Legal Issues In Corporate Law Essay.

Lifting the Corporate Veil

Issue:

Whether Bob can double his catch by incorporating the company?

Rule:

Section 1.5.1 of the Corporation Act 2001 states that company has separate legal existence which is distinct from its owners, operators, employees, and agents. In other words, company has its own properties, own rights, and its own obligations. Money and other assets are belongs to the company and it is necessary that they must be used only for the purpose of the company. company own similar powers of an individual such as company can own and dispose of the property and other assets also, company can enter into contracts, sue and be sued (Ramsay & Noakes, 2001).

A company is separate legal entity which is completely distinct from its members, and because of this law separates it from its shareholders, directors, promoters, etc. this central principle of Corporation Act were introduced in very clear terms by the House of Lords in the case law Salomon v Salomon & Company Ltd [1897] AC 2 . In this case, Court of Appeal stated that company was incorporated by the Solomon for the purpose which is contrary to the intention of the Companies Act, 1862. Later, he conducts the business of the company as an agent of the company. Therefore, Court stated that Solomon was responsible for the debt incurred by the company during the period of agency. The House of Lords on appeal reverse the ruling of the case and Court stated on unanimous basis that in case company was duly incorporated, motive of the person who took part in the promotion of the company is not considered relevant. Therefore, this case firmly establishes the principle of veil between the company and its members.

This concept of limited liability stated that owners of the company are not liable for the debts or obligations of the company in whose circumstances which can be considered normal. Principle stated in Solomon case stated that company has separate legal entity from its shareholders and this principle is applied by Court in number of cases such as Roundabout Ltd v. Byrne [1959] IR 423 (Law Teacher, n.d.).

However, human beings started using this principle for their own profit by conducted fraud and improper acts. Therefore, it become necessary for the Court to break this principle and lift the corporate veil and also look at those persons which are behind the act and who actually took the advantage of such corporate action.

Lifting of the veil actually means disregard the principle of separate legal entity and look for the actual person who controls the affairs of the company. In other words, when any person uses the entity for fraudulent and dishonest purpose then such case individuals are not allowed to take shelter behind that corporate veil.

Courts generally lift the corporate veil when Court founds that fraud is committed behind the veil, Court does not allowed the individual to take shadow under the principle of separate legal entity. For the purpose of discovering the fraud Court will break the corporate shell and applied the principle of lifting or piercing of corporate veil. Generally, law states that corporation is a distinct entity but in reality it is an association of person who holds the property of corporation for beneficial purpose. Court does not allowed the association of person to use the principle of separate legal entity (Anderson, 2009).

Subsidiary Company and Parent Company

Application:

In the present case, Bob cannot catches more than 50 tones fishes because as stated above Court can lift the corporate veil of the company and detect the fraud committed by Bob. In case company is incorporated with fraud intention then Court does not allowed the person to take shadow of separate legal entity principle and applied the principle of lifting and piercing corporate veil.

In case Bob catches more than 50 tones fishes then it is considered that Bob committed offense under the Act and will be liable for fine up to $100,000. Therefore, It is advisable to Bob for not incorporate the company for catching more than 50 tones fishes.

Issue:

Whether New Nirvana Ltd is liable for the negligence occurred by the Nuclear Blast Sounds Pty Ltd ?

Rule:

Subsidiary company is considered as that company which wholly owned or majority controlled by another company, and holding company is known as parent company which holds majority control of the subsidiary company.

Both parent and subsidiary company are considered as separate legal entities and independent from each other, but in some cases parent company is considered liable for the acts of subsidiary company, and court can pierce the corporate veil.

Court is bale to pierce the corporate veil in such cases when sufficient degree of common ownership and common enterprises exists in the case. This can be understood through case law Bluecorp Pty Ltd (in liq) v ANZ Executors and Trustee Co Ltd72, in which Court stated that inter-relation of the corporate entities can be determined through the control of the top structure and to the extent from which the companies were participating the concept of common enterprise for the purpose of mutual advantages perceived in the various steps which are plan and implemented, court also determine the influence of holding company on the subsidiary company (Lexology, 2014).

There is one more case law which is related to pierce of corporate veil in the group enterprise that is Walker v Wimborne, and in the decision of this case complete evidences for this concept are given. In case Industrial Equity Ltd v Blackburn, Mason J continued his approach towards the formal separation of legal identities of parent and subsidiary company. In this case, High Court rejects the argument which states that profit lies in subsidiary companies within the disposition of the parent company which also states the capacity of parent company to control the general meeting of each subsidiary and also ensures the distribution of profits and payment of dividends.

However, it must be noted that Court would not pierce the corporate veil only on the evidence of control only, because Court consider it insufficient reason to pierce the corporate veil in group enterprise mere on the ground of control. In case Briggs v James Hardie & Co Pty Ltd, Rogers AJA after examining the group enterprises stated that plaintiff can pierce the corporate veil for the purpose of suing the parent company because parent company exercise full control over its subsidiaries company (Law teacher, n.d.).

Adoption of Constitution for Companies

Application:

In the present case, New Nirvana Ltd is the holding company Nuclear Blast Sounds Pty Ltd, and is liable for the acts of its subsidiary because N/N Ltd exercise control over the Nuclear Blast Sounds Pty Ltd. Therefore, Court can lift the corporate veil in this case and held N/N liable for the acts of Nuclear Blast Sounds Pty Ltd. 

