LAW202 Corporations Law: Corporate Veil & Internal Governance

This report provides solutions to three questions related to Corporations Law. The first question addresses the concept of a company as a separate legal entity and the potential for piercing the corporate veil in the context of scallop fishing quotas. It references Salomon v Salomon (1897) and discusses circumstances under which a court might disregard the separate identity of a corporation. The second question examines the liability of a parent company for the negligence of its subsidiary, considering the doctrine of separate identity and exceptions where the corporate veil may be lifted, citing cases like Smith, Stone & Knight v Birmingham Corporation (1939) and D.H.N.food v Tower Hamlets (1976). The third question focuses on enforcing a company's constitution, particularly regarding the appointment of solicitors and dispute resolution, referencing s140 of the Corporations Act, 2001, and cases like Eley v Positive Life Assurance Co Ltd. (1876) and Hickman v Kent or Romney Marsh Sheepbreeders Association.

Question 1
Answer: In this question, according the Scallop Fishing and Marketing Act, each person has been
permitted to catch only 50 tons of scallops every year. In view of this legislation, Bob is willing
to find out if he can avoid the application of this legislation if a company is incorporated by him
for this purpose. His daughter Alice had told Bob that under the law, a corporation enjoys
distinct identity.
The doctrine related with the separate characteristic of a corporation was presented in Salomon v
Salomon (1897). The courts in Australia also follow this principle. The brief facts are that the
court concluded that the property belonging to the company should be treated as the assets of the
corporation itself and not as a property belonging to its members. In this regard, the court
expressed the opinion that the debts of the company can be imposed only against the company
and not against the members. In view of this doctrine, in case of a limited liability company, it is
not considered that the shareholders of the company can be held personally as possible for the
obligations of the company. The result is that in case the company becomes insolvent, the loss
suffered by the shareholders is limited to the sum put in the company.
However, there are certain cases when the law provides that it is possible for the court to impale
the corporate veil in order to look ahead of the separate identity of a corporation. In order to do
so, the process known as lifting the corporate veil has to be used. This process is connected with
the circumstances where the court may disregard the separate identity of the business. As a
result, in such cases the court is beyond the separate identity of a corporation in order to impose

liability or a right on the member of the corporation. Hence, it needs to be noted that in case of
piercing the corporate veil, it is available to the court to include the structure of the company and
impose liability on a member of the corporation. However, such process can only be used by the
court as an exception that is present in the general rule, which provides that company’s members
cannot be considered personally accountable for the obligations of the company.
By applying the principles mentioned above are particularly the principle of piercing the
corporate veil, it can be said that in the present case, the Scallop Fishing and Marketing Act
provides for a limit according to which one person can catch up to 50 tons of scallops. However,
Bob Beech has the capacity to catch much more scallops in a year. As a result, Bob wanted to
know if there was any way in which he can catch more than the limit that has been fixed by the
Act. Under these circumstances, Bob's daughter Alice tells him that the provisions of this
legislation can be circumvented by incorporating a company. With the help of a company, Bob
may be able to catch double the scallops. The reason given by Alice is that according to the law
of company has its own identity. Therefore it is considered as a separate entity.
But in view of the provisions related with impaling the corporate veil, it needs to be noted that in
such cases, the court may decide to impale the veil and hold Bob personally responsible for the
breach of the provisions of the Act. The reason is that when a corporation has been created only
for the purpose of escaping liability of the members, the court may lift the veil and hold the
members personally accountable.

Question 2
Ans: After considering the facts that have been provided in this question, the issue arises that
certain members of audience are willing to initiate a claim against New Nirvana Ltd. under
negligence. In this case, the negligence was on part of the subsidiary company, Nuclear Blast
Sounds Pty Ltd. The reason is that certain audiences experienced hearing loss on account of the
negligence of an employee of the company, Nuclear Blast. This employee set the sound level too
high as a result of which, certain audience members suffered hearing loss. Now these persons
want to initiate a claim against the parent company as the subsidiary, Nuclear does not have the
money to pay damages granted by the court. Moreover, the corporation does not have insurance
for negligence.
For dealing with this issue, an assessment of the doctrine of separate identity of the corporation
needs to be made. The reason is that in view of this doctrine, generally, the parent corporation is
not held to be responsible for the obligations of the subsidiary (Graw, 2011). The reason that can
be given in this regard is that according to the law, when a company has been incorporated, it is
considered by the law to be a separate entity. Consequently, the obligations of one corporation
can be imposed only against the corporation itself. Therefore these obligations cannot be
enforced against a member of the company or the parent company, in case of a group of
companies (Latimer, 2016). Hence the general rule provides in such cases that in case of a group
of companies, the subsidiary’s obligations cannot be forced against the parent corporation.
However, some exceptions exist to the use of general rule. The consequence is that in some
cases, the court may arrive at the conclusion that it is possible to impose the liabilities of
subsidiary against the parent company (Lipton, Herzberg and Welsh, 2016). Hence the court may
decide in such cases that the corporate veil needs to be impaled. Consequently, it is possible to

