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A Corporation Is a Distinct Legal Entity

Distinct Legal IdentityRohani v Rohani 2004 BCCA 605 , a family law case, has  a good summary of basic company law, starting with a corporation is a distinct legal entity separate from its directors and shareholders.

 

“It is a basic principle of Canadian company law that a limited company has a legal identity separate and distinct from that of its directors, officers, and shareholders. While there has been a trend in recent years to extend directors’ and officers’ personal liability for improper corporate management that resulted in the company’s incurring legal liability to others, courts have not shown any inclination to ignore a company’s separate legal existence when it comes to ownership of the corporate assets. The company owns its assets.

Directors and officers have no interest in the company or the company’s assets by virtue of their position.

On the other hand, shareholders do have an interest in the company by virtue of their shareholding that gives them specified rights, including a right to dividends, to share in capital upon winding up, to elect directors, and limited financial disclosure.

However, a shareholder, even a majority or sole shareholder, has no direct interest in any of the company’s assets.

The husband’s only property interest in the company was as a shareholder and this was limited to his shares.

Even if the shares were family assets under the Family Relations Act, the wife was entitled only to a joint interest in the husband’s shares. If the husband had no interest in his company’s assets, the wife, whose interest was equal to the husband’s interest under the Act, could not acquire any greater rights.

However, since the husband’s shares were held to be family assets in the circumstances, he could not deal with them to defeat the wife’s entitlement under the Act, after the parties separated.

Accordingly, the husband’s attempts to transfer some of his shares to his daughter while the marriage was in extremis and after separation were set aside as fraudulent transactions.

Lysyk J. appeared to be satisfied that the company was simply the husband’s alter ego, and historically courts have been willing to attribute personal liability to a director/officer/shareholder for a company’s debts in such circumstances.

However, this did not mean that a court could treat the company’s assets as its alter ego’s assets, which is what Lysyk J. did.

The husband incorporated his business for legitimate business reasons well before there were any marital problems. Presumably, the husband would not have incorporated the company and continued to carry on business through it if there was no financial advantage do doing so.

The conclusion that his shares were family assets meant that the company income was routinely used for family purposes. Accordingly, during the course of the marriage, the wife benefited from the company’s existence in the same way as did the husband, even though she was not a shareholder or manager. MacKenzie J.A. held that having enjoyed the benefits of the corporate vehicle the wife could not now chose to ignore the implications of incorporation for further economic advantage.

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