October 10, 2023
What do you do if your tenant (or any other creditor) fails to pay you after the controlling shareholder/director has stripped all the cash out of the company?
Suing the corporation is not productive. You want to sue the person with the money.
But what do you sue them for?
The Ontario Court of Appeal gives some guidance in FNF Enterprises Inc. v. Wag and Train Inc..
In order to sue a corporate director for the actions of the corporation (failure to pay rent), it is necessary to meet a strict test known as “piercing the corporate veil”. This is because corporations are “persons” in law and responsible for their own actions. Because directors must make decisions for corporations, they are usually protected from liability to creditors. This is basic corporate law.
Piercing or lifting the “corporate veil” to sue that director requires meeting a two-part test:
- Where the corporate entity is totally dominated and controlled by the individual and
- The corporation is being used as a shield for fraudulent or improper conduct.
Simply breaching a lease is not improper conduct. In contract law, there are sometimes good reasons to breach a contract.
On the particular facts of FNF, the stripping of the cash could not be described as improper because this did not create the liability for unpaid rent. It was not a misappropriation of funds. If it had been, the corporate veil might have been pierced.
The landlord, however, had also brought a claim to an oppression remedy under the Ontario Business Corporations Act, a subject about which we have written in detail before. This statutory remedy is available to creditors of the corporation as well as shareholders and other stakeholders.
What many people overlook, in addition to the rights of creditors, is that an oppression remedy claim, in some situations, can be made against the individual controlling the corporation.
For an oppression remedy to succeed, the claimant must:
- Identify the reasonable expectations violated by the conduct at issue and
- Show that these reasonable expectations were violated by the defendant.
Personal liability for oppression may be found where:
- The director was involved in the misconduct to such a degree that it can be attributed to them, and
- Personal liability is “fit in the circumstances”.
What does “fit in the circumstances” mean? It means that:
- The remedy sought is fair in the circumstances.
- The remedy goes only as far as necessary to rectify the oppression.
- The remedy only vindicates the reasonable expectations of the complainant.
- Other remedies are not more suitable.
FNF was allowed to proceed with an oppression remedy claim against the individual.
TAKEAWAYS
- Obtaining a personal guarantee remains the preferred way for creditors to protect themselves by being able to claim against key individuals, but
- A personal guarantee is not always possible to obtain.
- Where there is not a personal guarantee, suing the controlling individual of your debtor is difficult but
- It is not impossible in the right circumstances.
- The oppression remedy may suit some circumstances.
- How do you know? You consult lawyers experienced in the oppression remedy.
WHAT WEILERS LLP CAN DO TO HELP YOU
Our commercial real estate team will advise you about protection in the lease, such as personal guarantees.
If you do not have a personal guarantee, our litigation team has the knowledge and experience with oppression remedies to advise and represent you in this complex area.
Whether lease drafting or enforcing your rights, if you need the right lawyers, call Weilers LLP and see if we are the right lawyers for you.