Edited by Elyse Rosen

Contents

  • Editor's Note: Getting What You Bargained For
  • Important Notice to Readers Re: Supreme Court Decision in Peoples Department Stores
  • Reasonable Expectations in the Context of the Oppression Remedy
  • Le recours pour oppression, un remède à tous les maux?
  • What's in a Name? Protecting Limited Liability

Editor's Note: Getting What You Bargained For

Like the famous song goes, "you can't always get what you want." However, the oppression remedy is an excellent tool to "get what you need."

In his article entitled "Reasonable Expectations in the Context of the Oppression Remedy," Sean M. Sullivan of our Waterloo Region office explains how the case law has evolved to ensure that the reasonable expectations of shareholders are protected, and sets out what a stakeholder can consider to be a "reasonable expectation" in the context of that case law.

Sometimes getting what you want is a matter of knowing what you have and how to protect it. In "What's in a Name? Protecting Limited Liability," Patrick Fitzpatrick of our Calgary office sets out the dos and don'ts of protecting the limited liability resulting from incorporation.

Finally, in "Le recours pour oppression, un remède à tous les maux?," Julie Frégeau of our Montréal office explains how the oppression remedy can be used as a tool for getting what you want and getting what you need.

We hope that this edition of TakingStock@Gowlings will help shareholders ensure that they get what they bargained for. We also encourage you to consult with one of our attorneys in the event that you aren't getting what you need and want assistance to make sure that you do.

As always, we invite you to contact our authors, or the undersigned, for any further information you may require or any questions you may have with respect to the rights, recourses and obligations of shareholders, directors and officers.

Elyse Rosen

Important Notice To Readers Re: Supreme Court Decision In Peoples Department Stores

On October 29, 2004, the Supreme Court of Canada dismissed the appeal from the Québec Court of Appeal's decision in Peoples Department Stores Inc. (Caron Belanger Ernst and Young v. Wise et al.) In the next edition of TakingStock@Gowlings we will provide you with an analysis of the Court's decision and its impact on the extent of directors' duties in Canada.

Reasonable Expectations In The Context Of The Oppression Remedy

The oppression remedy is a statutory vehicle whereby a shareholder, director, officer or other person determined by the Court to be a complainant can gain protection and relief from corporate conduct that is disadvantageous or offensive to his or her interests. The remedy is governed by section 241 of the Canadian Business Corporations Act (CBCA) and section 248 of the Ontario Business Corporations Act (OBCA). It has become the preferred remedy in shareholder disputes and has been referred to as the "Charter of Rights and Freedoms of corporate law."1

As Justice Cummings stated in Ford Motor Co. Ltd. v. Ontario Municipal Employees Retirement Board,2 the oppression remedy is rooted in the equitable concept of fairness. Its legislative intent is to balance the competing interests of shareholders, creditors and the public with the ability of management to conduct business efficiently.3 Accordingly, while a Court will seek to protect the expectations of oppression remedy complainants, these expectations must be determined to be objectively reasonable. The purpose of this article is to outline how Courts have interpreted the concept of reasonable expectations in the context of the oppression remedy.

The Ballard Case

The starting point for any discussion on the meaning of reasonable expectations are the comments of Justice Farley in 820099 Ontario Inc. v. Harold E Ballard Ltd.4 In that case, the complainants, who were holders of common shares in the Defendant company, Harold E. Ballard Ltd. ("HEBL"), alleged that the affairs of HEBL were conducted by Harold Ballard Senior ("Ballard Sr.") and the other directors of HEBL in a manner that was oppressive or unfairly prejudicial or unfairly disregarded their interests. Among other things, the Plaintiffs complained about HEBL's acquisition of Ballard Sr.'s personal assets in exchange for the issuance of further common shares to Ballard Sr. HEBL also purchased the shares of other common shareholders for cancellation allegedly at the behest of Ballard Sr. The Applicants complained that there was no legitimate business purpose for these transactions and that they resulted in the dilution of their common shareholdings. The applicants sought, among other things, to have these transactions set aside. In considering whether the minority shareholders had been oppressed, Justice Farley acknowledged that the court must consider the reasonable expectations of those shareholders:

