The corporate veil is a legal concept in corporate law that separates the identity, liability, and obligations of a corporation from its shareholders and directors. This principle is fundamental to the structure of corporations, as it treats a corporation as a separate legal entity, protecting the personal assets of the people who incorporated it, own it, or run it from being used to satisfy the corporation’s liabilities, debts, or legal obligations such as legal judgments or contractual obligations. In other words, it allows the individuals involved in a corporation to avoid personal liability for the actions of the corporation except in limited circumstances. This is what is meant by “limited liability” in corporate law, and it is one of the main advantages of incorporating a business. However, it is important to note that this protection only exists as long as the shareholders and directors have acted lawfully and within the scope of their duties.

In general, the corporate veil ensures that the individuals involved in a corporation are not personally responsible for the company’s actions or debts. However, in certain situations, courts may “pierce the corporate veil”, in which case, the legal separation between the corporation and its shareholders and directors is ignored, and the shareholders and/or directors are held personally liable for the actions, debts, and obligations of the corporation. This usually happens in cases of fraud or misrepresentation; for example, if the corporation is used as a façade to commit fraud or other illegal activities like evading taxes or deceiving third parties.

Shareholders and directors may also lose the protection of the corporate veil if the court finds that the corporation was not properly kept as a separate legal entity; for example, the corporation’s funds and assets were not properly separated from the shareholders, or if the shareholders or directors divert corporate funds for their personal use.

In limited circumstances, the corporate veil may also be pierced if the court finds that the corporation did not have sufficient funds to cover its obligations, if the corporation was not adequately insured, or if the corporation’s shareholders and directors did not follow corporate formalities such as keeping the necessary corporate records, hold the required meetings, and other required formalities.

There is one exception to this rule. Under the Construction Act of Ontario, if a legal claim is based on a breach of trust, you can sue the officers and director personally. You do not have to show dishonest conduct. Under the Business Corporations Act, on the other hand, you normally must show dishonest conduct or breach of trust in order to lift the corporate veil and sue the individuals operating the company personally.

To maintain the protection of the corporate veil, it is necessary to keep proper records, ensure that there is no merging of the corporation’s assets and those of its shareholders and directors, and make sure that the corporation does not commit any illegal or unethical acts. In other words, the shareholders and directors should always act in the best interests of the corporation, not their own.

Please note these materials have been prepared for general information purposes only and do not constitute legal advice. Readers are advised to seek legal advice by contacting Frank Feldman* regarding any specific legal issues.

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