Incorporation Of Company And Separate Legal Entity Doctrine

Process of Company Formation in Australia

Question:

Discuss About The Salomon And Separate Legal Entity Doctrine?

In Australia, when any person wish to carry out business, then, he can do so by operating as a sole trader (a single person), or by forming a partnership (two or more persons) or by incorporating a company (separate legal entity) as per the provisions of the corporation Act2001[1].

Now, if any sole trader or a partnership organization intends to convert their business in the form of a company then there is series of steps that must be comply with. Once the steps of incorporation are met then a company is formed which is an artificial legal person in the eyes of law and is held in Salomon v A Salomon & Co Ltd[2]. A company acts like a natural person with the help of officers and directors and all the acts which are undertaken by such officers are in the name of the company alone and will not hold the officers liable for the same. This segregation of the company from its directors is called separate legal personality of the company and is only acquired by the company once it is registered[3].

Thus, the steps that are required for the incorporation of the company are submitted herein below[4]:

Whenever any person intends to run his business by way of a company then it is necessary that he must first decide the kind of company he wishes to operate.

Public – There are four kinds of public companies that are normally found, that is, limited by shares, limited by guarantee, unlimited with share capital and no liability.

Proprietary - These are not public companies and are normally of two kinds:

A proprietary company limited by share

An unlimited company with share capital

If any person intends to operate by way of a proprietary company then there are few compliances that needs to be made, that is,[5]

At least have one shareholder (section 114 of the Corporation Act, 2001)

At least 50 non-employees shareholders (section113 of the Act)

At least 1 director and one director must ordinary reside in Australia (section 201A of the Act)

May have one or more secretary and if the company has a secretary then one must ordinary reside in Australia (section 204A of the Act);

Once the kind of company is decided, the next step that is required is to decide the name of the company. It is very necessary that the proposed name should be distinct and should not be identical/similar with any company, business or trade name. While dealing the name precautions must be taken to not to include words such as bank, ANZAC, consumer, however, if the government approval is taken then they can be used. However, if the name is offensive, illegal, with connections with royal families, misleading, obscene, or associating with any ex-servicemen's organizations, then such name are not permissible to be kept as the name of the company.

Distinct Personality of a Company

Prior registration of the company it is also required that the officers must decide as how to operate the company. A company can be operated by establishment of a constitution. If the company does not want to indulge into any kind of documentation, then, the company can also operate its management by way of replaceable rules. Also, companies are also allowed to operate the management of the company with the help of both the constitution and replaceable rules;

Share details – When the company is formed then it is required that the share details of the company must be mentioned. If the company is limited by shares, then, how much share capital is due and how much is paid must be mentioned. If the company is unlimited with share capital then the details of the shares must be provided.

The officeholder must also be acquainted with the obligations which they must comply with when the company is registered. The obligations includes to update the statements of the company, to pay annual review fees, to pass a solvency resolution, to notify ASIC when any changes are made in regard to office address, joining of new office holder or if the share structure of the company is changed. The financial records of the company must be kept up to date[6].

Also, prior appointing any company secretary or director or any member it is necessary that requite consent of the entire person must be taken.

The registered office of the company must be selected. If the company does not own the office then it is necessary that the approval of the owner of the office premises must be taken prior making the premises as the head office of the company.

When all the above requirements are made then the applicant must make an application in Form 201 to ASIC along with the required fees.

Once the application is processed by ASIC, then, the company is registered and a certificate, Corporate key and ACN is provided to the company.

As soon as the company is registered the name of the company must be displayed, the ACN number must be published on all documents.

It is submitted that since Richard now wants to covert his sole trader ship in the form of a company along with his son, Liam and David, then, it is necessary that he must operate his business by way of a limited company as their sole intention is to limit their liability and seek tax advantages. However, they must fulfill all the requirements of the process of registration.

Piercing the Corporate Veil

They can keep the name of their company as Ridali as the same is not offensive or illegal and has no association with any Royal family or any government organization. Also, it is not similar in nature. The name Rich Guarantee olives is misleading in nature as it portrays an image of a guarantee olives that are supplied by the company of Richard.

To formulate a company there are series of steps that are required. Once the steps are comply with then there is incorporation of the company. Upon incorporation, a company is considered to be a separate legal entity in law. The separate legal entity characteristics of the company submits that the acts or omissions that are taken by the officers by on behalf of the company will bind the company alone and the officers will not be held accountable for the same.
This, distinct personality of the company is very important as the directors and officers are considered to be the acts of the company[7].

