Issues of Separate Identity and Piercing the Corporate Veil

The case discusses the issues related to the separate identity of the company and piercing the corporate veil. It explains the principles of limited liability and separate identity of a corporation. The case also discusses the circumstances under which the corporate veil can be lifted by the courts. The case cites examples of cases where the corporate veil was lifted and the real identity of the controllers of the company was considered.

Issue:
(i) The issues that are present in this case include the validity of the contract that has
been created by Sara as an agent of the undisclosed principle with Gabby.
(ii) The second issue is related with the enforceability of the contract that was created by
the supplies purchaser of Terry's Terrific Designs, Peter with Mary for purchasing 15
grams of gold at the price of $1500 even if Peter was prevented from buying gold by
Terence, the owner of the business.
(iii) The third issue is related with the enforceability of the contract against Terence that
was created by Peter after he was fired from service, but still he purchased diamonds
worth $5000 from Gordon and disappeared.
Rule:
(i) In order to deal with the above-mentioned issues, the principles of the law of agency need to
be applied. For example, the first issue is related with the agent of undisclosed principle. The use
of undisclosed agency agreements can be commonly found in the commercial world. For
example a person has entered into a contract for leasing a motor vehicle from ABC Leasing
Company and such person would ordinarily believe that he has a contract with such company.
But the truth can be that the person has contracted with another company who has given
authority as principal to ABC Leasing to act as its agent and enter into a contract on its behalf.
Therefore in such a case, both the agent as well as the undisclosed principle are allowed by the
law to sue and be sued under such a contract unless it has been expressly or implicitly mentioned
in the contract that the right to sue or be sued is confined to the named parties. However there are
certain anomalies present in this doctrine of undisclosed principle. The reason is that this

doctrine runs parallel to the principle of privity of contract. Privity of contract is a principle of
the law of contract according to which the parties to a contract are legally bound to each other
only and not with third-party. However, the doctrine of undisclosed principle is justified on the
grounds of commercial convenience. An example of the agents of undisclosed principle can be
given regarding the stockbrokers (Whincop, 1997). In most of the cases they transact securities
on behalf of the clients, but they do so in such a way that they appear to be the principals (Gelb,
1982). In a recent decision delivered in Abigroup Contractors Pty Limited v Peninsula Balmain
Pty Limited (2001), the court stated that the silence of a developer regarding agency agreement
that has an adverse impact on the interests of the building contractor was sent to be deceptive or
misleading (Sealy and Hooley, 2009).
(ii) An agent may have the actual or the implied authority to enter into a contract on behalf of its
principal. Therefore such a contract is binding against the principal if the agent had actual or
implied authority to do so. In this context, actual authority is provided to the agent when the
agent is granted authority, expressly or impliedly by the principal to act on its behalf. For
example, when a company passes a resolution empowering the agent to bind accompanying case
of certain contracts, it can be said that express actual authority has been delivered to the agent.
On the other hand, implied authority of the agent takes place when, in view of the position of the
agent, it can be expected by the third parties that the agent had the power to enter into contracts
on behalf of the principle. The implied authority of the agent differs on the basis of their position
with the principal and also the type of contract. For example, while it can be expected that the
managing director will have the power to enter into a major supply contract, and therefore would
have the implied authority to do so. However, regarding a junior employee of the company the

same cannot be said even if such employee can be considered to have the implied authority of
entering into minor contracts on behalf of the company as a result of his position in the company.
There are certain cases, when actual authority may not be granted to the agent, but still a third-
party may be allowed by the law to enforce the contract created by the agent, against the
principal if it can be established that the agent and ostensible authority. Whether the agent had
ostensible authority mainly depends on the way. The agent was presented by the principal to the
third-party.
(iii) Similarly, the law provides that when an employee acting as an agent had been fired but this
fact was not known to a third party and it was under the impression that that employees had the
authority to enter into a contract on behalf of principal, such contract will be binding against the
principal. However, in such a case, the principal may have the option to sue the agent for the loss
suffered by it.
Application:
(i) In this case, Sara was acting as an agent of Terence, but he forgot to tell this fact to
Gabby. As a result, the contract created by Sara with Gabby can be enforced by
Terence and also by Sara. The reason is that, Sara was acting as the agent of
undisclosed principle, Terence. Therefore even if Gabby was not aware of the fact but
she had also entered into a contract with Terence.
(ii) In the second issue, Peter was acting as an agent of Terence. Therefore, although
Terence had told Peter that he should not buy any more gold, but this fact was not
known to Mary. Therefore the contract, created by Peter as an agent of Terence is
enforceable against him by Mary.

(iii) Similarly in the third issue, although Terence had fired Peter from service, but this
fact was not known to Gordon. Therefore, when Peter contacted him through the
business e-mail system, he assumed that Peter still had the authority to enter into
contracts on behalf of Terence. Therefore this contract is also enforceable against
Terence, although Terence can sue beater for the recovery of his loss.
Conclusion:
(i) In the first case, the contract created with Gabby can be enforced by Sara and also by Terence.
(ii) In the second case, the contract created by Peter with Mary can be enforced by many against
Terence.
(iii) Gordon can also enforce the contract created by Peter against Terence, although Terence can
sue Peter.

