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Corporate Veil Piercing and Allocation of

Liability: Diagnosis and Prognosis


Mohamed F. Khimji* & Christopher C. Nicholls**
Piercing the corporate veil for the purposes of reallocating liability as be-
tween shareholders and corporations has been the subject of intense scrutiny by
both judges and scholars; yet there are still many issues to be resolved at theoreti-
cal, empirical and doctrinal levels. This paper reviews the doctrinal development of
veil piercing under the Canadian common law and the academic commentary that
has accompanied that development; focusing in particular on the significance of
the court’s disregard of the distinct attributes of separate legal personality and
limited liability in the context of reallocating liability and considering what factors
are and should be pertinent to the outcomes of veil piercing cases. The paper con-
cludes with observations about the future direction of veil piercing as a meaningful
judicial tool for liability reallocation and the key questions that need to be ad-
dressed with respect to how this doctrine operates going forward.

La levée du voile de la personnalité juridique aux fins de partager différem-


ment la responsabilité entre les actionnaires et les sociétés a fait l’objet de nom-
breuses analyses par les tribunaux et les chercheurs. Il reste néanmoins bien des
questions à régler, sur les plans théorique, empirique et doctrinal. Les auteurs ex-
aminent ici l’évolution de la doctrine relative à la levée du voile de la personnalité
juridique selon la common law canadienne ainsi que les commentaires
d’universitaires en marge de cette évolution; ils s’attardent plus particulièrement
sur le sens à donner au fait que les tribunaux paraissent faire abstraction des
caractéristiques particulières de la personnalité juridique distincte d’une société et
de responsabilité limitée dans le contexte d’une nouvelle répartition de la respon-
sabilité; ils examinent les facteurs pertinents dans l’issue des causes portant sur la
levée du voile de la personnalité juridique. En conclusion, les auteurs formulent
des observations sur l’utilisation future de la levée du voile de la personnalité
juridique comme un outil judiciaire dans une nouvelle répartition des respon-

* Associate Professor, Faculty of Law, Western University.


** Professor and Stephen Dattels Chair in Corporate Finance Law, Faculty of Law,
Western University. The authors would like to thank Jennifer Hodgins who provided
research assistance. Also, the funding for this article provided by the Social Sciences
and Humanities Research Council Standard Research Grant Program is gratefully
acknowledged.
212 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

sabilités et sur les questions fondamentales devant être posées relativement à


l’application de cette doctrine dans l’avenir.
1. INTRODUCTION
The legal protection that incorporation provides to shareholders has long been
the object of popular suspicion and even contempt. From Gilbert and Sullivan’s
19th century mockery of company promoters and those who shamelessly incorpo-
rate to evade their creditors1 to the pillory of corporations in contemporary popular
fiction2 and documentary films,3 the corporation has become a particularly service-
able scapegoat for all of the shortcomings of the free enterprise system and the
social problems afflicting nations whose economies embrace versions of that sys-
tem. Little wonder, then, that, when courts set aside or simply ignore irksome and
inconvenient provisions in corporate legislation that establish the separate legal
personality of corporations or provide limited liability to corporate shareholders,
there is rarely public outrage or complaint that courts have overstepped their
bounds. On the contrary, courts may even be applauded for refusing in such cases
to allow stubborn technicalities (such as the existence of unequivocal and constitu-
tionally sound provisions in statutes enacted by democratically-elected legislatures)
to stand in the way of the (presumably self-evident) “interests of justice”.
That courts in Canada, the United Kingdom, the United States and elsewhere
in the common law world have traditionally asserted the jurisdiction to pierce the
corporate veil4 there is no doubt. Yet, the legal basis for this jurisdiction is ill-
defined and the principles upon which it is properly exercised are frustratingly un-
certain. What is clear is that one of the most important objectives of judicial veil
piercing is the reallocation of liability as between shareholders and corporations.
The allocation of liability is the primary function of the two defining features of the

1 Arthur Sullivan & W.S. Gilbert, The Gondoliers (1889); Arthur Sullivan & W.S. Gil-
bert, Utopia, Limited (1893).
2 The examples are legion.
3 See, e.g., The Corporation, DVD (Canada: Big Picture Media Corporation, 2003);
Capitalism: A Love Story, DVD (Beverly Hills, Cal: Overture Films and Paramount
Vantage, 2009); The Story of Stuff, (Free Range Studios, 2007), online: The Story of
Stuff Project <http://storyofstuff.org/movies/story-of-stuff/>.
4 The expression “veil piercing” is used synonymously with “veil lifting” in this paper.
However, there has been some debate as to the distinction between the two expres-
sions. Most recently, Lord Neuberger of the Supreme Court of the United Kingdom
explained the difference as between evasion and concealment. Evasion, referred to as
veil piercing in the judgment, is properly described as disregarding separate legal per-
sonality. Concealment, referred to as veil lifting in the judgment, involves a legal deci-
sion based on conventional legal principles with no disregard of separate legal person-
ality; Petrodel Resources Ltd. v. Prest, [2013] UKSC 34, [2013] 2 A.C. 415 at para. 60
[Prest v. Petrodel]. Both concepts are used synonymously in this paper because,
whether a decision to reallocate liability as between shareholders and corporations is
based on veil piercing as an independent doctrine or on conventional legal principles
such as agency or trust, both are analytical mechanisms to make arguments about
whether the asset partitioning functions of separate legal personality and limited liabil-
ity should be sacrificed.
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 213

corporation: separate legal personality and limited liability.5 Accordingly, judicial


veil piercing does not involve merely incidental impact on the use of the corporate
form but strikes at the very core of incorporation as a state-sanctioned vehicle for
social wealth creation. One might expect the exercise of such intrusive judicial ac-
tion to be narrowly circumscribed by carefully developed and clearly-defined doc-
trinal principles. If the integrity of the corporation is to be subject to unpredictable
judicial ad hocery, the rule of law itself is threatened in the corporate sphere. In
fact, however, the shadowy history of the doctrine reveals neither analytical rigor
nor consistent judicial restraint.
Veil piercing cases have been described as defying “any attempt at rational
explanation”.6 Courts in Canada, as well as other common law jurisdictions includ-
ing England & Wales, the United States and Australia try to rationalize the decision
to disregard the corporate form on the basis of frequently-recited but underspecified
legal principles and sometimes on the basis of overriding, supposedly self-evident,
notions of justice. Some scholars have argued that veil piercing cases are best
viewed as attempts by courts to engage, at least roughly, in a cost-benefit analysis
that seeks to preserve separate legal personality and/or limited liability where the
benefits outweigh the costs and vice versa.7 However, the factors invoked by courts
to justify (or deny) veil piercing are often unrelated to the economic justifications
for and policy concerns of separate legal personality and limited liability. Further-
more, there is no evidence to suggest that the nominal legal principles invoked by
the courts are applied so as to systematically address the negative externalities that
could arise from separate legal personality and limited liability. The essential inco-
herence of veil piercing doctrine has led to occasional calls for veil piercing to be
abolished.8 Indeed, as recently as 2013, certain members of the Supreme Court of

5 While there is some divergence of opinion as to the various fundamental features of


corporations, separate legal personality and limited liability are frequently listed as the
top two fundamental features in leading treatises; see e.g. Reinier Kraakman et al., The
Anatomy of Corporate Law: A Comparative and Functional Approach, 2d ed. (Oxford:
Oxford University Press, 2009) [Kraakman, Anatomy of Corporate Law]; Christopher
C. Nicholls, Corporate Law (Toronto: Emond Montgomery, 2005) [Nicholls, Corpo-
rate Law]; Paul L. Davies, Gower & Davies: Principles of Modern Corporate Law, 9th
ed. by Paul L. Davies & Sarah Worthington (London, UK: Sweet & Maxwell, 2012);
Brian R. Cheffins, Corporate Ownership and Control: British Business Transformed
(Oxford: Oxford University Press, 2008); Bruce Welling, Corporate Law in Canada:
The Governing Principles, 3d ed. (London, Ont: Scribblers Publishing, 2006); and
Phillip Lipton, Abe Herzberg, & Michelle Welsh, Understanding Company Law, 16th
ed. (Pyrmont, Australia: Thomson Reuters, 2012).
6 Jonathan M. Landers, “A Unified Approach to the Parent, Subsidiary, and Affiliate
Questions in Bankruptcy” (1975) 42:4 U. Chicago L. Rev. 589 at 620.
7 Frank H. Easterbrook & Daniel R. Fischel, “Limited Liability and the Corporation”
(1985) 52 U. Chicago L. Rev. 89 at 109.
8 See generally Stephen M. Bainbridge, “Abolishing Veil Piercing” (2001) 26:3 J. Corp.
L. 479. However, others have argued that veil piercing should be preserved as it serves
as a deterrence to any wrong doing and places the burden of proof on the defendant to
show that there was no wrong-doing; Franklin A. Gevurtz, “Piercing Piercing: An At-
tempt to Lift the Veil of Confusion Surrounding the Doctrine of Piercing the Corporate
214 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

the United Kingdom briefly raised the possibility that the doctrine might not even
actually exist in English law.9
This paper reviews the doctrinal development of veil piercing under the Cana-
dian common law and the academic commentary that has accompanied that devel-
opment; focusing in particular on the significance of the court’s disregard of the
distinct attributes of separate legal personality and limited liability in the context of
reallocating liability and considering what factors are and should be pertinent to the
outcomes of veil piercing cases. The paper concludes with observations about the
future direction of veil piercing as a meaningful judicial tool for liability realloca-
tion and the key questions that need to be addressed with respect to how this doc-
trine operates.

2. DEFINING VEIL PIERCING


Generally, veil piercing is defined as the judicial disregard of the asset parti-
tioning functions of separate legal personality and limited liability for a variety of
ends. The concept needs to be defined further for four reasons. First, the expression
is commonly used to describe more than the subject of this paper — namely, judi-
cial re-allocations of liability which necessarily involve compromising the asset
partitioning functions of separate legal personality and limited liability.10 Second,

Veil” (1997) 76 Or. L. Rev. 853 at 878. Some have gone further and argued that courts
should pierce the veil more frequently to protect the interests of creditors; Jacob S.
Ziegel, “Is Incorporation (With Limited Liability) Too Easily Available?” (1990) 31:4
C. de D. 1075.
9 “In these circumstances, I was initially strongly attracted by the argument that we
should decide that a supposed doctrine, which is controversial and uncertain, and
which, on analysis, appears never to have been invoked successfully and appropriately
in its 80 years of supposed existence, should be given its quietus. Such a decision
would render the law much clearer than it is now, and in a number of cases it would
reduce complications and costs: whenever the doctrine is really needed, it never seems
to apply. However, I have reached the conclusion that it would be wrong to discard a
doctrine which, while it has been criticised by judges and academics, has been gener-
ally assumed to exist in all common law jurisdictions, and represents a potentially valu-
able judicial tool to undo wrongdoing in some cases, where no other principle is
available”; Prest v. Petrodel, supra note 4 at paras. 79-80, Neuberger L.J.
10 In addition to reallocating liability, the expression veil piercing is the judicial attempt
to reallocate benefits between shareholders and corporations. The claim that a benefit
should be reallocated as between shareholders and corporations may be made by a
shareholder or corporation itself; see e.g., Kosmopoulos v. Constitution Insurance Co.
of Canada, 1987 CarswellOnt 132, 1987 CarswellOnt 1054, EYB 1987-68613, [1987]
1 S.C.R. 2, 63 O.R. (2d) 731 (note), 63 O.R. (2d) 731, (sub nom. Kosmopoulos v.
Constitution Insurance Co.) 36 B.L.R. 233, 22 C.C.L.I. 296, (sub nom. Constitution
Insurance Co. of Canada v. Kosmopoulos) 34 D.L.R. (4th) 208, [1987] I.L.R. 1-2147,
74 N.R. 360, 21 O.A.C. 4, [1987] S.C.J. No. 2 (S.C.C.) at 10 [S.C.R.] [Kosmopoulos],
where a shareholder claimed to have an insurable interest in assets held by a corpora-
tion. In addition, the claim that a benefit should be reallocated as between shareholders
and corporations may be made by a third party such as a tax authority; see, e.g., Jodrey
Estate v. Nova Scotia (Minister of Finance), 1980 CarswellNS 78, 1980 CarswellNS
82, (sub nom. Covert v. Nova Scotia (Minister of Finance)) [1980] 2 S.C.R. 774, 41
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 215

there is debate as to the stature or nature of veil piercing as a legal mechanism; i.e.
does it merely define an end on some other grounds11 or does it operate as an
independent doctrine? Third, there is an unresolved issue as to the relationship be-
tween veil piercing and other legal bases for claim; i.e. does it exist independently
alongside other bases for claim or is it available only when no other remedy is

