Describe about the Business Law for Compensation for Business.
In the provided case scenario, it has been elucidated that Mark and his two friends, Lennie and George started a business of repairing model aeroplanes in a private garage, wherein one of the airplane malfunctioned and crashed to another company’s premises named Geek Ltd. As a result of this incident, Geek Ltd. faced problems due to the damage of expensive equipments and accordingly the company charged $300,000 as compensation. Considering the above scenario and based on the Companies Act 1993, it can be stated that since the airplane malfunctioned, therefore the entire liability relies on the repairer i.e. Mark[1].
Mark would be the liable person for the distressing incident because the airplane crashed due to malfunctioning disputes. In this situation, as a repairer, Mark must warn the owner regarding possible occurrences. From a different perspective, it is also observed from the case study that initially three members started the repairing business, wherein it is assumed that they all have equal responsibilities and liabilities as partners. Taking the reference from the Partnership Act 1908, it is apparent that under Part 1, all the partners are jointly liable for all the obligations and debts. Concerning the case scenario, it can therefore be asserted that all the three members will be liable for the incident and must provide the compensation accordingly[2]. However, the Section 10 of the Companies Act 1993 states that to start a company, there is a requirement of name, one or more shares, shareholders and one or more directors, who are the permanent residents of the country. Subsequently, as regards to Section 11 of this Act, the company is required to register under the Companies Act. Therefore, concerning the incident provided in the case scenario, it could be stated that the members involved in the model aeroplane repairing and assembling activity fail to fulfill these requirements, as they have not registered the company as per the requirements of the Companies Act[3]. This means that the members do not belong to any valid company based on which other members involved in the business can prove themselves innocent in front of the court, wherein Mark will be liable for the entire incident and would be required to compensate as well[4].
Therefore, considering the outcome of the court according to the Act, the liable person might require to compensate for the damages caused to Geek Ltd i.e. $300,000[5]. It is assumed that the company can suffer huge losses for the damages due to which it becomes necessary to compensate as required. Mark would therefore be liable to recover the damages caused to Geek Ltd, as the reason behind the damage was due to the negligence of Mark while repairing the model aeroplanes. Initially, the applicant can claim for damages of the expensive equipments based on which the court or the third party will evaluate the evidences and the cost.
In this regard, it is worth mentioning that the direct lawful action might not be viable unless the applicants produce valid evidences against Mark before the court. Thus, Geek Ltd. must produce proper evidences, wherein they are also liable to show that due to Mark’s negligence they had to suffer a substantial loss[6].
The concept of separate legal personality is fundamental to company law
Considering the legal perspective, a company is defined as an entity including two or more individuals who are involved in achieving a common objective by following a particular standard set by the governance of respective region. In this regard, the company also needs to fulfill all the legal requirements consisting of the name and the number of shares. Besides, the shareholders also need to be registered under the Companies Act[7]. According to the Section 124(1) of the Corporations Act 2001, a company has the capacity of an individual, wherein every company is different from other companies. Therefore, from the above scenario, it can be concluded that based on the operations and activities of the companies, every entity is different, thus ensuring that different legal personalities of diverse companies is fundamental under company law[8]. Based on the understanding gained from the doctrine of separate legal personality, the company is liable for all the debts. The separate legal personality outlines basic principles of the company law that describes the relationship between a company and its associates in legal perspectives as well[9].
Considering the stated fact, the concept of separate legal personality can be illustrated more elaborately through the case of Salomon v Salomon & Co. Ltd (1897)[10]. With reference to this case, it has been declared that the company can be described as a person with a separate legal personality, which is distinct to its members, directors and the shareholders formed by the House of Lords. In this case, Mr. Salomon started a business of manufacturing and selling boots. After a period, the company became insolvent and underwent liquidation for which the associated liquidator acted as an unsecured creditor as well as started demanding refund along with alleging the company for fraud. However, afterwards, the court appealed both the liquidator and Mr. Salomon, to enter into a legal contract with other members. Apart from this, it is also evident that Mr. Salomon was not liable for the company’s debt and he was separately entitled from the Salomon Company[11].
The case of Salomon v Salomon & Co. Ltd (1897) clearly exemplifies that the company, as a legal person is liable for its debts and liabilities. However, other members of the company will be considered as individuals liable for all the debts and liabilities, in case the business undergoes a situation of insolvency[12]. In this context, under the Section 124 of the Corporations Act, it is observed that the members cannot own the assets acquired by the name of company even after holding a huge position in the board or contributing major amount of assets of the company[13].
In the similar context, another case example can be elaborated, which had also resulted in similar perspectives alike the Salomon v Salomon & Co. Ltd (1897) case. The case Lee v Lee’s Air Farming Ltd. (1960)[14] clearly defines that a company as a separate legal entity can create a contract with the associated members, directors or outsiders, being a governing member of the company. Concerning this particular case, it is evident that Mr. Lee established a company as Lee’s Air Farming Ltd in which he was the only governing director and owned most of the shares, whereas his solicitor owned 1 share. After his death, his wife claimed the compensation from the company to the court of New Zealand. In this situation, the Court of New Zealand had provided the case outcome based on Salomon v Salomon & Co. Ltd (1897), wherein it considered Mr. Lee, as an employee instead of the sole governing director of the company. In addition, the court further stated that the company and Mr. Lee were separate legal personalities according to the company law due to which both of them can enter into a contract, representing two parties such as employer and employee. Therefore, it can be asserted based on the above-mentioned case instance that the company law considers the concept of separate legal personality as fundamental.
To preserve commercial certainty, the Courts have been very reluctant to “raise the corporate veil” to impose liability on individual shareholders or directors.
