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Corporations - Piercing the Corporate Veil


MORE CASES

Part 2


. Drive Auto Group Inc. v. David Hay Limited (Fix Auto Richmond Hill)

In Drive Auto Group Inc. v. David Hay Limited (Fix Auto Richmond Hill) (Ont CA, 2022) the Court of Appeal considered the interesting issue that a 'directing mind' of a corporation, signing 'bad' cheques for the corporation, was liable personally under the Bills of Exchange Act (BEA):
[2] The appellant submits the motion judge erred because he did not intend to incur personal liability as he was signing on behalf of 9033955 Canada Limited, of which he was the directing mind, and which carried on business under the name and style “Collision Repair Experts Toronto North”. He submits that due to the relationship between the parties, the respondent knew that it was contracting with the corporation and not with him in his personal capacity.

[3] We do not accept this submission. The BEA is a complete answer to the appellant’s argument. Section 131(1) of the BEA provides that “[w]here a person signs a bill in a trade-name or assumed name, he is liable thereon as if he had signed it in his own name.” The appellant signed cheques under an unregistered trade name and he thereby became personally liable on the cheques. The name “Collision Repair Experts Toronto” was not the name under which 9033955 Canada Limited carried on business. The case of K & S Plumbing & Heating Ltd. v. Troughton (c.o.b. T.F.D. 2000), [2003] O.J. No. 4564 (S.C.), relied on by the appellant, was not a bills of exchange case and has no application to the appellant’s liability on cheques he signed.

[4] As the motion judge observed, at para. 18, “The purpose of the [Bills of Exchange Act] is to provide certainty in upholding negotiable instruments. It is the responsibility of the person signing the instrument to ensure that it properly reflects the name of the corporate entity.” The scheme of the BEA is supported by s. 2(1) of the Business Names Act, R.S.O. 1990, c. B.17, which provides that, “No corporation shall carry on business or identify itself to the public under a name other than its corporate name unless the name is registered by that corporation.” See also: Canada Business Corporations Act, R.S.C. 1985, c. C-44, s. 10(5), which requires that a corporation set out its name in legible characters in, among other things, all negotiable instruments.

[5] In sum, the appellant was the directing mind of several companies which carried on business under a number of trade names. He signed cheques under a trade name that was not registered to any of the corporations and thereby became liable on those cheques pursuant to operation of the BEA.
. Guru Eak Transport Ltd. v. Eagle Truck Sales Inc. et al.

In Guru Eak Transport Ltd. v. Eagle Truck Sales Inc. et al. (Div Ct, 2022) the Divisional Court considered piercing the corporate veil:
[28] I adopt a recent helpful summary of the law on this point, by Nishikawa J. in Khursheed v. Venedig Capital SAS, 2019 ONSC 5190, at para. 26.

[26] The case law makes clear that unless there is an independent cause of action against them, officers, directors and employees are protected from personal liability for acts carried out under a corporate name. As the Court of Appeal stated in ScotiaMcLeod Inc. v. People’s Jewellers Ltd. (1995), 1995 CanLII 1301 (ON CA), 26 O.R. (3d) 481 (C.A.), at pp. 490-491:
The decided cases in which employees and officers of companies have been found personally liable for actions ostensibly carried out under a corporate name are fact-specific. In the absence of findings of fraud, deceit, dishonesty or want of authority on the part of employees or officers, they are also rare. … In every case, however, the facts giving rise to personal liability were specifically pleaded. Absent allegations which fit within the categories described above, officers or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own.
[27] The Court of Appeal went on to say that a corporation’s directors or officers may cause it to sign a contract, since a corporation can only operate through human agents. However, this does not mean that “if the actions of the directing minds are found wanting, that personal liability will flow through the corporation to those who caused it to act as it did”: Scotia McLeod v. People’s Jewellers, at p. 491…
Directors and officers are responsible for their tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the company, subject to the exception for liability for procuring a breach of contract (citations omitted)…the statement of claim must allege actions conducted by the individuals which are themselves tortious or exhibit a separate identity or interest from that of the corporation so as to make the act or conduct complained of their own…bald allegations that the individual defendants were the guiding minds or alter egos of the corporate defendants or that they dominated or controlled the corporation are not sufficient to pierce the corporate veil:(citations omitted).
. O'Reilly v. ClearMRI Solutions Ltd.

