Corporation Law: Liability of Parent Company, Piercing the Corporate Veil, and Constitution of a Company

This guide to Corporation Law covers the liability of a parent company for the negligence of its subsidiary, the concept of piercing the corporate veil, and the provisions of a company's constitution. It includes case law such as Salomon v Salomon & Co [1897] AC 22, David Brian Chandler v Cape Plc [2011] EWHC 951 (QB), and Hickman v Kent or Romney March Sheep-Breeders Association [1915] 1 Ch 881.

Running head: CORPORATION LAW
Corporation Law
Name of the Student
Name of the University
Authors Note
Course ID

1CORPORATION LAW
Answer 1
Issue
The issue in the situation is that whether Bob's daughter has given him a good idea to
create a company under the provisions of common law.
Rule
In the case of Salomon v Salomon & Co [1897] AC 22 it was held by the court that
registered company is a separate legal entity which means that its identity is not the same as
its owners. Once the incorporation of company is completed in a valid manner its separate
legal entity is created. This company has a limited liability which means that the liability
which is owed by the company is not the liability of its owners. They are protected by a
concept which is known as corporate veil.
However this decision of the court has been interpreted in a contradictory manner by
various other court in different cases. One of such case was the case of Adams v Cape
Industries plc [1990] Ch 433. In this case it was quoted by the judge that a company is a
separate legal entity and its owners are protected through the concept of corporate veil.
However the veil can be pierced in case it is established before the court that where an
organisation has been set up with an objective which is fraudulent in nature or in order to
evade any other existing obligation. The corporate veil can be lifted by the court in case such
actions are in the interest of Justice.
Through the passing of this decision by the court the concept in relation to lifting the
corporate veil had been established in the corporate world. There was various number of
reason because of with a Court May lift the corporate veil of a company. Few of these cases
are the case of Lee v Lee’s Air Farming Ltd (1961) AC 12 and Dennis Willcox Pty Ltd v
Federal Commissioner of Taxation (1988) 79 ALR 267.

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The concept of piercing the corporate veil in Australia has been adopted from the
English approach. In the case of Peate v Federal Commissioner of Taxation (1964) 111 CLR
443 it had been stated by the court that it is within the power of the court to hold that the
members of the company have the same identity as the company by lifting the corporate veil
in situation where the company only acts as a mask under which its members operate. This
means that the company has only been incorporated so that their members can continue
illegal and unethical activities under the protection provided by the separate legal entity of the
company.
In the case of Brewarrana v Commissioner of Highways (1973) 4 SASR 476 the word
piercing the corporate veil was ironically integrated by the judge has no fashionable. On the
other hand in the case of Walker v Hungerfords (1987) 44 SASR 532 it had been provided by
the judge that the concept of lifting the corporate veil is now out of date.
In the case of Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254
it was ruled by the court that the actual meaning of lifting the corporate veil is that in
situation where an individual company has been created a separate legal entity is formed
however the courts will on certain occasions look behind the corporate veil to see it's real
controllers. The lifting of Corporate veil by the court was rejected in the case of Briggs v
James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 however it was stated by the code that
the corporate veil may be lifted if the company has been incorporated to avoid a legal
obligation.
Application
It has been provided in the facts of the case that through the provisions of the
protective legislation it is illegal for any person to catch more than 50 tons of scallops in a
year. In addition the marketing authority is also under the restriction of purchasing 50 tons of

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scale up from a person each year. It has also been provided by the legislation that a person
cannot sell the caught scallops to any other person other than the marketing authority in New
South Wales. A financial penalty of $100,000 is imposed on any person who violates such
provisions. As Bob has a capacity to catch more than 50 tons of scallops he has been advised
by his daughter to form a company. This would mean that the company is created for an
improper purpose. The only purpose for which the organisation has been created is to event
the liability which would otherwise have in relation to the protective legislation. Therefore in
the given situation it can be stated that as the company has not been formed for a proper
purpose and its objective is to avoid legal obligations the court will pierce the corporate veil
and help Bob personally liable for any offence committed by the company.
Conclusion
It would not be a good idea for Bob to create a company in order to avoid legal
obligations. If he does so the limited liability feature of the company would not be able to
protect him as the court will pierce the corporate veil.
Answer 2
Issue
Whether New Nirvana Ltd who is the parent company of Nuclear Blast Sounds Pty
Ltd can be held liable for the negligence made by Nuclear Blast Sounds Pty Ltd
Rule
In the case of David Brian Chandler v Cape Plc [2011] EWHC 951 (QB) the liability
of a parent company in relation to its wholly owned subsidiary had to be determined by the
court with respect to negligence. In this case it was held by the court that a parent company of
a wholly owned subsidiary owe a duty of care towards a person who has been affected by the

