BUSINESS ASSOCIATIONS - Amazon S3 · Business Associations Semester 2, 2015 3 Class 1 – Introduction Administration Matters: Boros and Dunns – Simple textbook which is accepted

Business Associations Semester 2, 2015

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BUSINESS ASSOCIATIONS

Semester 2, 2015


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Table of Contents

Introduction to the Corporation and Incorporating under Australian Law……… 3

Separate Legal Personality…………………………………………………………………………….. 8

Implications of Limited Liability……………………………………………………………………. 12

The Corporate Constitution and Decision Making by the Board of Directors… 19

Decision Making by the General Meeting…………………………………………………….. 31

Contracts with Outsiders……………………………………………………………………………… 45

Theories of the Corporation……………………………………………………………………….… 54

Directors’ Duties under Statute and the Common Law…………………………………. 62

Directors’ Duty of Care…………………………………………………………………………………. 73

Directors’ Duty to Act in Good Faith and for a Proper Purpose…………………….. 82

Directors’ Duty to Avoid Conflicts…………………………………………………………………. 90

Directors’ Duty not to Make Secret Profits/Divert Corporate Opportunity…... 95

Statutory Disclosure Obligations: Related Party Transactions…………………….. 101

Directors’ Statutory Duty to Prevent Insolvent Trading………………………………. 111

Shareholders’ Remedies + Oppression……………………………………………………….. 120

Winding Up………………………………………………………………………………………………… 137

Corporate Regulation: The Role of ASIC…………………………………………………….. 144

Corporate Groups…………………………………………………………………………...…………. 152

Problem Solving in Corporate Law and Revision…………………………………………. 160


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Class 1 – Introduction

Administration Matters:

Boros and Dunns – Simple textbook which is accepted to be accurate and clear

Assessments:

1-2pm Wednesday 19th August – 20 multiple choice question electronic quiz (10%)

o Questions either in the form of a simple direct question or a little story

o More information + practice quiz will be up 10th August

o Class 1 – Introduction to the Course (summary) parts (2) and (3) – About the

General Meeting and the Board of Directors are tailor made to the course

Tuesday 15th September – Essay about theories (30%)

o Discursive note about theories will be issued by Week 3

o 2000 words (no +/- 10%)

o 3 components – Doctrine (what is the law), Theory, and personal opinion

o In considering the standard of care required of non-executive directors, the

NSWCA in Case, critically assess this statement from the perspective of one of

either of these 3 theories [three theories listed] , having specifically regard

for s 180, 189 of the Corporations Act

Negligence = Standard of care

Exam – 2 hours. Problem question with parts (60%)

Class Participation – 5% maximisable… Cannot make worse but can improve

16 Important Signposts for the Course:

(1) Doctrinal Law for the course can be found predominantly in Statute and Regulations

in Corporations Act 2001 (Cth), Australian Securities and Investments Act 2001 (Cth)

and Corporations (Fees) Act 2001

(2) But, the General Law (Common Law and Equity) normally applies as well- so that you

may get different results depending upon which cause of action (statutory or general

law) is considered

(3) A company is a person. In most ways, even though it has no physical form, it has a

personality similar to a natural person, and is capable of owning property, being a

party to contracts, and being a claimant or defendant in legal proceedings

(4) A company is a separate person from its shareholders and also directors. This is a

consequence of statute and general law

(5) A company exists solely by reason of statute: Corporations Act 2001. The Statute has

several Chapters- by and large we tackle only a few of them

(6) A company’s existence begins when it is registered and ends when it is de-registered.

