Corporation Act 2001 And The Concept Of Separate Legal Entity In Company Law

Introduction to Company Law

Question:

Discuss about the Regulating Enterprise for Law and Business Organisation.

Any desired person who wishes to initiate business can do so in the form of a sole trade ship, a partnership or a company. The corporation Act 2001 is the guiding legislation that governs the working of a company. A company is incorporated when the same is registered as per the governing Law of the country.

When a company is granted registration, then, as per Salomon v A Salomon & Co Ltd a company is regarded as an entity which has its own existence in Law. The separate legal existence rule simply qualifies that a company is not to be associated with its officers and is an artificial person and is capable to file suits, acquire properties, etc. The company indulges itself in its own actions and in its own name and will not render the officers accountable of the same. Even if all company officers die, still, the company survives and never dies. In Salomon v A Salomon & Co Ltd, a company is formed by one single person and it was held by the court that even if the company is incorporated by one single person still it is distinct from him and can take actions in its own name.

The concept of separate legal entity was retreated in Lee v Lee's Air Farming Ltd wherein the director/shareholder was also its employee. He died while serving his employment duties and the court upheld the claim of widow and considered that the director/shareholder should be considered as the employee. A company is capable to enter into a separate contract with the direct/shareholder and the same will be distinct in nature. In Industry v Bottrill, Magnatech UK Ltd in which Mr Botrill was the Managing director. He was also the shareholder and was also entered into an employment contract. It was held by the court that a shareholder can become the employee and both are distinct in its capacity as the company is a separate legal entity in the eyes of law. Thus he was allowed to seek unpaid wages of worth £346.15 a week from the National Insurance Fund.

This esteem principle of separate legal entity has its own set of disadvantages. There are times when this veil that makes a distinction amid the company and its officers is to be pierced. This is called piercing the corporate veil of the company.

When the veil if pierced, then, the company losses its personality and the officers are held liable directly for the acts of the company. The acts of the officers are the acts of the company and vice versa and the officers and be held directly liable for the same.

In one of the principle cases of Gilford Motor Company Ltd v. Horne, the veil is pierced on the ground that fraud is committed by availing the benefit of separate legal principle concept.  A company in the name of Gilford motors has employed Mr Homes. It is contractually decided amid the company and Mr Home that he is not permitted to implore the company employees post his job. Mr Home was acquainted with most of the company employees and the restriction is imposed to protect the business and good will of the company. But, Mr Home formulated a company in the name of his wife and has implored most the Gilford motors employees. The main plea of Mr Home was that the company was established by his wife and being the separate legal entity he has no association with his wife’s company and thus there is no contractual breach on the part of Mr Homes.

Understanding the Corporation Act 2001

But, the court held that the main intention for the establishment of the company by the wife of Mr Home was to deceit Gilford motors and to avoid the contractual breach. But, in such situation, the veil of the company can be lifted and the company established by Mr Homes wife should be considered as the company formed by Mr Home only. Thus, he has violated the term of the contract that was framed with Gilford motors.

Thus, the main question that arises is to what extend the restrain clauses are permitted and when they are legal.

Restrain clauses are those clauses wherein the employer in order to protect its confidentially, good will, etc imposes restrictions on the employees and does not allow any employee to transfer the information of the company to any other person. The restrain clause is only enforceable when the same is part of the employment contract.

The restrain clauses normally incorporate two kinds of restrain, that is, to prohibit an employee to work at some geographical region or to prohibit to carry the trade for some specific time period and is analyzed in Murray v Yorkshire Fund Managers Ltd.

Any restrain clause which is availed by the employer is valid provided, firstly, the restrain is obtained by an employer to protect his valid interest in Law; secondly, at times the transportation of information by the employee may hamper the reputation and good will of the company which has been built over the years. So, in order to protect such good will which may get hampered because of the transportations of the information can be secured by relying on the restrain clause; thirdly, the disclosure of information by the employee may also hinder the company’s confidentiality and in order to protect the same the employer is allowed to rely on the restrain clauses.

But, the clauses that are imposed on the employees must be for a limited period of time. It was found in number of cases that the justified prohibition is from 1 month to 2 years. Any restriction beyond such period is found to be unjustified and such restrain clauses are found to be inoperative in nature[15]. If the employer wants to rely on the restrain clauses which prohibit an employee beyond two years that the employer has to prove that the imposition is justified on the ground of confidentially, legal interest or to protect goodwill.

If the employee violates the restrain clause that is imposed upon him then he can be penalized and must face compensation, damages and injunction actions.

Computers Pty Ltd is the company which was established in New South Wales. Chu was the operations manager and is acquainted with most of the company secretive and important information. He was working with Computers Pty Ltd from last five years but on attaining the age of 50, he was retired from Computers Pty Ltd. The Computers Pty Ltd was dealing in hardware/software business.

Since Chu is acquainted with most of the confidential information of the business and is aware of the Computers Pty Ltd working, thus, he was prohibited to deal in the similar business in New South Wales for a period of two years. Thus, a restrain is imposed on Chu for two years.

The clause that is imposed by Computers Pty Ltd on Chu is legal and valid because Chu was the operational manager and is aware of all the clients of Computers Pty Ltd. there are chances that he might solicit the employees of Computers Pty Ltd and then may compete with Computers Pty Ltd thereby hampering the goodwill of the company, so, as per Seven Network (Operations) Limited the restrain clause is valid. Also, as per Pearson, a two year restrain clause is found to be valid and legal.  

However, Chu has violated the clause by taking the shelf of separate legal entity principle. He incorporated a company in his wife’s name wherein his wife was the sole shareholder. He established that the company is in the name of the company and is a separate legal entity thus he is not associated with the company in any manner.

But by applying the principal in Gilford Motor, Chu was not considered as distinct from the company. The veil of the company was pierced and it is found that fraud is incurred by Chu with the help of his wife in order to mitigate the effect of the restrain clause. The company was dealing in the same trade in which Computers Pty Ltd was dealing in New South Wales. The company was incorporated with two years of the retirement of Chu. Thus, the clause was totally violated.

Conclusion

So, the action of Chu to establish a company in his wife name is a clear violation of the restrain clause. The piercing of veil principal is applied and the company established by Chu wife is hold to be formed by Chu himself thereby breaching the terms of the restrain clause.

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Gilford Motor Co Ltd v Horne [1933] Ch 935 

Industry v Bottrill [1999] EWCA Civ 781.

Lee v. Lees Air Farming Ltd [1961] AC 12.

Murray v Yorkshire Fund Managers Ltd and another [1997].

Pearson v HRX Holdings Pty Ltd (2012).

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

Seven Network (Operations) Limited v Warburton (No 2) (2011).

Woolworths Limited V Mark Konrad Olson (2014).