Shareholders interests would appear to be intertwined with shareholder expectations. It does not appear to me that the shareholder expectations which are to be considered are those that a shareholder has as his own individual "wish list." They must be expectations, which could be said to have been (or ought to have been considered) as part of the compact of shareholders.5

In Justice Farley's view, the expectations that counted were those in existence at the time of the actions of which the applicants complained.6 The value of HEBL had increased over time. By the time the transactions complained of occurred, the applicants had many millions of dollars of investment at stake and could reasonably expect the directors of HEBL to act in their best interests to protect their investment. The Court found that the directors of HEBL were acting primarily for the benefit of Ballard Sr., the majority shareholder and the transactions complained of were conducted primarily to increase Ballard Sr.'s common shares in the company at the lowest possible cost, which had the detrimental effect of diluting the applicant's shares in the company. Accordingly, the Court set aside the transactions involving the company's acquisition of Ballard Sr.'s personal assets, and all common shares issued pursuant to these transactions were cancelled. The Ontario Court of Appeal has cited with approval the reasoning of Justice Farley in the Ballard Case.7

Reasonable Expectations Can Be Defined in Contract

Expectations that appear reasonable on their face can be overruled by expectations as defined under contract. In Gordon Glaves Holdings Ltd. v. Care Corporation of Canada Limited,8 Gordon Glaves jointly held shares in Care Corporation of Canada ("C. Corp") with his friend Peter Francis through their respective holding companies. C. Corp held life insurance policies on Glaves and Francis. Throughout 1990 and 1991, the shareholders of C. Corp had been developing a shareholders agreement to govern their relationship. No final agreement was executed prior to Glaves' death. After his death, C. Corp distributed the life insurance proceeds to the shareholders. Glaves' holding company, Gordon Glaves Holdings Ltd. ("GGHL") brought an action against C. Corp arguing that it was the expectation of GGHL that upon Glaves' death, the life insurance proceeds would be used to purchase the GGHL interest in C. Corp for the benefit of Glaves' estate.

Applying the reasoning of Justice Farley in Ballard, the Court of Appeal concluded that the evidence did not support GGHL's assertion that there was a reasonable expectation that upon Glaves' death, C. Corp would purchase GGHL's interest using the proceeds of its insurance policy on his life. The Court noted that in drafts of the Shareholders Agreement, there was a specific provision that, with respect to the shares held jointly by Glaves and Francis, only upon the death of the survivor of the two of them would the obligation to purchase their jointly held interest arise. Following Glaves' death, the Shareholders Agreement was executed with this provision included. As Francis had survived Glaves, GGHL's obligation to purchase the block of shares had not yet arisen.

Changing Expectations

Justice Farley also stated in the Ballard case that reasonable expectations were not static or frozen and may evolve or change, as arrangements are adapted over time.9 The reasonable expectations however, must be established before the oppression occurs. Krynen v. Bugg10 is an example where the personal relationships of the partners in a corporation, as they evolve over time, can influence the determination of reasonable expectations that are entitled to protection under the oppression remedy. The case involved a dispute between William Krynen, the president, manager of marketing and majority shareholder at DuraCap International Inc. ("DuraCap") and his partners Dale Bugg and Terry Simms who were minority shareholders with DuraCap. Relations between the parties had deteriorated over a period of several years. Krynen alleged that after the company was formed in 1994, it was his understanding that he was to be the only shareholder who was actively working at the company. Bugg and Simms however, played an active role in the day-to-day affairs of the company and in 2000 were approached by several key employees complaining about what they considered to be Krynen's "dysfunctional" management style. Bugg and Simms called a Board of Directors meeting at which Krynen was issued an ultimatum: accept a six-month paid leave of absence or be terminated. When Krynen refused to accept the leave of absence, the Board voted to terminate him. Krynen brought an oppression action against Bugg and Simms.

