ONTARIO – Corporation – Piercing the corporate veil. There must be a clear link between the liability the plaintiff seeks to recover by piercing the corporate veil and the wrongful conduct of the individual in control of the corporation. Even where the test to pierce the corporate veil is not met, the oppression remedy can be asserted against a director of the company if the director made unlawful and internal corporate manoeuvres against which a creditor could not protect itself that constitute oppression.
FNF Enterprises Inc. v. Wag and Train Inc., et al.
2023 ONCA 92 (February 9, 2023)
Ontario Court of Appeal(Zarnett, Thorburn and Copeland JJ.A)
The Appellants FNF Enterprises were the owner of a commercial property. The Respondent Wag and Train Inc. was their tenant. The term of the lease was to expire on March 31, 2021.
The Respondent paid rent until March 2020. Its sole officer, director and shareholder Linda Ross then moved to a new location and set up the same business under a different name.
In September 2020, the Appellants commenced an action against the Respondent and Ms. Ross claiming that the premises were vacated a year prior to the end of term and that rent to the end of the term was not paid.
The Appellant raised three causes of action against Ms. Ross: interference with contractual relations because she made the decisions that constituted Wag and Train’s breach of the lease; she conducted herself in a manner that justified piercing the corporate veil and imposing Wag and Train’s liabilities on her; and she acted in a manner that entitled the appellants to relief against her under the oppression remedy in s. 248 of the Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”).
The motions judge dismissed the claim against Ms. Ross on the basis that the claim did not disclose a reasonable cause of against her. The motion judge also denied the Appellant’s motion to amend the claim.
The issue on appeal was whether the motions judge erred in finding no reasonable cause of action based on piercing the corporate veil or under the oppression remedy that could not be cured by amending the claim. The appeal was allowed with respect to the oppression remedy claim.
Pursuant to s. 255 of the OBCA, an appeal of an OBCA statutory claim generally lies to the Divisional Court unless other aspects of the claim have a common law or equity source, in which case the appeal then lies to the Court of Appeal. The ONCA referred to Buccilli v. Pillitteri, 2016 ONCA 775 for this principle. (para. 8) The Court held that the claims related to lifting the corporate veil engage common law and equitable doctrines.
The standard of review for the decision that the claim disclosed no reasonable cause of action is correctness. The decision to deny the Appellant an opportunity to amend its claim was based on discretion and required an appeal court to defer to the lower court and would only be interfered with if the judge acted unreasonably in exercising their discretion. See Mortazavi v. University of Toronto, 2013 ONCA 655 at para. 3, (leave to appeal refused). (para. 11)
The test to be applied “is whether it is plain and obvious, assuming the facts pleaded to be true, that each of the plaintiffs’ pleaded claims disclose no reasonable cause of action. Simply stated, if a claim has no reasonable prospect of success, it should not be allowed to proceed to trial”: Atlantic Lottery Corp. Inc. v. Babstock, 2020 SCC 19 (para. 12)
The motions judge found that the statement of claim did not disclose an actionable tort committed by Ms. Ross and that the pleading did not disclose allegations of fraud or improper conduct by her that exhibited a separate identity from that of the Respondent. The judge considered the pleaded facts and held that, if true, they would amount to breach of contract.
Lifting the corporate veil is an equitable exception to certain statutory rules that provide that a corporation is a separate legal entity and that its shareholders are not liable for the acts, defaults or liability of the corporation. (para. 17)
The test for piercing the corporate veil is two part. Courts will disregard the separate legal personality of a corporate entity where it is 1) completely dominated and controlled and 2) being used as a shield for fraudulent or improper conduct. (para. 18) The test is set out in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 CanLII 7979 (ON SC).
The Appellants wanted to hold Ms. Ross liable for the balance of the lease obligations of the Respondent being rent arrears, unpaid rent to end of the term and cost to repair the premises. Although she was the controlling mind of the Respondent, her conduct, and breach of contract did not meet the standard as set out in the Transamerica case. (para. 24) The Court held that she could not be held liable for the tort of interference with contractual relations for inducing her company to breach a contract.
The pleadings also did not allege that the Respondent entered into the lease to shield fraudulent or improper conduct. The Respondent paid rent until it left the premises early. The corporation was not used to direct and cause misappropriation of funds. There was no nexus between the liability the Appellant sought to recover by lifting the corporate veil and the wrongful conduct directed by the individual in control of the corporation that gave rise to the liability. (paras 26 and 27). The ONCA agreed with the motions judge that the claim to lift the corporate veil had no reasonable chance of success.
With respect to the Respondent’s oppression remedy claim pursuant to s. 248 of the OBCA, the Court held that the Respondent must identify the expectations it claims have been violated by the conduct at issue and show that those expectations were reasonably held. The Respondent must also show that these 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. (para. 31)
The ONCA referred to Wilson v. Alharayeri, 2017 SCC 39 where the oppression remedy was granted against an officer and director of a company in their personal capacity rather than against the corporation to vindicate the reasonable expectations of the complainant. (para. 32) In Wilson, the SCC held that “personal liability may be imposed on a director for oppressive conduct if two criteria are met: (1) the director has the requisite degree of involvement in the oppressive conduct so that it is attributable to them; and (2) personal liability is fit in the circumstances.” (para. 33)
The Court noted the situations in which personal liability would be imposed on a director identified in Wilson such as if a director obtained a personal benefit or if a director misused a corporate power. (para. 34)
The ONCA held that the motions judge erred in deciding that the oppression remedy did not disclose a reasonable cause of action. The allegation that Ms. Ross stripped value from the Respondent company knowing of its liabilities was an allegation of unlawful internal corporate manoeuvres against which the corporate appellants as creditors could not protect themselves, as set out in J.S.M. Corporation (Ontario) Ltd. v. The Brick Furniture Warehouse Ltd., 2008 ONCA 183 (paras. 38 and 39)
The ONCA therefore held that the allegation that Ms. Ross striped value from the Respondent company presented an arguable case for a personal remedy against her under the oppression remedy. (para. 41)
The appeal was allowed to permit the Appellants to amend their claim to assert an oppression remedy claim against Ms. Ross personally. The motions judge’s finding that the other claims could not succeed against Ms. Ross personally was upheld. (paras. 43 and 44)