Piercing the corporate veil – in reverse

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A corporation is regarded by the law as a separate legal entity, separate from its shareholders or directors, so the liabilities of the corporation are not the liabilities of the shareholders. Courts will sometimes “pierce the corporate veil” and find shareholders liable for the debts of the company, in special circumstances. In the recent decision of Borden Ladner Gervais LLP v. Sinclair and others, however, this cross-liability was reversed.

Mr. Sinclair’s law firm had provided services to him and to three of his companies. During the course of the retainer, Mr. Sinclair advised the lawyers that he had organized his affairs to place assets out of his name or control and into various companies. When Mr. Sinclair failed to pay for the legal services provided, the lawyers sought to recover payment from two of Mr. Sinclair’s companies, alleging that the companies were his agents and alter egos. The lawyers went further, however, alleging that Mr. Sinclair fraudulently caused one of the companies to convey its property to his wife and the other to mortgage its property to his wife.

The court found there was nothing in the case authorities to prevent a “reverse” piercing of the corporate veil. Given the evidence, the court found that it could “treat the two properties as if they were owned by Mr. Sinclair.” The court then found the transactions between the companies and Mr. Sinclair’s wife to be breaches of the fraudulent conveyance and preference legislation. Accordingly, it set aside the respective conveyance and mortgage and allowed the lawyers to register their judgment against the two properties as if the titles were in Mr. Sinclair’s name.

Given this decision, creditors should be aware that a “reverse” piercing of the corporate veil may be a remedy where a debtor has set himself up as a “man of straw” to limit recovery from his assets. Clients should also remember: hell hath no fury like an unpaid lawyer!

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