The Plutus Payroll Scandal: Lifting The Corporate Veil

Background

Question:

Disucss about the:

1.The corporate veil 

2. Piercing the corporate veil

3. Director duties

Plutus payroll is an Australian company which was so far used by larger organizations in Australia to pay the contractors on roll or to pay the people who were working as freelance workers. The company (Plutus payroll) on the other hand was owned by Synep in which the son of deputy tax commissioner (ATO) was both a secretary and director.

Issue

The issue revolves around the status of the Plutus Payroll as a separate entity.

Rule

The concept of corporate veil was entrenched in the English company law. In the case of Salomon vs. A Salomon & Co. Ltd (1897) the English upper house has decided that once a company is formed based on whatever means the company would be regarded for all purpose a separate entity in the eyes of legal parlance and existence of such an entity can’t be questioned¹. A company established under legal provisions would run as a separate entity different from those people or members and shareholders who have formed the company and thus a legal entity would emerge on its own to undertake legal business activities². However, a company being a non-natural person -would not be able to run itself and thus it would need the help of natural persons to run its affairs for all practical purpose. Even though the law allows the judicial person to own assets in its own name the same would be signed by natural persons acting as directors etc. on behalf of the company under the seal of the company. As a result, a company can be capable of suing others for misconduct and other persons dealing with a company can also sue a company in case of a dispute and misconduct³.

Footnotes:

1. Hannigan, B. (2017). Company Law (4th ed.). London: Oxfrd foundation.
2. Worthington, S. (2016). Sealy & Worthington's Text, Cases, and Materials in Company Law (11th ed.). Brighton: Oxford University Press.
3. French, D. (2016). Company Law (Thirty-fourth edition ed.). London: Oxford University Press.

Application

In the case of Lee v. Lee’s Air Farming Ltd (1961) the court held that a person can act in dual capacity if there is a valid and legal contract between the company and the worker concerned and thus allowed a single person to act as am employee and a director. The gist of the case was that a company once registered as a company under the relevant provisions of the act would have all the powers to act as a separate entity for all legally applied purpose⁴.

Salomon & Co Ltd was a duly registered company under the relevant provisions of Companies Act 1862 of United Kingdom and form the case the followings have emerged:

The Concept of Corporate Veil

a company would have all the rights as natural person in owning its separate properties. 

a company would also have the right to incur debts and issue debts in the market on its own and it would solely be liable for its own debts⁵.

A company would be allowed to make contracts with employees of the company and outsiders as well which was reasserted in the case of Lee v. Lee’s Air Farming Ltd (1961).

Because a company is regarded as a separate entity or judicial person it would can commit crimes and torts.

Conclusion

Thus, it is quite clear that while the ruling in the case of Salomon v. A Salomon & Co. Ltd (1897) provided the legal sanctity to the companies, the same also provided a legal option of trying to ascertain if the companies are doing their activities legally or they have engaged themselves in illegal activities which has been prohibited under provisions of other laws of the state. If it is ever found that the companies concerned have been engaged in illegal and other activities which are not endorsed by law the real activities of a company like Plutus payroll can be checked thoroughly for breach of law⁶.

Thus, it can be said that Plutus payroll being a registered entity in Australia enjoyed the privilege of being a corporate entity and thus also enjoyed the concept of separate legal entity as endorsed in the above case settlements beforehand.

4. Bredeson, D. A. (2013). Business law and the Legal environment . Chicago: south western Cengage Learning.
5. Taylor, C. (2016). Company Law - Law Express (4th ed.). london: Pearson Education Limited.
6. Roach, L. (2017). Company law- Guide and Revision (4th ed.). Leicester: Oxford University Press.

Issue

The issue is to find whether the corporate veil shall be lifted for the Plutus payroll company to see the real operations undertaken by the company.

