Corporation and Contract Law: Evaluating the Role of Piercing of Corporate Veil in Australia

This report evaluates the role of piercing of corporate veil in Australia and its application in holding parties liable for their actions. The report discusses various factors based on which courts avoid the separate personality of corporations and lift the corporate veil to hold parent companies and directors liable for their actions.

Corporation and Contract Law

INTRODUCTION
Limited liability and separate legal entity are two of the key characteristics of a
corporation due to which people incorporate companies while operating their business
because they enable the corporation to enter into legal contracts under its own name. 1 The
liability of these contracts imposes on the corporation rather than its members. Due to the
option of limited liability, parties prefer to incorporate corporations while operating their
business since they can protect their personal assets; it is not the case in other business
structures such as sole trader or partnership. However, many times members misuse these
characteristics to gain an unfair advantage or conduct illegal activities. In such case, the court
pierces the corporate veil to set aside the element of the separate legal entity in order to hold
its members liable who take decisions for the corporation.2 Many argue that the courts in
Australia are reluctant to avoid the characteristics of the separate legal entity of a company
while providing their judgement because there is no legislation which requires them to do so.
However, this is not the case because there are many cases which are good examples that
prove courts avoid the principle of corporate veil while providing their judgement to hold the
parties liable for their actions. In this report, the role of piercing of corporate veil will be
evaluated to understand this concept. Various reasons will be given in the report which
argues that the Australian courts are not reluctant to depart from the separate legal entity
based on the fact that there is no legislation under which they have to do so. Relevant cases
will be evaluated in the report to justify arguments.
1 Rob McQueen, A Social History of Company Law: Great Britain and the Australian Colonies 1854–1920
(Routledge, 2016).
2 Helen Anderson, ‘Challenging the Limited Liability of Parent Companies: A Reform Agenda for Piercing the
Corporate Veil,’ (2012) 22 (2) Australian Accounting Review 129-141.
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PIERCING OF CORPORATE VEIL
This doctrine is an exception to the element of the separate personality of the
corporations. It is a key characteristic of a company which attracts many people to
incorporate a corporation while managing their business. The corporate structure protects
their private assets since the company has a distinct legal entity from its owners.3 This
concept was established by the court in the landmark judgement of Salomon v Salomon & Co
Ltd4 case. This is a relevant case in which the court provided its judgement based on the
element of a separate legal entity and limited liability. In this case, Salomon started a
company by transferring his business in which he was the majority shareholder along with his
family members. He was also holding debentures of the company. Later the corporation went
into liquidation in which Salomon received money from his debentures; however, the
unsecured creditors of the enterprise did not receive their due payment.5 They filed a case
against Salomon by provided that he is the majority shareholder along with his family
members based on which he should be held liable to pay their debts. They also argued that
the issuing of the debentures was a sham. The court evaluated the facts of the case and
provided a judgement that the legal entity of Salomon and Co Ltd is separate from Salomon.
The fact that he is a majority shareholder of the enterprise did not change that it has a difficult
entity.
Moreover, the information regarding debentures was included in the public
documents based on which they are valid. The court provided that Salomon’s liability is
limited and his personal assets cannot be used by the unsecured creditors to set off their
debts. Based on the principle established in this case, many judgements were given by the
court in which the separate entity of the company is identified. In Peate v Federal
3 David Kershaw, Company law in context: text and materials (Oxford University Press, 2012).
4 (1897) AC 22
5 Simon Goulding, Principles of company law (Routledge, 2013).
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Commissioner of Taxation6 case, it was held by Windeyer J that a company is considered as a
person in the eyes of the law based on the element of separate legal personality. This
principle was recognised by the Australian courts under which the actions of the company
were its own, and members’ liability is limited to the amount which they invest in the
corporation. Along with the principle of the separate legal entity, the courts have also
recognised the veil piercing provision. It is referred to an exception to the rule of the separate
legal entity in which the court did not take action against the company rather hold the
shareholders liable.7 After the judgement of Salomon v Salomon & Co Ltd case, the courts
situated in England, United Kingdom and Australia have applied the exception to the general
rule of the separate legal entity in many cases.
APPLICATION OF PIERCING OF CORPORATE VEIL BY AUSTRALIAN
COURTS
In Australia, the piercing of corporate veil was defined by Young J in the judgement
of the case Pioneer Concrete Services Ltd v Yelnah Pty Ltd8 in which it was held that the
courts recognises the element of separate legal entity, however, they will on certain occasion,
look behind the corporate veil in order to identify the real controllers of the company.9
Herron CJ argued in the case of Commissioner of Land Tax v Theosophical Foundation Pty
Ltd10 that in Australia it is difficult to identify cases in which this principle applies. There are
many reasons given for non-application of this rule which include failure to identify the
reasonable ground or lack of legislative framework which recognises this doctrine. Hill J
6 (1964) 111 CLR 443
7 David Parker, ‘The Company in the 21 st Century: Piercing the veil: reconceptualising the company under
law,’ (2015) 10 (2) Journal of Business Systems, Governance & Ethics 25-33.