In O'Reilly v. ClearMRI Solutions Ltd. (Ont CA, 2021) the Court of Appeal considered basics principle of 'corporate separateness':
Corporate Separateness

[43] A corporation is a distinct legal entity with the powers and privileges of a natural person: OBCA, s. 15. These powers and privileges include owning assets in its own right, carrying on its own business, and being responsible only for obligations it has itself incurred.

[44] The fact that one corporation owns the shares of or is affiliated with another does not mean they have common responsibility for their debts, nor common ownership of their businesses or assets. A corporation’s business and assets are not, in law, the business or assets of its parent corporation: Yaiguaje v. Chevron Corporation, 2018 ONCA 472, 141 O.R. (3d) 1 at paras. 57-58, leave to appeal refused, [2018] S.C.C.A. No. 255; BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560 at para. 34. Similarly, a parent (shareholder) corporation is not liable, as such, for the debts and obligations of a subsidiary: OBCA, s. 9

[45] The fact that corporations are related and coordinate their activities does not, in and of itself, change this paradigm. Ontario law rejects a “group enterprise theory” under which related corporations that operate closely would, by that very fact, be considered to jointly own their businesses or be liable for each other’s obligations. Although the group might, from the standpoint of economics, appear as a unit or single enterprise, the legal reality of distinct corporations governs: Meditrust Healthcare Inc. v. Shoppers Drug Mart (2002), 2002 CanLII 41710 (ON CA), 61 O.R. (3d) 786 (C.A.) at paras. 29-31; Yaiguaje, at paras. 76-77.

[46] Corporate separateness has exceptions – the court may pierce the corporate veil and hold a parent corporation liable for obligations nominally incurred by a subsidiary corporation that is a mere façade:
…in order to ignore the corporate separateness principle, the court must be satisfied that: (i) there is complete control of the subsidiary, such that the subsidiary is the “mere puppet” of the parent corporation; and (ii) the subsidiary was incorporated for a fraudulent or improper purpose or used by the parent as a shell for improper activity: Yaiguaje, at para. 66. [Citations omitted].
[47] As the test for piercing the corporate veil makes clear, control by one corporation over another, on its own, does not make the controlling corporation liable for the obligations of the controlled corporation; a fraudulent or improper purpose must also be present.

[48] It is not suggested in this case that there are grounds to pierce the corporate veil of any of the relevant corporations. Accordingly, the basis on which the common employer doctrine operates to hold related corporations liable, while remaining consistent with the concept of corporate separateness, is important.
. 6071376 Canada Inc. v. 3966305 Canada Inc.

In 6071376 Canada Inc. v. 3966305 Canada Inc. (Ont CA, 2020) the Court of Appeal briefly stated the law of piercing the corporate veil:
[14] Fourth, the appellant argues that he should not have been found personally liable. We do not accept this argument. The trial judge was aware of and applied the law correctly: 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. The corporate veil can be pierced in exceptional circumstances like these, where an individual directs a wrongful act to be done and uses a corporation as nothing more than an “alter ego”: 642947 Ontario Ltd. v. Fleischer (2001), 2001 CanLII 8623 (ON CA), 56 O.R. (3d) 417 (C.A.) at paras. 67-69. ...
. Michel v. Spirit Financial Inc.

In Michel v. Spirit Financial Inc. (Ont CA, 2020) the Court of Appeal considered the issue of liability between a corporation and it's principal, this time from a reversal of the typical situation of 'piercing the corporate veil':
[25] The jurisprudence with respect to separating personal from corporate liability typically considers an attempt to hold individuals liable for corporate debts. But the analysis is instructive even though the question here is whether the corporation should be held liable in addition to the individual. A separate legal entity will be disregarded when there is “complete control” and “conduct akin to fraud”: Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 CanLII 7979 (ON SC), 28 O.R. (3d) 423 (Sup. Ct.), at pp. 432-33; aff’d (1997) 74 A.C.W.S. (3d) 207 (C.A.). It may also be disregarded where those in control of a corporation expressly direct a wrongful act: 642947 Ontario Ltd. v. Fleischer (2001), 2001 CanLII 8623 (ON CA), 56 O.R. (3d) 417 (C.A.) at para. 68.

[26] The trial judge held that Spirit was completely controlled by Kramer and that Spirit was being used as a shield for fraudulent or improper conduct. He found that: (i) Kramer was “the controlling will and mind of both Spirit”; (ii) Kramer was “simply transferring all of the money in each between his own pockets”; (iii) Spirit was “just a plaything of Kramer’s”; and (iv) Spirit “must be considered an accomplice to Kramer’s fraudulent activities.”

