Law of Associations Summaries- Lifting the Veil/Promoters/Internal Gov

8/12/2019 Law of Associations Summaries- Lifting the Veil/Promoters/Internal Gov

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SEMINAR 5- LIFTING THE CORPORATE VEIL, PROMOTERS AND

INTERNAL GOVERNANCE RULES

LIFTING THE CORPORATE VEIL

Rule: In accordance with Saloman v Saloman and ss119 and 124 of the

Corporations Act, A company is a separate legal entity and as such is distinctfrom the directors and shareholders of the company.

Company is treated as an individual

Thus it is the company rather than the shareholders or the management that

should e sued or e sued.

Excepti!": !owever a numer of e"ceptions apply to this principle where

the courts have power to #li$e t%e c&p&'te (eil), which essentially allows the

courts to loo# eyond the protection of the company name to see who Is in

control of the usiness. These people may then e considered responsile for

the company$s conduct. %hile courts are reluctant to lift the corporate veil, it

may e lifted common law or statutory grounds.

- C**! L'+ excepti!"

o Avoidance of legal oligation

o &raud or improper purpose.

o Agency

o Involvement of reaches of director$s duties

o Corporate groups

- St'tut& Excepti!"

o 'ets and other oligations incurred as trustee (s197 CA)


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o Insolvent trading) directors e"posed to personal liaility for those

dets where they #new or ought have #nown of the insolvency

."5//G CA0

o %here the company is a susidiary of another company, that

holding company may e made liale in relation to those dets

where it #new r ought to have #nown of the state of its financialaffairs* s+-)+

COMMON LA1 E2AMPLE: F&'u3 & i*p&pe& C!3uct

- the court will lift the corporate veil and refuse to apply principle of separate legal

entity if the company is a sham) that the company is created for fraud or improper

purpose) Gilford, Jones v Lipman

Gilford Motor Co Ltd v Horne 46778- the court will lift the corporate veil if the

company is created to avoid legal oligation.

- &ACT/* !orne was managing director of 0ilford otor. !is employment contract

included a restraint of trade clause for a period of + yrs after leaving the company.

nce he left, !orne registered a company with his wife and friends as

shareholders. The new company engaged in a similar usiness as 0ilford otor Co

3td and the company, through !orne, targeted

-

- the customers of 0ilford otor Co 3td. 0ilford otor Co 3td sought an

inunction to restrain !orne. He +'" i! c*plete c!t&l $ t%e c*p'!

- C56T* The company created y !orne was a sham)incorporated to allow

!orne to escape his legal oligation imposed y his employment contract.

Accordingly, the court lifted t%e c&p&'te (eil '!3 c!"i3e&e3 H&!e '!3 t%e

c*p'! '" !e H&!e +'" %el3 &e"p!"i9le $& c!3uct $ t%e c*p'!'!3 '" ' &e"ult H&!e '!3 t%e c*p'! 9ec'*e !e

- !orne argued company is a separate legal entity and that the company is not

ound y the employment contract ecause this.

- Nee3 t p&(e t%'t it i" t%e *'i! &e'"! '!3 p&9'9l t%e !l &e'"! +%

t%i" c*p'! i" c&e'te3- it i" ' "%'* '!3 it %'" ' $&'u3ule!t '!3 i*p&pe&

pu&p"e

- %ife and friend had no input in the company) all controlled y !orne.

Jones v Lipman&ACT/* 3ipman contracted to sell land to the ut efore sa#e completed, 3

transferred the land to a company. /hareholders were 3 and a solicitor$s cler#. Aim*

to prevent purchasers from eing ale to compel 3 from transferring the land,

although entitled to sue for damages.

C56T* Treated contractual oligation on 3 to transfer the land as also inding on

the company. 6ussel 7 ordered specific performance against the company and

against 3. Court considered 3 using company as a 8sham$ to avoid his contractual

oligations.


