How do corporate and personal liability intersect in a corporation that has only one officer, director and shareholder? In the recent Shoppers Drug Mart v. 6470360 Canada Inc. case, the Court of Appeal helped to clarify when the person behind the corporation will be found liable.
In October 2005, Shoppers Drug Mart (“Shoppers”) contracted with Energyshop Consulting Inc. (“Energyshop”) to manage and pay its utility bills on a nationwide basis. Michael Wayne Beamish (“Beamish”) negotiated the contract on behalf of Energyshop, which had not yet been incorporated. Beamish later incorporated 6470360 Canada Inc. c.o.b. as Energyshop Consulting Inc./Powerhouse Energy Management Inc. (“647”).
Under the contract, Shoppers directed utility companies to send their bills to Energyshop. 647 then collected and organized the bills and periodically sent Shoppers an invoice for the total utility charges and a processing fee. Shoppers would then transfer the invoiced amount to a bank account in the names of 647 and Beamish (the “Clearing Account”). 647 either used the funds received from Shoppers to pay Shoppers’ utility bills or transferred them to a separate account that was used to pay 647’s operative expenses (the “Operating Account”). That account was also in the joint names of 647 and Beamish.
In August 2008, Shoppers received an anonymous notice that funds it had paid into the Clearing Account were being used for activities other than the payment of its utility bills. Shoppers terminated the relationship and commenced an action against 647 and Beamish personally to recover the funds that had been transferred to the Clearing Account, but not used to pay Shoppers’ bills.
Shoppers believed that it had contracted with a corporation and was unaware, until after it commenced the action, that Energyshop was not a registered corporation. Shoppers was also unaware of 647’s existence.
Thereafter, Shoppers brought a motion for summary judgment of its claims against 647 and Beamish.
The Motion Decision
The motions judge determined that 647’s transfer of $970,000 to the Operating Account was a wrongful misappropriation. While he was not satisfied the misappropriation constituted fraud or a breach of trust, Shoppers had established the elements required for its claim of unjust enrichment (i.e., 647 was enriched by its misappropriation; Shoppers suffered a correspondence deprivation; and there was no juristic reason for the enrichment).
However, the motions judge concluded that Beamish was not personally liable for unjust enrichment, noting that Shoppers knew it was contracting with a corporation and expected to contract with a limited liability company; Beamish did not intend to mislead Shoppers by using unregistered trade names for 647; and there was no evidence that Beamish intended to contract, or held himself out as contracting, personally with Shoppers.
The motions judge also rejected Shoppers’ request to pierce the corporate veil, stating “the corporate veil should be pierced not where a corporation has misappropriated funds, but where the very use of the corporation is to hide that misappropriation.” Further, “[a]bsent evidence that the incorporation of 647 was itself done for purposes that are illegal and/or fraudulent, a court should be reticent to ignore the corporate structure under which it did business.”
The Court of Appeal Decision
Shoppers appealed the motions judge’s decision, arguing that the judge erred in finding:
- that Beamish was not personally liable under the contract pursuant to s. 14 of the Canada Business Corporations Act, R.S.C., 1985, c. C-44 (“CBCA”);
- that Beamish had not been unjustly enriched by the misappropriation; and,
- that the corporate veil should not be pierced.
The Court of Appeal allowed the appeal, granting summary judgment against Beamish personally. In reasons delivered by Pepall, J.A., the Court upheld the motions judge’s finding that Beamish was not personally liable pursuant to s. 14 of the CBCA, as 647 had, by its conduct, signified its intention to be bound by the contract, effectively adopting the contract and relieving Beamish of personal liability under s. 14(1). In other words, formal adoption of the contract is not required.
However, the Court of Appeal disagreed with the motions judge that Beamish had not been unjustly enriched in his personal capacity and that the corporate veil should not be pierced. Pepall J.A. noted that the motions judge failed to apply the appropriate test for piecing of the corporate veil, as set out in 642947 Ontario Ltd. v. Fleischer (2001), 56 O.R. (3d) 417 (C.A.), in which Laskin J.A. 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), 28 O.R. (3d) 423 at pp. 433-34 (Gen. Div.), affd  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.”
Beamish had sole signing authority of the accounts in question and had 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 his own name and the name of a company of which he was the sole shareholder. He expressly directed and caused the wrongful act, and the Court of Appeal held that, in these circumstances, there was an unjust enrichment that warranted piercing of the corporate veil.
The Court of Appeal’s decision in Shoppers v. 647 clarifies that courts have the ability to pierce the corporate veil where a wrongful or improper act has been taken by a corporation that has only one officer, director and shareholder. In these cases, there can be no doubt as to the directing mind of the wrongful and improper act. In addition, the Court clarified that, to pierce the corporate veil, the corporation need not have been incorporated for an illegal, fraudulent or improper purpose. Rather, as in Fleischer, it is sufficient that those in control of the corporation direct that a wrongful thing be done or use the corporation as a shield for fraudulent or improper conduct.
For more information on how to avoid personal liability when acting on behalf of a corporation, see this Related Post by Marie-Hèléne Beaudoin on a recent British Columbia Court of Appeal case, Pageant Media Ltd. v. Piche, in which the president and chairman of a company was held personally liable for the remaining balance on a contract that he argued had been entered into by his company, not himself personally.
Date: January 31, 2014