The Ontario Court of Appeal (Court) recently provided guidance on claims against directors based on relief-seeking to pierce the corporate veil and the oppression remedy. In FNF Enterprises Inc. v. Wag and Train Inc. (FNF), the Court upheld the lower court’s decision in striking allegations supporting a claim that the corporate veil should be pierced against a director, allowing a claim of oppression to proceed.
FNF involved a commercial tenant that abandoned the premises before the leasehold term ended and failed to pay rent. The landlord initially sought three remedies against the former tenant’s sole director, officer and shareholder. The claims alleged that:
There was interference with contractual relations (this claim was later abandoned).
The director conducted herself in a manner that justified piercing the corporate veil.
The director acted in an oppressive manner that violated applicable corporate legislation.
The motions judge struck out all three claims. On appeal, however, the Court allowed the oppression claim to proceed but dismissed the claim seeking to pierce the corporate veil.
On a motion to strike, the facts asserted in the statement of claim are taken to be true unless they are patently incapable of proof. The test is then whether it is plain and obvious that each of the plaintiffs' claims disclose no reasonable cause of action.
Corporate Veil Claim
The principle that a corporation is a separate legal entity, distinct from shareholders, directors, officers and employees, is firmly entrenched in Canadian law. The principle of limited liability applies between not only corporations and individual shareholders, but also affiliated corporations and subsidiaries of a corporation.
The Court relied upon the existing Supreme Court of Canada authority that in order to pierce the corporate veil, a moving party must satisfy the court that:
The corporation is completely dominated and controlled, making it a “mere puppet” of the owner.
With this control and domination, the owner uses the corporation to disguise the owner’s part in fraudulent or improper conduct or to shield it from liability for these actions.
If both elements are satisfied, the corporate veil may be lifted to prevent the person who engaged in the impugned conduct from asserting that the corporation is solely liable for the conduct.
The Court confirmed that the first element of the test requires not only ownership or control of the corporation, but also complete domination or abuse of the corporate form. The second element requires fraudulent or improper conduct and contemplates that this conduct has given rise to the liabilities the plaintiff seeks to enforce.
With respect to the first element, the Court held that the mere fact that a director or officer decided a corporation should breach a contract is not the type of improper conduct that justifies piercing the corporate veil. This applies if the director or officer could not be sued for the tort of inducing breach of contract. Both the lower court and the Court held that inducing breach of contract was not a viable claim in these circumstances.
The second category of conduct was alleged value-stripping from the corporation. The Court held that the link between the wrongful conduct claimed and the liability sought to be imposed by piercing the corporate veil was missing from the facts of the case.
With respect to the second element, the Court noted that the corporation entering into the lease did not allege abuse of the corporate form or a shield for fraudulent or improper conduct. Instead, the corporation performed under the lease for many years until the leasehold property was abandoned.
The Court distinguished cases where the courts have pierced the corporate veil given the nexus between the liability that the plaintiff sought to recover by piercing the corporate veil and the wrongful conduct of a director that gave rise to that very liability.
Oppression Remedy Claim
There are two requirements for an oppression remedy:
The complainant must identify the expectations it claims were violated by the conduct at issue and show that those expectations were reasonably held.
The complainant must show that those reasonable expectations were violated by corporate conduct that was oppressive or unfairly prejudicial to or that unfairly disregarded the interests of any security holder, creditor, director or officer.
Personal liability may be imposed on a director for oppressive conduct if:
The director has the requisite degree of involvement in the oppressive conduct so that it is attributable to that director.
Personal liability is fit in the circumstances.
In FNF, the director allegedly stripped assets from the corporation while it was a going concern and set up the same business in a new location under a different name. It is distinct from a situation in which a corporation is wound up. The Court held that a shareholder of a corporation has the right of corporate assets only if and when the corporation is wound up and after payment is made to unpaid creditors.
The Court ultimately found there was an arguable case that the director stripped value from the corporation to avoid paying amounts owed under the lease and, thus, misused corporate powers to her own benefit. As a result, a personal remedy was arguably a fair way of dealing with the matter. The Court, therefore, declined to strike the oppression remedy claim.
Claims to ascribe liability to a director based on an attempt to pierce the corporate veil face serious obstacles and are prone to be struck by the court. Meanwhile, if properly pled, claims of oppression against directors may survive an application to strike. That said, plaintiffs remain vulnerable to having those claims dismissed on summary judgment motion or at trial. This is because the court can better scrutinize the evidence rather than assuming the facts pled are true as on a motion to strike.