[27] These findings of fact would be sufficient to pierce the corporate veil and hold Kramer liable for obligations of Spirit – here they have a different but equally well-founded consequence. When Kramer directed Spirit to participate in – be an accomplice to – wrongful conduct, Spirit was rendered liable for that conduct. When the controlling mind of the corporation directs it to do a wrongful act it can scarcely be argued that the corporation commits the act with impunity.
. McDowell v. Fortress Real Capital Inc.

In McDowell v. Fortress Real Capital Inc. (Ont CA, 2019) the Court of Appeal discussed the law of 'piercing the corporate veil':
(1) Did the motion judge err in law by striking out the personal claims against the two principals, Mr. Rathore and Mr. Petrozza, as disclosing no reasonable cause of action?

[54] The claims against the individual respondents sought to hold them responsible, as the directing minds of the Fortress Companies, for Fortress’s alleged breach of contract, breach of fiduciary duty, misrepresentation, and negligence. The motion judge followed this court’s decisions in Normart Management Ltd. v. West Hill Redevelopment Co. (1998), 1998 CanLII 2447 (ON CA), 37 O.R. (3d) 97 (C.A.), at pp. 102-3, and AGDA Systems International Ltd. v. Valcom Ltd. (1999), 1999 CanLII 1527 (ON CA), 43 O.R. (3d) 101 (C.A), leave to appeal ref’d, [1999] S.C.C.A. No. 124, at pp. 112-13, which in turn followed ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995), 1995 CanLII 1301 (ON CA), 26 O.R. (3d) 481 (C.A.), in holding that a director or officer of a corporation will not be personally liable for actions taken on behalf of the corporation unless some of their conduct is tortious in itself or exhibits a separate identity of interest from that of the corporation. He held that none of the four pleadings disclosed any such conduct.

[55] In ScotiaMcLeod, at pp. 490-91, Finlayson J.A. described the requirements for finding directors or officers personally liable:
The decided cases in which employees and officers of companies have been found personally liable for actions ostensibly carried out under a corporate name are fact-specific. In the absence of findings of fraud, deceit, dishonesty or want of authority on the part of employees or officers, they are also rare. Those cases in which the corporate veil has been pierced usually involve transactions where the use of the corporate structure was a sham from the outset or was an afterthought to a deal which had gone sour. There is also a considerable body of case-law wherein injured parties to actions for breach of contract have attempted to extend liability to the principals of the company by pleading that the principals were privy to the tort of inducing breach of contract between the company and the plaintiff: see Ontario Store Fixtures Inc. v. Mmmuffins Inc. (1989), 1989 CanLII 4229 (ON SC), 70 O.R. (2d) 42 (H.C.J.), and the cases referred to therein. Additionally there have been attempts by injured parties to attach liability to the principals of failed businesses through insolvency litigation. In every case, however, the facts giving rise to personal liability were specifically pleaded. Absent allegations which fit within the categories described above, officers or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own. [Emphasis added.]
. Ceballos v. DCL International Inc.

In Ceballos v. DCL International Inc. (Ont CA, 2018) the Court of Appeal held that in order to support a claim piercing the corporate veil by virtue of intentional torts, that pleadings must be particular:
[10] There is no question that, if sufficiently and adequately pleaded, allegations of conspiracy, fraudulent misrepresentation and other tortious conduct may form the basis of a reasonable cause of action against an officer or a director of a corporation: see, for example, 1175777 Ontario Ltd. v. Magna International Inc., 2001 CanLII 8529 (ON CA), [2001] O.J. No. 1621 (C.A.).

[11] However, to invoke those exceptions that permit the piercing of the corporate veil, the claim must be specifically pleaded. As Carthy J.A. said in ADGA Systems International Ltd. v. Valcom Ltd. (1999), 1999 CanLII 1527 (ON CA), 43 O.R. (3d) 101 (C.A.), at para. 39:
The operative portion of this paragraph is the final sentence which confirms that, where properly pleaded, officers or employees can be liable for tortious conduct even when acting in the course of duty. [Emphasis added.]
[12] Bald or vague assertions of intentional tortious conduct are insufficient to defeat a r. 21 motion. The pleading of intentional torts must meet a stringent standard of particularity, that is, they must be pleaded with “clarity and precision”: Lysko v. Braley (2006), 2006 CanLII 11846 (ON CA), 79 O.R. (3d) 721 (C.A.), at para. 144.
. Density Group Limited v. HK Hotels LLC

