Doctrine of Separate Legal Personality in Australian Law
It has been regularly stated that the courts in Australia are generally reluctant to ignore the principle of separating the identity of the corporations. This doctrine is considered as one of the basic principles of corporations law. The doctrine of separate identity and also the notion of limited liability of a corporation can be described as the reasons which have immensely helped in increasing the popularity of corporate form in Australia. But, it needs to be noted that under some circumstances, the courts have been willing to look beyond the separate existence of a corporation and to hold the persons who are in charge of the affairs of the company. In such a case, it is said that the corporate veil has been lifted by the court. This can be done by the courts where evidence is present which suggests that the parties have used the corporate form for the purpose of committing fraud or for avoiding their personal legal obligation. In this context, it is worth mentioning that such cases are very rare in Australia. Generally, the cases where this issue has been raised have two be decided on the basis of the facts of the case in place of relying upon the established exceptions to the principle related with a separate identity of a corporation. An example in this regard can be given of Briggs v James Hardie. In this case, Rogers AJA has stated that there is no common, unifying theory present in this regard, which may define the occasional decision that has been made by the courts of lifting the corporate veil. In this regard, it also needs to be noted that only on account of the reason that the corporate form has been elected by a person to limit the liability of such person for the debts of the business or a company with limited capital has been established, this fact alone cannot be treated as a sham or fraud on the part of such person.
The act of lifting the corporate patent can be described as the situation where the existence of the company has been ignored by the court, on account of the fact that the owners of the company failed to keep formalities and requirements. The act of piercing the corporate bail by the court can be described as a judicial act. Hence, various judges have tried to provide a brief meaning to this act. A similar attempt was made by Staughton J in Atlas Maritime v Avalon (No 1), where he used the following words for describing the term. Therefore, he said that the term piercing the corporate veil can be used for considering the obligations and privileges enjoyed by the corporation as the rights and liabilities that have been imposed on the shareholders. In this way, lifting the veil or looking beyond the corporate veil is to consider the shareholding in the company for legal purpose. As compared to this situation, Young J had mentioned in Pioneer Concrete Services Ltd v Yelnah Pty Ltd, that the act of lifting the corporate veil can be described as follows. He said that whenever a company is formed, there is the creation of a distinct legal entity. However there are certain occasions when it may be decided by the court that it needs to look beyond these legal personality and find the real controllers of the company. Keeping in view of these definitions, this doctrine can be simply explained as the direct opposite of the principle of limited liability. Even if there are a number of methods that are available in case of the Limited liability of a company, a problem is also present as the application of this notion may cause problems of over inclusion that may prove to be disadvantageous for the creditors of the company. Therefore it can be said that the law has overprotective of this concept of corporate law. As against this situation, when the court decides to lift the corporate veil, the personal assets of the members of the company may also become a part of litigation in the same way as is the case with sole proprietors or partnerships.
Circumstances Under Which the Courts Lift the Corporate Veil
The courts have been provided exclusive jurisdiction by the common law that they may look beyond the corporate veil or lift the corporate veil, anytime for the purpose of evaluating the operating mechanism that is working in cooperation. In view of the wide range of remedies that may be delivered by the courts, the issue of piercing the veil is one of the significant issues, that is brought before the courts under the common law. But in this regard, it also needs of mentioned that informal organizations, widespread censure, has to be faced by the application of these notion due to reason that it sacrifices substance for form. Probabilities were the reasons that Windeyer J had made the comment in Gorton that as a result of this approach, the law has been turned into “unreality and formalism”.
Hence, when a decision is made by the court to pierce the veil and look beyond separate personality of the company, the courts are going to consider the members of the company as the owners of the assets that were held by the company had also as if the members of the company were continuing their business in the form of their personal business. Similarly in such a case, it is available to the go to attribute the rights and liabilities grounding to the company to these members. This can be described as “disregarding the corporate entity”. However, the authority of the Commonwealth related with lifting the corporate veil has been described as “incoherent and unprincipled”. In Briggs v James Hardie, the same comment was made by Rogers J., while dealing with the issue, it has been said that there is a lack of common and unifying principle that underlies the decision of the courts that the corporate veil needs to be pierced in a particular case. Even if an ad hoc clarification may be presented by the courts but there is still a lack of a principled move towards it that can be seen in the applicable authorities. Some of the experts have also mentioned in this context that the major problem that can be seen in Salomon’s case was not mainly concerned with the claim made in favor of separate identity. But it was elated with the failure of English courts to provide an explanation regarding what needs to be considered by the boards than they are going to find the principle of separate identity and also the circumstances where the courts may decide against implementing the contracts related with corporate formation.
Implications of Lifting the Corporate Veil
Therefore, it is clear that a power has been granted to the common-law courts according to which they can design to lift the veil and ignore the rule that provides for the limited liability of corporations in certain cases. Due to this reason, in such a case, the members of the company will be treated as personally responsible for the liabilities of their company even if the rule of limited liability provides that a company has a distinct identity that is separate from its members.
