Piercing the Corporate Veil in CMS Case

This assignment examines a hypothetical case involving a company named CMS (and its subsidiaries) facing accusations of negligence. It delves into the concept of 'piercing the corporate veil,' exploring whether shareholders and directors can be held personally responsible for the actions of CMS. The analysis focuses on the company's restructuring, potential fraud, and relevant legal principles under Australian Corporations Act 2001. Students are expected to argue for or against holding shareholders and directors liable based on the provided facts.

Running head: CORPORATIONS LAW 0
Corporations Law

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Table of Contents
Answer 1....................................................................................................................................2
The Issue................................................................................................................................2
Relevant Law.........................................................................................................................2
Type of Companies................................................................................................................2
Name of a Company...............................................................................................................2
Selection of Registered Office...............................................................................................3
Details of Consent and Shareholding.....................................................................................3
Constitution or Replaceable Rules.........................................................................................3
Filing of Application and Fees...............................................................................................4
Impact of Incorporation and Requirements............................................................................4
Applicability and Conclusion.................................................................................................4
Answer 2....................................................................................................................................6
The Issue................................................................................................................................6
Relevant Law.........................................................................................................................6
Main Legal Principle..............................................................................................................6
Argument on the Facts...........................................................................................................6
Supporting Case.....................................................................................................................6
Sham or Façade Corporation..................................................................................................7
CMS Wound Up.....................................................................................................................8
Conclusion..............................................................................................................................8
References..................................................................................................................................9

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Answer 1.
The Issue
The issue is regarding steps and provisions of company’s incorporations including, selection
of name, office, and method of submitting application, rules, and impact of registration.
Relevant Law
The arguments, in this case, will revolve around the sections of incorporating a company
provided under the Corporations Act 2001. The sections include various provisions which
founders have to follow while establishing a corporation.
Type of Companies
As per the section 112 of Corporations Act 2001, there is two type of company, public, and
proprietary (Act 2001). There are four types of public enterprises:
 No liability
 Unlimited share capital
 Limited by guarantee
 Limited by shares
Proprietary corporations are divided into two parts:
 Unlimited by share
 Limited by share capital
Name of a Company
The provision relating to the name of a company provided under section 148 of the act. The
name selected by a new corporation must be available along with Australian Company
Number. While incorporating a public enterprise, it is necessary that word ‘Limited’ is added
at the end of the title. In case of a proprietary firm, the word ‘Proprietary Limited’ is required
to be added in the end. The name of unlimited proprietary firms must add ‘Proprietary’ at the
end of the title, and no liability organisations add ‘No Liability’ word in their title (Barrett
2010).
The section 148 of the act requires that the name of an enterprise must not be identical or
confusingly similar to another organisation’s title. This article also provides the regulations

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regarding unacceptability of specific names which are rejected by ASIC or government
departments. For example, a company cannot incorporate with the word ‘Federal’ or
‘Commonwealth’ in their title because it shows their connection to government, which can be
confusing for the public. The words or titles rejected by ASIC cannot be used by
organisations as their name (Lipton 2007).
Section 152 of the act provides provision regarding reservation of a name; an individual can
check the availability of a title in National Names Index which is provided over the online
website of ASIC (ASIC n.d.). It is necessary that such party must reserve the name by
submitting an application in prescribed format to ASIC. ASIC reserve such name for two
months, which can be extended by providing a written form for an extension for next two
months.
Selection of Registered Office
As per section 119A of the act, a company is required to select a registered office under its
jurisdiction. The jurisdiction of corporations is situated in a particular state or territory. ASIC
provides the name of company's registered office in its registration certificate. As per Cassidy
(2006), the legal rights and abilities of a corporation did not change according to state or
territory regulations. An enterprise adds its proposed registered office address in the
application which became permanent address after the incorporations. Usually, corporations
select a registration office near their place of working. As per section 144, it is compulsory
for enterprises to write their name in front of the place of business.
Details of Consent and Shareholding
The corporations are required to provide their shareholding structure while applying for
registration, which includes details regarding members and their shareholdings. The consent
of each member is required for incorporation, whose name is written on the form or who has
signed the application. This information must be correct and collected without any fraud by
the company, and they must be submitted at the time of registration (McBurnie and Ziguras
2001).
Constitution or Replaceable Rules
As per section 136, a company can adopt their constitution before or after their
incorporations. The constitution includes a contract of director and other members of the
corporation. The constitution provides guidelines regarding power and duties of directors and

