Ernst & Young v. Aquino 2022 Ont CA
Shareholders siphoned tens of millions of dollars from two construction corporations, corporations that subsequently went into receivership or bankruptcy. The money was taken by way of false invoicing schemes. The trustee/monitor moved under section 96 of the BIA to have the shareholders repay the money. The shareholders had two major defences. First, they claimed that, at the time they stole the money, the corporations were financially stable and therefore the purpose was not to defeat creditors, just to fraudulently strip assets from the corporations. The court disagreed that the corporations were financially stable at the time. Second, the shareholders argued that s. 96 only applies if the corporations were fraudulent and, in this case, the corporations did nothing wrong, just the shareholders. The court upheld the motion judge’s decision to apply the shareholders’ fraudulent intent to the corporations. It recognised that you cannot do this in a criminal or civil setting (e.g. a fraudulent shareholder cannot bring criminal or civil liability on a corporation unless the corporation benefitted from the action). In a bankruptcy scenario, however, the corporation is just a bundle of assets and the trade-off is between protecting the shareholders or the creditors. The court chose to protect the creditors.
Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.