It also needs to be mentioned in this regard that the issue of piercing the corporate veil is one of the most litigated issues under the corporations’ law. The result is that there are several general factors that have to be considered by the courts when they are going to decide if the corporate veil needs to be lifted in the particular case or not. The reason behind this position is that generally the courts support the maintenance of the separate identity of the corporations as being distinct from the identity of their owners. Hence, the fact related with the separate identity of the company will be ignored by the court only if the court comes to the conclusion that a partnership is present between the companies that are a member of the group or if the company is considered as a mere sham or facade or when the purpose behind the creation of the company is only to evade a legal or a fiduciary duty. Hence, it can be briefly stated that after the decision given in Salomon, there have been a number of discrete factors recognized by the courts that allow the courts to decide that the veil should be lifted in a particular case. Some of the factors have been discussed below:
Agency: according to the rule of separate identity of a corporation, companies considered to be a distinct legal entity, and it is treated as being separate from the members, also provides that the purpose of the companies not to act as the agent on behalf of its shareholders. Therefore, when such a thing takes place, the courts are ready to lift the corporate veil. Rowland J had discussed this issue in Barrow v CSR Ltd and mentioned that when the court adds that the conclusion that the patent company had the accountability for the actions of subsidiary company concerning an employee, the court will be ready to lift the veil. While dealing with the issue, the court stated that the effect will be the same whether the issue is mentioned by using the terms of agency law in terms of control or if it is claimed that there was proximity between the parent company and the employees of subsidiary or if it is considering terms of piercing the veil.
Factors Considered by the Courts Before Lifting the Corporate Veil
It is worth mentioning that a unique judicial approach has not been adopted by the courts in order to decide if it can be said that the company has been acting as an agent. The result is that it becomes little difficult to rationalize various decisions of the courts. The Electric Light v Cormack provides a good example in this regard. Here the court had decided against lifting the veil. In this case there was a one-man company, and it entered into a contract with the plaintiff regarding the use of the power supplied by them for two years. It was also agreed that the company will not install any alternative source of power in this period. But in these two years, the defendant decided to sell the company to another corporation and he became the manager and also the main shareholder of the new corporation. Hence, this new company decided to install energy power other than the one supplied by the plaintiffs. While dealing with the issue, the court was of the opinion that in this case there was no need to lift the veil and to consider the act as a personal undertaking. The court stated that there was no evidence which suggested that the business was sold by the defendant only for the purpose of evading his personal liability under the contract.
Generally the major reason due to which the courts, particularly in case of small corporations, are in favor of preferring the rules of agency law is because the courts are in favor of reducing the severity of energy that may be caused in cases where the corporate veil has been lifted.
Fraud: generally, fraud is alleged when the company is used by its owners only as a predicate for evading their responsibilities imposed by law. This can be the case where the owners of the company are intentionally using the corporate form in order to deny the pre-existing legal rights of the creditors. An example can be given of Re Edelsten ex parte Donnelly. In this case the court could not find out fraud by the owner of the company who had refuted his liabilities in favor of the creditors on account of the notion of limited liability. In view of the circumstances, the court had to find out if the corporation has been incorporated and used for the purpose of evading a legal obligation or in other words to perpetuate fraud, as claimed by the trustees of the companies. Therefore in this case, the court arrived at the conclusion that “the claim of fraud is certainly round. This argument can succeed only if the argument of sham is also successful. The reason behind this position is that if Edeleston has not required or debilitating property, there was no duty under the Act that can be evaded. The claim according to which VIP group had been used for the purpose of perpetuating fraud was coincidence, and it stood or fell along with the claims made in favor of considering the transitions through which the property has been obtained by VIP group as sham.”
In the end, it can be stated that lifting the corporate veil is a highly controversial topic under the corporate law. This topic will remain to be controversial even in the coming times. As mentioned in the present work, the act of piercing the veil can be described as an exceptional act that has been developed by the courts. According to the general rule, the courts usually favor the maintenance of the separate personality of a corporation which provides that a company has its own separate identity, and it is distinct from its shareholders. Therefore, the company is considered to have its own rights and obligations. The high threshold that is present in case of making a decision to pierce the veil has also been reaffirmed by the High Court. The Court had also mentioned that there are certain circumstances, when the personal liability of director may arise regarding the actions of the company. Similarly, the doctrine of veil piercing can be called upon when the shareholders blur the difference that is present in the company and its members.
Consequently, generally the courts are against the decision to pierce the veil and to and consider the members of the company for the purpose of imposing liabilities of the company on them. But there are certain circumstances, like facade or sham, groove enterprise, agency or cases involving unfairness where the courts do not hesitate to look beyond the separate identity of corporation and hold the members of the company has personally liable for the obligations of the corporation.. In order to achieve this objective, the courts do not hesitate to disregard one of the basic principles of corporations’ law that is the distinct identity of a corporation.
Anil Hargovan and Jason Harris, ‘Piercing the Corporate Veil in Canada: A comparative analysis’ (2007) 28 The Company Lawyer (UK) 58
Anil Hargovan, ‘Piercing the Corporate Veil on Sham Transactions and Companies’ (2006) 24 Company and Securities Law Journal 436
Helen Anderson, ‘Piercing the Veil on Corporate Groups in Australia: The Case for Reform’ [2009] 33 Melbourne University Law Review 333
Ian Ramsay and David Noakes, ‘Piercing the Corporate Veil in Australia’ (2001) 19 Company and Securities Law Journal 250
Jason Harris, Anil Hargovan, ‘Corporate groups: the intersection between corporate and tax law Commissioner of Taxation v BHP Billiton Finance Ltd’ (2010) 32 Sydney Law Review 723
Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 25
Case Law
Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769
Barrow v CSR Ltd (Unreported, 4 August 1988, Supreme Court of Western Australia, Rowland J)
Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549
Gorton v Federal Commissioner of Taxation (1965) 113 CLR 604
Re Edelsten ex parte Donnelly (Unreported, Federal Court, Northrop J, 11 September 1992)
Salomon V. Salomon [1897] A.C. 22
Taxation v BHP Billiton Finance Ltd’ (2010) 32 Sydney Law Review 723
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