“A company’s directors, officers and shareholders are usually not legally liable for its actions and legal obligations,” writes Achkar Law. “This separation between a company, its management and its shareholders is commonly referred to as the ‘corporate veil.’ It allows the courts to attribute a corporation’s actions to the corporation itself, and not the individuals who necessarily must act on behalf of the corporation.”
“‘Piercing the corporate veil’ refers to the common law judicial power whereby courts can set aside limited liability or separate legal personality which can be for the purpose of making shareholders liable for a corporation’s debts,” writes Julia Chen. “Generally recognized grounds for corporate veil piercing have included concepts such as agency or use of the corporate structure for improper purposes.”
Although limited in effectiveness, piercing of the corporate veil could be an invaluable tool when seeking remedies otherwise unavailable against the corporation itself, says Achkar.
The problem is precedent. The corporate veil concept is based on U.K. law that’s been upheld for more than 120 years.
Reliance on corporate veil protection is often left to a higher court to sort out when a lower court allows it, as recently shown in Alberta. It’s proven to be tough to crack.
Tru-Square Homes Ltd. was a corporation owned almost entirely by a James Metcalfe. Tru-Square was hired by the Swanbys to build a home.
As outlined by Scott Bower, a partner at Bennett Jones LLP, and associates Russell Kruger and Heather Taskey, “all contracts between the parties were between the Swanbys and Tru-Square, not Mr. Metcalfe in his personal capacity.”
The Swanbys sued both Tru-Square Homes Ltd. and Metcalfe for construction issues. A lower court ruled in favour of the Swanbys.
However, the Alberta Court of Appeal reversed that decision, ruling Metcalfe was not acting in a personal capacity but as a representative of his corporation.
It’s a similar scenario to an Alberta case outlined last year concerning claims by a homeowner about his verbal agreement with a builder, and defects discovered in his new home. The homeowner claimed both the builder and the corporation were essentially one and the same, and that therefore, the builder could not hide behind the corporate veil.
The Alberta Court of Appeal noted, however, that all invoices were issued by the company, not the individual. All monies received were deposited into the company bank account. Any personal assurances made by the builder concerning his commitment to the project were deemed as standard verbiage for any builder and not grounds for personal liability. The veil withstood the attack.
Can the veil ever be pierced?
- Whether the negligent act was committed while engaged in the business of the corporation, and whether the negligence of the employee was contemporaneous with that of the corporation;
- whether the individual was pursuing any personal interest beyond the corporate interest;
- whether the director or corporate representative owed a separate and distinct duty of care towards the injured party;
- whether the conduct was “in the best interests of the company”;
- whether the plaintiff voluntarily dealt with the limited liability corporation or had the corporate relationship “imposed” on it;
- the expectations of the parties;
- whether the tort was “independent”;
- whether the exception in Said v Butt applies (where the director or servant actually takes part in or authorizes such torts as assault, trespass to property, nuisance, or inducing breach of contract);
- the nature of the tort, and particularly whether it was an intentional tort; and
- whether the damage was physical or economic.
In other words, “the courts will typically pierce the corporate veil when the company is found to be incorporated for an illegal, fraudulent or improper purpose and is a mere façade concealing the true facts,” write Bower, Kruger and Taskey.
It’s challenging to establish, but it remains a strategy plaintiffs continue to pursue.
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to firstname.lastname@example.org.