Legal Position Of A Company And Its Constitutions

The concept of Veil of incorporation in Australian Law

Bob Beech is a scallop fisherman and involved in commercial scallop fishing in the coastal water of Jervis Bay in New South Wales. The stock of scallops in this water is limited and subject to protective legislation to ensure regeneration. Hence, the Scallop Fishing and Marketing Act provides for a quota system. Under the quota system, a person must apply for a quota which will permit him or her to catch 50 tonnes of scallops in a calendar year. Further, the Scallop Marketing Authority will purchase any scallops up to the quota limit for each person.
The Act also provides for a number of offences. It provides that it is an offence to sell scallops caught in New South Wales waters to any person other than the Scallop Marketing Authority and it further provides that it is an offence to catch more than the quota limit. Each offence carries a fine of up to $100,000.
Bob has the physical capacity to catch more than 50 tonnes of scallops in a year and wishes to make more money from his business. His daughter Alice tells him that by incorporating a company he could double his catch.
Is she correct?

New Nirvana Ltd is a company controlled by the members of the hard rock band, N/N. A number of wholly owned subsidiaries of New Nirvana Ltd are involved in setting up and running the band’s concerts. One of the subsidiary companies, Nuclear Blast Sounds Pty Ltd, is responsible for setting up the sound equipment at N/N concerts in Australia. At a recent N/N concert in Sydney, Nuclear Blast Sounds Pty Ltd negligently set the sound levels too
high with the result that five audience members suffered permanent hearing loss. Unfortunately for those audience members, Nuclear Blast Sounds Pty Ltd had no negligence insurance and cannot pay the likely damages claims.
Advise the injured audience members whether they can make New Nirvana Ltd liable for Nuclear Blast Sounds Pty Ltd’s negligence.

Simon, Michael and Don set up a project management company called Millennium Pty Ltd. Don is a solicitor and the constitution of Millennium Pty Ltd nominates that Don will be the solicitor for any land purchases or sales made by the company. The articles also provide that any disputes which arise between the company and its members should be first referred to an arbitrator before there are any court proceedings.
After a number of years, Simon and Michael meet another solicitor who they think is more efficient than Don and they appoint him as solicitor for Millennium Pty Ltd.
Don brings legal action against Millennium Pty Ltd over the matter. Advise the company as to their legal position.

In the given situation the issue is whether the daughter of Bob has provided him a better idea to form an organisation under the rules of common Law.

The court has stated in the given case Salomon v Salomon & Co [1897] AC 225 that the registered organisation is said to be the artificial legal person that states the identity of the company is not exactly similar as the identity of their owners. After the fusion of the organisation has been finished in a legal way the artificial legal person of the organisation has been created. This organisation has the limited liability that states the liability that the company owes has been not the owner’s liability. A concept of Veil of incorporation protects them (Ben-Shahar and Porat 2016).

However, the court’s decision has been taken in a conflicting way by other courts in several other cases. The case Adams v Cape Industries plc [1990] Ch 433 was one such case. In the given case the judges had stated that the company is said to be the artificial legal person and the owners of the company are being protected by the idea of veil of incorporation. Though, the veil of incorporation could be imposed if it is proved in court that the company set with an aim that is fraudulent or to vanish any prevailing obligation. The court can raise the veil of incorporation if these actions are complying with interest of the Justice.

The concept regarding the upliftment of Veil of incorporation was recognized by passing the decision through the court. Several reasons are there because of which the court might raise the company’s veil of incorporation. Some of the cases regarding this are Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267 and Lee v Lee’s Air Farming Ltd (1961) AC 12.

The idea of integrating veil of incorporation in the state of Australia is taken from English source. The court has stated in the given case Peate v Federal Commissioner of Taxation (1964) 111 CLR 443 that the court has the power to hold the company's members who has the similar identity as  organisation by uplifting the veil of incorporation in such circumstances when the organisation turns as a disguise in which the members of the company operate. This states that the organisation has been created so that the members of the organisation can continue with the unethical and illegal activities in the protection given through the company’s artificial legal person.