8 (1986) 5 NSWLR 254
9 Ian M Ramsay and David B Noakes, ‘Piercing the Corporate Veil in Australia,’ (2001) 19 Company and
Securities Law Journal 250-271.
10 (1966) 67 SR (NSW) 70
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provided in case of AGC (Investments) Ltd v Commissioner of Taxation11 that ambiguity
exists in situtions where the court can pierce the corporate veil.
However, this did not mean that the Australia courts are reluctant to avoid the
separate legal entity of corporations based on the fact that there is no legislative framework
established by the government for the same. There are many cases in which the Australian
courts have pierced the corporate veil while avoiding the element of the separate legal entity
in order to hold the members of the company personally liable for its liabilities. Jenkinson J
provided similar views in the judgement given in the case of Dennis Willcox Pty Ltd v
Federal Commissioner of Taxation12. It was held in this case that if the partnership which is
formed between the company and its member is a sham to conduct fraud and the company is
designed to conduct illegal activities, then the court can pierce the corporate veil in order to
hold them liable for their actions. The Australian courts have identified various discrete
factors based on which courts avoid the separate personality of corporations.13 These factors
are grouped into broad categorised by the court. These factors include agency, group
enterprise, fraud, unfairness/justice, and sham or façade. As per these factors, veil is pierced
to hold the members guilty without a legislative framework. The judgement given in Lazarus
Estates Ltd v Beasley14 case further proves this point. In this case, Denning LJ provided that
the court will not allow anyone to take unfair advantage of the company to conduct fraud.15
This is a relevant judgement given by Denning LJ after which it was clear that
Australian courts will rely corporate veil piercing to hold those parties liable who unfairly use
the principle of the separate legal entity. This doctrine puts a check on their actions and
11 (1992) FCA 313
12 (1988) 79 ALR 267
13 Debanjan Mandal and Rudresh Mandal, ‘Developing a Framework for Adjudication in a Phoenix Insolvency
Situation: Can the Enterprise Theory Offer a Viable Solution?,’ (2018) 39 (3) Business Law Review 64-70.
14 (1956) 1 QB 702
15 Alistair Alcock, ‘Piercing the Veil-A Dodo of a Doctrine,’ (2013) 25 The Denning Law Journal 241-254.
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enforces them to take corrective and legal actions while managing their operations.16
Therefore, the Australian courts rely on this doctrine to hold the parties liable for the fraud
conducted by them while misusing the corporate structure. A good example was given in the
judgement of Re Neo17 case. In this case, the judgement was given by the Immigration
Review Tribunal that was asked to review a decision which was made for a visa application
which was refused. This application as refused because the corporation which was providing
the sponsorship was incorporated on the same day. Moreover, the corporation has not started
to carry out the operations of the business. The Tribunal provided in its judgement that the
corporation is used by the parties as a mere vehicle to circumvent the Australian migration
law.18 The incorporation of the company is only a façade to ensure that the applicants remain
in the country based on which the court refused the application of visa.
TORTIOUS LIABILITIES
Along with holding the members liable for their operations, the Australian courts use
this principle against parent companies which have effective control over their subsidiaries to
impose their tortious liability on them.19 This element was established in the landmark
judgement given by Australia court on corporate veil piercing in the case of CSR v Young20.
This is a relevant case which shows that the Australia courts lift the corporate veil to hold the
parent corporation liable for the actions of subsidiary. In this case, CSR Company (CSR) was
appointed as the agent by Australian Blue Asbestos Ltd (ABA) for the purpose of conducting
business transactions with them. As per the relationship between the companies, the holding
corporation has complete control of the operations and decisions taken by the subsidiary
16 Helen Anderson, ‘Piercing the veil on corporate groups in Australia: the case for reform,’ (2009) 33 Melb. UL
Rev. 333.
17 (Unreported, Immigration Review Tribunal, Metledge M, 30 July 1997)
18 Peter Oh, ‘Veil-Piercing,’ (2010) 89 Tex L. Rev. 81.
19 John Matheson, ‘The modern law of corporate groups: An empirical study of piercing the corporate veil in the
parent-subsidiary context,’ (2008) 87 NCL Rev. 1091.
20 (1998) Aust Torts Reports 81-468
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company. As per this relationship, the decisions made by the holding company are enforced
on the subsidiary enterprise. Due to the actions of the company, a kid who was living near the
town suffered from cancer. A suit was filed against both ABA and CSR Company for the
damage suffered by the kid. The Court of Appeal provided that the tort liability is imposed on
the parent company for the actions of subsidiary if effective control is exercised. Based on
which, both ABA and CSR company were held liable by the court.21 Thus, the companies
which control the operations of their subsidiaries can also be held liable for the tortious acts
of their subsidiary companies.
DIRECTOR DUTIES
Australian courts rely on corporate veil piercing to hold directors liable for the
decisions which they take in the company. Although, a corporation has a separate entity;
however, it is an artificial person that cannot take its own decisions. The directors of the
company are considered as its mind who taken all the decisions for the enterprise. Since they
take all the business decisions, they are obligated for liabilities of the company by piercing
the corporate veil. In case of Australia, various provisions are given in the Corporations Act
200122 which imposes duties and responsibilities on directors of the company. While
discharging their duties and taking business decisions, if these duties are violated by the
directors, then they can be held personally liable by the court. There are various cases in
which the court held the directors of the company liable for its actions. In the case of ASIC v
Adler23, this principle was applied by the court in order to hold the director liable.
