An Analysis of Lifting the Corporate Veil in Australian Corporate Law

This essay provides an overview of the concept of 'lifting the corporate veil' in corporate law, which refers to the circumstances under which a court can disregard the separate legal personality of a company and hold its shareholders or directors personally liable for its actions or debts. The essay discusses the landmark case of Salomon v Salomon & Co [1897] AC 22, which established the principle of separate legal entity, and explores various situations where courts may lift the corporate veil, such as to prevent fraud, evasion of legal obligations, or when a company acts as an agent of its members. The essay also references other relevant cases and concludes that courts are more likely to lift the corporate veil in proprietary companies and when a parent company is involved in wrongful acts, emphasizing the need for courts to investigate the true intentions of the company to ensure it fulfills its obligations. Desklib provides a platform for students to access this and other solved assignments.

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CORPORATION LAW
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1CORPORATION LAW
A company is a kind of business structure which uses to carry out the business of people.
It is a separate legal entity which different from a partnership or sole trader. The company like
any other natural person can have the same rights to incur debt, sue other person or being sued.
Owner of the company or the shareholders of the company have limited personal liability and
they are not liable for debts of the company. A company has to register under the Australian
Securities and Investment Commission and the directors, officer of the company have legal
rights under the corporation act 2001. A company name indicates its legal status; the Pty Ltd
Company and Ltd Company should be mentioned at the end of the company name. In the case of
Macaura v Northern Assurance Co Ltd [1925] AC 619 it was decided that shareholders of a
company do not have any ownership regarding the company’s property.
Corporate veil separates the legal responsibility of a shareholder from an organization
(Stubbs and Rogers 2013). Always the shareholders and directors of a company are not liable for
the company’s action. A court can decide whether the shareholders and directors are responsible
for the company’s action or not. A corporate veil exists when a company is registered as a
separate legal entity and the members are different from the entity. In certain times corporate
personality from the company can be done any illegal or improper acts and commit frauds
(Chaiton 2013). An artificial person cannot do anything fraudulent and illegal act, so the
corporate personality has to remove the persons who are really guilty for those acts. Courts have
to decide whether the shareholder or directors of the company is liable for the debts for its
corporation despite the rule of separate personality and limited liability (Freudenberg 2013). In
the case of Salomon v Salomon & Co [1897] AC 22 the House of Lords stated that the company
is a separate legal entity from the shareholders (Lipton 2014). In this case it was stated that
Solomon is the only trader of the shoe and leather merchant company. He sells his business

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which he handles as a sole proprietorship to a company named Salomon Ltd, where his family
member including him is shareholders. The company fails to pay insufficient funds to outsiders
and Salomon borrowed money from Boderip. Salomon’s debentures mortgage for the loan, the
company failed to carry the business afterwards and Boderip liquidates the assets and claims the
money for a loan which he was given to Salomon. Court decided that the company acts as an
agent of Salomon and the company was entitled to get the principles assets.
In particular circumstances a court can lift the corporate veil where creditors and the third
party can claim the money from the assets of company directors or the members. A court lifts the
corporate veil in rare and circumstantial cases so it’s very difficult to provide clear guidance
when the court lifst the corporate veil (Bello and Michael 2014). Court will lift the corporate veil
if a person uses the company for any improper and dishonest purpose like to avoid the existing
legal duty. When members use the company with intension for not giving efforts on a transaction
like contracting and make sure that party never pay their debts the court may lift corporate veil
(Lee 2015). In other circumstances when a court may lift the veil is to avoid the existing legal
duty controller use the company as a vehicle for fraud.
In the case of Pioneer Concrete Services Ltd v Yelnah Pty Ltd, the term lifting of
corporate veil is defined when an individual company creates separate legal personality; courts
will decide the real controllers of that company. The court has to refer to the looking beyond or
lifting the corporate veil when it examines the company operating mechanism.
Under the case of Lee v. Lee’s Air Farming Ltd stated that there was a valid contract
between both parties’ lee and the company. In this case lee was a worker of the company under

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the company act. With the decision of Salomon case it was decided here that one person can
perform both actions as a director and an employee of the company.
There are different circumstances when a court can lift the corporate veil are as follows:
There are some cases where the situation of a company needs to understand by the court,
to determine the company whether it is enemy or friend, the court can adopt the test for control.
A court generally avoids the lifting of corporate veil till it’s involved with the public relations
(Macey and Mitts 2014). An enemy company means that when it is involved with an enemy
country it also becomes the enemy company. In that case the court has to examine the human
character that helps the company on their affairs.
The court may disregard the company who tries to evasion of duties and taxes.
Companies when evading the taxes are liable for the corporate veil (Lo 2017). In this case the
court needs to understand the real owner of the company and the source of income to make sure
the person can be liable for the taxes. The tax evacuation grant as an illegal act and the court
make sure to lift the corporate veil for the company.
Sometimes a company tries to avoid the legal obligations by creating a different
company. In this situation court allows to lift the corporate veil and understand the original
transactions (Warren 2016). For example when a company is liable to pay 30 percent from
company profit as an employee bonus it is called legal obligations, to avoid the legal obligation,
the company forms a subsidiary company and transfers all investments to the other company. By
transferring the investment principal company reduced the bonus amount which has to pay to the
employees. In this situation court lift the corporate veil to understand the real intension of the
company and make sure the principal company fulfills its obligations.

