Will a Parent Company be Bound by a Judgment Against a Dissolved Subsidiary

In the corporate world, incorporating a business might result in one corporate entity owning another. While this will not always directly impact the business’s day-to-day operations, it can affect things behind the scenes. In a recent case before the Court of Appeal of Alberta, the company responsible for building a condominium was dissolved before it was found liable for faulty construction, and the Court was asked to determine whether the parent corporation, which wholly owned the dissolved company, was bound by the judgment against them.

Condo corporation sues company who constructed building

Condominium Corporation No. 0828219 v Carrington Holdings Ltd. involved three different businesses: the appellant condominium corporation, the respondent “parent company” corporation, and the wholly owned subsidiary “construction company.” The construction company was a single-purpose corporation that was the developer of the condominium building. Both the parent company and construction company had common directors and officers.

The issues in this case arose due to allegations by the condominium corporation of faulty construction by the construction company. On January 31, 2018, while litigation was ongoing between the condominium corporation and the construction company, the construction company was dissolved. Less than one month later, counsel for the construction company withdrew from the record.

Condominium corporation successful in application for summary judgment

Following these events, the condominium corporation brought an application for summary judgment against the construction company but not against the parent company. The matter was heard on June 4, 2018, at which time the condominium corporation was advised for the first time that the construction company had been dissolved. At the hearing, counsel appeared on behalf of the parent company but not on behalf of the construction company. The lawyers who appeared on behalf of the parent company had previously represented the construction company.

The condominium corporation was successful in its motion, and the application judge awarded damages of $112,000 plus costs due to construction deficiencies.

Condominium corporation commences action against parent company

The condominium corporation subsequently brought a second action against the parent company, who they claimed was a “developer” of the building under the Condominium Property Act. The condominium corporation asked the Court to find that the parent company was also liable for the deficiencies in the building and the obligations of the construction company.

On March 4, 2020, the condominium corporation brought an application for a declaration under the doctrine of res judicata, seeking to merge the judgment against the construction company with the parent company. The condominium corporation also argued that the parent company should be precluded from raising defences about their liability in the matter.

The Chambers judge who originally heard the matter stated that res judicata did not apply in these circumstances because the parent company and the construction company were distinct legal entities. Therefore, the parent company could raise a defence for itself.

What is res judicata?

Res judicata is a common law principle that seeks to ensure that litigation reaches a conclusion and that all parties involved are aware that the issue has been resolved. This can be applied through issue estoppel, whereby an issue that another court has decided cannot be re-litigated. Alternatively, cause of action estoppel precludes the litigation of a cause of action that was already heard by a court. A court may also find that res judicata applies even when litigation might not fall squarely into just one type of estoppel.

The Court noted that in this case, there was potential for an inconsistent judgment against the parent company and the construction company, as well as separate findings of building deficiencies and the damages that should be awarded because of them.

Companies are two separate legal entities

The Court considered the separate corporate personalities at play. Under corporate law, one company is not liable for the debts or obligations of the other, regardless of whether one company is “completely controlled” by the other. The Court explained there can be instances where the child corporation is a sham or an alter-ego of the parent corporation; however, this was not the case in the matter at hand.

Turning to the question of whether res judicata applies when a subsidiary corporation is dissolved, the Court found that:

“The shareholders of a corporation cannot strip the corporation of its assets, leaving behind its debts. However, the liability of the shareholder after dissolution is limited to the assets it received from the subsidiary. That is consistent with the concept of the separate corporate personality.”

Court allows parent company to defend itself

The parent company told the Court that it did not dispute liability for the judgment granted against the construction company and acknowledged that it could not dispute the liability of the construction company. However, it did ask the Court to allow it to defend itself against the second action brought by the condominium corporation. The parent company argued that it planned to take the position that it was not a developer and had no legal obligation to the condominium corporation.

The Court determined that allowing the parent company to defend itself meant the judgment against the construction company would be somewhat undermined, given the possibility of separate findings with respect to the extent of the deficiencies and costs associated with the construction of the building.

The Chambers judge had ruled that res judicata did not apply in this case because the two companies were distinct legal entities. The Court of Appeal agreed with this finding, stating that “it is in the interests of justice to allow (the parent company) to defend itself on the merits,” and it was not an abuse of process to allow it to do so. The Court of Appeal subsequently dismissed the condominium corporation’s appeal.

Contact DBH Law in Calgary for Advice on Corporate Disputes

The experienced business lawyers at DBH Law have extensive experience advising corporate clients on their rights and responsibilities in business law disputes. Our lawyers work closely with clients to foster strong relationships and ensure that they have the information and advice they need at every step of the litigation process. Whether you have questions about incorporation, commercial litigation, or construction disputes, we are here to help. We take a pragmatic approach and strive to provide clients with cost-effective, practical solutions tailored to their specific needs. Contact us online or call us at 403.252.9937 to schedule a consultation with a member of our business law team.