The Doctrine of Piercing of Corporate Veil and its Importance

Limited liability and separate legal entity are two of the key characteristics of a corporation due to which people incorporate companies while operating their business because they enable the corporation to enter into legal contracts under its own name. The liability of these contracts imposes on the corporation rather than its members. Due to the option of limited liability, parties prefer to incorporate corporations while operating their business since they can protect their personal assets; it is not the case in other business structures such as sole trader or partnership. However, many times members misuse these characteristics to gain an unfair advantage or conduct illegal activities. In such case, the court pierces the corporate veil to set aside the element of the separate legal entity in order to hold its members liable who take decisions for the corporation. Many argue that the courts in Australia are reluctant to avoid the characteristics of the separate legal entity of a company while providing their judgement because there is no legislation which requires them to do so. However, this is not the case because there are many cases which are good examples that prove courts avoid the principle of corporate veil while providing their judgement to hold the parties liable for their actions. In this report, the role of piercing of corporate veil will be evaluated to understand this concept. Various reasons will be given in the report which argues that the Australian courts are not reluctant to depart from the separate legal entity based on the fact that there is no legislation under which they have to do so. Relevant cases will be evaluated in the report to justify arguments.

This doctrine is an exception to the element of the separate personality of the corporations. It is a key characteristic of a company which attracts many people to incorporate a corporation while managing their business. The corporate structure protects their private assets since the company has a distinct legal entity from its owners. This concept was established by the court in the landmark judgement of Salomon v Salomon & Co Ltd case. This is a relevant case in which the court provided its judgement based on the element of a separate legal entity and limited liability. In this case, Salomon started a company by transferring his business in which he was the majority shareholder along with his family members. He was also holding debentures of the company. Later the corporation went into liquidation in which Salomon received money from his debentures; however, the unsecured creditors of the enterprise did not receive their due payment. They filed a case against Salomon by provided that he is the majority shareholder along with his family members based on which he should be held liable to pay their debts. They also argued that the issuing of the debentures was a sham. The court evaluated the facts of the case and provided a judgement that the legal entity of Salomon and Co Ltd is separate from Salomon. The fact that he is a majority shareholder of the enterprise did not change that it has a difficult entity.

Moreover, the information regarding debentures was included in the public documents based on which they are valid. The court provided that Salomon’s liability is limited and his personal assets cannot be used by the unsecured creditors to set off their debts. Based on the principle established in this case, many judgements were given by the court in which the separate entity of the company is identified. In Peate v Federal Commissioner of Taxation case, it was held by Windeyer J that a company is considered as a person in the eyes of the law based on the element of separate legal personality. This principle was recognised by the Australian courts under which the actions of the company were its own, and members’ liability is limited to the amount which they invest in the corporation. Along with the principle of the separate legal entity, the courts have also recognised the veil piercing provision. It is referred to an exception to the rule of the separate legal entity in which the court did not take action against the company rather hold the shareholders liable. After the judgement of Salomon v Salomon & Co Ltd case, the courts situated in England, United Kingdom and Australia have applied the exception to the general rule of the separate legal entity in many cases.

In Australia, the piercing of corporate veil was defined by Young J in the judgement of the case Pioneer Concrete Services Ltd v Yelnah Pty Ltd in which it was held that the courts recognises the element of separate legal entity, however, they will on certain occasion, look behind the corporate veil in order to identify the real controllers of the company. Herron CJ argued in the case of Commissioner of Land Tax v Theosophical Foundation Pty Ltd that in Australia it is difficult to identify cases in which this principle applies. There are many reasons given for non-application of this rule which include failure to identify the reasonable ground or lack of legislative framework which recognises this doctrine. Hill J provided in case of AGC (Investments) Ltd v Commissioner of Taxation that ambiguity exists in situtions where the court can pierce the corporate veil.

However, this did not mean that the Australia courts are reluctant to avoid the separate legal entity of corporations based on the fact that there is no legislative framework established by the government for the same. There are many cases in which the Australian courts have pierced the corporate veil while avoiding the element of the separate legal entity in order to hold the members of the company personally liable for its liabilities. Jenkinson J provided similar views in the judgement given in the case of Dennis Willcox Pty Ltd v Federal Commissioner of Taxation. It was held in this case that if the partnership which is formed between the company and its member is a sham to conduct fraud and the company is designed to conduct illegal activities, then the court can pierce the corporate veil in order to hold them liable for their actions. The Australian courts have identified various discrete factors based on which courts avoid the separate personality of corporations. These factors are grouped into broad categorised by the court. These factors include agency, group enterprise, fraud, unfairness/justice, and sham or façade. As per these factors, veil is pierced to hold the members guilty without a legislative framework. The judgement given in Lazarus Estates Ltd v Beasley case further proves this point. In this case, Denning LJ provided that the court will not allow anyone to take unfair advantage of the company to conduct fraud.

