Corporate Law Case Study
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
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
Bibliography: Ireland, “Limited liability, shareholder rights and the problem of corporate irresponsibility”, (2008) 34 Cambridge Journal of Economics, viewed 10 April 2012 <http://cje.oxfordjournals.org/content/34/5/837.full> [ 2 ]. Noakes and Ramsay, “Piercing the Corporate Veil in Australia”, (2001) 19 Company and Securities Law Journal 250-271 at 6 [ 3 ] [ 4 ]. Ireland, “Limited liability, shareholder rights and the problem of corporate irresponsibility”, (2008) 34 Cambridge Journal of Economics, 837–856 [ 5 ] [ 6 ]. Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267 at 275 [ 7 ] [ 8 ]. Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254 [ 9 ] [ 10 ]. Smith Stone & Knight Ltd v Birmingham Corp (1939) 4 All ER 116 [ 11 ] [ 12 ]. Noakes and Ramsay, “Piercing the Corporate Veil in Australia”, (2001) 19 Company and Securities Law Journal 250-271 at 13 [ 13 ] [ 14 ]. ACN 007 528 207 Pty Ltd (in liq) v Bird Cameron (Reg) (2005) 91 SASR 570 [ 15 ] [ 16 ]. Salomon v Salomon & Co Ltd (1897) AC 22