August 27, 2024
The general rule is that directors and officers of a corporation cannot be sued for the wrongful acts of the corporation.
This is a corollary to the principle that corporations have their own legal identity, as if they are persons. Except corporations cannot think like people can, so the directors and officers think for them. When they do, they make decisions for and of the corporation, not themselves.
THE ISSUE
What are the exceptions to this general rule? When can directors and officers be sued?
THE CASE
The Ontario Court of Appeal summarizes these principles in 1417217 Ontario Inc. v. River Trail Estates Inc., a case involving a real estate joint venture gone wrong. This led to a finding of oppression. The issue was the proper remedy. Could the directors and officers be held personally responsible to make things right?
The Court begins by pointing out that there are two separate but related concepts that are easily confused:
- The personal liability of officers and directors
- “Piercing the corporate veil”
It then relies on an earlier decision that says that:
officers and employees are protected from personal liability unless it can be shown “that their actions are themselves tortious or exhibit a separate identity or interest from the company so as to make the act or conduct complained of their own”.
How do we know if this standard is met?
“Cases in which employees and officers have been personally liable for actions ostensibly carried out under a corporate name are fact‑specific and the facts said to give rise to personal liability must be specifically pleaded.”
Pleadings are indeed important.
What about piercing the corporate veil?
Piercing the corporate veil, on the other hand, typically occurs when the company is incorporated for an illegal, fraudulent, or improper purpose or where the corporate entity “is completely dominated and controlled and being used as a shield for fraudulent or improper conduct”.
As River Trail Inc. was incorporated for a legitimate purpose- to hold title to the property being developed- piercing the corporate veil, as the trial judge did, was not the proper remedy.
There was no effort in the pleadings to assert that the sole officer and director of River Trail Inc. was liable for actions separate from those of the corporation, so there was no personal liability.
TAKEAWAYS
- Directors and officers are usually not personally responsible for wrongful acts of the corporation.
- They may be liable for separate wrongful acts.
- They may also be liable where the corporate veil can be pierced.
- The concepts are different.
- Pleading properly is important.
- Proving the right facts is necessary – the right facts differ for the two concepts.
WHAT WEILERS LLP CAN DO FOR YOU
At Weilers LLP, our litigation team understands oppression remedies, the importance of proper pleadings, and how to prove the facts you need. We work closely with our experienced corporate lawyers to sort out the issues as early as possible, to save time and expense, and increase opportunities for recovery. If you find yourself on either end of a corporate dispute, we would be happy to discuss whether we are the right lawyers for you.