Discuss about the Corporate Law for Commonwealth Numbered Acts.
Before discussing this case it is necessary that we discuss the concept of separate legal entity, and its other aspects also. Section 1.5.1 of the Corporation Acct 2001 states the concept of separate legal entity. According to this section company has separate legal existence which is different from its owners, shareholder, employees and agents. Company can own its property, rights and obligations. All the assets and liabilities of company are belonged to company only, and used for the purpose of company only ( , n.d.; Clayton UTZ, 2014).
The principle of separate legal entity has exception that is “piercing of corporate veil”. The concept of piercing of corporate veil states that court can pierce the veil of the company and held the shareholders accountable for the actions of the company, if actually those actions are of shareholders (Ramsay, Noakes, 2001). Separate legal entity is the most important characteristic of the company, but in many cases it is necessary for the court that they lift the veil of the company and find the frauds which are committed by the owners of the company behind the veil of the company. This action is necessary because the control of the company is usually in the hands of the directors, and directors of the company commit many frauds in the name of the company (Anderson, 2009).
We can understand this exception with the help of the case law Salomon vs. Salomon. This case was landmark for the principle separate legal entity, and this case also states the exception rule for this principle. In this case, Mr. Salomon transferred his business of shoe making into accompany, which was formerly run as sole proprietorship. This company consist the Salomon himself and his family members as members of the company. In this company Salomon hold shares and debentures with floating charge. Later on, company went into liquidation, and Salomon recovers his money prior to the unsecured creditors. Liquidator file application in the court on behalf of unsecured creditors, and court found that Salomon is the agent of the company and held him personally liable for the debts of the company (Law teacher, n.d.).
In the present case, Bob Beech is a scallop fisherman, and worked as commercial Scallop in the coastal water of Jervis Bay of New South Wales. In the coastal water of Jervis Bay, stock of scallops is limited, and government made legislation for the protection of Scallop for the purpose of regeneration. According to this legislation a person can catch only 50 scallops in a calendar year.
Act also provides that it is offence to sell the cached scallops in any other market other than Scallop marketing authority. Each offence carries affine up to $100,000.
Bob wants to earn more money, and he has physical capability to catch more than 50 scallops in a calendar year. Therefore, her daughter suggest that he can incorporate accompany and catches more fishes. Her daughter Alice tells that company has separate legal entity, and Bob can catch more fishes in the name of the company.
From the above discussion we can state that Alice was not correct, because there is an exception to the principal of separate legal entity that is piercing of corporate veil. In this case also court can lift the corporate veil and found that Bob is catching more fishes in the name of the company. Court can impose penalty of $100, 000 on the Bob for the commitment of this offence.
Answer 2: Section 588V of Corporation Act 2001 defines when holding company is liable for the acts of subsidiary (Commonwealth Numbered Acts, n.d.). Liability of holding company for the acts of its subsidiary company is regulated on the basis of two important aspects that is limited liability and separate legal entity. There are some liabilities which shareholders owned towards the company. Court analyzes the liabilities of shareholders in the case Salomon v Salomon. Separate legal entity principle is the most important principle which states that company has distinct personality from its members. Salomon v Salomon case laid down a rule which states that even if only one individual holds maximum shares of the company and remaining shares are hold by other members on trust of him, then in such case also company cannot considered as shadow of that individual. Judgment of Salomon case was followed by court in many other cases such as Adams v Cape Industries Plc . In this case court held that subsidiary companies are creation of their parent companies, and subsidiary company was also treated as separate legal entity and enjoy all the rights and obligations which are given to separate legal entities (Law Teacher, n.d.).
According to Gilbert Tobin, a parent company can be considered as shadow director of the subsidiary company, if it controls the board and management of the subsidiary company. In other words if parent company holds the board of its subsidiary company, and subsidiary company is acting on the instructions of parent company then parent company will be considered as shadow director of its subsidiary company, and held liable for the acts of its subsidiary (Gilbert Tobin, 2014).
Many issues are raised which state that subsidiary companies are just puppets of their holding companies, and holding companies take shield behind the veil of subsidiaries. Courts pierce the veil and held the actual culprit out mainly in three circumstances which are when the directors of the company does not fulfill the duty they owned towards the company, when the company is closely held and behave in the way which is not acceptable, and when company commit any tort. In these situations it is not justified that court keeps the veil, because directors of holding company are effectively control the management of subsidiary company. Therefore, directors of holding company must be held liable for the actions of subsidiary company (Anderson, 2009).
In this case, Nuclear Blast Sounds Pty Ltd is a subsidiary company of New Nirvana Ltd, and New Nirvana Ltd is hold by the members of hard rock band. A concert was held in Sydney, and Nuclear Blast Sounds Pty Ltd negligently set the sounds level too high because of which five members from audience are become permanently deaf. Nuclear Blast Sounds Pty Ltd has no proper insurance policy for such members, and company is not able to pay claims to the members.
In this case it is clear that Nuclear Blast Sounds Pty Ltd is a subsidiary company of New Nirvana Ltd, and we assume that New Nirvana Ltd efficiently holds the management of the Nuclear Blast Sounds Pty Ltd. Therefore, it is justified that members can file claim against the holding company that is Nirvana Ltd.
