2- Piercing Lifting THE Corporate VEIL Partnerships PDF

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*2--PIERCING/LIFTING THE CORPORATE VEIL & PARTNERSHIPS LAWS3210 CORPORATIONS & PARTNERSHIPS WEEKS 3; READINGS 1-360 TO 1-500; 3-100 TO 3-480;

A Possible Issues that be encountered ●

Piercing the veil

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Lifting the veil

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What are the general law grounds for piercing the corporate veil?

B Topics Outline Piercing/lifting the corporate veil

Partnerships

ㄧ Piercing the veil

ㄧ Definition of a partnership

ㄧ Piercing the veil on statutory

ㄧ Formation of a partnership

grounds

ㄧ Existence of a partnership

○

Insolvent trading

ㄧ Properties of a partnership

○

Voidable transactions

○

Offences by the company

ㄧ Fiduciary obligations of partners

○

Taxation legislation

ㄧ Dissolution of a partnership

ㄧ Lifting the veil under General law

○

Exceptions

ㄧ Consequences of dissolution

ㄧ Lifting the veil of corporate groups on statutory grounds ㄧ Lifting the veil of corporate groups on general law grounds ㄧ Tortious liability ㄧ Agency or partnership implied ㄧ Different types of companies ㄧ Liability of members ㄧ Public of proprietary company C Key Legislation to apply Piercing/lifting the corporate veil ㄧ Corporations Act 2001 (cth) ㄧ s588G ㄧ s588FA – s588FJ

Partnerships ㄧ Partnership Act 1895 (WA) ㄧ s7(1) CA ㄧ s7(2) CA

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ㄧ ㄧ ㄧ ㄧ ㄧ ㄧ ㄧ ㄧ ㄧ

s260D s588V – s588X S9 s112(2) s113(1) s113(3) s201A(1) s45A s201A(2)

ㄧ ㄧ ㄧ ㄧ ㄧ ㄧ ㄧ ㄧ ㄧ ㄧ

S 8 CA S15- 17 S19 S26 S29 CA s30 S34- 35 S39 S43 - 46 s50

D Key Cases Piercing/lifting the corporate veil ㄧ Gilford Motor Co Ltd v Horne (UK)

Partnerships ㄧ Alderson v Clay (1816) ㄧ Williams v Nicoski (Unreported)

[1933]

[2003] WASC 131

ㄧ Jones v Lipman [1962] ㄧ Electric Light and Power Supply Corporation Ltd v Cormack (1911)

ㄧ Lang v James Morrison (1911) ㄧ Cricket & Football Social Club v

ㄧ Re Darby

Joseph [1970]

ㄧ Re Bugle Press Ltd [1961]

ㄧ Goldberg v Jenkins (1889)

ㄧ Briggs v James Hardy

ㄧ Thomas v Atherton (1878)

ㄧ Smith, Stone and Knight Ltd v

ㄧ Bury v Allen (1845)

Birmingham Corp [1939] ㄧ Spreag v Paeson

ㄧ Chapple v Cadell (1822) ㄧ Donaldson v Williams (1833) ㄧ Cameron v Murdoch (1986)

E Detailed Notes

1. Piercing the corporate veil ㄧ Corporate veil: Separate limited liability protects the promoters, directors and shareholders from the debts of the company. ㄧ To ensure fairness to people dealing with companies, there are a number of ways to go about piercing the corporate veil to get to the people behind the company. ㄧ The sources of the rights include: ○

Rights which are conferred under legislation; and

○

Rights under the common law.

2. Piercing the veil on statutory grounds

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ㄧ There are a number of statutory provisions that make individuals liable for some of the debts of the company . 1. Insolvent trading under s588G 2. Voidable transactions under s588FA – s588FJ 3. Taxation legislation INSOLVENT TRADING-- under s 588G ㄧ A company cannot trade while the company is insolvent ㄧ A person/company is solvent if it can pay its debts as when they become due. ㄧ It person/company cannot pay their debts then it is insolvent. (s9 definition, which takes you to s95A)

ㄧ s588G(2) prohibits a director from incurring a debt for the company if he suspects, or ought to have reasonably suspected that the company is insolvent. ○

This includes where the company will become insolvent due to the transaction about to be completed

○

This is a civil penalty provision-- allows ASIC to pursue people and impose sanctions (all provisions where ASIC can pursue is listed in s1317E(1)).

