The commercial real estate market continues to experience economic challenges following the COVID-19 pandemic. According to the Financial Post, stricter financing conditions and increasing vacancy rates will lend toward an uncertain future for commercial lenders and landlords in Ontario. This outlook could signal conditions ripe for tenants to breach their obligations and shelter from liability through their corporation.
A similar fact scenario was presented to the Court of Appeal in the context of an appeal by commercial landlords regarding a lower court’s decision to strike their action against a tenant under Rule 21.01(1)(b) of the Rules of Civil Procedure. In doing so, the Court considered whether a personal remedy could be sought under the oppression doctrine.
Shareholder Oppression in Ontario
In Ontario, oppression refers to a legal concept outlined in the Business Corporations Act (Ontario) (“OBCA”) and the Canada Business Corporations Act (“CBCA”). The provisions in this legislation relating to oppression are intended to protect shareholders, directors, and other stakeholders of a corporation against oppressive or unfairly prejudicial conduct by the corporation or its management.
The leading authority on oppression in Canada is the Supreme Court of Canada decision in BCE Inc. v. 1976 Debentureholders, which established the fundamental principles of oppression, including determining the shareholders’ reasonable expectations and balancing the interests of all stakeholders. The Supreme Court of Canada emphasized that the oppression remedy should be flexible and adaptable to different factual scenarios, which is demonstrated in the case below.
Owners of Commercial Premises Commence Claim Against Corporate Director
The case of FNF Enterprises Inc. v. Wag and Train Inc. involved a commercial lease between FNF Enterprises Inc. and 2378007 Ontario Inc. (the “Appellants”) to Wag and Train Inc. (the “Respondent”), a corporate entity running a pet care business. The Respondent allegedly vacated the premises approximately one year before the lease term ended, stopped paying rent, and left the premises in a condition that breached the lease.
The Appellants served a statement of claim that alleged several causes of action, including two key allegations that:
- the sole director, officer, and shareholder of the Respondent corporation, Ms. Ross, had pierced the corporate veil through her improper conduct, which involved “stripping value” from the Respondent; and
- as creditors under s. 248 of the OBCA, her conduct was unfairly prejudicial to and unfairly disregarded the interests of the Appellants.
Pleadings Struck by Motion Judge Under Rule 21
The motion judge found that it was “plain and obvious” that the action could not succeed.
When considering the facts, the motion judge found no evidence of conduct that could amount to fraud or improper conduct on the part of Ms. Ross, which is a key consideration in the relevant test set out in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (“Transamerica”), regarding piercing the corporate veil.
Similarly, the motion judge found a lack of particulars relating to the oppression claim, reasoning that if a matter concerns a breach of contract by the corporate entity, an action against that entity is the remedy. In doing so, the motion judge declined leave to amend the statement of claim, which the Appellants appealed.
The Court of Appeal partially allowed the appeal, enabling the Appellants to amend the statement of claim for the oppression claim against Ms. Ross personally.
The “Missing Link” in the Corporate Veil
The Court agreed with the result reached by the motion judge in denying the corporate veil claim but did not agree with the reasoning. The Court considered the two-part test of Transamerica, which required complete domination and control of the corporate entity, as well as fraudulent or improper conduct. In this case, the second limb of the test was at issue.
The Appellants alleged that Ms. Ross deciding on behalf of the Respondent to breach the lease and strip value from the Respondent, despite knowledge of its liabilities under the lease, was fraudulent or improper conduct. The motion judge found that this conduct “does not rise to such a level that application of the logic of Salomon would lead to a result that is flagrantly opposed to justice.”
The Court of Appeal, however, was more influenced by the “nexus between the liability the plaintiff sought to recover by piercing the corporate veil and the wrongful conduct directed by the individual in control of the corporation that gave rise to that very liability.” It distinguished this case from Shoppers Drug Mart Inc. v. 6470360 Canada Inc., where there was a “clear link” between the liability for the misappropriated funds and the wrongdoing.
In the Court of Appeal’s opinion, this link was missing, as it was not alleged in the statement of claim that the stripping of value constituted the misappropriation of funds, only that this conduct was fraudulent and improper. The Court of Appeal ultimately found that this conduct was more appropriately considered under the reasonable expectations of shareholders as part of the oppression remedy analysis.
Oppression: Maneuvers Against the Creditor
The Court considered the case of BCE Inc. v. 1976 Debentureholders to lay the oppression groundwork and further applied Wilson v. Alharayeri, which sets out the test for determining the personal liability of a director. In doing so, the Court of Appeal dismissed the motion judge’s reasoning that a breach of contract against the corporation should be the remedy in this case.
The Court of Appeal applied the logic from J.S.M. Corporation (Ontario) Ltd. v. The Brick Furniture Warehouse Ltd., which noted the difference between a creditor who failed to protect itself from risk and a creditor who finds its interest “compromised by unlawful and internal corporate manoeuvres against which the creditor cannot effectively protect itself.” The Court found that in this case, the Appellants fell within the second situation, where Ms. Ross had allegedly manoeuvred assets to prevent repayment, and the Appellants had no way to protect themselves as creditors. In other words, the Appellants had a reasonable expectation that this conduct would not occur. It is also noted that even though the Appellants did not specifically allege this reasonable expectation, it can be objectively derived.
Therefore, in the Court of Appeal’s eyes, the alleged stripping of value and misuse of corporate powers to her benefit enabled the Appellants to seek a personal remedy against Ms. Ross under oppression. The Court allowed the Appellants to amend this claim.
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