Canada: Corporate Veil Lifted In Regulatory Prosecution-Substantial Fine Recoverable From Individual Not Charged

In R. v. 1137749 Ontario Ltd. (operating as Pro-Teck Electric) 2018 ONCJ 502, an appellate court lifted the corporate veil and imposed total fines of $430,000 on the sole shareholder, officer and director of the company, one Antonio Merante, for safety violations under the Electricity Act S.O. 1998, c.18. The appellate court recognized that the jurisdiction to allow the fine to be recovered from an individual who was not himself charged with the offence, was restricted to the very narrow circumstances where a flagrant injustice would otherwise ensue, but found that Merante had in fact attempted to circumvent the legal process.

The charges were serious. By failing to obtain a permit for a home renovation, no inspections were carried out and such inspections would have caught a dangerous electrical connection that ultimately resulted in the death of a residential occupant. The Electrical Safety Authority, which prosecuted the violations, sought financial information about the defendant numbered company prior to sentence and learnt that Merante, had transferred corporate assets to himself and to a newly created electrical contracting company right around the time the charges had been laid. The prosecution requested that the sentencing court pierce the corporate veil and hold Merante personally liable for any fines imposed. The sentencing court decided it had no jurisdiction to do so and imposed fines totalling $430,000 after a contested sentencing hearing. The maximum penalty permitted would have been $1 million a count. However on appeal, Justice Fergus O'Donnell decided that the sentencing judge did, in the circumstances of the case, have the jurisdiction to lift the corporate veil and impose responsibility directly on Merante. The appellate judge ordered that the fines levied against Pro-Teck, were recoverable not only against Merante, but in addition from the newly created electrical contracting company. Merante, according to the appellate judge had, by his conduct, merged his personal and corporate selves in such a way as to render them indistinguishable for the purposes of sentencing. He had conveyed real property and a vehicle owned by the company to himself personally at a price determined solely by him:

Significantly, Merante's interests were fully represented at the sentencing hearing. He was put on notice that the prosecution would be seeking to attribute financial responsibility to him personally and he was given the opportunity to seek an adjournment and separate representation from the company. He chose not to exercise these rights and on appeal it was clear that counsel for the company also represented his interests and that of the newly created company.

What lessons are learnt from this Decision?

Companies facing investigation for regulatory offences or civil liability should, before they transfer significant corporate assets, document the reasons for the transfer. Assuming those reasons demonstrate a legitimate purpose and are supported by objective mechanisms for asset valuation, the separate legal personality of the corporation will be respected in any subsequent litigation.

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