A corporation is a separate legal entity from its shareholders. Any litigation brought against the corporation will typically not extend to individual directors, officers, or workers. This principle is known as the corporate veil, protecting shareholders from personal liability except where an individual has clear and direct responsibility for the harm suffered. However, in certain exceptional cases, courts may “pierce the corporate veil” to hold those individuals personally responsible for the corporation’s wrongful actions.
In cases of fraud – often where the founder is also the sole director or officer – the courts may disregard the corporation’s status as a separate legal entity. This is traditionally only allowed in extreme cases, such as where the corporation was created solely as a shield against liability. The Ontario Court of Appeal’s recent decision in BH Frontier v Canadian Choice Supply shows how this can also apply to fraudulent misrepresentation in corporate deals.
The Court of Appeal’s Decision in BH Frontier Solutions v 11054660 Canada Inc. (Canadian Choice Supply)
Background: The case arose from a commercial agreement in which BH Frontier Solutions (“BH”) contracted with Canadian Choice Supply (“CCS”) and the Hongray Group to purchase medical gloves. CCS made false representations that they had a direct relationship with Hongray, the manufacturer, with intermediaries, a promise that BH’s principal heavily relied on when agreeing to the deal.
Trusting CCS’s claim, BH entered into the deal and made substantial payments. However, BH never received a significant portion of the gloves, resulting in large financial losses. CCS had in fact transferred the payments to various unknown individuals in China rather than Hongray, and provided BH with a false receipt showing otherwise. At the Superior Court, the trial judge pierced the corporate veil to hold CCS’s principals – Mr. Salami and Ms. Chai – personally liable for fraudulent misrepresentation.
On appeal, Mr. Salami and Ms. Chai argued that the trial judge applied the wrong test for piercing the corporate veil, as fraudulent misrepresentation does not rise to the same level of intent or malice that veil-piercing requires. However, their appeal was dismissed.
The Test for Piercing the Corporate Veil
The appeals judge decided that courts can pierce the corporate veil not only when the company is incorporated for a fraudulent purpose, but also when “those in control expressly direct a wrongful thing to be done.” [19] There are two elements required to pierce the veil, as 642947 Ontario Ltd v Fleischer (2001) lays out:
- the company is completely dominated by its owners; and
- conduct akin to fraud has occurred.
In the case at hand, Mr. Salami and Mr. Chai were the sole directors, officers and shareholders of CCS, meaning their personal interests controlled the company to the point that the court could disregard its separate legal status. Fraud occurred in that the defendants’ deceit directly caused BH’s loss, as it entered the agreement based on their false promise of a direct relationship to the glove manufacturer.
Misrepresentation as “Fraudulent or Improper Conduct”
The appellants argued that fraudulent misrepresentation is distinct from fraud, as there is no evidence they incorporated CCS to act as a shield against liability or for any improper purpose. However, misrepresentation can also be conducted with enough fraudulent intent or malice to warrant taking action, which the Court found had occurred here.
While the misrepresentation that Salami and Chai perpetrated did not rise to the most severe levels of fraud, and their degree of participation in the scheme is unclear, their conduct was still fraudulent enough to justify piercing the veil. “Fraud” is not narrowly interpreted, and while it is tested differently than “fraudulent misrepresentation”, shareholders using a corporate entity as a shield for their improper conduct satisfies both standards. Because CCS had no directors besides Salami and Chai and no business interests independent from theirs, the two individuals “completely dominated” the corporation, which could not be held out as a separate legal entity. The Court therefore refused to let them hide behind the corporation’s legal identity.
Impact on the Future of Corporate Litigation
This decision broadens the practical scope of veil piercing in Ontario. It confirms that courts may hold shareholders and directors personally liable not only when a corporation was created for fraudulent purposes, but also when they use the corporation as a shield for their misconduct.
For litigants, this means that where a company’s representatives personally participate in deceit or misrepresentation, it may be possible to recover damages directly from those individuals — even if the corporation itself remains insolvent or inactive.
If you have been involved in a fraudulent corporate deal and are concerned about whether you have a case against the company’s shareholders, Walker Law and its experienced commercial litigation team are here to help. Please reach out for a consultation and we will ensure you know your options.