The Corporate Veil is a well-established legal principle that shields individual owners from personal liability for a corporation’s debts or legal obligations. However, when this framework is used to help business owners avoid accountability for criminal or fraudulent behaviour, the courts may hold individuals responsible for the actions or liabilities of their company.
When Will A Court ‘Pierce’ The Corporate Veil?
In Ontario, there are three specific circumstances or criteria where a court will remove the limited liability that company owners enjoy.
- Domination Theory; when a principal shareholder, who exercises full control over the business, uses it for improper purposes
- Agency Theory; when a corporation becomes an agent for the improper interests or aims of controlling shareholders
- Flagrant Opposition to Justice Theory; when failing to pierce the veil would lead to a legal result that is flagrantly unfair or unjust
In the first two cases, the corporation must function as an alter ego or puppet entity of the individual — it is not enough to just show ownership or control. Note that a court will not pierce the corporate veil for mere misconduct, but only for misconduct that led to the liabilities and from which the corporation would otherwise shield the individual owner.
In any case, it is incumbent on the plaintiff to clearly demonstrate domination or fraud.
Common Offenses
The courts will not typically pierce the corporate veil for contract breaches or ordinary failures of the company. Some of the most common reasons include:
- Sham corporations; the company was incorporated in order to carry out illegal or fraudulent activity
- Fraudulent asset stripping; the owner intentionally empties out or improperly transfers company funds in order to avoid paying company debts
- Intermingling finances; the owner treats the business’ bank account and their personal bank account interchangeably
- Equalization disputes; a spouse uses their corporation during a divorce to shield personal assets from equalization
There is typically a high threshold for a court to pierce the corporate veil. In Ontario, the courts have commonly ruled that business owners are personally liable in cases of fraud, even if acting in their capacity as a business owner.
There are other mechanisms more commonly used including the Statutory Oppression Remedy which, under Section 248 of the Ontario Business Corporations Act, allows minority shareholders to sue directors of the corporation for improper conduct.
Do you have a question or situation you’d like to speak to a lawyer about? Contact us today for a consultation.
* Please note that the information in this article is not intended as legal advice, but rather as a general overview on the subject. If you are seeking legal advice, please consult with a lawyer.
