Ontario Court of Appeal Declines to Pierce Corporate Veil in the Name of Justice

29 May 2018

By Khrystina McMillan & Daniel Babin

This is our third blog post on the ongoing saga of the Ecuadorian villagers’ attempts to enforce an Ecuadorian judgement against Chevron Canada Limited (“Chevron Canada”) in Yaiguaje v. Chevron Corporation. Our October 16, 2017 post concerned an order for security for costs ordered against the Ecuadorian villagers, and in our November 6, 2017 post we discussed the Court of Appeal’s decision to set aside the security for costs order.

This week we look at the villagers’ appeal of a summary judgment dismissal of their case. In dismissing the appeal, the Court of Appeal held that the shares and assets of Chevron Canada, a seventh-level subsidy of Chevron Corporation, are not exigible to satisfy the judgment debt of Chevron Corporation. The Court of Appeal further held that this was not an appropriate case to pierce to corporate veil between Chevron Canada and Chevron Corporation.

Judicial History of this Appeal: A more detailed description of the history of this case is provided in our October 16, 2017 post.

Through the Canadian action, the villagers attempt to enforce the Ecuadorian judgment against both Chevron Corporation and Chevron Canada. Both Chevron and Chevron Canada brought summary judgment motions seeking dismissal of the claim against Chevron Canada on the basis that it was a separate corporate entity. The Ecuadorian plaintiffs brought a cross-motion for summary judgment seeking, among other things, a declaration that Chevron Canada’s assets were exigible to satisfy Chevron’s judgment debt. The villagers lost their cross-motion and the court granted summary judgment in favour of the Chevron defendants. The villagers appealed this decision.

The Arguments on Appeal: On appeal, the villagers advanced two primary submissions. First, they argued that the Execution Act, (the “Act”), permits execution on Chevron Canada to satisfy the Ecuadorian judgment against Chevron Corporation. The broad wording of the Act permits seizure of any property in which a judgment debtor (Chevron Corporation) has a direct or indirect legal or beneficial interest. According to the villagers, Chevron Corporation has an indirect beneficial interest in Chevron Canada because it is “the sole owner of the shares of Chevron Canada…through the 100 [percent] ownership of cascading intermediary subsidiaries which carry on no business.” Second, and in the alternative, the villagers submitted that the court has the ability to pierce the corporate veil when (as here) the interests of justice demand it. They failed on both of these arguments.

Chevron Canada is Not Exigible to Satisfy Judgment Debt of Chevron Corporation: Contrary to the villagers’ position, cases involving the enforcement of a foreign judgment do not, for reasons of comity, require an especially expansive interpretation of the Act to facilitate collection of the debt. The Court of Appeal emphasized that enforcement of a foreign judgment in Canada in done in accordance with domestic law regarding the enforcement of domestic judgments: “[i]t would hardly be equitable to have one set of enforcement rules for domestic judgments and a second, far more expansive set of rules for foreign judgments.”

In this case, the Court of Appeal held that the motion judge did not err in his application of domestic debtor-creditor law. Indeed, the Court of Appeal noted that the villagers’ request for a declaration that Chevron Canada’s shares are exigible is a legal impossibility. A corporation’s shares do not belong to the corporation itself, but rather the shareholders. With respect to whether Chevron Canada’s assets are exigible, the Court of Appeal emphasized that it is a “bedrock principle of our corporate law” that corporations have the rights powers and privileges of a natural person. Similarly entrenched in our law is the notion of corporate separateness: corporations are separate entities from their shareholders and a corporation’s assets are its own and do not belong to related corporations.

Granting the rights sought by the villagers would ignore the corporate separateness of the various subsidiaries between Chevron Corporation and Chevron Canada to, in effect, pierce the corporate veil between the various entities. Corporations’ stakeholders (including creditors, shareholders and employees) 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 villagers’ proposed interpretation of the Act would have a significant policy impact on how corporations carry on business in Canada.

The Corporate Veil Cannot be Pierced: The villagers’ argument to pierce the corporate veil relied in large part on a 1987 Supreme Court of Canada decision which states that lifting the corporate veil follows no consistent principle and that corporate separateness will not be enforced where it would yield a result “too flagrantly opposed to justice”. Since then, however, the law has developed. The law has repeatedly rejected an independent just and equitable ground for piercing the corporate veil in favour of this approach taken in Transamerica Life Insurance Co. of Canada v. Canada Life Insurance Co.

As set out in Transamerica, the corporate veil will only be pierced in certain limited circumstances: (1) when the court is construing a statute, contract or other document; (2) when the court is satisfied that a company is a “mere façade” concealing the true facts; and (3) when it can be established that the company is an authorized agent of its controllers or its members. Where it is alleged that the subsidiary corporation is a mere façade, in order to piece the corporate veil the court must be satisfied that: (i) there is complete control of the subsidiary, such that the subsidiary is a “mere puppet” of the parent; and (ii) the subsidiary was incorporated for a fraudulent or improper purpose or used by the parent as a shell for improper activity.

On the villagers’ own position, they could not meet the Transamerica test, as they specifically plead that Chevron Canada has not engaged in any inappropriate conduct.

Though the villagers tried to argue that Transamerica is not applicable because this case was dealing with the enforcement of a judgement debt, not a case of first instance where the issue is establishing liability, the Court of Appeal reject this argument. Such argument “comes dangerously close” to the adoption of a group enterprise theory of liability: where several corporations operate closely as part of the same “group”, they are in reality a single enterprise and should, accordingly, be responsible for each other’s debts. In rejecting this theory, the Court of Appeal emphasized that there is a difference between economic reality and legal reality. The legal reality that each corporation is a separate entity with the rights of a natural person exists regardless of any economic reality that on an operational level corporate separateness is more nuanced among a group of corporations.

The Takeaway: Despite the tragic circumstances giving rise to their case, the villagers failed to convince the Court of Appeal to pierce the corporate veil between Chevron Canada and Chevron Corporation. The Court of Appeal commented that the test to pierce the corporate veil is not set in stone and may one day evolve. The villagers’ arguments to pierce the corporate veil in the name of justice, however, provided no guidance regarding the basis on which it will be appropriate to pierce the corporate veil in future cases: “the law must evolve on a principled basis and in a manner that brings certainty and clarity, not in a way that sows confusion and is devoid of principle.”

At time of posting, it is not yet known if the villagers intend to seek leave to appeal this decision to the Supreme Court of Canada.

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