Directors’ liability for statutory breaches: lifting the corporate veil

Directors’ liability for statutory breaches: lifting the corporate veil
Canadian law has always recognized the separate identity between a corporation and its directors. Only in very limited circumstances will a court pierce the corporate veil to hold a director personally liable for corporate wrongs. For example, a director may be responsible for individual tortious conduct that causes the plaintiff injury.

When it comes to statutory causes of action — those wrongs done by a corporation contrary to a statute — Canadian courts have shown a willingness to read these statutes broadly in order to lift the corporate veil and give effect to the purpose of the statute itself. That is, where the corporation’s statutory breach was caused by the actions of a director, the statute will be read so as to extend liability to both the company and its directing mind.

Two Ontario decisions illustrate this point.

Personal liability for unpaid wages and the oppression remedy

In El Ashiri v. Pembroke Residence Ltd., the court used the breadth of the oppression remedy under the Ontario Business Corporations Act to find the director of a small corporation personally liable for unpaid wages.

El Ashiri was not an ordinary constructive dismissal action. The plaintiffs worked as hotel managers for the corporate defendants. They were hired by the defendant director, who was the sole shareholder and officer of the corporate defendants. One of the plaintiffs was employed by virtue of an oral agreement; in fact, it was not clear which corporate defendant employed him.

From the outset of their relationship, the individual director failed to pay the plaintiffs their wages. The court ultimately held that the director knew at the time he hired the plaintiffs that he would not be able to pay them what they were owed. The plaintiffs provided labour and, as the court held, they were treated as though they were the director’s personal servants. The plaintiffs eventually brought an action for constructive dismissal.

Relying on the oppression remedy, as set out in s. 248 of the OBCA, the plaintiffs argued that the individual director should be held jointly and severally liable with the corporation for their unpaid wages. The court agreed.

The court did not hesitate to find that the plaintiffs were creditors of the corporation and were therefore proper complainants for the purpose of the oppression remedy.

Most important, the court emphasized the breadth of its discretion to fashion an appropriate remedy under s. 248 of the act. This included the ability to find a director personally liable for the wrongs of the corporation.

In particular, the court noted that a director could be held personally liable where:
(i)    the directors or officers personally benefited from the oppressive behaviour;
(ii)    where the directors furthered their own control over the company through oppression; and
(iii)    where the director had “virtually total control” over the corporation.

In the El Ashiri case, the individual director was the only officer and director of all the defendant companies. He clearly operated the businesses in a manner that was oppressive to the plaintiffs and could therefore be held jointly and severally liable for the unpaid wages owed to the plaintiffs.

Personal liability for environmental contamination

A similar line of reasoning was adopted to find the director of a corporation personally liable for environmental contamination.

Midwest Properties Ltd. v. Thordarson, involved an action by the plaintiff corporation against the defendant corporation and its director for petroleum hydrocarbon contamination.

The action was brought by the plaintiff in nuisance, negligence, and pursuant to s. 99(2) of the Environmental Protection Act. In short, s. 99(2) provides for a right of compensation for environmental contamination from the owner of the pollutant and the person having control of the pollutant.

In Midwest Properties, the corporate defendant had been storing waste PHC on its property since 1974. The individual director had been in control of the defendant corporation since 1969. Ultimately, the plaintiff corporation discovered PHC contamination on its neighbouring site and brought an action against the defendant.

The defendant director argued that he could not be held liable as the “owner of the pollutant” or as a person having “control of the pollutant” under s. 99(2) because of the “corporate veil” principle, i.e. that the court could not pierce the veil to find him personally liable for the wrongs of the corporation. The director relied on the historical legal distinction between a corporation and its directors.

The court disagreed and interpreted s. 99(2) broadly. It held that persons who manage or control the pollutant, including employees and agents, cannot escape liability by relying on the separate ownership of the pollutant by the corporation. This would defeat the underlying rationale of the EPA, which is to minimize environmental harm by requiring all parties responsible for the pollution to clean it up, regardless of fault.

Accordingly, the individual director could be held jointly and severally liable under s. 99(2) of the EPA for the environmental damage and remediation.

Giving teeth to statutory causes of action

Notably, El Ashiri and Midwest Properties both involve statutory provisions that are broadly worded and broadly construed, i.e. the oppression remedy and s. 99(2) of the EPA. The breadth of these provisions notwithstanding, Canadian courts have shown an inclination to pierce the corporate veil and impose individual liability where to do so gives effect to the purposes and rationale of the underlying statutes.

In other words, where the corporate veil could undermine the protections set out in the governing statute by shielding a director from liability, the veil will be lifted.

Marco P. Falco is a partner in the litigation department at Torkin Manes LLP in Toronto. His practice focuses on commercial litigation and appellate advocacy.

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