Rule

Thus, a company being considered a separate entity form those who comprises of the same would have the authority to undertake such actions which would be deemed to be necessary to run the activities and achieve the goals of the company (Taylor, 2016). However, a company being a non-natural person (company is regarded as a judicial entity only) would not be able to run itself and thus it would need the help of natural persons to run its affairs for all practical purpose. Because the company depends upon the human help, the same can be undertaken with dubious intentions sometimes and thus it would be necessary in such cases to look beyond the veil in which the company acts and operates to separate the goals and real activities form each other. If it is found that the actual activities of the company involve anything which defeats the purpose of the law then the company can be prosecuted and liquidated (shepherd, 2016). The lifting of corporate evil can be done in the following cases:

The veil of a company can be lifted by the state for protecting revenue of the state. Thus a company’s veil of being a separate entity can be lifted if its suspected of being used as means of evading taxes as proved in the case of  Adams V Cape Industries Plc ,1990 and  DHN Food Distributors Ltd V Tower Hamlets London Borough,1976.Corporate veil can also be lifted to determine if the company concerned is a case of being an enemy company which means the company is being run by people who are citizens of another country which is at war with Australia.

Lifting the Corporate Veil

7. Hargovan, J. H. (2014). Australian Corporate Law. Melbourne: Lexis Nexis.
8. Howard, L. (2013). Corporaete law and cases. UNSC LAW Journal, 24(2), 34-42.
9. The corporate veil of the entity can also be lifted to find out if the entity has been operating in a manner so as to avoid its legal obligations.
10. The corporate veil of the company being a separate entity can be lifted in circumstances under which it is suspected that the company is being run in a manner to defraud the respective state and the government in general and is actually sham institution as seen in the case of Gilford motor co v Horne ltd (1933)⁹.

Plutus payroll was one of those legitimate payroll companies in Australia which undertook payroll duties and was used by many larger companies in Australia for paying contractors and freelance workers. Plutus accepted funds from over a few dozen companies to pay the contractors of the respective companies. The payments were then transferred to 7 tier 2 or those companies which were sub-contracted by Plutus. These tier 2 companies then processed the payments to the concerned contractors. It was found that the tier 2 companies (sub-contracted companies) were run by people who were acting as directors has very little idea or knew nothing about these companies. The operations of these companies were run by members of crime syndicates in Australia¹⁰.

These tier two companies were paying the contractors of the client companies these companies were required to submit the PAYG taxes to the Australian tax office (acting on behalf of the client companies). The tax authorities found that the tier 2 companies were paying the Australian tax office only a small portion and deflating and hiding the balance of the due tax. The balance of the due taxes was cleverly siphoned off by the crime syndicate members to their own accounts and otherwise for being used for personal gain. Some of the companies which were used to transfer illegitimate payments were found to be present in the same building and run by fictitious persons¹¹.

9. Tomasic, R., Bottomley, S., & McQueen, R. (2014). Corporaiton Law in Australia (2nd ed.). Melbourne: The Federaiton Press.
10. Harris, J. (2015). Company Law: Theories, Principles and Applications (2nd ed.). Sydney: lexis-Nexis.
11. Kraakman, R., & Armour, J. (2017). Anatomy of Corporate LAw-A functional apporach. London: oxford University press.

Because of this discovery the accounts of the Plutus payroll was suspended by the Australian tax office and the same caused non-payments complaints from thousands of contractors or freelance workers engaged in the IT sector. Thousands of complaints later action was taken Australian tax office which found the son of the deputy tax commissioners involved in running of the company (Plutus payroll) and working both as a director and employee (secretary)¹².

It is believed that a private equity firm SYNEP was the owner of the firm Plutus Payroll and the company was chaired by Adam Cranston who was found to be the son of ATO deputy commissioner Michael Cranston. These revelations have brought the questions of law into operation which must be used to lift the corporate veil surrounding the existence of and operations of Plutus payroll.

Conclusion

The management of the Plutus payroll have been engaged in the business operations in a manner which is contrary to the legal provisions of the Australian corporation Act, 2001 ad others and the activities are believed to have been carried in manner to defraud the Australian government. There exists enough evidence of suggesting fraudulent activities being carried in the name of a maze of companies and tier -2 operatives in the name of Plutus payroll company¹³.

The Plutus Payroll Scandal

Thus, there is enough reason to believe that Plutus was arranged in the manner which was discovered has been carried out with sole intention of avoiding paying taxes and enriching personal coffers of some of these involved in the payment of payroll and those people are the people who bankrolled Plutus in the first place. Thus, it becomes the duty of the ATO and other legal departments to lift the veil of the Plutus Payroll and find out how the operations were carried by the management and under what pretext. The true facts would only emerge only when the corporate evil is taken off and investigations bring out the true operators behind the fraudulent behavior¹⁴.

