When Can a Corporation’s Director, Officer, or Shareholder Be Personally Liable?Team
Does a corporation have its own separate legal identity? This means a corporation’s existence, legal obligations, and liabilities are distinct from its directors, officers, and shareholders. As a result, a company’s directors, officers, and shareholders are usually not legally liable for its actions and legal obligations.
This separation between a company, its management and its shareholders is commonly referred to as the “corporate veil”. It allows the courts to attribute a corporation’s actions to the corporation itself, and not the individuals who necessarily must act on behalf of the corporation.
In limited circumstances, courts look beyond a corporation’s separate legal identity and assign personal liability to individual decision-makers for actions taken by the corporation. This is the piercing of the corporate veil in corporate and commercial litigation. Piercing the corporate veil is an invaluable tool to seek remedies that would otherwise be unavailable against the corporation itself.
What Is Piercing the Corporate Veil?
Piercing the corporate veil is an approaching court may take to peer beyond the corporation’s separate legal existence to find the company’s management or shareholders responsible for their wrongful acts disguised as the company’s.
In corporate or commercial litigation, the courts will typically pierce the corporate veil when the company is found to be “incorporated for an illegal, fraudulent or improper purpose and is a mere façade concealing the true facts.”
For instance, the court may pierce the corporate veil if a party demonstrates that the corporation’s ability to incorporate was abused by the directors to commit illegal actions for personal gains. One example is a director incorporating a new business and moving assets from an old business to avoid a legal claim against the old business.
Piercing the corporate veil in commercial litigation is less difficult when there is a single director, officer and/or shareholder acting as the “controlling mind”.
The overarching purpose of the court piercing the corporate veil is to prevent individuals from abusing a corporation’s separate legal identity as a shield from personal liability.
When Are Directors Personally Liable?
A company’s directors manage and control its operations subject to the law, its corporate articles, and its by-laws. In most cases, a company’s directors act on its behalf and the directors’ actions are legally the company’s.
If the directors fail to perform their duties and meet their personal obligations, the courts may pierce the corporate veil and hold the company’s directors personally liable.
In commercial litigation, piercing the corporate veil and the personal liability of directors for damages may arise if a plaintiff successfully shows:
- Breach of statutory duties owed by a director;
- Fraud and misrepresentation;
- Violation of criminal and quasi-criminal acts;
- Misappropriation of corporate funds;
- Serious tortious conduct attributable personally to the directors, such as breach of contract or intentional infliction of mental distress;
- Oppression under provincial or federal corporate statutes; and
- Other wrongful conduct engaged in by a director with substantial and majority control over the corporation.
The courts have frequently held piercing the corporate veil and holding directors, officers and/or shareholders personally liable are appropriate in “exceptional cases that result in flagrant injustice.” Such exceptional cases include:
- when the company’s incorporation is for an illegal, fraudulent, or improper purpose;
- where those in control of the corporation have expressly directed a wrongful act to be done; and
- where the company is completely dominated and controlled and is used as a shield for fraudulent or improper conduct.
While litigating a corporate or commercial dispute, the plaintiff must draft their claim properly to prove all the elements required to pierce the corporate veil. If a plaintiff fails to properly lay out the material facts in their case, the court may deny them the right to move forward with their claim.
Given the high threshold required for piercing the corporate veil, the courts routinely dismiss vague and unsupported claims for piercing the corporate veil and hold directors personally liable.
Incorporation and its distinct legal identity are useful tools for lowering the risk to engage in business. However, a corporation’s directors, officers and shareholders cannot hide behind the corporation’s separate legal identity to shield themselves from liability for fraudulent, deceitful, or other wrongful actions.
Asking a court to disregard a corporation’s distinct legal identity is a time-tested legal strategy to hold directors, officers, and/or shareholders responsible for their wrongdoing in corporate and commercial disputes.
Whether you want to pursue piercing the corporate veil or defend against it, a corporate and commercial litigation lawyer can be essential to maximize the chances of success.
Whether you are pursuing a claim for or defending against personal liability for allegations of illegal, fraudulent or improper conduct, our team of commercial litigation lawyers are eager to help. Contact us at 1-800-771-7882, or email [email protected] and we would be happy to assist.