The Ontario Business Corporations Act states that a corporation is a separate legal entity from its shareholders and directors. Section 15 of the Business Corporations Act sets out that “a corporation has the capacity and the rights, powers and privileges of a natural person.”
Section 92 further states that a corporation’s shareholders are not “liable for any act, default, obligation or liability of the corporation.” This means that, generally, individuals are not responsible for the actions of a corporation. Instead, the corporation, as a legal person, is responsible.
Courts can hold individuals liable for the acts of a corporation
There are exceptions to the general rule that individuals are not liable for the corporation’s acts. This process is called “piercing the corporate veil” or “lifting the corporate veil.” Courts may decide to “pierce the corporate veil” if a two-part test is satisfied by the particular circumstances of the matter.
When can you pierce the corporate veil?
The test for piercing the corporate veil in Ontario has been long established. The 1996 Ontario Superior Court case of Transamerica Life Insurance Co. of Canada v Canada Life Assurance Co. sets out a two-part test to be met:
- the corporation is completely dominated and controlled by the individual(s); and
- the corporation is being used as a shield for fraudulent or improper conduct.
Domination or control of a corporation requires “complete domination of abuse of the corporate form,” and therefore involves more than ownership or control in the typical sense. It requires the corporation to be used as an “alter ego.”
The second limb of the test requires conduct that is fraudulent or improper to have occurred in order to give rise to the liabilities at issue in the case. Therefore, the ability to pierce the corporate veil prevents an individual from hiding improper liabilities within a corporation and avoiding responsibility for them. Fraudulent or improper conduct can also occur when an individual with control expressly directs an improper thing to be done.
In 642947 Ontario Ltd. v Fleischer, the Court of Appeal for Ontario stated that piercing the corporate veil is considered an “exceptional” remedy, intended to prevent “flagrant injustice.”
Not all circumstances lend themselves to piercing the corporate veil
In the recent case of FNF Enterprises Inc. v Wag and Train, the plaintiffs, who were the owners of commercial premises in Kitchener, Ontario, sought to hold an individual responsible for the liability incurred by a corporation for the breach of the lease. Ms. Ross was the sole director, officer, and director of Wag and Train, a canine grooming, day-care, and training business. Wag and Train had leased the commercial premises and subsequently abandoned them over a year before the end of the lease term without paying rent and leaving damage to the premises.
The plaintiffs asked the Court to pierce the corporate veil, arguing that Ms. Ross decided to breach the lease and therefore, she should be held responsible for the liabilities incurred by Wag and Train. The plaintiffs claimed that Wag and Train was liable for approximately $195,000.
The Ontario Court of Appeal did not view this matter as an appropriate case in which to pierce the corporate veil. A director or officer deciding to breach a lease does not give rise to the level of improper conduct that justifies piercing the corporate veil. The plaintiffs also argued that Ms. Ross had stripped value from the corporation knowing that it had liabilities from the breach of the lease. The Court of Appeal found that there was no nexus between the value stripping and the breach of the lease. In other words, removing the value from the corporation was not what gave rise to the liabilities; these liabilities existed independent of the value stripping.
There must be a nexus between the liability and the wrongful act
The Court of Appeal contrasted this with previous cases where there was a connection between the liability the plaintiff was seeking to recover and the wrongful conduct. In one such case, Shoppers Drug Mart v 6470360 Canada Inc., the defendant corporation’s sole director, officer, and shareholder directed that corporate funds be put into an account in his own name and that of his corporation.
These funds were meant to pay the utility bills of the plaintiff’s, Shopper’s Drug Mart.
The plaintiff had contracted with Energyshop Consulting Inc., to pay and manage utility bills for various locations nationwide. Mr. Beamish was the president of Energyshop (which was not incorporated at the time), and he subsequently incorporated 6470360 Canada Inc.
Plaintiff learns that their funds were being used for activities other than intended use
The plaintiff did not know that Energyship was not incorporated, nor did it know that Mr. Beamish had another corporation, 6470360 Canada Inc.
The plaintiff had directed utility companies to send their bills directly to Energyhouse, which would send a remittance invoice to the plaintiff. The plaintiff would then pay to a clearing account in the joint names of Mr. Beamish and 6470360 Canada Inc.
After some time, the parties decided to terminate the arrangement. The plaintiff came to this decision after being anonymously informed that the funds in the clearing account were being used for activities other than utility bill payments. Nevertheless, the parties agreed to sign a termination agreement and mutual release.
Corporation’s director orders plaintiff’s funds to be moved, plaintiff’s invoices noted in default
On receipt of the termination letter, Mr. Beamish directed that almost $1 million be transferred of the plaintiff’s funds from the clearing account to an operating account for 6470360 Canada Inc. Shortly after, the plaintiff began receiving notices of default from various utility providers for outstanding invoices that Mr. Beamish should have paid.
Initially, the motions judge denied the plaintiff’s arguments to pierce the corporate veil.
The Court of Appeal disagreed with the motion’s judge and found that Mr. Beamish had control and had expressly directed a wrongful act to be done. Mr. Beamish directly caused the misappropriation of the plaintiff’s funds. There was a nexus between the wrongful act of misappropriation of funds and the plaintiff’s liability to the utility companies. Therefore, the Court of Appeal found it appropriate to grant a judgment against Mr. Beamish personally.
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