It has been said that a court’s power to pierce the corporate veil will be triggered when failing to act, “would be too flagrantly opposed to justice”.
An Ontario Court has revolutionized the law with respect to whether an individual can be held personally liable for fines imposed against the corporation for breaches of regulatory legislation.
Corporations are legally separate entities
The law in Canada (and across the Western world) considers a corporation to be an artificial legal person that is legally distinct from its shareholders. Corporate shareholders are not responsible for the debts and liabilities of the corporation, unless there is an explicit legislative section which imposes personal liability on shareholders.
In the civil context, shareholders have been held liable for the acts of a corporation through the “piercing of the corporate veil” when the shareholders have used the corporation for fraudulent purposes. Courts have held that the corporate veil should only be pierced in rare circumstances, such as where shareholders that are in control of the corporation have expressly directed illegal activity, when the company is incorporated for an illegal purpose, or where it is being used as a shield for illegal conduct. There have been a significant number of civil cases across the country where this issue has been litigated.
In our experience, regulatory prosecutors in Canada have frequently charged individual representatives of corporations personally for contraventions of legislation. In the OH&S context, charges against supervisors are routine and prosecutions against corporate directors also occur (although less frequently in our experience). However, we are not aware of any prior precedent of a regulatory prosecutor convincing a court to make an individual shareholder liable for a fine imposed against a corporation.
The Crown pierces the corporate veil
The very recent decision in R. v. 1137749 Ontario Ltd. (operating as Pro-Teck Electric) has literally transformed the legal regime in this area by opening the door to imposing liability against individuals for corporate fines. The case involved a prosecution under the Ontario Electricity Act against a very small electrical company for offences arising out of a tragic fatality (This was not an OHSA prosecution. The Electricity Act regulates licensed electricians.) The company pleaded guilty to three counts and proceeded to a contested sentencing hearing.
While preparing for the sentencing hearing, the Crown discovered that the sole owner of the company transferred real estate and other corporate property to himself personally. The Crown argued before the Justice of the Peace at the sentencing hearing that these transfers were done for the sole of purpose of avoiding payment of any fine the Court might impose and thus the owner of the company should be personally liable for the fine.
The Justice of the Peace declined to pierce the corporate veil. She found that since there was no legal authority in the Provincial Offences Act to impose a corporate fine on an individual there was no jurisdiction for the Court to make the owner liable personally.
The Crown successfully appealed the decision to the Ontario Court of Justice. The Appeal Court found that even though there was no explicit provision giving the Court the right to pierce the corporate veil, the Court had the “implied” jurisdiction to do so in appropriate cases. The Court stated:
To put the matter another way, it has been said that a court’s power to pierce the corporate veil will be triggered when failing to act, “would be too flagrantly opposed to justice”. It is simply inconceivable that a justice of the peace conducting a provincial offences trial lacks a very specific power (clearly possessed by other courts) that is essential to avoid a “flagrant” circumvention of justice.
Ontario Courts have come to different conclusions about the existence of “implied” powers of the Ontario Court of Justice not set out in legislation. In one recent case, the Ontario Court of Appeal found that the Provincial Offences Court can award costs against the Crown despite the lack of a provision for cost awards in the relevant legislation.
In another case, R. v. Live Nation Canada Inc., a court ruled that the Ontario Court of Justice lost jurisdiction to continue hearing a trial after the presiding Justice was appointed to a higher Court. The basis for the decision was the lack of a statutory provision to allow the Justice to complete the case even though the evidence in the highly complex and very lengthy trial had been completed and final argument was about to be heard.
The Justice indicated that he made the decision with “…great regret” and he recognized that there were “…compelling reasons why it would be in the best interests of justice for me to finish this.” The result of this decision was that the charges were dismissed against all defendants because of the unconstitutional delay in the matter proceeding to trial.
In the event the Court of Appeal hears an appeal of the decision in Pro-Teck, the Court will have to assess whether the civil concept of piercing the corporate veil can be readily transferred to the quasi-criminal context. It is our view that the Appeal Court placed far too much emphasis on the “flagrant” circumvention of justice and took a very broad view of the jurisdiction of the Ontario Court of Justice. The Live Nation case is but one illustration of the perhaps unfortunate reality that jurisdictional issues can sometimes lead to what may seem like an unfair result.
We are also of the view that the decision did not give sufficient consideration to the Charter issues which arise from piercing the corporate veil in the regulatory context. The company owner was not charged with or convicted of any offences. Imposing a fine on this individual without a trial may very well offend the company owner’s Charter right to fundamental justice under Section 7 and violate the cruel and unusual punishment provisions set out in Section 12.
It is also notable that the Legislature has expressly differentiated between individuals and corporations in terms of the scale of fines which may be imposed. Individuals face up to $100,000 per offence while corporations face up to $1.5 Million per offence. Query then, how can it be constitutional for a court to make an individual responsible personally to pay a fine that it would not have had jurisdiction to impose directly?
It is not known whether the Defendant will be seeking permission from the Court of Appeal to pursue this case further. We anticipate this would be one of the relatively few Provincial Offences cases that the Court of Appeal would be prepared to hear.
What this decision means for corporate defendants and individuals
This case opens the door for the Crown to seek to transfer liability for regulatory fines to individuals in circumstances where it can be proven that they willfully transferred corporate assets to avoid fine payment. The evidence seemed clear in Pro-Teck that the company owner did just that. In other cases, it might be more complex for a Court to determine an individual’s intentions, particularly where the corporation is a more complicated entity than the “one-man band” electrical company at issue in Pro-Teck.
Where the line is drawn between legitimate transactions and behavior which justifies piercing the corporate veil has been well litigated in the civil context, and Courts have emphasized that the corporate veil should only be pierced in clear cases. However, there are number of considerations that are unique to quasi-criminal situations including the behavior of individuals before charges are laid and the relevance of their subjective knowledge of potential penal consequences to the corporation.
We anticipate this issue will arise most often with smaller, closely held corporations. These businesses must be particularly aware that their business decisions will now be scrutinized by Crown Prosecutors for any hint that the company was attempting to avoid fine payment. There is also a live issue of what information (if any) the Crown may be entitled to at the sentencing stage to address this issue.
It should be noted that this decision does not open the door for the Crown to pursue individuals in all cases where a company is financially unable to pay a fine. The Court in Pro-Tek made it expressly clear that if no ‘improper’ transfers had been made, the corporate veil would not have been pierced. Therefore, companies that legitimately no longer have assets are not subject to this new regime.
However, the devil is in the details. Take the example of a staffing agency which rents an office, furniture and IT equipment. If the agency shuts down the day after a workplace accident and carries on business under a new name at a different office without transferring any “assets” (i.e. accounts receivable, cash in the bank, etc.), can the Crown attach personal liability to the individuals operating the agency for corporate fines? At this point, the answer is not clear.
The bottom line is that employers and their counsel must be particularly sensitive to restructuring issues if quasi-criminal litigation is contemplated, to avoid potential liability issues for the directing minds of the corporation.
By Ryan J. Conlin and Jeremy D. Schwartz, Stringer LLP