A Guide to Creditors’ Remedies

In the intricate world of corporate insolvency, fraudulent activity by debtors can leave creditors grappling with significant financial losses. A recent Supreme Court of Canada decision (released on 11 Oct 2024) entitled Aquino v. Bondfield Construction Co., 2024 SCC 31 has shed light on the legal recourse available to creditors when faced with such situations. This case, involving a complex false and fraudulent invoicing scheme, offers valuable insights into the remedies available to creditors under the Bankruptcy and Insolvency Act.

The Aquino v. Bondfield Construction Case: A False Invoice Scheme Unraveled

Bondfield Construction Company Limited and its affiliate, Forma-Con Construction, were family-owned construction companies operating in Ontario. John Aquino, the president and directing mind of both companies, was at the helm of a scheme that defrauded creditors of millions of dollars.

As the companies faced financial difficulties, Aquino and his accomplices orchestrated a false invoicing scheme, generating invoices for never-rendered services. Payments made to these fictitious suppliers, including Aquino’s holding company, siphoned off substantial sums, exceeding $21.8 million from Bondfield and $11.3 million from Forma-Con (para. 12).

Corporate Fraud and the ‘Directing Mind’

The crux of the legal battle in Aquino rested on corporate attribution. While a company is a separate legal entity, it acts through its directors and officers. The Supreme Court considered when the fraudulent intent of a ‘directing mind’, like Aquino, can be attributed to the company itself.

The Bankruptcy and Insolvency Act, specifically s. 96(1)(b)(ii)(B), allows for the recovery of assets transferred at undervalue if the debtor intended to “defraud, defeat, or delay a creditor.” The court affirmed that the false invoice payments were indeed transfers at undervalue, as the companies received no consideration in return.

Badges of Fraud: Unveiling the Debtor’s Intent

To establish the intent to defraud, the court relied on several “badges of fraud” evident in the case (at para. 45). These included:

• Non-Arm’s Length Transactions: The payments were made to parties closely related to Aquino.
• Lack of Consideration: The companies received no goods or services for the payments made.
• Secrecy and Haste: The false invoices were created and paid promptly, often within days.
• Financial Difficulties: The companies were facing mounting financial challenges, including long-term liabilities.

These factors collectively painted a clear picture of fraudulent intent, allowing the court to pierce the corporate veil and hold Aquino and his accomplices accountable.

Holding Individuals Accountable

The Supreme Court’s decision in Aquino reinforces the principle that a company cannot be used as a shield for fraudulent activities. When a directing mind, acting within its authority, engages in fraud that harms creditors, its intent can be attributed to the company. This allows creditors to pursue remedies against the company and the individuals involved.

The court emphasized that the fraud and “no benefit” exceptions to corporate attribution do not apply to a transfer at undervalue under s. 96 of the BIA. This ensures that creditors are protected, even if the company itself did not directly benefit from the fraudulent actions of its directing mind.

Creditors’ Remedies: Reclaiming Lost Assets

The Aquino case highlights the importance of the Bankruptcy and Insolvency Act in protecting creditors’ rights. Section 96 provides a mechanism for recovering assets transferred at undervalue, ensuring that the debtor’s estate is not unfairly diminished.

Creditors facing similar situations can seek legal recourse under the Bankruptcy and Insolvency Act to reclaim lost assets. By demonstrating the debtor’s intent to defraud and by identifying the individuals involved, creditors can attribute the losses and hold those responsible accountable.

Implications for Corporate Governance

The Aquino decision has significant implications for corporate governance. It underscores the importance of transparency and accountability in corporate dealings, particularly when a company faces insolvency. 

Directors and officers must be aware that their actions can have personal consequences, especially when they are intended to avoid paying or defrauding creditors.

When fraud is involved, the courts will look beyond the legal fiction of the corporation to ensure that justice is served and creditors are protected.

A Roadmap for Creditors to Recover Debts

The Aquino case provides a roadmap for creditors seeking to recover assets lost due to debtors’ fraudulent activities. The “badges of fraud” approach guides the courts to find evidence from which an inference of fraudulent conduct can be drawn. This development of common law sheds clarity on corporate fraud litigation.

By understanding the principles of corporate attribution and the remedies available under the Bankruptcy and Insolvency Act, creditors can take steps to protect their interests and reclaim what is rightfully theirs.

This case also serves as a cautionary tale for directors and officers, reminding them of their fiduciary duties and the potential consequences of engaging in fraudulent conduct. In corporate insolvency, one who commits fraud cannot hide behind corporations, and those who attempt to use it to shield themselves from liability will be held accountable.

Skilled Commercial Litigation Lawyers Advising On Debt Collection

For the past two decades, our firm has developed valuable experience in companies’ creditors’ remedies. Should you encounter such a dispute and are considering recovering your debts, contact Roland Luo. We have experience assisting clients by using alternative remedies, such as arbitration, mediation, or litigation.

Located in downtown Vancouver, Roland Luo proudly represents clients throughout British Columbia, Canada, and the United States. To schedule a confidential consultation, contact us online (the more efficient way) or by phone at 604-800-4628.