(7) The Australian Securities and Investments Commission is where the registration is

effected. ASIC is the administrator of the Corporations Act – commonly called the

‘watchdog’. Its key Act is the ASICA


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(8) The owners of a company (colloquially) are its shareholders. In fact they hold shares

of the share capital of the company. They do not own the company’s property. They

do not manage the company

(9) The internal management of a company is governed by its constitution and the

Corporations Act 2001. A company may have a ‘tailor made’ constitution or rely

upon a ‘default’ set of Replaceable Rules provided under the Act, or have a

combination of them

(10) Shareholders may get a benefit from a company:

(i) By receiving revenue, that is ‘dividends’ paid out of profits, which the

company has made;

(ii) By their power in passing resolutions (such as to appoint and remove

directors), and

(iii) From a capital gain if they sell their shares for an increased price

(11) The managers of a company (and all its assets) are the directors. Shareholders have

normally no right or power to tell directors how they manage the company

(12) Corporate Governance, even though an expression of indeterminate meaning, refers

to the fact that the directors have power over another person’s (the company’s)

assets. This may be concerned with how to make sure that the directors are:

(i) Not careless in their director’s duties, (negligence); or

(ii) Do not use the company’s assets for themselves (breach of fiduciary

duties). There are some parallels to the duties of Trustees.

(13) The General Meeting of a company refers to a formal meeting of the shareholders of

the company. When they properly meet, that meeting is said to be the company so

that a resolution properly passed by the shareholders is a resolution of the company

(14) A Board Meeting is a formal meeting of the directors. When they properly meet, that

meeting is said to be the company so that a resolution of the directors, properly

passed, is a resolution of the company

(15) Directors owe BOTH statutory and also ‘general law’ duties to the company and

generally not to the ‘owners’ of the company (the shareholders). The usual litigants

to seek to punish errant directors are ‘the company’ and ASIC – not the

shareholders.

(16) Shareholders may have complaints about the conduct of the company by reason of a

resolution either or both at its General Meeting and by its Board of Directors. There

are Statutory and ‘general law’ methods for shareholders to bring a case to court to

hear their grievances.

Corporations:

A company is a person They can have rights and obligations and generally have

the capacity of an individual (s 124 Corporations Act)

o s 2C of the Acts Interpretation Act defines a person to include a body

corporate as well as an individual


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Stakeholders – Anyone with an interest in the existence of a company Main

stakeholders include Shareholders, Directors and Creditors (also includes employees

and the community as a whole)

3 Jurisdictions of Company Law:

Common Law

Equity – Historically, companies mainly derived from the exclusive equitable division

over fiduciaries

Statute – The Corporations Act 2001 has overtaken the case law in company law

Historical Perspective:

Pre 1688, a corporation would have been created by the Monarch

o The King or Queen issued a grant of charter to create a corporation The

King’s consent was regarded as necessary to the erection of any corporation

(This led to towns or boroughs becoming companies and owning property)

Exception – The Crown itself is a corporation… Created by common

law and has a perpetual existence

Historically, the common law virtually did not recognise a corporate entity, and

statute was needed to create them A private Act of Parliament effectively created

the same results of incorporation as had been created by the Crown

o The features of a modern company are essentially the features which statute

gives

Regulated company/Joint-stock companies – Were essentially partnerships… The law

treated partnerships as a series of separate individuals

o Had features of a company, but in law they were not recognised

Statutory Corporations – At least since the 16th century, Parliament could create a

corporation by Private Act of Parliament

Main legislative movements to create the current law:

o 1720 Bubble Act (UK) – Prohibited companies acting as corporations without

being recognised by statute or charter (via the monarch)

o 1844 Joint Stock Companies Act (UK) – Permitted companies acting as

corporation once they had filed appropriate documentation and paid the

correct fee

o 1855 Limited Liability Act (UK) – Introduced the possibility that certain

individuals may not be liable for the debts of others

Shareholder may get the benefit if the company does well, but if the

company does badly, they bear the loss

o 1856 Joint Stock Companies Act (UK) – Consolidated the 1844 and 1855 Acts

o 1862 Companies Act (UK) – Cornerstone of Australian law. The first colonial

and State Acts were based on this Act


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Stated that if 7 persons subscribed a document, a corporation is

formed. s 7 of the Act allowed liability to be limited

o 1962 Uniform Companies Act – Acts separately passed in each State aimed at

resulting in a national set of company law provisions

o 2001 Corporations Act (Cth) – Main current Australian law

Encompasses all aspects of corporations following the States decision

to refer their power to the Cth

Corporations Act 2001:

s 3 – s 51(xxxvii) is the Constitutional basis for the Corporations Act, and all the rest of s 51

