Court of Appeal for Ontario Reaffirms Stringent Test for Piercing the Corporate Veil

In its recent decision in Yaiguaje v. Chevron Corporation, the Court of Appeal for Ontario (OCA) reaffirmed the principle of corporate separateness and confirmed the stringent requirements that must be proven in order to pierce the corporate veil.

BACKGROUND

In 2012, 47 Ecuadorian residents sought recognition and enforcement in the Ontario Superior Court of Justice of a US$9.51-billion judgment against Chevron Corporation (Chevron Corp.) by an Ecuadorian court. The plaintiffs sought to execute against the shares and assets of Chevron Canada, an indirect subsidiary of Chevron Corp., in satisfaction of the foreign judgment against Chevron Corp.

In September 2015, the Supreme Court of Canada (SCC) ruled that the Ontario courts had jurisdiction over the proceeding. For more information regarding the jurisdiction challenge, see our September 2015 Blakes Bulletin: Supreme Court of Canada Addresses Recognition, Enforcement of Foreign Judgments in Chevron Case.

LOWER COURT DECISION

Following the SCC’s decision, Chevron Corp., Chevron Canada and the plaintiffs each moved for summary judgment with respect to the claim against Chevron Canada. The plaintiffs advanced two main arguments in support of their claim for recognition and enforcement against Chevron Canada:

1. The shares and assets of Chevron Canada are exigible and available for execution and seizure pursuant to the Execution Act to satisfy the Ecuadorian judgment against Chevron Corp.
2. In the alternative, Chevron Canada’s corporate veil should be pierced so that shares and assets are available to satisfy the Ecuadorian judgment against its indirect parent Chevron Corp.

In a January 2017 decision, Justice G. Hainey rejected these arguments and granted the defendants’ motions for summary judgment, dismissing the plaintiffs’ claims against Chevron Canada. For more information, please see our January 2017 Blakes Bulletin: Corporate Veil Preserved: Court Dismisses Action Against Canadian Subsidiary in Chevron Case.

COURT OF APPEAL DECISION

The appellants’ principal argument before the OCA was that Chevron Canada is an asset of Chevron Corp. that is exigible and available for execution and that the broad wording of the Execution Act permits seizure of any property in which the judgment debtor has a direct or indirect legal or beneficial interest. In rejecting this argument, the OCA held that Chevron Corp. has no existing rights as against the assets of Chevron Canada. While shares that a judgment debtor owns are exigible and may be seized and sold by the sheriff, the assets of the issuing corporation are not exigible. Put another way, a shareholder of a corporation does not have a right to claim a proportionate share of the corporation’s assets while it is ongoing. The OCA noted that creditors, shareholders and employees, among other stakeholders, rely on the corporate separateness doctrine and have a “reasonable expectation” that when they do business with a Canadian corporation, they need only consider the liabilities of that corporation and not the liabilities of some related corporation.

The OCA also rejected the plaintiffs’ second argument that the corporate veil should be pierced to render Chevron Canada’s shares and assets exigible. In doing so, two judges (Justices C.W. Hourigan and G. Huscroft) reaffirmed the two-part test that must be satisfied to pierce the corporate veil in circumstances where it is alleged that a subsidiary corporation is a mere facade to protect its parent corporation:

1. There is complete control of the subsidiary, such that the subsidiary is the “mere puppet” of the parent corporation
2. The subsidiary was incorporated for a fraudulent or improper purpose or used by the parent as a shell for improper activity.

Justices Hourigan and Huscroft rejected the notion that there is an independent just and equitable ground for piercing the corporate veil, noting that absent extraordinary circumstances, stakeholders of corporations have a right to believe that they may deal with the corporation as a natural person. In this case, given the appellants’ concession that Chevron Canada did not engage in any inappropriate conduct meant that the second part of the test could not be satisfied and, as such, was a complete bar to the request to pierce the corporate veil.

On the issue of piercing the corporate veil, Justice I. Nordheimer issued concurring reasons that there may be rare and exceptional situations where equity would demand a departure from the strict application of the corporate separateness principle in the context of the enforceability of a valid judgment. In this case, however, the circumstances did not justify piercing the corporate veil on equitable grounds.

IMPLICATIONS

The OCA’s decision confirms the fundamental principle of corporate separateness in Canadian law and reaffirms the stringent two-part test that will have to be satisfied before a court will pierce the corporate veil.

Media coverage since the decision indicates that the plaintiffs may seek leave to appeal the decision to the SCC. We will continue to monitor the case and provide updates as appropriate.

For further information, please contact:

Jeff Galway                  416-863-3859
Kiran Patel                    416-863-2205

or any other member of our Litigation & Dispute Resolution group.