Court Pierces Corporate Veil of Husband’s Company to Pay Outstanding Spousal Support to Wife
May 13, 2021Mark Feigenbaum
In a recent Ontario decision, the court ordered the proceeds from the sale of two cottages, including one owned by the husband’s company, to be paid to the wife’s benefit after the husband refused to pay outstanding spousal support in the amount of $480,000.
One of the issues was whether the court could “pierce the corporate veil” of the husband’s company. Normally, an incorporated company will be shielded from liability for its shareholders or owners’ personal liabilities. However, under certain circumstances, the court may order otherwise.
Husband Falls in Arrears of Support Payments
In 2017, the Court of Appeal made a final order for the husband to pay $13,759 in monthly spousal support to the wife on an indefinite basis.
However, the husband resisted paying the support and had fallen into significant arrears. He had also since tried to have the amount varied, with no success.
In 2019, an interim preservation order was issued following a settlement conference. At that time, it was ordered that any sale proceeds of two cottages, one owned personally by the husband, and the other owned by the husband’s company, be held in trust until further order of the court.
In fact, in the summer of 2020, the husband and his company sold the two cottages. The husband’s cottage’s sale resulted in $86,218 in net proceeds. The husband’s company’s sale of the cottage resulted in $180,206 in net proceeds. Pursuant to the 2019 order, the combined proceeds of $266,925 were held in the trust.
Subsequently, the wife asked the husband to release the net sale proceeds to the Family Responsibility Office (“FRO”) as a credit against the support arrears and costs owed to her. The husband refused.
As a result, the wife brought a motion to have the cottages’ sale proceeds paid to the FRO for her benefit.
The husband opposed the motion claiming, first, that his income had declined significantly and he was therefore entitled to an adjustment in support obligations to the wife. He further claimed that the net proceeds of the sale of the second cottage belonged to his company and it was not obligated to pay his personal debts to the wife.
By 2020, when the motion was heard, the husband’s arrears amounted to about $480,000.
At issue before the court was whether the proceeds from the sale of one or both of the cottages should be paid to the FRO to pay off the arrears owed to the wife.
Court Orders Proceeds from Sales Be Paid for Wife’s Benefit
At the outset, the court determined that the proceeds from the sale of the cottage personally owned by the husband should be paid to the FRO, finding that the husband had not made a case against such an order.
The court then turned to the proceeds from the sale of the cottage owned by the husband’s company. In order to make such an order, the court had to determine whether it had grounds to pierce the corporate veil, which it explained as follows:
“The corporate veil may be pierced if those in control of the corporation expressly direct a wrongful thing to be done or use the company for improper conduct. A company need not have been created for an improper purpose to justify piercing the corporate veil; it is sufficient that the corporation is used for an improper purpose… The separate legal personality of a corporation is an important principle, but it is not an absolute one.. Courts will not enforce the “separate entities” notion under corporate law if doing so “would yield a result too flagrantly opposed to justice”… In the family law context, a more flexible or relaxed approach is taken in deciding whether to lift a corporate veil, particularly where the corporation at issue is entirely controlled by one spouse, for that spouse’s benefit, without third-party investors.”
The court then explained that it must look to the following test in making its determination:
- The individual exercises complete control of finances, policy and business practices of the company;
- That control must have been used by the individual to commit a fraud or wrong that would unjustly deprive a claimant of his or her rights; and
- The misconduct must be the reason for the third party’s injury or loss.
Ultimately, the court held that the wife had met the test and that it would be unjust to permit the husband to shield funds behind his company and continue to defy the court orders requiring him to pay spousal support and costs to the wife.
As a result, the court allowed the wife’s motion and ordered that the proceeds from the sale of both cottages be paid to the FRO for the wife’s benefit.
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