Also validated by the States referring their powers to the Cth

s 5B – Subject to the ASIC Act, ASIC has the general administration of this Act.

s 45A(2) – Small proprietary companies (cannot be registered as small/big Only

categorised)

- A proprietary company is a small proprietary company if it satisfies at least 2 of the

following paragraphs (a) consolidated revenue is less than $25 million, (b) the value

of consolidated gross assets at the end of a financial year is less than $12.5 million,

(c) the company and its entitles have fewer than 50 employees

s 45A (3) – Large proprietary companies

- A proprietary company is a large proprietary company if it satisfies at least 2 of the

following paragraphs (a) consolidated revenue is $25 million or more, (b) the value

of consolidated gross assets at the end of a financial year is $12.5 million or more, (c)

the company and its entitles have greater than 50 employee

s 112 – There are 6 types of company registrable under the Act

- Proprietary company: Limited by shares, unlimited with share capital

- Public company: Limited by shares, Limited by guarantee, Unlimited with share

capital, no liability company (restricted to mining)

s 113 – Defines proprietary companies

- Must no more than 50 non-employee shareholders

- Cannot be publicly funded (or get public funds)

s 114 – A company must have at least 1 member 1 person may be a company!

s 201A(1) – A proprietary company can have a minimum of 1 director

s 201A(2) – A public company must have at least 3 directors


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s 115 – Once there is more than 20 partnership, a corporation must be established

s 116 – A trade union cannot be registered as a corporation

s 117 – In order to get a company, certain forms must be lodged upon application stating

certain characteristics of the company (SEE SECTION FOR SPECIFIC REQUIREMENTS)

Explains the main requirements for the creation of a company

Cost of lodging an application is $400 (Corporations (Fees) Regulation 2001

s 118 – When the company is registered, ASIC gives you an identifying number

s 119 – A company comes into existence as a body corporate at the beginning of the day on

which it is registered

s 601AD – A company ceases to exist on deregistration

s 120 – Members, shareholders, directors and company secretary come into existence on

the day that a company is registered

s 121 – The registered office of a company is the address specified in the application for

registration

s 122 – The expenses incurred before registration in promoting and setting up a company

may be paid out of the company's assets

s 123 – A company may have a common seal (stamp which sets out ACN of the company and

its name an the last 9 digits of the ABN)

s 124 - A company has the legal capacity and powers of an individual both in and outside this

jurisdiction. A company also has all the powers of a body corporate (SEE SECTION FOR

SPECIFICS OF WHAT THE CORPORATION MAY DO)

SEE CORPORATIONS ACT SS 45A, 112, 113, 114, 117, 118, 119, 120, 121


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Class 2 – Separate Legal Personality

Essay:

700 words descriptive, 700 words on theories, 700 words critical voice (approx.)

Class 1 Recap:

Constitutional Basis of the Corporations Act:

s 3 – s 51(xxxvii) is the Constitutional basis for the Corporations Act, and all the rest

of s 51 Also validated by the States referring their powers to the Cth

What is the full name of the Administrator of the Corporations Act?

ASIC – Australian Securities and Investment Commission (s 5B)

Entity which supervisors the Financial Sector – APRA – Australian Prudential

Regulation Authority (Casebook p. 63)

What is the proper name of the entity which runs the national stock exchange?

ASX – Australian Securities Exchange (Casebook p. 63)

What is the name of the case in which the HCA said that the 1991 National Corporations Act

was found to be unconstitutional?

Re Wakim (Casebook p. 50)

How would you register a mining company?

No liability company (CA s 112)

What is the number for revenue which is critical for both large and small proprietary

companies?

s 45A(2) – Small proprietary companies, s 45A(3) – Large proprietary companies

o $25 million revenue, $12.5 assets, 50 employees (2/3 required)

What 2 things have to be met in order to be registered as a proprietary company?

Can’t have more than 50 non-employee shareholders, Can’t have any public funding

What is the largest number of partners that a business can have before registration is

required? 20

Name 5 things which must be included in the registration of a corporation:

See s 117 CA!

Who gives a company its registered number?

