Directors May Be Personally Liable To Creditors For Depleting Corporate Assets - Shareholders

The Ontario Court of Appeal recently held that directors who misuse corporate powers to prejudice creditors may face personal liability. In FNF Enterprises Inc. v. Wag and Train Inc.,¹ the Court of Appeal allowed a creditor's oppression claim to proceed against a director in her personal capacity, while striking the creditor's attempt to pierce the corporate veil because the director was also a shareholder.

The Claim

A landlord alleged that the sole director, officer and shareholder ("Ross") of a corporation ("W&T") caused W&T to abandon leased premises in a state of disrepair a year before the end of the lease, relocated the business, and refused to pay the remaining rent. More specifically, the landlord alleged that Ross caused value to be stripped from W&C with knowledge that W&C had incurred liabilities by breaching its lease, thereby justifying personal liability under (a) a claim for piercing the corporate veil,² and (b) the oppression remedy provisions of the Business Corporations Act (Ontario) ("OBCA") for breaching the landlord's reasonable expectations as a creditor.³

The Decision

The Ontario Superior Court struck the landlord's claims against Ross in her personal capacity, finding that the allegations did not justify piercing the corporate veil and that Ross as a director could not be personally liable for oppression as alleged. The landlord appealed.

Piercing of corporate veil not appropriate

The Court of Appeal agreed with the lower court that the corporate veil should not be pierced in the alleged circumstances. The mere fact that a shareholder qua director or officer causes a company to breach a contract (the lease in this case) is not enough to justify piercing the corporate veil and find that shareholder personally liable.

Similarly, there was no clear link between the corporation's liability (non-payment of lease) and the wrongdoing (stripping value from the corporation). The landlord did not allege that Ross had misappropriated the landlord's funds by stripping value from W&C, knowing it had incurred liabilities as a result of the lease and its breach.

The Oppression claim was viable

The Court of Appeal concluded that the landlord's oppression claim qua creditor against Ross was viable. In reaching its conclusion, the Court distinguished between a situation in which a creditor could have taken steps to protect itself from risks under a contract (but failed to do so), and a situation in which a creditor's interests are undermined by "unlawful and internal corporate manoeuvers" against which the creditor cannot effectively protect itself, noting:

... The prohibition on a director who is also a shareholder taking assets in priority to, and to the prejudice of, unpaid creditors is a statutory one. ... The allegations otherwise set out an arguable case that a personal remedy against Ms. Ross would be fit. She is alleged to have stripped value in priority to unpaid creditors and thus misused corporate powers to her own benefit, arguably making a personal remedy a fair way of dealing with the situation.⁴

Key takeaways

The Court's holding against Ross as a director is noteworthy, especially for directors and officers of closely held corporations who are also shareholders. While the prospect of personal liability for corporate oppression has been alive for some time,⁵ the Court of Appeal's decision in FNF provides further guidance on the circumstances in which a corporate director or officer may face personal liability for causing a corporation to act oppressively in relation to creditors.

A director or officer may be personally liable under the oppression remedy for knowingly stripping value from the corporation to the prejudice of creditors, especially when the creditor has no effective means of protecting itself. Directors and officers who are shareholders and would benefit from the alleged dissipation of corporate assets will also face additional scrutiny.

This development should be considered in light of the recent landmark case of the United Kingdom Supreme Court in BTI 2014 LLC v. Sequana SA & Ors, which we wrote about previously. In Sequana SA, the court held that directors of a corporation owe a fiduciary duty to creditors when a corporation is at or near insolvency. While Sequana SA is inconsistent with Canadian law because directors do not owe such duties to anyone other than the corporation,⁶ the creditor's use of the oppression remedy in this case to frame a viable claim against the director is instructive on how the statutory oppression remedy can not only protect creditors but also expose directors and officers to personal liability.

Footnotes

1. 2023 ONCA 92.

2. Piercing the corporate veil allows a court to disregard the well-established principle that a corporation is a separate legal person from its shareholders. To do so, two elements must be satisfied: (i) the corporation must be "completely dominated and controlled" by an individual; and (ii) the corporation must be "used as a shield for fraudulent or improper conduct".

3. An oppression claim permits a creditor (and others) to compel a company to meet its legitimate and objectively reasonable expectations in order to remedy conduct that is found to be "oppressive", "unfairly prejudicial to" or that "unfairly disregards" the creditor's reasonable expectations.

4. 2023 ONCA 92 at paras. 41, 42.

5. It was most recently considered by the Supreme Court of Canada in Wilson v. Alharayeri, 2017 SCC 39.

6. Specifically, the decisions of the Supreme Court of Canada in Trustee of People's Department Stores Inc. v. Wise, 2004 SCC 68 and BCE Inc. v. 1976 Debentureholders, 2008 SCC 69.

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