But, there are situations wherein this distinct personality of the company is disregarded by the courts and the acts that are taken by the directors and officers are not considered to be the acts of the company alone, rather, the acts are imposed upon the officers. This is called piercing the corporate veil of the company and there are instances when the piercing of the veil is required in order to bring justice and fairness[8].

Some of the instances wherein the veil of the company is pierced and the situation amid the company and its officers are disregarded. The same are:

Sham or façade – When the company is established by the controllers but the real intention is not established then it is an action of facade and sham and in such situation the company is not regarded as a separate legal entity in the eyes of aw. The acts of the company are considered to be the acts of its officers and they are held personally liable for the consequences and is held in Creasey v Breachwood Motors Ltd[9]

Subsidiary and holding company – A subsidiary is the company who is owned by the holding company, that is, the holding company secured more than 50% shares in the subsidiary company. Normally, the subsidiary company is distinct from the holding company and the acts of the subsidiary company are not regarded as the acts of the holding company. But, there are few situations wherein the veil amid the holding and the subsidiary company is pierced and the cats of the subsidiary company are considered to be the acts of the holding company. the same are:

Tortuous acts – When the acts of the subsidiary are such that it results in any tortuous wrongs and such wrongs are reasonably foreseeable by the holding company and the holding company is controlling the actions of the subsidiary company, then, the acts of the subsidiary will fall upon the holding company and it is the holding company which us held liable for such tortuous acts. In CSR v Young[10], the acts of the subsidiary company resulted in causing harm to its employees. In such situation the aggrieved party can sue the holding company for the negligent actions of the subsidiary provided there is proximity and reasonable forseeability.

Implied agency – When the subsidiary company is undertaking act or omission not under its own management but is 100% controlled by the holding company, then, the subsidiary company is held to be the agent of the holding company and the holding company will be liable for the acts of the subsidiary. In such situation the veil is priced and the subsidiary and the holding company is regarded as one company and is held in Smith, Stone and Knight v Birmingham Corporation[11].

Establishment of subsidiary is an act of Sham or façade – When the aim of incorporating the subsidiary company is to cause fraud or sham or façade then the veil amid the subsidiary and the holding company is pierced and is held in Dennis Willcox Pty Ltd v Federal Commissioner of Taxation[12].

Also, many a times, if any company is indulged in any wrong and the shareholders of the company are not willing to take any action alginate such wrong, then, the law under section 236 of the Act has authorized the officers and members (including former and employees) to make an application of Statutory Derivative Action against such wrongs. The court on being satisfied that the application is made in good faith, in the company’s best interest and the matter is of serious concern can look into the application and can make orders of the winding upon of the company under section 237 of the Act.

The Lazarus Pty Ltd is the company that is incorporated by CMS so that their own company is wind up. The main aim for the winding up of CMS and establishment of Lazarus Pty Ltd is so that the debt that is incurred because of the actions of CMS cannot be paid and CMS can protect itself. Thus, the creation of Lazarus Pty Ltd is an act of Sham and façade and thus the veil must be pierced and CMS and Lazarus Pty Ltd must be regarded as one. So, Terry can take action against Lazarus Pty Ltd.

 Terry can prove that the shareholders of CMS will not bring any proceedings against the wrong committed by CMS and thus by establishing the elements of Section 237 of the Act, Terry can bring derivative action against CMS.

CM is the holding company of CMS and is controlling all the actions of CMS. Now, the act which causes the harm to the residents and Terry are also governed under the instruction of CM. CM can reasonably foresee the impact of the act of CMS and they are in proximate relationship.

Thus, the veil must be lifted and CM must be held liable for the actions of CMS.

Conclusion

It is thus concluded that Terry can take action against CMS, CM and Lazarus Pty Ltd by lifting the corporate veil of the companies.

References

Cassidy, Julie,  Concise Corporations Law, Federation Press, 2006 -.

Malbon,  Justin, Bishop, Bernard,  Australian Export: A Guide to Law and Practice (Cambridge University Press, 10-Jul-2006).

Puig, Gonzalo Villalta , A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine, Murdoch University Electronic Journal of Law,  Volume 7, Number 3 (September 2000)

Creasey v Breachwood Motors Ltd [1993] BCLC 480.

CSR v Young, (1998).

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

Salomon v A Salomon & Co Ltd [1896] UKHL 1.

Smith, Stone and Knight v Birmingham Corporation (1939

ASIC, Company officeholder duties, 2017, https://asic.gov.au/for-business/running-a-company/company-officeholder-duties/.

ASIC, Steps to register a company, 2017 < https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/>.

Incorporator, 2017, https://www.incorporator.com.au/l3/21_01_Proprietary_company_compared_with_Public_Company_Australia.asp.