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A compensation order can be made by the Ct in favour of the company s588J so that the company is compensated for losses that were incurred as a result of the action of the individual who breached the provisions.

ㄧ s588G(3) creates a criminal offence relating to insolvent trading. ○

Done through ASIC

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Criminal courts

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S1311 directs you to schedule 3 of penalties for various offences

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A single penalty unit is $180 based on s4AA crimes Act 1914 (cth)

ㄧ The director is personally liable for transactions entered into on behalf of the company while he knew or ought to have known that the company was insolvent. ㄧ The action against the director would be taken by the company (or liquidator on behalf of the company) to recover loss. ㄧ It is also possible for a creditor to directly pursue the director for insolvent transactions, though s588M. The procedures relating to this are in s588R – s588U. ㄧ Corporate veil is pierced. The directors are held liable for the debts of the company, either by:

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○

The creditors recovering from the company and the company recovering from the director(s); or

○

by directly pursuing the director.

VOIDABLE TRANSACTIONS- under s588FA-s588FJ ㄧ When a company is being wound up, it is possible for a court to retrospectively make orders relating to certain transactions, having them effectively set aside. ㄧ Secured debt: where the debtor provides the creditor with security which can be taken and sold should the debtor default. ○

This security takes the form of a charge against an asset of the debtor.

○

A holder of security has first rights to the proceeds of the sale of the charged property.

ㄧ Unsecured debt: where there is no security provided to secure payment of a debt, simply share in the balance of the estate once all secured creditors have been paid. Examples of the types of transactions that are covered include: a. Unfair preferences-- s588FA ●

Unsecured creditor/s gain an advantage over other unsecured creditors

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ie. the unsecured creditor receives more than they would had they had to prove their debt in the winding up of the company.

b. Uncommercial transactions-- s588FB ●

These are transactions that a reasonable person in the company’s position would not have entered into.

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Is essentially a weighing up of the benefit vs cost to the company and the other party and other relevant information.

c. Insolvent transactions-- s588FC ●

Essentially the same requirements as those seen in s588G in relation to Director’s Duties.

d. Unfair loans-- s588FD ●

The terms of the loan effectively are extortionate.

e. Unreasonable director-related transactions-- s588FDA ●

Unreasonable payments made to directors.

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Covers monetary payments, issuing of securities and transfer of property.

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This was inserted in 2003 in response to companies who had authorised huge payments to directors while teetering on the brink of

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insolvency. ㄧ The Court can make various orders under s588FF with respect to voidable transactions. ㄧ If a director was a party to the voidable transaction, he may have to repay money to the company to satisfy creditors. OFFENCES BY THE COMPANY UNDER S260D ㄧ s260A states a company may give financial assistance to a person in order for that person to acquire shares in the company or in a holding company of the company provided that: a. The assistance does not materially prejudice the interests of the company or shareholders or the company’s ability to pay creditors; or b. The assistance is approved by shareholders ito s260B (requires prior notice to ASIC); or c. The assistance is exempted under s260D ㄧ These conditions are not met then an offence is committed BUT the company is not liable – it is anyone ( the directors or shareholders) who is involved in the company’s offence. ㄧ There are civil penalties (see s260D(2)) and criminal sanctions (see s260D(3)) for both of which the Court will make orders against the individuals involved. TAXATION LEGISLATION ㄧ Under the tax laws, directors of a company are personally liable for the group tax of the company. ㄧ There are other statutes which enable the courts to pierce the veil too.

3. Lifting the veil under the general law ㄧ Courts have been reluctant to pierce the corporate veil in the absence of statutory provisions, preferring instead for Parliament to explicitly create exceptions. ㄧ There are a couple of categories of cases in which the veil has been pierced. TO AVOID AN EXISTING LEGAL DUTY ㄧ If the company has been set up solely to get around an existing legal duty, then the corporate veil can be pierced. ㄧ The legal duty being avoided is generally a duty that arises under a contract or under a statute. ㄧ Examples include:

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○

Gilford Motor Co Ltd v Horne (UK) [1933] ●

HELD: The Court decided that on the evidence, the separate legal entity doctrine did not apply.