N.S.R. (2d) 181, [1980] C.T.C. 437, 8 E.T.R. 69, 81 D.T.C. 5344, 32 N.R. 275, [1980]
S.C.J. No. 101 (S.C.C.) [Covert], where a tax authority sought the attribute the owner-
ship of an asset held by a subsidiary to a parent corporation for the purpose of imposing
tax liability. For an analysis of this use, see Nicholls, Corporate Law, supra note 5 at
185–214; Michael J. Gaertner, “Reverse Piercing the Corporate Veil: Should Corpora-
tion Owners Have it Both Ways?” (1989) 30 Wm. & Mary L. Rev. 667. For literature
addressing veil piercing in tax cases specifically, see G.T. Tamaki, “Lifting the Corpo-
rate Veil in Canadian Income Tax Law” (1962) 8:3 McGill L.J. 159; W.J.A. Mitchell,
“Taxation and the Corporate Veil” (1966) 14 Can. Tax J. 534 [Mitchell, “Taxation”];
D.H. Bonham, “Judicial Treatment of the Corporate Entity Concept in Canadian Tax
Law” (1967) 6 U.W.O. L. Rev. 39; John W. Durnford, “The Corporate Veil in Tax
Law” (1979) 27:3 Can. Tax. J. 282. Disregarding separate legal personality for this
type of end deserves its own analysis and is beyond the scope of this paper. Also, the
expression veil piercing is used to describe director and officer liability to third parties;
see, e.g., Hogarth v. Rocky Mountain Slate Inc., 2013 ABCA 57, 2013 CarswellAlta
189, 542 A.R. 289, 75 Alta. L.R. (5th) 295, 360 D.L.R. (4th) 119, [2013] 5 W.W.R.
457, 566 W.A.C. 289 (Alta. C.A.); additional reasons 2013 ABCA 116, 2013 Carswell-
Alta 835, 87 Alta. L.R. (5th) 108, [2013] 12 W.W.R. 732 (Alta. C.A.); leave to appeal
refused 2013 CarswellAlta 1119, 2013 CarswellAlta 1120, 463 N.R. 397 (note), [2013]
S.C.C.A. No. 160 (S.C.C.). The idea that directors and officers may be liable for fraud
or tort in their capacity as agents has long been recognized by the law; see Cullen v.
Thompson’s Trustees (1862), 4 Macq. 424 at 432. However, while described as pierc-
ing the corporate veil, allocating liability in this way does not involve the disregard of
separate legal personality or limited liability. For an analysis of this issue, see Christo-
pher C. Nicholls, “Liability of Corporate Officers and Directors to Third Parties”
(2001) 35:1 Can. Bus. L.J. 1; Janis Sarra, “The Corporate Veil Lifted: Director and
Officer Liability to Third Parties” (2001) 35:1 Can. Bus. L.J. 55; Neil Campbell &
John Armour, “Demystifying the Civil Liability of Corporate Agents” (2003) 62:2
Cambridge L.J. 290.
11 “[F]or my part I consider that “piercing the corporate veil” is not a doctrine at all, in the
sense of a coherent principle or rule of law. It is simply a label — often, as Lord Sump-
tion observes, used indiscriminately — to describe the disparate occasions on which
some rule of law produces apparent exceptions to the principle of the separate juristic
personality of a body corporate reaffirmed by the House of Lords in Salomon v.
Salomon & Co. (1896), [1897] A.C. 22, [1895–99] All E.R. Rep. 33, 66 L.J. Ch. 35, 13
T.L.R. 46, 45 W.R. 193 (U.K. H.L.). These may result from a statutory provision, or
from joint liability in tort, or from the law of unjust enrichment, or from principles of
equity and the law of trusts (but without any “false invocation of equity” in the phrase
used by C. Mitchell in the article mentioned by Lord Neuberger). They may result
simply from the potency of an injunction or other court order in binding third parties
who are aware of its terms. If there is a small residual category in which the metaphor
operates independently no clear example has yet been identified, but Stone & Rolls Ltd
v. Moore Stephens (a firm), mentioned in Lady Hale’s judgment, is arguably an
example”; Prest v. Petrodel, supra note 4 at para. 106, Walker L.J.
216 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

available?12 Fourth, and perhaps most fundamentally, there is some debate as to


whether veil piercing is legally sanctioned at all.13 In a recent judgment of the Su-
preme Court of the United Kingdom, the court had the opportunity to respond to
the argument that veil piercing is not permitted on the basis that almost all previous
purported cases of veil piercing were either decided on the incorrect assumption
that the court had such a discretion or may be explained on other less controversial
grounds.14 While one member of the court acknowledged that there was some merit
to the argument, he went on to maintain that “it may be right for the law to permit
the veil to be pierced in certain circumstances in order to defeat injustice”.15 In
Canada, although there have been occasional suggestions in the academic literature
that the legitimacy of judicial veil piercing is suspect,16 there appears to have been
no serious doubt yet cast on its existence as a legal doctrine by any Canadian court.
Indeed, a recent judgment by the Supreme Court of Canada assumed the existence
of veil piercing under the Canadian common law.17 Therefore, this paper proceeds
on the assumption that veil piercing does exist as an independent doctrine, operates

12 “[Veil piercing] represents a potentially valuable judicial tool to undo wrongdoing in


some cases, where no other principle is available”; ibid. at para. 80, Neuberger L.J.
13 Separate legal personality and limited liability are codified by statute with no apparent
general exception; see, e.g., Canada Business Corporations Act, R.S.C. 1985, c. C-44,
ss. 15(1), 45(1) [CBCA]; Welling, supra note 5 at 114–121; Christopher C. Nicholls,
“Piercing the Corporate Veil and the “Pure Form” of the Corporation as Financial In-
novation” (2008) 46:2 Can. Bus. L.J. 233 at 257 [Nicholls, “Pure Form”]. However, the
case most commonly cited as support for the separate legal personality principle itself
appeared to contemplate exceptions in the form of fraud, agency, if the company was a
fiction or myth; Salomon v. Salomon & Co. (1896), [1897] A.C. 22, [1895–99] All E.R.
Rep. 33, 66 L.J. Ch. 35, 13 T.L.R. 46, 45 W.R. 193 (U.K. H.L.) at 32 [A.C.], Halsbury
L.J. [Salomon].
14 VTB Capital Plc v. Nutritek International Corp., [2013] UKSC 5, [2013] 2 A.C. 337 at
paras. 125-126, Neuberger LJ [VTB Capital].
15 Ibid. at para. 127. In a subsequent decision, the Supreme Court of the United Kingdom
again retained the discretion to disregard separate legal personality and limited liability
in future cases on the basis of piercing the corporate veil; Prest v. Petrodel, supra note
4 at paras. 100 per Mance L.J., 103 per Clarke L.J., 92 per Hale and Wilson L.J.J., and
106 per Walker L.J.
16 Welling, supra note 5 at 114–121; Nicholls, “Pure Form”, supra note 13 at 236-237,
255–258.
17 Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51, 2012
CarswellOnt 12505, 2012 CarswellOnt 12506, [2012] 2 S.C.R. 675, 3 B.L.R. (5th) 1,
351 D.L.R. (4th) 476, 24 R.P.R. (5th) 1, 435 N.R. 41, 296 O.A.C. 41, [2012] S.C.J. No.
51 (S.C.C.) at para. 86. This case involved the issue of whether the benefit of mitiga-
tion opportunities held by related corporations could be attributed to the claimant in the
assessment of damages for breach of contract. However, veil piercing was not given
any detailed analysis in this case. See also Yaiguaje v. Chevron Corp., 2013 ONCA
758, 2013 CarswellOnt 17574, 118 O.R. (3d) 1, 15 B.L.R. (5th) 285, 52 C.P.C. (7th)
229, 370 D.L.R. (4th) 132, 313 O.A.C. 285 (Ont. C.A.) at para. 39; leave to appeal
allowed 2014 CarswellOnt 4152, 2014 CarswellOnt 4153 (S.C.C.), where the Ontario
Court of Appeal applied the doctrine in a jurisdiction case. At the time of writing,
Chevron Corp. has sought leave to appeal to the order to the Supreme Court of Canada;
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 217

alongside other legal bases for claim, and is applied as, amongst other things, a
mechanism for reallocating liability by way of sacrificing the asset partitioning
functions of separate legal personality and limited liability.
When it comes to veil piercing litigation, the challenge to the asset partitioning
functions provided by separate legal personality and limited liability may take vari-
ous forms.18 Very generally, there are three types of veil piercing litigation where
the issue is one of reallocating liability: where shareholders (individuals or parent
corporations) are held liable for corporate obligations;19 where corporations are
held liable for the obligations of shareholders (individual human or parent corpora-
tions);20 and where one corporation is held liable for the obligations of related (sib-
ling) corporations.21 Courts, however, appear to pay little attention to particular

Yaiguaje v. Chevron Corp., 2014 ONCA 40, 2014 CarswellOnt 456, 315 O.A.C. 109
(Ont. C.A.).
18 Commentators have attempted to set out classification schemes for veil piercing cases
before; see, e.g., S. Ottolenghi, “From Peeping Behind the Corporate Veil, to Ignoring
it Completely” (1990) 53:3 Mod. L. Rev. 338.
19 This category refers to cases where a third party seeks to compel a corporation’s share-
holder or shareholders to satisfy a debt or other obligation that, strictly speaking, an
obligation of the corporation. The shareholders, as in all types of veil piercing claims,
may be human or parent corporations and include de facto controlling shareholders that
control a corporation indirectly though shareholding in another company or through
having shares held by family members or other personal relations. In this type of case,
the asset partitioning function provided by limited liability is at stake. The shareholder,
benefiting from its limited liability, is not liable for the obligations of the corporation
unless the veil is pierced; see e.g., VTB Capital, supra note 14; Ord & Anor v.
Belhaven Pubs Ltd., [1998] BCCA 607, [1998] EWCA Civ 243, [1998] 2 B.C.L.C. 447
(Eng. & Wales C.A. (Civil)) [Ord]; 801962 Ontario Inc. v. MacKenzie Trust Co., 1994
CarswellOnt 6168, [1994] O.J. No. 2105 (Ont. Gen. Div.) [801962 Ontario Inc];
Toronto (City) Board of Education v. Brunel Construction 2000 Ltd., 1997 Carswell-
Ont 3664, 41 O.T.C. 1, [1997] O.J. No. 3783 (Ont. Gen. Div.).
20 This category refers to cases where a third party seeks to compel a corporation to sat-
isfy a debt or other obligation that is, strictly speaking, an obligation of its shareholder
or shareholders. The asset partitioning function of separate legal personality, as op-
posed to limited liability, is at stake in this type of case. The corporation, benefiting
from its separate legal personality, would not be liable for debts and obligations owed
by a shareholder in his or her personal capacity unless the veil is pierced; see, e.g.,
Clarkson Co. v. Zhelka, 1967 CarswellOnt 144, [1967] 2 O.R. 565, 64 D.L.R. (2d) 457,
[1967] O.J. No. 1054 (Ont. H.C.) at 577 [O.R.] [Zhelka]; Gilford Motor Co. v. Horne,
[1933] All E.R. Rep. 109, [1933] Ch. 935 at 950, 149 L.T. 241 (Eng. C.A.); Jones v.
Lipman (1961), [1962] 1 All E.R. 442, [1962] 1 W.L.R. 832 (Eng. Ch. Div.); Wildman
v. Wildman, 2006 CarswellOnt 6042, 82 O.R. (3d) 401, 25 B.L.R. (4th) 52, 273 D.L.R.
(4th) 37, 33 R.F.L. (6th) 237, 215 O.A.C. 239, [2006] O.J. No. 3966 (Ont. C.A.) at
para. 24 [Wildman v. Wildman]; Prest v. Petrodel, supra note 4.
21 This category refers to cases where a third party seeks to compel a corporation to sat-
isfy a debt or some other obligation that is, strictly speaking, an obligation of another
corporation. Such a claim is tenable only due to the two companies being connected by
a common shareholder (parent corporation or human). In this type of case, like with the
liability of corporations for shareholder obligations cases, the asset partitioning func-
218 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

classifications of veil piercing cases, preferring to invoke similar lines of reasoning


regardless of the specific context in which they have been asked to pierce the cor-
porate veil.22