Question 2
Issue:
(i) The issue in this case is related with the separate identity of the company and piercing
the corporate veil. It has to be seen if the creditors of United Chemicals Pty Ltd can
sue Roger personally for the debt of the company.
(ii) The second issue is if Roger can use the doctrine of separate identity of a corporation
for circumventing a legal provision.
Rule:
(i) Among the main motivations behind the formation of a separate legal entity is the
limited liability enjoyed by its members and controllers regarding the obligations of
the business of the company (Whincop, 1997). Therefore, in the form of a separate
entity, companies incorporated for the purpose of protecting the shareholders of the
company from personal liability regarding the obligations of the business or claims
related with negligence (Farrar, 1990). That may be brought against the business. As
a result of legal principle, the shareholders of the company are not considered as
being personally liable for the obligations of the company including the debts of the
companies beyond the initial capital investment made by the investors and at the
same time, the shareholders do not have any proprietary interest in the property
owned by the company as a result of the principle of separate identity and limited
liability (Peate v Federal Commissioner of Taxation (1964) 111 CLR 443). This
principle provides that the shareholders of the company can be considered liable only
towards the company and not towards the third parties. As a result, a veil is created
between the shareholders and the third parties (Briggs v James Hardie & Co Pty Ltd,

1989). But it needs to be granted that there are certain circumstances where this veil
can be lifted by the courts. This can be done by the courts in cases involving fraud or
misleading use of legal entity (Thompson, 1991).
It is available to the courts left the corporate veil. In this case a legal decision is made by the
courts consider the rights and obligations of company as the rights and liabilities of the
shareholders. Generally, Corporation is treated by the law as a distinct legal person. However,
there are certain exceptional circumstances where the court may decide to pierce the corporate
veil (Ottolenghi, 1990). An example in this regard can be given of the case where a businessman
quits his job as a director and he has signed a contract according to which it cannot compete with
the company for a particular period of time. In order to avoid this stipulation, the businessman
may form a company that competes with the former company. In such it is technically, it will be
the company that is competing with the former company and not the former director. However in
such a case, it is likely that the court may arrive at the conclusion that the newly formed
company is merely a sham on a cover and therefore, the former employee can by the previous
company for the breach of contract.
(ii) The leading case in this regard is that of Salomon v A Salomon & Co Ltd [1896] UKHL 1.
This is a landmark case related with company law. The unanimous ruling delivered by the House
of Lords had the impact of formerly upholding the doctrine of corporate personality. The effect
of this ruling was that the creditors of an insolvent company were not allowed by the law to suit
the shareholders of the company to repay the debt of the company.
Application:
(i) In the present case also, Roger Smith owns 92 shares out of the 100 shares in United
Chemicals Pty Ltd. Now the company is not in a position to give the last installment

of $200,000. As a result, Industrial Machines Ltd wants to sue Roger personally, as
they know that Roger has the means to repay the debt. But it needs to be noted that in
the present case as a result of the application of a separate identity, United Chemicals
Pty Ltd is a distinct entity, and it is separate from its shareholders. As a result, the
shareholders of the company cannot be sued personally for the debts of company.
(ii) In the same way, Roger had established another company under the name of
Explosive Industries Pty Ltd. He has 99 shares in the company and his wife owns 1
share. This company has been formed by Roger to circumvent a Commonwealth
legislation according to which a person who has a criminal conviction cannot be
granted an explosive manufacturing license. As Roger was convicted of theft, he
forms a company and asked his wife to lodge an application for the grant of license
on behalf of the company. However, the Department of industry declines to grant the
license and points out the prior criminal conviction of Roger as the reason for
declining the application. In such cases it is available to the court to pierce the
corporate veil and to look at the identity of the persons who are running the company.
Conclusion:
(i) It can be concluded in the present case that the creditor of United Chemicals,
Industrial Machines Ltd. cannot to Roger personally, for the recovery of the last
installment of $200,000.
(ii) The corporate veil can be lifted and the real identity of the controllers of the company
can be considered. The reason is that the other company, Explosive Industries Pty
Ltd. had been formed by Roger only to circumvent the Commonwealth's legislative
provision. As a result, the company is a sham or a facade. Therefore, the grant of

license can be denied to Explosive Industries Pty Ltd. on account of prior criminal
conviction of Roger.

References
C Mitchell, ‘Lifting the Corporate Veil in the English Courts: An Empirical Study’ (1999) 3
Company Financial and Insolvency Law Review 15.
Farrar, J 1990, ‘Fraud, Fairness and Piercing the Corporate Veil’, 16 Canadian Business Law
Journal 474
Gelb, H., 1982 ‘Piercing the Corporate Veil – The Undercapitalization Factor’, 59 Chicago Kent
Law Review 1, 2
Ottolenghi, S., 1990 ‘From Peeping Behind the Veil to Ignoring it Completely’, 53 The Modern
Law Review’ 338
Sealy L.S. and Hooley, R.J.A., 2009 Commercial Law: Text, Cases and Materials 4th edn OUP
Thompson, R. 1991, ‘Piercing the Corporate Veil: An Empirical Study’, 76 Cornell Law Review
1036
Whincop, M., 1997, ‘Overcoming Corporate Law: Instrumentalism, Pragmatism and the
Separate Legal Entity Concept’ 15 Company and Securities Law Journal 411, 420
Case Law
Salomon v A Salomon & Co Ltd [1896] UKHL 1
Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549
PENINSULA BALMAIN PTY LTD V ABIGROUP CONTRACTORS PTY LTD [2002] NSWCA
211