Piercing the corporate veil
It is standard practice in Ontario to set up corporations to hold assets or to transact business. In Ontario the corporation is also a tool debtors use to place their assets beyond the reach of creditors. The fact that corporations have separate legal personality often allows the debtor to laugh cynically in the creditors face while pretending to have no assets.
The Court of Appeal of Ontario was alive to this issue in Lo Faso Estate v Ferracuti. In a December 2018 case ((2018) 143 OR (3d) 525) the Superior Court of Ontario swept away a technical defence that might have allowed debtors to go on laughing.
The game Ferracuti played was to place a property (Haines Road) into the formal ownership of his corporation (518). Of course Ferracuti owned and controlled 518, but Ferracuti could say that his debt was owed personally. His corporation (518) didn’t owe the debt.
Ordinary people will say this is equivalent to the debtor’s saying: “It’s my left pocket that owes the debt not my right pocket, don’t look in my right pocket.” Courts are alive to this game but must also protect the separate existence of corporations as legal entities. The corporate instrument has been one of the building blocks of prosperity in all advanced countries. Courts cannot randomly sweep away the separate personality. Careful and surgical steps are required to break open corporations that debtors use to hide assets from creditors while still protecting the integrity of the separate corporate personality.
After being sued and judgment obtained by the creditor, Ferracuti transferred his 518 shares to his wife. Now his wife said in effect: ‘the 518 shares are now mine so Haines Road is now mine and not available for the creditor’.
The Court of Appeal said no. Transfer of an interest in land in Ontario requires writing. A mere handing over of shares does not convey the land interest, if that land interest was previously held beneficially by the debtor.
So the Creditor then asked the court to amend creditor statement of claim, to plead the Statute of Frauds. The Debtor said in effect: ‘Can’t be done. Claiming the statute of frauds is a new cause of action outside the limitation period.’
The court said: ‘Yes, the Creditor can amend to include the statute of frauds. The Creditor’s argument was always that the husband Debtor could not convey his land interest to his wife merely by giving her his “518” shares. Nothing new if the Creditor wants to add reference to the statute of frauds.’
Behind all of this technical maneuvering is the Ontario court system giving the Creditor the opportunity to get his money back. A larger problem identified by the La Faso case which has gone on 18 years, is how inefficient the Ontario court system still is in protecting creditors. Judges might benefit from reading Joseph Schumpeter, the nobel-prizing winning economist, who emphasized how all advanced economies thrive upon credit more than any other economic input. Make credit difficult to retrieve as it is patently is in La Faso, and suffer the environmental consequences.
