The Court of Appeal for Ontario recently clarified the circumstances in which courts will pierce the corporate veil to find a director personally liable. In Shoppers Drug Mart Inc. v 6470360 Canada Inc.1, the court took the opportunity to address current Ontario law regarding the personal liability of directors. The implications of its decision are potentially far-reaching.
The parties and their agreement
Shoppers Drug Mart Inc. contracted with a consulting company called Powerhouse Energy Management Inc. to manage its utilities nationally (the Contract).
Termination of the Contract
As set out by Justice Morgan of the Ontario Superior Court of Justice, Shoppers received an anonymous phone tip that the funds it was paying Powerhouse were being used other than to pay its utility bills.2 Thereafter, Shoppers sent a notice of termination of the Contract to Powerhouse. The parties then entered into a transition agreement, which provided mutual confirmation of termination of the Contract. The transition agreement acknowledged that Shoppers had reconciled its accounts prior to the date of the notice of termination, and Powerhouse would cease to process and pay Shoppers' utilities bills as of that same date.
The disputed million
One week prior to delivering its letter of termination, Shoppers had transferred $1.3 million to Powerhouse pursuant to the agreement. Powerhouse, under the direction of Beamish, the company's director, moved that money into an operating account that was used to pay Powerhouse's expenses rather than keeping it in the clearing account it usually paid Shoppers' bills from.
Powerhouse did not pay any of Shoppers' utility bills after the date of notice of termination even though the $1.3 million remained in its account. A few weeks later, Shoppers received its first notice of default from its utilities providers in respect of unpaid invoices. Shoppers then brought a motion for summary judgment against both Powerhouse and Beamish, in his personal capacity, seeking repayment of the remaining funds it alleged had been misappropriated. Beamish responded with two motions to dismiss the action.
Lower court decision
Justice Morgan granted Shoppers' motion for summary judgment against Powerhouse, finding that Shoppers had satisfied the test for unjust enrichment. In so deciding, he held that Powerhouse was enriched by the misappropriation of funds, Shoppers had suffered a corresponding deprivation, and there was no juristic reason for Powerhouse's enrichment.
Regarding Shoppers' claim against Beamish personally, Justice Morgan refused to pierce the corporate veil and held that Beamish was not liable for the unjust enrichment. He found that, on the evidence, Beamish acted in his corporate capacity and for Powerhouse's benefit.
The Court of Appeal
Shoppers appealed the lower court's decision, and the Court of Appeal reversed the finding that Beamish was not personally liable. Powerhouse also cross-appealed the summary judgment decision against it, but the court declined to set aside Justice Morgan's decision in that respect. The court affirmed that its earlier decision in 642947 Ontario Ltd. v Fleischer3 is the leading case on piercing the corporate veil in Ontario. In that case, Justice Laskin summarized the law as follows:
Typically, the corporate veil is pierced when the company is incorporated for an illegal, fraudulent or improper purpose. But it can also be pierced if when incorporated "those in control expressly direct a wrongful thing to be done": Clarkson Co. v. Zhelka at p. 578. Sharpe J. set out a useful statement of the guiding principle in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 28 O.R. (3d) 423 at pp. 433-34 (Gen. Div.), affd [1997] O.J. No. 3754 (C.A.): "the courts 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."4
In its review of the law, the Court of Appeal confirmed its inherent discretion to pierce the corporate veil where warranted. The Court of Appeal applied the test from Fleischer to the facts in Shoppers, and found that there was no doubt Beamish was the directing mind of Powerhouse and he caused Powerhouse's misappropriation of Shoppers' funds and the ensuing unjust enrichment. The court emphasized that Beamish had sole signing authority over the accounts in question and had expressly directed the misappropriation. For those reasons, the Court of Appeal held that Beamish was personally liable.
The takeaway
The implications of this case are wide-reaching: Where a director or officer directs a "wrongful thing to be done," he or she may be held personally liable.
The author wishes to thank Dana Carson, articling student, for her help in preparing this legal update.
Footnotes
1 2014 ONCA 85 [Shoppers].
2 2012 ONSC 5167 at para 20.
3 (2001), 56 OR (3d) 417 [Fleischer].
4 Fleischer at para 68.
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