A company is considered to be a separate legal entity after it is incorporated in which the roles and liabilities are distinct to its members according to their abilities. The veil of incorporation subsists among the company and its members. Therefore, the members or managers of the companies take help of the corporate veil in order to defend themselves from the company’s liabilities or other debts[15].
There are certain circumstances for which the corporate veil is used such as fraudulent activities, avoidance of taxes and other legislative provisions. In case, the members of the company found to conduct any unfair activity, then they will not be allowed to continue with the company. In addition to this, the court will also apply the principle of lifting or piercing the veil, which can be applied if the shareholders or the members are found to be liable for legal obligations of the corporation[16].
Fraud is considered to be one of the grounds of the corporate veil based on which it is stated that if such fraudulent activities are suspected behind the veil, the court might apply the doctrine of corporate veil[17]. The stated fact can be illustrated with help of the case Official Assignee v 15 Insoll Avenue Ltd[18]. Taking reference from the case outcome, it is observed that the reason for lifting the corporate veil is due to the violation of law or persuading fraudulent activities. Fraud can be regarded as the unfair activities conducted by managers or members of the company, where the corporation is used to cover their illegal act in order to prevent the legal obligations[19].
In this case, New Zealand courts had performed in a more careful manner for uplifting the veil in which Mr. Russell, the accountant who established the company, used to acquire the property. By changing the name of the company, he also appointed fake directors within the company. Mr. Russell distributed the shares among his children, who were still under the minority so that he could own the shares being a parent to them. The children were unknown about the shares and debentures they possessed in the company, wherein he then transferred the shares to his girlfriend and then to his wife. Later on, his fraudulent activity got disclosed and he was bankrupted. In this regard, the bank uplifted the veil since the company was accused for involving in the fraudulent activities. In addition to this, it had also been found that the company had not followed the statutory provisions to establish the company with sincerity[20].
The lifting or piercing of the corporate veil can be grounded under the Sham or façade, which can be illustrated through the case of Gulland v Federal Commissioner of Taxation (1985). Dr. Gulland was a medical practitioner, who held a family trust in which the service agreement was held among the medical practice and the trust. In addition, the services through the trust were consisting of purchasing, payroll and other related official activities[21].
After a period of time, Dr. Gulland along with his accountant rescheduled the business activities in order to enhance the profit margin. The new arrangement proved to be more complicated in which the unit trust included accountant, trustee as Dr. Gulland and his friend[22]. In order to decide upon this situation, the court followed the case of Lord Denning approach in Newton, which is based on determining the tax evasion. In this regard, it has also been identified that the motive behind rescheduling of the business structures was to evade the tax. The court also declared Mr. Gulland as liable for the income tax[23].
Arthur, J. (2016), Damages and equitable compensation in a commercial setting. Damages are Compensatory, pp 1-35.
Australian Governemnt, (2016), Remedies and costs, Damages, viewed 9 September 2016, <https://www.alrc.gov.au/publications/12-remedies-and-costs/damages>
Cassidy, J. (2006), Concise Corporations Law, Federation Press, Australia.
Danielle, N. & Smith, P. (2013), Veils, Frauds, and Fast Cars. Introduction, pp 1-67.
Duncan, W, D. (2012), Joint Ventures Law in Australia: 3rd Edition, Federation Press, Australia.
Financial Services Commission Mauritius, (2001), The Companies Act 2001, Arrangement of Sections, pp. 1-301.
Gautam, D. (2014), Corporate personality and lifting of the corporate veil, Law, Vol 3(1), pp.1-3.
Luxford, L. S. (2014), The history and development of the choice principle, Introduction, pp 4-37.
1New Zealand Government, (2016), Companies Act 1993. Incorporation, viewed 9 September 2016, <https://www.legislation.govt.nz/act/public/1993/0105/latest/DLM320108.html>
2New Zealand Government, (2016), Partnership Act 1908. New Zealand Legislation, viewed 9 September 2016, <https://www.legislation.govt.nz/act/public/1908/0139/latest/whole.html#DLM172496>
Pathak, A. (2013), Legal aspects of business, Tata McGraw-Hill Education, New Delhi.
Ramsay, M, I & Noakes, D., .B (2001), ‘Piercing the Corporate Veil in Australia’, Company and Securities Law Journal, vol. 19, no. 250-271, pp. 1-40.
Sharma, N & Dang, R. (2014), Analyzing Companies Act: A move towards better Governance, IOSR Journal of Business and Management IOSRJBM, vol. 16, iss. 5, pp.26-32.
SingaporeLaw.sg, (2012), AQQ v Comptroller of Income Tax [2012] SGHC 249, Case Law, viewed 9 September 2016, <https://www.singaporelaw.sg/sglaw/laws-of-singapore/case-law/free-law/high-court-judgments/15088-aqq-v-comptroller-of-income-tax-2012-sghc-249>
Taylor, L. et. al. (2014), Company and securities law in New Zealand. Thomson Reuters NZ, pp. 95-1039.
Tomasic, R., Bottomley, S. & McQueen, R. (2002), Corporations Law in Australia, Federation Press, Sydney.
Williams, G. (2011), Corporations and Partnerships in New Zealand, Kluwer Law International, UK.
1ALII, (2016), CA s588G & s197.Corporations Act 2001 – Sect 588g, Commonwealth Consolidated Acts , viewed on 8 September 2016 < https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588g.html>
2ALII, (2016),CORPORATIONS ACT 2001 – SECT 124CA s124, Commonwealth Consolidated Acts , viewed on 8 September 2016 < https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s124.html>
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