Krynen argued that he was the founder and driving force behind the creation of DuraCap and that without him the company would not have come into existence. Consequently, he had a reasonable expectation that he would have a lifetime job with DuraCap as its president and manager of marketing. The Court concluded that this was an unrealistic expectation given his arrangements with his partners. The Court concluded that Krynen's reasonable expectations had to be measured objectively within the four corners of his pact with his partners. This pact evolved over time. Citing a passage from Westfair Foods Ltd. v. Watt,11 the Court stated: "…all words and deeds of the parties are relevant to an assessment of reasonable expectations, not necessarily only those consigned to paper, and not necessarily only those made when the relationship first arose."12 Although it may have been Krynen's original wish to have absolute control over DuraCap, he was never able to achieve this. Krynen had formed DuraCap with partners and never had attained majority control (he had 50 per cent of the shares while Bugg and Simms each had 25 per cent). Under the Shareholders Agreement, ultimate management and executive control of the partnership was placed in the hands of the Board of Directors. The Court dismissed Krynen's oppression action accordingly.

Presumption of Good Faith and Loyalty to the Corporation

In an oppression action, it is not necessary for a complainant to show bad faith in order to demonstrate that conduct is oppressive. What is important is the result not the intent. With regards to reasonable expectations, the Court in Waxman v. Waxman,13 stated the following:

At a minimum, reasonable expectations must be presumed to include expectations that directors and officers will fulfil their statutory duties of good faith and loyalty to the corporation, that shareholders will share the profits of the company in proportion to their ownership of a given class of shares, and that distributions of equity of the company will only be made to shareholders.

This principle was applied in the Ford Motor case.14 The Ontario Municipal Employees Retirement Board ("OMERS") was a minority shareholder of Ford Canada, which was being forced to sell its shares as Ford Canada was going private. Ford Canada had the right to force the sale of the shares pursuant to section 190(1) of the Ontario Business Corporations Act but had to pay the minority shareholders the fair market value of the shares. Ford Canada applied to the Court to have the value of the shares determined and OMERS disputed Ford Canada's valuation of the shares and brought a counterclaim arguing, among other things, that their shares had diminished in value, because since 1977, Ford's inter-corporate "transfer pricing system" required the company to purchase vehicles from Ford U.S. at U.S. prices. Given the decline in the Canadian dollar between 1985 and 1995, OMERS argued that Ford's transfer pricing system was historically oppressive. At trial, Justice Cummings found that OMERS had a reasonable expectation that management would act in the best interest of the corporation (meaning all of the shareholders) and take all reasonable steps to enhance profitability by changes to the inter-corporate pricing system.15 The Court concluded that Ford's failure to correct the transfer pricing system caused the oppression. The case demonstrates that oppressive conduct need not arise from active efforts to oppress a minority shareholder or other complainant. At times, oppressive conduct may result from inaction.

Conclusion

The oppression remedy has evolved into an instrument to protect the reasonable expectations of complainants. These reasonable expectations are not static and can change over time. While they may be defined by contract, they can also be determined by looking at the relationship between partners in a corporation. At a minimum, they must be presumed to include an expectation that directors and officers will act in good faith and loyalty with a view to the best interests of the shareholders and the corporation. Above all else, a Court must balance the expectations of a complainant against the ability of management to conduct business efficiently. Consequently, what is reasonable is a question of fact. The Court must assess whether an expectation is objectively reasonable or merely wishful thinking on the part of a complainant.

1 Kelvin Energy Ltd. v. Lee, (1992), 97 DLR (4th) 616, online: QL at p. 12

2 [2004] OJ No. 191

3 ibid, online: QL at p. 28

4 (1991), 3 BLR (2d) 113

5 ibid., onlne: QL at p. 46

6 ibid., at p. 49

7 See Naneff v. Con-Crete Holdings Ltd. (1995), 23 OR (3d) 481 where the principles expressed by Justice Farley in the Ballard case regarding reasonable expectations are expressly approved.

