Essay: Liability Of Companies And Separate Legal Entity Principle 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.

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 2
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.

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.

Issue 1: Can Bob double his catch of scallops by forming a company?

I: Issue

The key issue in this case relates to the possibility of doubling the catch by forming a new company.

R: Rule

In Australia, business can run in different ways, which includes trust, partnership, company and a sole proprietorship. Amongst all these forms, a company form of structure remains as the most preferred one, due to its features. A company is a separate legal entity, so for the debts of the company, its owners cannot be held liable, and so the members of the company have a limited liability. Also, a company has perpetual succession, hence, death of its owners has not affect over the status of the company, and it continues to run.

A company has the power of initiating claims against any entity and can also be sued by other entity. However, the structure of the company is quite complex and even the costs of running a company are high as compared to other structures of running a business. The companies are regulated in the nation by ASIC (Latimer, 2012).

The companies in the nation have to adhere to the statute of Corporations Act, 2001 (Cth), i.e., CA, and its operations have to be based on this very act (Federal Register of Legislation, 2017). Under section 124(1) of CA, the companies have been given the legal capacity and powers in and outside of this jurisdiction, as that of a person. Hence, a company is detached from the people who are responsible for running the same (WIPO, 2015).

It is also stated in this section that the company can cancel or issue shares, issue debentures, grant options with regards to the unissued shares of the company, provide security by charging the amount of uncalled capital and also arrange for the company’s registration (WIPO, 2015). The separate legal entity concept is contained under section 1.5.1 of CA as per which the corporations are different from its operators, agents, employees, managers and owners. And so, a separate legal existence is there for the companies. This status is available for both proprietary and public form of companies (Australasian Legal Information Institute, 2017).

The concept of separate legal entity was born through the case of Salomon v Salomon & Co Ltd [1897] AC 22. Aron Salomon was a manufacturer of boot and shoe and the company carried on his trade as an agent. Aron Salomon was held liable for the debts which were incurred by the company.

However, the court stated that this approach was completely wrong, as the company had to carry the business on behalf of its shareholders and on its own. In case of a company, the court held that a principal agent relationship was not present as the company is not an agent of its shareholders. Along with this, in order to hold that the company is a legally incorporation company, it has to be treated as being an autonomous person with distinctive obligations, as well as, liabilities. So, holding the company as a separate legal entity, the debts of the company were put as liability of Salomon (Kershaw, 2012).

Rule 1: Features and regulations of companies in Australia

The subsidiary being merely a component of the parent company was a notion which the High court rejected in the matter of Industrial Equity Ltd v Blackburn (1977) 52 ALJR 89. This ruling was given when the matter was being decided upon for determining the profits of the parent company, owing to the principle of separate legal entity (High Court of Australia, 2017). The separate legal entity status of a corporation was upheld by the Court of Appeal of New Zealand, which led to the dismissal of claims of Lee in Lee v Lee's Air Farming [1961] AC 12 (Bourne, 2016).

A: Application

As per the limits imposed by the Scallop Fishing and Marketing Act, Bob was only allowed to catch fifty tones of scallops or a fine of $100,000 would have been imposed on him. In case Bob decides to incorporate a company, the company would be separately allowed to catch fifty tones of scallops every year. And Bob could also catch fifty tones of scallops every year. So, the catch would in reality be doubled as advice by Alice. This is due to the principle of separate legal entity contained in the governing act. So, Bob should form a company as advised by his daughter in order to double his catch.

C: Conclusion

On these bases, it can be clearly stated that Alice had given correct advice to her father and Bob can undoubtedly double his catch by forming a company, as it would be treated separately, or as a separate entity from Bob.

I: Issue

The key issue in this case study relates to the liability of the holding company, i.e., New Nirvana Ltd, for the negligence of its subsidiary company, i.e., Nuclear Blast Sounds Pty Ltd under the tort of negligence.

