Critically Analyze the Concept of the Corporate Veil in Australia (Thesis Sample)

Critically Analyze the Concept of the Corporate Veil in Australia.
By .........
Presented to DR. /Prof………………….
Master of Commerce
Corporate Law
University of Melbourne...
25 January 2014
2.0 Table of Contents
Title Page …………………………………………………1
Table of contents…………………………………………2
Abstract..................………………………………………3
4.0 Introduction........………………………………………...4
5.0 Corporate Veil and Exemptions....................……………5
5.1 Salomon’s Case……………………………………………5
6.0 Lifting the Corporate Veil........…………………………..7
6.1 Agent and Holding / Shareholding Company..................7
6.2 Instrument of Fraud...............……………………………9
6.3 Victim of Tort……………………………………………10
6.4 Corporate Bodies...........................................................10
7.0 Lifting the Corporate veil under Corporations Act..............12
8.0 Conclusions....................................................................13
9.0 References......................................................................14
3.0 Abstract
This paper critically analysis the concept of the corporate veil. Reference is made to cases and legislation relating to the lifting of the veil. Corporate veil is one of the fundamental aspects in discussion of corporate law id forms an integral part of body corporate and their regulations thereof. A particular emphasis is put on the Australia judicial system in order to determine the influence common law has on body corporate within this jurisdiction. The doctrine of separation of powers forms an important engagement vehicle between the company and the shareholders the settlement of disputes arising out of their engagement through contracts or as a result of tort. The lifting of the corporate veil is also discussed showing particular instances when it is necessary to pierce the veil in order to address an injustice on parties’ concerned. Common law has addressed cases of injustice on the part of the shareholders through the principle of lifting the corporate veil. Through this the courts can lift the protection granted to the shareholders to deny them limited liability. In this case the courts will exempt the shareholders from the separate legal entity, the shareholders are held responsible for the actions of the company. Other instances that the court can lift the corporate veil include, where the courts have been requested to lift the corporate veil by either the shareholders or the company itself, this would allow the courts to give remedy that either party would be denied. The doctrine of separation of powers has been used as the basis of most jurisdiction laws and forms a fundamental aspect and component of international Law especially laws governing commerce. The courts in Australia intermittently use lifting and piercing the veil in other jurisdiction the two terms have different interpretations with reference to either shareholders or company.
4. O Introduction
One of the most important legal principles in corporate law was affirmed by the House of Lords though the Salomon’s case, upon the registration of the company as a limited liability company which is often referred to us incorporation a legal entity is formed which has a distinct and separate legal entity from owners such as shareholders and directors.
Corporate Veil is also often referred to us the Doctrine of Separate Legal Personality. This is legal position where the business (body corporate only) and owners (shareholders and directors) are treated in Law as distinct legal personalities each with rights and obligations. By creating a corporate veil the company becomes a distinct legal personality capable of being sued in a court of Law. The corporation has sole responsibility of debts it incurs or a beneficiary of debts it is owed, those debts cannot be treated as liabilities of the shareholders or directors unless the courts separate the legal personalities of the corporation and shareholders or directors, this is the concept upheld in many commonwealth countries Australia included, under common law. This doctrine was established in the famous case of Solomon vs Salomon case.
In a different description the concept has become a point of focus when courts “lift” or “piece” the corporate veil. Despite the fact that the doctrine conveys separate legal entity to corporations and shareholders in several circumstances it is possible for courts of law to treat the legal personality of corporations and individual shareholders as lifted. This way the courts treat the obligations and rights of corporations as the liabilities and rights of the shareholders. According to Eisenberg (n d) the limited liability of corporations and shareholders is distinct and are not related.
5.0 Corporate Veil and Exemptions
While the principle of separation of personalities is crucial in running modern day body corporate, the case Solomon v Solomon that established the principle has come under criticism especially given that there are instances where a conflict exists between the shareholders and the body corporate. In Australia the case law is not very clear on the particular circumstances under which the courts can lift the veil; the company law does not specify either. Therefore failure of legislation and case law makes it difficult to discern broad principle regarding the lifting of the veil in Australia courts, a similar case is observed in many other jurisdictions around the world, but case laws has helped bring out the particular facts that other courts can follow in cases involving lifting the veil. Therefore it is important to look at cases concerned with the corporate veil more critically.
5.1 Solomon’s Case
The case conferred upon the body corporate distinct legal personalities to ensure that the corporate can be able to acquire debts, own assets and be liable and responsible for these debts and assets respectively (Grantham & Rickett (eds), 1998). However several criticisms have been leveled on the case some of which are;
The shareholders do not participate in the day to day running of the company this was some of the benefit conferred upon the shareholders by the case (Boros and Duns). Therefore all the resources of the company are under direct control of the management and the workers. The shareholders interest is on divided and shareholders are not required to spend resources and time monitoring the company. The case focused on the financial costs associated with management while in reality there are social costs and other costs that can be attributed to an individual that are associated with the management. For example depending on the performance of the company capital will rise on good performance of the company and decline on poor performance, the man focus would be to diversify investments to minimize risks.
Limited liability conferred by the case helps in the transfer of shares to new shareholders thus allowing the market share to be efficient as all the shares are of equal value this makes the transfer procedure simple. The market share efficiency has been heralded as an important aspect in the desire by the companies to reduce cost of capital as often the company will not require to borrow at high interest rates from the banks as shareholders can often be required to raise additional capital.
The company information is often available to creditors than the shareholders as they do not actively participate in the running of the companies while creditors rely on careful analysis of the company’s finances to qualify the company to receive loans. Therefore the shareholders are poor bearers of the company risks as compared to creditors.
Careful analysis of the presented information about Salomon case reveals that shareholders were the main beneficiaries of the case as this ensured that the shareholders only loose the amount contributed as capital in case the company fails. While the creditors would be compensated from the disposal of, remaining assets, this often is not sufficient.
The major effect of the case was to shift the risk of business failure. In many instances this falls on the creditors as shareholders only loose the amount contributed as capital. Many such instances have been addressed by other common law cases through piecing the corporate veil.
In Salomon’s case a general rule that was intended was that the courts could not treat a body corporate and shareholders as one entity. However to address the different scenarios where a director or shareholder would incur liabilities and them make the company liable several common law cases have created exceptions to this rule. In this case when the exceptions are applied the company, shareholders and directors are liable for the company debts.
6.0 Lifting the Corporate Veil
The court can impose liability on the said parties and this is referred to us “Lifting” or “Piecing” of the corpora...