Legal Obligations of CMS, CM and Lazarus Pty Ltd for Loss Sustained by Terry

This article discusses the legal obligations of CMS, CM and Lazarus Pty Ltd for the loss sustained by Terry due to the contamination of the nearby river by CMS. It explains the concept of separate legal personality and piercing the veil of the company. It also highlights the right of Terry to bring a statutory derivative action against CM under section 236-237 of the Corporation Act 2001.

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Contents
Answer 2..........................................................................................................................................2
Issue.............................................................................................................................................2
Applicable Law............................................................................................................................2
Application of law........................................................................................................................3
Conclusion...................................................................................................................................4
Reference list...................................................................................................................................6

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Answer 2
Issue
Whether any legal obligations can be raised against CMS, CM or Lazarus Pty Ltd for the loss
that is sustained by Terry?
Applicable Law
One of the business forms that are generally availed by the people of Australia is to run their
business by way of a company. A company is created by getting the same registered as per the
law of Australia. A register company is an entity which has its own existence in law. Once a
company is registered it acquires a distinct legal personality with perpetual succession. In the
leading case of Salomon v A Salomon and Co Ltd [1897], the House of Lords submitted that
separate legal personality is the concept which signifies that the company has its own individual
identity and which is separate from its employees and officers. The acts of the company are its
own acts and will not hold its officers liable in any manner whatsoever. In Lee v Lee's Air
Farming Ltd [1960] the concept of Separate legal personality was retreated. (Gibson and Fraser,
2013)
However, at times, the distinction amid the officers and the company are disregarded by courts
and the acts of the company are held to the officer’s act, holding them personally liable for the
same. This rule is called the piercing the veil of the company and is regarded by the courts at
several instances, such as, fraud, agency, tax avoidance, group enterprise, etc. (Tomasic et al
2002)
The veil is also pierced when the relationship amid the parties is that of a subsidiary and parent
company. At times, the subsidiary company is indulged in act of torts resulting in loss. In such
situation, when the parent company is holding the subsidiary company and the subsidiary
company is not in the position to reimburse the loss, then, the veil amid the parent and the
subsidiary company is pierced by the courts and the liabilities of the subsidiary is then borne by
the parent company (Witting 2018). It is necessary that there is closeness amid the parent and
the subsidiary company and the parent company can reasonably foresee the acts of the subsidiary
company and is rightly evaluated in the leading case of CSR Ltd v Wren (1997). The court in the

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leading case of CSR v Young, (1998), held that the parent company will reimburse the liabilities
of the subsidiary company, that is, the loss that is caused to the children of the employees of the
subsidiary because of the wrongful acts of the subsidiary itself. In the leading case of Stone and
Knight v Birmingham Corporation (1939), the court has pierced the veil amid the subsidiary and
the parent when the acts of the subsidiary are found to be controlled and owned by the parent
company. (Latimer 2012)
In Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988), the court held that when
the creation of the new company is to incur fraud on the aggrieved parties then the new company
is held to be on the same footing as the old company and the aggrieved was held liable to sue the
new company for the losses so incurred because of the wrongful acts of the old company. in
Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) and Peate v Federal Commissioner of
Taxation (1964) veil is pierced on the establishment of sham and fraud. (Bottemley et al, 2017)
Also, under section 236-237 of the Corporation Act 2001, any former employee of the company
has the right to bring a statutory derivative action against the wrongful person if the company
itself is not taking action against such person provided it is in the interest of justice and the action
is carried on honestly and is held in Westgold Resources NL v Precious Metals Australia Ltd
[2002].. (Adams, 2002)
Application of law
The facts simply submits that,
Cosmo Mining Services Pty Ltd (CMS) is a company wherein Terry holds the position of an
employee. Cosmo Mine Ltd (CM) is the parent company of CMS. However, as per the rule held
in salmon case, once a company is formulated, then such a company has its own existence in
law. so, both CMS and CM have their own identity and the acts of one company is considered to
be the acts of its own.
It is found that CMS has undertaking mining activities which have resulted in the contamination
of the nearby river. The water of the river is supplied to the mine and Gunbarrel (the place where
Terry lives). Because of the use of the water, Terry and other residents have suffered cancer.

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It is thus submitted that CMS is indulged in tortuous action of negligence and because of the acts
and omission of CMS, loss is inflicted upon Terry.
Thus, Terry has the power to sue CMS under the law of tort.
But, it is submitted that CMS is directly owned and controlled by its parent company CM. CM
leases all the equipments from a bank and the same are sub leased to CMS. The leasing charges
are also paid by CM on behalf of CMS.
Thus, CMS is wholly and solely controlled by CM. Thus, as per CSR v Young and Stone and
Knight v Birmingham Corporation it is rightful to pierce the veil amid CMS and CM and
consider the acts of CMS as the acts of CM. So, Terry can avail his right under section 236-237
of the Corporation Act, 2001 so as to bring statutory derivative action. Terry can take the action
as CM is not acting in any manner to take action for the wrongful acts of CMS. Thus, Terry
being the former employee of CMS has the right to bring derivative action against CM.
Now, it is also analyzed that CMS conducted a general meeting and decided that in order to
avoid the liabilities that are raised because of the use of contaminated water, it is best to sell the
business of CMS to a new company. in order to avoid the liability, a new company, Lazarus Pty
Ltd, is formulated and the business of CMS is sold to the new company.
It is submitted that the act of CMS to formulate a new company is nothing but to incur fraud on
the injured parties including Terry. It is an act of sham and thus by applying the law
in ....................it is submitted that the formation of Lazarus Pty Ltd is not right and the formation
of the new company must be disregarded.
Terry has the right to take action even against Lazarus Pty Ltd as its incorporation is nothing but
to incur fraud on Terry.
So, Terry has the right to bring action both against CMS/CM and Lazarus Pty Ltd.
Conclusion

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It is crystal clear that Terry has suffered loss and thus it is the duty of CM or CMS to bring
justice to the loss that is caused to Terry. However, no action is taken by CM nor by CMS. Since
a tortuous action is carried on by CMS, thus, its parent company should be held liable for such
loss by lifting the veil amid CMS and CM.
Now, since no action is undertaken by CM for the redress of Terry. Thus, Terry has been right
under section 236-237 of the Corporation Act 2001 to bring a Statutory Derivative action against
CM as he being the former employee of CMS.

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Reference list
Book/Articles/Journals
Adams, Michael . (2002). Essential Corporate Law: Second Edition. Cavendish Australia.
Bottomley , Stephen, Hall, Kath Spender, Peta. (2017) Contemporary Australian Corporate
Law. Cambridge University Press.
Gibson, Andy & Fraser, Douglas. (2013). Business law. Pearson Higher Education AU.
Latimer, Paul. (2012). Business Law. Federation Press.
Tomasic, Roman, Bottomley, Stephen and McQueen, Rob. (2002) Corporations Law in
Australia, Federation Press.
Witting, Christian. (2018) Liability of Corporate Groups and Networks. Cambridge University
Press.
Case laws
CSR Ltd v Wren (1997) 44 NSWLR 463.
CSR v Young, (1998).
Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267.
Lee v Lee's Air Farming Ltd [1960] UKPC 33
Salomon v A Salomon and Co Ltd [1897] AC 22.
Peate v Federal Commissioner of Taxation (1964) 111 CLR 443.
Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530.
Stone and Knight v Birmingham Corporation (1939).
Westgold Resources NL v Precious Metals Australia Ltd [2002] WASC 221.

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