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Court has no appetite to pierce corporate veil in restaurant lease decision

corporate veil

Corporate directors and officers may generally only be held personally liable for misconduct on the part of the corporation in limited circumstances where there has been improper or fraudulent conduct. In Pita Royale Inc. (Aroma Taste of the Middle East) v Buckingham Properties Inc., 2019 ONCA 439, the Ontario Court of Appeal reaffirmed this position.

Background

Pita Royale Inc. leased a Toronto restaurant from Buckingham Properties Inc. After negotiating with Buckingham’s sole shareholder and officer, William Mandelbaum, Pita Royale also agreed to purchase Buckingham’s restaurant business and some property left in the leased premises, including kitchen equipment. In the summer of 2011, Pita Royale fell behind on its rent and Mr. Mendelbaum locked it out of the restaurant, seized its property, and terminated the lease. Pita Royale sued Buckingham and Mr. Mandelbaum personally, alleging improper termination of the lease and illegal seizure of its property. Importantly, Pita Royale did not argue that Mr. Mandelbaum, in his personal capacity, was the real party to the lease, nor was there any evidence to support such a finding.

The corporate veil & director liability

The trial judge for awarded damages to Pita Royale for the illegal seizure of its property, holding Buckingham and Mr. Mandelbaum jointly and severally liable. While only Buckingham was a party to the lease with Pita Royale, the trial judge found that Mr. Mandelbaum had acted personally in the seizure of  the  property, noting that “the individual defendant cannot hide behind the corporate veil in the circumstances of this case.”

On appeal, however, the Ontario Court of Appeal held that, while the seizure had been illegal, Mr. Mandelbaum was not personally liable. The Court noted that, if the trial judge’s reasoning was accepted, then any time a corporation committed a tort its officers and directors could be held personally liable. “The fact is that corporations act through officers and directors,” Justice Hourigan wrote for the Court. “That does not change the nature of the contractual relationships they enter into, such as the commercial lease in this case.”

This is consistent with existing case law which provides that the corporate veil – the separate legal personality of the corporation – will only be pierced in very limited circumstances where it is completely dominated and used as a shield for improper or fraudulent conduct. For there to be personal liability, the individual must engage in tortious conduct separate from that of the corporation. That was not the case in Pita Royale.

Key takeaways

The Pita Royale decision confirms that Ontario courts will only look behind a corporate veil and impose liability on officers and directors where they find individuals have been hiding behind it as a shield for improper or fraudulent conduct. Absent those circumstances, officers and directors are typically protected from personal liability where they adequately act in furtherance of their duties and obligations to the corporation itself.

By Mary Paterson, John M. Valley and Eleanor Vaughan, Osler

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