Tabl2741 Assignment - Grade: 15/20 PDF

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Tabl2741 Business Entities Assignment...

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TABL 2741 BUSINESS ENTITIES 2018 SEMESTER 2 ASSIGNMENT NAME: HYUN JEONG LEE STUDENT NUMBER: z5034759! WORD COUNT: 1625 CLASS: TUESDAY 4pm T16B EMAIL: [email protected]

Introduction The concept that a company is a separate legal entity with its own legal personality forms the fundamental principle behind company law. However, the direct application of this rule to parent and subsidiary companies is a complex issue due to the problem of separating and exclusively relating the legal rights and responsibilities to the relevant company. In addition, the ambiguity in guidelines of when it is appropriate to lift a corporate veil further adds to the complexity of the issue. However, as companies increasingly see the benefits of having a subsidiary company like reducing risk and tax effects, the significance of understanding corporate groups becomes increasingly important. Therefore, the problems and issues arising from the application of separate legal entity doctrine to corporate groups will examined through a close study of the case of Eco Ltd and Greenery Ltd. The facts and issues of the case will be investigated by comparison with relevant cases and the relevant law to advise Eco Ltd, Greenery Ltd and the trade union of their respective legal authorities involved.

The Facts On 1 February 2018, Eco Ltd a company owning and operating a large tourism resort in Tasmania, comes into contractual agreement with all its 200 employees to provide improved wages and working conditions, more than that of employees working in similar resorts in Australia. In March 2018, Greenery Ltd becomes newly incorporated as a wholly owned subsidiary of Eco Ltd. Eco Ltd undergoes major restructuring of the business under a newly devised business plan. 100 employees become redundant however, are offered and accept identical positions under

Greenery Ltd. Under the new positions however, the wages and conditions are not as favourable as their previous contract and similar to that of people working in similar industries. The trade union questions the practical effect of the application of the business plan as well as employment conditions.

The Issue To determine whether the contractual agreement is valid for the subsidiary company Greenery Ltd the following issues will be analysed:

1. The doctrine of separate legal entity 2. Piercing the corporate veil i) Sham, evasion of obligation, misconduct ii) agency relationship

The Doctrine of Separate Legal Entity In examining the validity of the contractual agreement to Greenery Ltd it is necessary first to determine whether Eco Ltd and Greenery Ltd exists as separate legal entities in corporate groups. s124 of the Corporations Act 1 states a company has all the “legal capacity and powers of an individual.” Therefore, as an incorporated company Eco Ltd and Greenery Ltd each has its own legal authority and capacity to contract and fulfil the obligations of the contract. As the initial contract was made between the employees and Eco Ltd and not with Greenery Ltd,

1

Corporations Act 2001 (Cth)

Greenery Ltd does not have a legal obligation to fulfil the conditions of the initial agreement.

The foundational principles of separate entity doctrine was further confirmed in the decisions of case of Salomon2 where the House of Lords held that provided there is no fraud, a legally incorporated company is an independent legal entity with its own legal rights and liabilities. The facts of the case state that Eco Ltd and Greenery Ltd are both validly incorporated entities and therefore, both companies exists independently of each other and are subject to their individual rights and obligations.

Similarly, in the case of Walker3 the High Court decided that the creditors of the subsidiary company A could not look to the parent company B for payment of debts as the court recognised each company in the group as a separate legal entity. Therefore, looking back to the case of Eco Ltd and Greenery Ltd, Greenery Ltd does not lose it’s rights as an individual incorporated company just because it is in a corporate group. It is merely an individual within a group and as such, is not required to exercise the liabilities arising from the contractual agreements of its parent company.

2 Salomon 3

v Salomon & Co Ltd [1897] AC 22

Walker v Wimborn (1976) 137 CLR 1

Piercing the corporate veil Although the doctrine of separate legal entity creates a corporate veil for incorporated companies, it is important to note the reminder from Lord Denning 4 that the courts have authority to lift the corporate veil in certain circumstances and to investigate on what is going on behind the surface. The common law principles in when a court can lift the veil is very ambiguous and unclear however, many precedents have demonstrated the courts ability to lift the veil in very exceptional circumstances.

i) Sham, evasion of obligation, misconduct One example is the case of Gilford Motor Co Ltd v Horne 5 where the court lifted the veil and gave an injunction on the grounds that “mere cloak or sham” and attempts to evade a legal obligation were suspected due to Horne having a “close involvement in the business activities of the newly formed company.” The facts of the case state that four of the Board of six directors of Eco Ltd were appointed as directors of Greenery Ltd and also, Eco Ltd wholly owned the subsidiary of Eco Ltd. As such, it can be observed that Eco Ltd has a high level of control over Greenery Ltd’s business operations. However, it should be noted that in the case of Briggs v James Hardie & Co6 the court held that “the proposition that the corporate veil maybe pierced where one company exercises complete dominance and control over another is entirely too simplistic.” Hence, just the mere fact that the Eco Ltd had absolute control over Greenery Ltd does not provide evidence that the