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negligence of the subsidiary. It was stated by the court in this case that although there is no
relevant authority which suggests that a person has a duty to prevent a third party from
causing and damage however in case of a parent company and the wholly owned subsidiary
the parent company have a duty of care in relation to those persons who may be affected by
the subsidiary company if the parent company controls the affairs of the subsidiary.
In order to established whether such duty of care is owned by the parent company
there is a three steps test which has to be applied as provided in the case of Caparo Industries
v Dickman [1990] UKHL 2.Firstly it has to be seen that whether a reasonably foreseeable
damage existed, secondly whether the nature of relationship between the defendant and the
claimant was of proximity, and thirdly whether imposing such duty would be reasonable and
just. If these three elements are satisfied then it is deemed that a Parent company would owe a
duty of care to those who have been injured through the acts of a subsidiary company.
Application
In the given situation it has been provided that nuclear blast sounds Pty ltd is a
subsidiary of new Nirvana ltd. The board of directors of Nirvana are the members of the hard
rock band. The objective of Nirvana is to set up band concerts. In relation to this setup the
subsidiary has a responsibility of setting up sound system at a concert. It has been provided
that the subsidiary company in one of the concert had negligently set the sound level very
high which has resulted for five audience in the concert to get permanent hearing damage.
According to the provisions of the above discussed cases Parent company may be liable for
the negligent acts of its subsidiary company. This may occur in situation where the affairs of
the subsidiary company are controlled by the parent company. Here the board of directors of
the parent company and the subsidiary company are also same. In addition to the application
of the three stage test it can be stated that there was very close proximity between the parent

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company and the subsidiary company and imposing a duty of care on the parent company in
relation to the actions of the subsidiary would be fair and reasonable. Therefore in the given
situation at can be stated that Nirvana would owe a duty of care towards any person who has
been harmed by the actions of its subsidiary nuclear blast.
Conclusion
Therefore it can be stated that Nirvana Limited can be held liable for the negligence
committed by nuclear blast.
Answer 3
Issue
What is the legal position of Millennium Pty Ltd Where Simon and Michael have
removed Don as the solicitor of the company and a legal proceeding has been brought by Don
contrary to the constitution
Rule
The Corporation Act (Cth) 2001 deals with provisions in relation activities of
registered organisation. It also has provisions which deal with the constitution of a company.
It has been stated through the provision of section 125 of the CA that in situation
where a company has a constitution it may have terms which may restrict or prohibit the
exercise of its powers. However a power exercised by the company would not be treated as
invalid merely if it is not within the compliance of restrictions imposed by the constitution. In
case an object is set out by the company in its constitution the act of the company beyond
such object would not be invalid only because it is beyond the object.

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In the case of Hickman v Kent or Romney March Sheep-Breeders Association [1915]
1 Ch 881 it had been stated by the court that the provisions provided through constitution of
the company result in the formation of statutory contract between its members.
In the case of Eley v Positive Government Security Life Assurance Co (1875) 1 EX D
20 it has been ruled by the court that members cannot enforce a provisions in relation to the
constitution against others for gaining personal interest.
It has been stated through the provisions of section 140 of the CA that the provisions
provided through constitution of the company result in the formation of statutory contract
between its members and the company with the members. Under this contract there is an
obligation of such members to comply with the rules of constitution as far as they are
applicable on them.
Application
In the given situation it has been provided that Simon, Don and Michael have
incorporated a company Millennium Pty Ltd. According to the constitution of the company
Don is required by be the solicitor of the company in relation to purchase or sale of land on
behalf of the company. In addition it has been stated that where there is a dispute between the
members of the company it has to be initially referred to an arbitrator before it can be
challenged in a court. Michael and Simon have met a better solicitor so they remove Don.
However Don has without going the arbitrator filed a legal action against the company.
It has been provided through the provisions of the Hickman case and rules under
section 140(1) that the terms of the constitution act as a contract between the members and
the company. Therefore in this case as the constitution provides that a dispute between
members has to be first referred to an arbitrator the actions of Don would be a breach of
contract with the company.

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However section 125 states that an act which is beyond the constitution of the
company is not invalid only because it is against the constitution. In addition it has been
provided by the court in the case of Eley that members may not enforce a term of the
constitution to gain personal interest. However in the given situation it can be stated that
Michael and Simon have no person interest in the situation. Although the act of Don is not
invalid as per section 125 he has violated the contract which was formed under the provisions
of section 140 of the CA
Conclusion
In the provided scenario Don has violated the provisions of section 140 of the CA.

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References
Salomon v Salomon & Co [1897] AC 22
Adams v Cape Industries plc [1990] Ch 433
Lee v Lee’s Air Farming Ltd (1961) AC 12
Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267
Peate v Federal Commissioner of Taxation (1964) 111 CLR 443
Brewarrana v Commissioner of Highways (1973) 4 SASR 476
Walker v Hungerfords (1987) 44 SASR 532
Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254
Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549
David Brian Chandler v Cape Plc [2011] EWHC 951 (QB)
of Caparo Industries v Dickman [1990] UKHL 2
Corporation Act (Cth) 2001
Hickman v Kent or Romney March Sheep-Breeders Association [1915] 1 Ch 881
Eley v Positive Government Security Life Assurance Co (1875) 1 EX D 20