Griffith University Corporations Law Essay: Corporate Veil Analysis

This essay delves into the doctrine of the corporate veil, a fundamental concept in corporations law. The essay begins by highlighting the advantages of the corporate structure, particularly its separate legal entity status, which shields owners and managers from company liabilities. It then discusses the landmark case of Salomon v A Salomon & Co Ltd, which established the principle of corporate veil, providing immunity to owners and directors. The essay explores the exceptions to this rule, detailing instances where courts may lift the corporate veil, such as when directors breach their fiduciary duties or when the company is used to evade existing legal obligations. Cases like Adams v Cape Industries plc, Green v Bestobell Industries Pty Ltd, Gilford Motor Co Ltd v Horne, and Creasey v Breachwood Motors Ltd are used to illustrate these exceptions. The essay analyzes agency theory and situations where the courts may lift the veil to hold the directors liable for their actions. It also explains how courts consider the intentions behind company formation to prevent misuse of the corporate structure. In conclusion, the essay examines the complex interplay between the corporate veil and its exceptions, providing a comprehensive understanding of the doctrine and its implications.

Running head: CORPORATIONS LAW
Corporations Law
Name of the Student
Name of the University
Author Note

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Introduction
Company is considered to be the most preferable from of business structure that is used
worldwide. It has been extensively owing to its separate entity in the eyes of law, which
should not be confused with the identity of its owners or managers. The preference of the
company as a business structure is consequent to the advantages that this form of business
structure provides, which other structures of business fails to provide. The features that a
company possesses are not possessed by any other form of business. The owners as well as
the managers of the company are not to be held liable the liabilities of the company1. This is
because of the separation that has been drawn between identity of the company and its
shareholders and directors. All the directors and the owners of the company are to be
provided with immunity from being held personally liable for the liabilities of the company.
Moreover, the shareholders who are the owners of the company are responsible for only those
proportion of the liabilities of the company, which they have contributed for in the share
capital of the company. The amount of money that the holder has contributed to the company
will inflict their liability in the company and the shareholders cannot be personably being
held responsible for the liabilities of the company. The immunity that has been provided to
the owners and the directors of the company owing to the distinct identity of the two is by
virtue of a corporate veil. In case of any liabilities that the company might have incurred does
not hold the owners and the managers liable and the court does not have the authority to
intervene the corporate veil for the purpose of holding the managers and the owners liable.
However, there are certain events where the courts might require the corporate veil to be
lifted for the purpose of any misuse in the same2. This essay would strive to analyse the
doctrine of corporate veil and provide the instances where the same can be lifted.
1 Macey, Joshua C. "What Corporate Veil." Mich. L. Rev. 117 (2018): 1195.
2 Puri, Poonam, et al. "Piercing the Corporate Veil: Multinational Corporate Accountability 2018." (2018).

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Discussion
The company is the most complicated form of business structure and the shareholder of
the company are treated as the owners of the same. All the profits as well as the losses that
the company accrues or incurs needs to be distribute among the shareholder of the company
being the owners of the company by way of declaration of dividends. It has a separate
identity before the law from that of its managers and owners. Owing to this separation of
identity, the liabilities that the company might incur would not be borne by the shareholders
or the managers in a personal capacity. The principle of corporate veil that provides
immunity to the owners of the company has been first established in the case of Salomon v A
Salomon & Co Ltd [1896] UKHL 13. In this case, it has been contended by the courts that
any company, which has been registered effectively severes the identity of the owners of the
company from that of the identity of the company. The courts are not required to pierce the
corporate veil of the company to hold the owners as well as the managers of the company
liable for the liabilities of the company. The company is assumed to have a separate existence
as an individual to that of the persons who has been conferred with the authority to manage
its affairs and the owners4.
The limited liability theory pertaining to a company provides the shareholders of a
company with an immunity limiting the liability that they owe towards the liabilities of the
company to their contribution towards the capital of the company. The liabilities of the
shareholders of a company would not exceed the finances that they have invested in the
company. The courts will not extend the liability of the company to the private assets of the
shareholder of the company5.
3 Salomon v A Salomon & Co Ltd [1896] UKHL 1
4 Jackson, Kody. "Behind the Corporate Veil." ReVista (Cambridge) 15.1 (2015): 50.
5 Tan, Cheng Han, Jiangyu Wang, and Christian Hofmann. "Piercing the Corporate Veil: Historical,
Theoretical and Comparative Perspectives." (2018).