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The company was formed for the sole (or dominant) purpose of defeating the contract which Horne had signed and in those circumstances, the injunction against the company was granted.

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Jones v Lipman [1962] ●

HELD: As the sole purpose was to prevent the Court from ordering specific performance of the contract, the company was seen as a sham and the order for specific performance was granted against both Lipman and the company.

○

Electric Light and Power Supply Corporation Ltd v Cormack (1911) ●

HELD: There were no facts to show that the sale was made with the object of avoiding the obligation.

ㄧ Where the sole or dominant purpose is to avoid a legal duty, the company will generally not be seen as a separate entity from the person seeking to take advantage of the separate legal entity doctrine. WHEN A LAW REQUIRES IT ㄧ It is narrowly applied ㄧ It is limited to situations, in order to give proper effect to a law, the company can’t be viewed as as a separate entity. ㄧ Example sinclude: ○

Re Darby ●

The Court found that the sole purpose of the Channel Island company was to perpetrate the fraud.

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To then find that the company was a separate legal entity from Darby would defeat the laws of fraud.

● ○

Darby’s argument was rejected.

Re Bugle Press ltd [1961] ●

The Court held that in order to give proper effect to the provisions of the Act, the takeover bid had to be made by an independent entity.

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This was not the case and the compulsory acquisition of the shares was not permitted under the Act.

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In order to give effect to the law, the company was not a separate legal entity from the individuals.

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4. Lifting the veil of corporate groups on statutory grounds ㄧ The provisions in s588V – s588X make a holding company liable for insolvent trading by its subsidiary. ㄧ This means that if the subsidiary continues to trade during insolvency, the assets of the holding company can be used to satisfy the debts. ㄧ Claim must be brought within 6 years of the beginning of the winding up. ㄧ There are four defences: ○

There were reasonable grounds on which to believe the company was solvent and would remain;

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Reliance was being placed on a competent person to provide info on the solvency of the company AND ●

It was believed that this person was fulfilling that responsibility AND

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On the basis of the info provided it was believed that the company was solvent and would remain;

○

○

The relevant director did not take part in the management due to: ●

Illness; or

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Some other good reason;

All reasonable steps were taken to prevent the company incurring the debt.

5. Lifting the veil of corporate groups on general law grounds ㄧ There are a few ways in which the veil of corporate groups can be pierced. ㄧ Case of Adams v Cape Industries PLC where it was argued that the restructuring of the companies was to avoid an existing legal duty and to defeat justice. ㄧ There are two main ways in which the veil can be pierced for corporate groups: ○

through tortious liability; and

○

is if an agency or partnership is implied between two members of the corporate group.

TORTIOUS LIABILITY ㄧ A a parent company can be liable for the torts of its subsidiary: Briggs v James hardy and co pty ltd (1989) ○

Principle: we have the possibility that a holding company will be liable in tort for the actions of at least a wholly owned subsidiary.

AGENCY OR PARTNERSHIP IMPLIED ㄧ Smith, Stone and Knight Ltd v Birmingham Corp [1939] held that there were six

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factors which points towards something being an agency: 1. The profit of the subsidiary was treated as the profit of the parent. 2. The people running the business were appointed by the parent. 3. The parent was the “head and brains” of the operation. 4. The parent was making all of the decisions regarding the venture. 5. The profits were made because of the skill of the parent. 6. The parent was in effectual and constant control of the operation. ㄧ The first factor is the most important factor. ㄧ These factors were accepted in the Federal Court by Shepherd J in Spreag v Paeson.

6. Different types of companies ㄧ There are basically two different ways in which you can categorise companies ○

according to the liability of the members; or

○

according to whether they are public companies or proprietary companies.

LIABILITY OF MEMBERS a. Company limited by shares b. Company limited by guarantee c. Unlimited company ○

s9 - “a company in which no limitation has been placed upon the liability of the members”.

○

is generally used by members of a profession as an alternative to forming a partnership in circumstances when the number of people involved means that a partnership is not permitted, but the professional rules do not permit liability to be limited.

d. No liability company: ○

s9 - “company that is either registered as, or is converted to, a no liability company”.

