Corporate Veil and Legal Liability

This assignment delves into the concept of the corporate veil and its significance in determining legal liability. It examines the circumstances under which the corporate veil may be pierced, exploring relevant case law like Donoghue v Stevenson and Smith, Stone & Knight Limited v Birmingham City Council. The discussion also touches upon factors influencing piercing decisions, statutory provisions governing corporations, and comparative perspectives on the doctrine.

CORPORATE LAW 2
Answer 1
I: Issue
The key issue which can be inferred from the case study is the process which has to be followed
by Richard and his two sons for registering and incorporating the company.
R: Rule
There are a number of business structures which can be followed by the prospective business
runners in the nation. Amongst these, the key one is a company form of business structure,
which has perpetual succession, unlimited liability, can raise funds from public and has a
complex setting up process (Australian Government, 2016). The Corporations Act, 2001 (Cth) is
the governing act in Australia, which covers different provisions including the incorporation and
registration of the companies. When an individual makes a decision to go forward with a
company sort of business structure, the very first decision which has to be made relates to
which type of company one needs to opt for. This is because under section 112 of this act, an
individual could opt for either a proprietary company or a public company. These two are
further divided, where a proprietary company can be either limited by shares or be unlimited
with share capital. On the other hand, a public company can also have these two forms, along
with being a no liability company and limited by shares (Australian Government, 2017). A key
difference between the two types of companies can be inferred from the fact that the public
companies can raise shares from general public, but the proprietary companies can only raise
shares from their acquaintances, friends and families, and not from the general public
(Australian Institute of Company Directors, 2016).
Once the decision on the type of the company has been undertaken, the individuals have to
make a decision on the name of the company. The availability of a particular name of the
company can be checked online. Under section 147 of Corporations Act, the companies can
freely chose any name, so long as it does not clash with the name of an existing company as a
per-existing name cannot be given to another company. The rationale behind this is that on the
basis of the name of the company, the company can sue or be sued by others. Under section

CORPORATE LAW 3
148, the requirement is given that the name of the company to be formed can be selected on
the basis of availability or on the basis of the ACN of the company, which stands for the
Australian Company Number (Australian Government, 2017).
The company’s name shows the kind of company it is as the name is affixed with certain terms
denoting the same. So, for a company having no liability, the words “No Liability” would be
stated at the end, and for the limited company, the term would be “Limited” at the end of the
company name (Department of Industry, Innovation and Science, 2016). Once the name of the
company has been shortlisted, section 152 requires an application to be made to the Australian
Securities and Investments Commission, or short for ASIC, so that this particular elected name
can be reserved (Australasian Legal Information Institute, 2017).
Section 117 of this act provides that the application which is submitted to ASIC should have
certain details like the name and details of the members, the address of the registered office of
the company, the share details, and the like (Australian Government, 2017). Upon the ASIC
being satisfied that the required items are covered under the application, pursuant to section
118 of this act, the ASIC provides the company with the ACN and the company is registered
pursuant to which a certificate is issued in which the name, the type and the ACN is covered.
And section 119 provides that the day on which the company is registered, becomes the day of
its inception. And till the company is de-registered, the company exists (Australasian Legal
Information Institute, 2017).
The next decision relates to the choice between constitution and replaceable rules. Replaceable
rules are covered under section 141 of this act and are applicable on certain specified
provisions only. Hence, mostly, a constitution is opted, which is covered under section 136 of
this act. The constitution can be adopted before or after the company is registered. But where
it is adopted afterwards, there is a need for a written agreement to be formed which states that
a constitution is being adopted and there is also a need of special resolution (ASIC, 2017a).
When the application is filed with ASIC, section 117 dictates that the application needs to
clearly specify between which two of the governing instrument is being adopted.

