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Corporations - Piercing the Corporate Veil (2)

. 7120761 Canada Inc. v. AGA Global Investments Inc.

In 7120761 Canada Inc. v. AGA Global Investments Inc. (Ont CA, 2023) the Court of Appeal set out a test for lifting the corporate veil:
[2] Lifting the corporate veil to impose liability on the individual in control of a corporation is the exception. Context is also important. We are concerned in this case with an agreement made in a purely commercial setting by parties with an ongoing relationship. The plaintiffs (appellants by cross-appeal) clearly appreciated that the agreements were with the corporation and not the individual controlling the corporation.

[3] The trial judge identified the test to be used when determining whether to pierce the corporate veil. She said, at paras. 240-41:
[240] I do not consider that the uncooperative behaviour of Mr. Vaidya on behalf of AGA rises to the level of fraud nor does it yield a result ‘too flagrantly opposed to justice’ as set in the Parkland decision.

[241] There is no evidence that the corporation here was used as a shell for improper activity. As discussed in Yaiguaje v. Chevron Corporation, 2018 ONCA 472, ‘corporate separateness is the rule’ unless it is abused to the point that the corporation is not a truly separate corporation and is being used to facilitate fraudulent or improper conduct.
[4] In our view, it was open to the trial judge to find that the breaches of contract that occurred when the corporate defendant failed to cooperate in selling the properties did not rise to the level of “improper conduct”, even though characterized by the trial judge as “unreasonable” and “capricious”. Were it otherwise, it would seem that virtually every breach of contract by a one-person company could give rise to personal liability.
. FNF Enterprises Inc. v. Wag and Train Inc.

In FNF Enterprises Inc. v. Wag and Train Inc. (Ont CA, 2023) the Court of Appeal considers the doctrine of piercing the corporate veil:
[17] Piercing or lifting the corporate veil is an equitable exception to certain statutory rules. Those rules provide that a corporation is a separate legal person (with the consequence that its property, rights, and obligations are its own, not those of the individuals through whom it acts) and that a shareholder is not liable for any act, default, obligation, or liability of the corporation: OBCA, ss. 15, 92.[2]

[18] The test for piercing the corporate veil in Ontario is that set out in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 CanLII 7979 (ON SC), 28 O.R. (3d) 423 (Gen. Div.), aff’d [1997] O.J. No. 3754 (C.A.). That case set out a two-part test, at pp. 433-34: “courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct.” See also Yaiguaje v. Chevron Corporation, 2018 ONCA 472, 141 O.R. (3d) 1, at paras. 36, 65-71.

[19] In Yaiguaje, at para. 70, the majority stated:
The Transamerica test is consistent with the principle reflected in the various business corporation statutes in Canada that corporate separateness is the rule. Where the corporate form is being abused to the point that the corporation is not a truly separate corporation and is being used to facilitate fraudulent or improper conduct, the law recognizes an exception to this rule.
[20] The first element of the Transamerica test requires not just ownership or control of a corporation, but complete domination or abuse of the corporate form. The second element requires fraudulent or improper conduct, and contemplates that it is that conduct that has given rise to the liabilities the plaintiff seeks to enforce. Where those two elements are present, the corporate veil will be lifted to prevent the person who engaged in that conduct from asserting that the liabilities the fraudulent or improper conduct gave rise to are those of the corporation only.

[21] In 642947 Ontario Ltd. v. Fleischer (2001), 2001 CanLII 8623 (ON CA), 56 O.R. (3d) 417 (C.A.), at para. 68, this court expanded on the meaning of “fraudulent or improper conduct”:
Typically, the corporate veil is pierced when the company is incorporated for an illegal, fraudulent or improper purpose. But it can also be pierced if when incorporated “those in control expressly direct a wrongful thing to be done”. [Citation omitted.]
See also Shoppers Drug Mart Inc. v. 6470360 Canada Inc. (Energyshop Consulting Inc./Powerhouse Energy Management Inc.), 2014 ONCA 85, 372 D.L.R. (4th) 90, at paras. 43-47, leave to appeal refused, [2014] S.C.C.A. No. 119.