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Sometimes a company form to act as an agent of its members or any other company. In
this case the company loses its individuality. Here the owner is liable for the act of such a
company. In this situation the principle company is liable for the action of the subsidiary
companies and the court can lift the corporate veil.
A company is formed with the intension to fraud or conducts any improper act to beat the
law. In similar cases a court can lift the corporate veil and make sure that the company does not
defeat the legal obligation (Mandaraka-Sheppard 2014).
There are more factors in which the corporate veil can be lifted. Those factors are as
follows:
In the case of Balmedia Pty Ltd v Nicola Russo(Unreported, Ryan, Whitlam and
Goldberg JJ, Federal Court, 21 August 1998) it was stated that the company is a separate legal
entity from the shareholders of the company and it does not act as an agent of its shareholders.
However the term agent is used to argue that a shareholder of a parent company or human
shareholder has effective control over the company (Spiro 2013). The company acts as an agent
of the shareholder and the acts done by the company deemed to be an act of the shareholder.
In terms of fraud it is used when a corporation has done any act to evade the existing
legal obligations in the case of Re Edelsten ex parte Donnelly (Unreported, Federal Court,
Northrop J, 11 September 1992) Dr Edelsten’s estate trusty commenced an action in bankruptcy
and claimed that VIP group of companies owned a property and it was discharged after the
bankruptcy. The trustee said that the company incorporates to evade the legal obligations and
make a fraud.

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In certain circumstances corporate group works as an indistinguishable entity. In this
situation a court may lift the corporate veil and make sure the principle company is liable for the
action of subsidiary companies.
There are some times when a party seeks for the lifting of the corporate veil of a
company it depends on the ground of fair and just. A shareholder from the company also seeks to
lift the corporate veil to know about the internal situation of the company (Kraakman and
Hansmann 2017).
From the above discussion it can be concluded that a court is most likely to lift the
corporate veil from a proprietary company rather than a public company. It was decided on the
basis of limited liability of a shareholder. The lifting of the corporate veil is decided on the
number of the shareholder of the company. By increasing rate of shareholders the percentage
also increased for lifting the corporate veil. A court generally lifts the corporate veil when the
parenting company is involved in a wrong full act or it tends to evade any legal obligations of the
company. By lifting the corporate veil court take the protection from the shareholders of the
company and in these circumstances shareholders are liable for the action done by a company. a
court have to investigate about the true intention of the company to lift the corporate veil and
court have to make sure the company is liable for its obligations toward the liquidators of a
company.

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References
Bello, S.A. and Michael, O.C., 2014. Piercing the Veil of Business Incorporation: An Overview
of what Warrants It. Review of Contemporary Business Research, pp.117-138.
Chaiton, D., 2013. The Controlling Mind in Company Law: An Examination of Corporate
Identity and the Corporate Veil. Business Beat.
Freudenberg, B., 2013. Lifting the Veil on Foreign Tax Flow-Through Companies: Could
Australian Closely Held Business Benefit from Their Governance Regimes?. Australian Journal
of Corporate Law, pp.201-232.
Kraakman, R. and Hansmann, H., 2017. The end of history for corporate law. In Corporate
Governance (pp. 49-78). Gower.
Lee, P.W., 2015. The enigma of veil-piercing. International Company and Commercial Law
Review, 26(1), p.28.
Lipton, P., 2014. The mythology of Salomon's case and the law dealing with the tort liabilities of
corporate groups: an historical perspective. Monash UL Rev., 40, p.452.
Lo, S.H., 2017. Piercing of the corporate veil for evasion of tort obligations. Common Law
World Review, 46(1), pp.42-60.
Macey, J. and Mitts, J., 2014. Finding order in the morass: The three real justifications for
piercing the corporate veil. Cornell L. Rev., 100, p.99.
Mandaraka-Sheppard, A., 2014. New Trends in Piercing the Corporate Veil: The Conservative
Versus the Liberal Approaches. Business Law Review, 35(1), pp.2-14.

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Spiro, P.S., 2013. Clarifying the Rules for Piercing of the Corporate Veil. Available at SSRN
2363647.
Stubbs, W. and Rogers, P., 2013. Lifting the veil on environment-social-governance rating
methods. Social Responsibility Journal, 9(4), pp.622-640.
Warren, M., 2016. Corporate Structures, the Veil and the Role of the Courts. Melb. UL Rev., 40,
p.657.