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other members. Section 141 of the act includes the provision of replaceable rules in an
enterprise. The replaceable rules manage the function of the internal department of firms,
which include maintaining of books of accounts, appointment & disappointment of directors,
the power of members and many more provisions. For ‘No Liability’ and special purpose
corporations it is compulsory to adopt constitution instead of replaceable rules. As compared
to replaceable regulations, the constitution is a safer option because it covers a broader range
of situations and it is easy to implement (Robinson 2011).
Filing of Application and Fees
As per section 117 of the act, a company can be registered by two methods, through a private
service provider or directly through ASIC. Following items must be included in the
application for registration:
 Details of the enterprise, including, name, address, authorised share capital, register
office, type of business and timings
 Details regarding members such as name, address, personal information and the
number of shareholdings
 Copy of corporation’s constitution or bylaws
 All aspects must be in a prescribed form
All other regulation provided by ASIC must be fulfilled by the firm while applying for
registration. ASIC apply fees over every paper or file submitted by any party. The fees for
reserving a name of the enterprise is AU$48. The registration fee for a corporation with share
capital is AU$479 and an AU$395 for a company without share capital (ASIC n.d.).
Impact of Incorporation and Requirements
The section 119 of the act provides the effect of incorporations; a company acquires various
rights and responsibilities right after its registration. The separate legal entity of the enterprise
formed right after its incorporation. As per Tomasic, Bottomley and McQueen (2002), after
the incorporation, the organization is required to perform various on-going requirements such
as maintaining necessary documents, displaying of name & ACN over registered office and
records.
Applicability and Conclusion
For the business of Richard and his sons, a proprietary organisation is a far better option than
a public company. A proprietary company will provide them various benefits including more

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control on operations, less legal requirement, no personal liability and much more. Both the
names suggested by Richard and his sons are available over the National Names Index,
meaning they can select any one of them. Richard operates his business in Hunter Valley,
which is where the register office of the company must be situated.
For Richard’s business, the constitution is a better option those replaceable rules. The
constitution covers broader situations, and it is more rigid, which provide safety in business
operations. The procedure of applying for registration as mentioned above, along with the
impact of incorporation. In conclusion, Proprietary Corporation is a beneficial option for
Richard’s business because it will assist in its growth and expansion.

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Answer 2.
The Issue
The legal issue is Cosmo Mining Ltd liability for negligence, towards their former workers
and society. Further, the issue is relating to the piercing of corporate veil in Cosmo Mining
Services Pty Ltd case.
Relevant Law
The argument would include the interpretation of the principle of the lifting of corporate veil
and provision of tortious liability for negligence by a business, as provided under section 5 of
Civil Liability Act 2002.
Main Legal Principle
As per the Corporations Act 2001, every company has a different legal entity from its
members. The directors or management of an enterprise cannot be held accountable for the
activities of the business. Any party aggrieved due to actions of a corporation has right to file
a suit against such firm, but not against the directors or members. The shield provided to the
directors against the actions of a company is called corporate veil. In case of fraud or illegal
activities of a firm, the court has right to lift such corporate veil and held directors liable for
their decision.
Argument on the Facts
In this case, Terry has filed a suit against CMS corporations which has been wound up by the
voluntary decision of its shareholder. The CMS Company was a subsidiary of CM enterprise;
they controlled all the business activities of CMS. Terry is stating that due to the principle of
corporate veil and liability of negligence, the shareholders of CM are responsible towards the
responsibility of CMS Company.
Supporting Case
 In CSR v Young (1998) Aust Tort Reports 81-468 case, Australian Blue Asbestos Ltd
appointed its CSR Company as an agent to conduct a business transaction for them.
This relationship provides the holding company full control over the operation of the
subsidiary enterprise. The decision of holding firms was behest upon the management
of the subsidiary organisation. The actions of ABA caused cancer to a kid living near

