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But I Incorporated…

This is what Darren Convery must have thought when the judge found him personally liable for a company debt

Why do people incorporate companies? One of the main reasons is that generally, if a company does business, no employee or officer of the corporation is personally liable for any act within the scope of their duties on behalf of the corporation. Now, there are some exceptions to that general rule that could result in personal liability, even if the business is incorporated.

Let’s take one example where a careless mistake may prove very costly. Darren Convery had a nursery and garden business called “Maple Lane Nurseries and Landscape.” After some time, he and his wife incorporated the business. For a while, Darren had been doing business with Bernard Kobes of Kobes Nurseries Inc. Darren told Kobes he planned to incorporate. Business for Darren took a turn for the worse, and he owed Kobes $78,000.00 for supplies provided.

Darren said these supplies were purchased after the incorporation, so the company owes the money. Even though Darren told Kobes about the incorporation, Darren failed to document it on his cheques, letterhead and contracts. Kobes Nurseries Inc. sued Darren personally. Since Darren told Kobes about the incorporation, Darren should not be personally liable – right? That’s not what Justice Lawyers of the Ontario Superior Court of Justice thought.

Let’s review the decision of the court in Kobes Nurseries Inc. v. Convery. After the incorporation, Darren still sent Kobes Nurseries Inc. cheques and faxes from Maple Lane Nurseries and Landscape. The documents and cheques made no mention of the company name or the fact that the business was incorporated. The court found that while Darren told his suppliers that he planned to incorporate, this did not mean they understood that he had done so.

In the words of the judge, “I find that Mr.Convery did not bring home to the plaintiff the fact that the status under which he was carrying on business had changed from that of sole proprietorship to a corporation.”

The case law suggests that if a person wants to escape personal liability on a contract, he has a duty to make it clear to the person with whom he is contracting that he is negotiating on behalf of his corporation and not in his personal capacity. Given the obligations set out in sections 6(2) of the Business Names Act and 10(10) of the Business Corporations Act, the court found Darren personally liable.

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Toronto Estate Litigator - Charles Wagner

The author of this blog is Charles B. Wagner. Charles is a Certified Specialist in Estates and Trusts and partner at Wagner Sidlofsky LLP.

This Toronto office is a boutique litigation law firm whose practice is focused on estate and commercial litigation.

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