John Aquino, the former chief executive officer of Bondfield, is seen in his SUV outside of Bondfield's office in Vaughan, Ont., April 20, 2020.Cole Burston/The Globe and Mail
The Supreme Court of Canada sharpened bankruptcy law on Friday in a decision that is a victory for creditors in a major case about the construction company Bondfield and its former president John Aquino.
Two lower court decisions in Ontario had previously found Mr. Aquino, former president of Bondfield Construction Co. Ltd., and his associates liable to pay creditors more than $33-million they siphoned out of the company through a fraudulent scheme.
Mr. Aquino appealed to the Supreme Court but the country’s top court on Friday upheld the earlier rulings. The unanimous decision will likely have a notable impact in the years ahead, as the Supreme Court for the first time applied several legal concepts to a bankruptcy case.
The decision provides “a straight-line mechanism to go and collect from fraudsters,” said Ian Aversa, a partner at Aird & Berlis LLP, who was not involved in the case.
Bondfield in 2019 sought bankruptcy protection – the biggest financial implosion of a construction company in Canada’s history. The collapse of the major builder of public institutions that were funded by taxpayers undermined ambitious projects. Among those was the redevelopment of St. Michael’s Hospital in downtown Toronto, in an era when the health care system is struggling to deliver timely care to patients.
Mr. Aquino has conceded that he was aware Bondfield paid tens of millions of dollars to several shell companies for work that was never even started, but he and his lawyers argued that the law as written and applied in previous cases indicated he didn’t have to pay back creditors.
The lower courts, and the Supreme Court on Friday, rejected that reasoning. The Supreme Court focused on the purpose of Section 96 of the Bankruptcy and Insolvency Act, around which the case revolved. The section is about transferring assets for less than they’re actually worth.
The aim of the law is to “protect creditors from harmful actions by a debtor that would diminish the assets available for recovery,” wrote Supreme Court Justice Mahmud Jamal, in the 7-0 ruling.
This was a rare case at the country’s top court as bankruptcy and insolvency matters are usually left to a trial judge in the lower courts to decide because of the many specific details in each particular case.
Section 96 of the Act is generally applied in cases where company executives attempt to shield corporate assets from creditors by moving them to a related entity at prices below actual value.
The Supreme Court decision clarified legal concepts in the context of bankruptcy, such as corporate attribution doctrine, which is about connecting the actions and intent of people running a company with the corporation itself. In two words, the court effectively said: context matters.
“This will make it easier for insolvent companies to collect on behalf of creditors against former executives who defrauded or otherwise took corporate assets,” said Jeremy Opolsky, a partner at Torys LLP. The firm was part of the Aquino case, representing KSV Restructuring Inc., in its capacity as the trustee-in-bankruptcy of Forma-Con, a subsidiary of Bondfield.
In previous criminal and civil cases, there had been exceptions that were applied to Section 96. While such exceptions may apply in certain cases in the future, the Supreme Court ruled they didn’t apply in this case.
Mr. Aquino’s lawyers had argued that his “fraudulent state of mind” cannot be attributed to Bondfield under the corporate attribution doctrine, as they claimed exceptions should apply because Bondfield did not benefit. Justice Jamal disagreed: “The corporate attribution doctrine does not countenance – much less require – such a perverse result,” he wrote.
“We needed this clarity,” said Natasha MacParland, a partner at Davies Ward Phillips & Vineberg LLP. Section 96 of the bankruptcy law is a “critical tool” for creditors and she added: “These cases involve complicated and messy facts.” Ms. MacParland represented the Insolvency Institute of Canada, which focuses on the legal process around insolvencies and was an intervenor in Aquino and a related case.
In that related case, also decided Friday, the Supreme Court applied the same legal principles it had set out in the Aquino decision.
Mr. Aquino, as of late Friday, did not respond to several requests for comment, nor did his lawyer.
While the Supreme Court decision concludes one legal odyssey for Mr. Aquino, another case continues. The criminal trial of Mr. Aquino and Vas Georgiou, the former chief administrative officer at St. Michael’s Hospital, is scheduled to start Nov. 4 in Toronto. Both men are fighting charges of fraud, which were laid in connection with the $300-million contract awarded to Bondfield to redevelop the hospital in 2015.