8 [2000] O.J. No. 1989 (C.A)

9 Ballard online: QL at p.49

10 [2003] O.J. No. 1209

11 (1991), 79 DLR (4th) 48

12 Krynen at p. 19

13 (2002), 25 BLR (3d) 1

14 supra note 4

15 Ford Motor Co online: QL at p. 47

Le Recours Pour Oppression, Un Remède À Tous Les Maux?

En vertu de la Loi canadienne sur les sociétés par actions (« LCSA »), un tribunal peut redresser une situation provoquée par une société ou l'une des personnes morales de son groupe qui abuse des droits des détenteurs de valeurs mobilières, créanciers, administrateurs ou dirigeants, ou se montre injuste à leur égard en portant préjudice ou en ne tenant pas compte de leur intérêt. Cette situation peut être provoquée soit par le comportement de la société ou de l'une des personnes morales de son groupe, soit par la façon dont la société conduit ses activités commerciales ou ses affaires internes. La façon dont les administrateurs de la société exercent ou ont exercé leurs pouvoirs peut également donner ouverture à ce type de recours.

Depuis quelques années, le recours pour oppression a donné lieu, à travers le Canada, à de multiples jugements et a été à l'origine de nombreux débats. Puisque le tribunal jouit d'un grand pouvoir dans l'émission des ordonnances qu'il peut rendre, il est difficile de fortifier le recours pour oppression et de lui attribuer ainsi un cadre précis. Cependant, il existe certains principes et règles de base qui doivent être respectés et suivis dans le cadre d'un recours pour oppression.

Selon l'article 238 de la LCSA, ce recours bénéficie aux personnes suivantes et il peut être intenté par celles-ci :

  1. le détenteur inscrit ou le véritable propriétaire, ancien ou actuel, de valeurs mobilières de la société ou de personnes morales du même groupe;

  2. tout administrateur ou dirigeant, ancien ou actuel, d'une société ou de personnes morales du même groupe;

  3. le directeur de la société;

  4. toute autre personne qui, d'après un tribunal, a la qualité nécessaire pour présenter un tel recours.

Évidemment, « toute autre personne ayant la qualité nécessaire » constitue un concept très large et inclut, notamment, les créanciers de la société, la personne qui prétend avoir légalement droit à des actions, l'anticipated shareholder, les autorités fiscales ainsi que le vendeur d'actions qui s'est réservé la propriété de ses actions jusqu'à parfait paiement. Ce recours peut également être entrepris lorsque le plaignant est en mesure d'alléguer que la société a octroyé une aide financière à un actionnaire et que cela a causé préjudice, et ce, même si l'aide financière a été octroyée de façon tout à fait légale.

Cependant, le recours pour oppression ne serait pas approprié dans le cas d'une dispute contractuelle entre actionnaires. Normalement, le recours pour oppression ne devrait pas être utilisé lorsqu'il y a un conflit entre actionnaires relativement à une convention d'achat ou de vente d'actions. Cependant, s'il y a violation injuste ou abusive d'une convention entre actionnaires par un actionnaire majoritaire, le recours pour oppression sera alors une voie qui pourra être empruntée.

Il est intéressant de constater que les tribunaux considèrent que le non-respect des représentations faites dans un prospectus lors de l'émission de débentures peut donner ouverture au recours pour oppression. Cette considération est toutefois alarmante pour la société émettrice et constitue une source de responsabilité potentiellement élevée.

Par ailleurs, c'est en ayant recours à l'article 241 de la LCSA que certains tribunaux canadiens examinent et analysent les devoirs des administrateurs des sociétés publiques lors d'offres publiques d'achat.

