Piercing the Corporate Veil in Australia

Topics: Corporation, Corporations law, Legal entities Pages: 50 (15226 words) Published: October 23, 2010
Piercing the Corporate Veil in Australia
Ian M Ramsay Harold Ford Professor of Commercial Law and Director, Centre for Corporate Law and Securities Regulation The University of Melbourne David B Noakes Solicitor, Allen Allen & Hemsley, Sydney, and Research Associate, Centre for Corporate Law and Securities Regulation The University of Melbourne There is a significant amount of literature by commentators discussing the doctrine of piercing the corporate veil. However, there has not been a comprehensive empirical study of the Australian cases relating to this doctrine. In this article, the authors present the results of the first such study. Some of the findings are (i) there has been a substantial increase in the number of piercing cases heard by courts over time; (ii) courts are more prepared to pierce the corporate veil of a proprietary company than a public company; (iii) piercing rates decline as the number of shareholders in companies increases; (iv) courts pierce the corporate veil less frequently when piercing is sought against a parent company than when piercing is sought against one or more individual shareholders; and (v) courts pierce more frequently in a contract context than in a tort context. ____________________________________________________________




The House of Lords in Salomon v Salomon1 affirmed the legal principle that, upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders. The court did this in relation to what was essentially a one person company. Windeyer J, in the High Court in Peate v Federal Commissioner of Taxation,2 stated that a company represents:

“[A] new legal entity, a person in the eye of the law. Perhaps it were better in some cases to say a legal persona, for the Latin word in one of its senses means a mask: Eriptur persona, manet res.”3 Salomon v Salomon & Co [1897] AC 22 (Salomon). For extended discussion of Salomon, see R Grantham and C Rickett (eds), Corporate Personality in the 20th Century, 1998. 2 Peate v Federal Commissioner of Taxation (1964) 111 CLR 443 (HC, McTiernan, Kitto, Taylor, Windeyer and Owen JJ). 3 Ibid, 478. 1

The separate legal entity principle has continued unexpurgated from Anglo-Australian corporate law for more than one hundred years. When a company acts it does so in its own right and not just as an alias for its controllers.4 Similarly, shareholders are not liable for the company’s debts beyond their initial capital investment, and have no proprietary interest in the property of the company.5

At the same time, courts have acknowledged that the corporate veil of a company may be pierced to deny shareholders the protection that limited liability normally provides. “Piercing the corporate veil” refers to the judicially imposed exception to the separate legal entity principle, whereby courts disregard the separateness of the corporation and hold a shareholder responsible for the actions of the corporation as if it were the actions of the shareholder. A court may also pierce the corporate veil where

requested to do so by the company itself or shareholders in the company, in order to afford a remedy that would otherwise be denied, create an enforceable right, or lessen a penalty. Since Salomon, the courts in the United States, England and Australia, have found exceptions to the general principle stated in Salomon and have pierced the corporate veil to reveal those who control the company.6

Lord Sumner in Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners (1923) AC 723 at 740 – 741 stated: “Between the investor, who participates as a shareholder, and the undertaking carried on, the law interposes another person, real though artificial, the company itself, and the business carried on is the business of that company, and the capital employed is its capital and not in either case the business or the capital of the shareholders. Assuming, of course,...
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