Facts alleged do not arguably support claim for piercing corporate veil, ruling says
The decision of a corporation’s sole shareholder to strip value from the corporation while knowing that it had liabilities arising from the breach of a lease could entitle a claimant to relief under the oppression remedy, a recent ruling said.
In 2015, the appellants – FNF Enterprises Inc. and 2378007 Ontario Inc. – leased its commercial premises in Kitchener, Ontario to the corporate respondent, Wag and Train Inc. Wag and Train used the premises for its canine grooming, training, and day care business.
In 2020, the appellants filed a statement of claim against Wag and Train and against the individual respondent, who was the corporation’s sole director, officer, and shareholder. They claimed that the respondents abandoned the premises about a year before the end of the term on Mar. 31, 2021, failed to leave the place in the condition required by the lease, and failed to pay further rent.
The appellants alleged that the individual respondent:
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controlled Wag and Train and made the decisions amounting to the corporation’s breach of the lease
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engaged in conduct that justified piercing the corporate veil and imposing the corporation’s liabilities on her
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acted in a way that entitled the appellants to relief under the oppression remedy in s. 248 of Ontario’s Business Corporations Act, 1990
Last May, Justice James Ramsay of the Ontario Superior Court of Justice struck out the action against the individual respondent under r. 21.01(1)(b) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. The judge refused leave to amend and found it plain and obvious that the action could not succeed against the individual respondent personally.
In FNF Enterprises Inc. v. Wag and Train Inc., 2023 ONCA 92, the Ontario Court of Appeal allowed the appeal to the extent of permitting the appellants to amend their action to assert their claim for a personal remedy against Ross under the oppression provision.
Corporate veil claim fails
The facts alleged in the statement of claim did not arguably support a claim for piercing the corporate veil, even if read generously, the appellate court said.
According to Said v. Butt, [1920] 3 K.B. 497, a director’s or officer’s decision that a corporation should breach a contract did not amount to improper conduct that justified piercing the corporate veil, at least where the director or officer could not be sued for the tort of inducing contractual breach.
Oppression remedy claim is arguable
The appellants’ allegation – that the individual respondent misused corporate powers for her own benefit by stripping value from Wag and Train to avoid payment of amounts that she knew were owed to the appellants as unpaid creditors – arguably supported the oppression remedy claim, the appellate court said.
J.S.M. Corporation (Ontario) Ltd. v. The Brick Furniture Warehouse Ltd., 2008 ONCA 183 distinguished between a situation where the creditor could but did not protect itself from a risk that it assumed when it entered into an agreement with a corporation and a situation where unlawful and internal corporate manoeuvres against the creditor’s interest prevented the creditor from effectively protecting itself. In the second situation, there was more room for relief under the oppression remedy.
The appellants’ claim fell under the second situation, the appellate court said. The individual respondent, as sole shareholder, could not use the corporation’s money as her own and could not appropriate its business when she knew about the unpaid amounts allegedly owed to creditors, the appellate court added.
