Separate Legal Personality of a Company and Piercing of Corporate Veil

This article analyzes the concept of separate legal personality of a company and how recently the courts are requested to look behind the corporate veil of the companies and to consider the same as a single entity. It also discusses the instances where the veil of the company is pierced and the reasons which deviate from the principle of separate legal personality to lifting of corporate veil.

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Contents
Solution 1....................................................................................................................................................2
“Frequently the courts have been requested to look behind the corporate veil [of companies] …where to
all outward appearances they seem to operate as a single entity. The Australian courts…have been
reluctant to depart from the separate entity where there is no legislation requiring them to do so.” [Lipton
& Herzberg, Understanding Company Law, 12th Ed, 2004, Thomson]......................................................2
Introduction:................................................................................................................................................2
The concept of separate legal personality....................................................................................................3
Reasons that support Separate legal personality of a company................................................................4
Instances where the courts have regarded the presence of separate legal personality of a company........5
Reasons which deviate from the principle of separate legal personality to lifting of corporate veil........6
Corporate veil – meaning and piercing of veil.............................................................................................7
Instances where veil of the company is pierced.......................................................................................8
Agency................................................................................................................................................8
Fraud...................................................................................................................................................8
Façade and Sham.................................................................................................................................9
Group enterprise..................................................................................................................................9
Shortcoming of piercing the veil.............................................................................................................9
Conclusion.................................................................................................................................................10
REFERENCE LIST...................................................................................................................................11

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Solution 1
“Frequently the courts have been requested to look behind the corporate veil [of
companies] …where to all outward appearances they seem to operate as a single entity. The
Australian courts…have been reluctant to depart from the separate entity where there is
no legislation requiring them to do so.” [Lipton & Herzberg, Understanding Company
Law, 12th Ed, 2004, Thomson]
Introduction:
The Concept of Separate legal Personality is age old principle and which simply emphasis that
every company is an artificial being in law and is not associated with its officers, which implies,
that the acts of the company are its own and are not1. In Salomon v A Salomon & Co. Ltd2, The
House of Lords has given legality to the concept of separate legal personality of company and
has established that a company a distinct from its members and the acts which are carried out by
the members in the name of the company are imposed on the company and are not considered as
the personal acts of the members. 3
Through this article, an attempt is made to analyze the concept of separate legal personality and
how recently the courts are requested to look behind the corporate veil of the companies and to
consider the same as a singe entity, that is, the acts of the members are not considered to be the
acts of the company but the members and the officers are held personally liable for such acts and
they cannot hide behind the corporate veil of the company.
1 Helen Anderson, piercing the veil on Corportae Groups in Australia: The case for reform, 2009, Melbourne University Law
Review, 33(2), 333-367.
2 Salomon v A Salomon & Co. Ltd [1897] AC 22, HL.
3Zuhairah Ghadas, Real or artificial?Jurisprudential theories on corporate personality, 2007, US-China Law Review, 4(5), 6-12.

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The concept of separate legal personality
The concept of separate legal personality of a company submits that a company a distinct from
its members and the acts which are carried out by the members in the name of the company are
imposed on the company and are not considered as their personal acts of the members. There is
no legislature framework that has been framed guarding the concept of the separate legal entity
principle of a company, but, still the principle is established time and again with the help of
several precedents.
In the leading case of Lee v Lee's Air Farming Limited4, it was held that the company is an
independent legal person and the shareholders of the company are distinct from the company,
thus, the owner of the company can also held the position of an employee and is thus has the
capability to act distinct from the company. Also, in Farrar v Farrars Ltd.5 it was held that when
any person sold anything to a company, then, the company has the capacity to purchase such
thing in its individual capacity and the members who have acted to comply with such sale-
purchase transaction is carried on behalf of the company.6
This distinction that is established which has considered the company as a distinct personality in
law from its members is bought with the help of a corporate veil. The corporate veil is an unseen
shield which is present amid the company and the members of the company and which has the
capacity to bring a distinct amid the two and the acts of the company which are carried on by its
members are considered to be the acts of the company alone and will not in any manner hold the
members liable for the same.
4 Lee v Lee's Air Farming Limited 1961 AC 12.
5 Farrar v Farrars Ltd., (1888) 40 ChD 395.
6 Thomas Cheng, ‘ The corporate doctrine revisited: A compararative study of english and the U.S. corporate veil doctorine’,
2011, Boston College International & Comparative Law Review, 34(2), 329-412.