3. SEPARATE LEGAL PERSONALITY AND LIMITED LIABILITY


(a) Separate Legal Personality
The separate legal personality of a corporation means that it is distinct from
the individuals who act as its officers, directors, agents, employees and from the
individuals who own its shares. While the separate legal personality of corporations
was established and recognized by the courts long before the 1896 House of Lords
decision in Salomon v. A. Salomon & Co., Ltd.,23 this case is most often cited as the
authoritative Anglo-Canadian declaration of the separate legal entity principle, par-
ticularly for de facto sole shareholder corporations.24
Early twentieth century theoretical corporate law scholarship on separate legal
personality prominently featured debate between advocates of the realist theory25
and the fiction or concession theory26 of the corporation. According to realist the-
ory, the corporate personality is a social fact and the law’s function is not constitu-

tion of separate legal personality is at stake. The related corporation, by virtue of hav-
ing a separate legal personality, is not liable for the debts or obligations of sibling
corporations under common control unless the veil is pierced; see, e.g., Creasey v.
Breachwood Motors Ltd., [1993] B.C.L.C. 480 (Q.B.D.); Walkovszky v. Carlton, 23
N.Y.2d 714, 296 N.Y.S.2d 362 (N.Y., 1968).
22 Some courts, however, have put forward a different analysis for groups of companies
and it has been suggested also that limited liability deserves more protection that sepa-
rate legal personality; see below under Part 5: Doctrinal Grounds for Veil Piercing.
23 Supra note 13. The earliest English general incorporation statute providing for the right
to organize business activity through a separate legal entity was An Act for the Regis-
tration, Incorporation and Regulation of Joint Stock Companies Act; 1844 (U.K.) 7 &
8 Vict., c. 110 (the “1844 Act”). Prior to the 1844 Act, the only incorporated entities
were those chartered by the Crown or a special act of Parliament; Bishop Carleton
Hunt, The Development of the Business Corporation in England, 1800–1867 (Cam-
bridge, MA: Harvard University Press, 1936) at 89. However, the 1844 Act did not
provide for limited liability for its members; s. 25 1844 Act. For an explanation of the
development of general incorporation in Canada, see F.W. Wegenast, The Law of Ca-
nadian Companies (Toronto: Burroughs and Co Ltd, 1931) at 17–27.
24 See also Lee v. Lee’s Air Farming Ltd. (1960), [1961] A.C. 12, [1960] 3 All E.R. 420,
[1960] 3 W.L.R. 758 (New Zealand P.C.).
25 “[I]t is a fact which has received far too little notice from English lawyers that, when-
ever men act in concert for a common purpose, they tend to create a body which, from
no fiction of law, but from the very nature of things, differed from the individuals of
whom it is constituted”; A.V. Dicey, cited in Adolf A. Berle Jr., Studies in the Law of
Corporation Finance (Chicago: Callaghan & Company, 1928) at 4.
26 “[T]here is nothing essentially in common between the fiction and concession theories,
although they both aimed toward the same general consequence, as far as limitation of
power of corporate bodies is concerned. The fiction theory is ultimately a philosophical
theory that the corporate body is but a name, a thing of the intellect; the concession
theory may be indifferent as to the question of the reality of a corporate body; what it
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 219

tive but merely to recognize the existence of the personality.27 By contrast, accord-
ing to the fiction theory, the corporation’s legal personality has no independent or
extra-legal reality and exists only in contemplation of the law.28 The concession
theory, like the fiction theory, rejects the independent reality of corporate personal-
ity and focuses chiefly on explaining the origins of the corporation by linking the
corporation’s essential legal rights to a concession or franchise granted by the
state.29 In 1926, Dewey mounted a convincing critique of the dubious usefulness of
abstract theorizing about the corporation’s personality arguing that these competing
theories were used instrumentally simply to serve opposing ends.30 More recently,
it has been argued that the rise of the realist theory was significant in terms of
legitimizing large business enterprises.31
The emergence of the “nexus of contracts” theory of the corporation in the
economics literature in the 1970s had a profound effect on corporate legal scholar-
ship and, today, nexus of contracts theory appears to be the dominant model for
analyzing the corporation in the American legal academy.32 Under this model, the
corporation is not conceptualized primarily as a separate entity or person but, in-
stead, represents a convenient nexus of explicit and implicit contracts between
shareholders, managers, creditors, employees, and the suppliers of other various
inputs.33 The fact that corporate law statutes typically grant a corporation “the
rights, powers and privileges of a natural person”34 merely serves as a useful fic-
tion by which a single common contractual counterparty is supplied to reduce what
would otherwise be the formidable transaction costs involved in entering into a
network of explicit multiparty contractual arrangements.35 Those who posit that a

must insist upon is that legal power is derived”; John Dewey, “The Historic Back-
ground of Corporate Legal Personality” (1926) 35:6 Yale L.J. 655 at 667.
27 Ernst Freund, The Legal Nature of Corporations (Chicago: University of Chicago
Press, 1897) at 13.
28 Dartmouth College v. Woodward (1819), 4 L.Ed. 629, 17 U.S. 518, 4 Wheat. 518 (U.S.
Sup. Ct.) at 636.
29 Dewey, supra note 26 at 668.
30 Ibid. at 675.
31 Morton J. Horwitz, “Santa Clara Revisited: The Development of Corporate Theory”
(1986) 88 W. Va. L. Rev. 173 at 203. But see David Millon, “Theories of the Corpora-
tion” (1990) 39:2 Duke L.J. 201.
32 “Although the contract analogy is imperfect, it comes reasonably close to a working
hypothesis. I think courts might consider using as a point of departure — but not neces-
sarily a controlling principle — what they perceive to be the investors’ reasonable con-
tractual expectations”; E. Norman Veasey, “An Economic Rationale for Judicial Deci-
sionmaking in Corporate Law” (1998) 1:2 Del. L. Rev. 169.
33 Armen A. Alchian & Harold Demsetz, “Production, Information Costs, and Economic
Organization” (1972) 62:5 Am. Econ. Rev. 777; Michael C. Jensen & William H.
Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership
Structure” (1976) 3:4 J. Finan. Econ. 305; and Easterbrook & Fischel, supra note 7.
34 CBCA, supra note 13 at s. 15(1).
35 For example, the ability for a corporation to own land in its own name negates the need
to amend title deeds every time the identity of the shareholders changes.
220 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

corporation is a nexus of contracts or a third party through which individuals within


the corporation may conduct their private contracting view the legal rules or fic-
tions associated with the corporate form as useful “off the rack” default rules that
correspond to the arrangements that the parties involved would have contracted for
anyway in the absence of transaction costs.36 In other words, the corporation has
developed into its modern form as a result of “organizational innovations that have
had the purpose and effect of economizing on transaction costs.”37 Interestingly,
despite its influence on corporate law scholarship and its de-emphasis on the corpo-
ration as a separate legal person, nexus of contracts theory has not had an impact on
veil piercing law in Canada where the doctrinal analysis invariably attaches a large
significance to reification of the corporation.
Organizational law theory, however, suggests that corporate law provides
more than just standard contractual terms. Most importantly, corporations and spe-
cifically their separate legal personality may allow for the creation of unique and
efficient relationships that could not be established by contract alone.38 One of the
corporation’s most important functions, “affirmative asset partitioning”,39 is made
possible by a legal recognition of the separation of the legal personality of a firm
from that of its shareholders.40 A firm’s ability to hold assets in its own name, and
not merely as agent or trustee for its shareholders, furthers economic activity and
creates efficiencies in the form of a reduction in monitoring costs for corporate
creditors, thereby reducing the cost of credit and allowing for an efficient allocation
of risk. It follows that, in liability cases where a corporation’s separate legal per-
sonality is at stake, a key consideration in the outcome ought to be protecting this
affirmative asset partitioning function.

36 While it is reasonable to assert that the dominant model for analyzing the corporation
in the legal academy is the nexus of contracts theory, there remain important scholars
that continue to reject it arguing that corporate laws are mandatory as opposed to ena-
bling; see William W. Bratton Jr., “The ‘Nexus of Contracts’: Corporation: A Critical
Appraisal” (1989) 74 Cornell L. Rev. 407; Melvin A. Eisenberg, “The Conception that
the Corporation is a Nexus of Contracts and the Dual Nature of the Firm” (1999) 24 J.
Corp. L. 819; Melvin A. Eisenberg, “Corporate Law and Social Norms” (1999) 99:5
Colum. L. Rev. 1253. For a response to these criticisms, see Fred S. McChesney, “Eco-
nomics, Law, and Science in the Corporate Field: A Critique of Eisenberg” (1989) 89
Colum. L. Rev. 1530; Fred S. McChesney, “Contractarianism Without Contracts? Yet
Another Critique of Eisenberg” (1990) 90:5 Colum. L. Rev. 1332.
37 Oliver Williamson, “The Modern Corporation: Origins, Evolution, Attributes” (1981)
19:4 J. Econ. Lit. 1537 at 1537.
38 Henry Hansmann & Reinier Kraakman, “Organizational Law as Asset Partitioning”
(2000) 44 E.E.R. 807 at 813–815 [Hansmann & Kraakman, “Organizational Law”].
39 Ibid.
40 Ibid. at 810.
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 221

(b) Limited Liability


Limited liability, or what may been termed “shareholder immunity,”41 means
that the liability of corporate shareholders for the debts and other obligations of the
corporation is strictly limited to the amount, if any, remaining unpaid on their
shares. While it is not an attribute that originated in the context of business corpora-
tions,42 is not unique to corporations,43 and was not initially a feature of the general
business corporation,44 it is now considered by many to be the most important
practical consequence of incorporation, particularly for small closely held
corporations.45
Easterbrook and Fischel have identified six main attributes of limited liability
that make it an economically efficient regime for corporations and their investors: it
decreases the need for shareholders to monitor the corporation,46 it decreases the
need for shareholders to monitor other shareholders, it gives managers incentives to
act efficiently by promoting the free transfer of shares, it allows market prices to

41 Nicholls, Corporate Law, supra note 5 at 77. In stating that “shareholder immunity”
may be a more apt term for limited liability, the author is referring to the fact that most
shareholders pay the total cost of their shares upon purchase. Therefore, to say that
limited liability simply means that a shareholder is only liable for the amount remain-
ing unpaid on his shares is a misnomer. Protection against future liabilities or business
failure is the “immunity” that limited liability provides. This is illustrated by entitling
the sections of the CBCA, supra note 13, that deal with this matter “shareholder
immunity”.
42 Limited liability in the context of business activity may be traced back to ancient civili-
zations; see Timothy Glynn, “Beyond “Unlimiting” Shareholder Liability: Vicarious
Tort Liability for Corporate Officers” (2004) 57:2 Vand. L. Rev. 329 at 336.
43 See e.g., Limited Partnerships Act, RSO 1990, c L.16.
44 Nicholls, Corporate Law, supra note 5 at 78. Limited liability in the context of busi-
ness corporations was introduced in England in 1855 through An Act for Limiting the
Liability of Members of Certain Joint Stock Companies; 18 & 19 Vict., c. 133.
45 Ibid. See also Hunt, supra note 23 at 41; Henry G. Manne, “Our Two Corporation
Systems: Law and Economics” (1967) 53:2 Va. L. Rev. 259 at 262; J. Freedman & M
Godwin, “The Statutory Audit of the Micro Company — An Empirical Investigation”
[1993] J. Bus. L. 105 at 112; Paddy Ireland, “The Rise of the Limited Liability Com-
pany” (1984) 12 Int’l J. Soc. L. 239 at 247–249.
46 By reducing shareholder monitoring costs in relation to corporations, limited liability
creates incentives for passivity and diversification. This benefit of limited liability has
been said to have facilitated the pooling of large amounts of capital thereby allowing
firms to engage in large-scale enterprise; Jonathan Barron Baskin & Paul J. Miranti Jr.,
A History of Corporate Finance (Cambridge, U.K.: Cambridge University Press, 1999)
at 139.
222 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

impound additional information about the value of firms, it allows for the diversifi-
cation of investments,47 and it facilitates optimal investment decisions by firms.48
Organizational law theory provides a further economic justification for limited
liability in the form of “defensive asset partitioning”.49 Just as separate legal per-
sonality reduces the monitoring costs of the corporation’s creditors, limited liability
is said to decrease the need for the shareholders’ creditors to monitor the corpora-
tion.50 It follows that, in litigation where a shareholder’s limited liability is at stake,
a key consideration in the outcome ought to be protecting this defensive asset parti-
tioning function.

4. NORMATIVE CLAIMS ABOUT VEIL PIERCING


While separate legal personality and limited liability serve valuable economic
objectives, commentators have argued that these benefits may be offset by negative
externalities in particular contexts. The principal policy concerns that scholars have
identified are organized below into three categories: private corporations, involun-
tary creditors, and corporate groups.

(a) Private Corporations


This section focuses primarily on voluntary creditors51 dealing with private
corporations with individual, rather than corporate, shareholders. Involuntary credi-
tors in the context of both public corporations and private corporations and the
allocation of liability amongst groups of companies are dealt with in the following
two sections, respectively. The context involving voluntary creditors of public cor-
porations will not be discussed as there is scholarly consensus that limited liability
is justified in the context of voluntary creditors dealing with public corporations.52
Furthermore, empirical studies on veil piercing in several jurisdictions have sug-
gested that veil piercing occurs almost exclusively in the context of private
corporations.53

47 See also Paul Halpern, Michael Trebilcock & Stuart Turnbull, “An Economic Analysis
of Limited Liability in Corporation Law” (1980) 30:2 U.T.L.J. 117 at 136–138; Manne,
supra note 45.
48 Easterbrook & Fischel, supra note 7. See also Larry E. Ribstein, “Limited Liability and
Theories of the Corporation” (1991) 50 Md. L. Rev. 80 [Ribstein, “Theories of the
Corporation”].
49 Hansmann & Kraakman, “Organizational Law”, supra note 38 at 424.
50 Along similar lines, limited liability also provides an economically efficient equivalent
to shareholder liability insurance; see generally Halpern, Trebilcock & Turnbull, supra
note 47.
51 Voluntary creditors may include employees, consumers, trade creditors, and lenders.
52 It has even been suggested that no externalities exist in this context; Easterbrook &
Fischel, supra note 7 at 104.
53 Robert B. Thompson, “Piercing the Corporate Veil: An Empirical Study” (1991) 76:5
Cornell L. Rev. 1036 at 1055-1056 [Thompson, “Empirical Study”]; Charles Mitchell,
“Lifting the Corporate Veil in the English Courts: An Empirical Study” (1999) 3 Com-
pany Fin. & Insolvency L. Rev. 15 at 21-22 [Mitchell, “Empirical Study”]; Ian Ramsay
& David B. Noakes, “Piercing the Corporate Veil in Australia” (2001) 19 Company &
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 223

