LAW205 Commercial Law Essay: Corporate Veil and Lifting of the Veil

This essay explores the concept of the corporate veil, a fundamental principle in commercial law that establishes a corporation as a separate legal entity distinct from its members and directors. The essay examines the advantages of this structure, including limited liability, and delves into the circumstances under which courts may "lift the corporate veil." This involves disregarding the separate legal personality to hold individuals liable for corporate actions, particularly in cases of fraud, improper conduct, or statutory breaches. The analysis includes landmark cases such as Salomon v A Salomon & Co Ltd and Lee v Lee’s Air Farming Ltd, alongside Australian statutory provisions outlined in the Corporations Act 2001, which address insolvent trading, uncommercial transactions, and employee entitlements. The essay highlights the duties of directors and the consequences of breaching them, emphasizing the court's power to hold individuals personally liable, particularly in cases where the separate legal entity is misused. The conclusion stresses the importance of ethical conduct and proper use of corporate positions to avoid personal liability.

Corp/Business Law
4/3/2019
Student’s Name

Commercial Law 1
Corporate Veil and Lifting of the same
Similar to any other business entity, the corporation is also a form of business structure. This, the
business structure has its own features, advantages, and disadvantages. One of the features of
corporations is that the same is an artificial person. This is the reason that the same cannot do its
business at its own and humans are required to be there to manage the affairs of the company.
Boards of directors are people responsible for the operation of a corporation. They are people
who take the decision and execute the documents/contracts on behalf of the company.
Nevertheless, another feature of the company is also required to be mentioned here which is its
separate legal personality. A corporation is a legal person in the eyes of law. Law provides all the
rights to a corporation similar to a natural person. It means a corporation can run a business in its
name, can sue other parties, and can be sued by other parties. Contracts that director sign on
behalf of a corporation are developed on the name of the corporation. As the company has a
separate legal identity from its members as well as from its directors. In this manner, neither
directors nor members can be held responsible for the act of the corporation. This rule is known
as the corporate veil. This is one of the significant advantages of corporation structure, which is
available to parties involved in the dealing. The rule has been set out in the case of Salomon v A
Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22. In the provided case, a person, Salomon
transferred his current business to a company, which was found by him. In this company, the
shareholding of the company was wholly owned by Salomon and his family members and the
ultimate control on the affairs of the company was with Salomon only. In consideration of the
transfer of business property to a new company, he took secured debenture of the same. At the
time of liquidation of the company, Salomon asked his claim before all other creditors of the

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company, as he was the secured creditor. In such situation, the other creditors presented their
disagreement and stated that Salomon has no right to claim his share as secured debenture as he
is the person who controlled the company and company and Salomon is the same person. In this
case, the House of Lord provided the decision in the favor of Salomon and held that due to
separate legal entity rule, Salomon has a different identity from the company (Lezcano, 2015).
The similar kind of decision has been provided in the case of Lee v Lee’s Air Farming Ltd [1960]
UKPC 33.
After the decision of these cases, it has been seen that people started taking unfair advantage of
separate entity rule, especially in the cases of insolvency of the companies and hence the remedy
to prevent such cases have been identified. This remedy is known as “Lifting of Corporate Veil.”
According to this remedy, the court may deny the existence of the corporate veil and may lift the
same. In such a situation, the court held liable to the person who has done a transaction on behalf
of the corporation. The corporate veil may be lifted either by applying general principles of law
or by specific statutory provisions. Sometimes nowhere in the law, it is written but it becomes
necessary for the courts to lift the corporate veil in order to provide justice. Gilford Motor Co Ltd
v Horne [1933] Ch 935 is one of such case. In this case, a person incorporated a company and
started his business. This person was restricted to conduct a similar kind of business under the
trade contract developed with a former employer. In the company formed by him, his wife and
another person was a shareholder. In the decision given of this case, the court held that no matter
who is a shareholder of the company, the defendant is the person who incorporated the company
and in this manner, the company cannot be seen as a separate entity from him. Defendant held
liable for the breach of restraint. Jones Re Darby; Ex parte Brougham [1911] 1 KB 95 is another
important case to study in this sector. In this case, individuals incorporated the company with a