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The concept of separate legal personality of a company is retreated again in the leading cases of
Beckett Investment Manageinent Gioiip v. HaW7 and Stone & Rolls Ltd. V. Moore Stephens8.
The principle of separate legal personality is though developed with the coming of Salomon v A
Salomon & Co. Ltd, but, its recognition is attributed with the passage of time and with slow and
steady approach. Courts have time and again given preference to the Principle of distinct
personality in law. With the presence of distinct personality of a company, a company has the
capacity to make contracts, to limit its liability, to pay tax, to sale and purchase property etc.
Like any other natural human being.
Reasons that support Separate legal personality of a company
The Separate Legal personality of the company has been a well known principle and is a
paramount feature which is attained by a company upon its incorporation. There are various
reasons which are established by the courts in support of the separate legal personality which
includes that it gives a sense of security to the agents of the company. This is because the agents
of the company are not held liable for the acts that are carried on by them in the name of the
company and the acts are considered to be the acts of the company alone. The agents are only the
representatives of the company who are only authorized to act for the company with the
outsiders and thus does not establish any kind of personal relationship with such outsiders and is
analyzed in the leading case of Standard Chartered Bank v Pakistan National Shipping Co [Nos
2 and 4] 9. Father, the company has its own capacity and thus can establish contractual
relationship with the third parties with the help of its authorized representatives and is held in
Briggs v James Hardie & Co Pty Ltd10. In Lee v Lee's Air Farming Limited the company liability
7 Beckett Investment ManageinentGioiip v. HaW [2007] EWCA (Civ) 613.
8 Stone & Rolls Ltd. V. Moore Stephens [2009] UKHL 39.
9Standard Chartered Bank v Pakistan National Shipping Co [Nos 2 and 4][2003] 1 AC 959, 968.
10 Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549.

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is limited in nature which signifies that the liability of the shareholders is not unlimited but is
only to the extent of their shareholdings. The shareholders are not liable for the debts which are
in excess of their value of shares. Further, as per Hobart Bridge Co Ltd v FCT11 a company is
liable to pay tax like any other individual.12
In order to further justify that the concept of separate legal personality is important, it is
important to now evaluate the approach of the courts regarding the applicability of the concept of
separate legal personality.
Instances where the courts have regarded the presence of separate legal personality of a
company
In Salomon v A Salomon & Co. Ltd13, The House of Lords has given legality to the concept of
separate legal personality of company and has established that a company a distinct from its
members and the acts which are carried out by the members in the name of the company are
imposed on the company and are not considered as the personal acts of the members. In
MacLaine Watson & Co Ltd v Department of Trade and Industry14, the courts have regarded that
the concept of the separate legal personality of the company is nothing but a foundation of the
modern corporate law.
The principle of separate legal personality is also given recognition under section 124 of the
corporation act 001, wherein it was held that the company upon its registration is considered as a
11 Hobart Bridge Co Ltd v FCT. (1951) 82 CLR 372
12 Nicholas James, Separate Legal Personality: Legal Reality and Metaphor, 1993, Bond Law Review.
13 Salomon v A Salomon & Co. Ltd [1897] AC 22, HL.
14 MacLaine Watson & Co Ltd v Department of Trade and Industry [1988] 3 WLR 1033

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separate personality in law. The courts have upheld the legality in the leading case of Industrial
Equity Ltd v Blackburn15; and Pioneer Concrete Services Ltd v Yelnah Pty Ltd16.17
But, with the passage of time, there are situations which have arise which are found not to be in
favor of the concept of the separate legal personality of the company and thus it is now important
to understand the same.
Reasons which deviate from the principle of separate legal personality to lifting of
corporate veil
It is a settled principle that as soon as a company is incorporated or registered then it is
considered as a separate legal person in the eyes of law which has the capacity to carry out all the
acts like a normal human being. But, there are various arguments which can be laid which does
not support the presence of this distinction amid the company from its members and officers. It is
found that the company is considered to be an artificial person but in reality it does not have no
real personality of its own. A company can act only to the extent to which the law has permitted
it to do so. The creditors are also at the receiving end because of the presence of the concept of
the separate legal entity. The most profound reason that has been found which has agreed the
courts to lift the veil of the company is because of the presence of fraud, faced and sham, evasion
of tax, etc.
Thus, “Frequently the courts have been requested to look behind the corporate veil [of
companies] …where to all outward appearances they seem to operate as a single entity.
15 Industrial Equity Ltd v Blackburn (1977) 137 CLR 567.
16 Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987) 5 ACLC 467.
17 Gonzalo Puig, A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine, 2000, Volume 7, Number 3.

