BLAW20001 Study Guide - Final Guide: Board Of Directors, Liquidated Damages, 18 Months
5 Jun 2018
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Chapter 2 Exam Answer
• The sepaate legal etit dotie estalishes that the opas loss is not the shaeholdes loss ee though it a edue thei
share value) A company at law is a different person than the shareholders, it is a separate legal personality* (Salomon)
• The company can use and be sued in its own name s 119
Lifting the corporate Veil Answer
Because of the doctrine of separate legal personality (Salomon, s516, a opas dets ill e its o. Patiipats ill hae liited
liability in respect of a claim by a creditor or injured party (or even a member of the company).
It is ery rare for ourts to lift the eil as a atter of oo la. It will usually occur in private companies or wholly owned subsids. It is
NOT enough that A is controlled by another (Salomon). Further, unfairness of result alone is not enough (Salomon) there is no principled,
unified approach to piercing the corporate veil (Briggs). However, There are three grounds where the veil might be pierced (Briggs):
(1) Agency
It is generally very hard to make out agency (Smith). Mere control by a holding company of a subsidiary will not make the subsidiary an
agent of the HC (Salomon). More is required. Although the additional factor of failure to provide adequate resources fo the opas
function may lead a court to find that an under-resourced company is an agent for its controller (Smith). However it would also need to
satisfy the Smith stone and knight test that if answered affirmatively, are likely to establish agency. (Aitken J subsidiary was conducting
the paets usiess
1. Were the profits treated as the profits of the holding co?
2. Were the persons conducting the business appointed by the holding co?
3. Was the holding co the head and the brain of the trading venture?
4. Did the holding co govern the adventure; decide what should be done and what capital should be embarked on the
venture?
5. Did the holding co make the profits by its skill and direction?
6. Was the holding company in effectual and constant control?
o However, mere potential/ability/capacity to exercise control over the subsidiary will CLEARLY not be enough (Briggs) Some
and (actual) control over the subsidiary is not enough either (Briggs). In Smith there was absolutely not separation between
the two companies. Even in Salomon he was controlling the company it all and even then agency was not made out.
o The substantial reason why the Smith Stone & Knight case diffeed fo “aloos ase la i the fat that the usiess
ostensibly carried on by the subsidiary had never been transferred to it and it had been given no resources.
• (Extra) In smith It was held that on the special facts of the case, the holding company was carrying on business on the land. Look to
these factors: in the case
o Not only were the shares in the subsidiary held by the holding company, and the directors also directors of the holding
company, but the subsidiary was not treated by the holding company as a separate entity:
o Separate accounts were not kept (2) there was no tenancy agreement (2) no rent was paid, (4) there was no assignment of
the business to the subsidiary and no remuneration was paid to the directors in their capacity ad directors of the
subsidiary
(2) Fraud/Improper conduct
• (2a) FRAUD → Where a company structure is used to perpetrate a fraud
o The fraud may lie in the particular use made of the company as where the company is a mere facade or the company
may have a real business and yet be an element in a series of transactions which constitute a fraud. (Darby)
o Fraud – Re Darby – using a company to lie to the public about value of slate quarry to attract investment and make
profits.
• (2b) AVOID OBLIGATION →Where company is set up to avoid a legal obligation
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o The Veil will be Pierced Where a company structure is used with the sole, or dominant, purpose of enabling another
person to avoid an existing legal obligation
→
Look for someone trying to evade their obligations (Cormack. If (x) has
an obligation on foot and are engaging in trickery to avoid obligation – Xs oligatio ot to opete ith Y when
leaving
▪ Persons who are already under an existing obligation form or acquire a company to engage in conduct
which, if engaged in by those obligors, would be breaches of their obligation and the avoidance of that
obligation is the sole, or the dominant, intention of the obligors in forming acquiring the company. If the
opa egages i the odut, the oligos a fid that a out asies the opas odut to
them (ie Guilford motors below).
o Gilford v Horn: Court granted injunction against both H and company (lifting the corp veil)
▪ Set up company in order to solicit customer
o Jones v Lipmann: sets up opa eause he didt at to tasfe lad
(3) Tort
• (Piercing the veil in relation to- groups/agency)
• While Agency was rejected in Briggs, (difficult to make out), there is a Policy idea that A tortfeasor cannot hide behind the
corporate veil. In Briggs, while not a case where the veil was definitely pieced, it was only an arguable case for piercing veil. It
was held that for policy reasons, we should treat tort differently*. The judge stated that arguably there should be different
principles when we are talking about tort due to the Special nature of tort claims - no choice, his eaple is that ou at
choose. But this is not a final determination and there is no common underlying principle to piercing veil.
• There is an unresolved question discussed by Rogers AJA in Briggs v James Hardie is to whether there should be a greater
readiness to lift the veil in favour of those claimants seeking redress from a parent who were not in a position to investigate the
resources of the subsidiary company.
• (Extra) In (Briggs v James Hardie) –Asbestos
• Hope JA and Rogers AJA held that the application should go back to the court below because all the applicant had to do was to
establish a possibility that evidence existed. Rogers AJA, of the majority, said that in the present state of the law about lifting
the corporate veil it was not possible to say what evidence would ultimately suffice to make out a case
(4) Group companies (insolvent trading/ piercing the Veil Briggs v Hardie- Tort) (looking to HOLDING COMP HYPO)
(5) STATUTE- Piercing the Corporate veil by Statute (INSOLVENT TRADING)
1) REGARDING DIRECTORS ONLY S588G
Onus of proof
• Lies on the person seeking to make the D liable – balance of probabilities.