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According to the single economic unit theory, a company needs to be treated as a single
unit while conducting transactions or while responding to legal rights and liabilities. A
company has been designated as a natural person in relation to the business transactions u/s
124 of the Corporations Act 2001 (Cth)6. They have been provided with the authority to
enter into contracts as well as transactions under its own name. It has been authorised to own
property and effect transactions under its own name. By virtue of this theory, a company is
authorised to represent itself in legal proceedings on its own behalf7.
The screen theory or the corporate veil theory provides an immunity to the internal
management of a company by way of a virtual veil that restricts the outsiders to the company
from peeping into the internal affairs of the company. U/s 119 of the Corporations Act 2001
(Cth)8, a company is said to have come into existence instantly at the time it gets
incorporated. After the incorporation, a company is covered with a virtual veil or a theoretical
screen to make the outsiders of the company from recognising the management and the
owners of the company9.
However, there have been several circumstances where this restriction on lifting the
corporate veil has resulted in discrepancies. This has resulted from the various instances of
misuse and wrongful actions that were found to have been committed by the directors of the
company. The courts have the authority to intervene and pierce through the corporate veil to
decipher the chief culprit and detect the misuse of the immunity provided through the
corporate veil. This can be illustrated with the case of Adams v Cape Industries plc [1990]
Ch 43310.
6 The Corporations Act 2001 (Cth), s 124
7 Hansmann, Henry, and Reinier Kraakman. "The end of history for corporate law." Corporate Governance.
Gower, 2017. 49-78.
8 The Corporations Act 2001 (Cth), s 119
9 Bainbridge, Stephen M. "Corporate Directors in the United Kingdom." Wm. & Mary L. Rev. Online 59
(2017): 65.
10 Adams v Cape Industries plc [1990] Ch 433

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The first theory that needs to be referred to while discussing the concept of lifting the
corporate veil is the agency theory. It is assumed that there exists an agent principal
relationship between the corporations and its directors. The directors under this theory are
considered to be mere agents of the company where the company is treated to be the
principal. The agency relationship creates a fiduciary duty owing to which the agents are
required to ensure the wellbeing and the best interests of the company. Owing to this
contention of fiduciary relationship, the directors are to be considered as the agent of the
company and this confers them with the responsibility of ensuring the best interest of the
company. There are certain instances where the directors fail to ensure the best interests of
the company, which has caused the company to be held liable. In such cases, the courts are
authorised to intervene and pierce the corporate veil to hold the director who is at fault liable.
This concept can be best discussed with the case of Green v Bestobell Industries Pty Ltd
(1982) 1 ACLC 111.
In this case, Bestobell has been a company engaged in the business of construction where
Mr. Green has been appointed as a senior manager. He has been aware of the fact that the
company in question has been engaged to work in a project, which is also involved in the
business of construction. This information has been available to Mr. Green by virtue of his
position as the senior manager of the company. Mr. Green has utilised this information and
established a new company named Clara Pty Ltd. and has applied for the project. Moreover,
owing to his knowledge regarding the amount that Bestobell has been tendering, Mr. Green
has made the tender of his company to be less than that of Bestobell. This has made Bestobell
lose the tender as the same has been awarded to Clara Pty Ltd. In this case, court held that
Mr. Green has failed to ensure the best interest of the company and has failed to comply with
the fiduciary duty that he has been liable to comply with. He has been accused by the court to
11 Green v Bestobell Industries Pty Ltd (1982) 1 ACLC 1

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have violated the duty that he has been liable for with respect to the conflict of interest as he
has been using the information obtained from the company serving his personal interest. In
this case, the court has been of the opinion that Mr. Green has been contravening his duties as
a director and for the same he would be held liable. This is because he has been using his
position to avail inside information, which has been using against the company. In such a
case, the court will lift the corporate veil to discover the real culprit for the purpose of
holding the director who has been at fault liable for his wrongful actions. Hence, the court in
this case has held Mr. Green liable for the losses that have been caused to the company owing
to his selfish actions12.
For the purpose of extending immunity to the owners as well as the directors of the
company, the court needs enquire regarding the intentions of the owners or directors behind
the formation of the company. There are certain instances where a company has been
established with the sole purpose of supressing an actual purpose pertaining to the owners or
with an intention to avoid a pre-existing legal liability. In case there has been an intention to
avoid liability behind the formation of a company the courts may lift the corporate veil for
holding the owners personally liable. This can be treated as another ground where the courts
are justified to lift the corporate veil for holding the wrongdoer liable. The rule of lifting the
corporate veil when a company has been formed for the purpose of evading liability that has
been previously existing can be best explained with the case of Gilford Motor Co Ltd v
Horne [1933] Ch 93513. In this particular case, the defendant has been previously employed
with the company that has been contesting as a plaintiff. There was an employment contract
is situated between the defendant and the plaintiff. Under this contract, the defendant has not
been authorised to solicit the customers belonging to the company. However, the defendant
has established a separate company and has establish the same under the name of his friend
12 Schall, Alexander. "The new law of piercing the corporate veil in the UK." European Company and
Financial Law Review 13.4 (2016): 549-574.
13 Gilford Motor Co Ltd v Horne [1933] Ch 935

