Issue
Whether Plutus Payroll can enjoy the corporate veil based on the case study given, or not?
Rule
One of unique features which a company form of business structure has is separate legal entity. As per this concept, the company has a separate legal status from the ones who are responsible for running the affairs of the company. This means that a company is different from its officers, directors, shareholders and the other stakeholders. Due to this status of the companies, they have the ability to sue other and be sued, but not only outsiders, but even by insiders like the employees and directors. The separate legal entity status is imparted upon the companies through the principle of corporate veil.
Corporate veil is a legal status through which the personality of the company is considered separated from its shareholders’ personalities and it also safeguards the shareholders from being held accountable for the obligations and the debts of the company. The company has its own rights which are not the alias of controllers. There is no liability of the shareholders towards company debts, beyond their contribution in initial capital. There are difference cases to prove this concept. In Farrar v Farrars Ltd, the separate legal entity status of the company was upheld by the court. Lee v Lee’s Air Farming saw the court rejecting the allegations made by Lee owing to the corporate veil which the company enjoyed through its status of separate legal entity. Industrial Equity Ltd v Blackburn also saw the determination of the profits of the holding company based on this concept. And the court rejected to hold that the subsidiary was a component of holding company.
The Corporations Act, 2001 (Cth) is the governing act for all the companies in Australia. Under section 124(1) of this act, it has been provided that upon becoming a company and being incorporated as a body corporate, the company attains a separate legal personality. This section provides that companies have a legal capacity as that of a person and is required to be treated as a separate individual. In addition to this, through this section, the companies are given the issuance and share cancellation powers, the granting of option for unissued shares, and issuing of debentures. This status of the companies is affirmed through section 1.5.1 of this act and it is provided that the company has to be treated as distinct from the directors, employees and officers who have the responsibility of running the company’s operations. Hence, the companies have been granted the separate legal entity status through corporate veil, by both the common law and the statutory law.
Application
In the given case study, Plutus Payroll is the company which is at the centre of the tax fraud allegations. As this is a company, it has the status of being separate legal entity; and due to this factor, it has to be treated in a separate manner from its directors, officers and employees. Moreover, it cannot be held liable for the acts done by its directors, officers and employees or its associated companies. This is due to the fact that on the basis of this concept, each of the companies has to be treated in a different manner from the other. Further, the provisions of Corporations Act, 2001 gives Plutus Payroll a separate status, owing to which, it is protected through corporate veil.
Conclusion
On the basis of discussion carried above, it is clear that the corporate veil provided through the common law and statutory law, gives Plutus Payroll a right to enjoy the separate legal entity status.
Issue
Whether the case study highlights enough reasons for the court to intervene and pierce the corporate veil, or not?
Rule
Piercing of corporate veil is a concept which has been born from the concept of separate legal entity. As per the concept of piercing of corporate veil, the court sets aside the separate legal entity status granted to the company and holds the people running the company’s operations liable for the acts undertaken by them, which were unfair for the company or another party. The concept of piercing of corporate veil was born from the case of Salomon & Co Ltd, where the judges made the shoe manufacturer liable for the company’s debts. Through this concept, the shareholders are denied the limited liability protection when it becomes crucial to pierce the corporate veil in the view of the court.
In order to hold the holding company liable for the actions subsidiary company, it is crucial to show that the holding company had a dominating control over the actions of the subsidiary. Creasey v Breachwood Motors Ltd is one of such cases, where the court made a decision to pierce the corporate veil as the court held that the new company was formed only for avoiding the liabilities of the old company which were present due to negligence of the old company. In this case, the court lifted the corporate veil to determine the ownership of the new company and make the shareholders liable. Another helpful case which proves similar point is the case of CSR Ltd v Young the judges were of the view that the position of the holding company resembled the position of the subsidiary. This gave the reason to the court to pierce the corporate veil and ultimately, the holding company was held liable for the acts done by its subsidiary company.
Application
In the given case study, it has already been established that by being a separate legal entity, Plutus Payroll enjoys separate legal entity and is covered by corporate veil. However, the court can pierce the corporate veil in this case if it can be established that the associate companies of Plutus Payroll were essentially being controlled by Plutus Payroll or were formed to help Plutus Payroll in evading their liabilities. Particularly the company owned by Plutus Payroll, Synep was being used to shield the fraud which was centered on Plutus Payroll. And the operations of this company were suspended owing to a commercial dispute. However, the real reason for this was never given.
The control of Plutus Payroll over its associate companies has to be shown to pierce the corporate veil. The chain for payment by the company makes it very clear. The contractors who were employed by the contracting firms and agencies, which in turn had contracted out to government agencies and the payment of the government agencies was made through Plutus Payroll. This chain denotes the ultimate control of Plutus Payroll over the entire chain. Then the excuse was used that the commercial dispute was the result for not making the payments. The company was paying its IT contractors through a different company which had a different ABN. Essentially, the other company was being used as a means of discharging its liabilities. This also is evidence to the fact that Plutus Payroll had dominant control over other companies.
