The Essay On Corporate Veil, Piercing, And Directors.

Significance of Corporate Veil

Question:

Plutus Payroll and associated Companies Case Study.

The corporate veil, the piercing of the corporate veil and the duties of the directors are terms associated with the issue which is surrounding modern day corporate governance. The purpose of this paper is to through light upon SYNEP, PLUTUS PAYROLL (PP) and other Syndicate companies (SC) in relation to corporate veil, the piercing of the corporate veil and the duties of the director[1]s. Every company is a separate entity and its identity is different from its members in addition the liability of the members of the company is only restricted to the amount they owe to the company in form of shares or guarantees. As the company does not act on its own and where there are various shareholders each of them cannot be a part of the management for the proper functioning of the company the governance of the company is vested in the selected board of directors[2]. The paper analyzes the significance of the corporate veil, when it may be pierced and the implications of the directors’ duties.

Issue

The issue which has to be discuss the corporate veil in relation to relation to Synep, PP and Syndicate companies.

Rules

As provided by LordMcNaughton in the case of Solomon v Solomon and Co[3]at law a company is a totally different person as compared to those person who have subscribed to its memorandum. In this case it is irrelevant that even after incorporation the business is same as it was before and the same heads receive profit and the same person are manager.

As provided by Macaura v Northern Assurance Coat law the company is not an agent of the trustees or subscribers of the memorandum and nor the members as subscribers are liable in any form or shape except to the manner and extent provided by the act to the liabilities of the company[4].

Application

The provisions laid down by this case are often considered the route on which corporate personality jurisprudence is been practiced around the world. The concept of a separate legal entity have successfully been continued in an uninterrupted manner for more than 100 years in Australia. Thus as Synep, PP and SC are all incorporated companies the liability of the company is not the same as its members as they are protected by the corporate veil.  The actions of a company and based on its own authority and the company does not act as the agent of its owners of the subscribers of its memorandum. However there have been various circumstances where this feature of the company has been taken up as a way to introduce fraud to the corporate world which is also highlighted in the present case of the three companies.  There are many instance where the owners of the company hide behind the corporate veil in order to take advantage of it and defraud the creditors of the company. As the concept of corporate veil protects and limits the liability of the owners of the company they are provided with a scope of committing such acts which may ensure them illegitimate profit without being held liable for it. The concept can be taken to Be as both an advantages and disadvantages in relation to the corporate world. However if a proper system was not initiated in order to restrict such acts the system of corporations would have been a total failure. The selected case for the purpose of this paper the director of the SC along with PP and Synep are protected to the principles of corporate veil.

Piercing Corporate Veil in Syndicate Companies

Conclusion

The members of the companies are protected through the concept of corporate veil

Issue

Whether the corporate veil should be pierced or not in relation to Synep, PP and Syndicate companies

Rules

In order to ensure the proper functioning of the Corporate Law system a concept was developed by the courts which is known as piercing the corporate veil. It has been recognized by the courts in Lee v Lee’s Air Farming at the same time that the corporate veil of the corporation may be pierced to deny the shareholders any protection which is provided to them by the provisions of limited liability[5].

According toGilford Motors Co Ltd v Hornethe piercing of the corporate veil may be referred to as exception which is imposed judicially to the principles of separate legal entity through which the courts do not take into regard the different identity of the corporation and hold its members liable for the actions of the corporation in the same way as if they were committed by the members themselves[6].

The piercing of the corporate veil may also be initiated by the court when a request to do so has been made by the company itself or its members so that they can attain a remedy which would be denied to them otherwise or create a right which is enforceable or impose a penalty on the board of directors as provided by Creasey v Breachwood Motors Ltd[7].

In the case of Equiticorp Finance v BNZit was provided by judges that piercing the corporate veil is a term which is reserved for treating the liabilities and rights call functions of a corporation as the liabilities and rights or functions of its members. On the other hand to lift the corporate veil or to have a look behind it means having a regard to the shareholders of the company in relation to a legal purpose. Never the difference between the two phrases as yet to be properly recognized in Australia as the quote most of the times refer to lifting then the effect of such lifting is piercing of corporate veil[8].

In the case of Pioneer Concrete Services Ltd v Yelnah Pty Ltd it was provided by young J that even though when an individual company is incorporated it creates a separate legal person only on occasions the court will look behind the legal person to determine its real controllers[9].