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Use of the corporate form to perpetuate fraud

Re D'&9(see 6edmond note 1 p 1:

'ary was one of two undischarged an#rupts with convictions for fraud who

registered a company in the Channel Islands. They were the only directors and the

seven shareholders included these directors and five nominees. The court found that

they had formed the company as part of their fraudulent plan. The company floatedan ;nglish company and sold it a


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if there is an agencythe court $ill lift the corporate !eil

and the companies in the group $ill "e considered as one as aresult- Smith Stone and Knight Ltd v Birmingham Corp *19+9,

o n England su"sidiaries ha!e "een treated as

agents or partners- %mith / 0night.

Smith Stone and Knight Ltd v Birmingham Corp [1939] #ourt may lift thecorporate !eil if there is agency "et$een the holding company and thesu"sidiary.

2#T% %mith %tone and 0night 3td $as the holding company of4irmingham Waste. 4 $as conducting "usiness on the property o$ned "y%mith %tone and 0night. The good$ill of the "usiness $as ne!er transferred

to the su"sidiary nor did the su"sidiary ha!e staff. t had no "ooks of accountand paid no rent for the premises. The person running the "usiness $asappointed "y %. the council ac5uired the land on $hich the "usiness $asrunning. o$e!er the su"sidiary $as not a"le to claim compensation for thedistur"ance to its "usiness. nstead the parent company s sued the councilfor compensation and distur"ance of the "usiness. The council argued thatdue to the principle of separate legal entity the holding company and thesu"sidiary $ere different companies and as a result the holding companycould not sue.

!t"#n$on % element$ to &eterm#ne w'et'er a $u($#ary #$ an #mpl#e&

agent o) t'e parent company* Te$t )or agency f all ans$ered yes then thesu"sidiary is conducting the parents "usiness.

- Were the profits treated as the profits of the parent8

- Were the persons conducting the "usiness appointed "y theparent8

- Was the parent the head and the "rain of the trading!enture8

-id the parent go!ern the ad!enture decide $hat should "e

done and $hat capital should "e em"arked on the !enture8

- id the parent make the profits "y its skill and direction8

- Was the parent in effectual and constant control8

+E,-: The su"sidiary conducted "usiness as agent of olding company andconse5uently lifted the corporate !eil and treated "oth companies as one.

+O.E/E0: the test for agency is highly critici:ed and are contro!ersial


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- %u$t (ecau$e t'e element$ are t'ere2 t'e court$ may not l#)tt'e corporate e#l (ecau$e )actor$ t'at con$t#tute an agencyrelat#on$'#p )or purpo$e$ o) e#l l#)t#ng are currently un$ettle&an& a$ $uc' #t &oe$ not pro#&e a &e)#n#t#e te$t o) agency*%a$on 'arr#$ l#)t#ng t'e corporate e#l 4 5#r& Cameron*

- The argument for lifting the corporate !eil $ould only "e likely to "econsidered in a case that has an identical set of facts to the %%0case.

- The & of the 6 elements largely focus on control and control of itselfcannot "e a decisi!e indicator of agency.

o #omplete control of a company is not sufficient to create an

implied agency "et$een the company and the controller and the"asis for !eil piercing- Briggs v James Hardie & Co Pty Ltd

!CN 007 528 207 Pty Ltd (in i!" v Bird Cameron (#eg" 6788 91 S!S0 ;8*

Court: ;efused to find an agency "et$een the partners and the company on the"asis that the company operated its o$n independent "usiness despite thecontrol eercised "y the partners. This $as "ecause the profits made "y thecompany $ere not o$ned "y the partners in the firm "ut rather $ere o$ned "y

the company and distri"uted as di!idends.

Important #ncator o) an agency relat#on$'#p: Where thepro)#t$ of the"usiness are treated as the profits of the parent company. f they are not mostlikely not an agent.

BUT- IS THE COMPANY A GHOST COMPANY? The elements can be used to

determine the existence of a shambetween separate entities- ghost companieswith

no assets, no employees and no real independent identity. Lack of resources indicates

that the companies were never intended to be separate legal entities- this justifies alifting of the veil-Jason Harris.

