By: Dylan Zamani, Articling Student
Preface
When a corporation does something wrong, it is human nature to point the litigation finger at the individual responsible for directing the wrongdoing, whether an employee, officer, or director, in addition to the corporation itself. But is that always the best course of action? During the first few months of my articling term, I have considered this question on several files I’ve worked on.
When working on civil disputes involving corporations, one of the challenges in the early stages of a file is determining whether it is appropriate to name in the Claim the individual who was seemingly responsible for the tortious actions of the corporation. While at times it may be appropriate to ‘pierce the corporate veil’ and name the individual, understanding the purpose of the corporate veil is important to avoid the potential adverse cost consequences that can arise from wrongfully suing an individual for the conduct of the corporation.
Piercing the Corporate Veil
Since a corporation is an inanimate piece of legal machinery incapable of thought or action, a corporation is unable to perform any actions without intervention by individuals who direct the actions of the corporation. As a result, the court can only determine whether a corporation is in fact liable by examining the conduct of those who caused the company to act in the way that it did. However, this does not automatically result in liability flowing throughout the corporation to those who directed the corporation to act in the manner in which it did. For there to be personal exposure to the individual directing the actions of the corporation, there must be some specific action by the individual that takes them out of the role of being the directing mind of the corporation. In doing so, the plaintiff must plead sufficient particulars which disclose a basis for attaching liability to the individuals in their personal capacities.[1]
The Court of Appeal in the case of 642947 Ontario Ltd. v. Fleischer[2] noted that it “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”.[3] Thus, if an individual, acting through his or her corporate entity, knowingly and directly commits an illegal act, such as misappropriation of funds or misrepresentation, then such individual cannot hide behind the corporation. This is why piercing the corporate veil is much more common with small, privately held corporations, where the corporation has a small number of shareholders/directors/officers and limited assets. Where such corporations act wrongly, it is easier for a court to determine as to who is the directing mind of the improper or illegal act and will hold such individual(s) personally liable.
Conclusion
Unless it is likely that a director, officer, or employee of a corporation knowingly and directly committed a fraudulent/illegal act, such as misappropriation of corporate funds or misrepresentation, such individuals should not indiscriminately be named in legal actions. Instead, the client should work with counsel to identify all potential defendants in their action, including researching whether individuals are likely to be protected by the corporate veil. Highlighting the potential risks associated with improperly attempting to pierce the corporate veil will avoid unnecessary cost consequences.
[1] Tran v. University of Western Ontario, 2015 ONCA 295
[2] 642947 Ontario Ltd. v. Fleischer, 2001, 8623 (ON CA)
[3] Ibid, at para 68