Lifting the Corporate Veil: Circumstances and Implications

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Commercial and Corporate Law for Accountants

1
After its incorporation, a company becomes a separate legal entity which has separate
rights and liabilities from its owners and directors. It is considered as an artificial
person that is capable of forming legal contracts, holding properties under its name and
suing others.1 Since a company is not a natural person, the responsibility of taking its
decisions is available to its shareholders and directors. Even though directors take the
business decisions on behalf of the company; however, they cannot face the legal
consequences for those decisions. The liability of directors and shareholders are limited
in the company due to the corporate veil that differentiates the rights and liabilities of
the company from its members.2 However, this veil can be lifted by the court, and a
personal liability can be imposed on the directors of the company in many
circumstances. In this essay, the circumstances in which Australian courts can lift the
corporate veil will be evaluated. Different case laws will be analysed in this essay in
which the court lifted the corporate veil to hold the members of the company liable for
their actions.
While establishing the liability of directors and members of a company, the House of
Lords provided the leading judgment in the case of
Salomon v Salomon & Co Ltd.3 In this
case, the court established two relevant rules that are considered as a foundation for the
concept of the corporate veil. The court held that a company has a separate legal entity
and the liability of its members and directors is limited; hence, they cannot be held
personally liable for its debts. This rule was further recognised by the court in cases
such as
Lee v Lee’s Air Farming Ltd.4 However, it gives an unfair advantage to directors
of the company since they are able to avoid legal consequences for their decisions which
encourage them to engage in illegal trading practices. They are more likely to engage in
fraudulent practices in the company when they know that they cannot be held
personally liable for their actions.5 In this regarding, the provision of ‘lifting or piercing
of corporate veil’ plays a major role since it gives the right to courts to hold the real
perpetrators liable for their actions.
1 Rob McQueen,
A Social History of Company Law: Great Britain and the Australian Colonies 1854–1920
(Routledge, 2016).
2 Len Sealy and Sarah Worthington,
Sealy & Worthington's Cases and Materials in Company Law (Oxford
University Press, 2013).
3 (1897) AC 22
4 [1960] UKPC 33
5 Brenda Hannigan,
Company Law (Oxford University Press, 2018).

2
Based on this principle, the courts can overlook the corporate veil of a company and
found out parties who are responsible for taking actions on behalf of the company to
ensure that they can be held accountable for their actions. In the case of Australia, the
concept of the lifting of corporate veil is recognised by the courts in many cases in
which the court provided the judgement in favour of the directors of the company to
hold them liable for their actions rather than the company.6 Although there are no
statutory provisions implemented in Australia that recognise the concept of the lifting
of the corporate veil; however, the court has recognised certain circumstances and
incidents when a legal liability can be imposed on the members of the company for their
actions. As per Australian courts, the corporate veil can be lifted in cases such as fraud,
sham or façade, agency, unfairness/justice, and ground enterprises. In
Gilford Motor Co
Ltd v Horne7 case, a person incorporated a new company in order to conduct fraud with
his previous employer in which he was the sole shareholder. It was held by the court
that the objective of the incorporation of the company is to conduct fraud based on
which the corporate veil can be lifted.8
Another relevant case in this regards is
Barrow v CSR Ltd.9 This is a relevant case in this
regarding in this the Supreme Court of Western Australia provided that the parent
company is responsible for the torts of the subsidiary based on the lifting of the
corporate veil. However, in the case of
The Electric Light and Power Supply Corporation
Limited v Cormack10, it was held by the Supreme Court of New South Wales that the
corporate veil cannot be pierced solely based on the fact that only one person is
handling the operations of the company. Until the members misuse their position to
engage in fraudulent practices, the corporate veil cannot be pierced. However, in
Australia, the courts can pierce the corporate veil in order to deliver justice in a
particular case. For example, it was established by the court in the case of
RMS Glazing
Pty Ltd v The Proprietors of Strata Plan No 1444211 that in order to eliminate
unfairness, the corporate veil can be lifted to protect the interest of innocent parties. In
6 Ross Grantham, ‘The corporate veil: An ingenious device’, (2013) 32
U. Queensland LJ. 311.
7 [1933] Ch 935
8 Pey Woan Lee, ‘The enigma of veil-piercing’, (2015) 26(1)
International Company and Commercial Law
Review 28.
9 (Unreported, 4 August 1988)
10 (1911) 11 NSWSR 350
11 (Unreported, 17 December 1993)