Piercing the Corporate Veil in Australia: A Discussion on the Courts' Reluctance to Depart from the Separate Entity Principle

This article discusses the principle of separating the identity of corporations in Australia and the circumstances under which the courts have been willing to look beyond the separate existence of a corporation. It also explores the factors that the courts consider when deciding whether to lift the corporate veil, such as agency and fraud. The article concludes that lifting the corporate veil remains a highly controversial topic under corporate law.

Question 1
“Frequently the courts have been requested to look behind the corporate veil [of
companies] …where to all outward appearances they seem to operate as a single entity. The
Australian courts…have been reluctant to depart from the separate entity where there is
no legislation requiring them to do so.”
Do you agree with the above quote? Discuss your reasons.
It has been regularly stated that the courts in Australia are generally reluctant to ignore the
principle of separating the identity of the corporations. This doctrine is considered as one of the
basic principles of corporations law. The doctrine of separate identity and also the notion of
limited liability of a corporation can be described as the reasons which have immensely helped in
increasing the popularity of corporate form in Australia. But, it needs to be noted that under
some circumstances, the courts have been willing to look beyond the separate existence of a
corporation and to hold the persons who are in charge of the affairs of the company. In such a
case, it is said that the corporate veil has been lifted by the court.1 This can be done by the courts
where evidence is present which suggests that the parties have used the corporate form for the
purpose of committing fraud or for avoiding their personal legal obligation. In this context, it is
worth mentioning that such cases are very rare in Australia. Generally, the cases where this issue
has been raised have two be decided on the basis of the facts of the case in place of relying upon
the established exceptions to the principle related with a separate identity of a corporation. An
1 Helen Anderson, ‘Piercing the Veil on Corporate Groups in Australia: The Case for Reform’ [2009] 33 Melbourne
University Law Review 333

example in this regard can be given of Briggs v James Hardie.2 In this case, Rogers AJA has
stated that there is no common, unifying theory present in this regard, which may define the
occasional decision that has been made by the courts of lifting the corporate veil. In this regard,
it also needs to be noted that only on account of the reason that the corporate form has been
elected by a person to limit the liability of such person for the debts of the business or a company
with limited capital has been established, this fact alone cannot be treated as a sham or fraud on
the part of such person.3
The act of lifting the corporate patent can be described as the situation where the existence of the
company has been ignored by the court, on account of the fact that the owners of the company
failed to keep formalities and requirements. The act of piercing the corporate bail by the court
can be described as a judicial act. Hence, various judges have tried to provide a brief meaning to
this act. A similar attempt was made by Staughton J in Atlas Maritime v Avalon (No 1), where
he used the following words for describing the term.4 Therefore, he said that the term piercing
the corporate veil can be used for considering the obligations and privileges enjoyed by the
corporation as the rights and liabilities that have been imposed on the shareholders. In this way,
lifting the veil or looking beyond the corporate veil is to consider the shareholding in the
company for legal purpose.5 As compared to this situation, Young J had mentioned in Pioneer
Concrete Services Ltd v Yelnah Pty Ltd, that the act of lifting the corporate veil can be described
as follows.6 He said that whenever a company is formed, there is the creation of a distinct legal
entity. However there are certain occasions when it may be decided by the court that it needs to
2 Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549
3 Jason Harris, Anil Hargovan, ‘Corporate groups: the intersection between corporate and tax law Commissioner of
Taxation v BHP Billiton Finance Ltd’ (2010) 32 Sydney Law Review 723
4 Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769
5 Ian Ramsay and David Noakes, ‘Piercing the Corporate Veil in Australia’ (2001) 19 Company and Securities Law
Journal 250
6 Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 25

