Legal Issues and Consequences for Directors in Breach of Corporations Act

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Contents
Solution.......................................................................................................................................................2
Facts............................................................................................................................................................2
Issues...........................................................................................................................................................2
Relevant Law...........................................................................................................................................2
Application of Law..................................................................................................................................5
Conclusion...................................................................................................................................................7
Bibliography................................................................................................................................................8

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Solution
Facts
Sonu Pty Ltd is a company and Sonal and Shilpa are its two shareholders and directors. The
Managing Director is Shilpa and she looks are the finances. She holds an accounting degree from
one of the best institutions. Sonal manages the administrative work and she does not have much
knowledge of finance but is a good sales person.
Now, on 2nd January 2019 and again on 14tb January, Jewel Co called Sonal and demanded a
payment for an overdue account. Sonal was astonished as to why the payment is not made by
Shilpa as usually all the payments are made on time. A mail is sent to Shilpa by Sonal who
interim submitted that she has cleared the account.
These relevant facts that have given rise to two major legal issues:
Issues
A. Whether the liquidator can sue Shilpa and Sonal to recover the debts owned by Sonu Pty
Ltd.
B. If the liquidator has found that Shilpa and Sonal have acted in breach of the Corporations
Act, then, what are the possible consequences for Shilpa and Sonal?
Relevant Law
A company is an entity which has its own existence in the eyes of law. The basic principle of
separate legal entity was evolved with the coming of Salomon v Salomon & Co Ltd1. The case
law simply states that when any business is converted into a separate legal entity then it is
regarded as distinct from its directors, shareholders and founders. To hold any company unique
and different from other kinds of businesses, that is, trust or partnership is that it is only a
company which attains the status of a separate legal entity.2
In Salomon v Salomon & Co Ltd, Mr Salomon initiate a company with 6 of his family members
as its shareholders and transferred all of his business to the company. Mr Salomon was the
director, major shareholder and the creditor of the company. When the company failed, then it
was argued by the liquidator that Mr Salomon is the controller of the company and thus no
payment must be made initially to him and the veil of the company must be pierced. The
company is nothing but a trustee or an agent at the hands of Mr Salomon and thus he must be
1 Salomon v Salomon & Co Ltd [1897] AC 22.
2 Jason Harris, Anil Hargovan, Michael Adams, Australian Corporate Law, (6th Edition, 2018).

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held sole liable for the acts of the company. However, the House of Lords held that Mr Salomon
has incorporated a company which s distinct from its directors, shareholders and founders. Mr
Salomon being the secured creditor must be paid on priority basis. The company legal status
cannot be pierced as it is a separate legal entity in law3.
The law that is held in the Salomon v Salomon & Co Ltd was rightly applied by the High Court
in Andar Transport Pty Ltd v Brambles Ltd4. The court submitted that the legal status of the
company is not affected merely on the ground that the company is a one man company. a
company is distinct in law and attains a separate legal personality in law.
In Salomon v Salomon & Co Ltd the court held that the debts of the company must be considered
as separate from the personal debts. In Macaura v Northern Assurance Co Ltd5, the court held
that the assents of the company must be considered as separate from the personal assets. The
property of the company is not considered to be the property of its participants. In Lee case, the
court held that a personal can hold dual capacity in the company at the same time, that is, a
person can be an employee and a director at the same time.
The man features that can be attributed to a company upon incorporation is highlighted under
section 124 of the Act. The same are:
i. The company has a perpetual succession;
ii. The liability of the company is limited;
iii. The company has the right to sue or be sued;
iv. Has the power to hold property
Now, the separate legal entity of the company is also regarded as corporate veil of the company.
The concept established that there is a veil which brings a distinction amid the company and its
shareholders and directors. This emphasis that the acts that are carried on by the directors of the
company are not associated as their personal acts and the acts are imposed on the company itself.
3 Stephen Bottomley, Kath Hall, Peta Spender, Beth Nosworthy, Contemporary Australian Corporate Law, (Cambridge
University Press, 08-Nov-2017).
4 Andar Transport Pty Ltd v Brambles Ltd (2004) 206 ALR 387.
5 Macaura v Northern Assurance Co Ltd [1925] AC 619.