PROMOTERS

P&*te&"- 5nder C3 definedBone who underta#es to form a company with

reference to a given proect and to set it going, and who ta#es the necessary steps to

accomplish that purpose. Twycross v Grant and accepted in the Australian decision

Tracy v Mandalay Pty Ltd .

Do definition in CA.

A promoter is involved in the formation of a usiness and estalishes acompany to operate it. The creators of a company.


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P&*te&" c'! 9e- Tracy v Mandalay Pty Ltd *

Acti(e P&*te&"- A&e i!(l(e3 i! t%e &e;i"t&'ti! $ t%e c*p'!

T%e '&e t'


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Glucstein v !arnes

- &ACT/* 0luc#stein and F

others purchased a property which they sold to a company they created. The

secret profit they made from the sale was not disclosed. The company

sought to recover the undisclosed profit made y the promotoers.

-!;3'* The 4 promoters

had reached their fiduciary duty and were liale to account to the company

for the secret profit that was made.

- P&*te&" %'(e

$i3uci'& 3utie" i*p"e3 ! t%e* '!3 t%e "%ul3 !t *'


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P&e-&e;i"t&'ti! c!t&'ct - c!t&'ct "i;!e3 ! 9e%'l$ $ ' c*p'! 9e$&e t%e

c*p'! i" 'ctu'll c&e'te3

R'i"e" i""ue: %ho is liale for this contractH Company or person who signedH

- The company comes into e"istence only from registration and derives

powers and capacity only upon incorporation) s119,124

OLD POSITION- At C3, promoters were held liale for contracts entered into priorto the company eing registered) company was non)e"isting entity

Ne+ p"iti!

Secti! 7.0- p&(i3e" t%'t ' c*p'! +ill 9e li'9le $& ' p&e-&e;i"t&'ti!

c!t&'ct, '" l!; '":

- T%e c*p'! i" &e;i"te&e3> '!3

If not, promoter person who signed contract is liale (s1F1(2:

- T%e c!t&'ct i" &'ti$ie3 +it%i! ';&ee3? &e'"!'9le ti*e

If not, promoter is liale (s1F1(2::.

6egistration and ratification oth need to e within agreedreasonale time. 6easonale amount of time* not defined y the courts. It will e decided ased

of the facts of each case.

o To determine if contract is signed within a reasonale amount of time*

Chec# oect of contract

Is oect perishaleH 6e purchasing mangos, ratified

after 1 month of signing the contractJ not reasonale)

too long.

Don perishaleH ;g lease for 2 years) signed within 1

month of signing the contract J reasonale time ecause

duration is 2 years.

I$ t%i" p&ce3u&e i" $ll+e3, t%e c*p'! i" 9u!3 9 t%e c!t&'ct '!3 t%ep&*te& i" t&e'te3 '" '! ';e!t $ t%e c*p'! Accordingly, if the company is not

registered or does not ratify the contract y the time agreed or within a reasonale

time, the promoter will e held personally liale for damages (s1F1(2:.

S7.70- If the company does not ratify the contract, the court may still hold the

company liale if*

The company is 9e!e$iti!; from the contract or

The company is refusing to e ound y the contract after ad fait!"

S7.@0- even if the company is ound y the contract, the person who signed the

contract may still e held liale.

-

can e used where in cases where company reaches contract and has nomoney to pay you damages

"7- Eerson who signed the contract can escape liaility K

- if the company sustitutes the contract that the person signs then the

person escapes liaility or

- under "7) if the outsider decides to release the person who signed the

contract from liaility.

SECT 7 -C!t&'ct" 9e$&e &e;i"t&'ti!

(1: If a person enters into, a contract on ehalf or for the enefit of, a

company efore it is registered, the company ecomes ound y the contract and

entitled to its enefit if the company, is registered and ratifies the contract*(a: within the time agreed to y the parties to the contractL or


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(: if there is no agreed time))within a reasonale time after the

contract is entered into.