look beyond these legal personality and find the real controllers of the company. Keeping in
view of these definitions, this doctrine can be simply explained as the direct opposite of the
principle of limited liability. Even if there are a number of methods that are available in case of
the Limited liability of a company, a problem is also present as the application of this notion may
cause problems of over inclusion that may prove to be disadvantageous for the creditors of the
company.7 Therefore it can be said that the law has overprotective of this concept of corporate
law. As against this situation, when the court decides to lift the corporate veil, the personal assets
of the members of the company may also become a part of litigation in the same way as is the
case with sole proprietors or partnerships.
The courts have been provided exclusive jurisdiction by the common law that they may look
beyond the corporate veil or lift the corporate veil, anytime for the purpose of evaluating the
operating mechanism that is working in cooperation.8 In view of the wide range of remedies that
may be delivered by the courts, the issue of piercing the veil is one of the significant issues, that
is brought before the courts under the common law. But in this regard, it also needs of mentioned
that informal organizations, widespread censure, has to be faced by the application of these
notion due to reason that it sacrifices substance for form. Probabilities were the reasons that
Windeyer J had made the comment in Gorton that as a result of this approach, the law has been
turned into "unreality and formalism".9
Hence, when a decision is made by the court to pierce the veil and look beyond separate
personality of the company, the courts are going to consider the members of the company as the
owners of the assets that were held by the company had also as if the members of the company
7 Anil Hargovan, ‘Piercing the Corporate Veil on Sham Transactions and Companies’ (2006) 24 Company and
Securities Law Journal 436
8 Anil Hargovan and Jason Harris, ‘Piercing the Corporate Veil in Canada: A comparative analysis’ (2007) 28 The
Company Lawyer (UK) 58
9 Gorton v Federal Commissioner of Taxation (1965) 113 CLR 604

were continuing their business in the form of their personal business. Similarly in such a case, it
is available to the go to attribute the rights and liabilities grounding to the company to these
members. This can be described as "disregarding the corporate entity". However, the authority of
the Commonwealth related with lifting the corporate veil has been described as “incoherent and
unprincipled”. In Briggs v James Hardie, the same comment was made by Rogers J., while
dealing with the issue, it has been said that there is a lack of common and unifying principle that
underlies the decision of the courts that the corporate veil needs to be pierced in a particular case.
Even if an ad hoc clarification may be presented by the courts but there is still a lack of a
principled move towards it that can be seen in the applicable authorities. Some of the experts
have also mentioned in this context that the major problem that can be seen in Salomon's case
was not mainly concerned with the claim made in favor of separate identity.10 But it was elated
with the failure of English courts to provide an explanation regarding what needs to be
considered by the boards than they are going to find the principle of separate identity and also
the circumstances where the courts may decide against implementing the contracts related with
corporate formation.
Therefore, it is clear that a power has been granted to the common-law courts according to which
they can design to lift the veil and ignore the rule that provides for the limited liability of
corporations in certain cases. Due to this reason, in such a case, the members of the company
will be treated as personally responsible for the liabilities of their company even if the rule of
limited liability provides that a company has a distinct identity that is separate from its members.
It also needs to be mentioned in this regard that the issue of piercing the corporate veil is one of
the most litigated issues under the corporations’ law. The result is that there are several general
factors that have to be considered by the courts when they are going to decide if the corporate
10 Salomon V. Salomon [1897] A.C. 22

veil needs to be lifted in the particular case or not. The reason behind this position is that
generally the courts support the maintenance of the separate identity of the corporations as being
distinct from the identity of their owners. Hence, the fact related with the separate identity of the
company will be ignored by the court only if the court comes to the conclusion that a partnership
is present between the companies that are a member of the group or if the company is considered
as a mere sham or facade or when the purpose behind the creation of the company is only to
evade a legal or a fiduciary duty. Hence, it can be briefly stated that after the decision given in
Salomon, there have been a number of discrete factors recognized by the courts that allow the
courts to decide that the veil should be lifted in a particular case. Some of the factors have been
discussed below:
Agency: according to the rule of separate identity of a corporation, companies considered to be a
distinct legal entity, and it is treated as being separate from the members, also provides that the
purpose of the companies not to act as the agent on behalf of its shareholders. Therefore, when
such a thing takes place, the courts are ready to lift the corporate veil. Rowland J had discussed
this issue in Barrow v CSR Ltd and mentioned that when the court adds that the conclusion that
the patent company had the accountability for the actions of subsidiary company concerning an
employee, the court will be ready to lift the veil.11 While dealing with the issue, the court stated
that the effect will be the same whether the issue is mentioned by using the terms of agency law
in terms of control or if it is claimed that there was proximity between the parent company and
the employees of subsidiary or if it is considering terms of piercing the veil.
It is worth mentioning that a unique judicial approach has not been adopted by the courts in order
to decide if it can be said that the company has been acting as an agent. The result is that it
becomes little difficult to rationalize various decisions of the courts. The Electric Light v
11 Barrow v CSR Ltd (Unreported, 4 August 1988, Supreme Court of Western Australia, Rowland J)

