When can a sole shareholder and director be liable for torts of the corporation?
A recent decision of the Alberta Court of Appeal looks at the circumstances which may give rise to concurrent liability in tort of a corporation and its sole shareholder and director. In Driving Force Inc v. I Spy-Eagle Eyes Safety Inc, 2022 ABCA 25, Driving Force leased several trucks to I Spy, who after stopping to make lease payments on most of them, failed to return the trucks upon demand. Driving Force at one point reported the trucks stolen but acknowledged at trial that was improper.
Driving Force sued I Spy for the amounts owed under the leases and for damages under the tort of conversion. In addition, it argued that I Spy’s sole shareholder and director, Juneau, should be held concurrently liable for conversion.
The tort of conversion involves a wrongful interference with the goods of another, such as taking, using, or destroying the goods in a manner inconsistent with the owner’s right of possession. The damages awarded for conversion can be the full value of the goods.
The trial judge found the corporation liable under the lease and in tort. The court of appeal disagreed with respect to the latter. It is a principle of law that when a party breaches a contract, that party might also be liable in tort. Another principle is the primacy of private ordering - the right of individuals to arrange their affairs and assume risks in a different way than would be done by the law of tort. Therefore, the general duties imposed by law yield to the parties’ right to make a different arrangement in a contract.
The court found the parties’ relationship in this case was founded in contract through the lease agreements. Juneau was not a party to the leases. The court stated that a secured lender should not be able to engage the personal liability of the directors and shareholders of a corporate borrower simply by suing for tortious conversion of the collateral rather than in contract or debt.
Furthermore, the court determined, the tort of conversion did not apply in the facts of this case. The trucks were not originally obtained via a wrongful act. The tort of conversion cannot be made out where a person is holding or dealing with the property with the consent of the owner. A lease or other agreement constitutes express consent by the owner. When the leases expired, Driving Force treated them as month-to-month leases, allowing I Spy to possess the trucks on a month-to-month basis. A lessee of chattels could be liable for conversion if, for example, they sold those chattels to a third party holding themselves out as an owner.
Having established the liability of the corporation under contract, the court then considered whether the sole shareholder and director could be concurrently held liable. When can the courts lift the corporate veil?
As a general rule a corporation is a legal entity distinct from its shareholders. The law on when a court may disregard this principle by “lifting the corporate veil” and regarding the company as a mere “agent” or “puppet” of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the “separate entities” principle is not enforced when it would yield a result “too flagrantly opposed to justice, convenience or the interests of the Revenue.” (Kosmopoulos v Constitution Insurance Co, 1987, SCC)
Mere control, or even complete domination of a corporation, by a controlling shareholder is not sufficient to lift the corporate veil. There must also be some element of fraud, improper purpose, or improper activity.
Sometimes courts have lifted the corporate veil where the corporation was merely a “sham”, or is just the “alter ego” of its controlling shareholders. This means that the corporation must have legitimate business or assets of its own and not be merely used as a pretext. In law, the corporation is a separate person, not an alter ego. The facts of this case showed that I Spy was a party to other leases and Juneau was a co-lessee in some of those leases, not subject of the current action. Therefore, in the circumstances of this case there was no basis to lift the corporate veil.
The court held that concurrent liability in this case would be inappropriate and dismissed the appeal. The claimed “damages” were economic in nature and were essentially a claim in debt. Juneau was only acting on behalf of the corporation when the breach of the leases occurred, and had no “independent” or personal interest beyond that.