Canada: The Corporate Veil Won't Cover Personal Misrepresentations

Co-authored by Victoria Mitrova, Student-At-Law

Honesty is the Best Policy

In the recent case of Meridian Credit Union Limited v Baig,1 the Court of Appeal considered the duties owed by various parties to be honest and to not mislead each other during the course of real estate transactions. The Court of Appeal emphasized the obligation purchasers owe to be clear about all of the facts relevant in a transaction. Moreover, the Court of Appeal affirmed that corporate directors can be held liable for fraudulent misrepresentations made during the sale of a property.

Facts

The appellant, Ahmed Baig, agreed to purchase a property from a court-appointed receiver for approximately $6.2 million. Before the transaction closed, Mr. Baig acquired another buyer, Yellowstone Property Consultant Corp. ('Yellowstone") who was willing to purchase the property from him for $9 million. Mr. Baig retained the help of a legal firm and had a lawyer at the firm assist with this second transaction.2

The receiver required court approval before selling the property. However, the receiver was unaware of the second agreement and would not have recommended approval of the sale to Mr. Baig had they known.3

Both Mr. Baig and his counsel did not wish for the receiver to know about the agreement with Yellowstone as the large price differential would jeopardize the first sale. Mr. Baig's counsel further suggested that the title to the property should be transferred to Yellowstone directly to avoid a land transfer tax. As a result, Mr. Baig's lawyer told the receiver to direct the title to Yellowstone on closing. The receiver assumed that Yellowstone was Mr. Baig's corporation; neither Mr. Baig nor his counsel ever corrected this assumption. Mr. Baig's lawyer also provided the receiver with documents in which Yellowstone was falsely listed as the purchasing corporation.4

While still believing in these misrepresentations, the receiver obtained court approval of the sale. Three years later, one of the creditor banks, Meridian Credit Union Limited ("Meridian") discovered the re-sale.5

Meridian commenced a legal action against Mr. Baig, claiming that he had misrepresented Yellowstone's status as a corporation when purchasing the property. Meridian sought an accounting for the profit made on the re-sale to Yellowstone, or in the alternative, damages of approximately $2.1 million for breach of contract, fraudulent misrepresentation, and conspiracy.6

On a motion for summary judgment, the motions judge found Mr. Baig liable for fraudulent misrepresentation. The motions judge held that Mr. Baig was liable for the misrepresentations made by his lawyers in the documents provided to the receiver. Additionally, the motions judge concluded that Mr. Baig was liable for his own personal conduct in failing to correct the misimpression that Yellowstone was a corporation he had created for the sale.7

On appeal, the Court of Appeal upheld the motions judge findings and found that Mr. Baig was personally liable for making fraudulent misrepresentations.8

The Claim for Civil Fraud

The Court of Appeal found that all four elements required to prove a claim for civil fraud were established in this case.

  1. Mr. Baig made a false representation.

    Both Mr. Baig and his counsel actively hid the second agreement by misrepresenting Yellowstone as a company incorporated by Mr. Baig to close the sale. As part of the ruse, Mr. Baig personally signed a title direction that falsely identified Yellowstone as the purchaser.9

    While the motions judge acknowledged that Mr. Baig had no duty to disclose the second sale, once his lawyers knowingly misled the receiver about the nature of Yellowstone's involvement, Mr. Baig's failure to correct the misimpression amounted to fraudulent misrepresentation.10

  2. Mr. Baig had some level of knowledge about the falsehood of his representations.

    Mr. Baig signed a title direction while knowing it was false. Mr. Baig further knew that the two sales were being represented as one to avoid paying land transfer tax. He also knew that the receiver was told to transfer the title to Yellowstone while wrongly believing it was Mr. Baig's company.11

  3. The false representation led to the receiver approving the sale.

    The Court of Appeal found that the misrepresentations led the receiver to seek court approval for the sale and to transfer the title directly to Yellowstone. Had the receiver known about the true nature of the sale, the receiver likely would not have recommended court approval.12

  4. The receiver suffered a financial opportunity loss.

    As a direct result of these misrepresentations, the receiver lost an opportunity to negotiate a higher sale price either with Mr. Baig or another party. This loss was enough to ground a claim in civil fraud.13

Personal Liability: Piercing the Corporate Viel

Mr. Baig argued that the motions judge had erred in finding him personally liable as he was protected by the corporate veil.14

...the corporate veil was inapplicable since Mr. Baig had made the fraudulent representations in his personal capacity.

The Court of Appeal disagreed. In his reasons, the motions judge had implicitly found the corporate veil was inapplicable since Mr. Baig had made the fraudulent representations in his personal capacity.15 The Court of Appeal supported this conclusion, reiterating that "in all events, officers, directors, and employees of corporations are responsible for their tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the company."16

Court of Appeal found that the corporate veil did not offer Mr. Baig protection for three reasons:17

  1. Mr. Baig's corporation never took title in the property, never had any dealings with the receiver, and was never a part of the transaction;
  2. Mr. Baig had signed the title direction in his name, and made no reference to his corporation; and
  3. Mr. Baig's lawyer stated that he was counsel for Mr. Baig, and not for his company.

At no point in time did Mr. Baig's actions represent those of his corporation. Therefore, he could not rely on the protection of the corporate veil.18

Conclusion

The Court of Appeal in Meridian reiterated that corporate directors can be held personally liable for failing to correct misrepresentations that detrimentally affect another party during a real estate transaction. Corporate directors need to be forthright in their dealings with other parties and must ensure that everyone is aware of all of the facts before proceeding with a sale. In circumstances such as this case, a corporate director's mere silence and/or half-truths can amount to fraudulent misrepresentation. More broadly, the Court of Appeal affirmed that corporate directors are responsible for their tortious conduct, and cannot claim the protection of the corporate veil for their personal actions.


12016 ONCA 150 [Meridian].
2Ibid at paras 5-9.
3Ibid at para 8.
4Ibid at paras 10-12.
5Ibid at paras 2, 14.
6Ibid at paras 15-16.
7Ibid at paras 18-19.
8Ibid at para 58.
9Ibid at para 28.
10Ibid at para 29.
11Meridian, supra note 1 at paras 31-32.
12Ibid at para 33.
13Ibid at paras 34.
14Ibid at para 36.
15Ibid at paras 36-38.
16Ibid at para 39.
17Ibid at para 38.
18Ibid at para 39.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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