Piercing the Corporate Veil – Is Unfairness a Good Enough Reason?

Paralegal Karen Fair

Paralegal Karen Fair summarizes a recent Small Claims Court case that deals with both the test used to pierce the corporate veil, and whether equitable remedies are within the court’s jurisdiction.

In Brander v. Backstage Bar and Grill Inc, 2014 CanLII 2325 (ON SCSM) Deputy Judge Searle evaluates past decisions and declines to pierce the corporate veil. The court found that the “corporate veil” should be pierced only in very specific circumstances.

Piercing the corporate veil does not extend to circumstances “where declining to do so would simply be unfair.”
This decision joined three related proceedings related to a business arrangement. Mr. Randhawa, Mr. Love and Ms. Brander incorporated the Backstage Bar and Grill Inc. restaurant and nightclub in December 2010. The restaurant was to be located in a commercial building that Basran owned. Mr. Randhawa was the president of Basran and able to negotiate favourable arrangements with the landlord, Basran. Ms. Brander was to manage the front of the house, Mr. Love the bar, and Mr. Randhawa the financials.

Myrna Brander, Kimberley Brander’s mother-in-law, and Douglas Brander, Kimberley Brander’s husband, sued to recover loans that they provided to a corporation. The Plaintiffs sought to make directors Randhawa and Love personally liable. Kimberley Brander alleged that she was excluded from the business without having her capital investment returned and sought to pierce the corporate veil for damages from breaches of fiduciary duty and due diligence. Mr. Randhawa counterclaimed against Ms. Brander for her share of personal guarantees that he paid, and unremitted payroll deductions, as well as Backstage credit card liabilities.

Remedies Available & Sought Within Jurisdiction

Another issue raised in this case is whether equitable remedies are available at Small Claims Court. Mr. Randhawa and Mr. Love argued that the Small Claims Court did not have jurisdiction, based on sections 96 and 97 of the Courts of Justice Act. The Plaintiffs’ Claims included what appeared to be an oppression remedy. Only the Court of Appeal and the Superior Court of Justice are permitted to provide that equitable relief. The judge found that an oppression remedy was not being sought. “The Branders simply seek orders for payment of money within the monetary jurisdiction of this court,” Deputy Judge Searle found.

For the court to pierce the corporate veil, the actions of the corporation must meet specific criteria. Courts have held that the corporate veil may be pierced where the separate legal personality is disregarded. In general, this means the corporate form has been abused, for example by being used for fraudulent or illegitimate purposes. Canvassing related decisions, Deputy Judge Searle noted that piercing the corporate veil does not extend to circumstances “where declining to do so would simply be unfair.”

When is the Corporate Veil Pierced?

The Backstage decision notes that the law of Ontario with respect to the personal liability of directors and officers of a corporation depends on their conduct. Absent any allegations of fraud, deceit, dishonesty, the use of the corporate structure as a sham, and similar tortious activity, officers or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own, Deputy Judge Searle found.

In the Backstage cases, the court found no evidence of fraudulent activities or any other reason to pierce the corporate veil. Furthermore, Mr. Randhawa’s business decisions were consistently made based on “whatever is best for the restaurant.” The court found that there were no breaches of fiduciary duty and due diligence.

The court determined that Myrna Brander did not intend her $18,000 loan to the corporation during the renovation period for electrical contractor work to be a shareholder loan. She received a judgment against Backstage for that amount.

Douglas Brander opened a credit account to purchase furniture at a cost of $4,493.02 for the corporation. Deputy Judge Searle issued a judgment for that amount against Backstage.
Regarding Mr. Randhawa’s counterclaim against Ms. Brander, the court issued judgments against Ms. Brander for the specific claims that were proven in court to a total of $6,990.78.

Further Reading – Corporate Veil, Equitable Remedies Cases & Legislation
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