COURT OF APPEAL FOR ONTARIO DATE: 20230209 DOCKET: C70755

Zarnett, Thorburn and Copeland JJ.A.

BETWEEN FNF Enterprises Inc. and 2378007 Ontario Inc. Plaintiffs (Appellants)

and

Wag and Train Inc. and Linda Ross Defendants (Respondents)

Counsel: Mark Gallagher, for the appellants Patrick Kraemer, for the respondents

Heard: January 10, 2023 by video conference

On appeal from the order of Justice James A. Ramsay of the Superior Court of Justice, dated May 10, 2022, with reasons reported at 2022 ONSC 2813.

Zarnett J.A.:

A. Overview

[1] The appellants are the owners of commercial premises in Kitchener, Ontario. In 2015, they leased the premises to the corporate respondent, Wag and Train Inc. (“Wag and Train”), for a term that was to run until March 31, 2021. The premises were to be used for a canine grooming, training, and day care business.

[2] In September 2020, the appellants commenced an action against Wag and Train and the individual respondent, Linda Ross, who is Wag and Train’s sole director, officer, and shareholder. The statement of claim alleges that the leased premises were abandoned approximately one year before the end of the term of the lease, no further rent was paid, and the premises were not left in the condition the lease required. It also alleges that the business previously conducted at the leased premises was moved to a different location in Kitchener under a different name.

[3] The statement of claim identifies three causes of action against Ms. Ross. It alleges that Ms. Ross interfered with contractual relations because she made the decisions that constituted Wag and Train’s breach of the lease, that she conducted herself in a manner that justifies piercing the corporate veil and imposing Wag and Train’s liabilities on her, and that she acted in a manner that entitles the appellants to relief against her under the oppression remedy in s. 248 of the Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”).

[4] The motion judge determined that the statement of claim did not disclose a reasonable cause of action against Ms. Ross and should be struck out against her under r. 21.01(1)(b) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, without leave to amend. [^1]

[5] The appellants argue that the gist of their claim against Ms. Ross, even if imperfectly pleaded, is that she stripped value from Wag and Train, and caused the same business to be carried on elsewhere, knowing that amounts were owed by Wag and Train under the lease. The appellants do not contest the motion judge’s decision to strike the claim for inducing breach of contract, but they submit that on the facts alleged he erred in finding that there was no reasonable cause of action against Ms. Ross based on piercing the corporate veil or under the oppression remedy. They submit that any lack of particularity in the pleading was curable by an amendment, and the motion judge erred in not giving them an opportunity to amend.

[6] For the reasons that follow, I would allow the appeal in part. The claim that value was stripped from Wag and Train by Ms. Ross, with knowledge that the corporation had incurred liabilities by breaching its lease with the appellants, is actionable under the oppression remedy rather than the doctrine of piercing the corporate veil. I therefore agree with the motion judge that, even read generously, the facts alleged in the statement of claim do not arguably support a claim for piercing the corporate veil. But contrary to the motion judge’s conclusion, the facts alleged arguably do support the claim against Ms. Ross under the oppression remedy.

B. Analysis

Is the Appeal Properly in this Court?

[7] Section 255 of the OBCA provides that an appeal from any order made under that Act lies to the Divisional Court. Because the statement of claim included a claim for oppression remedy relief, and that claim was struck, the question of the proper appeal route arises.

[8] The order of the motion judge struck the entire claim against Ms. Ross, which was asserted on bases that went beyond the oppression remedy. In such a case, the appeal route depends on the source of authority for each aspect of the order. “If … the source of the authority … is the common law or equity, as opposed to the OBCA, then the appeal lies properly to this court”: Buccilli v. Pillitteri, 2016 ONCA 775, 410 D.L.R. (4th) 480, at para. 19. If part of the relief is grounded in the OBCA, but other aspects of the order have a common law or equitable source, the entire order is appealable to this court: Buccilli, at para. 22; Courts of Justice Act, R.S.O. 1990, c. C.43, s. 6(2).

[9] Here, although the striking of the oppression remedy claim may be an order under the OBCA, the striking of the claim to lift the corporate veil engages a common law or equitable doctrine and therefore has a source other than the OBCA.

[10] Therefore, this court has jurisdiction to hear the appeal.

Did the Motion Judge Err in striking the Entire Claim Against Ms. Ross?

