Claiming against the person behind a company in their personal capacity for the actions of the company can be difficult. A company is a separate legal entity to its directors, shareholders and officers.
This article looks at this issue with reference to the recent decision of the Court of Appeal for Ontario in FNF Enterprises Inc. v. Wag and Train Inc. In this case, creditors brought a claim against a company’s sole director, officer and shareholder for unpaid rent, alleging that she stripped value from the company so that it could not pay them.
Defendant company moved out of the premises before the end of the tenancy
In 2015, the plaintiffs leased their commercial premises in Kitchener to one of the defendants, Wag and Train Inc. The lease was scheduled to run until the end of March 2021, and the premises were to be used to operate a dog daycare, training and grooming business. The brain behind this canine company was Ms. Ross, the company’s sole director, officer and shareholder.
One year before the end of the lease, Wag and Train Inc., moved out and stopped paying rent. The plaintiffs were unhappy with this and claimed that the company did not restore the premises to their original condition. Ms. Ross had moved her business to another location in Kitchener and started operating under a different name. The plaintiffs estimated that the company breached the lease, through rent owing plus the cost of repairs, in the amount of $195,000.
Plaintiffs argued that the defendant company’s sole director and shareholder was personally liable
The plaintiffs brought proceedings against both Ms. Ross and her company. The plaintiffs argued that Ms. Ross had:
- conducted herself in a manner that justified “piercing the corporate veil” to impose the company’s liabilities on her personally; and
- acted in a manner that entitled the plaintiffs to relief against her under the oppression remedy.
These causes of action against Ms. Ross were based on her alleged conduct of taking value away from Wag and Train Inc., and operating the same business elsewhere to avoid having to pay the plaintiffs under the lease.
Piercing the corporate veil
Ms. Ross sought to have the claims against her thrown out on the basis that they had no chance of success. The lease was signed by Wag and Train Inc., not Ms. Ross personally, and she was generally not liable for the company’s actions. This principle dates back to a famous English case of 1897, Salomon v. Salomon & Co., in which the Court found that a company has a separate legal personality to its officers, shareholders and directors.
However, the law has since developed mechanisms to get around this principle in limited circumstances, allowing plaintiffs to go behind the company and seek personal liability. One legal mechanism to achieve this is called piercing or lifting the corporate veil. In Ontario, courts are only prepared to disregard the separate legal personality of a company by piercing the corporate veil where (1) it is completely dominated and controlled and (2) it is being used as a shield for fraudulent or improper conduct.
The plaintiffs’ claim to pierce the corporate veil had no reasonable prospect of success
The plaintiffs argued that this test was satisfied because Ms. Ross controlled the company, decided to breach the lease, and stripped value from the company knowing that it owed money under the lease.
The Court of Appeal decided that the improper conduct part of the test was not satisfied.
Deciding that a company should breach a contract is not the type of conduct that satisfies breaching the corporate veil, unless the director/officer could be sued for the tort of inducing breach of contract. The Court decided that the value-stripping allegation was also not improper because there was no clear link between the alleged wrongful conduct and the liability. As the Court said:
“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 [plaintiffs’] funds.”
As a result, this cause of action was struck down.
What is the oppression remedy under the Business Corporations Act?
Section 248 of the Ontario Business Corporations Act allows certain complainants to apply to the court for a remedy when listed things happen that are:
“oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation”.
While these actions are often brought by shareholders against the company, they can also be brought by creditors and against directors personally if the director had the requisite degree of involvement in the conduct and personal liability is fit in the circumstances.
Courts apply another two-step test to assess oppression remedy claims, which requires that:
- the complainant must have had reasonable expectations; and
- those reasonable expectations were violated by conduct that was oppressive, unfairly prejudicial or unfairly disregarded the interests of certain people.
Arguable case for a personal oppression remedy against the director
The Court of Appeal noted that the allegation that Ms. Ross stripped value from her company knowing its liability to the plaintiffs constituted an allegation of unlawful and internal corporate manoeuvres against which the plaintiffs, as creditors, could not protect themselves. Importantly, the power of a director to give dividends to a shareholder is subject to the company’s ability to pay creditors.
The Court thought that the plaintiffs had an arguable case against Ms. Ross under the oppression remedy, thus allowing the claim to proceed.
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