Separate Legal Entity and the Element of Corporate Veil

Companies are legal entities which have a separate legal personality from its owners, and this personality provides them various rights such as the ability to form contractual relationship, purchase, sell or hold assets, sign legal contract, and others. The element of separate personality is referred as a corporate veil which separates the shareholders, directors, and members of the company from its legal existence. Due to this separate legal existence, the owners take business decisions in the corporation; however, they did not hold personally liable for the liabilities of the enterprise. This corporate veil provides protection to the members of the company, however, this is not an absolute rule, and the corporate veil can be pierced by the courts to hold the members personally liable. In the case of Australia, the provision of piercing of corporate veil applies as well under which the courts pierce the corporate veil to hold the real perpetrators liable for their actions. This report will provide arguments against the statement that Australian courts have been reluctant while departing from the separate entity of the company because there is no legislation which requires them to do so. This report will evaluate various reasons based on which the Australian courts pierce the corporate veil by evaluating the judgements of various Australian cases.

In order to understand the principle of the doctrine of the corporate veil, it is important to evaluate the element of the separate legal entity of corporations. This element was established in the landmark case of Salomon v Salomon & Co Ltd. Salomon was operating a business of boot making which he terminated to incorporate a company. He was the majority shareholder and debenture holder in the company along with his family members who were also the shareholders of the company. Unfortunately, the corporation went into liquidation in which the unsecured creditors did not receive their due amount. Salomon received money in the liquidation for the debentures. The unsecured creditors were upset, and they filed a suit against Salomon. They argued that he is the majority shareholder along with his family due to which he should repay the debts of the company. They also provided that the debenture were a sham, and they are not valid.

The House of Lords provided its judgement based on the element of a separate legal entity and limited liability. It was held that irrespective of the fact that Salomon is the majority shareholder along with his family members, the company has a separate legal personality based on which the liability of Salomon is limited, and he cannot be held personally liable for its liabilities. Moreover, the information regarding debentures was given in the document of the company, therefore, they are valid. A similar judgement was given in the court in Lee v Lee’s Air Farming Ltd case in which the court provided its judgement based on the element of the separate legal personality. Furthermore, this element is recognised by the Corporations Act 2001 (Cth) under section 124 in which the rights of companies operating in Australia are identified.

Recognised Situations for Piercing the Corporate Veil

The element of separate legal entity provides a corporate veil which protects parties such as directors, shareholders and other officers from being personally liable for the debts of the corporation. However, this veil can be pierced by the court in order to hold those parties liable who made business decisions for the enterprise. The veil is pierced so that the court can hold those parties liable who used the separate personality of the company to gain personal advantage or conduct an illegal act.

In the case of Australia, there is no legislative framework implemented by the government in order to recognise the principle of piercing of corporate veil. However, this did not stop Australian courts from relying on this principle to hold the culprits liable for their actions. The courts are not reluctant to terminate the element of the separate legal personality in order to promote justice. This view was given by Rogers AJA in the judgement of Briggs v James Hardie & Co Pty Ltd case. It was held that there is no common or unifying principle in Australia which underlines the occasional decisions in which the corporate veil is pierced by Australian courts. However, the courts rely on a fact-based approach while piercing the corporate veil due to which they are not reluctant to overlook the element of a separate legal entity. 

Moreover, the element of the lifting of the corporate veil was recognised by the court in Australia in the judgement of Pioneer Concrete Services Ltd v Yelnah Pty Ltd case. In this case, the court recognised that by relying on the element of piercing of corporate veil, the element of the separate personality could be overlooked while providing a judgement by the court. In this case, the court highlighted the difference between lifting and piercing of corporate veil phrase as well. In the judgement of Gorton v Federal Commissioner of Taxation case, it was held by Windeyer J that this element of the separate personality had led the law in unreality and formalism. It was argued that the main problem with the judgement of Salomon v Salomon & Co Ltd case is not the separate personality of the company; instead, it is the fact that the House of Lords did not define the situations in which the court can refuse to implement this provision.