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s112(2) gives the defining characteristics of a no liability company ●

The company must be solely for mining purposes ➢ (which includes any or all of prospecting, mining, selling or doing anything else incidental to or necessary for any of those things)

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Have shares but have no ability to force shareholders to pay calls on unpaid shares

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A no liability company must have “No Liability” or “NL” in the name in terms of s148(2) and s149.

PUBLIC OR PROPRIETARY a. Proprietary company: ○

This is defined in s9, which takes you to s45A(1) and states that a proprietary company is one that is registered as such under the Act.

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A proprietary company has the following characteristics: ●

Have less than 50 non-employee shareholders (s113(1)).

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Cannot attempt to raise money by issuing a prospectus and selling shares (s113(3)).

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Have between 1 and 49 members inclusive at all times (s113, s114)

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Must have at least one director (s201A(1)).

The company name must have “Proprietary” or “Pty” in the name (s148, s149) and can be either a small or large proprietary company as defined in s45A, based on: ●

gross revenue per financial year (less/more than $25 million);

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assets owned (less/more than $12.5 million);

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and number of employees (less/more than 50).

b. Public company: ○

Defined under s9.

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The most important part of the definition is that it is any company which is not a proprietary company.

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There is no upper limit to the number of shareholders ( s114 there must be at least one) and there must be at least three directors under s201A(2).

*2-- PARTNERSHIPS WEEKS 3; READINGS 1-360 TO 1-500; 3-100 TO 3-480; RESOURCES: Partnership Act 1895 (WA) A- D: As Above

E DETAILED NOTES

1. Definition of a partnership ㄧ Relationships between people carrying on a business with a view of profit: s7(1)

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2. Formation of a partnership ㄧ The maximum number of partners is 20 (s11); although this can be altered by regulations under s115(2) which has been done for a number of professions. ㄧ There is no requirement for a partnership agreement to be in writing, except where the Statute of Frauds requirement relating to the transfer of land (s34 Property Law Act 1969 (WA)) applies. ㄧ Oral evidence can be used to establish the existence of a partnership, even if a written agreement exists (Alderson v Clay (1816)). ㄧ Terms of the partnership can be altered by express or implied consent of all of the partners (s29).

3. Existence of a partnership ㄧ Look at the intention of the parties (s7(2)). ㄧ There are a number of statutory requirements (s8). ㄧ Common Law factual indicators: money supplied, control of business, profits received. ㄧ Have a look at Williams v Nicoski (Unreported) [2003].

4. Properties of a partnership ㄧ Carrying on a business in common (s7(1)). ㄧ The test is whether a person is acting as an agent for all of the alleged partners (Lang v James Morrison (1911)). ㄧ No legal personality outside of the members (Carlton Cricket & Football Social Club v Joseph [1970]). ㄧ Partners are jointly liable with other partners for debts and obligations incurred while (s)he is a partner (s16). ㄧ The firm is liable for wrongful acts or omissions of partners done in the ordinary course of the firm’s business or if the actions were endorsed by the other partners (s17). ㄧ Partners are jointly and severally liable for wrongs of the firm if they were done in the ordinary course of the firm’s business or the actions were endorsed by the other partners (s19). ㄧ One partner will bind the firm, unless (s)he has no authority to act for the firm and the person with whom (s)he is dealing knows that he has no authority or doesn’t think that he is a partner (s26). ㄧ If a transaction is conducted in an unusual way, the third party is deemed to know

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that the person is not acting on behalf of the partnership, so the partnership will not be bound (Goldberg v Jenkins (1889)). ㄧ Partnership property is held by individual partners and applied exclusively for the partnership (s30(1)). ㄧ Presumption is that partners hold equal shares in the partnership, and are entitled to an equal share of the profits and contribute equally towards losses (s34(1)). ㄧ Partners are indemnified for things on behalf of the partnership (s34(2)), but will not be indemnified for fraudulent or negligent acts (Thomas v Atherton (1878)) and may have to repay the partnership if it suffers resulting losses (Bury v Allen (1845)). ㄧ Generally all partners are permitted to take part in the management of the partnership (s34(5)). ㄧ Decisions can be made by majority subject to a contrary agreement, provided the decision is made in good faith for the interests of the partnership and all partners have the ...