The Case Law in Canada and the Notion of a Veil for a Sole Proprietorship - Essay Example

As an initial matter, it is necessary to recognize the precise nature of this contractual relationship under Canadian law. GSL, as the seller, is not the important focus of inquiry; quite the contrary, the question is the business status of the buyer, Hockey Fantasy. It has long been possible for a single individual to operate as a corporation if certain formalities are respected (Salomon v. Salomon & Co., 1897); however, the facts in this case present no comparable issue. Hockey Fantasy is a sole proprietorship. This is the basest of all forms of business organization in Canada. In effect, Hockey Fantasy is a transparent business shell through which the owner retains personal liability for all debts incurred by the sole proprietorship. Contrary to the owner’s assertion that GSL may not “pierce the sole proprietorship’s veil”, an explicit admission that he is not a statutory corporate entity, personal liability is indeed the standard result. Thus, there is a seller whom has delivered his goods according to the terms of the contract, a sole proprietor in receipt of these goods whom has refused to tender payment because of problems reselling the goods, and a dispute heading towards litigation. There is no mention of a consignment and the seller is not a guarantor of the buyer’s business success. Litigation being likely, because Hockey Fantasy alleges its sole proprietorship cannot be pierced, GSL will be forced to pursue its claim through the Ontario court system. To be sure, this case ought not to be too complicated or prolonged. By simply retaining legal representation, GSL should be able to persuade Hockey Fantasy that the facts are in its favor. First, there is a contract for the sale of goods between the seller and the buyer. There is no allegation by Hockey Fantasy that consideration was lacking, that there was fraud or mistake, or that any other legally recognizable excuse or defense exists. The contract would therefore appear to be valid. Second, the buyer is a sole proprietorship. This means that the owner is accorded no limited liability under Canadian business organization law; quite the contrary, the owner of the sole proprietorship is personally liable for all debts incurred by this particular type of business organization. His allegation of a veil is incorrect and illusory. Finally, Hockey Fantasy’s interposition of the fact that it could not resell the goods raises no plausible legal defense. This is because there is no allegation that the goods were defective, that they were misrepresented, or that the seller did not perform as agreed upon in the sales contract. The case law in Canada is extraordinarily straightforward in these types of cases. Absent a contractual basis for avoiding recognition of the contract, the owner of a sole proprietorship may not invoke the principles of limited liability; this is because limited liability is a statutory creation, and the sole proprietorship does not rise to this level because of a lack of organizational and legal formalities. The cases studied, in short, dismiss the notion of a veil for a sole proprietorship. Hockey Fantasy is arguing a position without legal merit or established legal precedent. In the final analysis, GSL will most likely prevail. They should force a pretrial settlement because the facts are so favorable to the seller; however, if the buyer remains obstinate, then the Ontario courts will almost certainly offer relief against him personally as well as against the assets of the sole proprietorship. After all, from a legal point of view, these assets are one and the same. Question 2 Piercing the Veil of a Corporate Entity: Gross Misconduct One of the main attractions of the corporate form of business organization is the limited liability feature; in effect, by properly forming a corporate entity pursuant to the applicable laws, individuals are able to separate themselves from the underlying business vehicle chosen to conduct their business. This limited liability is extensive, extending to directors, officers, and shareholders. It must be noted, however, that this limited liability is not without limits. Indeed, as the present facts demonstrate, there are situations where the corporate form of business organization is abused and manipulated for personal gain. Such abuses justify what is referred to as a piercing of the corporate veil; more particularly, this means that courts will impose personal liability on directors, officers, and shareholders in certain circumstances. The policy underlying this imposition of personal liability is based upon the premise that for a corporate entity to be treated separately from individuals, and for limited liability to prevail, the individuals must, in fact, treat the corporation as an autonomous business entity. These individuals must honor certain fiduciary obligations, they must not treat the corporation’s assets as their own, and they must, in short, operate in the best interests of the corporation. This fact pattern raises many troubling issues. Most generally, there is ample evidence, both documentary and in the form of Young Love Incorporation’s accountant, to establish that Eddie used and manipulated the corporate structure for his own personal benefit. The list of abuses is hardly infrequent. To be sure, beginning in 2006, when he became disenchanted with his marriage, Eddie set about a deliberate course of deceiving Brenda, of creating competing business interests, of crippling the corporate entity of which he was director, and, ultimately, of forcing Young Love Inc,. into a state of near-bankruptcy. He held secret meetings, ignored his other shareholder’s rights, and set up FU, Inc. as a vehicle to manage his stripping of the assets of Young Love Inc. FU, Inc. acquired the Tom Horton franchise in a deliberate effort to accomplish these goals. The acts of misconduct were numerous: lying to his other shareholder, creating competing business interests, conspiracy to violate his duties by confiding in his accountant, stripping Brenda of her shareholder rights by delegating her shares to a non-preferred status, and by using the corporate shell in all circumstances as his personal tool. A close examination reveals that this corporate entity was treated by Eddy very much like a sole proprietorship. He didn’t respect his other shareholder, he didn’t respect the formalities of the corporate form of business entity, and he didn’t respect the underlying commercial integrity of his corporate entity. Under