ASIC – Australian Securities and Investment Commission


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Limited Liability:

EG: 5 people agree to make a business. 2/5 will run the business (directors), 1/5 will

control the finances, and the other 2/5 are going to do nothing

o Company must be registered by filing in the necessary paperwork (s 117 CA)

o Must agree in advance how many shares the company is going to have, the

amount they will each pay for the shares, (s 117 (k)) 100 shares in this

example, with each having equal amount of 20 at a cost price of $5 per share

($100 each, giving the company $500 Minus $90 owed from B)

B’s only pays $10, owes $90 (thus they are only partly paid shares)

The company is obliged to keep a register of shareholders and the

shares which they hold

At common law (not equity), one is only a shareholder once

registered!

B sells the shares to Z, they remain partly paid

o Company comes into existence on the morning of registration 6 entities

have an interest in the company (5 individuals + the corporation)

o Company owes money to creditors… Company goes bust and can’t repay the

bill Shareholders (fully paid) have no obligation to pay the creditors

Partly paid shareholders have an obligation to repay the amount

which is still owing from the original sum (in this case $90)

Limited liability means that fully paid shareholders are not liable to personally repay

any amount of business loss to creditors

o EXCEPTION – Partly-paid shareholders must repay what they still owe

The nexus between corporate personality and limited liability:

Shareholders and directors have limited liability for the risk of a business This

responsibility falls upon creditors

o Limited liability shifts the risk of enterprise operations away from

shareholders and onto stakeholders or wider society

The merits and costs of limited liability:

Several arguments may be advanced in favour of limited liability:

o It encourages investment by those who have no interest in or capacity for

management participation

o It relieves shareholders from the burden of monitoring fellow shareholders

capacity to contribute proportionately to company failure

o It encourages free liquidity of share capital

o It encourages entrepreneurial risk taking by companies since they may safely

invest in projects with prospects of positive returns but also those with

significant risk exposure


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Corporate Personality:

The special character of corporate personality:

While a registered company is invested with the legal capacity and powers of an

individual (s 124 CA), its incorporeal nature ensures that there is no temporal limit

upon its existence It essentially has no conscience

o Is incapable of personal appearance in court, must appear through a rep

o A corporation is not entitled to invoke the common law privilege against self-

incrimination in answer to a demand for the production of documents under

statutory power (Environmental Protection Authority v Caltex Refining Co)

The separate personality of the corporation:

Saloman v Saloman & Co Ltd [1897] AC 22 HOL:

Facts – Aron Saloman had traded on his own as a leather merchant and wholesaler

boot manufacturer. He arranged for incorporation and arranged for himself to hold

20 001 shares, with his wife and 5 children also each holding 1 individual share in

trust (so that the legal requirements were satisfied)

o The company went bust, claim was made that the company was not actually

a company at all due to the 6 shareholders being essentially dummy’s to

satisfy legal requirements

o Saloman claims/estimates to own stock worth £38k… Wants to sell it to the

company (who does not have £38k)

o Facts - Downturn in the economy, creditors become involved to recoup the

debt which is owing Claims to recoup from Salmon (as a shareholder) in

fraud by claiming that the company is a sham

s 95A(1) CA – A person is solvent if they are able to pay all the persons

debts as and when they become payable

s 95A(2) CA – A person who is not solvent is insolvent (Saloman

company insolvent as they could not pay their debts)

Issue – Was Saloman & Co a company or a sham to avoid personal liability? Is

Saloman individually liable for the debts of the business?

Held (Lord Halsbury LC) – The sole guide in determining the status of a corporation

must be the statute itself

o The 6 family members were valid shareholders as the statute states that one

share is enough

o It was impossible to deny the validity of the transactions into which were

entered No fraud in having 6 shareholders with only 1 share and thus the

company is a real one (each shareholder assented to the arrangement!)