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and wife. As this company does not have the agreement with the plaintiff company regarding
the restraint on soliciting the clients of the plaintiff, the defendant carried on soliciting the
clients of the plaintiff under the name of this newly formed company. This can be treated as
an avoidance of legal obligation by setting up a new company. Hence in this case the courts
were compared to pierce the corporate veil for the purpose of holding the defendant liable as
the company has been set up solely for the purpose of avoiding the liability of not competing
with the plaintiff company14.
Again, the concept of lifting the corporate veil on deciphering a mal intention within the
directors regarding the avoidance of a liability has been followed in the case of Creasey v
Breachwood Motors Ltd [1993] BCLC 48015. In this case the plaintiff has been employed as
the general manager of the company and has been removed afterwards from his position.
Being unfair dismissal the plaintive wanted to claim damages from the company. However,
before the claim could have been affected the company has transferred all its assets to another
company, which has been held the defendant in this proceeding. This company has been
formed for the sole purpose of avoiding the liability of paying the general manager who has
been wrongfully dismissed. This made the plaintiff to bring a proceeding against the
company for claiming his compensation for wrongful dismissal. In this proceeding the
decision has been delivered in favour of the plaintiff. It has been held by the court in this
proceeding that the directors belonging to the defendant company has been intentionally
exploiting the concept of distinct legal entity by transferring the assets of the defendant
company to another company for the sole purpose of avoiding the claims of the plaintiff.
Hence, it can be stated that the sole purpose of the forming the new company and transferring
the assets of the previous company to the same has been affected for the sole purpose of
avoiding the legal liability of paying compensation to the plaintiff. This made the court to
14 McGowan, Jamie. "Veil Piercing in the UK: An Evolution of Doctrinal Approaches." De Lege Ferenda 2
(2019): 92.
15 Creasey v Breachwood Motors Ltd [1993] BCLC 480

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hold the directors liable for the wrongful acts committed with an intention of avoiding legal
liability. Hence, in such a case courts are justified to lift the corporate veil16.
There are certain instances where a company is registered with an objective of assisting a
sham or fraud or has been created as an equipment to a fraud. In such a case the courts would
not hold the company to be a separate legal entity from its owners or directors. In such a case
the courts have the authority to pierce the corporate veil who discovered the faces behind the
fraud or sham. This principle can be best explained with a case of Re Darby, ex parte
Brougham [1911] 1 KB 9517. In this case the court has ignored the corporate veil for the
purpose of detecting the fraud that has been carried on and the name of the company. In this
particular case, the parties involved were Gyde and Darby. They have been convicted for
their fraudulent activities and were undischarged bankrupts. However, they have formed a
company namely City of London Investment Corporation Ltd. This company consisted of
seven shareholders. However, the profits of the company has been remitted to Gyde and
Darby. Again, they attempted to establish a new company namely Welsh Slate Quarries Ltd.
A licence and certain plants costing 3500 to the old company has been sold to the new
company for a price of 1800. The prospectus of the company has provided for the profits of
the new company to be limited to the formal company. There was no provision to limit the
profit to Gyde and Darby. However, the company eventually failed. Upon the failure of the
company, a liquidator has been appointed. The liquidator has been claiming the secret profit
that has been made by Gyde and Darby. However on their defence Gyde and Darby has
claimed that the original promoter of this field company was the previous company. This
contention has been rejected by the courts. The court has admitted the fact that the whole
arrangement of forming a new company has been affected with the motive of assisting a
fraud and making illegal profits. It has been contended by the court that the former company
16 Garcia-Gallont, Rolf, and Andrew J. Kilpinen. "If the Veil Doesn't Fit... An Empirical Study of 30 Years
of Piercing the Corporate Veil in the Age of the LLC." Wake Forest L. Rev. 50 (2015): 1229.
17 Re Darby, ex parte Brougham [1911] 1 KB 95

