The law sees each corporation as a unique and distinct person. Corporations are recognized as separate legal entities from their officers, directors and shareholders. On the other hand, corporations are also described as legal fiction because they cannot take action unless an individual acts on their behalf.
Generally, if a corporation is sued and has insufficient assets to satisfy a judgment against them, the party seeking a remedy will be at a loss. In most cases, an individual who acts on behalf of a corporation is not liable for actions or debts incurred by the corporation. For these reasons, business owners choose to incorporate to avoid personal liability. However, there are instances when a corporate veil will be pierced, and those behind the corporation can be found personally liable.
Exceptions to avoiding personal liability
Personal liability may be imposed on individuals who act on behalf of corporations in a variety of situations. In employment law, directors of a corporation may be personally liable for the payment of employee wages. In construction disputes, the individuals in control of a corporation may be personally responsible for misappropriated trust funds concerning a construction project.
While the law generally protects business owners, the protection is not absolute. The Court of Queen’s Bench (now the Court of King’s Bench) in UBG Builders Inc. (Re) held that a corporate veil might be pierced if a person has engaged in improper conduct, such as fraud, or in instances where a corporate actor and the individual behind the corporation are an “alter ego” of each other. Generally, there is a reasonable chance of lifting the corporate veil in circumstances where:
- the corporation is incorporated for a fraudulent or improper purpose,
- the corporation is being used to shield fraudulent or improper conduct, or
- the individuals who control the corporation direct that a wrongful act be taken by the corporation.
Striking a Balance Between the Circumstances and the Interests of Justice
In Vila Holdings v. Rivnell Projects Inc., the Court of Queen’s Bench (as it was then) noted that the courts must consider all the circumstances and the interests of justice before piercing the corporate veil. Justice Neufeld affirmed that there are several factors for the courts to consider, including:
“(a) the shareholder treats itself and the corporation interchangeably;
(b) the corporation is merely intended to deflect monies from their proper usage;
(c) the shareholder intermingles the corporations affairs with its own, such that the shareholder fails to recognize the corporations separate identity; and
(d) the shareholder treats the corporation’s property as though it belongs to the shareholders without regard for the interest of those dealing with the corporation.”
Piercing the Corporate Veil in Construction Law Disputes
Last year, the Alberta Court of Queen’s Bench (now the Alberta Court of King’s Bench) affirmed the test for piercing the corporate veil in the construction law context. In Parks v. McAvoy, the Court was required to determine whether the director of a general contracting corporation could be held personally liable for damages which occurred when said director performed work on the project at the heart of the dispute.
The plaintiff homeowner filed a claim for fraud, deceit, and breach of trust against the defendant corporation and director regarding the accounting for the project. In reviewing the evidence, the Court noted that the invoices were issued by the corporation and not the director personally. Further, payment for the invoices was deposited into the company’s corporate bank account. Despite statements made by the director that he would “work day and night”, the Court held that the director was not a personal party to the contract and the evidence was insufficient to establish personal liability by the director.
Negligence of Corporation and Director are One in the Same
The Court ultimately held that a director will not be held personally liable for the company’s torts or breaches in most circumstances. Further, in order to establish personal liability, a plaintiff will bear the onus of proving that a director acted outside of their duties. In her decision, Justice Hollins referred to the case of Stewart v. Enterprise Universal Inc., which stated that:
“… the legal test is clear. The Directors in this case must either have done something that is tortious in itself or have done something that is independently tortious, such that they exhibited a separate interest from Enterprise and in doing so made the tort their own…”
Convincing the court to pierce a corporate veil requires a high threshold of evidence to establish that an individual should be held personally liable.
Contact the Business Lawyers at DBH Law in Calgary for Effective Representation in Commercial Litigation Matters
The corporate lawyers at DBH Law in Calgary provide clients with trusted advice with respect to commercial disputes and construction litigation. Our lawyers ensure that clients understand the legal processes and are aware of their options at each stage of litigation. Our team works quickly to develop satisfactory solutions to complex issues. To arrange a confidential consultation, reach out to us online or call our office at 403-252-9937.