Held (Lord MacNaghten) – There was nothing in the statute requiring the shareholder

to be independent or unconnected nor requiring them to take a substantial interest

in the undertaking Company was valid!

o Shareholders had full notice that they were no longer dealing with the

individual, but rather a company

Decision – Company was valid. Statute itself indicates requirements for a corporation


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Ratio - The company is at law a different person all together from the subscribers to the

memorandum (the shareholders) and though it may be that after incorporation the

business is the same as it was before, the company is not in law the agent of the

subscribers or trustee for them, nor as the subscribers liable in any shape or form

o Basis of doctrine has since been confirmed in s 156 CA

Company and the shareholders are separate entities Shareholders

are not liable for the debts of the company providing there is no fraud

Lee v Lee’s Air Farming Ltd [1961] AC 12 Privy Council:

Facts – Lee formed a company. He held the whole of the issued capital in the

company except for one share held by his solicitor.

o Lee enjoyed full and unrestricted control over the affairs of the company

however was killed while carrying out work

o Lee’s widow sued the company for compensation however the NZCA rejected

the application on the basis that Lee (as director) could not be under a

contract of service as he had the full control of the company

Issue – Could Lee be both a director and servant of the corporation?

Held (Lord Morris) – Lee was paid for his work in partaking the business of ariel top-

dressing… It cannot be suggested that when he engaged in the activities that caused

his death he was discharging his duties as governing director

o Appointment was valid as Lee acting as the agent of the company in

arranging the appointment

LAW – It is well established that the mere fact that someone is a director of a

company is no impediment to his entering into a contract to serve the company

o His capacity as a shareholder who is able to control the course of events

would not in itself affect the validity of his contractual relationship with the

company Logical conclusion to assert that one person may act in dual

capacities

Decision – Director role does not alter Lee’s contractual role as a servant The

company and Lee were two separate and distinct legal persons

o A company can give an order to a majority shareholder!

Ratio – It is the logical consequence from the decision in Saloman’s Case that one

person may function in dual capacities

Hamilton v Whitehead (1988) 166 CLR 121:

Facts – Whitehead is the managing director of a small Pty company (s 113 – Cannot

raise public funds). Company attempts to raise public funds by sending out

brochures. Whitehead is charged with contravening the law, as he assisted the

breach of the law

Issue – Who is liable? The company or Whitehead?

Held – There are two capacities for Whitehead One as an individual and another

as a corporation

o Case is HCA confirmation of Lee v Lee’s Air Farming principle


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Macaura v Northern Assurance Co [1925] AC 619

Facts – Macaura was the only shareholder of a timber business. Timber business was

sold into a company, Macaura is no longer the individual owner of the timber, the

company is

o Insurance policy was taken out in Macaura’s personal capacity, and was not

transferred to his company

Wood catches fires, Macaura attempted to claim insurance by

asserting that he is an individual

Issue – One legal entity or two?

Held – Macaura was protected as the company was essentially the same as his

individual self Not able to establish two separate legal entities

o HOL decision that indicates the separate legal personality doctrine works

both in favour of corporations and shareholders

Gower’s Principles of Modern Company Law:

Since the Saloman case, the complete separation of the company and its members

has never been doubted!

o If a trader sells his business to a company he will cease to have an insurable

interest in its assets even though he is the beneficial owner of all shares

Cheffins, B Company Law: Theory, Structure and Operation (1997) Case law indicates that a company is an entity which is distinct from those who run it

o In a financial sense, creditors bear much of the risk associated with business

failure

Concerns associated with limited liability:

o Shareholders have an incentive to gamble with creditors money

o The distribution of loss as between creditors seemingly prejudices those who

are least able to endure the consequences

Positive attributes of limited liability:

o Facilitates the operation of equity markets Owning a diversified portfolio

of shares is a sensible risk-reduction strategy

o Limited liability helps to distribute risk away from poor risk bearers in favour

of those better positioned to deal with the consequences


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Class 3 – Implications of Limited Liability

Corporate Personality:

Saloman principle - Company and the shareholders are separate entities

Shareholders are not liable for the debts of the company providing there is no fraud

o Legally incorporated companies are independent persons!

