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

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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