what does it mean when a judge ‘pierces the corporate veil’?

Why do people act through corporations?

1. The main reason for operating through a corporation is to avoid personal liability. This legal instrument has propelled the modern era of economic growth in North America.

Why do courts nevertheless hold corporate shareholders personally liable?

2. Such a legal instrument is open to abuse. If I set up a corporation and use it as my personal piggybank to pay for all my personal activities, if I put funds in and out with no identifiable corporate purpose, if I move funds among corporations with no identifiable corporate purpose, if I make deals that injure or benefit the corporation with no reasonable quid pro quo, then I am using the corporation as my alter ego and the court will pierce the corporate veil and attack me personally for actions done by my corporation.
3. In this latest case, the only alter ego indicia were: sole shareholder, misappropriation of ‘trust’ funds;

The latest example of piercing the corporate veil

4. In 6071376 Canada Inc. v. 3966305 Canada Inc. et.al., the plaintiff ‘607’ put up 40% of the money to buy a building in partnership with ‘396’. For convenience, the building (in Gatineau Quebec) is purchased by ‘396’. In this case, ‘607’ was a true contract partner with stated right to 40% of the revenue and 40% of the future sale price.
5. It is often the case that these situations are observationally equivalent to ‘396’ being the sole ‘buyer’ and ‘’607’ being a mere ‘lender’ (para 49). That is what ‘396’ (bad guy) made the bank think when ‘396’ listed ‘607’ as a ‘guarantor’ rather than an owner. (para. 15)
6. Like many corporations, ‘396’ was run by a single shareholder (Mahmood). It was a private corporation (not publicly traded). It provided no reports, financial statements or asset-status reports to its partner ‘607’.

You know what happens next:

7. ‘396’ the sole ‘owner’ of the Gatineau building sold the building without telling ‘607’;
8. ‘396’ took a vendor-take-back mortgage ($635,000) on the sale of the Gatineau building. Think about this step for a moment: “396’ had used ‘607’s’ money to originally buy the building. In selling, ‘396’ created a new asset for ‘396’ only (mortgage) shutting ‘607’ out of the candy shop.
9. ‘396’ then used the sale proceeds to buy an Ottawa property. ‘396’ then sold this Ottawa property at a profit. (para 24).
10. Mahmood (the bad guy) was asked at trial why he never told his ‘607’ partner of the sale of the Gatineau building. Mahmood said ‘I told my brother…he was their friend.’ (para 40).
11. What’s interesting about this is that the bad guy usually has a better cover story for his gamesmanship. Mahmood was positively unimaginative in his nonsense. When your directing and misappropriating other people’s money for your own purposes (para 56), it’s not often that the bad guy points at his brother and says ‘his fault’.

How does the judge pierce the corporate veil?

12. The important part of this case is the judicial step of piercing the corporate veil to all ‘607’ to attack Mahmood personally.
13. The judge found that ‘Mahmood personally, as the directing mind of ‘396’, agreed to act in the best interests of all the participants in the Hull Project (para 50).

Why did the judge take the special step of determining that Mahmood was a fiduciary?

14. There had been a document (co-tenancy agreement) wherein 396 would hold the property in trust (para 48). This should not, by itself, have been an ‘alter ego’ trigger. Mahmood did not sign personally.
15. ‘607’ had paid its money to ‘396’. Again his should not, by itself, have been an ‘alter ego’ trigger. (para 49).
16. Nevertheless, substance is more important than form. Mahmood was the obvious sole directing mind of ‘396’. (para 50).
17. The judge described the factual requirement for a fiduciary finding: express or implied undertaking by the fiduciary, to a defined person who is vulnerable because the fiduciary has some discretionary power over the legal or practical interests of the claimant. (para 53).
18. Mahmood (not ‘396?) had possession of the funds and he knew that ‘607’ relied upon him. (para 53).
19. This led the judge to personal liability on the grounds that:
    1. Mahmood was the controlling mind of ‘396’ and sole shareholder. (para 54).
    2. Mahmood directed a wrongful act to be done. (para 55).
    3. Mahmood used ‘396’ as his alter ego. he directed and caused misappropriation of ‘607’ funds. (para 56).
20. The judge found the conduct to be high-handed and malicious: he lied to ‘607’ for 6 years, and used their funds to enrich himself. $200,000 in punitive damages (in addition to the lost monies and profits) was awarded (para 67)