Corporate Law Case Study

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Capital Pty Ltd is inquiring into the Commissioner of Tax’s notice disallowing the tax deduction for bad debt. The Commissioner based the argument on the premise that Capital Pty Ltd is a mere appendage of Eastfield Ltd. This being the case, it is necessary to examine the exact relationship between Capital Pty Ltd and Eastfield Ltd and determine the likelihood of the courts lifting the corporate veil.

Separate Entity
Salomon v Salomon & Co established the key principle that an “incorporated company is a separate legal entity from its founder, shareholders and directors”. To further this point, the Albazero case provided authority within a group of companies, whereby each company is a separate legal entity with distinct legal rights and obligations. Applying this precedent to the current case, it is sufficient to assume that regardless of the fact that Capital is a wholly owned subsidiary of Eastfield, the two companies can be treated as separate entities with distinct corporate properties.

The corporate veil
The concept of ‘lifting the corporate veil’ arises when the courts disregard the concept of ‘separate legal entities’ and holds a shareholder responsible for the actions of the corporation as if it were the actions of the shareholder ‘ . Essentially, the piercing of the corporate veil severs the figurative screen of protection that a corporation offers individuals. Briggs v James Hardie & Co Pty Ltd provides evidence that there is ‘no common, unifying principle which underlies the occasional decision of courts to pierce the corporate veil’. This lack of rigidity, ultimately results in the need of a close examination by the courts in determining the validity of lifting the corporate veil and treating the “rights and liabilities….of a company as the rights and liabilities…of its shareholders.”

There are a variety of instances, applicable in the current situation, whereby the courts may lift the corporate veil and remove the usual protection of limited liability that a corporation provides. Snook v London and West Riding Investments Ltd provides precedent where a sham, hiding the true nature of a venture, can constitute the courts to pierce the corporate veil. Further, the courts may argue that Capital “was designed to enable a legal or fiduciary obligation to be evaded or a fraud to be perpetrated” , as witness in Gilford Motor Co Ltd v Horne. However, based on the unlikeness of this scenario, it would be most probable the courts would not consider this course of action. This is due to the fact that Capital, although set up as a debt financing source, was incorporated validly, with no apparent dishonesty or intention to dodge legal obligations based on the sheer unknown ‘bad debt’ that was to arise in the subsequent years.

Lifting the Corporate Veil
A more appropriate notion used to lift the corporate veil, is based on the agency relationship evident between two entities. Based on the fact that Capital is a wholly owned subsidiary of Eastfield, primarily established in order to finance the property development costs of Eastfield, the courts may infer an agency relationship between the two corporations. As apparent in Pioneer Concrete Services Ltd v Yelnah Pty Ltd, the courts may decide to lift the corporate veil based on the partnership relationship between the two entities, thus treating both Capital and Eastfield as a single legal economic entity with joint rights and liabilities. However, in order to conclude as such, all elements of the relationship must be first examined by the courts to determine their exact nature.

Agency Relationship
Since Capital Pty Ltd was validly incorporated in March 2008, there is no ambiguity surrounding the legitimacy that Capital is a wholly owned subsidiary of Eastfield, thus negating any uncertainty regarding the formal and legal relationship between the two corporations. However, there are six essential elements that need be confirmed in order...
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