(1) General Considerations

[11] The standard of review on an appeal from the motion judge’s order is not controversial. A motion judge's decision that a claim discloses no reasonable cause of action is a determination of law reviewable on a standard of correctness. However, a decision denying leave to amend is a discretionary one entitled to deference on appeal: Darmar Farms Inc. v. Syngenta Canada Inc., 2019 ONCA 789, 148 O.R. (3d) 115, at para. 30, leave to appeal refused, [2019] S.C.C.A. No. 409. A refusal to allow the claim to be amended will only be interfered with if the motion judge erred in principle or acted unreasonably in exercising discretion: Mortazavi v. University of Toronto, 2013 ONCA 655, at para. 3, leave to appeal refused, [2014] S.C.C.A. No. 190.

[12] The proper approach to a r. 21.01(1)(b) motion is also well settled. On such a motion, the facts asserted in the statement of claim are taken to be true unless patently incapable of proof: R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42, [2011] 3 S.C.R. 45, at para. 22. The statement of claim is to be read generously: Operation Dismantle v. The Queen, [1985] 1 S.C.R. 441, at p. 451. The test to be applied “is whether it is plain and obvious, assuming the facts pleaded to be true, that each of the plaintiffs’ pleaded claims disclose no reasonable cause of action. Simply stated, if a claim has no reasonable prospect of success, it should not be allowed to proceed to trial”: Atlantic Lottery Corp. Inc. v. Babstock, 2020 SCC 19, 447 D.L.R. (4th) 543, at para. 14.

(2) The Piercing the Corporate Veil Claim

[13] The statement of claim made the following allegations in support of the claim that the corporate veil should be pierced:

(a) the Lease was negotiated and executed by Ms. Ross on behalf of Wag and Train; (b) Ms. Ross is the sole director, shareholder and officer of Wag and Train; (c) Ms. Ross at all material times exercised sole and constant control over Wag and Train; (d) Ms. Ross at all material times treated the amounts earned by Wag and Train, as well as its liabilities, as her own and benefitted personally in respect of same; (e) Ms. Ross, in direct and knowing breach of the Lease, has simply picked up and moved her business to a new location, operating under a different name, which conduct is, in the circumstances, a fraud perpetrated specifically to avoid payments of amounts properly due and owing under the Lease; and (f) such further and other particulars as shall be proven at trial.

[14] The motion judge accepted that the gist of the pleading was to allege that:

[The] defendants vacated the premises early and without cleaning up, stopped paying rent, gave no notice and declined to answer all communications. They started up the same business in plain sight near by. [Ms.] Ross is the sole shareholder and director of the corporation and treats its earnings as her own. It is alleged that these acts constitute fraud or improper conduct designed to avoid paying amounts properly owing.

[15] However, he considered that the facts pleaded:

… do not disclose an actionable tort committed by [Ms.] Ross. Nor do they disclose fraud or improper conduct, or conduct by her that exhibits a separate identity from that of the corporation. If what is pleaded is true, she caused her closely-held corporation to breach its contract. She did not cause the corporation to disappear. [Ms.] Ross’s conduct does not rise to such a level that application of the logic of Salomon would lead to a result that is flagrantly opposed to justice. I find it plain and obvious that the action cannot succeed against her personally.

[16] I agree with the result reached by the motion judge, but would express the reasoning differently.

[17] Piercing or lifting the corporate veil is an equitable exception to certain statutory rules. Those rules provide that a corporation is a separate legal person (with the consequence that its property, rights, and obligations are its own, not those of the individuals through whom it acts) and that a shareholder is not liable for any act, default, obligation, or liability of the corporation: OBCA, ss. 15, 92. [^2]

[18] The test for piercing the corporate veil in Ontario is that set out in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 28 O.R. (3d) 423 (Gen. Div.), aff’d [1997] O.J. No. 3754 (C.A.). That case set out a two-part test, at pp. 433-34: “courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct.” See also Yaiguaje v. Chevron Corporation, 2018 ONCA 472, 141 O.R. (3d) 1, at paras. 36, 65-71.

[19] In Yaiguaje, at para. 70, the majority stated:

The Transamerica test is consistent with the principle reflected in the various business corporation statutes in Canada that corporate separateness is the rule. Where the corporate form is being abused to the point that the corporation is not a truly separate corporation and is being used to facilitate fraudulent or improper conduct, the law recognizes an exception to this rule.