impose the obligations of subsidiary on the parent company (Baxt, 1996). For example, the court
may decide in favor of impaling the corporate veil and impose liabilities on the parent business
in cases of sham or facade. For example, in Smith, Stone & Knight v Birmingham Corporation
(1939), it was decided by the court the veil needs to be lifted and liability imposed on the parent
business. This case the court stated that there is an exception present to the application of the
general rule that was provided in Salomon. Hence in this case the court was of the opinion that
the subsidiary was only carrying on the business on behalf of the parent company (Baxt, 1991).
For dealing with this type of issue, it has to be considered the persons who control what the two
companies can be considered as the head and brain of the business. It also needs to be seen for
this purpose, it is possible to apply the concept of constant and effective control. The law
provides that in order to deal with this type of cases, the court has to consider if there is an
agency relationship present between the two companies. In such cases it is required that the
patent company should have owed than normal level of control over the subsidiary.
Consequently, in D.H.N.food v Tower Hamlets (1976) it was provided by the court that it was
possible to ignore the rule provided in Salomon's case and the corporate veil should be lifted. In
this case, there were three subsidiary companies, and in the opinion of the Court, these
companies were considered as a part of single economic entity. Consequently, these companies
were considered as being entitled to receive compensation.
In this case also, the two companies, New Nirvana and Nuclear Blast form a group of companies.
Nirvana is the parent corporation. The result is that the liability of Nuclear Blast Sounds can be
imposed against the parent company if the parties can establish complete control of New Nirvana
on subsidiary company added under the circumstances, it can be considered that Nuclear Blast
Sounds was acting as an agent of New Nirvana and carrying on its business. Therefore the

injured members of the audience can initiate claim against Nirvana Ltd. for Nuclear Blast’s
negligence.

Question 3
Ans: In this question, the issue is with the question of enforcing the constitution by the company
as well as by an individual. Therefore, it has to be seen if Don has the right to enforce a clause
present in the articles of Millennium Pty Ltd.. According to this provision, it was, provided that
Don will be the solicitors of the company. This company has been encapsulated by Michael,
Simon and Don. But later on, the company determined that some other person needs to be
selected as the solicitor of the corporation.
The relevant legal provision that needs to be applied in the present case is s140, Corporations
Act, 2001. According to this provision, the constitution has to be treated as a contract formed
between the company and its members, the company and its directors, as well as a contract that
is present between the members of the company. However, in this context, it has to be mentioned
that regarding the enforcement of the provisions of the contract, it has been clearly stated that it
is confined to the situations mentioned above. Similarly, under the common law also, a person
cannot lose any rights regarding the articles of the corporation in some other capacity. The
relevant is in this regard is that of Eley v Positive Life Assurance Co Ltd. (1876) The facts are that
Eley was chosen as the solicitor of the corporation. He was also made a member of the corporation
later on. According to the articles of the company, it was provided that Eley will act as solicitor for
lifetime. However after some time, he was removed from the position of the solicitor. The result
was that proceedings were initiated by Eley, and the particular provision of the Constitution of the
corporation was relied upon. However, the court was of the opinion that in this case, a right is not
available to Eley as a result of particular provision of the Constitution, in his position as the
company's solicitor. Consequently, the court held that Eley cannot be allowed to sue the company to
enforce a provision of its constitution as the solicitor of the company.

There is another issue present in this question. The articles provide that if there is a disagreement
between Millennium and its members, such dispute needs to be put before arbitrator first of all
before anybody can start legal proceedings. However in the present case, Don started legal
proceedings without referring to dispute the arbitrator. Therefore the issue here is if such action
can continue in the court. In this regard, the facts of Hickman v Kent or Romney Marsh Sheep-
breeders Association need to be considered. It was provided by the articles of the company in this
case the case of a dispute between the company and its members, the dispute has to be presented
before an arbitrator before a party can start legal proceedings. However, the proceedings were
started by Hickman, without putting the dispute to the arbitrator. The result was that these
proceedings were stayed by the court.
On account of the legal position mentioned above, it can be said that in the present case also,
Don ignored the provision according to which any dispute has to be referred to an arbitrator
before legal proceedings can be started. As a result, the legal proceedings started by Don cannot
continue and Millennium Pty Ltd. can enforce the provisions present in the articles of the
company.

References
Baxt R, 1991, ‘Company Law Reform – The Future and Fixing Up the Past – The Doctrine of
Ultra Vires’, 19 Australian Business Law Review147
Baxt R, 1996, ‘Informality may be a Good Thing but it may be Very Dangerous’, 24 Australian
Business Law Review 463
Graw, S. 2011, An Introduction to the Law of Contract, 7th Ed., Thomson Reuters.
Latimer, P, 2016, Australian Business Law CC, 2016 Edition
Lipton P, Herzberg A and Welsh, M, 2016, Understanding Company Law, 18th edition, Thomson
Reuters
Case Law
DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852
Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88
Hickman v Kent or Romney Marsh Sheep-Breeders' Association [1915] 1 Ch 881
Salomon v Salomon & Co [1897] AC 22
Smith, Stone & Knight v Birmingham Corporation [1939] 4 ALL ER 116