News & Updates
Court of Appeal Affirms Director’s Personal Liability for Value Stripping: FNF Enterprises Inc. v. Wag and Train Inc.
July 27, 2023
The recent decision of the Court of Appeal for Ontario in FNF Enterprises Inc. v. Wag and Train Inc., 2023 ONCA 92 confirms that the oppression remedy in section 248 of the Business Corporations Act, R.S.O. 1990, c. B. 16 (“OBCA”) remains a potential tool for creditors seeking personal recovery from directors that improperly strip corporate assets in the face of liabilities owed to them.
The defendant at issue in FNF, Linda Ross (“Ross”),was a sole director, officer, and shareholder of the corporate defendant, Wag and Train Inc. (“Wag and Train”). The plaintiff, FNF Enterprises Inc. (“FNF”), had leased commercial premises to Wag and Train.
FNF alleged that Wag and Train abandoned the leased premises and ceased paying rent. FNF also claimed that Ross stripped assets from Wag and Train while aware of its liabilities for having breached the lease.
FNF asserted three causes of action against Ross personally, namely:
- Ross interfered with contractual relations because she made decisions that constituted Wag and Train’s breach of the lease;
- Ross conducted herself in a manner that justified piercing the corporate veil; and
- Ross’ conduct constituted oppression pursuant to section 248 of the OBCA.
The motion judge determined that the facts as plead did not disclose fraud or improper conduct justifying piercing the corporate veil. The motion judge also determined that there was no reasonable cause of action to obtain relief under the oppression remedy.
The Court of Appeal determined that the motion judge did not err in striking the claim for piercing the corporate veil. The acts by Ross did not disclose fraudulent or improper conduct to be the source of liabilities that FNF sought to remedy. The fact that a director or officer decided that a corporation should breach a contract does not amount to improper conduct that justifies piercing the corporate veil. Regarding the allegation of value stripping, it was held that the link between the alleged wrongful conduct and liabilities sought to be imposed by piercing the veil was missing: the value was stripped because of the breach of the lease, rather than having caused it.
The appeal was allowed in relation to the oppression remedy, however. The Court held that the claim that Ross stripped the assets of Wag and Train while she was aware that Wag and Train had incurred liabilities by breaching its lease was actionable under the oppression remedy.
The Court referenced the Supreme Court of Canada decision in Wilson v. Alharayeri, 2017 SCC 39 in stating that in order for an oppression remedy claim to succeed, the complainant must identify the expectations it claims have been violated by the conduct at issue and show that those expectations were reasonably held and were violated by corporate conduct that was oppressive, unfairly prejudicial to, or unfairly disregarded the interests of any security holder, creditor, director, or officer.
The Court noted that Wilson states that personal liability may be imposed upon a director for oppressive conduct where (1) the director has the requisite degree of involvement in the oppressive conduct so that it is attributable to them and (2) personal liability is fit in the circumstances because it is a fair way of dealing with the situation, the order goes no further than necessary to rectify the oppression, the order serves only to vindicate the reasonable expectations of the complainant, and other forms of statutory and common law relief are not more fitting in the circumstances. The obtaining of a personal benefit by a director or a director misusing a corporate power were situations in which it would typically be fair to impose personal liability.
The Court also cited the decision in J.S.M. Corporation (Ontario) Ltd. v. The Brick Furniture Warehouse Ltd., 2008 ONCA 183 which distinguished a creditor seeking to utilize the oppression remedy in response to a situation that it could have protected against at the time it entered the contract, with a creditor whose interests are compromised by unlawful and internal corporate manoeuvres which are impossible to protect against.
The Court concluded that the allegation that Ross had stripped value in priority to unpaid creditors and had thus misused corporate powers for her own benefit made the use of a personal remedy fair. The stripping of value from Wag and Train by Ross while she was aware of its liabilities constituted an unlawful and internal corporate manoeuvre which FNF could not have effectively protected itself against.
The Court concluded that it was not plain and obvious that the personal claim for oppression against Ross could not succeed, and accordingly the claim was permitted to proceed.
Tags: Commercial Litigation
