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The Second Opinion: The B.C. Court of Appeal Preserves the Corporate Veil…Sort of

A Commentary on Recent Legal Developments by the Opinions Group of McCarthy Tétrault LLP

Posted in The Second Opinion
Hovsep Afarian

In a just-released decision, the British Columbia Court of Appeal declined to pierce the corporate veil between a group of related entities.

The pertinent facts of the decision in XY, LLC v. Zhu, 2013 BCCA 352 are as follows.  XY, LLC (“XY”) licenced technology to JingJing Genetic Inc. (“JingJIng”).  Mr. Zhu was the controlling shareholder of JingJing and a related group of companies (the “IND Group”).  JingJing provided XY with false reports concerning revenues it received from the use of XY’s technology, underpaid royalties to XY, concealed documents from XY, and violated its confidentiality agreement with XY.  JingJing was found liable for breach of contract and the tort of deceit.  JingJing, however, became insolvent.

On appeal, XY sought to pierce the corporate veil so as to extend liability to members of the IND Group.  XY argued that the acts of the employees of JingJing should be attributed to the IND Group.  The B.C. Court of Appeal rejected this theory of “infective liability.” The Court ruled that the employees were acting for JingJing and that only JingJing had a contractual obligation to report its revenues from the use of the technology.  The employees were not acting on behalf of or for the benefit of the IND Group (at para. 84).

Although recognizing that “the disregarding of a group of related corporations is highly fact-dependent and does not admit of any clear test or rules”, the Court noted that the veil has been lifted in instances of fraud.  However, in the instant case, “XY was not deceived by JingJing’s separate legal personality per se”, as XY was presumed to have dealt with JingJing in full knowledge that it was a part of a larger group (at para. 92).  The alleged fraud thus had “nothing to do” with the corporate veil.  The Court therefore declined to take the “extreme step notionally collapsing the separate identity of the IND [Group] into one” (at para. 97).

Nevertheless, the Court accepted that it was possible to pursue a claim for unjust enrichment against the IND Group of companies based on the assertion that it had contrived JingJing’s insolvency through notional transactions, with the intent of depriving XY of its technology (at paras. 93-7).  The Court therefore remitted this issue back to the Superior Court for trial.

The ruling in XY, LLC v. Zhu confirms the continued reluctance of Canadian Courts to pierce the corporate veil, particularly in the face of an alternative remedy that may be available to an aggrieved party.

The McCarthy Tétrault Opinions Group consists of members of the firm’s litigation department whose practices focus on written advocacy and the provision of strategic advice and opinions in the context of complex business disputes and transactions.  The members of the Opinions Group are Anthony Alexander, Martin Boodman, Brandon Kain, Hovsep Afarian and Kirsten Thompson.