The rationales for limited liability identified above do not apply to private cor-
porations in the same way that they apply to public corporations.54 Because the
investors in a private corporation also often serve as managers directly involved in
making and implementing business decisions, limited liability does not reduce
monitoring costs for shareholders. Similarly, because shares in private corporations
are not freely transferable, limited liability facilitates neither efficient risk bearing
nor investor diversification. Furthermore, it has been suggested that private corpo-
ration shareholder-managers have an incentive to “transfer uncompensated business
risks” to creditors and, therefore, some form of unlimited liability would be best for
the contract creditors of private corporations.55
Nevertheless, it has been suggested that limited liability remains the default
rule in the context of private corporations because it is easier to attach the rule to a
form (i.e. the business corporation) than to a size (i.e. a large, public corporation vs.
a small, private corporation).56 Once the rule is in place, parties can freely choose
to bargain around it before the fact depending on their individual circumstances.57
In other words, voluntary creditors are able to assess the credit risk of the corpora-
tions they bargain with and negotiate terms accordingly. Therefore, if voluntary
creditors do not achieve a suitable deal through bargaining, then the law should not
step in to protect them.58
Though limited liability in the case of private corporations does not offer the
economic benefits of investment diversification and positive managerial incentives,
it does achieve defensive asset partitioning functions. Accordingly, together with
the affirmative asset partitioning functions achieved by separate legal personality,
creditors’ monitoring costs are reduced and entrepreneurs may isolate business as-
sets and expose only specifically chosen assets to the risks of the corporation’s
business.59 This tension between these benefits provided by asset partitioning and

Sec. L.J. 250 at 24–27; Peter B. Oh, “Veil-Piercing” (2010) 89:1 Tex. L. Rev. 81 at
110; Stephane Rousseau & Nadia Smaı̈li, “La « levée du voile corporatif » en vertu du
Code civil du Québec: des perspectives théoriques et empiriques à la lumière de dix
années de jurisprudence” (2006) 47:4 C. de D. 815 at 820.
54 Easterbrook & Fischel, supra note 7 at 110.
55 See Halpern, Trebilcock & Turnbull, supra note 47 at 126.
56 Bainbridge, supra note 8 at 507-508.
57 Ibid. See also Halpern, Trebilcock & Turnbull, supra note 47 at 126 and 148. Other
commentators argue, however, that this rule negatively impacts trade creditors who
may be unable to effectively bargain out of the default rule; see, e.g., William P. Hack-
ney & Tracey G. Benson, “Shareholder Liability for Inadequate Capital” (1982) 43 U.
Pitt. L. Rev. 837 at 860–64.
58 In this context, therefore, a rule of limited liability for contract creditors of closely held
corporations may be seen to be a “penalty default”; Bainbridge, supra note 8 at 501-
502. See also Ian Ayres & Robert Gertner, “Filling Gaps in Incomplete Contracts: An
Economic Theory of Default Rules” (1989) 99 Yale L.J. 87. Ayres and Gertner discuss
the meaning of a “penalty default” and argue that non-majoritarian defaults may be
best in some situations as they penalize the party who fails to bargain out of the default
rule and that party will then have an incentive to negotiate by contract a rule more
favourable to it.
59 Nicholls, Corporate Law, supra note 5 at 201.
224 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

the risk of shareholder-managers externalizing risks to voluntary creditors seems to


be recognized by the courts as a significant proportion of veil piercing cases in-
volve private corporations and voluntary creditors.60

(b) Involuntary Creditors


The case for extending limited liability to claims by involuntary creditors of
public and private corporations is more controversial. Unlike voluntary creditors,
involuntary creditors (usually tort claimants) have not chosen to enter into any for-
mal relationship with the corporation. An involuntary creditor thus has no way to
assess the risk associated with becoming a creditor of the corporation and cannot
bargain in advance to have the cost of that risk passed on to the corporation.61
Corporations can, therefore, engage in risky activities that may result in tort
claims but, because their liability (or, more precisely, the liability of their share-
holders) is limited, the corporation and its shareholders are not forced to fully inter-
nalize these risks.62 With respect to public corporations, Hansmann and Kraakman
have argued that allowing the amount recovered by a tort victim to be dictated by
the form of the entity that is responsible for the tort, not only externalizes accident
costs, but also incentivizes the externalization of these costs.63 In addition to what
appears to be the inherent unfairness of this cost externalization, a regime of lim-
ited liability for involuntary creditors, in Hansmann and Kraakman’s view, does not
appear to serve any efficiency enhancing purpose.64 Thus, they propose a scheme
for imposing proportionate liability upon shareholders in the case of firm ending
corporate torts and argue that such a scheme should replace limited liability in this
context so as to force corporate investors to internalize the risks incurred by the
corporations in which they invest.65 They acknowledge that such a scheme would
result in lower share prices but argue that this result would simply mean that share
prices would be priced more accurately by reflecting tort costs.66
However, the view that investors should internalize the tort risk created by the
corporations in which they choose to invest is far from universally accepted. In
relation to the operationalization of a rule of unlimited, or proportionate, liability
for corporate torts, it has been argued that the collection costs would be prohibi-

60 Oh, supra note 53 at 141–143; Thompson, “Empirical Study”, supra note 53 at 1059;
Mitchell, “Empirical Study”, supra note 53 at 23-24; Ramsay & Noakes, supra note 53
at 30.
61 David W. Leebron, “Limited Liability, Tort Victims, and Creditors” (1991) 91:7
Colum. L. Rev. 1565 at 1584.
62 See generally Ronald M. Green, “Shareholders as Stakeholders: Changing Metaphors
of Corporate Governance” (1993) 50:4 Wash. & Lee L. Rev. 1409.
63 Henry Hansmann & Reinier Kraakman, “Toward Unlimited Shareholder Liability for
Corporate Torts” (1991) 100 Yale L.J. 1879 at 1882-1883 [Hansmann & Kraakman,
“Corporate Torts”].
64 Ibid. at 1920.
65 Ibid. at 1892–1894. See also Nina A. Mendelson, “A Control-Based Approach to
Shareholder Liability for Corporate Torts” (2002) 102:5 Colum. L. Rev. 1203.
66 Hansmann & Kraakman, “Corporate Torts”, supra note 63 at 1879–1882, 1903–1905.
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 225

tively high.67 In addition, in response to the claim that it would be “irrational” for
investors to invest less under a rule of unlimited liability,68 behavioral economics
has been relied upon to suggest that otherwise plausible behavior patterns cannot be
dismissed simply because they are inconsistent with the predictions of the rational
choice model and, therefore, an unlimited liability rule for tort claimants of public
corporations may actually lead to less investment.69 Analytically, the claim that
shareholders ought to be liable for corporate torts has also been challenged on the
basis that, if the logic behind imposing liability on shareholders is that they provide
the resources that facilitate corporate activity, then the same logic may be extended
to apply to “constituents” who provide other equally necessary inputs such as credit
and labour.70 Also, there appears to be no empirical evidence to suggest that mass
torts are common and sound social policy does not necessarily require the internal-
ization of all tort risk.71 Therefore, notwithstanding the important contribution of
Hansmann and Kraakman, there appears to be general agreement that the social
benefits of maintaining the limited liability of shareholders in the context of invol-
untary creditors of public corporations exceed the costs.72
The justification for limited liability in the case of claims of involuntary credi-
tors of private corporations, however, is much more tenuous.73 However, it has
been suggested that limited liability remains the rule even in this context because it
avoids drawing legislators and courts into disputes that require them to draw dis-
tinctions between public and private corporations.74 In addition, although tort
claimants, by definition, do not choose and so cannot monitor their prospective
corporate creditors, voluntary creditors of the corporation would be expected to
monitor the asset base of private corporations and tort creditors are able to free ride
off of this monitoring.75 Also, though limited liability may well be the appropriate
default rule in the case of public corporations where it is typically the tortious acts
of non-shareholder employees or agents of the corporation that expose the corpora-
tion to liability vicariously, in the case of private corporations it is the shareholders

67 Leebron, supra note 61; Bainbridge, supra note 8 at 497.


68 Hansmann & Kraakman, “Corporate Torts”, supra note 63 at 1904.
69 Bainbridge, supra note 8 at 498; Leebron, supra note 61 at 1601.
70 Nicholls, “Pure Form”, supra note 13 at 259-260.
71 Bainbridge, supra note 8 at 494–500; Michael P. Dooley, Fundamentals of Corpora-
tion Law (Westbury, NY: Foundation Press, 1995) at 56.
72 See also Michael P. Coffey, “In Defense of Limited Liability — A Reply to Hansmann
and Kraakman” (1994) 1 Geo. Mason L. Rev. 59, where the author, while not support-
ing unlimited liability in this context, argues for superiority in bankruptcy for tort vic-
tims and mandating insurance for risky industries. Insurance as a mechanism for deal-
ing with the issue of involuntary creditors has also been suggested by other
commentators; see e.g. Easterbrook & Fischel, supra note 7 at 101; William P. Fried-
man, “The Limits of Limited Liability” (1999) in The Future of Corporation Law:
Issues and Perspectives, Papers Presented at the Queen’s Annual Business Law Sym-
posium 1997 (Toronto: Carswell, 1999) at 25.
73 Bainbridge, supra note 8 at 503.
74 Ibid. at 504.
75 Ibid.
226 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

themselves who are often directly involved in the corporate activity that results in
the harm and so they are likely to be found liable directly with no need to invoke
the doctrine of veil piercing.76 Therefore, few commentators support abolishing
limited liability for private corporations with respect to tort claims.77 The more
frequently-voiced suggestion is that the courts ought to pierce the veil more often in
this context in order to incentivize shareholders to internalize tort risk.78
The case for a veil piercing claim made by an involuntary, rather than a volun-
tary, creditor is believed to be strengthened by the fact that, while the asset parti-
tioning benefits of separate legal personality and limited liability apply to all corpo-
rate liabilities, in the case of involuntary creditors the incentive of the corporation
to externalize risk is coupled with the inability of the claimant to bargain before the
fact. Yet, empirical studies from other jurisdictions suggest that veil piercing litiga-
tion involves a significantly larger number of contract cases than it does tort
cases.79 Possible explanations for this are the availability of liability insurance,
that, in general, corporations enter into contractual relationships more often than
they commit torts,80 or perhaps simply that tort-based claims are more frequently
settled and so do not lead to judicial decisions. What is surprising, however, is that
most empirical studies suggest that courts have actually pierced the corporate veil
in cases involving involuntary creditors less often than in cases involving voluntary
creditors.81 Naturally, counter-intuitive findings such as these have attracted criti-
cism from commentators.82

76 Nicholls, “Pure Form”, supra note 13 at 258.


77 It has, however, been argued that, while a rule of limited liability imposes no costs
upon the corporation owner, a rule of unlimited liability requires the owner of the cor-
poration to be insured in some way such that there is a market price for limited liability
imposed on the corporation owner and therefore, increases the incentive of the owner
of the corporation to act efficiently; Halpern, Trebilcock & Turnbull, supra note 47 at
145–147.
78 Easterbrook & Fischel, supra note 7 at 109-110. As an alternative to veil piercing,
imposing direct liability on shareholders has also been suggested; Bainbridge, supra
note 8 at 505-506.
79 John H. Matheson, “The Modern Law of Corporate Groups: An Empirical Study of
Piercing the Corporate Veil in the Parent-Subsidiary Context” (2009) 87:4 N.C.L. Rev
1091 at 1122; Oh, supra note 53 at 131; Mitchell, “Empirical Study”, supra note 53 at
24; Thompson, “Empirical Study”, supra note 53 at 1058; Ramsay & Noakes, supra
note 53 at 265.
80 David Millon, “The Still-Elusive Quest to Make Sense of Veil Piercing” (2009) 89:15
Tex. L. Rev. 15 at 25–27.
81 Thompson, “Empirical Study”, supra note 53 at 1059; Matheson, supra note 79 at
1092; Mitchell, “Empirical Study”, supra note 53 at 23-24; Ramsay & Noakes, supra
note 53 at 30. Even studies that have made findings consistent with conventional wis-
dom have not been able to suggest that courts are significantly more likely to pierce in
the tort context. See, for example, where it is found that there is a veil-piercing rate of
46.24% for contract versus a veil-piercing rate of 47.75% for tort; Oh, supra note 53 at
142.
82 Gevurtz, supra note 8 at 859; Bainbridge, supra note 8 at 512.
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 227

(c) Corporate Groups


Separate legal personality and limited liability also create incentives to organ-
ize business activity within groups of related corporations. What constitutes a
group of corporations is not defined formally but is commonly understood as a
structure whereby a parent or holding corporation, through shareholding or man-
agement, effectively controls subsidiary corporations. Such structures are driven by
the basic New Institutional Economics principle that choices about institutional de-
sign have an effect on the value that is created.83 Specifically, organizing commer-
cial activity into group structures facilitates distributing risks in a way that benefits
the group as a whole, managerial autonomy for buying or selling particular activi-
ties, the separate management of geographically-dispersed firms, compliance with
local laws, and tax advantages.84 While these are clearly legitimate uses of the
group structure, the ability to organize business activity through parents and subsid-
iaries also facilitates the externalization of risk on to third parties. Therefore, the
challenge for the law is in this context is to distinguish between legitimate and non-
legitimate uses of the group structure.85
It has been argued that the considerations justifying limited liability seem far
less persuasive when applied to corporate shareholders (and sibling corporations)
as opposed to individual shareholders despite acknowledged legitimate uses of the
corporate group structure.86 As with private corporations generally, many eco-
nomic justifications for limited liability, such as facilitating investor diversification,
are simply irrelevant when it comes to holding a corporation liable for the acts of
its related corporate entities. Also, the risk that the acts of a subsidiary will have a
negative business impact on the parent is no different than if one of the unincorpo-
rated divisions of the business in a single entity structure ran into difficultly.87 The
problem with being able to use separate legal personality and limited liability to
organize activity into corporate groups is that it facilitates judgment proofing.88
For this reason, commentators have argued that a more liberal approach
should be taken with respect to veil piercing within corporate groups in order to

