Canada: Is The Corporate Veil An Iron Curtain? The Prevailing Standard For Directors' Liability

In Hogarth v Rocky Mountain Slate Inc., 2013 ABCA 57  the Court of Appeal re-affirmed the test for directors' liability in the context of tortious action by a director in a limited liability corporate context.

Roger Simonson had been a director, officer and shareholder of Rocky Mountain Slate Inc. (RMS) during a period when that limited liability partnership was actively soliciting investment. He had helped to prepare some promotional materials that contained misrepresentations about the technical expertise contained in RMS' management team and misleading predictions about the potential success of RMS' operations. At trial, the Court found that Simonson's acts constituted tortious conduct that made him personally liable for the misrepresentations in the promotional materials.

The majority of the Court of Appeal reversed this decision on narrow grounds, following its previous decision in Blacklaws v. Morrow, 2000 ABCA 175, leave refused [2001] 1 SCR vii. In that case, the Court had acknowledged that in some circumstances the actions of a director, officer, shareholder or employee done in the course of their corporate duties may result in personal liability. However, this personal liability is confined to actions that are tortious in themselves, or that "exhibit a separate identity or interest from that of the corporation so as to make the act or conduct complained of their own."

On this basis alone, Justices O'Brien and Rowbotham concluded that personal liability was not established against Mr. Simonson. They noted that being an officer and shareholder in the corporation was insufficient to establish Mr. Simonson as having a separate identity from his corporate role in connection with the impugned conduct. The trial judge had not identified any of Mr. Simonson's actions as being independent from his corporate role. Thus he could not be held personally liable.
In a concurring judgment, Slatter JA gave much more expansive reasons.

Importantly, he noted that the trial judge appeared to have applied a standard of "universal concurrent liability" and characterized this as a misstatement of law resulting in an elimination of the corporate veil. Justice Slatter went on to highlight the important public policy basis of limited liability corporations. He found that there is ambiguity in the case law as to whether the question of directors' liability should be approached from the perspective of the directors' duty of care or as a question of "piercing the corporate veil".

In the event, Justice Slatter adopted the duty of care approach. He determined that it was impossible to determine on the facts in this case which representations were made by RMS and which were made by Mr. Simonson, and that a reasonable person would not expect that the authors of the promotional materials were in fact attaching persona legal responsibility to such representations. The policy consideration of maintaining the integrity of limited liability business structures weighed heavily in favour of Slatter JA's ultimate determination that there was no personal liability in these circumstances.

While Justice Slatter would also have denied liability on the basis of a lack of causation, the majority of the Court repudiated his formulation of the "but for" test in this case.

Unfortunately, neither the majority nor the concurring opinion in this case laid down any definable rule to distinguish an independent tort from a corporate tort. The majority simply noted that there was no statement from the trial judge identifying any of Mr. Simonson's actions as being independent. Justice Slatter's concurring reasons contend that promotional materials prepared in the corporation's name and not identifying any particular contributors should be presumed not to create personal liability, as raising capital is one of the limited liability corporation's primary functions.

As a result, the law remains vague with respect to what constitutes an independent tortious act by a director, officer, employee or shareholder. The answer to this question is likely to turn on the individual facts of each case.
 

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