Legal News

A veil of steel: Ontario courts refuse to modify test to pierce the corporate veil

A recent decision of the Ontario Court of Appeal has provided a vigorous defence of separate corporate personality and refused to adopt a test for piercing the corporate veil where it is simply “just and equitable”.

The case is Yaiguaje v. Chevron Corporation, 2018 ONCA 472, which is the latest in a string decisions arising from petroleum extraction operations in Ecuador by Chevron Corporation’s (“Chevron”) predecessor, a subsidiary of Texaco (in a consortium with the Ecuadorian state oil company). The plaintiffs were a group of indigenous peoples of Ecuador who alleged that they suffered damage from environmental pollution caused by extraction operations. The plaintiffs brought an action in Ecuador and, after nearly a decade of trials and appeals, obtained a $9.5 billion judgment against Chevron. Chevron, a California company, had no assets in Ecuador and the plaintiffs sought to enforce the judgment in the United States. The American court concluded that the enforcement action should be dismissed because the Ecuadorian judgment was obtained through fraud.

Undeterred, the plaintiffs brought a judgment enforcement action against one of Chevron’s subsidiaries, Chevron Canada. Based in Calgary, Chevron Canada is a distinct corporation and was not implicated in the Ecuadorian judgment. Chevron holds shares in subsidiary corporations. It owns all the shares of Chevron Investments Inc., also incorporated in the US., and Chevron Investments owns, in turn, another subsidiary, and so on down a corporate chain. There are seven corporate entities between Chevron and Chevron Canada.

The plaintiffs argued that they could enforce against Chevron Canada because shares in that company were indirectly owned by Chevron. The Ontario courts rejected this argument as it misconstrued Ontario’s judgment enforcement legislation and the law regarding the ownership of shares. The plaintiffs then argued that the Court should set aside corporate personality and reach through Chevron to Chevron Canada to make its assets exigible. They argued the courts “have an equitable ability to pierce the corporate veil whenever it appears just.”

A majority of the Ontario Court of Appeal rejected this argument, stating that such a submission disregarded decades of jurisprudence on the piercing of the corporate veil. Courts in Ontario and elsewhere in Canada have held that the law will ignore corporate personality where a corporation is a “mere façade” that protects its owner. It must be shown that there is complete control of the company and the company was incorporated for a fraudulent or improper purpose or used by the owner as a shell for improper activity.

The plaintiffs’ arguments in this case, as noted by the Court of Appeal, essentially attempted to adopt a “group enterprise theory of liability”, which made companies operating in the same family liable for the each other’s debts. This concept had been rejected in the past, and was again rejected here. The majority was not prepared to consider relaxing the rules where the result could lead to more unpredictability and ad hoc decision-making.

The majority’s vigorous defence of corporate personality was tempered somewhat by a concurring judgment, where one justice suggested that there might be still a role for an equitable piercing of the corporate veil in exceptional circumstances. In particular, the concurring justice pointed to an Ontario employment case where the court found that the plaintiff had entered into an employment contract with a non-legal entity and was paid by a corporation that was simply acting as the paymaster for a group of companies. The court found no fraud in that case, but nonetheless found that the entire group of companies had in fact employed the plaintiff and that a complex corporate structure could produce an injustice justifying lifting the veil in the employment context.

Yaiguaje provides another clear and forceful statement in support of a strict test to set aside corporate personhood. This test is consistent with decisions in British Columbia, which have also repeatedly rejected a test that “permits the corporate veil to be lifted whenever to do otherwise is not fair.” While a concurring opinion leaves the door open to a more relaxed test in exceptional circumstances, this is a minority view both within the case and in the broader field of Canadian law. However, both decisions also serve as a useful reminder that there may be ongoing uncertainty regarding the strength of the corporate veil in exceptional circumstances dealing with the status of an employer in cases where there is a complex corporate structure.