[20] The first element of the Transamerica test requires not just ownership or control of a corporation, but complete domination or abuse of the corporate form. The second element requires fraudulent or improper conduct, and contemplates that it is that conduct that has given rise to the liabilities the plaintiff seeks to enforce. Where those two elements are present, the corporate veil will be lifted to prevent the person who engaged in that conduct from asserting that the liabilities the fraudulent or improper conduct gave rise to are those of the corporation only.

[21] In 642947 Ontario Ltd. v. Fleischer (2001), 56 O.R. (3d) 417 (C.A.), at para. 68, this court expanded on the meaning of “fraudulent or improper conduct”:

Typically, the corporate veil is pierced when the company is incorporated for an illegal, fraudulent or improper purpose. But it can also be pierced if when incorporated “those in control expressly direct a wrongful thing to be done”. [Citation omitted.]

See also Shoppers Drug Mart Inc. v. 6470360 Canada Inc. (Energyshop Consulting Inc./Powerhouse Energy Management Inc.), 2014 ONCA 85, 372 D.L.R. (4th) 90, at paras. 43-47, leave to appeal refused, [2014] S.C.C.A. No. 119.

[22] The object of the piercing the corporate veil claim in this case is to hold Ms. Ross liable for the obligation incurred by Wag and Train for breaching its lease. In the statement of claim, the appellants allege that the obligation is an amount of approximately $195,000 “owing pursuant to the [lease]” and claimed to consist of arrears of rent owing as of September 2020 (shortly after the appellants discovered the premises had been abandoned), the cost to repair the premises to the condition the lease required they be in on departure, and a further amount “representing the remainder of the amounts of rent due and owing under the [lease] up to the end of the term of the [lease]”. To meet the Transamerica test, the wrongful conduct alleged against Ms. Ross must have given rise to those lease liabilities, such that it is appropriate to lift the corporate veil and consider those liabilities to be hers.

[23] The appellants allege two categories of conduct by Ms. Ross. One is that she controlled Wag and Train and thus made the decisions that it breach the lease. The other is that she, by treating Wag and Train’s assets and business as her own, stripped value from Wag and Train knowing of its lease liabilities.

[24] In my view, the appellants cannot rely on the first category of conduct to satisfy the improper conduct aspect of the Transamerica test. The fact that a director or officer decided, in that capacity, that a corporation should breach a contract does not amount to the type of improper conduct that justifies piercing the corporate veil, at least where the director or officer could not be sued for the tort of inducing breach of contract under the doctrine in Said v. Butt, [1920] 3 K.B. 497: J.S.M. Corporation (Ontario) Ltd. v. The Brick Furniture Warehouse Ltd. (2006), 16 B.L.R. (4th) 227 (Ont. S.C.), at para. 99, aff’d 2008 ONCA 183, 41 B.L.R. (4th) 51; Beckett v. Ridgeway Estates Ltd., 2019 ONSC 112, 97 C.L.R. (4th) 199, at para. 12.

[25] The appellants do not challenge the correctness of the motion judge’s decision to strike the claim that Ms. Ross, in her capacity as sole director and officer, induced Wag and Train’s breach of the lease and interfered with the appellants’ contractual relations with Wag and Train. The motion judge referred to the appellants’ concession “that according to the doctrine in Said v. Butt … [Ms.] Ross cannot be held liable for the tort of interference with contractual relations by inducing her own company to breach a contract.”

[26] The second category of alleged conduct is value stripping. However, it is important to identify what this allegation is and what it is not. As the appellants describe it, the gist of this allegation is that Ms. Ross stripped value from Wag and Train knowing of its lease liabilities, that is, the amounts it owed by reason of its breach of the lease. It is not alleged that removing value from Wag and Train knowing of the lease liabilities is what gave rise to those liabilities in the first place – they arose because of Wag and Train’s breach of the lease. This is important because it is the lease liabilities that the piercing the corporate veil claim seeks to impose on Ms. Ross. It is not alleged that Wag and Train’s entering into the lease was an abuse of the corporate form or a shield for fraudulent or improper conduct. On the appellants’ own allegations, Wag and Train performed the lease from the time it was made in 2015 until March 2020.