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the town; the child filed a suit against both ABA and CSR Company. The court
provided that both the holding and subsidiary corporation has a liability of care
towards their employees as well as citizens (Warren 2016).
 In Smith, Stone & Knight Ltd v Birmingham Corp (1939) 4 ALL ER 116 case, the
holding corporation failed to transfer the ownership paper of a waste paper business to
its subsidiary firm. After finding out this fact, the court provided that subsidiary is just
an agent of the holding firms and the real owner of the business is holding enterprise.
In its decision, the court held that the revenue, investment, workers and control of
subsidiary firm should be determined as holding corporations business (Nyombi
2014).
 In Gilford Motor Co. v Horne (1993) Ch 935 case, an employee enters into a contract
with his employer for not performing in related corporate job. The employee founded
an organisation after quitting his work, and such corporation performs similar work
for the first company. The employee’s family member was the shareholder in such
enterprise, and the employee himself was the director. The employer sued the
employee for breaching the contract; the court decided that employee formed the
company as a sham and façade. The judge can ignore the provision of corporate veil if
the corporations are created just as sham or façade (Grantham 2013).
Form the decision of cases mentioned above; it can be concluded that Terry can file a suit
against CM Corporation because they were acting as an agent for CMS and they were in
complete control of their operations. The new company called Lazarus Pty Ltd is a sham
corporation. Therefore, it can be held liable toward a former employee of CMS and society.
Sham or Façade Corporation
The Creasey v Breachwood Motors Ltd (1993) BCLC 480 case is an excellent example of the
liability of a sham corporation. In this case, Breachwood Welwyn Ltd unlawfully discharged
Creasey, who was their general manager. Creasey files a suit against the enterprise, but the
company was wound up by its directors before the settlement of the claim. The assets were
transferred to Breachwood Motors, and all the amount outstanding were settled by them,
except for Creasey’s claim. The court decided that Breachwood Welwyn Ltd breaches the
provision of spate legal entity and the Breachwood Motor Company is a sham and façade
(Saxena 2010). A similar principle applies over Lazarus Pty Ltd, the directors of CM uses

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these corporations to avoid the liability of CMS Company. Therefore, they shall be held
liable towards the actions of CMS enterprise (Hameed 2012).
CMS Wound Up
Although, the CMS has been voluntary wound up by the unanimous decision of its
shareholders, the liability of the corporation toward former worker and citizens did not
dismiss. The motive of wound up was to avoid the accountability by the shareholders.
Therefore, the court can hold the shareholders and directors of CMS personally accountable
towards Terry and the residents of Gunbarrel.
Conclusion
In conclusion, CM was an agent of CMS, but they control the entire operation of the
company which makes them liable towards the obligations of CMS. The reason for wound up
was to avoid the responsibility of the company, and the new corporations were just a sham or
façade to confuse the public. As per the provision of the lifting of the corporate veil, the court
can hold directors and member of CM liable toward Terry and the residents of Gunbarrel.

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References
Act, C., 2001. Corporations act 2001. Commonwealth of Australia.
ASIC, n.d. Schedules of corporations fees. ASIC. Retrieved from < http://asic.gov.au/for-
business/payments-fees-and-invoices/asic-fees/schedules-of-corporations-fees/ >
ASIC, n.d. Search ASIC Registers. ASIC. Retrieved from <
https://connectonline.asic.gov.au/RegistrySearch/faces/landing/SearchRegisters.jspx?
_adf.ctrl-state=h8lii3ryc_4 >
Barrett, R.I., 2010. Making the acquaintance of Pilcher, Uther and Baldock:[The first
annotated Australian book on company law was Butterworth's' Pilcher, NG; Uther, AW and
Baldock, WJ The Australian Companies Acts Reconciled and Annotated'(1937).]. Law
Society Journal: the official journal of the Law Society of New South Wales, 48(7), p.30.
Cassidy, J., 2006. Concise corporations law. Federation Press.
Grantham, R., 2013. The corporate veil: An ingenious device. U. Queensland LJ, 32, p.311.
Hameed, I., 2012. The Doctrine of Limited Liability and the Piercing of the Corporate Veil in
the light of fraud: A critical multi-jurisdictional study.
Lipton, P., 2007. A history of company law in colonial Australia: Economic development and
legal evolution. Melb. UL Rev., 31, p.805.
McBurnie, G. and Ziguras, C., 2001. The regulation of transnational higher education in
Southeast Asia: Case studies of Hong Kong, Malaysia and Australia. Higher
Education, 42(1), pp.85-105.
Nyombi, C., 2014. Lifting the veil of incorporation under common law and
statute. International Journal of Law and Management, 56(1), pp.66-81.
Robinson, T., 2011. Which Is Better For A Company, A Constitution Or Replaceable Rules?.
Everingham Solomons. Retrieved from < http://eversol.com.au/2011/05/27/which-is-better-
for-a-company-a-constitution-or-replaceable-rules/ >
Saxena, H., 2010. Lifting of Corporate Veil.

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Tomasic, R., Bottomley, S. and McQueen, R., 2002. Corporations law in Australia.
Federation Press.
Warren, M., 2016. Corporate structures, the veil and the role of the courts. Melb. UL Rev., 40,
p.657.