Il est permis, depuis seulement quelques années, aux créanciers impayés d'obtenir, par le biais du recours de l'article 241 de la LCSA, la condamnation personnelle des administrateurs des sociétés insolvables. Par conséquent, les administrateurs peuvent être tenus de rembourser le créancier impayé s'il est mis en preuve que les administrateurs ont bénéficié de paiements faits par la société insolvable. On pourrait donc maintenant considérer que l'article 241 de la LCSA constitue une source de responsabilité personnelle distincte pour les administrateurs.

Les tribunaux ont développé certaines notions en matière de recours pour oppression, notamment la notion d'attente raisonnable. La Cour utilise la notion d'« attente raisonnable » afin d'évaluer si la conduite de la société est acceptable ou non. Le caractère raisonnable est évalué de façon objective par les tribunaux. Cette notion d'attente raisonnable permettra également de déterminer si la société s'est conduite de façon juste ou injuste à l'endroit du plaignant. Il faut comprendre que les attentes raisonnables n'obligent pas les administrateurs à rendre la société le plus profitable possible ni n'obligent les administrateurs à considérer uniquement le meilleur intérêt de la société lors de la prise de décisions. Bien entendu, dans l'éventualité où les administrateurs auraient empoché des sommes élevées provenant des bénéfices de la société, la Cour pourrait en venir à la conclusion qu'il s'agit d'un comportement injuste, mais telle n'est pas une règle absolue. Il est également important de rappeler que même si la société agit de façon légale et en conformité avec les lois et la réglementation existante, cela n'empêchera pas un tribunal de qualifier sa conduite d'injuste.

Une panoplie d'ordonnances peuvent être rendues par le tribunal dans le cadre d'un recours en oppression et la liste contenue à la LCSA, à l'article 241(3), n'est pas limitative. En effet, le tribunal possède tous les pouvoirs nécessaires pour redresser une situation. Le remède doit cependant être proportionnel au préjudice qui a été subi par le plaignant. Le tribunal pourra, notamment, ordonner le rachat forcé des actions du plaignant, condamner la société à des dommages-intérêts, ordonner la destitution d'un actionnaire, empêcher l'émission ou l'échange de valeurs mobilières ou encore, prononcer la liquidation et la dissolution de la société. Le tribunal peut également annuler ou interdire le comportement reproché, nommer un séquestre, modifier les statuts ou les règlements de la société ou bien encore, modifier la convention unanime des actionnaires.

Souvent, le plaignant qui intente un recours en oppression est un actionnaire minoritaire qui ne siège pas au conseil d'administration. Dans plusieurs cas, la société refusera de lui donner accès aux documents et aux informations de la société. Devant une telle situation, le tribunal pourra émettre une ordonnance qui permettra au plaignant d'avoir accès aux livres de la société.

Il est également important de souligner que, dans certains cas, la conduite du plaignant permet à la société d'adopter une conduite qui normalement serait considérée comme étant abusive ou injuste. Le plaignant qui se présente devant la Cour doit donc avoir les mains propres. Le recours pour oppression ne sera également pas approprié si le plaignant recherche l'annulation d'une entente à laquelle il a consenti valablement. Dans le cas où il y a divergence d'opinion au sein de la société relativement aux objectifs de l'entreprise, le recours pour oppression n'est pas indiqué, sauf s'il est mis en preuve que les objectifs sont préjudiciables.

Avant l'année 2000, le congédiement illégal d'un employé ne pouvait faire l'objet d'un recours pour oppression. Aujourd'hui, suite à deux jugements rendus par la Cour d'appel du Québec, le droit est incertain quant à savoir si un employé congédié peut intenter un recours pour oppression. Évidemment, si l'employé congédié illégalement est actionnaire, administrateur et/ou dirigeant de la société et que son congédiement résulte de tactiques visant à l'évincer de la société ou à le forcer à vendre ses actions, le recours pour oppression lui sera permis.

On peut dégager, à la lumière des deux décisions rendues par la Cour d'appel, que le recours pour oppression ne semble pas accessible à l'employé congédié qui n'a pas été victime d'oppression.

Le recours pour oppression peut être entrepris trois (3) ans après la commission de la faute ou de la conduite reprochée à la société.