83 Larry E. Ribstein, “Limited Liability Unlimited” (1999) 24 Del. J. Corp. L. 407 at 439.
84 Vanessa Finch, Corporate Insolvency Law: Perspectives and Principles, 2d ed. (Cam-
bridge, UK: Cambridge University Press, 2009) at 581–596.
85 Bainbridge, supra note 8 at 539–546.
86 Ibid. at 528; Landers, supra note 6 at 599; Leebron, supra note 61 at 1619; Easterbrook
& Fischel, supra note 7 at 11. For a defence of limited liability within the context of
corporate groups, see Richard A. Posner “The Rights of Creditors of Affiliated Corpo-
rations” (1976) 43 U. Chicago L. Rev. 499; Robert B. Thompson, “Piercing the Veil
Within Corporate Groups: Corporate Shareholders as Mere Investors” (1999) 13 Conn.
J. Int’l L. 379 at 388-89.
87 Bainbridge, supra note 8 at 529.
88 Lynn M. LoPucki, “The Death of Liability” (1996) 106 Yale L.J. 1. For criticisms, see
James J. White, “Corporate Judgment Proofing: A Response to Lynn LoPucki’s The
Death of Liability” (1998) 107:5 Yale L.J. 1363; Steven J. Schwarcz, “The Inherent
Irrationality of Judgment Proofing” (1999) 52 Stan. L. Rev. 1.
228 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

allocate enterprise liability.89 However, empirical studies from other jurisdictions


have suggested that courts have actually pierced the veil so as to impose liability on
a corporation for the acts of an affiliated corporation (parent, subsidiary, or sibling)
less often than when a human shareholder is involved.90 While these findings may
lend credence to the concern that judgment proofing is facilitated by organizing
economic activity into corporate groups, possible explanations for the counter-intu-
itive evidence include the possibility that cases settled without a trial (which there-
fore generate no written judgment) more frequently involve judgment proofing as
well as the possibility that analytic difficulties are greater when attempting to
ascribe blame for the actions of another to an artificial entity as opposed to a human
shareholder.

5. DOCTRINAL GROUNDS FOR VEIL PIERCING


The brief overview above identifies certain policy concerns raised by the doc-
trines of separate corporate legal personality and limited liability and the impact of
judicial departure from the implications of these doctrines when courts presume to
engage in veil piercing; a concept defined here in terms of relaxing or abandoning
the asset partitioning function of either or both of these two fundamental features of
corporate law for the purposes of re-allocating liability. This section turns from a
consideration of the policy implications of judicial veil piercing to a review of the
recognized doctrinal bases for veil piercing. The focus here, then, is not on the
economic impact of veil piercing but on the doctrinal elements of judicial veil
piercing decisions. The use of the veil metaphor to refer to the asset partitioning
between shareholders and corporations achieved by separate legal personality and
limited liability appears to have originated in the U.S. courts in the nineteenth cen-
tury.91 The expression “piercing the corporate veil” to describe the disregard of
separate legal personality and limited liability is commonly attributed to the semi-
nal 1912 article published in the Columbia Law Review by Wormser.92 In summa-
rizing the nineteenth century judicial attitude to veil piercing in the U.S., Wormser
noted that courts will disregard separate legal personality and/or limited liability
when “the conception of corporate entity is employed to defraud creditors, to evade
an existing obligation, to circumvent a statute, to achieve or perpetuate monopoly,
or to protect knavery or crime.”93
Initial challenges to the separate legal personality of corporations and the lim-
ited liability of shareholders in Canadian courts contained no references to the veil

89 Kurt A. Strasser, “Piercing the Veil in Corporate Groups” (2005) 37 Conn. L. Rev.
637; Bainbridge, supra note 8 at 526; Robert B. Thompson, “Unpacking Limited Lia-
bility: Direct and Vicarious Liability of Corporate Participants for Torts of the Enter-
prise” (1994) 47:1 Vand. L. Rev. 1; Phillip I. Blumberg, “Limited Liability and Corpo-
rate Groups” (1986) 11:4 J. Corp. L. 573.
90 Thompson, “Empirical Study”, supra note 53 at 1069; Matheson, supra note 79 at
1115; Oh, supra note 53 at 131; Mitchell, “Empirical Study”, supra note 53 at 22.
91 Fairfield County Turnpike Co. v. Thorp, 13 Conn. 173 (Conn., 1839) at 179.
92 Maurice I. Wormser, “Piercing the Veil of Corporate Entity” (1912) 12:6 Colum. L.
Rev. 496.
93 Ibid. at 517.
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 229

metaphor and, as in Salomon’s case in England, were instead based on arguments


characterizing the corporation as an agent, trustee, or alias of the shareholder.94 In
fact, pejorative terms now associated with veil piercing such as sham and cloak
appeared in judgments before the veil metaphor.95 Justice Masten, in the first Cana-
dian scholarly work on the subject published in the 1930’s, made no reference to
the veil metaphor.96 In summarizing the state of the law at the time, Justice Masten
explained that shareholders may be liable for the obligations of corporations either
on the basis of agency or if the company is formed or used for an improper pur-
pose.97 However, he cautioned that pejorative terms such as sham and cloak should
not be used indiscriminately to describe corporations but should only be used to
describe facts which established an agency relationship or an improper use of the
corporate form.98 The veil metaphor appears to have been used for the first time in
the context of Canadian corporate law in an article published by Justice Woods in
the 1950’s99 where he described the agency ground for re-allocating liability in
terms of the essential character of the corporation and the improper purpose ground
in terms of intention.100 However, he conceded that the courts had not been entirely
clear on precisely what facts would establish either an agency relationship or im-
proper use of the corporate form.101 Shortly after the publication of this article, the
veil metaphor began to appear in Canadian judgments.102
Despite Justice Masten’s warning against the indiscriminate use of pejorative
terms, courts did begin to use such terms evidently as independent grounds upon
which to pierce the corporate veil. Indeed, it soon became unclear where the dis-
tinction was to be drawn between agency and concepts such as sham and cloak.103

94 Rielle v. Reid (1899), 26 O.A.R. 54 (Ont. C.A.).


95 Export Brewing & Malting Co. v. Dominion Bank, 1934 CarswellOnt 44, [1934] O.R.
560, [1934] 4 D.L.R. 204 (Ont. C.A.) at 578 [O.R.]; reversed 1937 CarswellOnt 97,
[1937] 3 D.L.R. 513, [1937] 2 W.W.R. 568, [1937] 3 All E.R. 555 (Ontario P.C.).
96 C.A. Masten, “One Man Companies and Their Controlling Shareholders” (1936) 14:8
Can. Bar Rev. 663. This work was cited with approval in Zhelka, supra note 20 at 578.
97 Masten, supra note 96 at 671.
98 Ibid.
99 Mervyn Woods, “Lifting the Corporate Veil in Canada” (1957) 35:10 Can. Bar Rev.
1176.
100 Ibid. at 1184.
101 “Where there is marked fraud or criminal activity, the courts readily disregard the cor-
porate form and in cases where it is clear that the company is simply an agent or tool of
a shareholder they sometimes look behind the façade. But in fact the courts have lifted
the veil often enough to make the whole matter unpredictable. It is not, however, possi-
ble to form a rational pattern out of the courts’ handling of the various situations”; ibid.
at 1193.
102 Vicross Apartments Ltd. v. Minister of National Revenue, 1962 CarswellNat 175, 30
Tax A.B.C. 61, 62 D.T.C. 464 (Can. Tax App. Bd.); R. v. Shumiatcher (1965), 1965
CarswellSask 93, [1966] 2 C.C.C. 76 (Sask. C.A.).
103 “It should be noted that to advance the proposition that a corporation is an agent for a
shareholder is to affirm the existence of the corporation as a separate entity. It seems to
me that the reasoning in some cases in defective in that it fails to recognize this fact.
230 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

In theory, relying upon conventional legal principles such as agency or trust in-
volves no disregard of the separate legal entity as, in order for such relationships to
arise, two separate legal entities are needed: i.e. an agent and principal or a trustee
and beneficiary.104 However, it has never been clear what courts consider sufficient
evidence of these relationships as between shareholders and corporations. Typi-
cally, courts examine the degree of control shareholders exercise over corporations
and the degree of independence with respect to commercial interests.105 This em-
phasis on control overlooks the reality that, in the vast majority of private corpora-
tions (the subject of most veil piercing cases), shareholders will necessarily exer-
cise a high degree of control over the enterprise and their commercial interests,
likewise, will be fused inextricably with those of the corporation.106
The courts’ reliance upon pejorative terms such as sham or cloak as the bases
for piercing the corporate veil, on the other hand, does not require the finding of a
genuine agency or trust relationship as between shareholder and corporation and, in
theory, would involve the disregard of separate legal personality. In practice, how-
ever, it has always been difficult to distinguish between circumstances in which a
corporation may be said to be an agent for its shareholder and circumstances in
which a corporation is merely a sham or cloak for its shareholder;107 although at
times the courts have recognized the theoretical difference.108 Courts traditionally

One cannot logically treat a corporation as a sham or cloak or alter ego for the share-
holder so as to deny its existence and at the same time argue that it is an agent”; Ivan
Feltham, “Lifting the Corporate Veil”, (1968) Law Society of Upper Canada Special
Lectures 305 at 319.
104 It has been argued that the preserving of the separate legal personality of corporations
through the use of conventional legal concepts is more coherent as compared to an
independent veil piercing doctrine that disregards the separate legal personality of cor-
porations; see generally Jason W. Neyers, “Canadian Corporate Law, Veil-Piercing,
and the Private Law Model Corporation” (2000) 50:2 U.T.L.J. 173.
105 For an agency example, see Commissioners of Inland Revenue v. Sansom, [1921] 2
K.B. 492 (Eng. C.A.) at 503, Sterndale L.J. For a trusts example, see Covert, supra
note 10 at 795-796; Kosmopoulos, supra note 10.
106 In a recent case, the Supreme Court of the United Kingdom deemed a shareholder to
have beneficial ownership of corporate assets on the basis that most of the assets were
acquired before the relevant corporation commenced trading with at most nominal
consideration; Prest v. Petrodel, supra note 4 at paras. 49–51. Even this logic fails to
account for the reality in the context of the vast majority of private corporations. Such
corporations will often involve direct investment by the controlling shareholders prior
to the corporation developing the business activity to a level where it can sustain itself.
107 It has been argued that agency relationship as between shareholder and corporation
should only be found when the former exercises unauthorized control over the latter’s
assets; see Robert Flannigan, “Corporations Controlled by Shareholders: Principals,
Agents or Servants” (1986-1987) 51:1 Sask. L. Rev. 23.
108 “I note that in this passage the court lists agency as the third situation for piercing the
corporate veil. As I have already explained this legal principle allows one to circum-
vent rather than lift or pierce the corporate veil. While both achieve the same result, it
is incorrect to characterize agency as a tool to pierce the corporate veil”; Durling v.
Sunrise Propane Energy Group Inc., 2012 ONSC 4196, 2012 CarswellOnt 9200, 68
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 231

describe the basis of sham and cloak, at least in part, with reference to the degree of
control exercised by the shareholder over the corporation,109 the same basis upon
which findings of trust or agency are made. What is unclear is whether findings of
sham and cloak require only some requisite degree of control or whether they are
also dependent upon an additional finding of impropriety.
Lord Sumption of the Supreme Court of the United Kingdom recently at-
tempted to clarify the confusion that surrounds veil piercing jurisprudence by ex-
pressing the view that most prior English cases purportedly involving veil piercing
were not actually veil piercing cases at all.110 Instead, he argued, a substantial num-
ber of these cases — which he classified as “concealment” cases111 — could be ex-
plained using conventional legal principles. Concealment, which would include the
finding of an agency relationship, need not involve impropriety.112 The only “true”
veil piercing cases, according to Lord Sumption, were those involving the use of
the corporate form to avoid a pre-existing legal obligation. These he classified as
“evasion cases”.113 Lord Sumption did not explain, however, precisely what facts
in the “concealment cases” would result in the definitive determination of the exis-
tence of an agency or trust relationship between a shareholder and corporation.114
However, when applying the concept of concealment in a subsequent case, the En-
glish Court of Appeal reasoned that, where the shareholder was “the sole controller
of the company, and where there was a very close inter-relationship between the
corrupt actions of the [shareholder] and steps taken by the company in advancing
those corrupt acts and intentions, the reality is that the activities of both the [share-
holder] and the company are so interlinked as to be indivisible.”115 This suggests
that the relevance of the level of control a shareholder has over a corporation under
a concealment analysis is similar to the relevance of such control under a veil pierc-
ing analysis.