Responsibility of the Main Company for Negligence of a Subsidiary Company

The phrase piercing the veil of incorporation in the given case Brewarrana v Commissioner of Highways (1973) 4 SASR 476 was incorporated ironically through the judge. On another side, it has been stated by the judges in the given case Walker v Humgerfords (1987) 44 SASR 532 that the idea of uplifting theveil of incorporation has been now outdated.

The court has stated in the given case Pioneer Concrete Services Ltd v Yelnah Pty ltd (1986) 5 NSWLR 254 that the real meaning of uplifting veil of incorporation is when a single organisation is created then artificial legal person is made but the court on certain situations will look back the veil of incorporation to perceive it’s actual controllers. In the given case, Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549, the court had rejected the upliftment of the veil of incorporation. The court had stated that the upliftment of the veil of incorporation can be done if the organisation is integrated to prevent the legal obligation.

The evidences of the above mentioned case states that by the rules of protective Law, it is said that in order to catch scallops that to more than fifty tons is illegal for any individual in one year. Furthermore, restriction has been put by the authority of marketing to buy fifty tons of scallops from individual each year. The legislation also states that an individual do not have the right to sell the scallops that has been caught to other individual. However he can only sell those scallops to the authority of marketing in the state of New South Wales. An individual will be imposed with a penalty of $100000 if he violates these rules. The daughter of Bob has advised her father to create a company as he holds the ability to catch scallops more than fifty tons. This means that the organisation has been formed for an inappropriate purpose. The purpose for the formation of the company is to even out the liability to protect the legislation. Thus, the above situation states that the organisation is not created for a good purpose and the objective of the organisation is to prevent obligations under law and the court would impose veil of incorporation and will held Bob responsible for any kind of offence that will be committed through the organisation.

Conclusion

It can be concluded that Bob must not create an organisation to prevent obligations under Law. If Bob forms an organisation then the feature of limited liability of the organisation will not protect him because the court would impose veil of incorporation.

The Lawful Position of the Company Millennium Pty Ltd

Does New Nirvana Ltd, the main organisation of the subsidiary organization Nuclear Blast Sounds Pty Ltd could be held responsible for negligence that has been made by the company Nuclear Blast Sounds Pty Ltd

The case David Brian Chandler v Cape Plc [2011] EWHC 951 (QB), the responsibility regarding the totally owned subsidiary of the main company has to determine through the court in relation to negligence. The court held in the above mentioned case that the main company of the totallypossessed subsidiary owe towards an individual a duty to take care who was affected by subsidiary's negligence. In the above mentioned case, the court had stated that though no authority of relevance is there that can help an individual to know that he has duty to avoid the third party to cause damage. In the situation of the totally owned subsidiary and the main company, the main organisation has the duty to take care regarding those individuals who might get affected by subsidiary organisation if the main organisation has the control over the subsidiary’s affairs.

In order to recognise whether the duty to take care has been possessed by the main company, the test of three steps are there that has to apply as given in case Caparo Industries v Dickman [1990] UKHL. Initially, it is seen whether there is any existing prudent predictable damage, secondly whether there was any nature of proximity in the relationship between claimant and defendant and third one is whether it would be prudent and just to impose such duty. It has been said that if the above three factors have been satisfied then the main company will have to owe duty to take care of the injured person by the actions of the subsidiary organization (Fulbrook 2017).

In the above circumstance, it is given that the subsidiary company of the latest Nirvana Ltd is Nuclear Blast Sounds Pty Ltd. The Hard Rock Band’s members are Nirvana’s board of directors. Nirvana’s objective is to set band concerts. The subsidiary company has the responsibility to set up the system of sound at the concert. It is stated that subsidiary organisation had negligently in a concert set the system so loud and high that five audiences had got the damage of hearing permanently. As per the rules of above mentioned cases, the main company will be held responsible for all the negligent activities done by its subsidiary organisation. This might happen if the acts of subsidiary organisation have been controlled by main company. The board of directors of subsidiary and the main company are same. Furthermore, through the implementation of the test of three stage, it can be mentioned that theclose proximity was there among the subsidiary organisations and the main company and by imposing the duty to take care on main company regarding the acts of subsidiary company will be reasonable and fair. Thus, in the provided circumstances it could be mentioned that Nirvana will owe duty to take care to any individual who is harmed through the acts of its secondary company Nuclear Blast.