CORPORATE LAW 4
Once the company is incorporated, the affairs of the business can be initiated. Further, there is
a need to follow all the key statutory instruments which apply on the company. The name of
the company is to be clearly stated on all its communication documents, along with the ACN.
Lastly, the details of the company always have to be kept updated (ASIC, 2017b).
A: Application
In the rules segment, the process of incorporation and registration of the company has been
stated which needs to be followed by Richard and his two sons when they want to convert their
family business in the company form of business structure. Apart from this, they need to make
a decision upon what the name of the company would be, along with the type of company. As
the need is of raising money from general public, the public type of company, which is limited
by shares, should be opted. For the name part, whichever of the two names is available should
be adopted. There is an option of keeping both names, where one could be the name of the
company and the other could be the name of the business. Lastly, there is a need to choose
between constitution and replaceable rules. As replaceable rules are deemed as restrictive,
they should opt for a constitution formed before the incorporation of the company.
C: Conclusion
Hence, it can be concluded that Richard and his two sons have to follows the procedure laid
down in the rules segment; and for the dispute regarding the name of the company, they have
to mutually reach a resolution. Lastly, for their needs, a public company limited by shares and
ruled by constitution needs to be adopted.
Answer 2
I: Issue
The key issue in this case relates to the possible legal actions which can be raised by Terry
against Lazarus Pty Ltd, CM and CMS, or not?

CORPORATE LAW 5
R: Rule
Amongst the different torts in Australia, is the key tort of negligence. Under negligence, party X
owes a duty of care to party Y, where the actions of X have the capability of injuring/ harming
party Y and where the injury/ loss is foreseeable in a rationale manner (Trindade, Cane and
Lunney, 2007). When such a duty is breached, the aggrieved party can apply for remedies in
form of damages (Latimer, 2012).
1: Lazarus Pty Ltd
The company form of business structure has a unique characteristic of being a separate artificial
legal person, whereby they are treated in a separate manner from the ones who run the affairs
of the company. This means that for the actions of the directors and the management, the
company cannot be made accountable. However, a key exception to this can be found in the
piercing of corporate veil whereby the courts, in just cases, can pierce the veil of corporate as is
held by the entity, and make the ones running the business off the company, liable for the
undertake actions (Vanderkerckhove, 2007). Hence, where a company has been created just for
evading the liabilities of the old company, the incorporation of the new company is deemed as
a facade or sham. And in such cases, the corporate veil of the new company is pierced and the
old company is held accountable for their negligence (Cheng, 2011).
For further explaining this, reference needs to be made to Creasey v Breachwood Motors Ltd
[1993] BCLC 480; 10 ACLC 3,052 in which a new company was formed to evade the liabilities of
the old company arising from the wrongful dismissal of the old company’s employee. And so,
the court held that in the interest of justice, it was necessary to pierce the corporate veil. And
ultimately, the new company was made liable for the money to be paid for the wrongful
dismissal (French, Ryan and Mason, 2016).
A: Application
In this case, the company Lazarus Pty Ltd had been incorporated so that the liabilities of GMS
could be avoided. The liabilities of CMS were raised as a result of the employees and the
residents of a particular area getting cancer as they had been negligent in their work. Applying

CORPORATE LAW 6
the case of Creasey, the new company here would be made liable. Hence, Lazarus Pty Ltd would
be required to pay the liabilities of CMS arising out of their negligence.
2: CMS
It has already been stated that the companies have a separate legal entity status in the nation
as per which, the subsidiary and its holding company are deemed as two separate entities.
Though, in cases where such circumstances are present which make the court uphold justice
and fairness, the court would pierce the corporate veil and set aside the separate legal entity
status (Wibberley and Gioia, 2017). Where the company’s conduct is against the law, again the
corporate veil would be pierced and the ones responsible would be made accountable for the
debts owed by company (Rudorfer, 2009).
In the leading matter of CSR Ltd v Young [1998] Aust Tort Reports 81-468, the parent company’s
position was held as being similar to the position of the subsidiary company. And owing to the
strong control of the parent company over subsidiaries actions, the holding company was made
liable (Anderson, 2008). In another matter of Smith, Stone & Knight Ltd v Birmingham Corp
[1939] 4 All ER 116, the veil was pierced due to the subsidiary being an implied agent of the
holding company. In this case, the business of the subsidiary was being carried only for the
purpose of holding company. Hence, the holding company was required to compensate for the
liabilities arising out of subsidiary’s business (Swarb, 2016).
A: Application
It is very clear from the case study that CMS is subsidiary and CM is holding/ parent company.
The control of CM over CMS is clear from the leasing charges being paid to CMS, which were
10% more than the normal rates. And based on CSR Ltd case, CM would be made liable. Also,
the work of CMS was being done for CM only. So, based on Smith, the corporate veil will be
pierced and CM would be accountable for CMS’s negligence.
3: CM
For making a case of negligence, there is a need to show the presence of obligation of care, its
violation, resulting harm or loss, foreseeability, remotes and direct causation (Kelly, Hammer
and Hendy, 2014). In this regard, the Snail in Bottle case, i.e., Donoghue v Stevenson [1932]