R: Rule

The wholly owned companies in the nation are deemed as the extension of their holding company. This does not mean that the entities’ status of separate legal entity is ended, and so, it applies on both the subsidiary company, as well as, the holding company. The holding companies in the nation can, in certain cases, be deemed as the shadow director of its subsidiary when the executives on the board of the subsidiary company are appointed through the parent company. One of the cases, where this occurs is when the executives appointed by the holding company in the subsidiary company have to use their powers, based on the directions provided to them by the holding company. In such cases, the holding company is liable for the liabilities and obligations of the subsidiary as they are treated as the shadow directors of the subsidiary, pursuant to section 9 of the governing act (Bonomelli, 2014).

The principle of lifting the corporate veil is another helpful doctrine for such cases. when the corporate structure of the company is used by a holding company, so that the legal duties which have been owed by the holding company can be escaped, the court has the power to pierce the corporate veil, so that the real runners or the individuals who run the business can be held accountable and are held liable for the debts of the company. An example of this case can be established through the case of Creasey v Breachwood Motors Ltd [1993] BCLC 480; 10 ACLC 3,052. In this case, the court lifted the corporate veil as they held that the new company was formed just so that the liabilities of the previous company, with regards to negligence, could be avoided. And so, the shareholders of the new company were held liable for the negligence of the old company (French et al. 2016).

Application 1: Explaining how Bob can double his catch through a company

For cases related to tort, the companies are required to be treated in a separate manner, and the doctrine of corporate veil, at times, cannot be applied. In such cases, the direct duty owed by the holding company has to be depicted towards the injured entity (Kerr, 2014). Berkey v. Third Avenue Ry 244 N.Y. 602 (1927) was a case where due to the calamity which took place at the tram line, the plaintiff was injured.

This tram line was controlled by the railways company and this particular company was held by the defendant, along with other two corporations. The subsidiary initiated legal actions against the defendant and claimed for getting compensated for the injury. It was held by the New York Court of Appeals that for the outstanding amount of the subsidiary company, the defendant could not be held accountable. For holding the holding company accountable, it had to be shown that the holding had a dominating control over the subsidiary. In absence of such dominance, the plaintiff was not awarded any compensation by the court (Lezcano, 2015).   

A: Application

The subsidiary in this case has to be held accountable separately from the holding company for making the setting up and arrangements of the equipments for the concept which had to take place. On the basis of Berkey v. Third Avenue Ry, it has to be shown that the holding company was in a dominating position; and as a result of this, the corporate veil of the company could be lifted. Due to the reasons of treating the parent and subsidiary company in a separate manner, based on the concept of separate legal entity, the holding company could not be held responsible for the undertaken negligence of the subsidiary company.

C: Conclusion

On these bases, it can be concluded that the holding company in this case cannot be made liable for the undertaken negligence by its subsidiary as there was an absence of dominance of the holding company over the subsidiary company or such circumstances which could force the court to lift the corporate veil.

The key issue in this case relates to the possibility of successful claims which can be brought against the company by Don.

R: Rule

CA provides that the internal management of the company has to be based either on the constitution or on the replaceable rules; and in some cases a combination of both of these can also be adopted. Irrespective of the type of document which governs the companies, this document is considered as a major document for any company as it contains how the relationships are formed and governed and also differentiates between allowed and disallowed conduct (ICNL, 2017). The replaceable rules usually denote a modified form of constitution and a company can adopt modified terms in both of these documents, as is decided by the members. Under section 140 of CA, the constitution of a company creates an agreement between the company and its company secretary, its members, its directors and it also creates an agreement between each of the members (Australian Government, 2017).

Conclusion 1: It is advisable for Bob to form a company to double his catch

The Article of Association of a company, or just Articles, in addition to the Memorandum of Association form the company. The type of business is dictated through the Articles which the company follows and these articles contain the details regarding the manner in which the control is exercised by the company’s shareholders over the bard and also defines the responsibilities of the directors, which is apart from the provisions regarding directors duties contained in CA (Cassidy, 2006).