4

Littlewoods Mail Order Stores Ltd v McGregor [1969] 3 All ER 855 at 860

5 Gilford 6

Motor Co Ltd v Horne [1933] 1 Ch 935

Briggs v James Hardie & Co Pty Ltd [1989] 16 NSWLR 549

application of the business plan was a sham. In fact, the case of the facts present a clear, genuine motive for the restructure to develop the catering and entertainment services by separating it from the resort and then being able to provide services within and outside the resort. This business plan was not devised to evade the employment agreement terms however, during the application of the plan it happened to involve making the initial contractual agreement void in the process. As in the case of Winland Enterprises Group Inc.7 the judicial decision stated that there is a difference between using a corporate structure to evade and avoid an obligation and that avoiding a legal objection in actual fact is not objectionable. Hence, it is further clear that Eco Ltd and Greenery Ltd’s actions were not an act of misconduct and thus the court does not have sufficient grounds to lift the corporate veil.

ii) agency relationship Another grounds that the court pierces the corporate veil is when there is an agency relationship involved. This relationship is indicated in the test for six questions used in the case of Smith, Stone & Knight8 which was about profit and power of control over the company. However, from the case of ACN 007 528 207 Pty Ltd v Bird Cameron9, His Honour pointed out that out of the six criterion, the first criteria regarding profits often provided a very important indicator to an agency relationship and that the other criteria about ownership should not be put in too much emphasis. From the facts of the case, we can confirm that the profits of

7

WINLAND ENTERPRISES GROUP INC. v. WEX PHARMACEUTICALS INC. [2012] HKCA 155

8 Smith, 9

Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116

ACN 007 528 207 Pty Ltd (in lie) v Bird Cameron (Reg) (2005) 91 SASR 570

Greenery Ltd was distributed to Eco Ltd as dividends instead of directly paying the profits to the parent company. Therefore, it is quite difficult to observe an agency relationship between the two.

Furthermore, in the case of Commissioner of Taxation v BHP Billiton Finance Ltd10 the court showed that an agency relationship was not implicated just because of the mere relationship of management between a parent company and subsidiary company. The court held the view that despite the subsidiary company generating profits to the parent company and the parent company having complete dominance on the control exercised to the subsidiary company, it cannot be used as a reason to ignore the separate status given them by law. This is relevant to the case being examined in this essay as even though the creation of Greenery Ltd is projected to create long term financial return to Eco Ltd and Eco Ltd exercising dominance in the control of Greenery Ltd, these reasons alone are not enough to prove the existence of an agency relationship between the two. Therefore, both Eco Ltd and Greenery Ltd has a right to remain as independent legal personal. The case of Bank of Tokyo v Karoon11 further adds weight to this view where the counsel suggested that economically the relationship between a parent and subsidiary company would be seen as one however, when it concerns the law the two companies are distinguished as two. As such, in the context of company law Eco Ltd and Greenery Ltd are clearly two separate entities and therefore Greenery Ltd has no obligation to undertake the contractual agreement made between Eco Ltd.

10

Commissioner of Taxation v BHP Billiton Finance Ltd (2010) 182 FCR 526; [2010] FCAFC 25

11

Bank of Tokyo Ltd v Karoon [1987] AC 45

Conclusion The common law through the corporations act sets out a clear definition of incorporated companies as separate entities characterised by individuality. However, in examining the facts and issues against the case law and common law, it is clear how complex the application of the separate legal entity doctrine to present day corporate situations is. Particularly, when it involves a number of parties as corporate groups. The relationship between Eco Ltd and Greenery Ltd involved a distribution of funds and a involvement of management exercising control over the subsidiary company. However, when investigating through the issues there was inadequate evidence for the courts to suspect a deceptive motive behind the formation of the relationship between Eco Ltd and Greenery Ltd. Hence, it can be concluded that there is insufficient grounds for the court to lift the corporate veil and thus while Eco Ltd and Greenery Ltd remains as separate and individual legal entities, the trade union will be unsuccessful in getting he contractual agreement with Eco Ltd to apply to Greenery Ltd.

Bibliography Harris J, Hargovan A and Adams M, 2018 , Australian Corporate Law, 6th Edition, LexisNexis Butterworths...