Nunatsiaq News
COMMENTARY: Nunavut December 12, 2017 - 11:30 am

Legal Ease, Dec. 12

Suing a corporation

JAMES MORTON

A corporation is a somewhat mysterious entity. It employs people, it owns property, it pays taxes and it can even be punished for committing offences.

But a corporation is not a person. 

A corporation is a form of organization that the government has given some of the rights and responsibilities of being a real human being.

As a legal matter, a corporation is a different person from the owners of the corporation.

So that means if a corporation has, say, a lease for a building, it is the corporation that is responsible to pay the lease—the owners of the corporation are not legally bound. 

An example may make things clearer.

If you sign a lease to rent a snowmobile to a corporation and the corporation fails to pay the lease, you can sue the corporation. But you cannot sue the corporation’s owner.

So if you want to be sure of getting paid you will need to make the lease with the owners directly, or you will need the owners to guarantee payment personally. 

That is important in a number of ways. 

First, it means that if you invest in a corporation, in general, you only risk your investment. You are not personally liable for the corporation’s debts. That encourages people to invest and that promotes business activity.

The flip side of the owners’ immunity from debts is that the people dealing with the corporation have recourse only against the corporation’s assets. 

If a corporation owes you money but has no money, the fact that the corporation’s owners are rich helps not at all. 

There are some exceptions to the owner’s immunity from corporate debt. If the owner was using the corporation to commit a fraud, then the owner is liable. But ordinary business does not count as fraud, so this is an unusual exception.

The courts explain the rare circumstances where an owner will be held personally liable for corporate debts as follows:

“Typically, the corporate veil is pierced when the company is incorporated for an illegal, fraudulent or improper purpose. But it can also be pierced if/when those in control expressly direct a wrongful thing to be done.

“The courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct.”

In general, when dealing with a corporation you have to assume only the corporate assets are available should there be a claim against the corporation.

James Morton is a lawyer practising in Nunavut with offices in Iqaluit. The comments here are intended as general legal information and not as specific legal advice.

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