In claims involving corporations, "veil piercing" can be transformative. It refers to situations where the court ignores the separate legal identity of the corporation, arguably the central concept in corporate law, and holds the corporation's shareholders or directors personally liable for the company's actions. Two recent cases, BH Frontier Solutions Inc. v. 11054660 Canada Inc. (Canadian Choice Supply), 2024 ONCA 93 ("BH Frontier") and Chu De Québec-Université Laval v. Tree of Knowledge International Corp., 2024 ONSC 3541 ("TOKI"), offer an interesting contrast in whether and how courts decide to pierce the corporate veil. I recently wrote about the TOKI case here, so let's start with a discussion of the more recent BH Frontier decision from the Court of Appeal for Ontario.
The BH Frontier Case: Piercing the Veil
In BH Frontier, the Court of Appeal upheld the trial judge's decision to pierce the corporate veil, holding the individuals behind the corporation personally liable. Essentially, the court found that the corporate structure was being used as a facade to shield wrongful conduct.
Specifically, the individuals were found to have:
- knowingly and intentionally misrepresented to the plaintiff buyer that they had a "factory direct" relationship with an overseas supplier;
- completely controlled the defendant corporation that was liable for the breach of contract; and
- "hid behind their company, [Canada Choice Supply], and used deceit to manipulate the Plaintiff into entering and Agreement."
The Court of Appeal held that the trial judge was therefore entitled to find the individuals' fraudulent misrepresentations "conduct akin to fraud" sufficient to satisfy the test for veil piercing in 642947 Ontario Ltd. v. Fleischer (2001), 56 OR (3d) 417 (CA) ("Fleischer"): "(a) complete domination of the company by its owners, and (b) conduct akin to fraud."
On appeal, the Court of Appeal rejected the appellants' argument that in doing so, the trial judge had conflated fraudulent misrepresentation with civil fraud, and therefore misapplied the test for veil piercing. The Court of Appeal was emphatic that "conduct akin to fraud" could include deliberate fraudulent misrepresentations.
The TOKI Case: Upholding the Veil, Despite Direct Personal Liability
In contrast, the TOKI case resulted in the Court deciding not to pierce the corporate veil. Here, the Court found that:
- despite the individual behind the corporation, Caridi, making "several false representations which resulted in [the Plaintiff]'s valid claim for deceit" the Plaintiff knew at all times it was "dealing with Caridi in his capacity as an officer and director of TOKI"; but
- even though "TOKI was dominated by Caridi as the sole director," there was "no evidence that TOKI was a sham corporation incorporated for 'an illegal fraudulent or improper purpose', nor was TOKI 'being used as a shield for fraudulent or improper conduct'."
The Court's decision in TOKI was based on the absence of factors that justify veil piercing. As the Court put it: "TOKI was created for a legitimate corporate purpose with the knowledge and awareness of the board of directors of [TOKI's parent] TOK Corp. – to engage in non-ordinary course transactions which were generally speculative in nature, the profits of which would be shared with TOK Corp".
Instead, the Court held Caridi personally liable based upon an independent cause of action because Caridi's conduct was found to be tortious, separate and apart from anything the corporation did. The Court therefore found it unnecessary to determine whether TOKI's fraudulent misrepresentations amounted to a "wrongful thing to be done" under the test in Fleischer.
Comparing the Two Cases
On the one hand, TOKI highlights the protective power of a well-maintained corporate structure. But it also shows that even corporate law formalities do not preclude personal liability where the actions of the individuals involved are tortious in themselves. Arguably, a similar approach could have been taken in BH Frontier even if the test for veil piercing had not been satisfied.
Taken together, what the two cases emphasize are the alternative theories that can independently ground personal liability. Such independent grounds can arise from the same facts and are not mutually exclusive. As such, prudent counsel should consider pleading all such alternative theories and not simply relying exclusively on veil-piercing or direct personal liability of directors and offices on their own.
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