Since there is no legislative framework established by the Australian government, the court relies on this doctrine based on the facts of the case. Australian courts have recognised various situations in which they overlook the element of the separate personality in order to pierce the corporate veil. Generally, the objective of the veil piercing by the court is to ensure that parties are not missing the position of the company for conducting fraud or illegal activities, and they are not using the separate personality element for personal benefit. In Dennis Willcox Pty Ltd v Federal Commissioner of Taxation case, the purpose of avoiding the element of the separate legal personality by the court is to evaluate whether the corporation is a mere sham or façade or it is created in order to bypass certain law or obligation by its members. There are certain broad categorised which are recognised by the Australian courts to pierce the corporate veil of companies which include fraud, group enterprises, unfairness, agency and sham or façade.

Legislation and Directors’ Duties

Generally, it is not considered that the company is the agent of its shareholders or the parent company just based on the fact that they hold its shares as given in Balmedie Pty Ltd & Anor v Nicola Russo & Ors case. However, in some cases, the parent company or shareholders have a high degree of control on the operations of the enterprise that the company is considered as their agent based on which these parties are held liable for their actions. In the case of Barrow v CSR Ltd, it was held by Rowland J that the parent company could be held liable for the actions of the subsidiary because their relationship was considered as a principal-agent relationship due to the effective control which the parent company had on the subsidiary. In the case of The Electric Light and Power Supply Corporation Limited v Cormack, it was held by Rich AJ that the corporate veil could not be pierced in case of a one-man company because he acted as the agent for the corporation and the decision was not taken by him for evading his personal obligations. 

Fraud is another key element in which the courts are not reluctant to establish the principle of the separate legal entity even though there is no legislative framework established. However, it did not mean that the courts did not uphold the element of corporate veil while providing their judgement. For instance, in the judgement of Re Edelsten ex parte Donnelly case, it was held by the court that no fraud is conducted by the parties if they have incorporated the company to ensure that the property which is acquired after the bankruptcy did not go into the hands of the trustee. On the other hand, it was held in the case of Re Neo it was held by the court that the purpose of forming the company is to avoid the provisions of the Australian migration law since it was incorporated on the same day and it did not carry out any business. Moreover, in the judgement of RMS Glazing Pty Ltd v The Proprietors of Strata Plan No 14442 case it was held by the court that a shareholder of the company also has the right to seek piercing of the corporate veil in order to avoid an unfair outcome. 

Therefore, the objective of the doctrine of piercing of corporate veil is to ensure that parties are not misusing the corporate structure to conduct fraud or illegal activity. Certain provisions given in the Corporations Act assists courts in piercing the corporate veil, for instance, the implementation of director duties. The directors play a crucial role in corporation since they take business decisions and form future strategies in the company. Therefore, the Corporations Act has provided a range of duties or obligations which directors have to comply with in order to ensure that they did not misuse their position. These duties are focused on ensuring that the directors do their job with care and diligence and they maintain a good faith towards the company. In case these duties are violated by directors, or they failed to comply with them, then the court pierces the corporate veil to hold the directors liable for the actions of the company. For instance, in ASIC v Narain case, the director was held liable for the misleading letters send by the company by piercing the corporate veil by the court since the director failed to comply with the duties imposed under the Corporations Act.

Conclusion

Another good example is the ASIC v Adlercase. In this case, the directors misused his position as the director and shareholder in another company to illegally use the funds of the company for improper purposes and personal gain. Rather than holding the corporation liable for the actions, the court pierced the corporate veil by provided that the directors have violated the duties given under section 180 to 183 of the Corporations Act based on which the director is liable for the actions of the corporation. By piercing the corporate veil, the tortious liability of the company is also imposed on other parties who are liable for the same. The parent company which completely controls the operations and decisions of its subsidiary is liable for the torts committed by the corporation (Barrow v CSR Ltd). Thus, the courts in Australia did not shy away from piercing the corporate veil of a company in order to deliver justice or hold the parties liable for their actions. These policies are targeted towards ensuring that parties are not misusing the limited liability and separate personality element to take unfair advantage, avoid a law or conduct illegal activity through the corporation.