C.E.L.R. (3d) 231, 23 C.P.C. (7th) 341, [2012] O.J. No. 3408 (Ont. S.C.J.) at para. 126;
leave to appeal allowed 2013 ONSC 5830, 2013 CarswellOnt 13731, 5 C.C.L.T. (4th)
199, 81 C.E.L.R. (3d) 51, 315 O.A.C. 246 (Ont. Div. Ct.) [Durling].
109 “There is much overlap between what I will call here “agency by control” and some of
the principles related to piercing the corporate veil”; Elbow River Marketing Limited
Partnership v. Canada Clean Fuels Inc., 2012 ABQB 277, 2012 CarswellAlta 790, 538
A.R. 145, 62 Alta. L.R. (5th) 359, 1 B.L.R. (5th) 223 (Alta. Q.B.) at para. 124; reversed
in part 2012 ABCA 328, 2012 CarswellAlta 1914, 539 A.R. 68, 69 Alta. L.R. (5th) 22,
1 B.L.R. (5th) 292, 561 W.A.C. 68 (Alta. C.A.).
110 Prest v. Petrodel, supra note 4 at para. 28.
111 Ibid.
112 Ibid. at para. 32.
113 Ibid. at para. 35.
114 In Petrodel, the court held unanimously that the shareholder had a beneficial interest in
assets legally held by the corporation pursuant to a resulting trust. However, Lord
Sumption stated also that it was “not possible to give general guidance going beyond
the ordinary principles and presumptions of equity, especially those relating to gifts
and resulting trusts”; ibid. at para. 52.
115 Ibid. at para. 40.
232 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

The concealment and evasion principles have not yet been adopted into Cana-
dian law. Rather, contemporary Canadian scholars typically attempt to explain the
doctrine of veil piercing by setting out a list of doctrinal grounds which include
agency, sham, cloak, and improper use of the corporate form.116 The list of pejora-
tive terms to describe corporate structures not deemed worthy of benefiting from
the asset partitioning functions of separate legal personality and limited liability has
also expanded over time. They now include judicial condemnations of a corpora-
tion as a mere instrument,117 alter-ego;118 façade concealing the true facts;119 or
engaged in conduct akin to fraud.120 In addition, courts have identified more spe-
cific factors that point to impropriety so as to justify veil piercing such as thin or

116 See e.g. Corporate Law, supra note 5 at 194–213; Welling, supra note 5 at 116–121. J.
Anthony VanDuzer, The Law of Partnerships and Corporations, 3d ed. (Toronto: Irwin
Law, 2009).
117 See e.g. Dominion Royalty Corp. v. Goffatt, 1935 CarswellOnt 12, [1935] O.R. 169,
[1935] 1 D.L.R. 780, [1935] O.W.N. 77 (Ont. C.A.) at para. 32; affirmed 1935 Cars-
wellOnt 118, [1935] S.C.R. 565, [1935] 4 D.L.R. 736 (S.C.C.). The use of term instru-
ment, which may also be referred to as the instrumentality doctrine, is attributed to
Frederick Powell in the 1930’s and, in its initial articulation, contained no less than
eleven factors: the parent corporation owns all or most of the shares of the subsidiary;
the parent and subsidiary corporations have overlap in terms of directors or officers;
the parent corporation finances the subsidiary; the parent corporation subscribes to all
of the shares of the subsidiary or otherwise causes its incorporation; the subsidiary is
grossly undercapitalized capital; the parent corporation pays the salaries and other ex-
penses or losses of the subsidiary; the subsidiary has substantially no business except
with the parent corporation or no assets except the ones conveyed to it by the parent
corporation; in any formal statements, the subsidiary is described as a department or
division of the parent corporation; the parent corporation uses the property of the sub-
sidiary as its own; the directors of the subsidiary do not act independently in the inter-
ests of the subsidiary, and the formal legal requirements of the subsidiary are not met;
Frederick James Powell, Parent and Subsidiary Corporations: Liability of a Parent
Corporation for the Obligations of Its Subsidiary (Chicago: Callaghan, 1931). While
Powell’s articulation refers specifically to cases involving groups of companies, the
term instrument has since been applied to companies with human shareholders; see e.g.
Toronto (City) v. 1342736 Ontario Inc., 2001 CarswellOnt 6039, 34 C.L.R. (3d) 130,
[2001] O.J. No. 4550 (Ont. C.J.). Also, in the U.S. jurisdictions that invoke the instru-
mentality doctrine as a basis for piercing the corporate veil, the doctrine involves the
analysis of impropriety and causation as well as control; see e.g. Van Dorn Co. v.
Future Chemical and Oil Corp., 753 F.2d 565 (7th Cir., 1985) at 570.
118 See, e.g., Phillips v. 707739 Alberta Ltd., 2000 ABQB 139, 2000 CarswellAlta 147,
259 A.R. 201, 77 Alta. L.R. (2d) 302, 77 Alta. L.R. (3d) 302, [2000] 6 W.W.R. 280,
[2000] A.J. No. 167 (Alta. Q.B.) at para. 4.
119 See, e.g., Syntex Pharmaceuticals International Ltd. v. Medichem Inc., 1990 Car-
swellNat 636, 1990 CarswellNat 636F, [1990] 2 F.C. 499, 28 C.P.R. (3d) 1, 105 N.R.
49, [1990] F.C.J. No. 24 (Fed. C.A.) at paras. 35-36.
120 See, e.g., Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co.,
1996 CarswellOnt 1699, 28 O.R. (3d) 423, 2 O.T.C. 146, [1996] O.J. No. 1568 (Ont.
Gen. Div.) at para. 22; affirmed 1997 CarswellOnt 3496, [1997] O.J. No. 3754 (Ont.
C.A.) [Transamerica].
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 233

inadequate capitalization of the corporation;121 the failure to maintain adequately


separate records as between different entities,122 using the corporate form to avoid
pre-existing legal obligations,123 and, in cases involving groups of companies,
overlap between two corporations with respect to access to funds, corporate func-
tion, employees, directors, and/or shareholders when considering degrees of con-
trol.124 More generally, courts have also suggested that the corporate veil may be
pierced more liberally in family law cases,125 when equity or the interests of justice
are served by disregarding the corporate entity,126 or where it is appropriate to re-
gard a group of related corporations as a single economic unit.127
Canadian veil piercing doctrinal analysis, then, has evolved. Once based on a
finding of agency or improper use of the corporate form, decisions to pierce the veil
now may involve judicial consideration of a long list of purported grounds. The
Supreme Court of Canada has stated that the decided cases follow “no consistent
principle.”128 Scholars have pointed out that courts often preface veil piercing deci-
sions with a recitation of some or all of the above grounds but with little or no
indication of how, if at all, such factors should be weighted or balanced.129 Instead,
depending on the ultimate outcome desired, courts appear to grant themselves the
discretion to utilize particular factors while ignoring others subject to no obvious

121 See e.g. Shillingford v. Dalbridge Group Inc. (1996), 1996 CarswellAlta 997, 197 A.R.
56, 47 Alta. L.R. (3d) 154, 28 B.L.R. (2d) 281, 31 C.L.R. (2d) 99, 7 R.P.R. (3d) 254,
[1997] 3 W.W.R. 645, [1996] A.J. No. 1063 (Alta. Q.B.) at para. 28.
122 See e.g. 1005633 Ontario Inc. v. Winchester Arms Ltd., 2000 CarswellOnt 2207, 8
B.L.R. (3d) 176, [2000] O.J. No. 2404 (Ont. S.C.J.) at para. 92; additional reasons 2000
CarswellOnt 4298, [2000] O.J. No. 4327 (Ont. S.C.J.); affirmed 2000 CarswellOnt
4748, [2000] O.J. No. 4711 (Ont. C.A.) [Winchester Arms].
123 See e.g. Suncor Inc. Resources Group v. Allarco Group Ltd., 1987 CarswellAlta 144,
77 A.R. 378, 53 Alta. L.R. (2d) 107, (sub nom. Allarco Group Ltd. v. Suncor Inc.
Resources Group, Oil Sands Div.) [1987] 5 W.W.R. 159 (Alta. C.A.) at para. 22; leave
to appeal allowed (1988), 88 A.R. 320 (note), 60 Alta. L.R. (2d) lv (note), [1988] 6
W.W.R. lxvii (note), 89 N.R. 80 (note) (S.C.C.).
124 See e.g. Winchester Arms, supra note 122 at para. 92.
125 Wildman v. Wildman, supra note 20 at para. 31. While similar views were expressed by
courts in England for a number of years, the Supreme Court of the United Kingdom
recently stated that veil piercing has no special application in family law cases; see
Prest v. Petrodel, supra note 4 at para. 37.
126 See e.g. Kosmopolous, supra note 10 at paras. 12–14. Kosmopolous, while perhaps
being the most cited case for the proposition that veil may be pierced in the interests of
justice, involved the issue of whether a shareholder had an insurable interest in corpo-
rate assets and not the reallocation of liability. However, references to piercing the
corporate veil in the interests of justice have also been made in liability cases; Zhelka,
supra note 20 at 572.
127 See e.g. Manley Inc. v. Fallis, 1977 CarswellOnt 56, 2 B.L.R. 277, 38 C.P.R. (2d) 74,
[1977] O.J. No. 1080 (Ont. C.A.) at para. 6.
128 Kosmopoulos, supra note 10 at para. 12. The Supreme Court of the United Kingdom
recently made the same point about English cases; VTB Capital, supra note 14 at para.
128, Neuberger L.J.
129 Nicholls, “Pure Form”, supra note 13 at 240.
234 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

governing principle. Furthermore, for the most part, courts do not adjust their anal-
yses to take account of the distinction between cases involving allocation of liabil-
ity to a shareholder for corporate obligations, to a corporation for shareholder obli-
gations, or to one corporation for the obligations of another related corporation.
Sometimes, however, courts have suggested that limited liability is more deserving
of protection than separate legal personality; i.e., that courts should be more willing
to pierce the veil in cases that do not involve imposing personal liability on share-
holders for corporate obligations.130
Doctrinal justifications for veil piercing may be broadly divided into two cate-
gories. First are those that amount to nothing more than a presumed general discre-
tion to pierce the corporate veil. Into this category would fall veil piercing under-
taken “in the interests of justice”, under circumstances where it is said to be
appropriate to treat a corporate group as a single economic entity, and even, per-
haps, when the underlying liability arises in a family law context. The second cate-
gory includes those grounds for veil piercing that are better described as judicial
attempts to identify specific factors that support the finding of veil piercing.
Though courts use different specific labels to describe such factors, they may use-
fully be divided into two broad groups: those that point to the existence of suffi-
cient degree of control to justify veil piercing, and those that point to the sufficient
degree of impropriety to justify veil piercing.131

(a) Discretion — Interests of Justice, Single Economic Entity and Family Law
Cases in which courts pierce the veil on the basis of the need to promote the
interests of justice, because it is appropriate to treat a group of companies as a
single economic entity, or when the underlying liability arises in a family law con-
text appear to be examples of judicial exercise of a presumed general discretion to
pierce the corporate veil. The invocation of such general grounds lacks analytic

130 Wildman v. Wildman, supra note 20 at para. 24.


131 While there is utility in dividing them up this way as it allows for control and impropri-
ety to be considered independently, it must be acknowledged that some of the factors,
such as alter ego and instrument, contain elements of both control and impropriety.
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 235

rigour and so, not surprisingly, the validity of such grounds has been doubted by
many courts132 and commentators.133
While empirical studies in several jurisdictions suggest that the “interests of
justice” and single economic entity lines of reasoning can impact the outcome of

