Court pierces corporate veil on alter ego theory of liability

In Chan v. City Commercial Realty Group Ltd., the court “pierced the corporate veil” to hold the principals of a real estate brokerage personally liable for the debts of their corporation.

The corporate defendant, City Commercial Realty Services (Canada) Ltd. (“City 1”), had initially sued the plaintiffs in respect of a real estate transaction, which was dismissed at trial. City 1 further appealed and lost. Costs awards were ordered against City 1, which went unsatisfied.

Shortly before the appeal was heard, a new real estate brokerage – City Commercial Realty Group Ltd. (“City 2”) – was established to continue the business of City 1. The principals of City 1 were brothers. One of the brothers resigned from City 1, transferred his shares in City 1 to his brother, and became the sole officer, director and shareholder of City 2.

The plaintiffs requested that the court pierce the corporate veil on the basis that City 2 was incorporated for an illegal, fraudulent and/or improper purpose, namely, to prevent the plaintiffs from collecting their lawful debts. Further, City 2 was incorporated at the direction of the individual defendants. The plaintiffs sought a monetary award against the principals of City 1 personally in an amount equal to the unpaid costs awards from the initial trial on the basis that City 1 and City 2 were the alter egos of the principals of City 1 and City 2.

At trial, the defendants said that steps were taken for legitimate business purposes, which did not warrant lifting the corporate veil and that they had no obligation to fund City 1. They argued that it was not unlawful or improper to let City 1 die or to incorporate City 2, which was not burdened by City 1’s liabilities.

The trial judge, Justice A.D. Grace of the Ontario Superior Court of Justice, found that “City 2 engages in the same business, occupies the same premises, uses the same furniture, phone number, business name, signage and some of the same personnel.”

Grace J. went on to find that the rule that a corporation is a separate legal person is not inviolate and would not be applied if its result would be “too flagrantly opposed to justice”. The alter ego theory was designed to prevent the use of a corporate vehicle to achieve an objective which offends a right minded person’s sense of fairness. To satisfy the burden on them, two elements had to be proven by the plaintiffs in this case: first, that the activities of the companies were completely dominated by the principals and second, that they engaged in improper conduct that unjustly deprived the plaintiffs of their rights.

The defendants admitted that City 1’s licence, the cessation of its business and the creation of City 2 was to address the consequences of the adverse costs award made against City 1 in the initial trial. Grace J. found troubling the fact that by the time the appeal was argued, City 1 had nothing to lose. If it succeeded, the award of costs at trial would likely have been reversed or abide the result of a new trial if ordered. On the other hand, except to the extent arrangements were made with its counsel, there were no adverse financial consequences if the appeal was dismissed since City 1 had no assets and would no longer generate revenue. Moreover, Grace J. found that it did not sit well that the principals cut loose one company and formed a new one to seamlessly carry on precisely the same business.

While the plaintiffs’ case was framed on common law principles, Grace J. found that comments drawn from the case of Downtown Eatery (1993) Ltd. v. Her Majesty the Queen in Right of Ontario et al., which was an oppression remedy case under Section 248 of the Ontario Business Corporations Act, were instructive in determining whether the conduct complained of in this case was illegal, fraudulent, or wrongful.

To that end, the defendants argued that the cessation of City 1’s business was of no consequence to the plaintiffs in that it was without assets or other means of satisfying the judgment. However, at trial, City 1 and City 2 did not produce any financial statements. There being no explanation which demonstrated that City 1 was unprofitable, insolvent and the reorganization non-prejudicial at trial, Grace J. was left with evidence that established that the principals of City 1 and City 2 organized their affairs and those of their companies in a way which made it impossible for the plaintiffs to enforce the costs awards.

While Grace J. held that the principals of City 1 and City 2 were not obligated to inject their own funds into City 1 to pay the costs awards, he also found that what they were not entitled to do was to quietly organize their corporate affairs in a way which provided them with all of the benefits of their real estate activities and none of the burdens. To summarize, Grace J. held that the plaintiffs’ inability to recover any amount on account of costs is attributable to the improper conduct of the principals.

In the circumstances, Grace J. held that the principals were personally liable to the plaintiffs to pay the costs awards ordered against City 1 in the initial trial and appeal.

The decision in Chan v. City Commercial Realty Group Ltd. can be found at http://canlii.ca/t/fld58

The decision in Downtown Eatery (1993) Ltd. v. Her Majesty the Queen in Right of Ontario et al. can be found at http://canlii.ca/t/1fbtm

Affleck Greene McMurtry LLP acted as counsel to the plaintiffs in this case.