Redress Risk Management (post until May 31/19)
Civil Litigation

Supreme Court should resolve controversy over piercing the corporate veil

The Supreme Court of Canada should intervene to clarify the law around piercing the corporate veil after Ontario’s top court refused to hold a Canadian subsidiary liable for a US$9.5-billion award against its U.S. parent, Toronto civil litigator Patricia Virc tells AdvocateDaily.com.   

Although the three-judge panel in the case was united in the result, they split 2-1 on the issue of whether the corporate veil can ever be pierced for reasons of equity.  

Virc, a lawyer with Steinberg Title Hope & Israel LLP, explains that the majority essentially answered no, sticking strictly to case law that suggests its equitable jurisdiction can only be invoked when the subsidiary is a shell for improper activity or was created for fraudulent purposes. However, the dissenting judge was unwilling to limit courts’ powers to lift the veil exclusively to cases where the existing test is met.

According to a Globe and Mail report on the case, the losing plaintiffs intend to seek leave to appeal to the nation’s top court.

“It will be interesting to see what the Supreme Court says either way, but I would personally hope the minority is right because it’s very hard to anticipate all future situations,” Virc says. “The law tries to encourage people to behave well, and we never want people to feel like there’s a way to do an end-run around their obligations, or for them to be unjustly enriched.”

The case has its roots in an Ecuadorian village, where a class action was launched on behalf of its 30,000 Indigenous inhabitants against a major U.S. oil company in the 1990s. The claim alleged the business had polluted a swath of rainforest, tainting drinking water and causing a number of ongoing health effects.

Although the villagers won a US$9.5-billion judgment in Ecuador in 2013, the company had long since removed any assets from the country, and a U.S. court refused to enforce the award after finding it was obtained fraudulently.

The Canadian action started in 2012 against a seventh-level subsidiary of the U.S. parent company, but a Superior Court Justice ruled it could not be held liable for the debt.

At the appeal court, the majority of the judges agreed. Despite expressing sympathy for the plaintiffs’ “tragic” plight, Appeal Court Justice William Hourigan resisted their attempts to pierce the corporate veil, noting that it doing so would require “significant changes to fundamental principles of our corporate law and the law of execution.”

Referring to a landmark 1996 ruling on the issue, Hourigan wrote that the test for piercing the corporate veil was well established and that the appeal court has “repeatedly rejected an independent just and equitable ground for” doing so.

“The existing rules for piercing the corporate veil can and likely will evolve. But the law must evolve on a principled basis and in a manner that brings certainty and clarity, not in a way that sows confusion and is devoid of principle,” Hourigan concluded for the 2-1 majority.

However, Justice Ian Nordheimer dissented on the issues.

“I do not agree … that it would never be appropriate to lift the corporate veil to permit the enforcement of a judgment, unless the requirements” of the existing test are met, he wrote, noting that the situation in the Ecuadorian case could be distinguished because it involved enforcement of a judgment debt.

“I am not satisfied that the [test] can simply be lifted out of the liability context and then dropped into, and applied to, the judgment enforcement context,” Nordheimer continued, boiling the issue down to a single question.

“Is this court prepared to recognize that there may be situations where equity would demand a departure from the strict application of the corporate separateness principle in the context of the enforceability of a valid judgment, whether foreign or domestic? I suggest that that question should be answered in the affirmative while, at the same time, recognizing that the situations where such a remedy will be appropriate are likely to be rare and exceptional,” he added.

Despite his findings on the corporate veil issue, Nordheimer ultimately concurred in the result, ruling against the villagers due to the American court’s findings regarding the taint of fraud on the original judgment.

Virc agrees that there are good reasons for maintaining a high bar to pierce the corporate veil, due to the potential effect it could have on innocent third-party stakeholders in subsidiary companies, including not only shareholders but also creditors, suppliers, directors, employees and government.

However, she says the oil company’s position is weakened by the fact that all seven layers between the parent and its Canadian subsidiary are 100 per cent owned by the head corporation.

“It’s a long chain, but it’s hard to see why it’s fair to uphold the corporate veil when it’s 100 per cent owned all the way down,” Virc says, "particularly as there was no finding that there were other third-party interests that would be prejudiced if the corporate veil was pierced.”

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