132 For criticisms of the interests of justice line of reasoning, see Ord, supra note 19; Tran-
samerica, supra note 120. For criticisms of the single economic entity line of reason-
ing, see Adams v. Cape Industries Plc (1989), [1991] 1 All E.R. 929, [1990] 1 Ch. 433,
[1990] 2 W.L.R. 657 (Eng. C.A.); leave to appeal refused (1990), [1991] 1 All E.R.
1054n, [1990] 2 W.L.R. 676 (U.K. H.L.) [Adams v. Cape]; Polly Peck International
Plc, Re, [1996] 2 All E.R. 433, [1996] B.C.C. 486 (Eng. Ch.) at 447-48 [All E.R.];
801962 Ontario Inc, supra note 19. “These decisions do not support a claim that the
test in Salomon v. Salomon has been superseded by a new “business entity” or “single
business entity” test. They merely illustrate the principle that, in particular fact situa-
tions, where the nature of the legal issue in dispute makes it appropriate to have regard
to the larger business entity, the court is not precluded by Salomon v. Salomon from
doing so.” and “It is important to note that the plaintiffs allege that the . . . defendants
“operated as one economic unit or a single group enterprise.” As explained, these are
labels for piercing the corporate veil and do not relieve the plaintiffs from pleading
facts that support the veils being pierced”; Durling, supra note 108 at paras. 109, 135.
For criticism against the notion that the veil should be pierced more liberally in family
law cases, see Prest v. Petrodel, supra note 4 at para. 41: “[F]or the court to deploy its
authority to authorise the appropriation of the company’s assets to satisfy a personal
liability of its shareholder to his wife, in circumstances where the company has not
only not consented to that course but vigorously opposed it, would, as it seems to me,
be an even more remarkable break with principle.” While the Supreme Court of the
United Kingdom rejected unanimously the notion that veil piercing enjoyed a special
application in family law cases in this case, it appears that courts in Canada continue to
enjoy a greater flexibility when piercing the corporate veil in the family context; see
Wildman v. Wildman, supra note 20; Lynch v. Segal, 2006 CarswellOnt 7929, 82 O.R.
(3d) 641, 26 B.L.R. (4th) 14, 277 D.L.R. (4th) 36, 33 R.F.L. (6th) 279, 219 O.A.C. 1,
[2006] O.J. No. 5014 (Ont. C.A.); leave to appeal refused 2007 CarswellOnt 4425,
2007 CarswellOnt 4426, 375 N.R. 392 (note), 241 O.A.C. 396 (note), [2007] S.C.C.A.
No. 84 (S.C.C.) [Lynch]; Debora v. Debora, 2006 CarswellOnt 7633, 83 O.R. (3d) 81,
275 D.L.R. (4th) 698, 33 R.F.L. (6th) 252, 33 R.F.L. (6th) 232, 52 R.P.R. (4th) 191,
218 O.A.C. 237, [2006] O.J. No. 4826 (Ont. C.A.) [Debora v. Debora].
133 For criticisms against the idea of piercing the veil in the interests of justice, see Nich-
olls, “Pure Form”, supra note 13 at 244-245; Jennifer Payne, “Lifting the Corporate
Veil: A Reassessment of the Fraud Exception” (1997) 56:2 Cambridge L.J. 284 at 290;
Welling, supra note 5 at 129: “Little need be said about this rationale, other than that it
simply will not do. There are, so far as we know, no such broadly enforceable stan-
dards of “fair play and good conscience,” at least in Canadian corporate law.” With
respect to cases involving groups of companies, commentators have been less hostile to
the idea of treating a group of companies as a single economic unit but have generally
attempted to set out more specific grounds when this should occur; see Adolf A. Berle,
Jr., “The Theory of Enterprise Entity” (1947) 47:3 Colum. L. Rev. 343 at 352-254;
Bainbridge, supra note 8 at 539–546. For criticism against the notion that veil should
be pierced more liberally in family law cases, see Nicholls, “Pure Form”, supra note 13
at 245–248.
236 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

some cases,134 it appears that these concepts often simply serve as a judicial short-
hand to explain a conclusion that is actually supported by other, more specific,
factors.135 It follows that, while piercing the veil in the interests of justice and
piercing the veil when it appropriate to treat a group of companies as a single eco-
nomic entity are ideas that form part of the legal landscape in this area, such state-
ments do not convey anything other than merely an acknowledgement that courts
have the discretion to disregard separate legal personality and/or limited liability in
companies when the relevant facts support such a finding.
Similarly, in family law cases, courts often cite conventional veil piercing
grounds in addition to noting the supposed wider judicial discretion to pierce the
veil in this context.136 In other words, the mere fact that family obligations are
involved, in and of itself, is not enough to justify piercing the corporate veil. To
rationalize a wider discretion to pierce the corporate veil in the family context,
courts point to considerations such as government support payment guidelines that

134 See, for example, Piercing the Corporate Veil in Australia where Ramsay & Noakes
find that the veil is pierced in 60% of cases where unfairness/justice is argued, although
the numbers of cases for this category was small: supra note 53 at 282. Further, Robert
Thompson’s study revealed that “equity, fairness, or justice” was cited as a ground for
piercing the veil in 135 cases from a total of 1583 (8.5%), although it is not clear from
this statistic if justice was relied upon as a primary reason for the decision or if it was
stated in combination with other recognized grounds for piercing the veil: “Empirical
Study”, supra note 53 at 104. See also Ramsay & Noakes, supra note 53 at 271, Table
12; Matheson, supra note 79 at 1115.
135 Support for the treatment of the interests of justice as an independent ground for veil
piercing is often found in the Supreme Court of Canada decision Kosmopoulos v.
Constitution Insurance Co. of Canada, 1987 CarswellOnt 132, 1987 CarswellOnt
1054, EYB 1987-68613, [1987] 1 S.C.R. 2, 63 O.R. (2d) 731 (note), 63 O.R. (2d) 731,
(sub nom. Kosmopoulos v. Constitution Insurance Co.) 36 B.L.R. 233, 22 C.C.L.I. 296,
(sub nom. Constitution Insurance Co. of Canada v. Kosmopoulos) 34 D.L.R. (4th) 208,
[1987] I.L.R. 1-2147, 74 N.R. 360, 21 O.A.C. 4, [1987] S.C.J. No. 2 (S.C.C.). Even in
this case, the idea is articulated more as a conclusion than as a ground around which to
build an argument: “As a general rule a corporation is a legal entity distinct from its
shareholders: Salomon v. Salomon & Co. (1896), [1897] A.C. 22, [1895–99] All E.R.
Rep. 33, 66 L.J. Ch. 35, 13 T.L.R. 46, 45 W.R. 193 (U.K. H.L.). The law on when a
court may disregard this principle by “lifting the corporate veil” and regarding the
company as a mere “agent” or “puppet” of its controlling shareholder or parent corpo-
ration follows no consistent principle. The best that can be said is that the “separate
entities” principle is not enforced when it would yield a result “too flagrantly opposed
to justice, convenience or the interests of the Revenue”: L.C.B. Gower, Modern Com-
pany Law (4th ed. 1979) at 112. I have no doubt that theoretically the veil could be
lifted in this case to do justice. . . . But a number of factors lead me to think it would be
unwise to do so”; at paras. 10-11. Likewise, for single economic entity, arguably the
strongest proponent for such a line of reasoning was Lord Denning and even he, when
setting it out for the first time, supported it with the argument that the parent in that
case could “control every movement of the subsidiaries”; D.N.H. Food Distributors
Ltd. v. Tower Hamlets London Borough Council, [1976] 3 All E.R. 462, [1976] 1
W.L.R. 852 (Eng. C.A.) at 860 [W.L.R.].
136 Wildman v. Wildman, supra note 20 at paras. 24, 31; Lynch, supra note 132 at para. 38;
Debora v. Debora, supra note 132 at paras. 24–29.
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 237

allow courts to consider a spouse’s shareholdings in corporations for the purposes


of calculating income137 and to the special nature of spousal and child support
claims.138 These justifications have been subject to criticism. The support guide-
lines, for example, merely require the court to take account of income generated by
share ownership and it is not entirely clear why spousal and child support claims
deserve protection not afforded to other types of creditors, many of whom may be
equally vulnerable and deserving.139

(b) Factors — Control and Impropriety


The second broad category of judicial justifications for veil piercing comprise
a lengthy list of conventional terms, all of which appear to relate to one of two
critical findings: shareholder control and impropriety. When courts determine that
there is “overlap” between two or more corporations or when they characterize a
corporation as a mere instrument, conduit, alias, alter ago, or agent, such findings
essentially indicate a determination that that the shareholder has a sufficient degree
of control over the corporation to justify piecing the corporate veil. Similarly, a
judicial finding of sham, façade, fraud, improper purpose, avoiding legal obliga-
tions, inadequate record keeping, and inadequate capitalization all indicate that a
sufficient degree of wrongdoing has been established to justify piercing the veil. In
short, then, regardless of the specific language used by the court, it appears that the
corporate veil will be pierced where sufficient degrees of control and impropriety
are present.140 The cases, however, reveal a number of important nuances sur-
rounding the requisite degrees of control or impropriety.

137 Federal Child Support Guidelines, S.O.R./97-175, s. 18.


138 Wildman v. Wildman, supra note 20 at para. 31.
139 Nicholls, “Pure Form”, supra note 13 at 245-246; Wildman v. Wildman, supra note 20
at paras. 26-27, 31. At judicial level, the Supreme Court of the United Kingdom has
unanimously rejected the notion that veil piercing benefits from a more liberal applica-
tion in family cases; Prest v. Petrodel, supra note 4 at paras. 37–42.
140 “If a company is formed for the express purpose of doing a wrongful or unlawful act,
or, if when formed, those in control expressly direct a wrongful thing to be done, the
individuals as well as the company are responsible to those to whom liability is legally
owed. In such cases, or where the company is the mere agent of a controlling corpora-
tor, it may be said that the company is a sham, cloak or alter ego, but otherwise it
should not be so termed”; Zhelka, supra note 20 at 578. “The courts will disregard the
separate legal personality of a corporate entity where it is completely dominated and
controlled and being used as a shield for fraudulent or improper conduct. The first
element, “complete control”, requires more than ownership. It must be shown that there
is complete domination and that the subsidiary company does not, in fact, function
independently . . .. The second element relates to the nature of the conduct: is there
“conduct akin to fraud that would otherwise unjustly deprive claimants of their rights”;
Transamerica, supra note 120 at 434. “Generally, a subsidiary, even a wholly owned
subsidiary, will not be found to be the alter ego of its parent unless the subsidiary is
under the complete control of the parent and is nothing more than a conduit used by the
parent to avoid liability”; Gregorio v. Intrans-Corp., 1994 CarswellOnt 237, 18 O.R.
(3d) 527, 15 B.L.R. (2d) 109, 115 D.L.R. (4th) 200, 4 M.V.R. (3d) 140, 72 O.A.C. 51,
238 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

(i) Control
That a finding of control is essential to veil piercing is not surprising.141 As
explained above, veil piercing as a legal mechanism for reallocating liability is ap-
plied exclusively in the context of private corporations where there is typically no
separation of ownership and control.142 What is problematic, however, is that it is
impossible to discern from the veil piercing cases precisely what degree of control
will justify veil piercing. The terms typically invoked by courts to denote sufficient
control such as instrument, conduit, alias, alter ago, and agent are vague and inde-
terminate labels that appear merely to rationalize a decision after the fact.
When attempting to articulate when a corporation may be considered the in-
strument, conduit, alias, alter ago, or agent for its shareholder, courts frequently
state that share ownership is not enough and that what is required is complete con-
trol.143 With respect to groups of companies, courts typically point to facts indicat-
ing the lack of a formal separation between the various entities; examining factors
such as overlap of corporate personnel, overlap of corporate records, overlap of
corporate function and commingling of profits.144 In the case of individual share-
holders, courts similarly examine the degree to which the corporation is used to
further the interests of the shareholder. In other words, for the veil to be pierced on
a control ground, there needs to be evidence of lack of independence as between
the shareholder and the corporation. However, the precise level of independence
required to preserve separate legal personality is not clear.145

[1994] O.J. No. 1063 (Ont. C.A.) at 536 [O.R.]; additional reasons 1994 CarswellOnt
3827, 15 B.L.R. (2d) 109n (Ont. C.A.).
141 All of the empirical studies to date from other jurisdictions that have collected data on
the reasons used by courts when piercing the veil suggest that control is a very influen-
tial factor when it comes to deciding veil piercing outcomes. However, the different
recognized terms used to convey the idea of sufficient control vary in terms of their
frequency in judgments; see Thompson, “Empirical Study”, supra note 53 at 1063-64,
Oh, supra note 53 at 133. See also Matheson, supra note 79 at 1115. The study of veil
piercing in Australia does not present data on reasons used by the courts when making
decisions but instead arguments made by the parties when making claims and suggests
that agency is the most commonly used factor to indicate sufficient control; Ramsay &
Noakes, supra note 53 at 31.
142 Findings from most empirical studies in other jurisdictions support this; Thompson,
“Empirical Study”, supra note 53 at 1047, 1055–58; Oh, supra note 53 at 107–109;
Mitchell, “Empirical Study”, supra note 53 at 22. Rather surprising, the empirical study
conducted for Australia revealed that the courts have on occasion pierced the veil of a
public corporation; Ramsay & Noakes, supra note 53 at 23.
143 See, e.g., Transamerica, supra note 120 at 434; Gregorio, supra note 140 at 536.
144 Smith, Stone & Knight Ltd. v. Birmingham (City), [1939] 4 All E.R. 116, 3 Mod LR
226 (Eng. K.B.) at 121 [All E.R.].
145 For example, in Branco v. American Home Assurance Co., 2012 SKQB 394, 2012
CarswellSask 685, 14 C.C.L.I. (5th) 193, [2012] I.L.R. I-5344, 406 Sask. R. 205 (Sask.
Q.B.) at paras. 126–130, the presence of overlap of employees, the provision of payroll
services by the parent to the subsidiary, and the negotiation of an insurance policy by
the parent on behalf of the subsidiary were not enough to render the subsidiary the alter
ego of its parent. However, in 642947 Ontario Ltd. v. Fleischer, 2001 CarswellOnt
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 239

Apart from the difficulty in determining the requisite degree of control that
will justify veil piercing, there is an overarching question about the relevance of
control to veil piercing in the first place.146 In all private corporations with one or
very few shareholders, shareholders will necessarily exercise a high degree of con-
trol by virtue of their ability to appoint, or even to be involved directly in, manage-
ment. Accordingly, such a corporation’s interests will always be fused with those
of its dominant shareholders.147 It has thus been noted that, if control really was a
determinative factor in veil piercing cases, courts would pierce the veil far more
often than they do.148 Yet they do not because they recognize and acknowledge
that there is nothing wrong with using the corporate structure specifically for the
purpose of asset partitioning.149 Furthermore, concerns about the degree of control
a shareholder has over a corporation seem misplaced as they are disconnected from
the relevant policy concerns raised by separate legal personality and limited liabil-
ity referred to above.150

