Legal Blog

Veil

Individuals often use a corporation to shelter themselves from personal liability. Normally, this is perfectly acceptable and effective. However, sometimes, the use of a corporation is unacceptable and the law goes behind the form to deal with the substance of the relationship. This proposition is demonstrated in two 2013 Ontario Superior Court of Justice cases. The first, Wolf v. Anstett, we have previously discussed (see February 2013 newsletter), but is being updated. The second, Borden Ladner Gervais v. Sinclair, is new.

 

Wolf 

In Wolf, the debtor husband had attempted to evade payment to a creditor by incorporating a corporation with his wife as the sole shareholder and then using the corporation to receive payment for services he rendered to the garnishee employer. Were it not for the corporation, the employer would have paid husband directly and deducted a portion of that payment to satisfy the creditor’s garnishment.

 

The creditor brought a motion to attack the corporation’s interposition. The judge held that the use was a fraudulent gift or preference (husband and wife claimed wife was also a creditor of husband) and ordered that the employer corporation pay all future payments for husband’s services to the creditor pursuant to the garnishment.

 

We noted in our prior newsletter that “the judge dealt with future payments because that is all that the creditor requested.” However, it seems that this was not all that the creditor requested and that the creditor was as surprised with the judge’s decision as we were.

 

Amend

A judge has the authority to amend a decision before the order has been signed and entered as a formal court order. Accordingly, when a litigant realises that the judge may have made a slip or mistake, the litigant should not merely accept the slip and then appeal the decision; rather, the litigant should bring the error to the judge’s attention. When we refer to a “mistake”, we do not mean a decision with which a litigant disagrees, and therefore wants the judge to reconsider; we mean that, given the judge’s reasons for decision, the judge may have made a slip that the judge may wish to correct.

 

The creditor’s motion requested that the corporation and wife pay to the creditor all money that the employer paid to the corporation between the time of the garnishment and the time of the order. The judge agreed that he had failed to appreciate that the creditor had requested this relief.

 

The judge noted that his intent, at the time he made the order, was to ensure that the creditor suffer no prejudice because of what the judge found to be the improper actions of husband and wife. They improperly redirected money to the corporation, and indirectly to wife, money that the employer otherwise would have paid to husband. He noted that if he allowed husband and wife to circumvent the notice of garnishment from the date it was served to the date of the order, he would be rewarding conduct that he found to be akin to fraud.

 

Accordingly, the judge amended his order and rectified his “oversight” to include an order that the corporation and wife pay to the creditor any money received from the date of the notice of garnishment.  

 

Borden

In Borden, a law firm had defended an individual and two corporations (#1 & #2) regarding environmental regulatory charges. The firm delivered 7 invoices totalling $266,000 for its services rendered from 2008 to 2010. The defendants did not pay anything and the firm commenced two actions. The first was against the individual and the corporations. The second was against the individual’s wife. Since the individual and the corporations had no assets, the real claim was against wife.

 

The individual had organised his affairs to make it appear that he owned nothing. He had already been involved in other court actions. The courts had not treated him kindly and had held that he had been involved in various sham transactions involving his son, wife, and controlled corporations.

 

The individual was the sole officer and director of corporation #3. It had the same head office address as corporations #1 & #2. The individual was the sole director of corporation #4. Its head office was the individual’s home. Corporations #3 and #4 each owned a piece of real property.

 

Two transactions were in issue. In December 2010, corporation #3 transferred its real property to wife for a stated consideration of $60,000. In June 2011, corporation #4 granted a mortgage to wife for $300,000. The firm alleged that these transfers were part of a scheme to hide or encumber the individual’s assets with the intent of defeating his creditors. The firm requested that the court pierce the corporate veil and treat the two properties as if they were owned not by corporations #3 and #4, but rather by the individual.

 

Reverse

The firm’s request was unusual. Normally, a court is asked to pierce a corporate veil to attribute corporate debt to the corporation’s directors, officers, and shareholders (e.g. the corporation owes me money, but, because of the facts of the case, the director should pay it personally). In this case, however, the court was being asked to treat the debt of the individual as the debt of corporations #3 & #4.

 

Piercing the court veil is an equitable doctrine whose purpose is to relieve against injustice. A court will exercise its discretion if it appears that those who control the corporation expressly direct a wrongful thing to be done or, put another way, if the corporation is being “completely dominated and controlled and being used as a shield for fraudulent or improper conduct.”

 

The judge decided that if a court has discretion to deploy the doctrine to make a shareholder responsible for a corporate debt, then, logically, the court should be able to deploy the doctrine to make a corporation owning property responsible for its shareholder’s personal debt.

 

The judge found that the individual had used his corporations to transfer and encumber property in favour of wife to perpetrate a fraud on the firm and, in doing so, had violated s. 4(1) of the Assignment and Preferences Act and s. 2 of the Fraudulent Conveyances Act. This convinced the judge to pierce the corporate veil and treat the real properties as if they were owned by the individual.

 

The judge gave judgment against the individual and corporations #1 & #2 for the full amount claimed, declared the transfer and mortgage to wife to be void, and ordered that the judgment be registered against the real properties of corporations #3 & 4 as if the individual actually owned the properties.

 

Remarkable

This remarkable decision has to be tempered a wee bit. None of the defendants defended the actions. Accordingly, all of the firm’s allegations were deemed to have been true. It is not quite that easy in a normal defended action.

 

Regardless, the judge still had to decide, as a matter of law, whether he could grant the requested remedies and, as a matter of law, he decided that he could.