[27] This situation is unlike cases in which courts have pierced the corporate veil given the nexus between the liability the plaintiff sought to recover by piercing the corporate veil and the wrongful conduct directed by the individual in control of the corporation that gave rise to that very liability. For instance, in Shoppers Drug Mart, the defendant corporation’s sole officer, director, and shareholder directed that funds – which were supposed to be used to satisfy the plaintiff’s utility bills pursuant to an agreement – be misappropriated into an account in his name and that of his corporation. The court applied the holding from Fleischer and concluded that the corporate veil should be pierced to impose liability for the misappropriated funds on the corporation’s directing mind, as he expressly directed and caused the wrongful act of misappropriation: at paras. 43, 45. There was a clear link between the liability for the misappropriated funds and the wrongdoing − the decision by the corporation’s directing mind to misappropriate gave rise to the liability for the misappropriated funds. A similar link was present in 6071376 Canada Inc. v. 3966305 Canada Inc., 2020 ONCA 428, 5 B.L.R. (6th) 193. In that case, the court considered that the individual appellant used the corporation “to direct and cause the misappropriation of the respondent’s funds for his own purposes”: at para. 14.

[28] That kind of link between the alleged wrongful conduct and the liabilities sought to be imposed by piercing the corporate veil is missing here. The allegations in this case are materially different than those in Shoppers Drug Mart or 6071376. It is not alleged that stripping value from Wag and Train, knowing it had incurred liabilities as a result of the lease and its breach, constitutes misappropriation of the appellants’ funds. More importantly, the piercing the corporate veil claim is not aimed at whatever value was “stripped” with knowledge of the lease liabilities – it is aimed at the lease liabilities themselves (regardless of the amount of value that was stripped). But the lease liabilities have a source other than, and independent of, any alleged value stripping.

[29] To be sure, the alleged value stripping may be conduct that prejudices the appellants, as creditors of the corporation, in their ability to collect the liabilities of Wag and Train that arose from its breach of the lease. But the remedy for conduct that defeats reasonable expectations of a creditor of a corporation is, as discussed below, under the oppression remedy, rather than piercing the corporate veil.

[30] In my view, the piercing the corporate veil claim has no reasonable chance of success, even accepting the facts pleaded as true and giving them the generous characterization urged by the appellants’ counsel. As the Supreme Court stated in Atlantic Lottery, at para. 19, striking a claim, even a novel one, that is doomed to fail is “beneficial, and indeed critical to the viability of civil justice and public access thereto” since it avoids protracted and expensive proceedings. And although that observation was made in the context of striking an entire claim, it applies with equal force to striking part of a claim so that the parties may focus on aspects of the claim that have a viable legal justification.

(3) The Oppression Remedy Claim

[31] There are two requirements for an oppression remedy claim under s. 248 of the OBCA to succeed. First, the complainant must identify the expectations it claims have been violated by the conduct at issue and show that those expectations were reasonably held. Second, the complainant must show that these reasonable expectations were violated by corporate conduct that was oppressive or unfairly prejudicial to or that unfairly disregarded the interests of any security holder, creditor, director, or officer: Wilson v. Alharayeri, 2017 SCC 39, [2017] 1 S.C.R. 1037, at para. 24.

[32] At issue in Wilson was when oppression remedy relief should be granted against an individual director personally, rather than simply against the corporation.

[33] The Supreme Court held that personal liability may be imposed on a director for oppressive conduct if two criteria are met: (1) the director has the requisite degree of involvement in the oppressive conduct so that it is attributable to them; and (2) personal liability is fit in the circumstances. An order against a director personally will be fit where it is a fair way of dealing with the situation, the order goes no further than necessary to rectify the oppression, the order serves only to vindicate the reasonable expectations of the complainant, and other forms of statutory and common law relief are not more fitting in the circumstances: Wilson, at paras. 47-55.

[34] In Wilson, the court identified the obtaining of a personal benefit by the director, or the director misusing a corporate power, as situations in which it would typically be fair to impose personal liability on the director: at para. 49.

[35] In the oppression remedy claim against Ms. Ross, the statement of claim alleges that the appellants are creditors whose interests are subject to protection under s. 248 of the OBCA, and that conduct of Ms. Ross was unfairly prejudicial to and unfairly disregarded the interests of the appellants, as it included “severe mismanagement of funds, self-dealing, and disregard for statutory and common law trust obligations”. Reading the pleading generously, those allegations should be read in light of the more specific pleadings and their gist relating to value stripping which I have excerpted above (at paras. 13-14). Even though they were asserted in relation to the claim to pierce the corporate veil, they should be read as though they applied to the oppression remedy claim as well.