The director used his position for ulterior motives, and he had failed to ensure that a
standard is maintained by conducting the operations of the business based on which he was
21 Lee McConnell, Extracting Accountability from Non-state Actors in International Law: Assessing the Scope
for Direct Regulation (Routledge, 2016).
22 Corporations Act 2001 (Cth)
23 (2002) 41 ACSR 72
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held personally liable. In this case, the director was also a majority shareholder in another
corporation, and he misused his position in one company to get unfair advantage in another
based on which the court hold him personally liable.24 Thus, directors who did not hold shares
are still obligated under the piercing of corporate veil if they violate their duties which are
given under section 180, 181, 182, 183, 588G or others. The corporate veil which protects the
rights and actions of directors is pierced by the courts if it is identified that the power and
position of directors are used for illegal purposes or for gaining personal advantages.
CONCLUSION
Based on the above observations, it can be concluded that corporate veil can be
pierced and it enables the courts to overlook the provision of the separate legal entity of the
company in order to hold its members personally liable for its actions. In case of Australia, a
legislative framework has not been established for this doctrine; however, it did not mean that
the courts are reluctant to apply this principle. Various cases are discussed in the report which
shows that the Australian courts apply the principle of piercing of corporate veil in
circumstances such as fraud, sham or façade, group enterprises, agency, and unfair practices.
The objective of this doctrine is to ensure that parties did not misuse the element of limited
liability and separate legal personality of the company to gain an unfair advantage or causing
harm to other parties. In the case of Australia, the courts also rely on this doctrine to hold the
real parties liable who conduct fraud or gain an unfair advantage by misusing the corporate
structure of the company. Therefore, it is argued that the Australian courts are not reluctant to
apply the doctrine of piercing of corporate veil because they rely on this principle to ensure
that corporations continue to operate in a lawful and ethical way which benefits the whole
country.
24 Jessica Viven-Wilksch, ‘The adventures of good faith: can legal history and international developments
provide guidelines for Australia?,’ (2015) 40 (2) Alternative Law Journal 89-92.
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BIBLIOGRAPHY
Articles/Books/Reports
Alcock, Alistair, ‘Piercing the Veil-A Dodo of a Doctrine,’ (2013) 25 The Denning Law
Journal 241-254.
Anderson, Helen, ‘Challenging the Limited Liability of Parent Companies: A Reform
Agenda for Piercing the Corporate Veil,’ (2012) 22 (2) Australian Accounting Review 129-
141.
Anderson, Helen, ‘Piercing the veil on corporate groups in Australia: the case for reform,’
(2009) 33 Melb. UL Rev. 333.
Goulding, Simon, Principles of company law (Routledge, 2013).
Kershaw, David, Company law in context: text and materials (Oxford University Press,
2012).
Mandal, Debanjan and Rudresh Mandal, ‘Developing a Framework for Adjudication in a
Phoenix Insolvency Situation: Can the Enterprise Theory Offer a Viable Solution?,’ (2018)
39 (3) Business Law Review 64-70.
Matheson, John, ‘The modern law of corporate groups: An empirical study of piercing the
corporate veil in the parent-subsidiary context,’ (2008) 87 NCL Rev. 1091.
McConnell, Lee, Extracting Accountability from Non-state Actors in International Law:
Assessing the Scope for Direct Regulation (Routledge, 2016).
McQueen, Rob, A Social History of Company Law: Great Britain and the Australian
Colonies 1854–1920 (Routledge, 2016).
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Oh, Peter, ‘Veil-Piercing,’ (2010) 89 Tex L. Rev. 81.
Parker, David, ‘The Company in the 21 st Century: Piercing the veil: reconceptualising the
company under law,’ (2015) 10 (2) Journal of Business Systems, Governance & Ethics 25-33.
Ramsay, Ian M and David B Noakes, ‘Piercing the Corporate Veil in Australia,’ (2001) 19
Company and Securities Law Journal 250-271.
Viven-Wilksch, Jessica, ‘The adventures of good faith: can legal history and international
developments provide guidelines for Australia?,’ (2015) 40 (2) Alternative Law Journal 89-
92.
Cases
AGC (Investments) Ltd v Commissioner of Taxation (1992) FCA 313
ASIC v Adler (2002) 41 ACSR 72
Commissioner of Land Tax v Theosophical Foundation Pty Ltd (1966) 67 SR (NSW) 70
CSR v Young (1998) Aust Torts Reports 81-468
Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267
Lazarus Estates Ltd v Beasley (1956) 1 QB 702
Peate v Federal Commissioner of Taxation (1964) 111 CLR 443
Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254
Re Neo (Unreported, Immigration Review Tribunal, Metledge M, 30 July 1997)
Salomon & Co Ltd (1897) AC 22
Legislation
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Corporations Act 2001 (Cth)
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