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It is now first important to understand the concept of piercing the corporate veil.
Corporate veil – meaning and piercing of veil
The concept of corporate veil signifies that a shield or a veil that brings a distinction amid the
members and officers of the company and the company itself and is given legal recognition. It is
the corporate veil that brings in the separate legal personality principle of the company.
But, there are times when this corporate veil of the company is pierced by the courts. When the
corporate veil of a company is pierced by the courts then the company and its officers are not
considered as distinct in law, rather, the distinction amid the two are disregard and the acts that
are carried on by the officers of the company are not considered as the acts carried out in the
name of the company, but, are held to be their personal acts and are held liable for the same
personally. It is not always that the veil of the company is pierced by the court on its own. At
times the company itself seeks the lifting of the corporate veil of the company in order to justify
the acts that are undertaken by the officers of the company in the name of the company.
It was in the leading case of Brewarrana v Commissioner of Highways18 that the term ‘piercing
of the corporate veil ‘was coined and it’s now very popular in its approach. In Atlas-Maiitime
Co. v. Avalon Maritiine Lt19 the court held that to look behind the personality of the company and
to look at the acts of the members is an act of piercing the veil of the company. in the leading
case of Commissioner of Land Tax v Theosophical Foundation Pty Ltd 20, the courts have held
that there is no precise list which has been framed wherein the courts are found to be lifting the
18 Brewarrana v Commissioner of Highways (1973) 4 SASR 476, 480.
19 Atlas-Maiitime Co. v. Avalon Maritiine Lt [1991] 1 Lloyd's Rep. 563 (A.C.) at 569.
20 Commissioner of Land Tax v Theosophical Foundation Pty Ltd (1966) 67 SR (NSW) 70.

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veil of the company. However, with the passage of time, there are few principles which are valid
down under which the courts have lifted the veil of the company.21
Instances where veil of the company is pierced
In the leading case of Dennis Willcox Pty Ltd v Federal Commissioner of Taxation22, there are
few instances which are highlighted wherein the veil of the company is lifted.
Agency
Since a company has a separate legal personality thus the acts that are carried out by the
company are carried in its own name. however as per Balmedie Pty Ltd v Nicola Russo23, it was
held that at times the shareholders of the company are controlling the acts of the company in
such a manner so that the company is nothing but is an agent of the shareholder and thus the acts
which are carried out by the company under the authority of the shareholders should be regarded
as the acts of the shareholder alone and thus it is feasible to lift the veil of the company and to
consider the shareholders to be liable for all the acts of the company. In the leading case of The
Electric Light and Power Supply Corporation Limited v Cormack24, the veil of the company is
pierced on the ground of agency.
Fraud
At times the court is found to be lifting the veil of the company on the ground of fraud. When the
court is of the opinion that the officers are acting in such a manner so that to incur any kind of
fraud then the courts are found to be interested in lifting the veil of the company and to hold the
officers of the company personally liable for such fraud and the company is not held liable for
21 Ian Ramsay and David Noakes, Piercing the Corporate Veil in Australia, 2001, 19 Company and Securities Law Journal 250-
271
22 Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267
23 Balmedie Pty Ltd v Nicola Russo (Unreported).
24 The Electric Light and Power Supply Corporation Limited v Cormack (1911) 11 NSWSR 350.

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the same and is held in the leading case of Re Edelsten ex parte Donnelly25 and Donnelly v
Edelsten26.
Façade and Sham
In the leading case of Sharrment Pty Ltd v Official Trustee in Bankruptcy27, the courts have lifted
the veil of the company when the company is formulated mainly to cheat and to hide the real
purpose for it is created. When the company is formulated to indulge in acts which the law would
not otherwise allow. This is nothing but an act of façade and the courts pierce the veil of the
company and look at the acts of the company officers as their own acts. Piercing of veil on the
ground of façade is also recognized in Peate v Federal Commissioner of Taxation28 that the veil
can be pierced on the ground of façade.
Group enterprise
In order to hold the parent company liable for the acts of the subsidiary, the veil of the company
is lifted and is held in the leading case of James Hardie & Coy Pty Limited v Putt29.
Thus, there are various instances wherein it is found that the courts are not reluctant to pierce the
veil of the company.
Shortcoming of piercing the veil
But, there are also situations, wherein the courts are not willing to pierce the veil of the company.
It is found the concept of piercing the veil of the company is not applicable in tort cases and is
held in Adams v. Cape Industries pic30. In Macaura v. N. Assurance Co31, the courts have not
25 Re Edelsten ex parte Donnelly (Unreported).
26 Donnelly v Edelsten (1994) 13 ACSR 196.
27 Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530.
28 Peate v Federal Commissioner of Taxation (1964) 111 CLR 443.
29 James Hardie & Coy Pty Limited v Putt (1998) 43 NSWLR 554.
30 Adams v. Cape Industries pic [1990] Ch. 433 (A.C.) at 544.
31Macaura v. N. Assurance Co., [1925] A.C. 619 (H.L.) at 630

