When Legal Worlds Collide: The Impact Of Corporate Law On Family Law Rights & Obligations Following A Relationship Breakdown

1. INTRODUCTION

   Family law seeks to define the rights and obligations of individual family members based on societal interests at large. Similarly, an objective of corporate law is to reflect broad societal interests in the rights and obligations of the separate legal entity known as a corporation. Family law lawyers and corporate lawyers alike may wonder: what happens when the legal aim of the family law and corporate law worlds collide?

   This paper considers the circumstances where family law and corporate law meet following the breakdown of a spousal relationship. While the "corporate veil" often protects individuals in liability and enforcement issues, our legal system recognizes that the corporate veil may be "pierced" where equity requires it. While veil "piercing" and "lifting" are often used interchangeably, the writer opines in Part V of this paper that the veil is "pierced" when only one spouse has a corporate interest and is "lifted" when both spouses have an interest in the same corporation. Unless otherwise indicated, this paper will focus on corporate veil "piercing."

   Family law procedure and/or substantive law operates to pierce the corporate veil in order to characterize and value property and income on relationship breakdown, force documentary disclosure so that the family law litigant may properly advance his/her claims, bring a claim against a corporation or corporate participant, and enforce orders that impact a corporation's separate legal personality.

   First, this paper provides the legal tests for piercing the corporate veil in the family law context. Next, the paper investigates the characterization and valuation of a spouse's interests and when corporate disclosure is required for same. It then explores potential claims relating to family law and corporate interests, and how orders arising from those claims may be enforced. Finally, the paper provides recommendations for advisors who address corporate law issues that arise for family law litigants in Ontario.

2. LEGAL TESTS FOR PIERCING THE CORPORATE VEIL

   Canadian jurisprudence has yet to establish a single test for determining when courts can pierce the corporate veil.1 Instead, judges consider a combination of statutory provisions (where applicable) and common law factors in their determination.2 In the family law context, the statutes and case law increasingly allow parties to access business assets to advance their claims.3

   (i) Piercing the Corporate Veil in General

   Canadian judges have offered a host of considerations when determining whether the corporate veil should be pierced. The "alter ego" test prohibits individuals from using the corporation for an "illegal, fraudulent or improper purpose."4 Under this test, the corporate veil can only be pierced if the corporation's separate legal personality is being used as a "conduit....to avoid liability."5 The broader "flagrantly unjust" test allows judges to exercise their discretion if failing to pierce the corporate veil would be "flagrantly opposed to justice."6 This test applies if those in control of the corporation "expressly direct a wrongful thing to be done."7 In Canada, the "alter ego" test is the predominant one and some disagreement exists as to whether the "flagrantly unjust" test provides discretion that is too broad.8

   The leading Ontario case applying the tests for piercing the corporate veil is 642947 Ontario Ltd. v. Fleischer, which was decided by the Ontario Court of Appeal in 2001.9 Justice Laskin considers when the corporate veil ought to be pierced and found that the determination is largely fact-specific: These authorities indicate that the decision to pierce the corporate veil will depend on the context. They also indicate that the separate legal personality of the corporation cannot be lightly set aside. Yet, however restrictive corporate law principles for piercing the corporate veil may be, in the context of an undertaking to the court, the trial judge's findings support going behind Sweet Dreams and imposing personal liability.10

   In Fleischer, the Court found the trial judge made no error in piercing the corporate veil to hold shareholders personally liable for damages that flowed from the breach of an agreement.

   More recently in 2012, the Alberta Court of Appeal in Elbow River Marketing Limited Partnership v. Canada Clean Fuels Inc. summarized the circumstances where courts and academics have found that the corporate veil may be pierced in a variety of legal contexts:

   where express and clear statutory provisions permit it; where a corporation is formed for the express purpose of doing a wrongful act; where once incorporated, those in control expressly direct a wrongful thing to be done (including criminal activity); where there is fraud or manifestly improper conduct akin to fraud; where one entity acts as an agent of another; where two seemingly separate entities are in fact one common enterprise (but the veil will be lifted only to benefit third parties); where the corporation is a mere agent, or "alter ego", of the controlling shareholder or other party (as noted above, control is not enough; requires wrongful, unlawful, fraudulent or improper conduct); where there is a trust relationship; where shareholders disregard the corporate form (especially in their dealings with others, as in when persons hold themselves out to the public without identifying their corporate status); sometimes, where it can be shown the corporation was too thinly capitalized to conduct the business for which it was formed (but this has been doubted); in certain family law cases to...