Australian Courts’ Approach to Piercing of Corporate Veil Doctrine

This is a relevant judgement given by Denning LJ after which it was clear that Australian courts will rely corporate veil piercing to hold those parties liable who unfairly use the principle of the separate legal entity. This doctrine puts a check on their actions and enforces them to take corrective and legal actions while managing their operations. Therefore, the Australian courts rely on this doctrine to hold the parties liable for the fraud conducted by them while misusing the corporate structure. A good example was given in the judgement of Re Neo case. In this case, the judgement was given by the Immigration Review Tribunal that was asked to review a decision which was made for a visa application which was refused. This application as refused because the corporation which was providing the sponsorship was incorporated on the same day. Moreover, the corporation has not started to carry out the operations of the business. The Tribunal provided in its judgement that the corporation is used by the parties as a mere vehicle to circumvent the Australian migration law. The incorporation of the company is only a façade to ensure that the applicants remain in the country based on which the court refused the application of visa.

Along with holding the members liable for their operations, the Australian courts use this principle against parent companies which have effective control over their subsidiaries to impose their tortious liability on them. This element was established in the landmark judgement given by Australia court on corporate veil piercing in the case of CSR v Young. This is a relevant case which shows that the Australia courts lift the corporate veil to hold the parent corporation liable for the actions of subsidiary. In this case, CSR Company (CSR) was appointed as the agent by Australian Blue Asbestos Ltd (ABA) for the purpose of conducting business transactions with them. As per the relationship between the companies, the holding corporation has complete control of the operations and decisions taken by the subsidiary company. As per this relationship, the decisions made by the holding company are enforced on the subsidiary enterprise. Due to the actions of the company, a kid who was living near the town suffered from cancer. A suit was filed against both ABA and CSR Company for the damage suffered by the kid. The Court of Appeal provided that the tort liability is imposed on the parent company for the actions of subsidiary if effective control is exercised. Based on which, both ABA and CSR company were held liable by the court. Thus, the companies which control the operations of their subsidiaries can also be held liable for the tortious acts of their subsidiary companies.

Different Factors that Australian Courts Use to Pierce the Corporate Veil

Australian courts rely on corporate veil piercing to hold directors liable for the decisions which they take in the company. Although, a corporation has a separate entity; however, it is an artificial person that cannot take its own decisions. The directors of the company are considered as its mind who taken all the decisions for the enterprise. Since they take all the business decisions, they are obligated for liabilities of the company by piercing the corporate veil. In case of Australia, various provisions are given in the Corporations Act 2001 which imposes duties and responsibilities on directors of the company. While discharging their duties and taking business decisions, if these duties are violated by the directors, then they can be held personally liable by the court. There are various cases in which the court held the directors of the company liable for its actions. In the case of ASIC v Adler, this principle was applied by the court in order to hold the director liable.

The director used his position for ulterior motives, and he had failed to ensure that a standard is maintained by conducting the operations of the business based on which he was held personally liable. In this case, the director was also a majority shareholder in another corporation, and he misused his position in one company to get unfair advantage in another based on which the court hold him personally liable. Thus, directors who did not hold shares are still obligated under the piercing of corporate veil if they violate their duties which are given under section 180, 181, 182, 183, 588G or others. The corporate veil which protects the rights and actions of directors is pierced by the courts if it is identified that the power and position of directors are used for illegal purposes or for gaining personal advantages.

Conclusion

Based on the above observations, it can be concluded that corporate veil can be pierced and it enables the courts to overlook the provision of the separate legal entity of the company in order to hold its members personally liable for its actions. In case of Australia, a legislative framework has not been established for this doctrine; however, it did not mean that the courts are reluctant to apply this principle. Various cases are discussed in the report which shows that the Australian courts apply the principle of piercing of corporate veil in circumstances such as fraud, sham or façade, group enterprises, agency, and unfair practices. The objective of this doctrine is to ensure that parties did not misuse the element of limited liability and separate legal personality of the company to gain an unfair advantage or causing harm to other parties. In the case of Australia, the courts also rely on this doctrine to hold the real parties liable who conduct fraud or gain an unfair advantage by misusing the corporate structure of the company. Therefore, it is argued that the Australian courts are not reluctant to apply the doctrine of piercing of corporate veil because they rely on this principle to ensure that corporations continue to operate in a lawful and ethical way which benefits the whole country.

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