As the COVID-19 pandemic continues to wear on, corporations must remain vigilant against the increased risk of fraud. Unfortunately, due to the covert nature of many fraudulent schemes, the full extent of the fallout will not likely be known for some time. It is not uncommon for the corporation responsible for the fraud to be insolvent or stripped of assets by the time the fraud is uncovered. When this happens, it is important to recovery to be able to hold the corporation’s directors and officers personally liable.

In Canada, corporate directors and officers may be held personally liable for fraudulent conduct. An organization assessing whether it has a viable claim against a director in his or her personal capacity should consider the following questions: 

  • Did the individual act in a manner that is inconsistent with the best interests of the corporation? Courts will consider whether directors demonstrated a separate identity or interest from the corporation, such as to make the conduct their own. 
  • Did the individual expressly direct a wrongful thing to be done? Courts may “pierce the corporate veil” if it can be shown that the individual director expressly directed the company’s misconduct, such as the diversion or misappropriation of funds. The fact an action was deficient does not mean liability automatically flows to the individual, but pinpointing the individual’s particular role in the alleged fraud is key.
  • Did the individual act dishonestly, resulting in a risk of loss? Untruthfulness, on its own, is typically not sufficient to establish personal liability. There should also be an element of risk to the prejudice of another. For example, directors have been held personally liable for accepting client funds where there was no intention to ever fulfil the obligations to the client.
  • Did the individual make fraudulent misrepresentations in his or her personal capacity? Courts have held that corporations will not provide directors with immunity from their own tortious conduct, even if the directors were acting in the best interests of the corporation at the time. If the loss can be traced back to the director’s fraudulent representations, there may be no need to pierce the corporate veil because the fraud was committed by the individual director. 
  • Did the individual personally benefit from the fraudulent activity? Courts will consider whether the director personally benefitted from the fraud, although this factor is not determinative. 
  • Was the company incorporated for the very purpose of disguising the fraud? Courts will typically pierce the corporate veil if it can be shown that the corporation was created to be used as a sham or a shield for fraudulent conduct. 

Victims of fraud need to act quickly and decisively to maximize their chances of recovering from current or former directors. An organization should consider taking the following immediate steps to assist counsel in the recovery process: 

  • Consider who is behind the curtain: Make efforts to understand the people behind the corporation, their ownership interests, signing authority, and roles in the operation of the business. Investigate where the directors are located, what assets they might have, and whether they personally benefitted from the fraud. 
  • Maintain proper evidence: Take stock of your dealings with individual directors and your evidence of those interactions. If your organization relied on directors’ misrepresentations to its detriment, ensure that you have proper records about the particulars of those misrepresentations, including who made them, what was said, and when and where they were made. Strong corporate record-keeping will prove beneficial in the recovery process.  
  • Understand the individual’s role in the fraudulent scheme: As noted above, whether or not directors will be held personally liable will turn on the particular facts of the case. It is therefore crucial to understand the precise nature of the individual’s misconduct and how it leads to liability separate from that of the corporation. Courts have been clear that claims against individual defendants will not be upheld if they contain bald allegations or are mere “window dressing” of the claims against the corporation.
 


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Managing Partner, Vancouver Office

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