Issue:

Whether Don takes Legal action against the Millennium Pty Ltd?

Rule:

Adoption of constitution can be considered as both legal requirement for some companies and good management practices for some business. It is necessary for company to adopt the constitution at the time of registration of the company. As per the requirement stated by the Australian Securities and Investment Commission (ASIC), company can choose whether to adopt its own constitution or corporation act’s replaceable rules, and company can also adopts the combination of both. It must be noted that company either drafted their own constitution or adopt replaceable rules (Find law, n.d.).

Those companies which conduct business in Australia must state internal rules which govern various relationships of the members and officers of the corporation. According to section 134 of the Corporation Act 2001, internal management of the company is governed by the provisions of this Act which applied to the company as replaceable rules, by the constitution of the company, or by a combination of both. However, it must be noted that there are some additional rules related to internal management of the company in ordinary provisions of this Act and also in the common law (Corporation Act, 2001).  

Section 140 of the Corporation Act 2001 states that constitution of the company and any replaceable rules that applied to the company have effect like the contract entered between the company and each of its members, between the company and each of its director’s and company secretary, and between the member and each other member. It is necessary that person must agree to observe and perform the constitution and rules as to the extent they apply to the person (Corporation Act, 2001).

Constitution of the company provided contractual force by section 140(1) of the Corporation Act 2001, and this section states the effect of contract between the company and member, director, and officers. It must be noted that normal contracts are very different from this contract. Generally, in normal sense contract between the parties are formed by an agreement entered between the parties which are legally enforceable, but in case of company’s constitution incorporators of the company in some cases reach agreement in the form of the company’s constitution which is made before the registration of the company. Subsequently, members of the company bound by the terms of the constitution such as shares are issued to the members as per the rules of the constitution, and directors and officers of the company are appointed as peer the rules of the constitution.

There is one more difference between the normal contract and constitution of the company that is constitution of the company can be amended in the general meeting of the company by passing special resolution. However, this right of the company is subject to some limitations which include safeguards for the prevention of oppression in the management of the company.

Constitution can be adopted either before the registration of the company or after the registration, but each member must agree with the terms stated in constitution of the company.  In case constitution is adopted after the registration of the company then company must pass special resolution for the purpose of adopting the constitution, and by passing SR Company can also change and repeal its constitution. Such resolution needs at least 28 days’ notice period in case of publicly listed companies and 21 days’ notice for other types of company (ASIC, 2017).

Application:

In the present case, Simon, Michael and Don incorporate project Management Company named as Millennium Pty Ltd. Don is the solicitor of the company for the purpose of purchasing or sailing land of the company, and he is also nominated by the constitution of the company. This article also stated that in case any disputes arise between the company and the members of the company or between the members, then such dispute first referred to an arbitrator before initiating any court proceedings. After some years, Simon and Michael appoint another person as the solicitor of the company because they think that another solicitor is more efficient as compared to Don.

In this case, Don is bind by the rules of the constitution because as per the Section 140 of the Corporation Act 2001, constitution of the company is the contract between the company and the members of the company. Therefore, Don must bring the dispute to the arbitrator before initiating any legal proceedings. 

References:

Roundabout Ltd v. Byrne [1959] IR 423.

Salomon v Salomon & Company Ltd [1897] AC 2.

Law Teacher. Lifting Of the Corporate Veil. Available at: https://www.lawteacher.net/free-law-essays/business-law/article-on-lifting-of-the-law-essays.php. Accessed on 21^st June 2017.

Anderson, H. (2009). Piercing The Veil On Corporate Groups In Australia: The Case For Reform. Available at: https://www.austlii.edu.au/au/journals/MelbULawRw/2009/13.html. Accessed on 21^st June 2017.

Ramsay, M. I. & Noakes, B. D. (2001). Piercing the Corporate Veil in Australia. Company and Securities Law Journal 250-271.

Bluecorp Pty Ltd (in liq) v ANZ Executors and Trustee Co Ltd72.

Law teacher. Liability Of Parent Over Subsidiary Company Actions. Available at: https://www.lawteacher.net/free-law-essays/business-law/liability-of-parent-over-subsidiary-company-actions-business-law-essay.php. Accessed on 21^st June 2017.

Lexology. (2014). Wholly-owned subsidiaries: same same but different. Available at: https://www.lexology.com/library/detail.aspx?g=90cc6c72-de1a-4ba7-91d0-7cd7a798c5ed. Accessed on 21^st June 2017.

Briggs v James Hardie & Co Pty Ltd & Co Pty Ltd (1989) 16 NSWLR 549 at 577.

Industrial Equity Ltd v Blackburn, [1977] HCA 59; 137 CLR 567; 52 ALJR 89; 17 ALR 575; 2 ACLR 421.

Corporation Act 2001- Section 134.

Corporation Act 2001- Section 140.

ASIC, (2017). Constitution and replaceable rules. Available at: https://asic.gov.au/for-business/starting-a-company/constitution-and-replaceable-rules/. Accessed on 21^st June 2017.

Find law. Registering a company in Australia. Available at: https://www.findlaw.com.au/articles/4660/registering-a-company-in-australia.aspx. Accessed on 21^st June 2017.