Cormack provides a good example in this regard. Here the court had decided against lifting the
veil. In this case there was a one-man company, and it entered into a contract with the plaintiff
regarding the use of the power supplied by them for two years. It was also agreed that the
company will not install any alternative source of power in this period. But in these two years,
the defendant decided to sell the company to another corporation and he became the manager
and also the main shareholder of the new corporation. Hence, this new company decided to
install energy power other than the one supplied by the plaintiffs. While dealing with the issue,
the court was of the opinion that in this case there was no need to lift the veil and to consider the
act as a personal undertaking. The court stated that there was no evidence which suggested that
the business was sold by the defendant only for the purpose of evading his personal liability
under the contract.
Generally the major reason due to which the courts, particularly in case of small corporations,
are in favor of preferring the rules of agency law is because the courts are in favor of reducing
the severity of energy that may be caused in cases where the corporate veil has been lifted.
Fraud: generally, fraud is alleged when the company is used by its owners only as a predicate for
evading their responsibilities imposed by law. This can be the case where the owners of the
company are intentionally using the corporate form in order to deny the pre-existing legal rights
of the creditors. An example can be given of Re Edelsten ex parte Donnelly.12 In this case the
court could not find out fraud by the owner of the company who had refuted his liabilities in
favor of the creditors on account of the notion of limited liability. In view of the circumstances,
the court had to find out if the corporation has been incorporated and used for the purpose of
evading a legal obligation or in other words to perpetuate fraud, as claimed by the trustees of the
companies. Therefore in this case, the court arrived at the conclusion that "the claim of fraud is
12 Re Edelsten ex parte Donnelly (Unreported, Federal Court, Northrop J, 11 September 1992)

certainly round. This argument can succeed only if the argument of sham is also successful. The
reason behind this position is that if Edeleston has not required or debilitating property, there was
no duty under the Act that can be evaded. The claim according to which VIP group had been
used for the purpose of perpetuating fraud was coincidence, and it stood or fell along with the
claims made in favor of considering the transitions through which the property has been obtained
by VIP group as sham."
In the end, it can be stated that lifting the corporate veil is a highly controversial topic under the
corporate law. This topic will remain to be controversial even in the coming times. As mentioned
in the present work, the act of piercing the veil can be described as an exceptional act that has
been developed by the courts. According to the general rule, the courts usually favor the
maintenance of the separate personality of a corporation which provides that a company has its
own separate identity, and it is distinct from its shareholders. Therefore, the company is
considered to have its own rights and obligations. The high threshold that is present in case of
making a decision to pierce the veil has also been reaffirmed by the High Court. The Court had
also mentioned that there are certain circumstances, when the personal liability of director may
arise regarding the actions of the company. Similarly, the doctrine of veil piercing can be called
upon when the shareholders blur the difference that is present in the company and its members.
Consequently, generally the courts are against the decision to pierce the veil and to and consider
the members of the company for the purpose of imposing liabilities of the company on them. But
there are certain circumstances, like facade or sham, groove enterprise, agency or cases involving
unfairness where the courts do not hesitate to look beyond the separate identity of corporation
and hold the members of the company has personally liable for the obligations of the

corporation.. In order to achieve this objective, the courts do not hesitate to disregard one of the
basic principles of corporations’ law that is the distinct identity of a corporation.

Bibliography
Anil Hargovan and Jason Harris, ‘Piercing the Corporate Veil in Canada: A comparative
analysis’ (2007) 28 The Company Lawyer (UK) 58
Anil Hargovan, ‘Piercing the Corporate Veil on Sham Transactions and Companies’ (2006) 24
Company and Securities Law Journal 436
Helen Anderson, ‘Piercing the Veil on Corporate Groups in Australia: The Case for Reform’
[2009] 33 Melbourne University Law Review 333
Ian Ramsay and David Noakes, ‘Piercing the Corporate Veil in Australia’ (2001) 19 Company
and Securities Law Journal 250
Jason Harris, Anil Hargovan, ‘Corporate groups: the intersection between corporate and tax law
Commissioner of Taxation v BHP Billiton Finance Ltd’ (2010) 32 Sydney Law Review 723
Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 25
Case Law
Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769
Barrow v CSR Ltd (Unreported, 4 August 1988, Supreme Court of Western Australia, Rowland
J)
Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549
Gorton v Federal Commissioner of Taxation (1965) 113 CLR 604
Re Edelsten ex parte Donnelly (Unreported, Federal Court, Northrop J, 11 September 1992)
Salomon V. Salomon [1897] A.C. 22
Taxation v BHP Billiton Finance Ltd’ (2010) 32 Sydney Law Review 723