Directing Minds, Unclean Hands: Acting Within The Scope Of Business Is No Shield Against Piercing The Corporate Veil

Directing Minds, Unclean Hands: Acting Within The Scope Of Business Is No Shield Against Piercing The Corporate Veil¹

Under Canadian law, a corporation is a separate legal entity from the people who own or run it. This means that, as a general rule, the corporation’s debts and liabilities belong to the corporation alone and not to its officers, directors or shareholders personally.

“Piercing the corporate veil” is an exception to this rule. It allows a court to look behind the corporate structure and hold the individuals in control personally responsible for the corporation’s liabilities.

The Court of Appeal recently revisited the doctrine of piercing the corporate veil in Chanderpaul v. Caesars Convention Centre Ltd. (“Chanderpaul”), and clarified that the corporate veil can be pierced even where the wrongful conduct falls squarely within the individual’s role as directing mind, so long as those in control expressly directed the corporation to carry out the wrongful act.²

Facts

The appellant, Michelle Chanderpaul, was injured in a car accident that occurred while she was a passenger in a car driven by an intoxicated, underage driver.

Prior to the accident, the appellant and the driver had been at a nightclub operated by Caesars Convention Centre Ltd. (“Caesars“), where the driver used fake identification to purchase alcohol. The two individual defendants, Rajesh and Kanta Kaura (the “Kauras“) were the directors and shareholders of both the corporate defendants, Caesars and R.K.S. Investments Ltd. (“R.K.S.“), which owned the property where Caesars operated.

The appellant commenced proceedings against Caesars on the theory that it had overserved the driver.³ The appellant also brought claims against the Kauras and R.K.S., alleging that they had negligently operated Caesars as a nightclub, failed to properly insure it, and had taken steps to improperly render Caesars judgment-proof by dissolving Caesars after it was noted in default.⁴

The respondents brought a motion for summary judgment, or in the alternative, to strike the appellant’s pleadings.

Piercing the corporate veil in Chanderpaul

The motion judge applied the two-part test from Transamerica on piercing the corporate veil, where a party must establish that:

1. the individual must have completely dominated and controlled the corporation (not merely owned or managed it); and
2. the individual must have engaged in fraudulent or improper conduct that gave rise to the liabilities the plaintiff is seeking to enforce.⁵

In applying the test, the motion judge found that the evidence did not support piercing the veil as the alleged wrongful conduct related to how Caesars was operated and how alcohol was served on the premises, which was conduct the Kauras undertook in their capacity as the directing minds of the corporation, not outside of it.⁶

Piercing the corporate veil does not require conduct outside the corporation’s operations

While the Court of Appeal agreed with the motion judge’s ultimate conclusion it found that the motion judge had erred in her interpretation of the second element of the Transamerica test. As noted above, the motion judge reasoned that the alleged wrongful conduct was taken by the Kauras in their capacity as the directing minds of the corporation and therefore could not form the basis for piercing the corporate veil.

The Court of Appeal held that this interpretation was too restrictive. The second element of the Transamerica test does not require that the wrongful conduct be unrelated to the corporation’s operations.⁷ Rather, the corporate veil can be pierced where those in control of the corporation expressly direct a wrongful act to be done by the corporation, regardless of whether such conduct is connected to the corporation’s business.⁸ The Court further confirmed that, while the corporate veil may be pierced where a corporation is incorporated for an illegal, fraudulent, or improper purpose, the relevant wrongful conduct is plainly not limited to the time of incorporation.⁹

Takeaways

Chanderpaul offers important clarification on the scope of the Transamerica test for piercing the corporate veil. The decision serves as a reminder that the corporate form, while robust, is not an impenetrable shield for those who use it to facilitate wrongdoing. Remember:

• The alleged wrongful conduct does not have to be made outside the individual’s role as directing mind, or for a purpose unrelated to the corporation’s operations.
• Where those in control expressly direct a wrongful act to be done by the corporation, the corporate veil can be pierced, even if that conduct is central to the corporation’s business.
• However, piercing the corporate veil is still reserved for the most exceptional cases, and robust evidence must be adduced to prove the flagrant injustice required.

Footnotes

1. In a prior bulletin, our firm discussed the Ontario Court of Appeal’s decision in FNF Enterprises Inc. v. Wag and Train Inc., 2023 ONCA 92, which examined the interplay between the doctrine of corporate separateness and the oppression remedy. The Court reinforced that the corporate veil should not be pierced where the alleged improper conduct did not give rise to the liabilities at issue, while holding that directors may still face personal liability under the oppression remedy provisions of Ontario’s Business Corporations Act.

2. Chanderpaul v. Caesars Convention Centre Ltd., 2026 ONCA 332 (“Chanderpaul”) at para 66.

3. Ibid at para 3.

4. Ibid at paras 4, 18.

5. Ibid at paras 46-47.

6. Ibid at paras 52-54.

7. Ibid at paras 66-67.

8. Ibid.

9. Ibid at paras 57-58.