Conclusion

Thus, by the above situation it could be concluded that the main company Nirvana Limited could be held responsible for the act of negligence that has been committed by the subsidiary company Nuclear Blast.

Discuss the lawful position of the company Millennium Pty Ltd where Michael and Simon have detached Don from the position of solicitor of organisation and a lawful proceeding is brought through Don to the constitution's contrary.

The rules regarding the acts of the registered company is dealt by the Corporation Act (Cth) 2001. There are other provisions that deals with company's constitution.

The rules of the section 125 of the Corporation Act states that the company might have certain terms of its constitution that might restrict the powers to be exercised. However, the power exercised through the organisation will not be considered as invalid if the power is not complying with the restrictions that has been imposed through the constitution. The action of the organisation will not be considered as invalid as it is further side of the term of such term that has been set through their organisation in their constitution.

The court had stated in the given case Hickman v Kent or Romney March Sheep-Breeders Association [1915] 1Ch 881 that the rules given by the company’s constitution results in forming the statutory contract among their members.

The court had stated in the given case Eley v Positive Government Security Life Assurance Co (1875) 1EX D 20 that the members do not have the right to impose a rule regarding the constitution contrary to the other members to gain the personal interest.

The rules of the section 140 of Corporation Act states that the rules given in the company’s constitution results in forming the contract that is statutory among their members and organisation with members. In this contract, an obligation is there that these members have to obey the constitution’s provisions as long as they have been appropriate for them.

The above situation states that Don, Michael and Simon had started a new company named Millennium Pty Ltd.  As per the company’s constitution, Don is supposed to be the company’s solicitor regarding the buying or selling of the land on company’s behalf. Furthermore it is also stated that when a dispute is there among the company’s members, then it is supposed to be statedto the arbitrator firstly before it is challenged in the court. Simon and Michael have already met a new solicitor so that they can remove Don from this position. However, Don by not going to the arbitrator had filed a case against the organisation.

The rules of the case of Hickman and the rules provided under the section 140(1) states that the object of Constitution behave as the contract among the organisation and the members. Thus in the above case it has been provided that the constitution stated that the differences among the members needs to be initially referred to the arbitrator but the acts of Don has led to the violation of the legal agreement with the organisation.

However, the section 125 of the Corporation Act deliberates that an action that is further side of the company’s constitution is not considered to be invalid as the action is against company’s constitution. Furthermore, Eley’s case states that the members might not enforce the constitution's term to achieve personal interest. In the present circumstances it could be said that Simon and Michael do not have any personal interest. Though, Don's act is not considered to be valid according to the section 125 of the Corporation Act but the contract has been violated by him that was formed as per the rules of the section 140 of Corporation Act.

Conclusion

It can be concluded from the above situation that the rules of the section 140 of Corporation Act has been violated by Don.

References

Adams v Cape Industries plc [1990] Ch 433

Brewarrana v Commissioner of Highways (1973) 4 SASR 476

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

Caparo Industries v Dickman [1990] UKHL 

Corporation Act (Cth) 2001

David Brian Chandler v Cape Plc [2011] EWHC 951 (QB)  

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

Eley v Positive Government Security Life Assurance Co (1875) 1 EX D 20

Hickman v Kent or Romney March Sheep-Breeders Association [1915] 1 Ch 881

Lee v Lee’s Air Farming Ltd (1961) AC 12  

Peate v Federal Commissioner of Taxation (1964) 111 CLR 443

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

Salomon v Salomon & Co [1897] AC 22

Walker v Hungerfords (1987) 44 SASR 532

Fulbrook, J., 2017. Outdoor activities, negligence and the law. Routledge.

Ben-Shahar, O. and Porat, A., 2016. Personalizing Negligence Law. NYUL Rev., 91, p.627.