Canadian law, as a general rule, the veil of limited liability may be pierced in certain circumstances. First, the corporate veil has been pierced when the corporate director or the principal shareholder has behaved in such a way as to make others believe that he is carrying on the business activity in his own name. Second, the corporate veil has been pierced where discretionary dividends have been channeled or allocated to a director or principal shareholder to the detriment of the corporation. Finally, personal liability has been imposed where the corporation becomes insolvent as a consequence of misappropriations or other abuses detrimental to the corporation’s fundamental business interests. This fact pattern presents numerous abuses which Brenda might use to sue Eddie, Young Love Inc., FU Inc., the Tom Horton franchise, and even the scheming accountant; I would recommend pursuing all corporate and personal assets without exception. All creditors are looking to Young Love, Inc. for payment and the assets have, in effect, been stripped. Eddie very well may argue that the landlord and the car lessor are looking to the corporate entity as the debtor. He may argue that he used the corporate entity as a separate entity; these arguments, when considered against the overall evidence, will probably prove disingenuous and therefore unsuccessful. Brenda, for example, has had her dividend rights diluted to the point of nakedness, her employment made obsolete, and the corporation is either insolvent or very near bankruptcy. Brenda has many strong claims, based on the aforementioned facts and legal principles, to sue Eddie personally, his business acquisitions, and perhaps the accountant for his own collusion and involvement in the plan to strip Young Love, Inc. of its assets. This appears to be a classic model for justifying the setting aside of the corporate veil and the imposition of personal liability. The is the opposite of the first case; here, to be sure, a legislatively granted benefit, limited liability, has been abused and manipulated. Though formally a corporate entity, it has been treated consistently by Eddie as a sort of personal sole proprietorship. Sound policy, and legal precedent, makes him extraordinarily vulnerable to any claims by Brenda to pierce the corporate veil. In a very real way, Eddie burned the veil himself with a flamethrower. Question 3 Causation and Allocation of Liability: Self-Inflicted Deafness On the surface, one is inclined to become consumed with Harry Potter’s suffering to the exclusion of legal principles dealing with issues of causation, allocation, and issues of reasonable care and foreseeability. The facts present two injuries. The first injury was blindness caused by the negligence of Allan Dumbledorre. The defendant’s negligence was established as a cause of Harry’s blindness and $250,000 was awarded. The second injury was deafness; this, however, is where the legal issues become complicated. The original defendant, for instance, has since the first judgment became rather famous and wealthy. Can he be viewed as a deep pocket to pursue? Can he be linked, in short, as a causal factor contributing to the second accident? Can he be viewed as a causal factor in the mental anguish suffered by the Good Samaritan, Sly Slitherin? What about the company which dug the trench? These are the fundamental issues raised in this fact pattern. It is critical, at the outset, to note a couple of established facts. First, Harry was beginning to recover from the first injury. He had secured a job, he had learned to travel outside, and he had become rather independent. The damage done by Dumbledorre had reached its peak, been compensated, and there was no further contact between the unfortunate Harry Potter and Dumbledorre. In addition, on the date of his second accident, Harry was listening to music on his headphones; as a direct consequence, he was unable to hear Sly’s warning. The reasonableness of a blind man wearing headphones, thus depriving himself of his only available sensory perceptions, is hardly reasonable or wise. Harry decided to venture outside. Harry decided to wear the headphones. To a significant degree, as case law has established, he assumed certain risks. Third, and finally, the workers from Enbridge Gas acted with reasonable care. Digging the trench was reasonable. There are no facts suggesting that the trench was too deep or too wide. Taking a coffee break and indulging in a few donuts was also reasonable; indeed, as stated in the fact-pattern, “before leaving, the workers placed a brightly marked obstacle and warning signs near the trench.” They did all they thought was reasonably necessary to prevent possible accidents. The issues raised in this case focus on causation, the applicable duty of care, and reasonable foreseeability. As an initial matter, neither Harry nor Sly ought to consider pursuing Dumbledorre as a defendant. This is because he was not a proximate cause of the injury; not being a proximate cause, the attenuation being too distant, there is no probable basis for allocating liability based upon his prior negligent act. That he is now wealthy, while attractive to the working class, is irrelevant to the issue of causation. Second, both Harry and Sly might very well sue Enbridge Gas for negligence. This, though, is a difficult proposition because the workers demonstrated reasonable care. The question, though, is whether this type of accident---a blind man wearing headphones while walking to work--was reasonably foreseeable just as the workers decided to pop out for donuts and coffee. This seems more comical than reasonable, and it might very well be difficult to establish negligence on their part. A jury would probably giggle, and a judge might very well become angry. This sounds more like a movie script than a real situation. Nonetheless, in the final analysis, the persons assuming the liability might very well be the employers of the injured parties. There is simply not a strong enough link of causation, based upon the legal standards governing negligence, to justify a lawsuit. The chances of it prevailing at trial, in short, would appear to be slim. Conclusions There is no limited liability for sole proprietorships. Hockey Fantasy is highly vulnerable. In the second case, Eddie has a few arguments to make, but his actions would justify a court in piercing the corporate veil. Finally, both Eddie and Sly have some difficult issues of proximate cause and reasonable foreseeability to overcome. Works Cited Salomon v. Salomon & Co. [1897] AC 22 (HL). Read More