Piercing the Veil of Incorporation

Piercing the veil of incorporation occurs where the separate legal personality of a

corporation is ignored Often (but not exclusively) due to fraud, agency and the

limited recognition given to the company by owners

There is no consistent principle of when the veil has been pierced

Several statutory provisions contain directions to pierce the veil of incorporation

o s 558G – A company’s directors are exposed to personal liability for debts

incurred when a company is insolvent where they knew or ought to have

known of the insolvency

Different from Saloman as it is concerning directors who incur debts

s 95A(1), s 95A(2) – Insolvency sections

o s 588V – Where the company is a subsidiary of another company, that holding

company may also be made liable in relation to those debts (if it is a holding

company, the company is insolvent/reasonable grounds to suspect

insolvency) SEE SECTION TO APPLY THE LAW PROPERLY!

s 9 defines holding company – If it has a subsidiary

s 46 defines subsidiary – Where another body controls (a) the

composition of the first body’s board, (b) is in a position to cast more

than 50% of votes at a GM, (c) holds more than 50% of the issued

shared capital has over 50% of the company

o Directors are also exposed to personal liability for the debts incurred by a

corporate trustee where the trustee is not entitled to be fully indemnified by

the beneficiaries of the trust (usually due to rights being waived)

The use of a phoenix company to avoid taxes or liability has been met with

legislation allowing ASIC to order the winding-up of companies that have been

abandoned by their directors (s 489EA(1))

Where piercing the corporate veil applies (Prest v Petrodel) - Where a person who owns

and controls a company is said in certain circumstances to be identified with it in law

by virtue of that ownership and control

James Hardie & Co Pty Ltd v Putt [1998] NSWSC 434: The element that is most important

in establishing whether the corporate veil has been pierce Is the 2nd company a

mere façade of the 1st company, or are they a fully individualised entity?

Grammaphone Typewriter v Stanley – German company is a wholly owed subsidiary of

an English company. Issue – Are the German profits taxable income of the English

company?


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o German profits were not taxable on the English company as they are

separate

o LAW – The subsidiary of another company are separate from the other

company

Re Darby; Ex parte Borugham – Two individuals set up Company 1… Company 1

bought (cheaply) a lease/license to a Welsh Slate. The same persons set up a 2nd

company and advertised the company as wealthy.

o Fraudulent conduct does allow the corporate veil to be pierced!

o LAW - As the setup was solely due to defrauding people, the principle that the

company and the individual are two separate entities does not apply

Walker and Wimborne (Mason J) – It does not matter if a company is in a group or not,

it is still a separate entity unless there is a way to find a way around it

o Industrial Equity v Blackburn – Mason J confirmed the belief that a group of

companies can still be separate entities

Adams Industries – The mere fact that it is just to find individuals and corporations are

separate entities will not suffice to pierce the corporate veil

o There are limited opportunities to consider the company and the individual

as separate entities!

Solving a problem on piercing the corporate veil -

(1) Are there any common law answers?

o Is there any analogous cases? Can you find a way to pierce the veil?

o NOTE: Mere fact that an individual holds all the shares does not matter

o Find a doctrine – Principle/Agent (possibly implied), possible to lift the veil?

(2) Are there any equity answers?

o Fraud as per Gilford, Jones (where equitable remedies were sought)

(3) Are there any statutory answers?

o s 558G – A company’s directors are exposed to personal liability for debts

incurred when a company is insolvent where they knew or ought to have

known of the insolvency

Different from Saloman as it is concerning directors who incur debts

s 95A(1), s 95A(2) – Insolvency sections

o s 588V – Where the company is a subsidiary of another company, that holding

company may also be made liable in relation to those debts (if it is a holding

company, the company is insolvent/reasonable grounds to suspect

insolvency) SEE SECTION TO APPLY THE LAW PROPERLY!

s 9 defines holding company – If it has a subsidiary

s 46 defines subsidiary – Where another body controls (a) the

composition of the first body’s board, (b) is in a position to cast more

than 50% of votes at a GM, (c) holds more than 50% of the issued

shared capital has over 50% of the company


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Fraud or Improper Conduct:

Gilford Motor Co Ltd v Horne [1933] 1 Ch 935:

Facts – A company was incorporated by Horne in order to avoid a restraint of trade

clause that restricted him from attempting to entice away any of Gilford Motor Co’s

customers Argued that company is not him, therefore restraint in unenforceable

(sought an injunction to enforce this)

Issue – Was the company restricted by the restraint or was it a separate legal entity?

