Written By Scott Bower, Russell Kruger and Heather Taskey

Separate corporate personality is not a loophole or technicality, but is an essential principle of corporate law, the Alberta Court of Appeal recently reiterated in Condominium Corporation No. 0828219 v Carrington Holdings Ltd., 2023 ABCA 222 [Carrington] and Swanby v Tru-Square Homes Ltd, 2023 ABCA 224 [Swanby]. Together, Carrington and Swanby highlight the powerful impact of separate corporate personality on shareholder liability for the actions of their corporations.

Parent companies and their subsidiaries are distinct and separate legal entities, generally liable only for their own debts and obligations. It does not matter that a subsidiary has a "single purpose", is generally controlled by its parent corporation, or that the companies share the same directors and ultimate shareholders. Courts continue to emphasize that shareholders are not personally liable for the actions and obligations of their company, and this principle limits shareholder liability for both individuals and parent corporations, as demonstrated by Carrington and Swanby.

Condominium Corporation No. 0828219 v Carrington Holdings Ltd., 2023 ABCA 222

In Carrington, the Court addressed the principle of separate corporate personality between a parent corporation and its subsidiary. Carrington Holdings Ltd. was the parent corporation of Carrington Hermitage Ltd., which had the sole purpose of building a condominium (Condominium Corporation No. 0828219). After experiencing problems with the building, the Condominium Corporation sued Carrington Hermitage for construction deficiencies and obtained a default judgment. Before the judgment was obtained, however, Carrington Hermitage was dissolved, rendering it judgment-proof. The Condominium Corporation then brought an action against Carrington Holdings Ltd. for the same damages and sought an application to hold Carrington Holdings Ltd. liable based on the judgment against its subsidiary, Carrington Hermitage. The chambers judge refused, holding that the parent company, Carrington Holdings Ltd., was not bound by the judgment against its subsidiary, because they were separate legal entities.

On appeal, the Court of Appeal agreed with the chambers judge that parent and subsidiary companies are not liable for the debts and obligations of the other. This is not a loophole or technicality, but an essential principle of corporate law. While not impossible, the Court stressed it is a high bar to stray from the principle of separate corporate personality: "[a]bsent some fraud or improper purpose, shareholders are not liable for the obligations of the corporations they own and control."

There was no such fraud or improper purpose here, and notwithstanding the sympathetic position of the Condominium Corporation (who bought a condo only to find out there was limited legal recourse against the company that built and sold it to them), the Court held that the chambers judge was correct. Carrington Holdings Ltd. and Carrington Hermitage were separate legal entities and the judgment against the subsidiary did not determine the liability of the parent.

Swanby v Tru-Square Homes Ltd, 2023 ABCA 224

In Swanby, the Alberta Court of Appeal dealt with the principle of separate corporate personality between a corporation and its individual owner. Mr. Metcalfe was a 99 percent shareholder of Tru-Square Homes Ltd., which was hired by the Swanbys to build a home. All contracts between the parties were between the Swanbys and Tru-Square, not Mr. Metcalfe in his personal capacity. The Swanbys later sued Tru-Square Homes Ltd. and Mr. Metcalfe for construction issues, and the trial judge found both Mr. Metcalfe and Tru-Square liable. Mr. Metcalfe appealed only the finding that he was jointly and severally liable for the acts of his company, Tru-Square.

The Court of Appeal held that the trial judge erred in finding Mr. Metcalfe jointly and severally liable, since he did not act in his personal capacity, but as a representative of Tru-Square. Referencing an earlier decision, the Court stated that "[t]he liability of the individual is based on his or her breach of an individual duty owed in tort, not by lifting the corporate veil to impose the corporation’s duty or liability on the individual." Based on the facts, Mr. Metcalfe had no separate and distinct duty beyond that owed by Tru-Square, and the doctrine of separate legal personality prevented him from being found personally liable for the acts of his company.

Takeaway

Both Carrington and Swanby demonstrate the court's continued emphasis on the principle of separate corporate personality. While beneficial for shareholders, recovery efforts for those seeking damages against a corporation that cannot compensate them for their losses may be hindered. To address this concern, possible solutions include requiring the parent company or owner to be a party to the contract or act as a guarantor for any damages not remedied by the subsidiary or corporation.

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