Trying to Dissolve the Corporate Veil? Not Likely.
August 2023 - 5 min read
Condominium Corporation No. 0828219 v Carrington Holdings Ltd. is a recent decision reinforcing the long-standing principle that parent corporations and subsidiaries are separate legal entities and damage caused by a subsidiary cannot automatically be imposed onto a parent company, even with common directors and officers.
This case also provides guidance on the process to follow when counsel is faced with litigation against a dissolved subsidiary corporation to maximize the chance of recovery for their client and to avoid litigation by installment.
Carrington Holdings (“Holdings”) was the parent corporation of a wholly owned, single-purpose subsidiary, Carrington Hermitage (“Hermitage”), which constructed condominiums.
Hermitage was sued by Condominium Corporation No. 082819 (the “Condominium Corporation”) for a small amount of alleged building deficiencies. On June 4, 2018, the Condominium Corporation obtained a default judgment due to Hermitage being dissolved (after years of litigation), and Hermitage was therefore incapable of defending. Before that default judgment, Hermitage denied any liability and had been urging the Condominium Corporation to use its warranty rights with a third party for any alleged deficiencies.
Rather than add Holdings to the existing litigation before taking judgment against the dissolved entity (which is the typical process to ensure that all parties are before the Court in a single action), the Condominium Corporation followed a very unusual process, presumably as it believed it would gain a tactical advantage against Holdings.
After the default judgment, the Condominium Corporation commenced a new action against Holdings, claiming it was also liable for the alleged deficiencies subject to the default judgment. The Condominium Corporation took the legal position that Holdings could not defend on the merits (if there were deficiencies or not) on the basis that a Court had already decided that there were deficiencies, and the issue was res judicata. Alternatively, the Condominium Corporation argued any such defence on the merits would be an abuse of process. It then brought an application to seek a declaration that Holdings could not defend on the basis there were no deficiencies. If the Condominium Corporation were successful on the application, it would mean that Holdings would be liable for construction deficiencies, even though it never had its [literal] day in Court, and a new path would exist to attach liability to parent companies.
The Chambers Justice decided that since Hermitage and Holdings were separate legal entities, the doctrine of res judicata did not apply. The Chambers Justice also concluded it was not an abuse of process in the circumstances for Holdings to argue a full defence, notwithstanding any judgment that may exist against the dissolved subsidiary.
The Condominium Corporation appealed.
The Alberta Court of Appeal dismissed the appeal, as a parent corporation is not automatically liable for the debts of its subsidiaries without more, such as fraud or a clear statutory obligation, none of which was present.
While there is a robust body of law relating to parties trying to either impose or escape the liability of companies and “pierce the corporate veil,” in this case, the Court of Appeal strongly reaffirmed that the doctrine of separate legal identity is not just a “loophole” or “technicality .” It was emphasized that only in the clearest of cases should that doctrine be ignored. This case will likely be relied upon in future matters, where novel arguments are raised to evade the application of a separate legal identity.
Notably, the Condominium Corporation’s case was specifically framed as a “consumer protection” claim to limit the ability of construction companies to use single-purpose entities to construct single projects, as is the convention in Alberta’s condominium construction market.
The Court of Appeal specifically found there was nothing inherently improper about single-use entities or the business model that is pervasive in Alberta. If consumers are concerned about a risk that the developer might not exist in many years to collect from (in the event latent issues are found and warranty periods have lapsed), those consumers can always use the power of contract to ensure appropriate protections are in place to avoid loss. For example, the contract could require the use of guarantees, insurance, additional parties, or other means that apply to specific circumstances.
Implicit in its decision, there is some critical guidance from the Court of Appeal on an important procedural point.
The Condominium Corporation argued that it would be an abuse of process and embarrassing for the Court for a plaintiff to have to prove the same facts in two sequential lawsuits – since the Court has already ruled on the issue at first instance.
The Court of Appeal was clear that if there is a default judgment that proves a fact (such as a deficiency in a building), it is not automatically an abuse of process for a shareholder in a subsequent lawsuit to challenge that same factual finding. It will be a case-by-case analysis to determine if there is an abuse of process occurring, and the Court can always take steps to control its own process. In this case, there was no abuse of process by Holdings.
The logical solution for counsel to avoid this problem is to bring all possible parties liable at first instance, which is a well-known principle in law, but was something the Condominium Corporation did not do in this instance.
By adding all possible parties at first instance, a plaintiff avoids litigation by installment, duplication of efforts and wasted client money, all of which were the result of the Condominium Corporation’s chosen process in this litigation.
When acting against a dissolved (or a soon-to-be-dissolved entity), serious consideration should be given to adding parties before taking a judgment. Failure to do so could result in an inability to sue any other parties in the future, under the doctrine of merger, or otherwise having to reprove the entire case again.
We recommend that organizations consider the following:
- There is nothing improper about structuring corporate organizations to minimize the risk of litigation and to permit certain entities within that organization to have limited roles, after which they may be dissolved when their purpose is over.
- A member of the public who enters a contract, where there may be a risk that the company will not exist in the future, or otherwise not be available to satisfy its obligations by the time a possible claim is discovered, should consider taking additional steps to ensure their contract provides them additional protection.
- There may be circumstances where adding the shareholders of a company is warranted at first instance in litigation. In other cases, it might not be appropriate.
- Judgments involving dissolved companies create additional complex issues which should be considered before obtaining judgment.
If you have any questions about corporate structures, litigation involving complex corporate structures, or dissolved companies, contact Pat Robinson, Jeremy Taylor or any of the lawyers in Field Law’s Dispute Resolution Group.
Link to decision: Condominium Corporation No. 0828219 v Carrington Holdings Ltd., 2023 ABCA 222
Special thanks to Janika Sumaylo, Field Law Summer Student, for assistance authoring this article.