Piercing the Corporate Veil: Why Being Incorporated Matters

“Piercing the corporate veil” is not just a fun term that corporate lawyers like to throw around, but is a legal concept that allows courts to hold individuals personally liable for the debts or actions of a corporation. While corporations provide limited liability protection to their shareholders, directors, and officers, there are situations where this protection can be disregarded. The Alberta courts took a look at this issue in Swanby v. Tru-Square Homes Ltd. The trial judge did pierce the corporate veil, but the Alberta Court of Appeal overruled that decision. The Swanbys tried to appeal that decision to the Supreme Court of Canada, but their application for an appeal was dismissed. In other words, the final decision is that the Swanbys had a contract with a company and the person behind the company was not liable for any action/inaction of the company; the corporate veil was not pierced.  This blog post will delve into the fundamentals of piercing the corporate veil, analyze the Swanby case, and explore its implications for corporate law.

Understanding the Corporate Veil

The corporate veil refers to the legal separation between a corporation and its shareholders, shielding the latter from personal liability for the company’s obligations. At law, companies are separate legal entities that can hold assets, conduct business, and sue and be sued. The legal separation between companies and their owners and operators (i.e. shareholders, officers and directors) encourages entrepreneurship and investment by limiting the risk borne by individuals involved in corporate ventures. However, there are instances where the courts will look beyond the company, finding its owners and operators personally liable (i.e. when the courts will pierce the corporate veil) when it is in the interest of justice. Typically, courts will pierce the veil when there is evidence of fraud, injustice, or an abuse of corporate structure to evade legal obligations.

Factors Considered in Piercing the Corporate Veil

Courts consider various factors when determining whether to pierce the corporate veil. These may include inadequate capitalization, failure to observe corporate formalities, commingling of assets, and using the corporation as a mere instrumentality to conduct personal affairs. Additionally, courts assess whether piercing the veil is necessary to prevent injustice or uphold public policy. Each case is unique, and courts weigh these factors based on the specific facts and circumstances presented before them.

Swanby v. Tru-Square Homes Ltd.: A Case Study

In Swanby v. Tru-Square Homes Ltd., the Alberta Court of Appeal addressed the issue of piercing the corporate veil in the context of a construction dispute. The plaintiffs, the Swanbys, sought to hold the individual defendants personally liable for the construction deficiencies and breach of the construction contract that they had with Tru-Square Homes Ltd. The plaintiffs argued that the corporate structure was used to shield the defendants from liability, despite their active involvement in the project’s management and decision-making. They argued that Mr. Metcalfe, the principal behind Tru-Square Homes Ltd., as well as his wife, committed separate actionable wrongs that were separate and distinct from the the breaches of the contract that they had with Tru-Square Homes Ltd.

The court examined various factors, including the corporate structure, the defendants’ roles and responsibilities, the nature of the relationship between the defendants and the corporation, and the “wrongs” that were allegedly perpetrated by Mr. Metcalfe and his wife. Ultimately, the Alberta Court of Appeal found that the individual defendants had not engaged in any behaviour that was completely separate and distinct from the actions of the company. The Court held that the allegations made by the Swanbys against  Mr. and Mrs. Metcalfe were not separate and distinct legal wrongs and the only entity liable for the problems with the construction of the home was the corporation who constructed the home.  In the end, the Alberta Court of Appeal did not pierce the corporate veil and hold Mr. and Mrs. Metcalfe personally liable. The Swanbys appealed one level up, to the Supreme Court of Canada, but the Supreme Court of Canada did not feel that this case warranted a further review, and dismissed the motion for leave to appeal.

Implications and Conclusion

The Swanby case serves as a reminder that the limited liability protection afforded by the corporate structure is strong, but not absolute. Courts have the discretion to pierce the corporate veil when necessary to prevent injustice and uphold the integrity of the legal system, but the circumstances for this to happen are not ones that happen every day. Businesses and individuals should therefore be mindful of their obligations and responsibilities within the corporate framework.

Please feel free to contact us to see if incorporation, and getting the protection of the corporate veil, is right for you and your business.