Le fait d'intenter un recours pour oppression n'empêche pas le plaignant d'intenter d'autres recours civils.

What's In A Name? Protecting Limited Liability

One of the main benefits of incorporating a business is limited liability. When one incorporates the liability of the business owner for the debts and contractual liabilities of the business, it's ordinarily limited to the amount of his or her capital investment in the business.

Despite this general principle, there are many types of circumstances that can result in a corporation's principals, directors or officers becoming liable for the corporation's debts and obligations. These types of circumstances include well-known examples, such as directors' liability for unremitted source deductions, and a variety of deliberate or otherwise wrongful conduct, such as misrepresenting the corporation's financial status to suppliers when obtaining credit, or withdrawing capital when the corporation is insolvent. Personal liability can also arise from the lesser known, relatively innocent mistake of not using the corporate name properly when doing business for the corporation.

In British Columbia, personal liability for failing to use the company's name properly is provided in the Business Corporations Act, SBC 2002, c. 57:

27 (1) A company or extraprovincial company must display its name, or in the case of an extraprovincial company that has adopted an assumed name under this Act, its assumed name, in legible English or French characters:

(a) in a conspicuous position at each place in British Columbia at which it carries on business;

(b) in all its notices and other official publications used in British Columbia;

(c) on all its contracts, business letters and orders for goods, and on all its invoices, statements of account, receipts and letters of credit used in British Columbia; and

(d) on all bills of exchange, promissory notes, endorsements, cheques and orders for money used in British Columbia and signed by it or on its behalf

(2) If a company has a seal, the company must have its name in legible characters on that seal.

158 (1) A director or officer of a company who knowingly permits the company to contravene section 27 (1) (a), (b) or (c) or (2) is personally liable to indemnify any of the following persons who suffer loss or damage as a result of being misled by that contravention:

(a) a purchaser of goods or services from the company;

(b) a supplier of goods or services to the company; and

(c) a person holding a security of the company.

(2) A director or officer of a company who issues or authorizes the issue of any instrument referred to in section 27 (1) (d) that does not display the name of the company is personally liable to the person holding that instrument for the amount of it, unless it is duly paid by the company.

As one would expect from a plain reading of this provision, the B.C. courts have held officers and directors personally liable for failing to use the company name when obtaining goods or services on credit from suppliers, or when contracting with the company's customers. See for example: Mitchell v. Consolidated Technologies Inc., [2000] B.C.J. No. 2408 (S.C.); Blom v. Bredt (c.o.b. Kootenay Lake Log Structures), [2003] B.C.J. No. 2256 (S.C.). In Blom, the owner's error was simply failing to include "Ltd." in the company name on contractual documents, while describing himself in signing the document as "owner" of the business.

Other provinces have statutory provisions similar to s. 27 of B.C.'s Business Corporations Act, requiring use of the company name when conducting business on behalf of the company. Company directors and officers have been held personally liable in various provinces for company debts and obligations they have entered into without using the company name. See for example: Truster v. Tri-Lux Homes Ltd., [1998] O.J. No. 2001 (C.A.); Pennelly Ltd. v. 449483 Ontario Ltd., [1986] O.J. No. 2672 (H.C.); TCT Logistics Inc. v. Osborne (c.o.b. Key-West Storage & Distribution), [2001] M.J. No. 460 (Q.B.); Clow Darling Ltd. v. 1013983 Ontario Inc. (c.o.b. Provincial Contracting), [1997] O.J. No. 3655 (G.D.); Leland Brown Electric Ltd. v. Hansen, [1998] A.J. No. 529 (C.A.).

The onus is on the person making a contract or ordering goods or services on behalf of the corporation to demonstrate that the fact the person was contracting on behalf of the corporation was clearly communicated to the opposite party. It is no defence to say that the opposite party "should have known" that a corporation was involved. See for example: CHED-CKNG FM, a division of Westcom Radio Group Ltd. v. Goose Loonies Inc., [1995] A.J. No. 596 (Q.B. Master).

