Business Law, Litigation

Piercing the Corporate Veil

Aug 26th, 2013

By Barry Landy

In tough economic times, it happens that creditors often want to "pierce the corporate veil", meaning that they want to sue the directors of a company which has little or no assets to satisfy an obligation.

Unfortunately, those creditors run up against the well known stumbling block that limited liability is the raison d'être for people to incorporate in the first place.

When the Civil Code of Quebec was adopted in 1994, it contained the following provision:

Art. 317  In no case may a legal person set up juridicial personality against a person in good faith if it is set up to dissemble fraud, abuse of right or contravention of a rule of public order.

The purpose of adopting this rule, as explained by Professor Martel, was to codify the rule of law regarding piercing the corporate veil.

Unfortunately, what then happened was that the courts began to use this provision (obviously because intelligent litigation lawyers made the suggestion!) to impose liability on directors in all sorts of circumstances where it could be alleged that the director had abused some right or did something fraudulent, or even supposedly acted in bad faith.

In short, the adoption of article 317 C.c.Q. which was intended to clarify the cases where a director could be held personally liable for a corporate obligation, had exactly the opposite effect.

The confusion arose because the notions of "lifting the corporate veil" and the general provisions of extra-contractual responsibility became mixed up.

The purpose of this note is to set forth, in general terms,  when an individual who is a majority shareholder of a company and a director may be held liable for a corporate obligation.

  1.  When that person has guaranteed the obligation of the company;
  2.  When the director himself has committed a fault for which he incurs extra-contractual liability, for example, by making false representations or by providing false information or documents;
  3.  Where the director himself has participated in an extra-contractual fault of the company, which is presumed when you have a so-called "one-man company";
  4. Where the person has used the company that he controls as a "screen" or to camouflage a fraud or an abuse of rights, in other words, a situation where an apparently legitimate act of a company is really being used to to cover a fraudulent act of the individual controlling the company.

It is only in this last case that it is proper to talk about "lifting the corporate veil".

In short, a director of a company may become liable for the acts of that company for all kinds of reasons. But generally speaking this is not as a result of the provisions of the Civil Code dealing with piercing the corporate veil, but for other reasons, all of which have different burdens of proof and other elements that have to be properly weighed.

Barry Landy is a senior litigation lawyer at Spiegel Sohmer who focuses his practice on commercial litigation and is also experienced in the area of media law.