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disregarded the concept of separate legal entity and have not applied the concept of corporate
veil. The courts have found difficulty in applying the principle of lifting the corporate veil as the
principle is applicable only in exceptional cases.
Thus, The Australian courts…have been reluctant to depart from the separate entity where there
is no legislation requiring them to do so.”
Conclusion
It is concluded by establishing that it is rightful in holding that The Australian courts…have been
reluctant to depart from the separate entity where there is no legislation requiring them to do
so.” This is because the legislation of Australia has given recognition to the concept of the
separate legal personality of a company in section 124 of the Corporation Act 2001. Through this
legal framework and with the held of several precedents it is well established that a company
upon its incorporation is considered as a separate legal personality in law.
But, it is also established that Frequently the courts have been requested to look behind the
corporate veil [of companies] …where to all outward appearances they seem to operate as a
single entity. This is because the concept of the separate legal personality has its own flaws and
there are numerous instances such as of fraud, façade, sham, etc, wherein it was found to be just
to pierce the corporate veil of the company and disregard the separate legal personality of the
company. However, the piercing of the veil is based on judicial pronouncements and there is no
legislative framework to support the same whereas the concept of separate legal personality is
supported with the applicability of section 124 of the Corporation Act 001.
Thus, the separate legal personality principle cannot be shed away easily unless there are special
circumsttbces wherein the veil can be pierced unless there is no legislature to support the same.

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REFERENCE LIST
Articles/Journals/Case Laws
1) Anderson, Helen , piercing the veil on Corportae Groups in Australia: The case for
reform, 2009, Melbourne University Law Review, 33(2), 333-367.
2) Cheng, Thomas ‘ The corporate doctrine revisited: A compararative study of english and
the U.S. corporate veil doctorine’, 2011, Boston College International & Comparative
Law Review, 34(2), 329-412
3) Ghadas, Zuhairah , Real or artificial?Jurisprudential theories on corporate personality,
2007, US-China Law Review, 4(5), 6-12;
4) Puig, Gonzalo, A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine,
2000, Volume 7, Number 3.
5) Ramsay, Ian and Noakes, David Piercing the Corporate Veil in Australia, 2001, 19
Company and Securities Law Journal 250-271
Cases
1) Adams v. Cape Industries pic [1990] Ch. 433 (A.C.) at 544.
2) Atlas-Maiitime Co. v. Avalon Maritiine Lt [1991] 1 Lloyd's Rep. 563 (A.C.) at 569.
3) Beckett Investment ManageinentGioiip v. HaW [2007] EWCA (Civ) 613.
4) Brewarrana v Commissioner of Highways (1973) 4 SASR 476, 480.
5) Commissioner of Land Tax v Theosophical Foundation Pty Ltd (1966) 67 SR (NSW) 70.
6) Balmedie Pty Ltd v Nicola Russo (Unreported).
7) Donnelly v Edelsten (1994) 13 ACSR 196

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8) Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267.
9) Farrar v Farrars Ltd., (1888) 40 ChD 395
10) Hobart Bridge Co Ltd v FCT. (1951) 82 CLR 372
11) Industrial Equity Ltd v Blackburn (1977) 137 CLR 567.
12) James Hardie & Coy Pty Limited v Putt (1998) 43 NSWLR 554.
13) Lee v Lee's Air Farming Limited 1961 AC 12
14) MacLaine Watson & Co Ltd v Department of Trade and Industry [1988] 3 WLR 1033
15) Re Edelsten ex parte Donnelly (Unreported)
16) Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987) 5 ACLC 467.
17) Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530
18) Salomon v A Salomon & Co. Ltd [1897] AC 22, HL.
19) Stone & Rolls Ltd. V. Moore Stephens [2009] UKHL 39.
20) Standard Chartered Bank v Pakistan National Shipping Co [Nos 2 and 4] [2003] 1 AC
959, 968.
21) The Electric Light and Power Supply Corporation Limited v Cormack (1911) 11 NSWSR
350.