Negligence and Corporate Veil

This assignment analyzes a case study involving negligence claims against Lazarus Pty Ltd, CMS, and CM. It explores the concept of piercing the corporate veil and how it applies to determining liability for the actions of a subsidiary. The student must apply relevant legal principles and case law to determine if Terry can successfully sue all three parties for damages.

CORPORATE LAW 2
QUESTION 1
ISSUE
The key issue in this case revolves around the steps which Richard and his sons are required to
take for registering a company in the nation.
RULE
There are different business structures which can be selected by people who want to start their
business in Australia. Included in these are trust, partnerships, sole trader and company. The
particular requirement of the individual helps in finalising which business structure suits the
most to such person1. For instance, in the company form of business structure, there are
numerous benefits like limited liability and the ability to raise funds from general public. The
Corporations Act, 20012 is the governing act for all the companies in the nation and over the
incorporation and registration of the company, this act has to be followed.
Before starting a company form of business structure in the nation, there is a need to elect the
type of the company which one needs to start. Under section 112 of this act, there are two types
of companies which can be established and these are public and proprietary companies3. Under
these categories, there are subcategories; for public companies, there can be unlimited public
company with share capital, or no liability company, or company which is limited by guarantee,
or lastly, the company limited through shares. The proprietary companies also have subtypes, but
1 Australian Government, Business structure (2016) <https://www.business.gov.au/info/plan-and-start/start-your-
business/business-structure>
2 Corporations Act, 2001 (Cth)
3 Corporations Act 2001, s112

CORPORATE LAW 3
there are only two subtypes of it, the one in which the company is limited by share and the one in
which it is unlimited with share capital. The proprietary companies in the nation do not have the
power to sell the shares to the general public, which can be done by the public companies in the
nation4.
The next requirement for fulfilling the company’s incorporation is to select the name of the
company. In this regard, certain key points have to be considered. As per section 147, no two
companies can have identical names, so the name of the company has to be unique5 and for this
purpose, the availability of name can be checked online. As per section 148 of this act, the
company’s name can be finalized on the basis of the Australian Company Number or it can be
done on the basis of the availability of name6. In addition to this, certain terms have to be affixed
with the name of the company, to show the type of company. So a unlimited proprietary
company needs to have in the end of the name of the company, the wordings “Proprietary”, a no
liability company to have “No Liability”, and for the limited company, the wordings are
“Limited”. And under section 152 of this act, upon the finalization of the name, an application
needs to be made to the ASIC for reserving this name7.
Under section 117 of this act, the application contents have to be filled by the applicants of the
company with ASIC for applying for the company’s registration8. This application has to clearly
state the members’ details, who are interested in holding such post in the company, the details of
the company secretary, the consent of such individual, the type of company, the address and
name of the proposed registered office, and the details of the shares.
4 Australian Institute of Company Directors, Organisation definitions (2016)
<http://www.companydirectors.com.au/director-resource-centre/organisation-type/organisation-definitions>
5 Corporations Act 2001, s147
6 Corporations Act 2001, s148
7 Corporations Act 2001, s152
8 Corporations Act 2001, s117

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After these steps have been undertaken, the next requirement is for the company to be managed
either by replaceable rules or the constitution. Under Part 2B.4 of this act, the company has to be
ruled by either of these9. Under section 141 of this act, the replaceable rules have to be applied
for certain provisions. These rules are selected when certain the members of the company do not
want to opt for a constitution as the ruling document for the company. Where a constitution is to
be adopted, the company needs to adhere to section 136 of this act. The constitution can be
selected, both before and after the company is registered10. In case the company adopts the
constitution before registration, an agreement has to be provided with the members for the
constitution terms to be put down in writing. There is a need for the special resolution to be filed
when the constitution has to be adopted after the registration of the company11. Upon the
finalization of which of the two is to be elected, the same has to be stated in the application based
on section 117 and the required fees has to be filed with it12.
Some elements have to be covered under the application made to ASIC for it to be completed in
every aspect and when such is done, the company is awarded the ACN, the company is
registered and a certificate is issued which covers the details of the company like the type and the
name of the company. As per section 119, the company comes into existence from the day it is
registered13. The certificate of registration shows the company name and till deregistration of the
company, it comes to exist under the eyes of law.
Once the company is incorporated, the operations of the company can be initiated. However, the
name of the company has to be displayed when the business of the company is conducted. The
9 Corporations Act 2001, pt2B.4
10 Corporations Act 2001, s136
11 ASIC, Constitution and replaceable rules (2017) <http://asic.gov.au/for-business/starting-a-company/constitution-
and-replaceable-rules/>
12 Corporations Act 2001, s117
13 Corporations Act 2001, s119

