Michael Ford (post until Oct. 31/19)
Corporate

Issues of piercing corporate veil remain after OCA decision

The “long and twisting saga” that pits South American villagers against a global oil giant took another turn recently in a Canadian courtroom, Toronto business lawyer Joel Berkovitz tells The Lawyer’s Daily.

“At its core,” explains Berkovitz, a lawyer with Shibley Righton LLP, “this case is about attempts to enforce a US$9.5 billion judgment in Canada which was obtained in Ecuador against the U.S. company … A New York court declined to enforce this judgment in the United States, finding that the Ecuadorian judgment was obtained by fraud.”

In a previous post with AdvocateDaily.com, Berkovitz said the case began in 1993, after roughly 30,000 Ecuadorian villagers alleged that an oil company dumped billions of litres of toxic oil-drilling byproducts into the environment. They alleged the toxins caused increased health problems, including more frequent cancer deaths and a higher rate of miscarriages.

In a 2011 decision, Ecuadorian courts ordered the company to pay the villagers US$9.5 billion. Since the company didn’t have assets in Ecuador, the plaintiffs looked elsewhere to collect on the judgment. They tried in the U.S., but the judge found there had been extensive acts of fraud, bribery, forgery, intimidation and collusion in the Ecuadorian proceedings. 

The plaintiffs then sought to seize the shares of the company’s Canadian subsidiary — a seventh-level subsidiary of the American company — by piercing the Canadian company’s “corporate veil so that its shares and assets would be available to satisfy the judgment against its parent,” writes Berkovitz.

“In a 2017 ruling, the Ontario Superior Court of Justice granted the … defendants summary judgment, finding that the shares and assets of [the Canadian company] were not available for seizure to satisfy the Ecuadorian judgment, and that [the Canadian company’s] corporate veil should not be pierced.”

On appeal, he says, the Ecuadorian plaintiffs sought to overturn the Superior Court ruling on both issues.

“The Court of Appeal unanimously dismissed the appeal and ruled in favour of the … defendants, though the majority and concurring minority opinions came to different conclusions about the test for piercing the corporate veil,” says Berkovitz.

“The majority opinion largely echoed the analysis and findings of the Superior Court’s ruling, finding that [the Canadian company’s] shares and assets were not subject to be seized under the Execution Act (as these shares were not held directly by [the U.S. company]) and that the applicable test to pierce [the Canadian subsidiary’s] corporate veil had not been met.

“The majority rejected the argument that courts can pierce the corporate veil for reasons of equity, reiterating that the applicable test for piercing the corporate veil is set out in” this case.  

To pierce a subsidiary’s corporate veil, says Berkovitz, the court must be satisfied that “the subsidiary was incorporated for a fraudulent or improper purpose or used by the parent as a shell for improper activity. In the present case, the majority found that this test was not satisfied as there was no allegation of wrongdoing against [the Canadian company].”

He says the majority worried that abandoning the test “would lead to ad hoc applications of equity to pierce the corporate veil, introducing uncertainty into corporate law.”

“While Justice Ian Nordheimer (writing a concurring minority opinion) also dismissed the appeal, he disagreed with the majority about whether the Transamerica test was applicable in these circumstances and on the general approach with respect to when the corporate veil can be pierced,” says Berkovitz.

“Regarding the Transamerica test, Justice Nordheimer explained that it was adopted in the context of deciding whether liability could be imposed by lifting the corporate veil, but that it may not be applicable to the judgment enforcement context, as ‘it would appear to be very difficult to conceive of a factual situation where the Transamerica test could be met by a judgment creditor, that is, where the corporate structure would be found to have been ‘used as a shield for fraudulent or improper conduct’ solely in the execution context.’”

The judge then reviewed the case law for piercing the corporate veil, “noting several instances in which it appeared that the courts had applied equity to do so and observing that the power to pierce the corporate veil stems from the courts' equitable jurisdiction,” writes Berkovitz.

Nordheimer wrote that “it would take much stronger language in the jurisprudence, or a clear statutory amendment, to displace or limit the courts’ equitable power to pierce the corporate veil in those extraordinary situations where liability has been established but the judgment creditor is nevertheless left without any remedy because of the judgment debtor’s internal corporate structure.”

Berkovitz says “even if principles of equity can be applied to pierce the corporate veil, Justice Nordheimer was not convinced that it would be appropriate to do so in this case in light of the U.S. court’s conclusion that the judgment against [the company] was obtained by fraud. Absent a Canadian court finding that the Ecuadorian judgment was valid, he could not conclude that failing to enforce the judgment would be ‘too flagrantly opposed to justice’ as to permit the corporate veil to be pierced.”

He says the decision “confirms the principle of corporate separateness and the applicable test for piercing the corporate veil, the concurring minority opinion may provide fodder for further arguments that principles of equity should be applied to pierce the corporate veil in some cases where a party is seeking to enforce a judgment whose validity is not in question.”

Given the dollar value of the judgment and “the legal issues at stake, the Supreme Court of Canada may be called upon to review this matter in the near future,” says Berkovitz.

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