Directors And Officers Liability
The separation between a company, its management, and its shareholders is commonly referred to as the “corporate veil”. It allows the courts to attribute a corporation’s actions to the corporation itself, and not the individuals who necessarily must act on behalf of the corporation. In limited circumstances, courts look beyond a corporation’s separate legal identity and assign personal liability to individual decision-makers for actions taken by the corporation. This is the piercing of the corporate veil in corporate and commercial litigation. Piercing the corporate veil is an invaluable tool to seek remedies that would otherwise be unavailable against the corporation itself. Whether you want to pursue piercing the corporate veil or defend against it, a corporate lawyer at Achkar Law can help maximize the chances of success.
When Can a Corporation’s Director, Officer, or Shareholder Be Personally Liable?
A corporation has its own separate legal identity. This means a corporation’s existence, legal obligations, and liabilities are distinct from its directors, officers, and shareholders.
However, in certain circumstances, courts look beyond a corporation’s separate legal identity and assign personal liability to individual decision-makers for actions taken by the corporation. This includes directors, officers, and shareholders. This is known as the “piercing of the corporate veil” in corporate and commercial litigation. Piercing the corporate veil is an invaluable tool to seek remedies that would otherwise be unavailable against the corporation itself.
What Is Piercing the Corporate Veil?
Piercing the corporate veil is an approach a court may take to assign liability to more than merely the corporation’s separate legal existence, to find the company’s management or shareholders responsible for their wrongful acts disguised as those of the company.
In corporate and commercial litigation, the courts will typically pierce the corporate veil when the company is found or suspected to be “incorporated for an illegal, fraudulent or improper purpose and is a mere façade concealing the true facts.”
For instance, if incorporation was done to allow for the abuse of position or funds, the court may pierce the corporate veil and find directors and officers personally liable for losses. Another example is if a director incorporates a new business and moves assets from an old business to avoid a legal claim against the old business.
Piercing the corporate veil in commercial litigation is quite easy when there is a single director, officer, and/or shareholder acting as the “controlling mind”.
The overarching purpose of the court piercing the corporate veil is to prevent individuals from abusing a corporation’s separate legal identity as a shield from personal liability.
When Are Directors Personally Liable?
Directors manage and control the operations of companies subject to the law, its corporate articles, and its by-laws. In most cases, a company’s directors act on its behalf and the directors’ actions are legally those of the company.
If the directors fail to perform their duties and meet their personal obligations. The courts may pierce the corporate veil and hold the company’s directors personally liable and go after their personal assets.
Other reasons for piercing the corporate veil include:
- Breach of statutory duties owed by a director;
- Fraud and misrepresentation;
- Violation of criminal and quasi-criminal acts;
- Misappropriation of corporate funds;
- Serious tortious conduct attributable personally to the directors, such as breach of contract or intentional infliction of mental distress;
- Oppression under provincial or federal corporate statutes; and
- Other wrongful conduct engaged in by a director with substantial and majority control over the corporation.
The courts have frequently held piercing the corporate veil and holding directors, officers, and/or shareholders personally liable are appropriate, including for the following reasons:
- when the company’s incorporation is for an illegal, fraudulent, or improper purpose;
- where those in control of the corporation have expressly directed a wrongful act to be done; and
- where the company is completely dominated and controlled and is used as a shield for fraudulent or improper conduct.
While litigating a corporate or commercial dispute, the plaintiff must draft their claim properly to prove all the elements required to pierce the corporate veil. If a plaintiff fails to properly plead material facts in their case, the court may deny them the right to move forward with their claim.
That said, the Courts sometimes dismiss claims where not enough has been pled to justify piercing the corporate veil. This includes vague and unsupported claims improperly pled in Statements of Claim by certain Plaintiffs.
Often, a corporation’s directors, officers, and shareholders cannot hide behind the corporation’s separate legal identity. They do this to shield themselves from liability for fraudulent, deceitful, or other wrongful actions.
Asking a court to disregard a corporation’s distinct legal identity is a viable legal strategy to hold directors, officers, and/or shareholders responsible for their wrongdoing in corporate and commercial disputes.
Whether you want to pursue piercing the corporate veil or defend against it. A corporate and commercial litigation lawyer can be essential to maximize your chances of success.
Whether you are pursuing a claim for or defending against personal liability for allegations of illegal, fraudulent or improper conduct, our team of commercial litigation lawyers are eager to help. Contact us at 1-800-771-7882, or email [email protected] and we would be happy to assist.