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ABN or the ACN has to be stated over the documents which are published by the company. And
the details of the company have to be kept updated at all times14.
APPLICATION
For starting a family run company by Richard and his two sons, there is a need to adopt the steps
which have been covered earlier. Richard and sons need to select the type of company firstly. As
they do have to raise money from public, they should opt for a public company, which is limited
by shares. The name of the company also needs to be finalized. As both of these names are
available as per the online search, they can select either name. The name of the business can be
Rich’s Guaranteed Olives and the name of the company can be Ridali.
There is also a need to choose between replaceable rules or constitution. As the replaceable rules
are restricted, Richard and sons should draw up a constitution, following which, they can register
and incorporate the new company.
CONCLUSION
To conclude, the steps covered above need to be adopted by Richard and sons for registering and
incorporating the company.
QUESTION 2
ISSUE
Whether or not an action can be brought by Terry against the three companies?
14 ASIC, Starting a company - How to start a company (2017)
<http://asic.gov.au/for-business/starting-a-company/how-to-start-a-company/>

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RULE
A tort can be defined in the best manner as a civil wrong as a result of which, one person has to
bear a particular loss. Negligence is deemed as a tort in the nation. And under negligence, one
party breaches the duty of care which is owed by one person to another and where the actions of
the first party, injure the other15.
LAZARUS PTY LTD.
The companies have a unique characteristics and this is of a company being a separate legal
entity as per which, for the actions of the company, the persons who run its affairs cannot be held
liable. However, in certain cases, this status can be set aside by piercing the corporate veil of the
company and hold the liable persons responsible for their actions16. Where a new company is
formed just for evading the old company’s liabilities, the same is treated as a facade17. And in
such cases, the corporate veil is pierced and the old company is made liable for their undertaken
acts.
A leading example of this is Creasey v Breachwood Motors Ltd18 where the corporate veil of the
company was pierced in the interest of justice when the new company was formed. The new
company was made liable for wrongfully dismissing the employees of the old company and it
was held that the new company was just a sham for avoiding the old company liabilities19.
15 Paul Latimer, Australian Business Law 2012 (CCH Australia Limited, 31st ed, 2012)
16 Michala Rudorfer, Piercing the Corporate Veil (GRIN Verlag, 2009)
17 Thomas K. Cheng, ‘The Corporate Veil Doctrine Revisited: A Comparative Study of the English and the U.S.
Corporate Veil Doctrines’ 34(2) Boston College International and Comparative Law Review, 329.
18 [1993] BCLC 480; 10 ACLC 3,052
19 Lynden Griggs, A Note On The Application Of Enterprise Theory To The Problem Of Phoenix Companies (2017)
<http://www.austlii.edu.au/au/journals/MacarthurLawRw/1998/3.pdf>

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APPLICATION
Lazarus Pty Ltd was created for avoiding the liabilities of CMS, which is clear from the case
studies, which were raised as a result of the undertaken negligence and due to which the
employees and the Gunbarrel residents were harmed. Holding the formation of Lazarus as
facade, based on Creasey v Breachwood Motors Ltd, Lazarus would have to compensate the
injured parties for the negligence of CMS.
CMS
In order to make a case of negligence, a duty of care has to be present, where it was breached and
where it resulted in harm or loss, which was reasonably foreseeable and where the proximity of
parties resulted in such injury20. The English case of Donoghue v Stevenson21 proves to be of help
in this regard, where the manufacturer had to compensate consumer for the losses suffered by
them owing to the negligence of the consumer.
APPLICATION
In this case, a duty of care was owed by CMS to its employees and to the residents of Gunbarrel.
The duty of care was contravened when the contaminated water resulted in people contracting
cancer. Mining companies are known to cause different diseases. Based on case of Donoghue v
Stevenson, the company would have to compensate the employees and the residents as the loss
was foreseeable in this case.
20 Legal Services Commission of South Australia, What is negligence? (2013)
<http://www.lawhandbook.sa.gov.au/ch29s05s01.php>
21 [1932] UKHL 100

