Summary
The Québec Court of Appeal upheld the Superior Court’s decision in Leclerc Automobiles International Inc. c. Duhamel, in which the Superior Court had refused to pierce the corporate veil despite the sole shareholder’s complete control over the company. The Superior Court reiterated that, under the criteria set out in article 317 of the Civil Code of Québec, piercing the corporate veil requires proof that juridical personality is being invoked to conceal fraud, an abuse of rights, or a violation of a rule of public order. The shareholder’s complete control over the corporation is not enough.
The Court of Appeal confirmed this approach. It emphasized that incorporation for legitimate reasons, including the recommendation of a professional, weighs against piercing the corporate veil.
The facts
The plaintiff, Leclerc Automobiles International Inc., buys and sells used vehicles. It worked with Marco Duhamel for many years. Under the business model established by the parties, Duhamel identified business opportunities and potential buyers, while Leclerc Automobiles acted as an authorized dealer for the purchase and resale of vehicles. They split the profits from these transactions equally.
On the recommendation of his accountant, Duhamel incorporated his business, and 9347-6331 Québec Inc. (“Québec Inc.”), of which he was the sole shareholder, took his place in the parties’ dealings.
The parties later departed from their established business model for the sale of a bus. Rather than selling the bus directly to the customer, Leclerc Automobiles resold it to Québec Inc., which then sold it to the customer. Following the sale, Leclerc Automobiles claimed the outstanding balance owed by Québec Inc. for the bus. In response, Duhamel attempted to set off amounts he claimed were owed to him personally and to Québec Inc. for unpaid commissions.
Trial judgment
The Superior Court granted the plaintiff’s claim in part and ordered Québec Inc. to pay $158,963.94. It dismissed the claim brought by Duhamel and Québec Inc., finding it time-barred.
As for piercing the corporate veil, the Court refused to hold Duhamel personally liable for the unpaid balance of the sale price. Although he was the sole shareholder and director of the corporation, the evidence did not show that the corporate entity was used to conceal fraud, an abuse of rights, or a violation of a rule of public order. Rather, the Court concluded that the incorporation was based on legitimate grounds related to professional advice.
Analysis by the Court of Appeal
The only issue before the Court of Appeal was whether to pierce the corporate veil. The Court dismissed Leclerc Automobiles’ appeal. It found that no reversible error had been demonstrated in the trial judge’s reasoning.
The Court analyzed the case based on the criteria set out in article 317 of the Civil Code of Québec:
- The existence of an alter ego;
- The use of the legal entity to conceal fraud, an abuse of rights, or a violation of a rule of public order.
In this case, it was undisputed that Québec Inc. was Duhamel’s alter ego, given that he was its sole director and their affairs were closely intertwined.
However, the second criterion was not met. Concealing fraud, abuse, or a violation requires bad faith. The Court of Appeal concluded that, although Duhamel’s conduct could be described as careless and negligent, it did not meet this criterion.
The Court of Appeal therefore upheld the trial judgment and refused to pierce the corporate veil.
Commentary and comparison with recent case law
The mere fact that an individual is the sole shareholder, director, and officer of a corporation does not permit courts to disregard the corporation’s separate legal personality. The decision is a reminder that overlap between a corporation’s activities and those of its officer is only one factor. Without evidence of the legal structure being used to conceal fraud or abuse, that overlap alone is insufficient.
Ultimately, it is the nature of the alleged wrongful conduct that determines whether the circumstances warrant piercing the corporate veil. The facts must demonstrate deceptive conduct, fraudulent tactics, or acts of bad faith.
The following examples from recent case law illustrate circumstances in which the corporate veil was pierced:
- When a corporation was used to obtain financing advances based on fictitious vehicle sales (Fédération des caisses Desjardins du Québec c. 9268-9413 Québec Inc.)
- In a real estate investment context, where partners used their corporations to misappropriate funds and overcharge investors (OLM International Inc. c. Roy)
- The corporate veil may also be pierced between two separate corporations to hold a sister corporation liable as the alter ego of the first, particularly when the sister corporation was formed to evade contractual obligations (9311-2159 Québec Inc. c. Agence de voyage Mont St-Hilaire Inc., 2025 QCCS 3586 (notice of appeal, 500-09-031761-257, 500-09-031759-251))
In another recent decision, Maçons Patrimoniaux Inc. c. Aliston Investissement Inc., the Court of Appeal overturned a trial judgment that had pierced the corporate veil. The trial judge found that the company’s director had committed fraud during the closing of a transaction by instructing his employees to replace one surety document with another without notice, thereby removing the agreed-upon guarantee. The Court of Appeal reiterated that the existence of fraud must be supported by serious, specific, and consistent facts. The mere existence of an unfavourable consequence for one party is not sufficient to infer bad faith. The Court of Appeal also emphasized that the evidence regarding the existence of an alter ego was incomplete. On these grounds, and in the absence of sufficient evidence regarding the existence of an alter ego and the commission of fraud, the Court of Appeal overturned the trial judgment.
The decisions analyzed confirm that Québec courts approach piercing the corporate veil with caution, reserving this measure for clear-cut cases. Article 317 of the Civil Code of Québec applies only in truly exceptional circumstances.