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has been registered by Gyde and Darby for the sole purpose of supressing their fraudulent
activities. In this case, the court has pierce the corporate veil for the purpose of holding Gyde
and Darby liable and claiming the secret profits that has been made by them under this
fraudulent arrangement18.
It has also been held by the court in several instances that when corporation has been
established for tax avoidance or for evading the obligations of taxation, quotes on authorised
to pierce the corporate wheel for the purpose of holding actors behind the same responsible.
This principle can be best established with a case of Sharrment Pty. Ltd. v Official Trustee
in Bankruptcy (1988) 18 FCR 44919. It has been held by the court in this case that when there
is an element of revenue avoidance behind the formation of a company the same will be
considered as sham company and the court has been authorised to pierce the corporate veil of
such a company to hold the actors behind this arrangement liable20.
Certain statutory provisions also empowers the court to pierce the corporate veil for the
purpose of holding the wrongdoer is liable. The Corporations Act 2001 (Cth)21 provides for
the principles that allows such piercing of corporate veil. The directors of a company may be
held liable personally for any trading or transaction that they have been a part of or have
consented to, which has the probability of rendering the company insolvent or has rendered
the company insolvent as per the provisions contained u/s 588G of the Corporations Act
2001 (Cth)22. This provision empowers the court to lift the corporate veil of a company for
the purpose of holding the real culprits of insolvent trading liable in a personal capacity. A
holding company can also be held liable for insolvent trading u/s 588V of the Corporations
Act 2001 (Cth)23. On the other hand where a person has contravened the principal contained
18 Peterson, Christopher W. "Piercing the corporate veil by tort creditors." J. Bus. & Tech. L. 13 (2017): 63.
19 Sharrment Pty. Ltd. v Official Trustee in Bankruptcy (1988) 18 FCR 449
20 Tan, Zhong Xing. "New Era of Corporate Veil-Piercing: Concealed Cracks and Evaded Issues." SAcLJ 28
(2016): 209.
21 The Corporations Act 2001 (Cth)
22 The Corporations Act 2001 (Cth), s 588G
23 The Corporations Act 2001 (Cth), s 588V

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u/s 206A of the Corporations Act 2001 (Cth)24 and rendered financial assistance in pursuance
of the same, the person will be held liable. A director may also incur liability u/s 197 of the
Corporations Act 2001 (Cth)25 the discharge gets in incurred by a corporation owing to his
breach of duties.
Conclusion
Hence, it can be concluded that any company, which has been registered effectively
severes the identity of the owners of the company from that of the identity of the company.
The courts are not required to pierce the corporate veil of the company to hold the owners as
well as the managers of the company liable for the liabilities of the company. The company is
assumed to have a separate existence as an individual to that of the persons who has been
conferred with the authority to manage its affairs and the owners26. However, there have been
several circumstances where this restriction on lifting the corporate veil has resulted in
discrepancies. This has resulted from the various instances of misuse and wrongful actions
that were found to have been committed by the directors of the company. The courts have the
authority to intervene and pierce through the corporate veil to decipher the chief culprit and
detect the misuse of the immunity provided through the corporate veil. There are certain
instances where the company used as an instrument to effect the illegitimate interests of the
owners or managers of the company. In such instances, the courts are authorised to intervene
and pierce the corporate veil to hold the director who is at fault liable27.
24 The Corporations Act 2001 (Cth), s 206A
25 The Corporations Act 2001 (Cth), s 197
26 Macey, Joshua C. "What Corporate Veil." Mich. L. Rev. 117 (2018): 1195.
27 Peterson, Christopher W. "Piercing the corporate veil by tort creditors." J. Bus. & Tech. L. 13 (2017): 63.

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Bibliography
Adams v Cape Industries plc [1990] Ch 433
Bainbridge, Stephen M. "Corporate Directors in the United Kingdom." Wm. & Mary L. Rev.
Online 59 (2017): 65.
Creasey v Breachwood Motors Ltd [1993] BCLC 480
Garcia-Gallont, Rolf, and Andrew J. Kilpinen. "If the Veil Doesn't Fit... An Empirical Study
of 30 Years of Piercing the Corporate Veil in the Age of the LLC." Wake Forest L. Rev. 50
(2015): 1229.
Gilford Motor Co Ltd v Horne [1933] Ch 935
Green v Bestobell Industries Pty Ltd (1982) 1 ACLC 1
Hansmann, Henry, and Reinier Kraakman. "The end of history for corporate law." Corporate
Governance. Gower, 2017. 49-78.
Jackson, Kody. "Behind the Corporate Veil." ReVista (Cambridge) 15.1 (2015): 50.
Macey, Joshua C. "What Corporate Veil." Mich. L. Rev. 117 (2018): 1195.
McGowan, Jamie. "Veil Piercing in the UK: An Evolution of Doctrinal Approaches." De
Lege Ferenda 2 (2019): 92.
Peterson, Christopher W. "Piercing the corporate veil by tort creditors." J. Bus. & Tech. L. 13
(2017): 63.
Puri, Poonam, et al. "Piercing the Corporate Veil: Multinational Corporate Accountability
2018." (2018).
Re Darby, ex parte Brougham [1911] 1 KB 95

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Salomon v A Salomon & Co Ltd [1896] UKHL 1
Schall, Alexander. "The new law of piercing the corporate veil in the UK." European
Company and Financial Law Review 13.4 (2016): 549-574.
Sharrment Pty. Ltd. v Official Trustee in Bankruptcy (1988) 18 FCR 449
Tan, Cheng Han, Jiangyu Wang, and Christian Hofmann. "Piercing the Corporate Veil:
Historical, Theoretical and Comparative Perspectives." (2018).
The Corporations Act 2001 (Cth)