Directors' Duties in Australia

Since the Solomon case there have been various instances in the United States the United Kingdom and Australia where the courts have found general to the principles of corporate veil and have pierced it in order to reveal those who have control over the company’s affairs.

Thus the courts have the power to look behind for lift the corporate veil whenever they want to determine the operational mechanism running the company. It is clear that the corporate veil is only lifted or pierced when the actual purpose of the company is to do fraud. From the provided facts it is difficult to say that Synep or PP had been incorporated for a fraudulent purpose. When it comes to syndicate companies the actual purpose for which they had been formed has to be analyzed in order to determine whether the corporate veil should be pierced or not

Conclusion

The corporate veil of Synep ,PP and other SC may only be pierced if it is found that the company was formed in an illegitimate way for a fraudulent purpose

Issue

Whether director’s duties have been breached by Adam Cranston who is the director of Synep, PP and the syndicate companies.

Rule

The duties of directors in Australia is controlled by the provisions of common law along with statutory provisions provided by the Corporation Act 2001[10].

The Corporation Act 2001through Section 181- 84 provide the statutory duties which are imposed upon the directors of companies operating in Australia.

According to Section 181 it is the duty of director to act in good faith and in a way which will enhance the interest of the company in the best possible outcome what is of the director have to be disposed for a proper purpose.

According to Section 182 of the act the directors of the company are forbidden from using their position in such a way so as to bring detriment to the company in order to achieve personal gain.

Section 183 states that the directors of the company must not use the information which is gained by them through position in the company in such way so as to make personal profits at the cost of the company without disclosing such situation to the other directors.

As provided by section 184 anything in relation to the above sections done intentionally is a criminal offence.

There had been various instances in Australia such as the case of ASIC v Healey &Ors[11]and Asic v Adler and 4 Ors[12] where the directors have been made personally liable for their actions and breach of duties.

Breach of Duties by Adam Cranston

As they have been imposed with the duty to control the affair of the company the directors are expected to provide high standard of skill, care and diligence while disposing their duty towards a company. There is a duty imposed on the directors which raises Expectations of the shareholders towards them that they will always act in good faith to enhance the success of the company

In the provided scenario the government companies have themselves admitted that they should have observed due diligence while providing authority to another company to deal with public money. Whether Adam Cranston had breached his duties as director or not is still under the scanner but as provided by the article that the public had not been paid their money he can be held liable for not abiding by his duties to act in the best interest of the companies owned by him.

It is not suitable to comment on a case which is under investigation and yet to be decided. However as of now it appears that Synep, PP and the Syndicate companies had not been initiated for the purpose of doing fraud and the customers were initially being paid properly by the company. However a few directors of the companies were fake as provided by the ATO investigation as their residential address was not proper. In case the ATO is able to provide it would be a strong evidence to establish that PP had not been incorporated properly and the corporate veil may be pierced.

Conclusion

Apparently the duties of directors have been breached by Adam Cranston

Asic v Adler and 4 Ors [2002] NSWSC 171

ASIC v Healey &Ors [2011] FCA 717

Corporation Act 2001(Cth)

Creasey v Breachwood Motors Ltd (1992) 10 ACLC 3052

Equiticorp Finance v BNZ (1993) 11 ACLC 952

Gilford Motors Co Ltd v Horne [1933] 1 Ch 935

https://www.abc.net.au/news/2017-05-18/tax-fraud-allegations-could-risk-investigations-senator-says/8537608

Lee v Lee’s Air Farming [1961] AC 12

Macaura v Northern Assurance Co (1925) Ac 619

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

Smith Stone and Knight [1939] 4 KB 116

Solomon v Solomon and Co (1897) A.C 22 (H.L)

https://www.abc.net.au/news/2017-05-18/tax-fraud-allegations-could-risk-investigations-senator-says/8537608

Smith Stone and Knight [1939] 4 KB 116.

(1897) A.C 22 (H.L).

(1925) Ac 619.

[1961] AC 12.

[1933] 1 Ch 935.

(1992) 10 ACLC 3052.

(1993) 11 ACLC 952.

(1986) 5 NSWLR 254. 

Corporation Act 2001 (Cth).

[2011] FCA 717.

[2002] NSWSC 171.