There are a number of practices that can be adopted to help maintain the protection of corporate limited liability, and to prevent inadvertently becoming personally liable for the debts and obligations of the corporation. These include:

  1. Having the corporation's name pre-printed on all business letterhead, purchase orders, cheques, etc.;

  2. Having all contractual documents and credit applications written and signed in the formal name of the corporation, rather than only the trade name. A corporate signing block (i.e., "XYZ Ltd. per: John Doe, President") should be used when signing any contractual or credit documents on behalf of the company. See for example: City Press Inc. v. Green (c.o.b. B & G Print & Litho), [1996] O.J. No. 1823 (G.D.). Credit applications and standard form contracts should also be reviewed carefully to ensure there are no standard terms stating the person signing is liable in their personal capacity for the credit being extended;

  3. If invoices are received addressed to the business trade name (and not the corporation's name), or especially to an individual only, insist that the supplier reissue the invoice in the name of the corporation and issue all future invoices in name of the corporation only. When invoices are received addressed to the trade name or to an individual name, payment of the invoices with cheques bearing the corporation's name will not result in the supplier being deemed to know that the corporation was the contacting party. See for example: Excelco Foods Inc. v. Snider, [1991] S.J. No. 466 (Q.B.); 3253791 Canada Inc. (c.o.b. Nutrition Club) v. Armstrong (c.o.b. Armstrong Nutrition), [2002] O.J. No. 3424 (S.C.);

  4. If an existing unincorporated business is later incorporated, all suppliers should be advised (preferably in writing) that the business is now owned by a corporation. Otherwise, the suppliers can continue to hold the business owners personally liable for goods and services supplied after the incorporation. See for example: Excelco Foods, supra; Ellehammer Industries Ltd. v. Hanson, [1990] B.C.J. No. 312 (C.A.). Also, if the business trade name was registered in the business owner's personal name before incorporation, the name registration should be changed after incorporation. Failure to do so effectively represents to the public that the business owner, personally, continues to operate the business, and can be a basis for holding the business owner personally liable for the debts and obligations of the business even after incorporation. See for example: TCT Logistics Inc., supra;

  5. Similarly, when taking over a business from prior owners, customers and suppliers should be told that a corporation is the new owner of the business. In small closely held companies, it is common for the owners to describe each other as "partners" and themselves as "owners" of the business. However, describing themselves in this way to suppliers can result in suppliers assuming (and being entitled to assume) that they are dealing with a partnership rather than a corporation, thereby making the owners personally liable for the debts and obligations of the corporation to those suppliers. See for example: CHED-CKNG FM supra;

  6. When using the practice of having shell companies enter contracts for particular parts of the business (e.g., having separate numbered companies being the operators of different retail store locations), care must be taken to communicate clearly with suppliers which company in a corporate structure is the contracting party. Failure to do so, or even making an error of misstating the company name so it is not exactly the same as any name in a corporate group, can result in personal liability of the person making the contact for the company: see Race-Way Construction & Management Ltd. v. Barker-Taylor, [2003] B.C.J. No. 555 (C.A.); Mexam Corp. v. Coffee, Tea, or … Me & Bakery Café Inc., [2001] O.J. No. 3535 (S.C. Master), reversed on other grounds [2002] O.J. No. 4487 (D.C.); and

  7. When signing cheques on behalf of a company, the company name should be pre-printed on the cheques and a corporate signing block should be used for signing the cheques. Otherwise, if the cheque is not honoured, the person signing the cheque can be held personally liable pursuant to the Bills of Exchange Act, R.S.C. 1985, c.B-4.

For the incorporation of a business to be effective as a shield against personal liability for the business' owners, directors and officers, care must be taken to use and communicate the corporate name when conducting business on behalf of the company. Rather than being the last step to take in establishing limited liability, incorporation should be seen as the first in an ongoing series of steps to protect a business' owners, directors and officers from personal liability for the debts and obligations of the corporation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.