[22] The object of the piercing the corporate veil claim in this case is to hold Ms. Ross liable for the obligation incurred by Wag and Train for breaching its lease. In the statement of claim, the appellants allege that the obligation is an amount of approximately $195,000 “owing pursuant to the [lease]” and claimed to consist of arrears of rent owing as of September 2020 (shortly after the appellants discovered the premises had been abandoned), the cost to repair the premises to the condition the lease required they be in on departure, and a further amount “representing the remainder of the amounts of rent due and owing under the [lease] up to the end of the term of the [lease]”. To meet the Transamerica test, the wrongful conduct alleged against Ms. Ross must have given rise to those lease liabilities, such that it is appropriate to lift the corporate veil and consider those liabilities to be hers.

[23] The appellants allege two categories of conduct by Ms. Ross. One is that she controlled Wag and Train and thus made the decisions that it breach the lease. The other is that she, by treating Wag and Train’s assets and business as her own, stripped value from Wag and Train knowing of its lease liabilities.

[24] In my view, the appellants cannot rely on the first category of conduct to satisfy the improper conduct aspect of the Transamerica test. The fact that a director or officer decided, in that capacity, that a corporation should breach a contract does not amount to the type of improper conduct that justifies piercing the corporate veil, at least where the director or officer could not be sued for the tort of inducing breach of contract under the doctrine in Said v. Butt, [1920] 3 K.B. 497: J.S.M. Corporation (Ontario) Ltd. v. The Brick Furniture Warehouse Ltd. (2006), 2006 CanLII 6198 (ON SC), 16 B.L.R. (4th) 227 (Ont. S.C.), at para. 99, aff’d 2008 ONCA 183, 41 B.L.R. (4th) 51; Beckett v. Ridgeway Estates Ltd., 2019 ONSC 112, 97 C.L.R. (4th) 199, at para. 12.

[25] The appellants do not challenge the correctness of the motion judge’s decision to strike the claim that Ms. Ross, in her capacity as sole director and officer, induced Wag and Train’s breach of the lease and interfered with the appellants’ contractual relations with Wag and Train. The motion judge referred to the appellants’ concession “that according to the doctrine in Said v. Butt … [Ms.] Ross cannot be held liable for the tort of interference with contractual relations by inducing her own company to breach a contract.”

[26] The second category of alleged conduct is value stripping. However, it is important to identify what this allegation is and what it is not. As the appellants describe it, the gist of this allegation is that Ms. Ross stripped value from Wag and Train knowing of its lease liabilities, that is, the amounts it owed by reason of its breach of the lease. It is not alleged that removing value from Wag and Train knowing of the lease liabilities is what gave rise to those liabilities in the first place – they arose because of Wag and Train’s breach of the lease. This is important because it is the lease liabilities that the piercing the corporate veil claim seeks to impose on Ms. Ross. It is not alleged that Wag and Train’s entering into the lease was an abuse of the corporate form or a shield for fraudulent or improper conduct. On the appellants’ own allegations, Wag and Train performed the lease from the time it was made in 2015 until March 2020.

[27] This situation is unlike cases in which courts have pierced the corporate veil given 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. For instance, in Shoppers Drug Mart, the defendant corporation’s sole officer, director, and shareholder directed that funds – which were supposed to be used to satisfy the plaintiff’s utility bills pursuant to an agreement – be misappropriated into an account in his name and that of his corporation. The court applied the holding from Fleischer and concluded that the corporate veil should be pierced to impose liability for the misappropriated funds on the corporation’s directing mind, as he expressly directed and caused the wrongful act of misappropriation: at paras. 43, 45. There was a clear link between the liability for the misappropriated funds and the wrongdoing − the decision by the corporation’s directing mind to misappropriate gave rise to the liability for the misappropriated funds. A similar link was present in 6071376 Canada Inc. v. 3966305 Canada Inc., 2020 ONCA 428, 5 B.L.R. (6th) 193. In that case, the court considered that the individual appellant used the corporation “to direct and cause the misappropriation of the respondent’s funds for his own purposes”: at para. 14.