CORPORATE LAW 7
UKHL 100 proves to be of help. In this case, as a result of the dead snail, the ginger beer bottle
was contaminated, which caused D’s sickness and for which she claimed compensation from S.
The Court held that the required elements of negligence were present due to which S had to
compensate D for her illness as a result of present negligence (British and Irish Legal
Information Institute, 2017).
A: Application
The case study shows that CM owed an obligation of care towards the residents of that area
and towards its employees, as people getting cancer from mining activities is a reasonably
foreseeable harm. Further the proximity between the parties gave rise to the presence of
obligation of care. Hence, based on Donoghue, CM would be required to compensate the
residents and the employees for the negligence.
C: Conclusion
Hence, it becomes very clear that damages would be awarded to Terry for claims raised by her
against the three parties.

CORPORATE LAW 8
References
Anderson, H. (2008) Directors’ Liability for Unpaid Employee Entitlements: Suggestions for
Reform Based on their Liabilities for Unremitted Taxes. Sydney Law Review, 30 (470), pp. 478.
ASIC. (2017a) Constitution and replaceable rules. [Online] ASIC. Available from:
http://asic.gov.au/for-business/starting-a-company/constitution-and-replaceable-rules/
[Accessed on: 26/09/17]
ASIC. (2017b) Starting a company - How to start a company. [Online] ASIC. Available from:
http://asic.gov.au/for-business/starting-a-company/how-to-start-a-company/ [Accessed on:
26/09/17]
Australasian Legal Information Institute. (2017) Corporations Act 2001. [Online] Australasian
Legal Information Institute. Available from: http://www.companydirectors.com.au/director-
resource-centre/organisation-type/organisation-definitions [Accessed on: 26/09/17]
Australian Government. (2016) Business structure. [Online] Australian Government. Available
from: https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure
[Accessed on: 26/09/17]
Australian Government. (2017) Corporations Act 2001. [Online] Australian Government.
Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 26/09/17]
Australian Institute of Company Directors. (2016) Organisation definitions. [Online] Australian
Institute of Company Directors. Available from:
http://www.companydirectors.com.au/director-resource-centre/organisation-type/
organisation-definitions [Accessed on: 26/09/17]
British and Irish Legal Information Institute. (2017) Donoghue v Stevenson [1932] UKHL 100 (26
May 1932). [Online] British and Irish Legal Information Institute. Available from:
http://www.bailii.org/uk/cases/UKHL/1932/100.html [Accessed on: 26/09/17]

CORPORATE LAW 9
Cheng, T. (2011) The Corporate Veil Doctrine Revisited: A Comparative Study of the English and
the U.S. Corporate Veil Doctrines. Boston College International and Comparative Law Review,
34(2), pp. 329- 412.
Department of Industry, Innovation and Science. (2016) Register your company. [Online]
Australian Government. Available from:
https://www.business.gov.au/info/plan-and-start/start-your-business/business-and-company-
registration/register-your-company [Accessed on: 26/09/17]
French, D., Ryan, C., and Mason, S. (2016) Mayson, French and Ryan on Company Law. 33rd ed.
Oxford: Oxford University Press, pp. 140.
Kelly, D., Hammer, R., and Hendy, J. (2014) Business Law. 2nd ed. Oxon: Routledge.
Latimer, P. (2012) Australian Business Law 2012. 31st ed. Sydney, CSW: CCH Australia Limited.
Rudorfer, M. (2009) Piercing the Corporate Veil. Norderstedt: GRIN Verlag.
Swarb. (2016) Smith, Stone And Knight Limited V Birmingham: 1939. [Online] Swarb. Available
from: http://swarb.co.uk/smith-stone-and-knight-limited-v-birmingham-1939/ [Accessed on:
26/09/17]
Trindade, F., Cane, P. and Lunney, M. (2007). The law of torts in Australia. 4th ed. South
Melbourne: Oxford University Press.
Vanderkerckhove, K. (2007) Piercing the Corporate Veil. Netherlands: Kluwer Law International.
Wibberley, J., and Gioia, M.D. (2017) Lifting, Piercing And Sidestepping The Corporate Veil.
[Online] Guildhall Chambers. Available from:
http://www.guildhallchambers.co.uk/uploadedFiles/PiercingtheCorporate%20Veil.JW,MDG.pdf
[Accessed on: 26/09/17]