In the recent Court of Appeal decision of FNF Enterprises Inc. v. Wag and Train Inc., 2023 ONCA 92 the Court of Appeal considered whether a landlord in a commercial lease arrangement could pursue a claim against the sole director and officer of the tenant corporation, for stripping the assets of the corporation to evade their debt obligations under the lease.
The Facts
The Appellants, FNF Enterprises Inc., and 2378007 Ontario Inc. (the “Landlord”) owned a commercial premises in Kitchener, Ontario which they leased to one of the Respondents on the appeal, a corporate entity named Wag and Tag Inc., (the “Tenant”). Wag and Tag Inc. was in the business of providing dog grooming, training and daycare services. The lease ran from 2015 to March 31, 2021. The premises was abandoned by the Tenant prior to the end of the lease term.
The Claim
In September 2020, the Landlord commenced suit against the Tenant and the Tenant’s sole director, officer and shareholder (the “Director”), alleging that the leased premises were abandoned approximately one year prior to the end of the lease term, and the premises were not left in the condition required by the lease. The Landlord also alleged that the Director began to operate a similar business at a different location in Kitchener under a different name.
The Claim Against the Director
The Landlord pursued three causes of action against the Director: that the Director interfered with contractual relations because she made the decisions that constituted the Tenant’s breach of the lease; that she conducted herself in a manner that justified piercing the corporate veil; and that she acted in a manner that entitles the Landlord to relief against the Director under the oppression remedy in s. 248 of the Business Corporations Act, R.S.O. 1990, c. B. 16 (“OBCA”).
The Lower Court Ruling
The Director was successful on a motion to strike out the claim as against her without leave to amend the claim pursuant to rule 21.01(1)(b) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. The learned motion judge ruled that the claim did not disclose a reasonable cause of action against the Director.
The Court of Appeal Decision
The Landlord appealed the lower court decision to strike out the claim pursuant to piercing of the corporate veil and the oppression remedy under the OBCA but did not appeal the ruling related to interference with contractual relations.
The Court of Appeal set aside the lower court ruling that the claim did not disclose a reasonable cause of action under the oppression remedy in the OBCA but maintained the lower court ruling dismissing the claim pursuant to piercing of the corporate veil.
The Court of Appeal On Piercing The Corporate Veil
The Court of Appeal held that as a remedy, piercing the corporate veil is an equitable exception to certain statutory rules. The corporation is a separate legal person, and a shareholder is not liable for any act, default, obligation, or liability of the corporation pursuant to sections 15 and 92 of the OBCA.
The Court of Appeal held that the Landlord could not rely on the decision of the Director, made in her capacity as same, to have the Tenant breach the lease, as being improper conduct that justified piercing of the corporate veil, particularly where the Landlord did not challenge the lower court ruling to dismiss the tort of interference with contractual relations claim.
The Court of Appeal distinguished the Landlord’s claim from other cases where the courts have pierced the corporate veil because the director caused the corporation to divert and thus misappropriate funds that were supposed to be for payment of a debt owed to the Plaintiff, holding that the lease liabilities are derived from the contract and not from the value stripping.
The Court of Appeal on Oppression Claim
The Court of Appeal, citing the Supreme Court of Canada in Wilson v. Alharayeri, 2017 SCC 39, [2017] 1 S.C.R. 1037, (“Wilson”) at para. 24., reiterated that personal liability may be imposed on a director for oppressive conduct if 1) the director has the requisite degree of involvement in the oppressive conduct that is attributable to them and 2) personal liability fits in the circumstances. The Supreme Court of Canada in Wilson identified the obtaining of a personal benefit, or misuse of corporate power by a director as situations where it may be fair to impose personal liability.
The Court of Appeal disagreed with the lower court’s finding that the situation was that of a creditor who could, but did not, protect itself from a risk it assumed when entering into an agreement with the corporation as per J.S.M. Corporation (Ontario) Ltd. v. The Brick Furniture Warehouse Ltd., 2008 ONCA 183, 41 B.L.R. (4th) 51, at para. 66, and held that due to the asset stripping allegation in the claim, the pleading should be read to allege that creditor’s interests were compromised by unlawful and internal corporate manoeuvres against which the creditor could not protect itself.
The Court of Appeal also disagreed with the lower court’s reasoning that Ms. Ross, as sole shareholder could use the funds of the corporation as she wished. The Court of Appeal held, the power of a director to declare a dividend to shareholders is subject to the corporation being able to pay it’s creditors as per section 38(3) of the OBCA.
The Court of Appeal concluded that the allegation in the claim that the Director engaged in asset and value stripping from the Tenant to avoid payments of a debt owing to the Landlord under the lease agreement, presented an arguable case for a personal remedy against the Director under the oppression provisions of the OBCA.
The lawyers at Gilbertson Davis LLP have experience with commercial litigation, including contract disputes, director liability claims and commercial lease disputes. Please contact us for an initial consultation.
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