Held (Lord Hanworth) – The defendant company was obviously carried out wholly by

Horne and was evidentially the channel through which Horne was carrying out

business

o Court was satisfied that the company was formed as a device, a stratagem, in

order to mask the effective carrying out of business by Horne

Decision – Company and person not separate as Horne’s company was a ‘mere cloak

or sham’ which was an attempt to avoid the restraint

Jones v Lipman [1962] 1 WLR 832:

Facts – Lipman contracted to sell land to the Joneses but before completion of the

contract Lipman sold and transferred land to a company which he had newly

acquired Joneses sought specific performance of the contract sale to them

Issue – Could Lipman’s company be afforded a separate legal personality to Lipman

and consequently be classified as the property owner?

Held (Russell J) – The company was under the complete control of Lipman and the

transfer was carried through solely for the purpose of defeating the plaintiff’s rights

to specific performance

o Lipman’s company was a sham, a mask to avoid recognition by the eye of

equity and thus separate legal personality is declined

o Company not valid as its purpose was to get around a contract!

Agency:

Agency failed as an option in Saloman, however was confirmed as a possibility is SSK

and Briggs

Smith Stone and Knight Ltd v Birmingham Corporation (1939) 161 LT 371:

Facts – SSK Ltd were a paper manufacturer who nominally let a factory to one of

their subsidiaries Birmingham Co. The municipal authority wished to acquire the

property… Issue was raised as to whether SS and Knight could claim compensation or

whether such claim must be made by Birmingham Co

Issue – Were SS and Knight one company or is the subsidiary to be afforded separate

legal personality? Who did the business belong to?

Held (Atkinson J) – SS and Knight has complete control over the waste company…

Birmingham Co does everything the same as a department of SS and Knight

o Corporate shareholder was the principle, the subsidiary company was the

(implied) agent Company that owned 100% of the shares in the subsidiary


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was held to be responsible for the subsidiary (despite the earlier held

Saloman Case)

LAW – Whether agency creates a separate legal entity is a question of fact in each

case. 6 points were deemed relevant for the determination of the question

o (1) Who was really carrying on the business? Were the profits treated as

profits of the parent or individual company?

o (2) Were the persons conducting the business appointed by the parent

company?

o (3) Was the company the head and the brain of the venture?

o (4) Did the company govern the adventure, decide what should be done and

what capital should be embarked on the venture?

o (5) Did the company make the profits by its skill and direction?

o (6) Was the company in effectual and constant control?

Points have been confined to similar facts

Decision – Each of the above questions is answered in favour of the claimants… The

business was the company’s business and was being carried out under their

discretion

Spreag v Paeson Pty Ltd (1990) 94 ALR 679:

Facts – Bricks weren’t produced at the pace or quality that was claimed for and

consequently Spreag sought compensation

o Company bricks were purchased from was a range of companies, unsure who

to sue and whether all of them were legally separate

o Paeson Pty were essentially owned and controlled as a holding company of

Componere (had no bank account or assets, no premises, did not keep any

records, all moneys paid were remitted back)

Issue – Is Paeson Pty a separate legal entity to Componere?

Held – Componere was really carrying on the business of Paeson… They were not

carrying on the business as its own

o Emphasis was placed on the fact that at no time did Paeson ever have any

money… A holding company cannot generally pay the debts of the subsidiary

Decision – Componere was the principle and Paeson was only conducting business as

an agent Componere liable to pay Spreag’s compensation

o Separate legal personality applies where a company is using a sham

subsidiary to conduct business (proven that business has no real purpose)

LAW – When considering separate legal personality, look to the 6 questions (listed

above) from Smith Stone and Knight

CSR Ltd v Wren:

Facts – CSR owned all the shares in a subsidiary. Mr Wren was employed by the

subsidiary company and contracted lung disease due to asbestos exposure

o Wren claimed that there was a direct relationship between himself and CSR

and thus believed he could claim compensation from the holding company


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Held – CSR was essentially the same as the subsidiary Look to the facts of each

case to determine whether there is one or two legal entities

Briggs v James Hardie & Co Pty Ltd (1989) 7 ACLC 841 NSWSCCA:

Facts – Briggs was exposed to asbestos whilst working for Asbestos Mines Pty Ltd

(the holding company for James Hardie)

o Action was brought on the basis that Asbestos was acting as agent for

Hardies and that Briggs was able to pierce the corporate veil

Issue – Did the agency arrangement make James Hardie liable for the negligence of

their holding company?