Answer 3: Companies that are operated in Australia and govern their business in Australia need to frame internal management rules which assist the relationship between the company and its members and officers. Internal management of companies is governed by the provision of the corporation act 2001 which are also known as replaceable rules, constitution, or by the combination of both. Constitution is generally a contract between the member, director and its officers. Whereas, replaceable rules are mentioned in the Corporation Act 2001, and they are just basic rules which are helps in govern the company’s management. If companies opt not to have constitution they can use replaceable rules (ASIC, n.d.).
Constitution of the company is a contract between the company and its shareholders, and it has binding effect on the company and its shareholders as any other contract has. Shareholders who agreed to adopt the constitution are bind with the contract. Like other contracts constitution binds only that parties who sign the constitution.
Section 140 of the Corporation Act 2001 states the effect of constitution and replaceable rules. According to this section constitution of the company and any replaceable rules that govern the company is a special form of contract between the company and its members, directors and officers. It is also a contract between the members of the company. In this contract every person is bind to follow the constitution and rules which apply to that person (Commonwealth Consolidated Acts, n.d.). This method is different for creation of contract, but this contract is formed by mutual agreement of the parties who want to legally enforce this agreement. Usually, in some cases this agreement is executed between the parties even before the registration of the company. There is one important difference between the contract and constitution that is constitution can be changed by passing special resolution in a meeting (Ferguson, 2013).
Court will consider the matter and looking the nature of the breach in case of constitution of the company. All the similar consequences which are occurred in case of breach of contract are also applied to the constitution of the company, but this matter is treated differently by court because this is a form of special contract.
In this case, Simon, Michael and Don Set up a project management company called Millennium Pty Ltd. Constitution of the company states that Don is the solicitor of the company, and constitution also states that any disputes arising between the company and members of the company shall be first referred to arbitrate before any court proceedings.
After few years Simon and Michael found anew solicitor who work better than the Don, and they appoint him as a solicitor of the company. Don initiates legal action against the company.
In this case there is a provision in the company’s constitution that Don is the solicitor of the company, and Simon and Michael cannot change the solicitor without making necessary changes in the constitution of company by passing special resolution in the company. As above mentioned necessary aspects are considered by the court, and all the consequences of breach of contract are also applied in this case.
Don can initiate legal action against the company, but before it is necessary that he refer the matter to the arbitrator, because there is one more provision that all the matters are first referred to the arbitrator and then referred to the court. Therefore, it is necessary that Don first referred the matter to the arbitrator and then to the court.
Commonwealth Numbered Acts. Corporations act 2001 - SECT 1.5.1. Retrieved on 20th October 2016 from: https://www.austlii.edu.au/au/legis/cth/num_act/ca2001172/s1.5.1.html.
Clayton UTZ, (2014). Doing Business in Australia: Business structures. Retrieved on 20th October 2016 from: https://www.claytonutz.com/knowledge/2014/july/doing-business-in-australia-business-structures.
Ramsay, M. I. Noakes B. D. (2001). Piercing the Corporate Veil in Australia. pg- 250-271. Retrieved on 20th October 2016 from: https://law.unimelb.edu.au/__data/assets/pdf_file/0008/1710089/122-Piercing_the_Corporate_Veil1.pdf.
Anderson, H. (2009). Piercing the veil on corporate groups in Australia: the case for reform. Retrieved on 20th October 2016 from: https://www.austlii.edu.au/au/journals/MelbULawRw/2009/13.html.
Law Teacher, Salomon V A Salomon And Co Ltd  AC 22 Case Summary. Retrieved on 20th October 2016 from: https://www.lawteacher.net/cases/company-law/salomon-v-salomon.php.
Commonwealth Numbered Acts. Corporations act 2001 - SECT 46. Retrieved on 20th October 2016 from: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588v.html.
Law Teacher, Liability Of Parent Over Subsidiary Company Actions. Retrieved on 20th October 2016 from: https://www.lawteacher.net/free-law-essays/business-law/liability-of-parent-over-subsidiary-company-actions-business-law-essay.php.
Tobin, G. (2014). Wholly-owned subsidiaries: same same but different. Retrieved on 20th October 2016 from: https://www.lexology.com/library/detail.aspx?g=90cc6c72-de1a-4ba7-91d0-7cd7a798c5ed.
Anderson, H. (2009). Piercing the veil on Corporate Groups in Australia: The Case for reform. Retrieved on 20th October 2016 from: https://www.austlii.edu.au/au/journals/MelbULawRw/2009/13.html.
ASIC. Constitution and replaceable rules. Retrieved on 20th October 2016 from: https://asic.gov.au/for-business/starting-a-company/constitution-and-replaceable-rules/.
Commonwealth Numbered Acts. Corporations act 2001 - SECT 140. Retrieved on 20th October 2016 from: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s140.html.
Ferguson, D. (2013). Australia: The Statutory Contract. Retrieved on 20th October 2016 from: https://www.mondaq.com/australia/x/221404/Contract+Law/The+Statutory+Contract.