Piercing of Corporate Veil in Australian Context

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Corporate and Contract Law

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TABLE OF CONTENTS
Introduction................................................................................................................................2
Element of Separate Legal Entity..............................................................................................2
Doctrine of Piercing of Corporate Veil......................................................................................3
Australian Context.....................................................................................................................4
Situations in which Australian Courts pierce the corporate veil................................................5
Conclusion..................................................................................................................................8
Bibliography.............................................................................................................................10

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INTRODUCTION
Companies are legal entities which have a separate legal personality from its owners, and this
personality provides them various rights such as the ability to form contractual relationship,
purchase, sell or hold assets, sign legal contract, and others.1 The element of separate
personality is referred as a corporate veil which separates the shareholders, directors, and
members of the company from its legal existence. Due to this separate legal existence, the
owners take business decisions in the corporation; however, they did not hold personally
liable for the liabilities of the enterprise. This corporate veil provides protection to the
members of the company, however, this is not an absolute rule, and the corporate veil can be
pierced by the courts to hold the members personally liable. In the case of Australia, the
provision of piercing of corporate veil applies as well under which the courts pierce the
corporate veil to hold the real perpetrators liable for their actions.2 This report will provide
arguments against the statement that Australian courts have been reluctant while departing
from the separate entity of the company because there is no legislation which requires them
to do so. This report will evaluate various reasons based on which the Australian courts
pierce the corporate veil by evaluating the judgements of various Australian cases.
ELEMENT OF SEPARATE LEGAL ENTITY
In order to understand the principle of the doctrine of the corporate veil, it is important to
evaluate the element of the separate legal entity of corporations. This element was established
in the landmark case of Salomon v Salomon & Co Ltd3. Salomon was operating a business of
boot making which he terminated to incorporate a company. He was the majority shareholder
1 Anil Hargovan, ‘Piercing the Corporate Veil on Sham Transactions and Companies’ (2006) 24 Company and
Securities Law Journal 436.
2 RI Bob Tricker and Robert Ian Tricker, Corporate governance: Principles, policies, and practices (Oxford
University Press, 2015).
3 (1897) AC 22

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and debenture holder in the company along with his family members who were also the
shareholders of the company.4 Unfortunately, the corporation went into liquidation in which
the unsecured creditors did not receive their due amount. Salomon received money in the
liquidation for the debentures. The unsecured creditors were upset, and they filed a suit
against Salomon. They argued that he is the majority shareholder along with his family due to
which he should repay the debts of the company. They also provided that the debenture were
a sham, and they are not valid.
The House of Lords provided its judgement based on the element of a separate legal entity
and limited liability. It was held that irrespective of the fact that Salomon is the majority
shareholder along with his family members, the company has a separate legal personality
based on which the liability of Salomon is limited, and he cannot be held personally liable for
its liabilities. Moreover, the information regarding debentures was given in the document of
the company, therefore, they are valid. A similar judgement was given in the court in Lee v
Lee’s Air Farming Ltd5 case in which the court provided its judgement based on the element
of the separate legal personality.6 Furthermore, this element is recognised by the
Corporations Act 2001 (Cth)7 under section 124 in which the rights of companies operating
in Australia are identified.
DOCTRINE OF PIERCING OF CORPORATE VEIL
The element of separate legal entity provides a corporate veil which protects parties such as
directors, shareholders and other officers from being personally liable for the debts of the
corporation.8 However, this veil can be pierced by the court in order to hold those parties
4 Len Sealy and Sarah Worthington, Sealy & Worthington's Cases and Materials in Company Law (Oxford
University Press, 2013).
5 (1960) UKPC 33
6 Lee Roach, Company Law (Oxford University Press, 2016).
7 Corporations Act 2001 (Cth)
8 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.