Company Law: Analysis of Incorporation and Corporate Veil

This case study analyzes two scenarios related to Australian company law. The first scenario explores the benefits of incorporating a company for Richard and his sons, considering issues such as business name registration, limited liability, and tax rates. The second scenario examines the legal implications of corporate structure and liability, specifically addressing whether employees can sue a parent company when the subsidiary is wound up to avoid liabilities. The analysis delves into the doctrine of separate legal entity, piercing the corporate veil, and the potential for holding parent companies accountable for the actions of their subsidiaries, especially in cases of negligence and attempts to evade obligations. Relevant case laws like Salomon v Salomon and Barrow v CSR Ltd are referenced to support the arguments.

Q 1:
Answer: After going through the facts that have been provided in this question, it becomes clear
that Richard and his sons, David and Liam will obtain certain benefits if they go ahead and
incorporate a company in order to expand their current business. The reason is that when the
business structure of sole trader or partnership is compared with the company, it is easier to
expand the business. Significant cost has to be incurred for the purpose of registration of a
company as against the case where the business is run as sole trader or in partnership. However
in the long run, the cost incurred in the incorporation of the company can be considered as a part
of the business expenses (Sweeney, O’Reilly and Coleman, 2013). Similarly, only registering a
business name is less expansive as compared to register a corporation. But after the registration
of a corporation, the business name is not required to be registered (Lipton, Herzberg and Welsh,
2016). The reason behind this situation is that after the incorporation of a corporation, the full
name of the corporation, ending with "Pty Ltd" has to be used. Regarding the ongoing costs, the
registration of a business name requires renewal after a fix interval. The government also charges
a fee for this purpose.
But in case of a company, the law requires that an annual fee has to be paid to the ASIC by every
registered company. The major advantage that is associated with the incorporation of a company
is present in the form of the Limited liability of its members. Therefore the law provides that
when a company has been incorporated, the liability of its members is confined to their shares
(Graw, 2011). However, the situation is different, in case of sole traders and partners. They are
treated to be personally responsible for the debts and obligations of the business. Similarly,
among other benefits available in case of the incorporation of a company deals with the rate of

tax. Therefore the persons managing business by registering a business name are required to pay
income tax at the normal, marginal rate but in case of the companies registered in Australia, a
flat rate of tax is applicable. This rate is significantly less than the rate of tax that applies in case
of individuals.
Due to the reason that a company is treated by the law as a distinct legal entity, the law allows
the company to own property in its own name. A corporation can also enter into a contract in its
own name. In this way a company is considered by the law as a separate legal entity that is
separate from its members and directors (Pentony et al., 2009).
Before discussing the steps that need to be taken for the purpose of the registration of a company,
the first issue is to decide which business structure will be most appropriate in the present case.
Therefore, Richard and his sons are also required to decide the appropriate business structure for
the expansion of their business. In order to make this decision, the parties have considered all the
circumstances. For instance, in this case, Richard owns a successful business. Soon, his sons,
David and Liam are also going to join him in business. However, in this case, they want to
expand the family business. For this purpose, the parties are required to select the most
appropriate business structure. The most appropriate business structure, in the present case will
be that allows the parties to easily raise funds that are necessary for expanding the business.
Similarly, there is another issue present in this question. Richard wants that the company should
be named "Ridali". On the other hand, his sons was that the name of the business should be
"Rich's Guarantee Olives". At this point it needs to be stated that there is a difference present
between the registration of a company and only the registration of a business name. When the
parties are going to select a name for their business, there are certain issues that have to be
looked into. For instance, the name selected by the parties should not be similar to the name of a

present business. Therefore, only the name that does not match any present corporation or
business name can be used. Thus it can be recommended that a name availability search should
be made in order to ensure that the name selected by the parties is available or not. In this regard,
the law provides that if the parties also have an identical name, such name may be registered by
the parties as the name of the business. The law also provides that there are certain words due to
which people may be misled regarding the activities of the company. Therefore, it is not
permissible to use these words for example, any relationship with the government, Royal family
or ex-servicemen.
It is also insisted that company’s name should also reveal the liability of its members. For
instance, if the members have limited liability regarding the debts and obligations of the
company, it is necessary that company’s name ends with “Proprietary Limited”. In the same
way, when the members of the company have unlimited liability, the law provides that the name
should end "Proprietary". However if the parties want to exhibit a diverse name, an alternative is
accessible to them according to which they can register another name as the business name.
Therefore in this case, Rich's Guaranteed Olives can register a business name "Ridali". Therefore
in such a case the business can trade under the name "Ridali". This name will be displayed on all
the signage of the business.

