribution doctrine are met, the individual's acts can be attributed to the company for the purposes of the BIA, without regard to whether the fraud exception would otherwise apply. On that basis, Aquino's fraudulent intent was attributed to Bondfield and Forma-Con, and the transfers were recoverable.
Why this matters
Aquino was decided in a federal insolvency proceeding, but as a Supreme Court decision it applies to Nova Scotia companies as it does other companies anywhere else in Canada. For directors and owner-managers of private companies, three practical points stand out:
- The corporate form does not protect misuse of corporate authority. Courts will not allow a director or officer to hide behind separate corporate personality where the corporate form is being used to facilitate or shield misconduct.
- "The company did not benefit" is not a reliable defence. In the transfer-at-undervalue context, Aquino confirms that a directing mind's fraudulent intent may be attributed to the corporation where necessary to protect creditors and give effect to the statute. The Supreme Court's stated approach of applying the corporate attribution doctrine in a flexible and pragmatic manner suggests the reasoning in the Aquino case will apply in other contexts.
- Clean records remain a key protection. Proper invoices, approval records, supplier verification, and governance minutes are often the clearest evidence that a transaction was legitimate if it is later scrutinized.
If you are contemplating incorporating a business and have questions, please feel free to reach out to me at Sandy@JenkinsBusinessLaw.ca to start a conversation.
This article is provided for general informational purposes and does not constitute legal advice. If you have questions about corporate governance, director liability, or creditor protection in the context of your business, please get in touch.