Director faces personal liability where personally benefited from a corporate transaction

When is a director of a corporation personally liable to a third party for misconduct arising out of the ‎performance of their duties? A recent decision of the Ontario Superior Court of Justice (Commercial List) ‎in CHU de Québec-Université Laval v Tree of Knowledge International Corp, 2024 ONSC 3541 confirms ‎that directors cannot simply hide behind the separate legal personality of a corporation for liability ‎arising out of transactions from which they directly benefitted.‎

Facts

The Plaintiff, CHU de Québec-Université Laval (“CHU”), is the largest hospital network in Quebec and had ‎a particular need for N95 respirator masks during the COVID-19 pandemic. Tree of Knowledge ‎International Corp. (“TOKI”) and its director, Michael Caridi (“Caridi”), sought to supply hospital ‎institutions like CHU with masks. Caridi and TOKI had a side arrangement to split the profits earned from ‎the sale of the masks.‎

Following an introduction brokered by the respective agents of CHU and TOKI, Caridi represented to ‎CHU that TOKI was able to supply massive quantities of NIOSH-certified N95 masks. Once CHU ‎expressed interest in purchasing N95 masks from TOKI, Caridi provided a signed invoice for the ‎provision of three million “NIOSH Certified” N95 masks. A corresponding purchase order from Chu ‎confirmed the institution’s understanding that the masks would be NIOSH-certified N95 masks.‎

Once the first batch of masks arrived in Quebec, CHU discovered that TOKI was shipping KN95, not ‎N95, masks. Responding to complaints from CHU, Caridi equivocated, seeking to persuade CHU and its ‎agent that there was no meaningful difference between the N95 masks ordered and the KN95 masks ‎already delivered and on the way. TOKI never did provide the N95 masks ordered by CHU and did not ‎refund the $11.6 million USD paid by CHU.‎

CHU originally sought damages against TOKI, Caridi and TOKI’s agents. By the time of the decision, ‎CHU had settled with or obtained recovery against some parties. As such, the Court only considered ‎whether Caridi was liable for civil fraud or deceit based on lifting of the corporate veil or, alternatively, ‎through the oppression remedy.‎

Analysis

Applying the test for deceit laid out in Bruno Appliance and Furniture, Inc v Hryniak, 2014 SCC 7, the ‎Court found that in four instances, Caridi had made false representations to CHU with respect to TOKI’s ‎capacity to supply 3 million NIOSH-certified N95 masks. Although Caridi claimed to be ignorant or ‎mistaken about the differences between the N95 and KN95 certifications, the Court found that Caridi’s ‎recklessness as to the truth and disregard for the possibility that there was a meaningful difference ‎between the two standards was sufficient to establish the elements of the tort.‎

Caridi argued that even if TOKI has committed deceit, he was personally acting in his capacity as a ‎director of TOKI and entitled to the shield of TOKI’s separate legal personality as a corporation. CHU ‎argued that the Court should disregard or pierce the veil of TOKI to obtain judgment against Caridi ‎personally on the grounds that Caridi dominated TOKI and used it as the vehicle to perpetuate a fraud.‎

The Court disagreed with CHU’s approach, declining to pierce the corporate veil of TOKI. In particular, the ‎Court stressed the requirement to show that TOKI was a sham corporation incorporated or used for the ‎very purpose of engaging in fraud. The Court held that CHU had not shown that Caridi used TOKI, which ‎otherwise conducted a legitimate business, for the purposes of conducting a fraud on CHU.‎

CHU also advanced an oppression claim, arguing that Caridi unfairly disregarded its reasonable ‎expectations that (1) TOKI would not be used as a vehicle for fraud and (2) that TOKI would not dissipate ‎its assets to defeat a judgment. The Court dismissed the oppression claim. With respect to the first ‎expectation, the Court held that because Caridi did not use TOKI as a vehicle for fraud (as noted above ‎in the context of piercing of the corporate veil), this expectation could not have been reasonable. With ‎respect to the second expectation, the Court held that there was simply no evidence that Caridi had ‎depleted the funds of TOKI to defeat judgment creditors.‎

Although CHU’s veil-piercing and oppression arguments failed, the Court did not leave CHU without a ‎remedy against Caridi. In particular, the Court considered whether there were grounds to identify an ‎independent cause of action against Caridi for the tortious misrepresentations he made as a director of ‎TOKI. In this regard, the Court noted that a director is liable for torts committed in their official capacity in ‎cases where their conduct exhibits a separate identity or interest from the corporation that they control.‎

In this case, Caridi stood to benefit from the transaction with CHU, in that he would receive half of TOKI’s ‎profits from the transaction. Accordingly, the Court found that Caridi was acting in both a personal and a ‎corporate capacity when he misrepresented the type of mask that TOKI would supply. Further, Caridi’s ‎personal benefit from CHU’s reliance on that misrepresentation was sufficient to establish Caridi’s ‎personal liability for deceit.‎

Takeaway

The separate legal personality of a corporation is a venerable concept in Canadian law that will not be ‎lightly set aside. That said, in claims made against closely held corporations for commercial transactions ‎gone wrong, the risk that a judgment will be unrecoverable against the corporation means that plaintiffs ‎should carefully consider whether there are valid claims for personal liability against the corporation’s ‎directing minds.‎

The Court’s decision in this case underlines another strategy for plaintiffs seeking to recover against a ‎directing mind of a corporation that does not require piercing the corporate veil: demonstrating that the ‎directing mind had a separate identity or interest from the corporation sufficient to give rise to personal ‎liability for torts committed while acting on behalf of the corporation. 

The strategy provides further opportunities for recovery against a director’s personal assets but ‎demands that plaintiffs do additional work at the investigation and discovery stage to identify any side-‎deals or arrangements under which a director stood to benefit directly from a subject transaction.‎