(2: The person is liale to pay damages to each other party to the pre)

registration contract if the company is not registered, or the company is registered ut

does not ratify the contract or enter into a sustitute for it*

(a: within the time agreed to y the parties to the contractL or(: if there is no agreed time))within a reasonale time after the

contract is entered into.

The amount that the person is liale to pay to a party is the amount the company

would e liale to pay to the party if the company had ratified the contract and then

did not perform it at all.

(F: If proceedings are rought to recover damages under susection (2:

ecause the company is registered ut does not ratify the pre)registration contract, the

court may do anything that it considers appropriate in the circumstances, including

ordering the company to do 1 or more of the following*

(a: pay all or part of the damages that the person is liale to payL

(: transfer property that the company received ecause of the contractto a party to the contractL

(c: pay an amount to a party to the contract.

(4: If the company ratifies the pre))registration contract ut fails to perform

all or part of it, the court may order the person to pay all or part of the damages that

the company is ordered to pay.

C6E6ATID/ ACT 2==1 ) /;CT 1F2

Eerson may e released from liaility ut is not entitled to indemnity

(1: A party to the pre))registration contract may release the person from all

or part of their liaility under section 1F1 to the party y signing a release.

(2: 'espite any rule of law or e


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o If a company chooses to adopt its own constitution, that will displace

the application to the company of any inconsistent rule.

;C;ETID* Eulic companies) a rule which is e"pressed to

e mandatory operates as an ordinary provision of the Act of

the company.

-Repl'ce'9le &ule"- A series of provisions in the Corporations A#t whichany company may use to regulate its internal proceedings and

management.

o If a company decides not to have a constitution, the 66 provide the

asic standards re


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c!t&'ct 9et+ee! c*p'! '!3 *e*9e& i!

&el'ti! t it

2: The company and each director and secretary and

F: ?etween a memer and each other memers

U!3e& +%ic% e'c% pe&"! ';&ee" t 9"e&(e '!3 pe&$&* t%e c!"tituti! '!3

&ule" " $'& '" t%e 'ppl t t%'t pe&"!:"@- These parties may enforce the rights contained in the constitution or 66.

- T%e c!t&'ct .c!"tituti! '!3 RR0 c'!!t 9e e!$&ce3 9 7&3 p'&tie"-

'! ut"i3e&) constitution will not e a contract etween outsiders and the

company and as such will not e ale to enforce constitution in a reach.

&ailure to comply with a 66 is not of itself a contravention of the Act s1F+(F:.

CONSTITUTION

Amendments to the Constitution

)Eropritary rights attaching to shares are suect to modification

- A company may vary the terms of a constitution y special resolution*

s1F(:.o Speci'l &e"luti!) one passed with the support of at least N+> of the

votes cast y memers entitled to vote on the resolution in the meeting*

s 9.

o There is scope for entrenchment of a constitutional provision against

alteration y a special resolution, y specifying in the constitution a

further re


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COMMON LA1: Gam#otto v &CP Ltd .6650: Applies to C!an.e of #onstitution

to e"propriate shares or proprietary rights) 2 tests need to e applied* the proper

purpose test and the fairness test

) 0ives protection to minority shareholders

FACTS: %CE amended its constitution to allow its maority shareholder, Industrial

; of the shares in %CE: to compulsorily ac interests in the company, rought an action to prevent the amendment of the

constition.

The court held that amendment of the constitution to e"propriate a proprietary right

was valid as long as long as a special resolution to change the constitution A/ %;33

as 2 re


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the

K A company$s

constitution may include a restriction or prohiition upon the e"ercise of

any of the company$s powers.

o The e"ercise or a

power is not invalid merely ecause t contravenes the restriction or

prohiition*s12+(1:.

REPLACEA=LE RULES

-s1F+(1:) 'o not apply to a proprietary company while the same person is oth itssole shareholder and sole director.

Documents

Law of Associations Summaries- Lifting the Veil/Promoters/Internal Gov