• use expert evidence regarding the solvency of the company.
• For a defence, the D need only show the balance of probabilities as well (Plymin; Elliot)
• the seriousness of the allegation and gravity of consequences will be considered Miller
Begin - In order to have a claim on the assets of the company in the event of winding up, the creditor (or X) will need to establish the
following –s 588G. Both the liuidato of a opa, o a edito of the opa ith the liuidatos oset, a ig poeedigs
against a director to recover compensation for loss resulting from insolvent trading.
(1) THUS A PERSON MUST BE A DIRECTOR AT THE TIME THE DEBT WAS INCURRED S55G(1)(A)
• (1) (X) Is a director as Per s 9 as they are appointed to the position of a director (a)(i) (check this definition). (Think→ shadow
Ds/ Defato Ds?
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• The ee a D the time that the debt was incurred (rather than imposed) (588G 1A). A debt is incurred where the company
subjects itself to an unavoidable obligation to pay a sum of money (of either a foxed amount or an amount capable of
calculation) in the future Hawkins v Bank of China (1992). In this case the company _________ (Ex. *Entered into uncommercial
transaction where according to 558Ga, the debt was incurred when the transaction was entered into)→ look to list in notes*
• The det ust e iued athe tha iposed (i.e. a voluntary act on the part of the co is required)
o Consider the deemed debts s 558G(1A) – automatic (must be voluntary)
▪ Paying a dividend
• Debt incurred when→ when Dividend is paid or when declared
▪ Reducing share capital
• Debt incurred when→ When Reduction takes effect
▪ Buy-back of shares
• Debt incurred when→ when buyback agreement is entered
▪ Issuing/redeeming preference shares (Certain circumstances)
• Debt incurred when→ when company exercises option
▪ Financial assistance to a person to acquire shares in the company/holding company
• Debt incurred when→When the agreement to provide assistance is entered or isnot agreement, when
assistance is provided
▪ *Entry into uncommercial transaction
• Debt incurred when→When the transaction is entered into
• IF A SHADOW D→ Look to notes
(2) THE COMPANY TRADES WHILE INSOLVENT: S 588G(1)(B)
• A opa is isolet if ot solet “A. Copa Xs is insolvent/pushed by debt into insolvency if at the time of
trading S588G(1)(b) if it is unable to pay its debts as and when they are due and payable s95A(1). Here ______________
however, Insolvency is not derived from a temporary cash flow problem but from an endemic shortage of working capital
(Hymix Concrete Pty Ltd v Garrity adopted in Hall v Poolman.
• Look to
o (USE) * →If the company has failed to keep/retain financial periods as required by s 286 (588E(4)) (7 years)
• Showing insolvency:
• However, Inability to pay debts when they become due is not enough alone in itself. ‘ealistiall, osideig the opas
financial position as a whole. Seeing if Current and future clash flows are sufficient to allow current and future liabilities to be
paid when due, ASIC v Plymin outlines the Cash flow test in assessing insolvency:
o The incurring of substantial trading losses
o Suppliers being paid well outside the terms of trade despite continual complaints
o Placement of orders by suppliers on cash on delivery terms
o Issue of post-dated cheques some of which were dishonoured
o Threatened legal proceedings in relation to non-payment of debts
o Overdue taxes
o Inability to obtain further bank finance
o Inability to raise equity capital
• Additionally, having regard to the Indicators of potential insolvency on page 21 of ASIC Guide 21:*
o Ongoing loss, poor cash flow, absence of business plan, enforcement action of creditors, defaults, overdue tax –
see Plymin ASIC RG 217.
o Indicators of potential insolvency on page 21 of ASIC Guide 21:
1. The company has a history of continuing trading losses *
2. The company is experiencing cash flow difficulties *
3. The company is experiencing difficulties selling its stock, or collecting debts owed to it
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Document Summary
The company can use and be sued in its own name s 119. Because of the doctrine of separate legal personality (salomon, s516(cid:895), a (cid:272)o(cid:373)pa(cid:374)(cid:455)(cid:859)s de(cid:271)ts (cid:449)ill (cid:271)e its o(cid:449)(cid:374). Pa(cid:396)ti(cid:272)ipa(cid:374)ts (cid:449)ill ha(cid:448)e li(cid:373)ited liability in respect of a claim by a creditor or injured party (or even a member of the company). It is (cid:448)ery rare for (cid:272)ourts to lift the (cid:448)eil (cid:858)as a (cid:373)atter of (cid:272)o(cid:373)(cid:373)o(cid:374) la(cid:449)(cid:859). It will usually occur in private companies or wholly owned subsids. Not enough that a is controlled by another (salomon). Further, unfairness of result alone is not enough (salomon) there is no principled, unified approach to piercing the corporate veil (briggs). However, there are three grounds where the veil might be pierced (briggs): (1) agency. It is generally very hard to make out agency (smith). Mere control by a holding company of a subsidiary will not make the subsidiary an agent of the hc (salomon).
