Divorce with a Business
The case of Aubin v Petrone, 2020 ABCA 13 (Leave to appeal to the Supreme Court of Canada denied.) is an important decision at the intersection of family law and corporate law that clearly demonstrates the application of fundamental corporate law principles in the context of family law. In this case, the Alberta Court of Appeal, the highest court in Alberta “pierced the corporate veil” and granted a spouse a security interest directly against the property of her spouse’s corporation to secure her equalization payment owing from her husband following their divorce.
To contextualize this application of the law, we must first go back in time over 100 years to the UK case of Salomon v Salomon (1896 UKHL). This case defined our modern view of corporations as distinct legal entities from their shareholders—that a shareholder cannot be held liable for money owed by a corporation. Since then, countless legal cases have reinforced this relationship between corporation and shareholders, that there is “veil” between the two which is not to be “pierced” except in very limited circumstances.
This Corporate Veil is not only the law in the UK but in Canada, too. As the Supreme Court of Canada ruled 1987 in the case of Kosmopoulos v Constitution Insurance Co., the general rule is that a corporation is a distinct legal entity from its shareholders but the Corporate Veil may be pierced when failing to do so “would yield a result too flagrantly opposed to justice”. It is against this backdrop of corporate law that Aubin v Petrone was decided.
Ms. Aubin, like many spouses, helped her spouse, Mr. Petrone, get his business off the ground during their marriage—a corporation in which he remains the majority shareholder today. She contributed in some direct ways, such as working for the corporation in various roles, but also in other indirect ways, such as caring for their children at home and allowing Mr. Petrone to pursue various business opportunities. Through their marriage and their combined efforts, the corporation became successful and valuable. When the spouses split up, most of the family wealth was tied up in the very valuable shares (which the Court valued in the millions of dollars) with relatively few liquid assets.
At trial, the judge awarded Ms. Aubin an “equalization payment,” an order that in exchange for keeping some or all of the property of a marriage, one spouse, in this case the husband, must pay the other spouse money to “equalize” the other spouses’ interest in the property. In other words, because Mr. Petrone kept all of his shares, he was obligated to pay Ms. Aubin for the portion of the shares to which she was otherwise entitled.
As a result of this equalization payment and the significant value of Mr. Petrone’s interest in the corporation as a majority shareholder, when the trial judge made her ruling, Mr. Petrone did not have the liquid assets to pay Ms. Aubin. When the two parties weren’t able to reach a solution to this problem, the trial judge intervened and ordered that to ensure Ms. Aubin eventually received her equalization payment, she could secure her judgment directly against some of the property of owned by the corporation—specifically, a building it owned that was roughly the same value as her equalization payment. If Mr. Petrone still couldn’t pay on certain other conditions, Ms. Aubin could return to court to force the corporation to use or sell this property to pay her judgment.
This decision put corporation law on a collision course with family law; never before in Canada had a corporation’s property been used to secure the debt of its majority shareholder for a spouse’s equalization payment. While we take for granted now that upon divorce spouses are each entitled to share in the property of the marriage, Court of Appeal Justice Antonio observes in the Aubin v Petrone case:
The question arising…is whether or how the corporate veil interacts with principles of matrimonial property division—a concept that did not exist when the law of corporations and corporate separateness developed. For most of common law history, married women could not own property, and divorce was literally or practically unavailable. (Aubin v Petrone, 2020 ABCA 13 at para. 27)
Fundamental issues of law, corporate and family, had crossed. While it was clear in Canadian law that the corporate veil may be pierced if the result would otherwise be flagrantly opposed to justice, rarely had that issue come before the Court in the context of family law.
However, the Court in Alberta wasn’t the first court to grapple with this intersection of family law and corporate law. The Courts in Ontario had grappled with piercing the corporate veil in the payment of spousal support. In Aubin v Petrone,the Court of Appeal summarized that when looking to pierce the corporate veil in order to satisfy a claim by a spouse for spousal support, one must consider (Aubin v Petrone, 2020 ABCA 13 at para. 24):
- whether the spouse behind the corporate veil has complete control of the corporation;
- whether the spouse is using that control to commit a wrong or unjustly deprive the other spouse of his or her rights; and
- that this misconduct is the reason for the loss of the other spouse.
The court ultimately found that these same principles applied to property as much as to spousal support. Based on this test, the Court ruled it was justified to “pierce the corporate veil” to secure Ms. Aubin’s judgment, not based on a specific act by Mr. Petrone, but rather a pattern of acts and omissions wherein he used his majority shareholder power in a manner that ultimately lead to an injustice in this case that caused Ms. Aubin’s loss (see 2020 ABCA 13 at paras. 71-74).
Unlike the cases in Ontario, a complicating factor here was that in the years since its incorporation, the corporation had grown beyond just Mr. Petrone and Ms. Aubin, and now had other shareholders. However, the Court found that by limiting the security to a specific piece of property (the building) sufficiently balanced the needs and obligations of all parties: Ms. Aubin, Mr. Petrone, and all of the other shareholders (see 2020 ABCA 13 at paras 61-62).
The Corporate Veil has been a pillar of corporate law for a reason: it is important to distinguish between the rights and obligations of corporations from those of its shareholders. But, as has long been established, the Veil cannot be a sham; it exists for a proper purpose, but not to allow flagrant injustice. Aubin v Petrone clearly demonstrates these foundational principles of corporate law apply in family law just as they would in any other legal arena.
We know that going through a separation is a challenging time. If you have questions or concerns about your rights or obligations, please contact our Family Law Practice Group for guidance and assistance.
This article was written by Jeff Arsenault, a lawyer at McCuaig Desrochers LLP who worked on the Aubin v. Petrone matter.
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