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CM
The parent and its subsidiary are deemed as separate legal entity and for the actions of one the
other cannot be made liable in general. However, for delivering fair and just decision, this veil
can be pierced22. This happens when in the eye of law, the conduct of company is against the
law, and it becomes necessary to hold the company owners accountable for the debts which the
company incurred23.
For the tortious activities, the corporate veil can be pierced based on the actions undertaken by
the subsidiary. CSR Ltd v Young24 is a leading example of this. In order to decide upon the issue
of liability, the similarity of positions of the two companies, along with the control over the
activity of subsidiary, with the holding, is considered25. In this case, the court stated that the
control of the holding was very strong as a result of which, the activities which the subsidiary
took part in, were deemed as ones undertaken by the holding company.
Where the subsidiary acts as the implied agent of its parent company, the corporate veil of the
company can be pierced. In Smith, Stone & Knight Ltd v Birmingham Corp26, the business of the
subsidiary was just to carry on the business of its parent company and the parent company was
formed to be eligible for compensation owing to the business of the subsidiary. This led the court
to pierce the corporate veil and hold the parent company liable27.
22 James Wibberley, and Michelle Di Gioia, Lifting, Piercing And Sidestepping The Corporate Veil (2017)
<http://www.guildhallchambers.co.uk/uploadedFiles/PiercingtheCorporate%20Veil.JW,MDG.pdf>
23 Karen Vandekerckhove, Piercing the Corporate Veil (Kluwer Law International, 2007)
24 [1998] Aust Tort Reports 81-468
25 Helen Anderson, ‘Directors’ Liability for Unpaid Employee Entitlements: Suggestions for Reform Based on their
Liabilities for Unremitted Taxes’ 30(470) Sydney Law Review 478.
26 [1939] 4 All ER 116
27 Derek French, Stephen Mayson and Christopher Ryan, Mayson, French and Ryan on Company Law (Oxford
University Press, 33rd ed, 2016)

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APPLICATION
CM is the parent company of CMS which is its subsidiary. For holding CM liable for negligence
of CMS the requirements set out in rules segment have to be fulfilled. CMS was making
payment of leasing charge to CM, which was higher by 10% of leasing costs of the standard
banks. This rate shows the control of CM over CMS. Hence, on the basis of CSR Ltd v Young,
CM would be held liable.
The next key point of this case relates to the purpose of leasing, which was solely done for
subleasing the mining equipment to CMS. So, the only purpose was to get the work carried by
the subsidiary. Applying Smith, Stone & Knight Ltd v Birmingham Corp, CM’s operations were
effectively being conducted for CM. This would mean that the court can pierce the compote veil
for making CM responsible for the negligence of CMS.
CONCLUSION
To conclude, Terry can start legal action against all the three and would be successful in
recovering damages for negligence from Lazarus Pty Ltd, CMS and CM.

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Bibliography
A. Articles/ Books/ Reports
Anderson H, ‘Directors’ Liability for Unpaid Employee Entitlements: Suggestions for Reform
Based on their Liabilities for Unremitted Taxes’ 30(470) Sydney Law Review 478.
Cheng TK, ‘The Corporate Veil Doctrine Revisited: A Comparative Study of the English and the
U.S. Corporate Veil Doctrines’ 34(2) Boston College International and Comparative Law
Review, 329.
French D, Mayson S, and Ryan C, Mayson, French and Ryan on Company Law (Oxford
University Press, 33rd ed, 2016)
Latimer P, Australian Business Law 2012 (CCH Australia Limited, 31st ed, 2012)
Rudorfer M, Piercing the Corporate Veil (GRIN Verlag, 2009)
Vandekerckhove K, Piercing the Corporate Veil (Kluwer Law International, 2007)
B. Cases
Creasey v Breachwood Motors Ltd [1993] BCLC 480; 10 ACLC 3,052
CSR Ltd v Young [1998] Aust Tort Reports 81-468
Donoghue v Stevenson [1932] UKHL 100
Smith, Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116

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C. Legislations
Corporations Act, 2001 (Cth)
D. Others
ASIC, Constitution and replaceable rules (2017) <http://asic.gov.au/for-business/starting-a-
company/constitution-and-replaceable-rules/>
ASIC, Starting a company - How to start a company (2017)
<http://asic.gov.au/for-business/starting-a-company/how-to-start-a-company/>
Australian Government, Business structure (2016) <https://www.business.gov.au/info/plan-and-
start/start-your-business/business-structure>
Australian Institute of Company Directors, Organisation definitions (2016)
<http://www.companydirectors.com.au/director-resource-centre/organisation-type/organisation-
definitions>
Griggs L, A Note On The Application Of Enterprise Theory To The Problem Of Phoenix
Companies (2017) <http://www.austlii.edu.au/au/journals/MacarthurLawRw/1998/3.pdf>
Legal Services Commission of South Australia, What is negligence? (2013)
<http://www.lawhandbook.sa.gov.au/ch29s05s01.php>
Wibberley D, and Gioia MD, Lifting, Piercing And Sidestepping The Corporate Veil (2017)
<http://www.guildhallchambers.co.uk/uploadedFiles/PiercingtheCorporate
%20Veil.JW,MDG.pdf>