Author: Christophe Savoie

The principle of separate legal personality, commonly referred to as the “corporate veil”, holds that legal persons are distinct persons from their directors and shareholders. A legal person’s acts therefore do not bind its members but rather only binds itself. As such, creditors of a legal person are not equally creditors of its shareholders or directors.

Despite the centrality of this principle, it is not without exceptions. When the legal personality of a corporate entity is invoked for unlawful purposes, creditors may, exceptionally, take direct action against shareholders and directors. This recourse, known as “lifting the corporate veil”, is provided for by the law. Article 317 of the Civil Code of Quebec reads as follows:

317. The juridical personality of a legal person may not be invoked against a person in good faith so as to dissemble fraud, abuse of right or contravention of a rule of public order.

In a 2022 decision, the Court of Appeal underlined that the three scenarios listed in Article 317 C.C.Q. were sufficiently broad to cover almost all situations where the legal personality of a corporate entity is misused. It did not, however, entirely rule out the possibility that the courts might find further exceptions to those already provided for by law[1]. Importantly, it remains that article 317 C.C.Q. must be interpreted restrictively as it represents an exception to the foundational principle of the separate legal personality of a corporation. Anyone seeking to obtain the lifting of the corporate veil must therefore, in theory, demonstrate that the legal person is being used to dissemble fraud, abuse of right, or a contravention of a rule of public order. Otherwise, the corporate veil will not be lifted.

Quebec jurisprudence is nevertheless replete with cases where the liability of directors is sought on account of alleged faults they would have committed in the context of a breach of the corporation’s contractual obligations. In such cases, directors regularly argue that the conditions for the application of Article 317 C.C.Q. are not met and that they can thus not be held personally liable.

But lifting the corporate veil is not the only, nor the primary, way to seek the personal liability of directors. Indeed, as with any other persons, directors remain subject to the general duty set out in article 1457 C.C.Q. to abide by the rules of conduct incumbent on them, according to the circumstances, usage, or law, so as not to cause injury to others. If they fail in this duty, they are liable for any injury they cause by such fault.

In other words, the corporate veil does not grant immunity to directors for faults they may themselves have committed in the context of a contractual relationship to which the corporation is a party. However, in order for directors to be held liable, the alleged fault must not result solely from the transgression of a contractual obligation incumbent on the legal person; rather, the fault must result from an independent breach of the duty set out in Article 1457 C.C.Q.

For example, in Meyerco Enterprises Ltd. v. Kinmont Canada Inc., 2016 QCCA 89, the purchaser of a commercial building brought an action against the seller, Meyerco Enterprises Ltd. (“Meyerco”), and its sole shareholder and director, Daniel Ouaknine, in reduction of the sale price, accusing them of having made false declarations at the time the contract was signed. The Superior Court granted the purchaser’s action in part and ordered Meyerco and Mr. Ouaknine to pay damages. On appeal, Mr. Ouaknine argued that he could not be held personally liable as he was not a party to the sales contract. According to Mr. Ouaknine, Meyerco having a separate legal personality, was the only party that could be held liable. He further argued that the conditions for lifting the corporate veil had not been met.

The Court of Appeal found that Mr. Ouaknine’s arguments were unfounded. The Court pointed out that it has long been recognized that a majority shareholder who also acts as a director may be held personally liable if he commits an extra-contractual fault in the context of, or in connection with, a contract to which the corporation is a party. When the director’s extra-contractual liability is sought on this basis, the criteria for lifting the corporate veil become irrelevant. Rather, it is simply a matter of applying Article 1457 C.C.Q. to the director’s actions.

The Court of Appeal recently reiterated this applicability of article 1457 C.C.Q. in Maison Lapierre Inc. v. Pareclemco Inc., 2022 QCCA 490.

In conclusion, it is important not to lose sight of the fact that directors may be held personally liable if they cause an injury to another (including the corporation’s creditors) through their own fault. Such liability may be found to exist without any need to argue that the legal person has been used to dissemble fraud, abuse of right, or contravention of a rule of public order. The “mere” demonstration of a fault is sufficient, provided that the fault is independent, meaning that it does not stem solely from the legal person’s breach of a contract.

In other words, the personal liability of directors is not of an exceptional nature. It flows from an application of the standard extra-contractual liability regime codified in article 1457 C.C.Q., a regime which should not be confused with the criteria for lifting the corporate veil set out in article 317 C.C.Q.

[1] Air India, Ltd. v. CC/Devas (Mauritius) Ltd, 2022 QCCA 1264, par. 57.