In Density Group Limited v. HK Hotels LLC (Ont CA, 2014) the Court of Appeal commented as follows on when the 'corporate veil' can be pierced to render a principal of the corporation personally liable:
[163] In this court’s decision in ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. 1995 CanLII 1301 (ON CA), (1995), 26 O.R. (3d) 481, leave to appeal refused, [1996] S.C.C.A. No. 40, Finlayson J.A. discussed situations in which directors may be held personally liable for actions ostensibly carried out in the corporate name. I think it is helpful to review the principles set out at pp. 490-91:
The decided cases in which employees and officers of companies have been found personally liable for actions ostensibly carried out under a corporate name are fact- specific. In the absence of findings of fraud, deceit, dishonesty or want of authority on the part of employees or officers, they are also rare. Those cases in which the corporate veil has been pierced usually involve transactions where the use of the corporate structure was a sham from the outset or was an afterthought to a deal which had gone sour. There is also a considerable body of case-law wherein injured parties to actions for breach of contract have attempted to extend liability to the principals of the company by pleading that the that the principals were privy to the tort of inducing breach of contract between the company and the plaintiff: see Ontario Store Fixtures Inc. v. Mmmuffins Inc. 1989 CanLII 4229 (ON SC), (1989), 70 O.R. (2d) 42 (H.C.J.), and the cases referred to therein. Additionally there have been attempts by injured parties to attach liability to the principals of failed businesses through insolvency litigation. In every case, however, the facts giving rise to personal liability were specifically pleaded. Absent allegations which fit within the categories described above, officers or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own.
[164] In ADGA Systems International Ltd v. Valcom Ltd. 1999 CanLII 1527 (ON CA), (1999), 43 O.R. (3d) 101, leave to appeal refused, [1999] S.C.C.A. 124, Carthy J.A. had occasion to review the law in relation to when an officer or director may be held personally liable even though purportedly acting bona fide in the best interests of the corporation. At p. 107 he stated:
The consistent line of authority in Canada holds simply that, in all events, officers, directors and employees of corporations are responsible for their tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the company, always subject to the Said v. Butt exception.
[165] The so-called “Said v. Butt exception” is a longstanding rule dating back to a 1920 decision by the Court of King’s Bench. As that decision comes into play into this case, it is worth briefly reviewing it.

[166] The facts of the case are as follows. Mr. Said wanted to be present at the opening night of a play but knew that if he ordered a ticket in his own name his request would be refused because had made certain serious and unfounded charges against some members of the theatre’s staff. He therefore obtained a ticket through a friend but when he showed up at the theatre with the ticket, he was spotted by the theatre’s managing director, Sir Alfred Butt, and was denied admission. Mr. Said sued Sir Butt on the basis that he wrongfully and maliciously procured the company to break a contract made by the company in selling him a ticket to the performance.

[167] McCardie J. concluded that there was no contract upon which Mr. Said could have sued the theatre. Nonetheless, the trial judge went on to consider whether if the plaintiff had established that there was a valid contract between the theatre and himself, the claim against Mr. Butt personally could have succeeded.

[168] The trial judge concluded, at p. 506, that:
…if a servant acting bona fide within the scope of his authority procures or causes the breach of a contract between his employer and a third person, he does not thereby become liable to an action of tort at the suit of the person whose contract has thereby been broken.
[169] He also clarified that nothing in his decision should be taken as being “inconsistent with the rule that a director or a servant who actually takes part in or actually authorizes such torts as assault, trespass to property, nuisance, or the like may be liable in damages as a joint participant” in such a tortious wrong: p. 506.
. Shoppers Drug Mart Inc. v. 6470360 Canada Inc. (Energyshop Consulting Inc./Powerhouse Energy Management Inc.)

In Shoppers Drug Mart Inc. v. 6470360 Canada Inc. (Energyshop Consulting Inc./Powerhouse Energy Management Inc.) (Ont CA, 2014) a retailer who had hired a consultant to manage and pay their energy bills sued both the corporation and the sole individual behind it for misappropriation. On the legal test for piercing the corporate veil the court stated:
[43] ..... Fleischer [642947 Ontario Ltd. v. Fleischer 2001 CanLII 8623 (ON CA),] is the appropriate test to apply to piercing the corporate veil in Ontario. In Fleischer, Laskin J.A. stated that only exceptional cases that result in flagrant injustice warrant going behind the corporate veil. It can be pierced if those in control expressly direct a wrongful act to be done. At para. 68, he stated:
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”: Clarkson Co. v. Zhelka at p. 578. Sharpe J. set out a useful statement of the guiding principle in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. 1996 CanLII 7979 (ON SC), (1996), 28 O.R. (3d) 423 at pp. 433-34 (Gen. Div.), affd [1997] O.J. No. 3754 (C.A.): “the 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.”
[44] The motions judge found a misappropriation. Black’s Law Dictionary, 7th ed., at p. 1013 defines “misappropriation” as, “the application of another’s property or money dishonestly to one’s own use.”