Conclusion

To conclude, limited liability and the separate legal entity are a part of the corporate structure due to which the shareholders, directors or other officers of the company cannot be held personally liable for its debts. However, these principles can be set aside by the court by the doctrine of piercing of corporate veil in which the court set aside the separate personality of the company to hold those parties liable who have taken its decisions. A legislative framework has not established by the government in Australia, however, it did not stop the Australian courts from applying this principle. The Australian courts are not reluctant to set aside the principle of the separate personality based on the fact that no legislative framework exists. There are various cases in Australia in which the courts applied the principle of corporate veil piercing to hold the real culprits liable for the liabilities of the corporation. There is a board range of categorises based on which the courts overlook the corporate veil of the corporations to find out who is responsible for its actions. These categories include fraud, sham or façade, unfairness, agency and group enterprises. The courts can hold the shareholder, parent corporations, directors or any other officers liable who have taken the wrong advantage of the separate entity of the company for personal gain or for conducting illegal activities. Therefore, the doctrine of piercing of corporate veil is recognised and applied by the Australian courts irrespective of the fact that a legislative framework is not recognised by the government to apply this principle.

Anderson, Helen, ‘Challenging the Limited Liability of Parent Companies: A Reform Agenda for Piercing the Corporate Veil,’ (2012) 22 (2) Australian Accounting Review 129-141.

Anderson, Helen, ‘Piercing the Veil on Corporate Groups in Australia: The Case for Reform’ (2009) 33 Melbourne University Law Review 333.

Cassidy, Julie, Concise corporations law (Federation Press, 2006).

Gopalan, Sandeep and Michael Guihot, ‘Cross-Border Inslovency Law and Multinational Enterprise Groups: Judicial Innovation as an International Solution,’ (2015) 48 Geo. Wash. Int’L. Rev. 549.

Hargovan, Anil and Jason Harris, ‘Piercing the Corporate Veil in Canada: A comparative analysis’ (2007) 28 The Company Lawyer (UK) 58.

Hargovan, Anil, ‘Piercing the Corporate Veil on Sham Transactions and Companies’ (2006) 24 Company and Securities Law Journal 436.

Oh, Peter, ‘Veil-Piercing Unbound,’ (2013) 93 BUL Rev. 89.

Ramsay, Ian and David Noakes, ‘Piercing the Corporate Veil in Australia’ (2001) 19 Company and Securities Law Journal 8.

Roach, Lee, Company Law (Oxford University Press, 2016

Scott, Peter Dominick, ‘Shafron v Australian Securities and Investments Commission (2012) 286 ALR 612,’ (2012) 31 U. Tas. L. Rev. 155.

Sealy, Len and Sarah Worthington, Sealy & Worthington’s Cases and Materials in Company Law (Oxford University Press, 2013).

Tricker, RI Bob and Robert Ian Tricker, Corporate governance: Principles, policies, and practices (Oxford University Press, 2015).

Warren, Marilyn, ‘Corporate structures, the veil and the role of the courts,’ (2016) 40 Melb. UL Rev. 657.

ASIC v Adler (2002) 41 ACSR 72

ASIC v Narain (2008) FCAFC 120

Balmedie Pty Ltd & Anor v Nicola Russo & Ors (1998) FCA 980

Barrow v CSR Ltd (Unreported, 4 August 1988, Supreme Court of Western Australia, Rowland J)

Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549

Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267

Gorton v Federal Commissioner of Taxation (1965) 113 CLR 604

Lee v Lee’s Air Farming Ltd (1960) UKPC 33

Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254

Re Edelsten ex parte Donnelly (1992) FCA 296

Re Neo (Unreported, Immigration Review Tribunal, Metledge M, 30 July 1997)

RMS Glazing Pty Ltd v The Proprietors of Strata Plan No 14442 (Unreported, Supreme Court of New South Wales, Cole J, 17 December 1993)

Salomon v Salomon & Co Ltd (1897) AC 22

The Electric Light and Power Supply Corporation Limited v Cormack (1911) 11 NSWSR 350

George, Amin, The Veil Doctrine in Company Law < https://www.llrx.com/2007/09/the-veil-doctrine-in-company-law/>.

Jade, Dennis Wilcox Pty Ltd v. The Commissioner of Taxation of the Commonwealth of Australia < https://jade.io/j/?a=outline&id=150636>.

Jade, Re Edelsten, G.W. Ex parte Donnelly, M.C. (Trustee of estate) v Edelsten, G.W. & ors < https://jade.io/j/?a=outline&id=325427>.