[36] In deciding that the oppression remedy claim did not disclose a reasonable cause of action, the motion judge acknowledged that s. 248 of the OBCA gives the court “a broad discretion to fashion a remedy for creditors who are treated unfairly by corporations and their directors”. But he noted that: “[n]o particulars are given of mismanagement of funds, self-dealing and trust obligations. If [Ms.] Ross is the sole shareholder of the corporate defendant, presumably she is entitled to use its money as her own.” He also noted that the oppression remedy is not to be used to refashion a contract with a corporation to, in effect, make the directing mind of the corporation a personal guarantor of its obligations because it might seem just and equitable to do so after the fact. Where the complaint concerns a breach of contract, a contract action against the corporation is the remedy.

[37] In my view, the motion judge erred in principle in some of these conclusions.

[38] In J.S.M. Corporation (Ontario) Ltd. v. The Brick Furniture Warehouse Ltd., 2008 ONCA 183, 41 B.L.R. (4th) 51, at para. 66, Doherty J.A. distinguished between the situation of a creditor who could, but did not, protect itself from a risk it assumed when it entered into an agreement with a corporation, and “a creditor who finds his interest as a creditor compromised by unlawful and internal corporate manoeuvres against which the creditor cannot effectively protect itself. In the latter case, there is much more room for relief under the oppression provisions than in the former case” (emphasis added).

[39] In essence, the motion judge viewed the claim as falling within the first situation described in J.S.M. In my view, the claim actually falls within the second. The allegation that Ms. Ross stripped value from Wag and Train knowing of its liabilities is an allegation of unlawful and internal corporate manoeuvres against which the appellants, as creditors, could not effectively protect themselves.

[40] Contrary to the motion judge’s observation, in light of the allegation of unpaid amounts owing to creditors, Ms. Ross, as sole shareholder was not entitled to use Wag and Train’s money as her own or to appropriate its business. Nor could she, as sole director, confer either upon herself. The power of a director to declare a dividend to shareholders is subject to the corporation being able to pay its creditors: OBCA, s. 38(3). A shareholder of a corporation does not have a right to the corporation's assets while it is ongoing: BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560, at para. 34. That right only arises if and when the corporation is wound up. On winding up, a shareholder’s right to payment or to receive assets is subject to the prior rights of unpaid creditors: OBCA, s. 221(1)(a).

[41] Accordingly, the appellants’ allegations – that Ms. Ross stripped value from Wag and Train to avoid payment of amounts known to be owing to the appellants – present an arguable case for a personal remedy against her under the oppression remedy relating to the stripped value. Although the appellants have not specifically alleged that they had a reasonable expectation that such conduct would not occur, reasonable expectations are objectively derived: BCE Inc., at para. 62. The prohibition on a director who is also a shareholder taking assets in priority to, and to the prejudice of, unpaid creditors is a statutory one. The appellants should have an opportunity to amend to address that deficiency.

[42] The allegations otherwise set out an arguable case that a personal remedy against Ms. Ross would be fit. She is alleged to have stripped value in priority to unpaid creditors and thus misused corporate powers to her own benefit, arguably making a personal remedy a fair way of dealing with the situation. The allegations arguably satisfy the other Wilson criteria for a personal remedy as well. Any lack of particularity should also be addressed by amendment.

C. Conclusion

[43] The motion judge found it plain and obvious that the action could not succeed against Ms. Ross personally, and that the problem with the pleading was not a question of drafting. He declined leave to amend. I agree with this conclusion except insofar as the oppression remedy claim is concerned.

[44] I would allow the appeal to the extent of permitting the appellants to amend their statement of claim within 30 days of the release of these reasons to assert their claim for a personal remedy against Ms. Ross under the oppression remedy.

[45] Success was divided. I would not award any costs.

Released: February 9, 2023 “B.Z.” “B. Zarnett J.A.” “I agree. Thorburn J.A.” “I agree. Copeland J.A.”

[^1]: There was no issue before the motion judge that a proper cause of action had been asserted against Wag and Train, and he dismissed its request to stay the action and refer the claim against it to arbitration. No appeal is taken from that aspect of the decision. [^2]: The statutory limited liability of a shareholder is subject to certain statutory exceptions, none of which are argued to be applicable here.