ONTARIO – Corporations – Piercing the Corporate Veil – If corporate entities are completely dominated and controlled by individual debtors and if the corporation is being used as a shield for fraudulent or improper conduct, the court may pierce the corporate veil.

Stevens v Hutchens
2024 ONCA 717 (October 1, 2024)
Ontario Court of Appeal (Miller, Copeland and Gomery JJ.A.)

The appellant, Adroit Advocates LLC, a non-party, an unsecured creditor of both individual and corporate debtors, appealed the motion judge’s distribution order in a receivership. The appellant objected to the motion judge’s approval of a pooled distribution of assets of the individual debtors and three corporate debtors controlled by one of the individual debtors. The result of the approval order was that the appellant had to share the assets held by the corporations on a pro rata basis with two creditors of the individual debtors rather than receiving all of the corporate assets.

Background

A receiver was appointed over the assets and undertakings of Sandy and Tanya Hutchens ( individual debtors) and several corporate debtors of which Tanya Hutchens was the sole shareholder. The individual debtors were found to have engaged in fraudulent lending schemes.(para 3)

The receiver sold 16 properties and undertook tracing of funds to identify assets owned by the individual debtors.(para.4)

The last remaining assets were funds held by the three corporate debtors. At the time of the distribution motion, there were three remaining creditors. Two of the creditors had judgments against the individual debtors. The third creditor, the appellant, was the law firm that represented the debtors and had an unsecured claim for unpaid fees against the individual and corporate debtors. The appellant had the only unsecured claim against the corporate debtors. (para. 5)

The judgment creditors contested the appellant’s priority for the corporate assets on the basis that the remaining corporate assets in the hands of the corporate debtors were received as a result of fraudulent transfers by the individual debtors with the intent of defeating their creditors. (para 6)

The motion judge held that it was appropriate to pierce the corporate veil in order to pool the corporate and individual assets to satisfy the claims against individual and corporate debtors on the basis that the individual debtor Tanya Hutchens controlled the corporate debtors and that she used the corporate debtors to engage in fraudulent transactions to defeat creditors.(para.8) Alternatively, the motion judge held that the pooled distribution was justified on the basis of substantive consolidation.

Analysis

Issue 1 Did the motion judge err in piercing the corporate veil to affect a pooled distribution to creditors of both the individual and corporate debtors.

Issue 2: Was there procedural unfairness in deciding to pierce the corporate veil?

Piercing the Corporate Veil

The motion judge found that the corporations were controlled by the individual debtor Tanya and that she used the corporations to fraudulently transfer funds to defeat creditors and that the remaining assets held by the corporations were derived solely from the proceeds of fraud. The ONCA found no error in these findings and noted the findings were supported by the tracing carried out by the receiver. (para.14)

When both elements are present the corporate veil will be lifted to prevent the individual who engaged in the conduct from asserting that the liabilities or fraudulent or improper conduct are those of the corporation only.

The motion judge applied the two-part test in for piercing the corporate veil as set out in FNF Enterprises Inc. v. Wag and Train 2023 ONCA 92, which referred to the test as set out in the Transamerica Life Insurance Co of Canada v Canada Life Assurance Co.(1996) case and recognized that the starting point in considering claims against the individual debtors and corporate debtors was the separate legal personality of the corporate debtors. (para.12)

The ONCA held that the motion judge correctly set out the FNF Enterprises test and correctly considered whether the corporate entities were completely dominated and controlled by the individual debtors and whether the corporation was being used as a shield for fraudulent or improper conduct. (para. 12)

The ONCA found that the motion judge also correctly considered that to make a corporation responsible for the shareholder’s debts, the shareholder must have fraudulently used the corporation to avoid the shareholder’s personal obligations. (para. 13)

Procedural Unfairness

The ONCA rejected the appellant’s argument that it was procedurally unfair of the motions judge to consider piercing the corporate veil on a motion for directions.

The ONCA held that one of the functions of a court-appointed receiver is to establish a summary procedure for determining the validity and quantum of a creditors claim so they are determined in a single proceeding. A court may make a summary determination of creditor rights on a motion for directions as long as there are no genuine issues for trial.(para. 16)

There was no dispute about the results of the receiver’s tracing which formed the basis of the motion judge’s finding that the assets held by the corporate debtors were solely derived from fraudulent transactions designed to defeat creditors.( para.17)

The ONCA held that there was no error and no unfairness to the appellant as a result of the pooled funds distribution as the assets in the corporations’ hands were fraudulently transferred to the corporations to defeat creditors of the individual debtors and accordingly, the appeal was dismissed. (para.18)