Eley v Positive Life Assurance Co Ltd [1876] 1 Ex D 88 is a case, where the scenario given in this case study was found. In this matter, the plaintiff had been appointed as the lawyer of the company for entire lifetime. Subsequently, the plaintiff was made the member of the company and the appointment of the plaintiff was contained in the articles of the company. Later on, the plaintiff was removed from his position of the company’s lawyer. The plaintiff sued the company for the breach of contract on the basis that articles had to be treated as an agreement. The court held that based on the company’s articles, no right of the plaintiff as being a member was affected. And so, the court dismissed his claims (Dignam, 2011).

Hickman v Kent or Romney Marsh Sheepbreeders Association [1915] 1 Ch D 881 was a case where the articles of the company required the member to make a consultation to the arbitrator before the matter was referred to any court. However, the plaintiff did not refer the matter as per the articles and instead sued the defendant in the court. The court held that as CA’ 140(1) (a) section provides that a contract is formed between the company and its members upon the memorandum and articles being drawn. Hence, it was crucial that the plaintiff followed these terms and on these bases, the defendant was granted a stay order for the plaintiff’s claims (Swarb, 2015).

A: Application

In the given case, as Don was a member of Millennium Pty Ltd, a contract was formed between him and the company. As per the articles, he did not have any rights other than the right of being the company’s member in any capacity. When he was discharged from his position of being the company’s lawyer, his rights of being a member of the company were untouched. Applying the decision of Eley v Positive Life Assurance Co Ltd, Don’s claims would not be successful due to his rights being untouched.  Further, if the case of Hickman v Kent or Romney Marsh Sheepbreeders Association is applied here, Don was required to go to an arbitrator before he went to the court. And on the basis of decision of this case, the company can obtain a stay at the proceedings of Don.

C: Conclusion

Hence, it can be stated that the claims of Don would fail as his members’ rights were untouched. Further, the company can obtain a stay at the proceedings initiated by Don, as he failed to uphold the requirement stated in the articles of the company.

References

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Australian Government. (2017) Corporations Act 2001. [Online] Australasian Legal Information Institute. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 29/05/17]

Bonomelli, M. (2014) Wholly-owned subsidiaries: same same but different. [Online] Lexology. Available from: https://www.lexology.com/library/detail.aspx?g=90cc6c72-de1a-4ba7-91d0-7cd7a798c5ed [Accessed on: 29/05/17]

Bourne, N. (2012) Bourne on Company Law. 7^th ed. Oxon: Routledge.

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French, D., Mayson, S., and Ryan, C. (2014) Mayson, French & Ryan on Company Law. 31^st ed. Oxford: Oxford University Press.

High Court of Australia. (2017) Industrial Equity Ltd v Blackburn. [Online] High Court of Australia. Available from: https://eresources.hcourt.gov.au/showbyHandle/1/230830 [Accessed on: 29/05/17]

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Kerr, D. (2014) Hiding Behind Subsidiaries: Holding Parents Liable. [Online] The GULS Law Review. Available from: https://www.gulawreview.org/entries/commercial/hiding-behind-subsidiaries-holding-parents-liable [Accessed on: 29/05/17]

Kershaw, D. (2012) Company Law in Context: Text and Materials. 2^nd ed. Oxford: Oxford University Press.

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Lezcano, J.M. (2015) Piercing the Corporate Veil in Latin American Jurisprudence: A Comparison with the Anglo-American Method. Oxon: Routledge.

Swarb. (2015) Hickman V Kent Or Romney Marsh Sheep Breeders ‘ Association; 1915. [Online] Swarb. Available from: https://swarb.co.uk/hickman-v-kent-or-romney-marsh-sheep-breeders-association-1915/ [Accessed on: 29/05/17]

WIPO. (2015) Corporations Act 2001. [Online] Australasian Legal Information Institute. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 29/05/17]