(ii) Impropriety
For liability to attach to a shareholder for corporate obligations, to a corpora-
tion for shareholder obligations, or to one corporation for obligations of a related
corporation, courts frequently seek to identify some form of impropriety.151 Indicia
of impropriety range from specific findings such as the failure to observe corporate

4296, 56 O.R. (3d) 417, 16 C.P.C. (5th) 1, 209 D.L.R. (4th) 182, 47 R.P.R. (3d) 191,
152 O.A.C. 313, [2001] O.T.C. 358, [2001] O.J. No. 4771 (Ont. C.A.) [642947 On-
tario], two human shareholders were held to be alter egos of a company despite the fact
that they held an indirect interest in it through other corporations and the fact that it
was incorporated for the specific purpose of holding property.
146 Bainbridge, supra note 8 at 507.
147 Corporate law statutes in Canada even recognize and facilitate this through the unani-
mous shareholder agreement mechanism; see e.g. CBCA, supra note 13 at s. 146.
148 Bainbridge, supra note 8 at 507.
149 “We do not accept as a matter of law that the court is entitled to lift the corporate veil
as against a defendant company which is the member of a corporate group merely be-
cause the corporate structure has been used so as to ensure that the legal liability (if
any) in respect of particular future activities of the group (and correspondingly the risk
of enforcement of that liability) will fall on another member of the group rather than
the defendant company. Whether or not this is desirable, thee right to use a corporate
structure in this manner is inherent in our corporate law”; Adams v. Cape, supra note
132 at 1026, Slade L.J.
150 “Where is the concern for externalization of risk? Or the effect of the decision on capi-
tal formation? Or on populist notions of economic democracy?” Bainbridge, supra note
8 at 520-521.
151 All of the empirical studies from other jurisdictions that have collected data on the
reasons used by courts when piercing the veil suggest that impropriety factors are very
influential when it comes to deciding veil piercing outcomes. Like with control, the
different recognized terms used to convey the idea of sufficient impropriety vary in
terms of their frequency in judgments; see Matheson, supra note 79 at 1153–1155;
Thompson, “Empirical Study”, supra note 53 at 1063-1064; Oh, supra note 53 at
89–94; Ramsay & Noakes, supra note 53 at 31.
240 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

formalities to more general denunciations of the corporation as a sham, façade con-


cealing the true facts, or findings of fraud and improper purpose. Among these indi-
cia of impropriety, the failure to observe corporate formalities, unless it contributed
to a misrepresentation to the claimant, has been criticized as being completely irrel-
evant to the issue.152
There has also been debate amongst scholars as to the relevance of inadequate
capitalization in veil piercing claims. Descriptively, some scholars argue that courts
have found it to be relevant to all types of veil piercing claims with particular sig-
nificance in the case of claims made by involuntary creditors.153 However, empiri-
cal studies conducted in the U.S. have suggested that inadequate capitalization is
one of the least influential lines of reasoning in successful veil piercing cases.154
Normatively, scholars have argued that inadequate capitalization should not be rel-
evant to veil piercing claims launched by voluntary creditors as they are able to
assess credit risk before the fact.155 Many general corporate statutes — including
all Canadian corporate law statutes — do not include minimum capital require-
ments, at least in part because of the practical impossibility of setting an appropri-
ate standard that would apply fairly and effectively to all types of businesses.156
Since corporate statutes themselves do not require any minimum capitalization, it
hardly seems appropriate for courts to impose one after the fact on an ad hoc basis.
In any event, while courts have cited undercapitalization as a factor that supports an
argument for veil piercing, as with all such factors, it is typically recited alongside
a litany of other factors with no indication as to its relative significance or
weight.157
With respect to using the corporate form to avoid pre-existing obligations, as
mentioned above, Lord Sumption of the Supreme Court of the United Kingdom
suggested that this is the only basis upon which courts can, and do, legitimately
pierce the corporate veil.158 The benefit of adopting such a principle into Canadian

152 “Recall that we worry about limited liability mainly because it permits shareholders to
externalize risk. If so, what on earth does [the] failure to hold corporate meetings have
to do with anything?” Bainbridge, supra note 8 at 523. The empirical studies in the
U.S. suggest that the failure to observe corporate formalities is one of the least fre-
quently cited grounds in veil piercing cases; see Thompson, “Empirical Study”, supra
note 53 at 1063-1064; Oh, supra note 53 at 92. The justification for considering the
failure of corporate formalities as being relevant to veil piercing as been described as
being “to prevent shareholder-owners from impairing the interests of other parties by
carrying this unity of interest too far”; David H. Barber, “Piercing the Corporate Veil”
(1980-1981) 17 Willamette L. Rev. 371 at 377-378.
153 Hackney & Benson, supra note 57 at 859.
154 Matheson, supra note 79 at 1153–1155; Thompson, “Empirical Study”, supra note 53
at 1063-1064; Oh, supra note 53 at 92.
155 Bainbridge, supra note 8 at 511–513; David Millon, “Piercing the Corporate Veil, Fi-
nancial Responsibility, and the Limits of Limited Liability” (2007) 56 Emory L.J. 1305
at 1336.
156 See Nicholls, “Pure Form”, supra note 13 at 242.
157 See e.g. 642947 Ontario, supra note 145 at paras. 59-60.
158 Prest v. Petrodel, supra note 4 at paras. 19–35. However, this view was not adopted
whole-heartedly by all of the judges; see ibid. Hale and Wilson L.J.J. at para. 92,
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 241

law is that it would provide a relatively precise definition of the kind of impropriety
required to pierce the corporate veil. However, it has also been suggested that there
may be other more specific and appropriate legal tools with which to combat the
misuse of the corporate form to avoid pre-existing obligations, including the use of
traditional agency principles159 or fraudulent conveyance law.160 In other words,
an independent veil piercing doctrine may not be necessary to deal with this partic-
ular form of impropriety.
Canadian courts continue to refer to other alleged forms of impropriety to jus-
tify veil piercing including denouncing corporations and their operations using
terms such as sham, façade, fraud, and improper purpose. This menu of pejorative
labels, unfortunately, does not help define the degree of impropriety that will jus-
tify veil piercing but merely adds to the doctrinal uncertainty and confusion.161 A
corporate structure has been described as a sham where it is “formed for the express
purpose of doing a wrongful or unlawful act, or, if when formed, those in control
expressly direct a wrongful thing to be done.”162 The basis upon which a corporate
structure is deemed a façade is equally unclear. A company is a mere façade con-
cealing the true facts “where it is completely dominated and controlled and being
used as a shield for fraudulent or improper conduct.”163 Similarly, the standard of
fraud required is an ill-defined “conduct akin to fraud”; wording so broad that one
fears it might be suggested that even incorporating for the purpose of asset parti-
tioning might breach the standard.164 Yet, of course, corporate legislation specifi-
cally permits the incorporation and operation of private companies and so endorses
their use, implicitly acknowledging that there are benefits afforded to society by
allowing entrepreneurs to organize business activity into separate legal entities spe-
cifically to take advantage of asset partitioning.165

Mance L.J. at para. 100, Clarke L.J. at para. 103, and Walker LJ at para. 106. For an
analysis of Prest v. Petrodel, see Thomas G. Heintzman & Brandon Kain, “Through
the Looking Glass: Recent Developments in Piercing the Corporate Veil” (2013) 28:3
B.F.L.R. 525.
159 Prest v. Petrodel, supra note 4 at paras. 70–73.
160 Ribstein, “Theories of the Corporation”, supra note 48 at 108–112.
161 In a recent judgment, the Supreme Court of the United Kingdom described expressions
such as sham and façade as “pejorative” and “dangerous” as “they risk assisting moral
indignation to triumph over legal principle, and, while they may enable the court to
arrive at a result which seems fair in the case in question, they can also risk causing
confusion and uncertainty in the law”; VTB Capital, supra note 14 at para. 124, Neu-
berger L.J. Despite acknowledging the problems of having such legal standards, the
court went on to apply them to the facts of the case; ibid. at para. 142. In a subsequent
judgment, the same court added that these expressions “beg too many questions to pro-
vide a satisfactory answer”; Prest v. Petrodel, supra note 4 at para. 28.
162 Zhelka, supra note 20 at 578.
163 Transamerica, supra note 120 at 433.
164 “The alter ego principle is applied to prevent conduct akin to fraud that would other-
wise unjustly deprive claimants of their rights”; Gregorio, supra note 140 at 536.
165 “No doubt his creditors are disappointed at their inability to have access to his corpo-
rate assets and particularly where he himself is reaping some financial benefit there-
from. But that must of necessity be, so long as the Legislature provides for and encour-
242 BANKING & FINANCE LAW REVIEW [30 B.F.L.R.]

6. CONCLUSION
Veil piercing has been the subject of intense scrutiny by both judges and
scholars; yet there are still many issues to be resolved at theoretical, empirical and
doctrinal levels. While organizational law has explained the asset partitioning func-
tions of separate legal personality and limited liability, no comprehensive theoreti-
cal grounds have yet been advanced to explain and justify the basis on which these
functions should be sacrificed. The economic justifications for limited liability only
go as far as explaining why veil piercing does not operate in cases involving the
liability of shareholders for corporate obligations in public corporations. However,
the asset partitioning benefits of limited liability apply equally to public and private
corporations. Similarly, the view expressed by Canadian courts that limited liability
is more deserving of protection than separate legal personality ignores that fact that
the latter performs an identical asset partitioning function. Arguably, any theoreti-
cal explanation for the sacrificing of asset partitioning would apply equally to both
separate legal personality and limited liability. More empirical work is needed also
to inform proposals aimed at addressing the policy concerns surrounding involun-
tary creditors and corporate groups. The empirical work that has been conducted to
date does not suggest that courts are responding to these concerns by piercing the
veil more frequently in these contexts. Research indicating the degree to which as-
set partitioning is used specifically to avoid tort liability or otherwise render corpo-
rations judgment proof through the use of corporate groups would be helpful in
setting the policy for any reform.
Fundamentally, there is the question of whether veil piercing is legitimate or
needed as a legal mechanism to deal with the policy concerns raised by separate
legal personality and limited liability. Given that both separate legal personality
and limited liability have a statutory basis with very limited exceptions,166 scholars
have rightly questioned the legitimacy of a broad independent veil piercing doc-
trine. The Supreme Court of the United Kingdom recently justified the existence of
an independent veil piercing doctrine on the basis that legal advantages obtained by
fraud or dishonesty will not be enforced.167 Such a justification is not materially
different from current observed Canadian judicial practice. Ideally, however, an in-
dependent veil piercing doctrine should carefully and explicitly weigh the complex
costs and benefits associated with the availability of separate legal personality and
limited liability and provide standards and criteria with genuine predictive value.
Assuming courts have, and should retain, a general veil-piercing discretion,
the vague standards of control and impropriety upon which exercise of that discre-
tion is currently based are clearly inadequate. As has been pointed out, most private
corporations will be subject to a high level of control from shareholders. The con-
trol that shareholders enjoy in such entities, in and of itself, cannot serve as the

ages the formation of private corporations. Without such, of course, enterprise and
business adventure would be stiffed. Limited liability is one of the landmarks of incor-
poration”; Zhelka, supra note 20 at 577.
166 See, e.g., CBCA, supra note 13 at s. 45(1), which provides that shareholders of a corpo-
ration are not liable for a corporation’s obligations except as specifically provided for
in six specific provisions of the CBCA.
167 Prest v. Petrodel, supra note 4 at para. 18.
CORPORATE VEIL PIERCING & ALLOCATION OF LIABILITY 243

lynchpin for liability. Similarly, relying upon a vague standard for impropriety as
the basis of veil piercing dissuades courts from undertaking the difficult but essen-
tial task of revisiting the economic justifications for and policy considerations of
separate legal personality and limited liability with a view to developing a more
considered legal framework that sets out specific improper uses of the corporate
form.168
Alternatively, if courts were no longer to purport to exercise a free-standing
discretion to pierce the corporate veil, the asset partitioning functions of separate
legal personality and limited liability might nevertheless still be abrogated through
the application of agency and trust principles. While this approach avoids the legiti-
macy issues associated with an independent veil piercing doctrine, significant re-
finement and definition of the law of agency and trust in this context would be
needed to clarify when precisely shareholders and corporations could expect to find
themselves in such relationships and so lose the statutory protections of limited
liability or separate legal personality. Basing a finding of an agency or trust rela-
tionship on vague notions of control does little to obviate the unpredictability asso-
ciated with a standalone doctrine of veil piercing. Indeed, sacrificing asset parti-
tioning between shareholders and corporations on the basis of agency or trust will
always be somewhat disingenuous as the parties themselves will never have in-
tended to create such relationships. The development of a rich theory explaining
appropriate departures from the asset partitioning functions of separate legal per-
sonality and limited liability and further empirical research identifying the degree
to which policy concerns exist would contribute to more coherent doctrine.

168 “Put bluntly, what use is there in debating, settling upon and ultimately embodying a
preferred and carefully considered policy decision in legislation if the courts routinely
decide to ignore legislative fiat”; Nicholls, “Pure Form”, supra note 13 at 256.
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