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One of the more appealing aspects of a corporate business structure is that it has a distinct legal identity from its shareholders, directors and officers. This means that a corporation can sue, be sued, enter into contracts or acquire a loan.
It also protects the shareholders, directors and officers from personal liability in many situations. This is referred to as the corporate “veil” and is one of the key reasons that businesses often decide to incorporate and create corporate structures.
The corporate veil shields the personal assets of those in control of the corporation, such as real or personal property or bank accounts, from creditors of the corporation.
Piercing the Corporate Veil
Generally, the courts are reluctant to pierce the corporate veil to find shareholders, directors or officers personally liable. However, in limited circumstances, such as fraud, misappropriation of funds or serious tortious conduct, they will hold the individuals responsible personally liable for the damages or debts of the corporation.
The two-part test for piercing the corporate veil is set out in the 2001 Ontario Court of Appeal decision 642947 Ontario Ltd. v Fleischer.
The corporate veil is pierced when:
- The company is incorporated for an illegal, fraudulent, or improper purpose; or
- Those in control of the corporation expressly direct a wrongful thing to be done.
This two-part test has been reaffirmed and followed in more recent case law. The Ontario Court of Appeal in Mitchell v Lewis, reinforced in 2016 that the veil can be pierced in a variety of cases involving fraudulent or improper conduct by an individual in control of the corporation, and is not limited to cases involving sham corporations. In this case, the appellant was arguing that the respondents had misappropriated monies that were owed to and to be held in trust for the appellants. Other examples of tortious conduct can include conspiracy, fraudulent misrepresentation or negligent misrepresentation. The tortious or other serious actions that can trigger the piercing of the veil is highly fact specific to each case.
As confirmed in the 2014 Ontario Court of Appeal decision Shoppers Drug Mart Inc. v 6470360 Canada Inc., it is easier to pierce the corporate veil in closely held corporations, especially if there is a sole individual acting as the shareholder, officer and director. In such cases it is much easier to see who directed the wrongful or fraudulent act to be done.
Ultimately, this remedy provides plaintiffs with more options when trying to collect on a judgment where the corporation holds few or no assets and it discourages individuals from using a corporation as a shield to hide behind when committing fraudulent or improper conduct.
Are Employees Protected from Personal Liability?
In short, no. Employees of a corporation are not protected from personal liability for claims of personal negligence relating to incidents that occurred during the course of their employment. That is not to say that employers are not also vicariously liable for the negligence of employees – the general rule is that employers are.
In the 2017 Ontario Court of Appeal decision Sataur v Starbucks Coffee Canada Inc., the Court confirmed that the corporate veil does not extend to employees of the corporation for claims of personal negligence. Furthermore, such claims of personal negligence are a separate and distinct legal concept from the corporation’s vicarious liability for its employees, and both concepts can exist together in Canadian law.
In this case, the Plaintiff sued both an employee and manager of Starbucks for personal negligence when she was injured when a barista poured scalding hot water on her hands.
In a decision by the Supreme Court of British Columbia (Koltai v Hauser), a judge considered whether a claim by a homeowner for faulty renovation work against the defendant contractor’s corporation could pierce the corporate veil and hold the contractor personally liable.
In this case, the defendant contractor had performed the renovations at the property along with his son and other staff employed by his corporation. The defendant supervised, managed, controlled and personally oversaw all the renovation work; the renovations did not go as planned, a fact admitted by the defendant. An expert opinion on the renovations found that not a single component of the project could be salvaged.
The defendant admitted that he had not used an accredited electrician to perform the electrical work or use a qualified plumber. None of the work met Building Code requirements.
The judge found that the failure of the renovations was so extreme as to amount to fraud and while the full contract price had been paid, the defendant could not account for what had been done with the funds. The judge noted that “there is no separate rule concerning the piercing of the corporate veil in the case of one-man companies.”
Given that the renovations were not completed in a timely or proper fashion, that the defendant could not account for the funds, and that the renovations actually damaged the property, the judge found it appropriate to pierce the corporate veil and hold the defendant personally liable in this case. It is also worth noting that this defendant had several other lawsuits against his company for poor work.
This case should not be taken as meaning that the “corporate veil” can be pierced for all cases of negligent construction. It is illustrative of the fact that in some cases a contracting company crosses the line between negligence and fraud, and if that line is crossed recovery may be possible against the party who owns or controls the contracting company.
It is important to understand how the corporate veil works and what its limitations are before incorporating your business. A corporate lawyer can help you to understand what types of situations you may be personally liable for and how you can protect yourself and the corporation. Additionally, a corporate lawyer can advise you if you may have grounds to pierce the corporate veil if you are pursuing a debt or claim for damages against a corporation.