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Piercing the Corporate Veil, Personal Liability of Directors in Employment Contracts

In its recent decision, Mainieri v Kajotec Inc. et al., the Superior Court of Justice awarded an employee $25000 in damages after finding that he was induced to enter into an employment contract as a result of fraudulent misrepresentation by the corporation's sole director, Joel Kaleu. 

FACTS

Prior to hiring Mr. Mainieri, Kaleu informed the Plaintiff that his company was operating in the eco-products industry and selling various products listed on a website with corresponding patent numbers. Based on these representations, the Plaintiff entered into a six-month employment contract with a $30,000 salary. Shortly after, the Plaintiff found that Kajotec Inc. did not own various patents as claimed by the director and was terminated from his employment when the Defendant ran into financial difficulties. The Plaintiff commenced an action against Kajotec Inc. and the corporate director Joel Kaleu for unpaid wages and damages for breach of contract. When the corporation was dissolved the action continued against Mr. Kaleu.

PIERCING THE CORPORATE VEIL

In order to pierce the corporate veil and establish liability of the officers in control of a corporation, the action of the defendant must be "fraudulent, dishonest, and deceitful". In 642947 Ontario Ltd. v Fleischer, the Court further confirmed that the corporate veil could be pierced when a company is incorporated for illegal, fraudulent, and improper purpose and confirmed that liability can be extended to those in control of the corporation. In Yaiguaje v Chevron Corporation, the Court established the doctrine of alter ego and found that personal liability can be imposed on those in control of a corporation when it is used as a shield for personal misconduct after causing damages to a plaintiff.

In the case at hand, the Plaintiff alleged that the Defendant, who had direct control and knowledge of the corporation, would have known that his representations in regards to his company were patently false when he induced the Plaintiff to enter into an employment contract.

DECISION

In its decision, the Court was satisfied that the Defendant's representations were patently false and fraudulent and that the sole director knowingly misrepresented the ownership status of the patents for the corporations benefit. The Court was also satisfied that defendant had control over the corporation and tried to use the corporation to escape liability from the misconduct he engaged in. The Court held that "it would therefore be unfair to find liability only against the Defendants corporation and since it has now been dissolved and the Plaintiff would be left with no remedy what so ever. So for that reason I find that it is appropriate to attach liability to the individual corporate director and there shall be judgment against them, jointly and severally with that of the corporation".

SUMMARY

The Courts decision is an important reminder that directors should not use corporations as a shield as that they may be found personally liable if they knowingly misrepresent the true state of affairs to prospective employees in order to gain an advantage for themselves or the business.

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