Can a director be personally liable to creditors for stripping assets out of a company after breaking off a contract?
A recent judgment of the Ontario Court of Appeal in FNF Enterprises Inc. v. Wag and Train Inc. (Wag and Train), confirms "yes", while clarifying the distinction between piercing the corporate veil to reach shareholders and simply holding directors individually accountable through the oppression remedy. In Wag and Train, the court allowed a landlord (i.e. creditor) to pursue an oppression claim against a corporate director for stripping assets out of a company (in which she was also the sole shareholder) after breaching the applicable lease agreement for non-payment. However, at the same time, the court reaffirmed the principle of "corporate separateness" by not, on the facts at hand, allowing the creditor to pierce the corporate veil to reach the individual in their capacity as a shareholder.
Small Corporation Defaults on Commercial Lease
The defendant in Wag and Train was a small corporation (the "Corporation") with a single director, officer, and shareholder. After leasing a commercial property for a number of years, the defendant corporation abandoned the property and quit paying rent with about one year remaining in the lease term. According to the landlord, the director/shareholder then stripped all the assets from the company and moved them to a new business enterprise at a new location outside of the Corporation.
With little hope of recovering damages from the now-gutted Corporation, the landlord filed a claim against the director/shareholder trying to hold her personally liable for the default. The trial court refused to allow the landlord to pierce the corporate veil or to seek relief under the oppression remedy provisions of Section 248 of the Business Corporations Act. However, the Court of Appeal overturned part of the decision and allowed the oppression claim to succeed.
Why The Oppression Remedy Claim Was Successful
The Court noted that while the corporation may have entered into the lease for valid business reasons, the director's actions in divesting corporate assets to avoid paying for the lease was not a legitimate business decision. Creditors, explained the court, should be able to reasonably expect directors to fulfill their duty not to divert corporate assets out of their reach. "The oppression remedy is available to address corporate conduct that defeats the reasonable expectations of corporate creditors as a class of corporate stakeholders eligible to use the oppression remedy," the Court concluded. In summary, personal liability may be an appropriate remedy when a director takes "oppressive steps" that benefit them personally while harming a corporation's stakeholders, which includes its creditors.
Observations
The Court of Appeal agreed with the lower court that the landlord did not have a remedy against an individual shareholder. To pierce the corporate veil, the court noted, required that the liability stem from fraudulent or improper conduct. In this case, the source of the liability was simple breach of a valid commercial lease entered into for legitimate business purposes.
In Wag and Train, the Court affirmed both that shareholders are not likely to be liable for corporate obligations, but also that directors can be personally liable when they strip a corporation of its assets for what the court finds to be oppressive reasons: defeating the claims of corporate creditors, legitimate stakeholders of the corporation.
The Court of Appeal's decision may raise many questions about the potential for personal liability for corporate directors and even shareholders. Members of our Business Law group would be happy to discuss concerns or strategies with you.
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