Question 2
Answer: After going through the facts of this question, it appears that the issue in this case is if
Terry and the other employees are allowed by the law to sue Cosmo Mine Ltd (CM). The reason
behind this issue is that they were working for Cosmo Mining Services Pty Ltd (CMS). Cosmo
Mine Ltd was a subsidy of CMS. The shareholders of CMS passed a resolution according to
which they were going to establish a new corporation and CMS’s business was going to be sold
to this company. Therefore, CMS was going to be wound up. Under these circumstances, the
question before Terry and the other employees of the company is if any action can be initiated
against the parent company, CM or their employer company CMS.
According to the general rule applied by the corporations’ law, a company is considered as
having its own separate legal identity. The rule of separate entity was mentioned by the court in
Salomon v Salomon (1896). The court affirmed that every company enjoys a distinct identity in
the eyes of law. Therefore, this rule provides that, according to the corporations’ law, every
company has its own separate legal identity after its registration (Vermeesch and Lindgren, 2005).
As a result of the doctrine, a company can own property in its own name and enter into contracts
in its own name. Therefore, the liabilities of the company are company’s own liabilities and can
be enforced against the company only. Similarly, a company can also be sued under its own
name. In the same way, the doctrine of limited liability provides that the members of the
company are not individually accountable for the liabilities of the corporation. Consequently, the
debts and obligations of a particular company have to be enforced against the company only and
the members of the company (directors and shareholders) cannot be held personally liable
regarding these obligations.

However, the rule related with limited liability of the members of a company is a general rule.
There is an exception applicable to the general rule. It is known as piercing the corporate veil. In
this regard, the corporations’ law provides that in certain cases, the courts are allowed by the law
to ignore the distinct legal identity of a company and therefore the courts may decide to lift the
corporate veil. Such decision can be made under the circumstances where the court is willing to
inflict legal responsibility on the persons who have control over the corporation. This obligation
is also present under the tort law, where it has been mentioned that in cases involving negligence,
there should be a relationship of proximity present between the parties.
The same requirement is also present in case of lifting the corporate veil. In Barrow v CSR Ltd
(1988) the court was of the opinion the company needs to be considered liable for the tort of its
subsidiary company towards its employees. Consequently, due to negligence of the subsidiary
company, an employee of the company suffered asbestosis. The court concluded that in such a
case it was not important if the principles of agency law were used to describe the case or if the
proximity between the employees of the parent company and its subsidiary has been used or if
the doctrine of lifting the corporate veil has been used, or the issue has been discussed in terms
of the control of the parent company. The court stated that in all the cases, the final effect will be
similar. Similarly in Briggs v James Hardie& Co Pty Ltd (1989), the court found that the issue
deals with negligence. The court had to consider the issue of lifting the corporate veil, along with
the notion of foreseeability.
In view of the decision given in the cases related with this issue, the current legal position can be
described as follows. If sufficient resources are not available to the subsidiary company to
compensate the other party under the law of tort, the other party can claim compensation from
the party that has ultimate control over the subsidiary. In view of this legal position, in the

present case also, it can be concluded that Terry can bring a claim against the parent company,
CM. It was unanimously decided by the shareholders of CMS that the company is going to be
wound up and the business of CMS was going to be sold to Lazarus Pty Ltd., a new company
formed for this purpose.
However in this case, it is clear that this new company has been created only for the purpose of
evading the liability of CMS towards his former employees as well as the other residents of the
town. These persons are suffering from cancer due to the reason that as a result of the mining
activities of CMS, their drinking water has been contaminated. Now the situation is that the
subsidiary company does not have the resources to pay compensation to these residents. The
payment company CM owns 120, out of the 200 shares of its subsidiary, CMS.. At this point, it
also needs to be mentioned that CS has complete control over the activities of its subsidiary.
CMS had also leased the mining equipment from CM.
In view of this situation, it can be concluded in the present case that Terry can sue the parent
company, CS or the newly formed company, Lazarus for compensation. Under the
circumstances, the court may decide to let the corporate veil and impose liability on the parent
company which has ultimate control on the activities of CMS.

References
Harris, J. Hargovan, A. Adams, M. 2015, Australian Corporate Law LexisNexis Butterworths 5th
edition,
Lipton P, Herzberg A and Welsh, M, 2016, Understanding Company Law, 18th edition, Thomson
Reuters
Pentony, Graw, Lennard & Parker, 2009, Understanding Business Law 3rd ed Butterworths
Stephen Graw, 2011, An Introduction to the Law of Contract, 7th Ed., Thomson Reuters.
Sweeney, O’Reilly & Coleman, 2013, Law in Commerce, 5th Ed., LexisNexis.
Vermeesch, R B, Lindgren, K E, 2005, Business Law of Australia Butterworths, 11th Edition
Case Law
Barrow v CSR Ltd (1988) Unreported
Briggs v James Hardie& Co Pty Ltd (1989) 16 NSWLR 549
Salomon v A Salomon & Co Ltd [1896] UKHL 1