[45] There can be no doubt that Beamish was the directing mind and caused the misappropriation and misrepresentation by 647 and the ensuing unjust enrichment. He had sole signing authority over the accounts and authorized the transfer of significant amounts of money, which were supposed to be dedicated to the payment of utility bills, to an Operating Account in the names of himself and a company of which he was the sole shareholder. He expressly directed and caused the wrongful act. Applying the correct test, in these circumstances, effect should be given to the second and third grounds of appeal. There was an unjust enrichment and the corporate veil should be pierced.
. Meridian Credit Union Limited v. Baig

In Meridian Credit Union Limited v. Baig (Ont CA, 2016) the Court of Appeal stated that tortious misrepresentations made by directors were directly actionable against them without recourse to the doctrine of piercing the corporate veil:
[39] Subject to an exception that does not apply in this case, “[t]he consistent line of authority in Canada holds simply that, in all events, officers, directors and employees of corporations are responsible for their tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the company”: ADGA Systems International Ltd. v. Valcom Ltd. (1999), 1999 CanLII 1527 (ON CA), 168 D.L.R. (4th) 351 (Ont. C.A.), at para. 18. ....
. Pita Royale Inc. (Aroma Taste of the Middle East) v. Buckingham Properties Inc.

In Pita Royale Inc. (Aroma Taste of the Middle East) v. Buckingham Properties Inc. (Ont CA, 2019) the Court of Appeal considered an issue of piercing the corporate veil:
[30] The trial judge also erred in failing to consider the nature of the allegations pleaded against Mr. Mandelbaum. In McDowell v. Fortress Real Capital Inc., 2019 ONCA 71 (CanLII), this court emphasized the need to plead the particulars of tortious conduct separate from that of the company when suing officers and directors. In the statement of claim, Mr. Mandelbaum was sued on the basis that he “was at all material times the director, president and controlling mind of Buckingham Properties Inc.” There were no allegations of separate misconduct levelled against him. It is unconscionable to find an officer or director of a company liable in circumstances where they do not know the precise nature of the alleged malfeasance and how it leads to liability separate from that of the corporation.

[31] In addition, Beaver Steel was relied on by the trial judge without reference to the leading case in Ontario on officers and directors’ liability, being ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995), 1995 CanLII 1301 (ON CA), 26 O. R. (3d) 481 (C.A.). That case was binding on the trial judge. In it, Justice Finlayson said the following about the personal liability of directors and officers for torts, at pp. 490-91:
The decided cases in which employees and officers of companies have been found personally liable for actions ostensibly carried out under a corporate name are fact- specific. In the absence of findings of fraud, deceit, dishonesty or want of authority on the part of employees or officers, they are also rare. Those cases in which the corporate veil has been pierced usually involve transactions where the use of the corporate structure was a sham from the outset or was an afterthought to a deal which had gone sour... Additionally there have been attempts by injured parties to attach liability to the principals of failed businesses through insolvency litigation. In every case, however, the facts giving rise to personal liability were specifically pleaded. Absent allegations which fit within the categories described above, officers or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own.
[32] More recently, in 642947 Ontario Ltd. v. Fleischer (2001), 2001 CanLII 8623 (ON CA), 56 O.R. (3d) 417 (C.A.), at para. 68, Laskin J.A. stated as follows:
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”: Clarkson Co. v. Zhelka at p. 578. Sharpe J. set out a useful statement of the guiding principle in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 CanLII 7979 (ON SC), 28 O.R. (3d) 423 at pp. 433-34 (Gen. Div.), aff’d [1997] O.J. No. 3754 (C.A.): “the 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.
[33] In this case there was no evidence that the Buckingham was incorporated as a sham or was being used as a shield for fraudulent or improper conduct. If the trial judge’s analysis were accepted, then any time a corporation engaged in a tort its officers and directors would be personally liable. In summary, this is not one of those exceptional cases where the corporate veil should be pierced to impose liability on an officer or director.


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Last modified: 17-03-23
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