Your company can wind up on hook for debts of your shareholders
The veil that protects firms can be pierced in rare instances, Adam N. Black writes.
A corporation is a separate legal entity, generally immune from the personal responsibilities of its shareholders. However, in rare circumstances, the veil that protects the corporation can be pierced and the corporation may find itself liable for the debts of its shareholders. That is precisely what happened in the 2018 case of Slater v. Slater, penned by Justice McCreary of the Queen’s Bench for Saskatchewan.
At the time of their separation, Mr. Slater and Ms. Slater were the sole shareholders of Advance Door Systems. In December 2017, the Slaters reached an agreement that resolved issues arising from their separation. The agreement, incorporated into a court order, required Mr. Slater to make payments totalling $110,031 towards the mortgage of the family home, and the home and cottage taxes, and discharge certain registered interests in respect of the home and cottage.
Before the ink had dried on the agreement, Mr. Slater found himself unable to pay. Pursuant to the terms of the agreement, the amount owed was automatically deemed to be lump sum spousal support and payable immediately. As it turns out, converting the amount owed to lump sum spousal support opened the door to significant and farreaching enforcement remedies for Ms. Slater.
Ms. Slater proceeded in court seeking a declaration that Advance Door Systems is jointly and severally liable with Mr. Slater for the lump sum support payment in default. In response, Mr. Slater said that he had used his best efforts to make payment but was unable to do so. According to him, his financial circumstances were precarious.
Mr. Slater further argued that finding Advance Door Systems jointly and severally liable for the support payment would financially ruin Mr. Slater’s company and prevent Ms. Slater from ever collecting the money owed to her. In dismissing that argument, Justice McCreary was not convinced that Ms. Slater did not understand the implications of the order she was seeking, noting “(Ms. Slater) seeks to be able to enforce against Mr. Slater’s companies and, pursuant to the requirements of the Act, it is her right to do so. She is represented by highly competent legal counsel and I assume she is sufficiently capable and well-advised to determine what is in her own best interests.”
In Saskatchewan, and in provinces across Canada, legislation permits a court to make an order that a closely held corporation is liable for the support obligations of its shareholders. Specifically, according to Saskatchewan’s The Enforcement of Maintenance Orders Act, 1997 a support recipient may apply to the court for an order declaring that a corporation is jointly and severally liable with a payor for payments required under a support order if: One, the payor defaults in a payment required under the support order; two, the corporation has been served with a notice of seizure respecting the amount owing by the payor under the support order; and three, the payor is in arrears in an amount not less than three months’ payments under a support.
If all three conditions are met, a corporation may become jointly and severally liable for a shareholder’s support obligation. Justice McCreary determined the conditions were met and Advance Door Systems became liable for Mr. Slater’s support obligation to Ms. Slater.
In the context of such a finding, the legislation makes it clear that: the corporation continues to be liable as long as the shareholder continues to be liable for payment required under the support order; any enforcement measure that may be taken with respect to the shareholder may be taken with respect to the corporation; and the amount of a payment required under the support order that is paid by the corporation is a debt owed by shareholder to the corporation.
Mr. Slater further argued that Advance Door Systems should only be made jointly and severally liable if it was created for an improper purpose. Justice McCreary dismissed that argument noting that Advance Door Systems did “not have to be created for an improper purpose in order for it to be declared jointly and severally liable. It is sufficient for the corporation to be used for an improper purpose — to shield monies from garnishment, for example — to give grounds to pierce the corporate veil. The Act’s purpose is to hold a corporation liable for the obligations of the shareholder, as opposed to protecting the shareholder from the liability of the corporation.”
This approach is consistent with decisions across the country, including Wildman v. Wildman, a 2006 decision of the Court of Appeal for Ontario. In that case, Justice Macpherson noted that “although a business person is entitled to create corporate structures and relationships for valid business, tax and other reasons, the law must be vigilant to ensure that permissible corporate arrangements do not work an injustice in the realm of family law. In appropriate cases, piercing the corporate veil of one spouse’s business enterprises may be an essential mechanism for ensuring that the other spouse and children of the marriage receive the financial support to which, by law, they are entitled.”
In the context of such a finding, the legislation makes it clear that the corporation continues to be liable as long as the shareholder continues to be liable for payment required under the support order ...