Corporations Are People Too
Have you ever heard the expression “corporations are people too”? While a corporation may not live and breathe like a human being, as far as the law is concerned, a corporation is very much a distinct and unique person.
Corporations have been described as a legal fiction. After all, a corporation is entirely abstract. A corporation cannot do anything unless an individual acts on its behalf. Nonetheless, it has been settled law for over 120 years that a corporation exists as a separate legal entity, and is distinct from its shareholders, directors, and officers.
The practical implications of corporate personhood have shaped society in many ways. For example, most contracts involve at least one corporation. Claims for breach of contract and negligence are routinely brought against corporations, rather than against the shareholders or owners of corporations. If the corporation has no assets to satisfy a judgment, then the plaintiff will likely have no ultimate remedy.
It is not uncommon for an individual to incorporate a corporation for the express purpose of avoiding the potential for personal liability. When operating through a corporation, an individual is generally not liable for the debts or actions of the corporation. Statutes impose exceptions to this general rule. For instance, under the Construction Act, if a corporation misappropriates trust funds it receives relating to a particular construction project, the individuals who have effective control of the corporation may be held personally liable along with the corporation. Under the Employment Standards Act, 2000, directors of a corporation are personally liable for wages of employees under certain circumstances.
What Does it Mean to Pierce the Corporate Veil?
Apart from specific exceptions in statutes and other limited circumstances, there is a principle which allows the distinct personhood of a corporation to be effectively ignored, and liability imposed on the owner of the corporation or some other person: “piercing the corporate veil”.
Piercing the corporate veil is an equitable remedy which a court may exercise in certain instances to disregard the distinct legal personality of a corporation. It is used in circumstances where it would be grossly unfair for liability to rest solely with the corporation (which usually has no assets), so the court imposes liability on someone else as well (usually the “directing mind” of the corporation).
Because piercing the corporate veil sets aside a fundamental principle of corporate law, the threshold which must be met is onerous. There is no “bright-line” test a court will use to determine whether the corporate veil should be pierced. There are, however, some general principles which have emerged. Piercing the corporate veil is an exceptional remedy which will only succeed in cases of flagrant injustice. There is a reasonable prospect of piercing the corporate veil when:
- the company is incorporated for an illegal, fraudulent, or improper purpose;
- those in control of the corporation expressly direct a wrongful thing to be done; or
- the company is completely dominated and controlled and being used as a shield for fraudulent or improper conduct.
Takeaway
It is important to remember a contract with a corporation is just that; a contract with a corporation, and not the individual(s) who control the corporation. Under most circumstances, any remedy will be against the corporation and no one else. When entering into a substantial or important contract with a corporation, it is prudent to investigate the corporation to consider the risk involved. Securing a personal guarantee from the owners or shareholders of the corporation, or some other person, is one of the most effective ways of mitigating the risks involved in dealing with a corporation.
These comments are of a general nature and not intended to provide legal advice as individual situations will differ and should be discussed with a lawyer.