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fraudulent purpose as they want to cheat investors and creditors and wanted to take benefit of
separate legal entity rule. In the judgment of the case, the court declined the subjective rule i.e.
separate legal personality rule and held the promoters responsible lifting corporate veil.
It is the case of common law, but as mentioned above, some statutory provisions are also there.
Every country has different legislation to regulate the behavior of corporates, which provides
provisions related to this business structure. Corporations Act 2001 (Cth) (herein after referred as
CA 2011) is the legislation that governs companies over there. Firstly, sections 588G-588M and
588V-588X provides provisions related to insolvent trading (Austlii.edu.au, 2019). According to
these sections, directors as well as holding company of a subsidiary company may held
personally liable where even after a suspect of insolvency a company continues to trade. Here
this is necessary to state that unlike UK courts, Australian court does not held holding company
liable for the deeds of subsidiary only because of the holding company has control on the affairs
of the subsidiary. In such situations, courts do not consider a subsidiary company as an agent of
holding one. Section 588FB-588FF and 588G(1A) on the different side, consist of the provisions
related to uncommercial transactions. This section says that some transactions are voidable
against liquidator that have done just before the company went into liquidation if any parties get
benefit out of such transactions. These transactions are known as uncommercial transactions.
Many of the times, the company do certain transactions with the director or his/her close relative
which are not in the best interest of the company and a reasonable person would not have entered
in the same. Section 588FDA of the act covers the provisions of such transactions. In cases of
such transactions, the court may lift the corporate veil. Part 5.8A of the subjective act mention
employee entitlements. Courts have all the rights to lift the artificial corporate veil and to hold
directors and officers of the company personally liable wherever they develop a transaction with

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the intention to defeat an employee’s right. In addition to these sections, 588FP and 260D(2) are
another sections, in cases of breach of that court may lift corporate veil. These are just a few
examples of statutory provisions where courts may held the members/directors/officers of the
company personally liable.
CA 2001 provides certain duties for directors and officers of the company that they are required
to perform. If directors breach these duties they may held personally liable. Courts, in such a
situation do not consider the separate legal entity rules. Many of the cases have happened there,
where directors conducted certain acts but were not able to take the benefit of separate legal
entity rule. The court considered directors and company as the same person. Phoenix
Constructions Queensland Pty Ltd v Coastline Constructions Pty Ltd and McCracken [2011] 167
is the recent decision of the court where it has been provided that creditors may claim damage
against the directors if the claims fall under the category of section 1324 of the act i.e. in the
contravention of the act. ASIC v Adler (2002) NSWC 171 is also a significant Australian case
where court lifted corporate veil because of breach of director duty. In this case, a person named
Adler provided an unsecured loan from one company of a group to another. He was the common
factor in these companies and were aware of the financial situation of each of them. He did not
act in the best interest of the companies and breached the duets provided under CA 2001. Court
set aside his individual position and made him personally liable.
In a conclusive way, this is to state that in general liability of members and directors of a
company is limited but courts have the power to lift the corporate veil in those circumstances
where people misuse the separate legal entity feature of corporations. In the above-mentioned
discussion, many of such cases have identified under statue as well as common law where

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director suffered from personal liability. Directors, as well as members, are required to properly
use their position and to act in a fair and ethical manner.
References
ASIC v Adler (2002) NSWC 171
Austlii.edu.au. (2019) Corporations Act 2001 NO. 50, 2001 - Sect 588V. [online] Available
from: http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s588v.html [Accessed on
04/04/19]
Corporations Act 2001 (Cth)
Gilford Motor Co Ltd v Horne [1933] Ch 935
Jones Re Darby; Ex parte Brougham [1911] 1 KB 95
Lee v Lee’s Air Farming Ltd [1960] UKPC 33
Lezcano, J., M. (2015) Piercing the Corporate Veil in Latin American Jurisprudence: A
comparison with the Anglo-American method. Oxon: Routledge.
Phoenix Constructions Queensland Pty Ltd v Coastline Constructions Pty Ltd and McCracken
[2011] 167
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22