You are the sole or majority shareholder of a corporation. You sign all contracts, approve all expenses, determine the strategy. For partners, customers and suppliers, you embody the company.

This total steering power gives you flexibility and autonomy. But in law, this degree of control can also justify holding you personally liable for actions taken under the guise of your company.

Article 317 of the Civil Code of Québec allows the corporate veil to be lifted when a legal person is used to hide fraud, abuse of rights or contravention of a rule of public order. This lifting opens the way to proceedings directed directly against the shareholder.

The principle: the legal personality is distinct

The incorporation of a corporation entails the creation of a legal person . The latter has its own assets, distinct from those of its shareholders. This separation protects shareholders against the company's debts and liabilities, with some exceptions.
This principle, which has been recognized for more than 100 years, is the foundation of corporate law . But it is not absolute.

The exception: article 317 C.C.Q.

"The legal personality of a legal person may not be invoked against a person acting in good faith, if that personality is invoked to conceal fraud, abuse of rights or a contravention of a rule concerning public policy."

In other words, a creditor, a co-contractor or an authority may be unaware of the personality of your company and address you personally if the joint-stock company serves as a front for illegal or contrary to public policy.

Three reasons given by the courts

Case law is consistent: the autonomy of society cannot be invoked to justify reprehensible behaviour.

1. Fraud:

Undue payment, embezzlement, wilful concealment.

2. Abuse of rights:

Using the Company to Harm a Third Party or Circumvent
the law.

3. Contravention of public order:

Serious regulatory non-compliance, artificial mounting.

The role of the alter ego

The concept of alter ego refers to the individual who, in practice, runs society entirely. It is not enough to be a majority shareholder or director: you must demonstrate real and constant operational control.

However, effective control alone is not enough to break the corporate veil . However, the company must have been used to commit fraud, abuse of rights or a breach of a peremptory norm.

Concrete risks for the shareholder

When a company is insolvent, ceases operations or fails to meet contractual commitments, some shareholders believe that they cannot be held personally liable. It's a mistake.

If a court concludes that the legal person has been used for illegitimate purposes, the consequences are serious:
• an order to pay debts or damages personally;
• seizure of personal property;
• Loss of corporate credibility with financial institutions.

Tips

  1. Keep a strict separation between your personal assets and that of your
    society.
  2. Avoid confusion between your individual actions and those of the company.
  3. Avoid façade arrangements or transfers of dubious assets in context
    litigation or insolvency.
  4. Keep clear documentation of the decisions made by the company.
  5. Consult a lawyer before entering into agreements between related entities.

Conclusion

Operating a business as a corporation does not protect you, at all times, against the challenge of your personal patrimony. Article 317 of the Civil Code of Québec provides a framework for the exception to the rule of corporate autonomy.

If you have extensive control over your company, it is imperative that you adopt strong governance practices to avoid personal liability .

Contact us

Compagnie abg conseils juridiques assists entrepreneurs in the legal structuring of their businesses and the protection of their assets. We assess the risks of personal liability, verify the compliance of your governance and intervene in any litigation context involving corporate liability issues .

Contact us
Related articles

Read the blog