So, Plutus Payroll was using others to evade their liabilities. On the basis of Creasey v Breachwood Motors Ltd, the court would pierce the corporate veil and hold Plutus Payroll for its debts, which it claimed to not being able to pay owing to dispute with others. This ultimately led the Australian Taxation Office freezing the accounts of Plutus Payroll as they knew that the company was just trying to evade its liabilities by claiming a dispute had taken place.
Hence, the facts of this case are such that the court would look into the associate companies of Plutus Payroll, on the basis of CSR Ltd v Young, and would hold Plutus Payroll liable for their debts. Moreover, through the piercing of this veil, the people running the business of Plutus Payroll, i.e., its officers and the directors would be held liable for the entire fraud which took place in the company and they would have to pay the debts which the company owed.
Conclusion
On the basis of the discussion carried above, it becomes clear that Plutus Payroll would be held liable for the debts incurred by its associates; and for this purpose, the corporate veil would be pierced. Also, the directors of Plutus Payroll would be held liable for such debts and again the corporate veil would be pierced.
Issue
Whether any of the director duties were breached in this case, or not?
Rule
As has been stated earlier, Corporation Act, 2001 (Cth) is the governing act in Australia for the companies. The general duties for the officers and employees of any company have been codified in Division 1, Part 2D.1 Chapter 2D of this act. As per section 180 contained in this chapter, the directors of the company have a civil obligation upon them, to be careful and diligent in the work which they perform. This means that when the powers are used and the duties are performed, it has to be done as a prudent person would do. Section 181 requires the directors to use their powers and duties for proper purpose, in good faith and for the company’s best interest.
Similar sections are contained in section 182 regarding the use of position for proper purpose and section 183 regarding the use of the information of the company. This has to be done so that the information of the company is not used for a benefit of a related party or for the detriment of the company. The criminal liability for the misuse of company information, position in company and not using the powers and discharging duties in good faith are covered under section 184 of this act. When an officer or a director of the company, recklessly or knowingly becomes dishonest and does not use his powers and discharges duties for proper purpose, they can be held criminally liable under this act.
Apart from the statutory duties, under the common law, the directors have the duty of being honest to the company and to the stakeholders. This means that they have to discharge all the relevant information in a truthful manner, unless the same is confidential. And also to have the relevant qualifications to hold the position of a company director based on the concept of good faith.
Application
In the given case study, a number of director duties were breached by the directors of Plutus Payroll. The biggest breach in this regard was the fake profiles of the registered directors. The directors of the company have the duty of being faithful to the company, and by admitting fake profiles of the directors, the stakeholders of the company were duped. Moreover, the company was being used as a mode to evade the tax fraud by the directors of the company which is a misuse of the position and information of the company. Also, these actions were such that they were not in the best interest of the company, as the company had to suspend its operations owing to the dispute which arose, due to the actions of the directors and which had ultimately led to the piercing of corporate veil.
A prudent director would have resolved the dispute which occurred with the Australian Taxation Office and would not have used the company’s position in the way it was done. The directors of the company were not at all diligent in their conduct and were involved in such activities which led to the company’s position being maligned. Hence, not only the statutory duties but also the common law duties of the directors were contravened in this case.
Conclusion
On the basis of the discussion carried above, it can be concluded that indeed director duties were breached in this case as the company was put in a position where the tax fraud was being blamed on it.
A. Articles/ Books/ Reports
Anderson H, Directors’ Personal Liability for Corporate Fault: A Comparative Analysis (Kluwer Law International, 2008)
Cassidy J, Concise Corporations Law (The Federation Press, 5th ed, 2006)
Franklin, Company Law. Significance of corporate personality and the meaning of ‘lifting the veil of incorporation'(GRIN Verlag, 2012)
Milne SJ, and Tucker KA, A Practical Guide to Legal Research (Lawbook Company, 2nd ed, 2010)
Parthalan OR, Separate Legal Entity (Vadpress, 2012)
B. Cases
Creasey v Breachwood Motors Ltd [1993] BCLC 480; 10 ACLC 3,052
CSR Ltd v Young (1998) ATR 81-468
Farrar v Farrars Ltd [1888] 40 ChD 395
Industrial Equity Ltd v Blackburn (1977) 52 ALJR 89
Lee v Lee’s Air Farming [1961] AC 12
Salomon & Co Ltd [1897] AC 22
C. Legislations
Corporations Act, 2001 (Cth)
D. Others
PwC, A guide to directors’ duties and responsibilities for non-listed public companies and proprietary companies in Australia (2008) <https://etraining.communitydoor.org.au/pluginfile.php/608/course/section/95/GuideDirectors_Apr08.pdf >
Welch D, Tax fraud allegation could undermine trillion-dollar investigations, senator says (19 May 2017) <https://www.abc.net.au/news/2017-05-18/tax-fraud-allegations-could-risk-investigations-senator-says/8537608>
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