[28] That kind of link between the alleged wrongful conduct and the liabilities sought to be imposed by piercing the corporate veil is missing here. The allegations in this case are materially different than those in Shoppers Drug Mart or 6071376. It is not alleged that stripping value from Wag and Train, knowing it had incurred liabilities as a result of the lease and its breach, constitutes misappropriation of the appellants’ funds. More importantly, the piercing the corporate veil claim is not aimed at whatever value was “stripped” with knowledge of the lease liabilities – it is aimed at the lease liabilities themselves (regardless of the amount of value that was stripped). But the lease liabilities have a source other than, and independent of, any alleged value stripping.

[29] To be sure, the alleged value stripping may be conduct that prejudices the appellants, as creditors of the corporation, in their ability to collect the liabilities of Wag and Train that arose from its breach of the lease. But the remedy for conduct that defeats reasonable expectations of a creditor of a corporation is, as discussed below, under the oppression remedy, rather than piercing the corporate veil.

[30] In my view, the piercing the corporate veil claim has no reasonable chance of success, even accepting the facts pleaded as true and giving them the generous characterization urged by the appellants’ counsel. As the Supreme Court stated in Atlantic Lottery, at para. 19, striking a claim, even a novel one, that is doomed to fail is “beneficial, and indeed critical to the viability of civil justice and public access thereto” since it avoids protracted and expensive proceedings. And although that observation was made in the context of striking an entire claim, it applies with equal force to striking part of a claim so that the parties may focus on aspects of the claim that have a viable legal justification.
. Bilodeau v. Her Majesty The Queen in the Right of Ontario

In Bilodeau v. Her Majesty The Queen in the Right of Ontario (Div Ct, 2022) the Divisional Court made an interesting conclusion regarding piercing the corporate veil in the context of the duties of a corporate director under the EPA [S.194(1)]:
[64] In Transamerica Life Insurance Co. of Canada v. Canada Life Insurance Co. (1996), 1996 CanLII 7979 (ON SC), 28 O.R. (3d) 423, (Gen. Div.) at p. 433, aff’d [1997] O.J. No. 3754 (C.A.), one of the leading authorities on piercing the corporate veil, Sharpe J. (as he then was) stated: “It is also the case that courts will look behind corporate structures when it is necessary to give effect to legislation, especially taxation statutes”. As found by the Designee, the Act is remedial legislation. While its purpose as a whole is not expressly set out, one of the express purposes of a plugging order is to remove a hazard to the public or to the environment (s. 7.0.1 of the Act). When the 2019 Plugging Order was issued the inspector who issued the order detected gas leaks of both an explosive gas and/or a poisonous gas at 7 of the wells. Thus, one of the reasons it was issued was to protect both the public and the environment. As the Supreme Court of Canada has noted, “environmental protection [has] emerged as a fundamental value in Canadian society.”(114957 Canada Ltée (Spraytech, Société d’arrosage v. Hudson (Town), 2001 SCC 40, [2001] 2 S.C.R. 241 at para. 1). While not explicitly phrased in this way, the Designee implicitly found that the only way to give effect to the plugging order was to impose liability on Energex’s directing mind, Mr. Bilodeau. Having made this finding, piercing the corporate veil was justifiable and reasonable.

[65] Section 194(1) of the EPA provides that every officer and director has a duty to do a number of things to prevent a corporation from violating the EPA and further provides that a failure to carry out that duty is constitutes an offence. The EPA, like the Act, provides that the Director can make remedial orders against a “person having charge and control” of a land or building. In Bristol Metal Industries, supra, one of the decisions relied upon by the Designee, the Board dealt with an argument that it was inappropriate for the Director to make a remedial order against a corporate director because if the legislature wished to make directors personally liable for such orders it would have said so explicitly. The corporate director raised the predecessor of s. 194(1) as support for his submission. The legislature had been explicit with respect to who could be prosecuted; by implication by not doing so when it came to liability for remedial orders, the personal liability of directors of directors had been excluded. The Board rejected this argument, finding that construing the phrase “person who has or had charge and control” so narrowly, would undermine the objectives of the EPA. Thus, contrary to the Applicant’s submissions, the EPA jurisprudence (of which Bristol Metal is one example) does not rely on s. 194(1) to find officers and directors liable. It relies on the wording of the EPA and the reference to “person”. This aspect of the wording is the same as the wording in the Act, which as the Designee reasonably found, is also remedial legislation that should be construed broadly, if doing so helps accomplish its purpose.


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