Footnotes

12. Croese, J. H. (2016). CORPORATE AND COMMERCIAL LAW (2nd ed.). Melbourne: CCH Austrlalia.
13. Dignam, A., & Lowry, J. (2015). Company Law (9th ed.). London : Oxford university Press .
14. Tomasic, R., Bottomley, S., & McQueen, R. (2014). Corporaiton Law in Australia (2nd ed.). Melbourne: The Federaiton Press

Issue

The issue is to find out if the directors of the Plutus Payroll acted within legal sanctions.

Rule

Directors of any company would be expected to company with the internal regulations of the company and exercise their powers only in the direction for which they were authorized. Directors are in fact stand in a fiduciary position which means the directors can’t use the position in which they were in for their own benefit Towers v Premier Waste Management Ltd [2011]  and must use the power to make sure they work for the overall benefit of the shareholders and the employees of the company. Under s180(1) the directors involved must also use due care and diligence in doing their duty. The same has been established in the case of  (ASIC) v Cassimatis (No. 8) [2016] FCA 1023 where the directors were found to be in breach of their duty to undertake acts with due care and diligence¹⁵.

Application

The directors of Plutus has had the primary duty of paying the payrolls of the contractors on behalf of tis clients and there is no known reason to know why the same operations were transferred to the sub-contractors in the first place¹⁶.

Conclusion

It was the duty of the Plutus management to oversee the payment operations went on smoothly and make sure payments are done in a timely manner when they have sub-contracted the payment work to others. Tax deductions would have been made by Plutus and not the sub-contractors and the same should have be complied with by the management of the Plutus payroll itself¹⁷. Thus, there is enough reason to believe that the directors of the Plutus payroll violated established principles and were explicitly involved in diversion of funds with an intention to avoid payment of taxes¹⁸.

Footnotes

15. Armour, J. (2015). Essential Corporate Law. London: oxford University press.
16. Beatty, J. F. (2013). Business Law and Leagal Environment (6th ed.). Newyork: South Western Cengage Learning.
17. Stephen, B. (2015). Foundations of Taxation Law (5th ed.). Melbourne: CCH Australia Limited.
18. Coleman, K. S. (2016). Principles of taxation law (6th ed.). Pyrmont, N.S.W: Thomson Reuters.

Armour, J. (2015). Essential Corporate Law. London: oxford University press.

Beatty, J. F. (2013). Business Law and Leagal Environment (6th ed.). Newyork: South Western Cengage Learning.

Bredeson, D. A. (2013). Business law and the Legal environment . Chicago: south western Cengage Learning.

coleman, K. S. (2016). Principles of taxation law (6th ed.). Pyrmont, N.S.W: Thomson Reuters.

Croese, J. H. (2016). CORPORATE AND COMMERCIAL LAW (2nd ed.). Melbourne: CCH Austrlalia.

Dignam, A., & Lowry, J. (2015). Company Law (9th ed.). London : Oxford university Press .

French, D. (2016). Company Law (Thirty-fourth edition ed.). London: Oxford University Press.

Hannigan, B. (2017). Company Law (4th ed.). London: Oxfrd foundation.

Hargovan, J. H. (2014). Australian Corporate Law. Melbourne: Lexis Nexis.

Harris, J. (2015). Company Law: Theories, Principles and Applications (2nd ed.). Sydney: lexis-Nexis.

Howard, L. (2013). Corporaete law and cases. UNSC LAW Journal, 24(2), 34-42.

Kraakman, R., & Armour, J. (2017). Anatomy of Corporate LAw-A functional apporach. London: oxford University press.

Roach, L. (2017). Company law- Guide and Revision (4th ed.). Leicester: Oxford University Press.

shepherd, c. (2016). Key Cases: Company Law - Key Cases (3rd ed.). BRIGHTON: aylor & Francis Ltd.

Stephen, B. (2015). Foundations of Taxation Law (5th ed.). Melbourne: CCH Australia Limited.

Taylor, C. (2016). Company Law - Law Express (4th ed.). london: Pearson Education Limited.

Tomasic, R., Bottomley, S., & McQueen, R. (2014). Corporaiton Law in Australia (2nd ed.). Melbourne: The Federaiton Press.

Worthington, S. (2016). Sealy & Worthington's Text, Cases, and Materials in Company Law (11th ed.). Brighton: Oxford University Press.