Corporate Limited Liability in a Page
May 07, 2023
Overview
In Canada, the notion of shareholder limited liability flows directly through the Canadian Business Corporations Act [CBCA] or various other provincial corporate statutes (if they provide for it). Under section 45 of the CBCA, shareholders of a corporation are not liable as shareholders for any liability, act or default of the corporation. In practice, this means that shareholders only risk losing their capital investment in the firm and nothing more. It is also worth mentioning that section 45 does not apply to specific subsections under the CBCA and there has been growing developments in Canada in which Courts have “pierced the corporate veil”.
Historical Roots: Salomon v Salomon 1896 House of Lords
In 1896 the House of Lords decided the landmark case of Salomon v Salomon which was a unanimous ruling upholding the doctrine of separate corporate personality under the the United Kingdom’s Companies Act. In this case, the creditors of an insolvent company tried to argue that they should be entitled to recover against the shareholders of the company for the repayment of outstanding debts.
Under the Companies Act, a corporation needed to have at least seven shareholders. In order to achieve this Salomon appointed himself, his wife and five children as shareholders. Salomon held approximately 20,000 shares, while his wife and five children each held one share. The creditors brought an action against Salomon to recover on the basis that he should not be protected by the separate corporate personality.
In deciding this case, Lord MacNaghten stated, “[t]he company is at law a different person altogether from the subscribers to the memorandum” or in plain terms its shareholders. Lord Halssbury stated, “it seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are.”
Thus, the House of Lords held that the separate legal personality of the corporation conferred limited liability upon Salomon. Salomon was not liable for the corporate debts.
In Canada Today
Section 45 of the CBCA and various judicial pronouncements have kept the views expressed in Salomon v Salomon alive to this day. While it is outside the scope of this article, it is worth noting the three main scenarios where the doctrine of shareholder limited liability has been bypassed by the courts (also known as the act of “piercing the corporate veil”). In situations of;
Fraud or improper conduct
Absence of legitimate business purpose: the corporation was created only or mainly to avoid statutory obligations, contractual obligations or obligations flowing from tort law.
Corporate groups such as using subsidiaries
A cautionary note, the materials on this website provide an overview and does not constitute legal advice. Readings are cautioned against making any decisions based on this material alone. Rather, Speicifc legal advice should be obtained.