Held (Rogers AJA) – There is no settled principle for piercing the corporate veil

o General rule = A corporation will be looked upon as a legal entity until

sufficient reason to the contrary appears

o The corporation is not regarded as a separate legal entity where that would

give rise to an injustice or anomaly

o Too simplistic to assert that the corporate veil may be pierced where one

company exercises complete dominion and control over another

Held – The threshold problem arises from the fact that there is no common,

principled approach to be derived from the authority to pierce the corporate veil

o There is no unifying principle to lift the corporate veil… There is some

situations where the corporation has been considered not a separate legal

entity Look to these cases and attempt to draw analogies (as there is no

set law)

Held – General tort considerations should not be applicable in assessing whether a

corporation has a separate entity

James Hardie & Coy Pty Ltd v Putt [1998] NSWSC 343:

Facts – Putt was diagnosed with mesothelioma and he sought to recover damages

from James Hardie and Coy (subsidiary) and James Hardie Ltd (Holding Company)

rather than James Hardie NZ (his actual employer)

o Sued for damages claiming that the relationship between the companies was

in such close proximity that they owed the respondent

Issue – Was James Hardie (the Holding company) responsible for the subsidiary

company?

Held – The corporate veil should only be lifted in circumstances where it is clear that

it is a mere façade

o No general principle that all companies in a group of companies are to be

regarded as one Relationship of control is not of a nature so as to impose

liability

o A court cannot disregard the Saloman principles merely because it

considered it just to do so

LAW – The proposition that the corporate veil may be pierced where one company

exercises complete dominion and control over another is entirely too simplistic


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o Must be the deliberate concealment of the identity and activities of the co-

operator for separate legal personality to be established

Decision – The holding company did not control or influence the subsidiary to the

necessary extent to make them liable

o There was nothing to suggest that the subsidiary was a mere façade

Standard is not easy to overcome!

SEE CORPORATIONS ACR SS 588G, 588H AND 588V-W, S 9, S 46

Lifting the Corporate Veil Example: A, B and C decide to form a company using s 117 Corporations Act. A, B and C name their company

ABC Pty Ltd, with the 3 business partners being directors. After 2 successful business years, A, B

and C decide to diversify into the sale of disposable cigarette lighters. In order to absolve

themselves of personal liability, the partners get the company to fill in the form to create a new

company (Lighters Pty Ltd). ABC Pty Ltd consequently owns 100% of the equity in Lighters Pty Ltd.

Customers who have brought lighters from Lighters P/L are injured by faulty lighters, claim

damages. Who can the victims get recovery from?

(1) Victims has a cause of action in contract or tort against the person who sold them

the lighter (employee of Lighters) Person who sold is Lighters Pty/Ltd

o If Lighters P/L does not have enough money to pay the victims, it is possible

to argue that ABC Pty Ltd are liable as they hold all the assets of Lighters P/L

(2) Could directors A, B and C be sued as the directors of Lighters P/L?

o Statute 588G – Directors are liable for debts where they should have

reasonably known of insolvency

o Statute 588V – Situations where holding company may be liable for debts

where they should have reasonably known of insolvency

These are not debts, therefore not relevant

o Equity – Where equitable remedies are possible (injunction, specific

performance)

o Common law – Principle/Agent? Fraud?

By analogy try and compare facts to the cases in notes!

Basic Structure to a lifting the Corporate Veil Question:

(1) Who can be sued?

(2) Can the person be pay the money to overcome the damages?

(3) Issue – Corporate Veil

(4) 4 streams to overcome the corporate veil

Documents

BUSINESS ASSOCIATIONS - Amazon S3 · Business Associations Semester 2, 2015 3 Class 1 – Introduction Administration Matters: Boros and Dunns – Simple textbook which is accepted