When attempting to determine liability for the actions of a corporation, two common law doctrines come into play: the doctrine of lifting the corporate veil and the corporate attribution doctrine. Both are employed when the status of a corporation as a separate legal entity requires a distinction from the acts of its officers, leading to exceptions to the principle of limited liability or separate legal entity. However, these doctrines diverge in their applicable tests.
The Test of Lifting the Corporate Veil in Canadian Courts
Canadian courts utilise a two-part test[1] in determining whether to lift the corporate veil. The first part requires there to be not just ownership or control of a corporation but complete domination or abuse of the corporate form. The second part requires there to be fraudulent or improper conduct, with the liabilities sought to be enforced arising directly from this conduct. If both elements are present, the corporate veil may be lifted, preventing the person engaged in such conduct from asserting that the liabilities lie squarely with the corporation.
The Corporate Attribution Doctrine's Two-Part Test
Similarly, the corporate attribution doctrine also employs a two-part test.[2] The first requirement is that the wrongdoer must be the directing mind of the corporation. The second requirement is that the wrongful actions of the directing mind must have been executed within the scope of their authority, within the assigned sector of corporate operation.
Distinguishing the Doctrines and Their Applicability in the Insolvency Context
Lifting the corporate veil is concerned with the "conduct or action" of the corporation as an instrument for fraud and abuse, such as in the case of any company that operates as a Ponzi scheme. The corporation becomes a "mere façade," controlled by the owner as a "puppet" for improper purposes.[3] In contrast, the corporate attribution doctrine focuses on the "intent" of the directing mind to engage in wrongful actions, even if the corporation was incorporated for proper purposes. Additionally, while lifting the corporate veil examines "control or ownership," the corporate attribution doctrine revolves around the “scope of authority” within the corporate operations.
Deciding which Doctrine Applies
- Company as an Engine for Wrongful Conduct
In the insolvency context, courts may consider whether the bankrupt entity was used or incorporated as a vehicle for fraud and wrongful conduct. If so, the corporate veil may be lifted to determine the causal links behind such incorporation. If not, the courts may attribute liability for the plaintiff's claims to a person within the corporation's organisational sphere to whom the responsibility for the actions is attributable.
- Action and Reasonable Intent in the Context of Bankruptcy Events
To positively affirm the corporate attribution doctrine, both the "action" and the "intent" of the directing mind could be concurrently analysed. Courts may find guidance in statutory language that links the actions of directing minds with their intent. This analysis becomes particularly relevant when evaluating preferential, undervalued, exponential, and fraudulent transfers preceding the bankruptcy event. Courts may want to ascertain the debtor's "intention" at the time of the transaction based on the information available then, without incorporating knowledge of subsequent events into the analysis. The focus remains on the "intention" of the debtor at that time and the "reasonableness of that intent" given the existing circumstances. For instance, in the context of ascertaining a debtor's intention, several key indicators may come into play. These include the transferor's possession of minimal remaining assets following the transfer, transactions with non-arm's length individuals, the presence of actual or potential liabilities, insolvency, or engagement in risky endeavours. Additionally, grossly inadequate consideration, continued possession of transferred property for personal use, self-serving and unusual provisions in the transfer deed, hasty execution of the transfer, or transactions made in the face of outstanding judgments against the debtor can provide insights into the debtor's motives. Analysing these factors helps shed light on the debtor's true intentions during the transfer and whether fraudulent or improper conduct played a role.[4]
- Furthering the Objectives of Bankruptcy Laws
The application of the corporate attribution doctrine can serve the objectives of bankruptcy laws in the Canadian insolvency regime. This regime operates under the assumption that creditors and debtors share a common goal of maximising recoveries. Fairness within the insolvency regime is based on the premise that all parties involved face real economic risks.[5] Unfairness arises when some parties encounter these risks, while others benefit from the situation. To interpret the application of the corporate attribution doctrine purposefully, courts may recognize conflicting interests and actions that run counter to the goals of the statute and if the corporate attribution doctrine is not applied, does any party risk unjustly benefiting from the situation.
Conclusion
The Supreme Court of Canada (SCC) recently granted an application for leave to appeal in the case of Ernst & Young Inc. v. Aquino[6], which decision signals the importance of examining these common law doctrines. Both doctrines have seemingly interchangeable utilisation. Therefore, it is crucial to distinguish and understand their application in various scenarios, while considering the conduct of the entire corporation versus the actions and intentions of its directing minds. This understanding will ensure their effective implementation to address fraudulent or wrongful conduct, advancing insolvency laws' objectives and promoting fairness for all parties involved.