The owner of a corporation faces personal liability under the oppression remedy for stripping assets but not under an action based on piercing the corporate veil. The case of FNF Enterprises Inc. v. Wag and Train Inc., 2023 ONCA 92, explains why a claim for a personal remedy against the owner should be under the oppression remedy.
In the FNF case, commercial premises were leased to a corporation for the use of a canine grooming, training, and day care business. The owners of the premises commenced an action against the corporation and its sole director, officer and shareholder for breach of the lease, alleging that the director stripped value from the corporation and caused the same business to be carried on elsewhere, knowing that amounts were owed by the corporation under the lease. They claimed the director conducted herself in a manner that justified piercing the corporate veil and imposing the corporation’s liabilities on her, while also claiming that she acted in a manner that entitled the owners to relief against her under the oppression remedy in section 248 of the Ontario Business Corporations Act (“OBCA”). The motion judge determined that the statement of claim did not disclose a reasonable cause of action against the director and should be struck out against her without leave to amend.
On appeal, the Ontario Court of Appeal allowed the appeal in part, holding that value stripped from the corporation by the director with knowledge that the corporation had incurred liabilities by breaching its lease was actionable under the oppression remedy rather than the doctrine of piercing the corporate veil. The facts alleged in the statement of claim did not arguably support a claim for piercing the corporate veil.
The Court of Appeal [at paras. 17 and 18] described what is generally required to pierce the corporate veil as follows:
Piercing or lifting the corporate veil is an equitable exception to certain statutory rules. Those rules provide that a corporation is a separate legal person (with the consequence that its property, rights, and obligations are its own, not those of the individuals through whom it acts) and that a shareholder is not liable for any act, default, obligation, or liability of the corporation: … The test for piercing the corporate veil in Ontario is that set out in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. … That case set out a two-part test: “courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct.”
In addressing the improper conduct test and the director’s alleged value stripping, the Court of Appeal stated [at paras. 26 and 27] as follows:
However, it is important to identify what this allegation is and what it is not. As the appellants describe it, the gist of this allegation is that [the director] Ms. Ross stripped value from [the corporation] Wag and Train knowing of its lease liabilities, that is, the amounts it owed by reason of its breach of the lease. It is not alleged that removing value from Wag and Train knowing of the lease liabilities is what gave rise to those liabilities in the first place – they arose because of Wag and Train’s breach of the lease. This is important because it is the lease liabilities that the piercing the corporate veil claim seeks to impose on Ms. Ross … This situation is unlike cases in which courts have pierced the corporate veil given the nexus between the liability the plaintiff sought to recover by piercing the corporate veil and the wrongful conduct directed by the individual in control of the corporation that gave rise to that very liability.
In holding that this kind of link between the alleged wrongful conduct and the liabilities sought to be imposed by piercing the corporate veil is missing, the Court of Appeal suggested [at para. 29] a more suitable remedy, as follows:
To be sure, the alleged value stripping may be conduct that prejudices the appellants, as creditors of the corporation, in their ability to collect the liabilities of Wag and Train that arose from its breach of the lease. But the remedy for conduct that defeats reasonable expectations of a creditor of a corporation is, as discussed below, under the oppression remedy, rather than piercing the corporate veil.
The Court of Appeal then summarized [at para. 31] the two requirements for an oppression remedy claim to succeed:
First, the complainant must identify the expectations it claims have been violated by the conduct at issue and show that those expectations were reasonably held. Second, the complainant must show that these reasonable expectations were violated by corporate conduct that was oppressive or unfairly prejudicial to or that unfairly disregarded the interests of any security holder, creditor, director, or officer: Wilson v. Alharayeri.
In discussing when oppression remedy relief should be granted against an individual director personally, rather than simply against the corporation, the Court of Appeal referred [at paras. 33 and 34] to Wilson as follows:
The Supreme Court held that personal liability may be imposed on a director for oppressive conduct if two criteria are met: (1) the director has the requisite degree of involvement in the oppressive conduct so that it is attributable to them; and (2) personal liability is fit in the circumstances. An order against a director personally will be fit where it is a fair way of dealing with the situation, the order goes no further than necessary to rectify the oppression, the order serves only to vindicate the reasonable expectations of the complainant, and other forms of statutory and common law relief are not more fitting in the circumstances. … In Wilson, the court identified the obtaining of a personal benefit by the director, or the director misusing a corporate power, as situations in which it would typically be fair to impose personal liability on the director.
The Court of Appeal concluded that the allegations set out an arguable case that a personal remedy against the director would be fit. She was alleged to have stripped value in priority to unpaid creditors and thus misused corporate powers to her own benefit, arguably making a personal remedy a fair way of dealing with the situation. The appeal was therefore allowed to permit the appellants to amend their statement of claim to assert their claim for a personal remedy against the director under the oppression remedy.
In light of the foregoing, the FNF case provides guidance as to when a claim for piercing the corporate veil may succeed and when a claim for an oppression remedy may succeed in order to obtain a personal remedy from an individual director, officer or shareholder of a corporation.
Given the allegation in FNF of unpaid amounts owing to creditors, the corporation’s sole shareholder was arguably not entitled to use the corporation’s money as her own or to appropriate its business. Even though a personal remedy was granted against her under the oppression remedy relating to the stripped value, there should still be kept in mind the statutory prohibition on directors who are also shareholders from taking assets in priority to, and to the prejudice of, unpaid creditors. The power of a director to declare a dividend to shareholders is subject to the corporation being able to pay its creditors (see OBCA, s. 38(3)). A shareholder of a corporation does not have a right to the corporation’s assets while it is ongoing but that right arises if and when the corporation is wound up. On winding up, a shareholder’s right to payment or to receive assets is subject to the prior rights of unpaid creditors: (see OBCA, s. 221(1)(a)).
As seen in FNF and so many other cases, unpaid creditors will continue to seek recourse against directors, officers and shareholders of private companies in a variety of ways.
Private Company Law 