Incorporation & Registration Of A Company – Legal Obligations Of Parent & Subsidiary Companies

Separate Legal Personality of a Company

Whether any legal obligations can be raised against CMS, CM or Lazarus Pty Ltd for the loss that is sustained by Terry?

One of the business forms that are generally availed by the people of Australia is to run their business by way of a company. A company is created by getting the same registered as per the law of Australia. A register company is an entity which has its own existence in law. Once a company is registered it acquires a distinct legal personality with perpetual succession. In the leading case of Salomon v A Salomon and Co Ltd [1897], the House of Lords submitted that separate legal personality is the concept which signifies that the company has its own individual identity and which is separate from its employees and officers. The acts of the company are its own acts and will not hold its officers liable in any manner whatsoever. In Lee v Lee’s Air Farming Ltd [1960] the concept of Separate legal personality was retreated. (Gibson and Fraser, 2013)

However, at times, the distinction amid the officers and the company are disregarded by courts and the acts of the company are held to the officer’s act, holding them personally liable for the same. This rule is called the piercing the veil of the company and is regarded by the courts at several instances, such as, fraud, agency, tax avoidance, group enterprise, etc.  (Tomasic et al 2002)

The veil is also pierced when the relationship amid the parties is that of a subsidiary and parent company. At times, the subsidiary company is indulged in act of torts resulting in loss. In such situation, when the parent company is holding the subsidiary company and the subsidiary company is not in the position to reimburse the loss, then, the veil amid the parent and the subsidiary company is pierced by the courts and the liabilities of the subsidiary is then borne by the parent company  (Witting 2018). It is necessary that there is closeness amid the parent and the subsidiary company and the parent company can reasonably foresee the acts of the subsidiary company and is rightly evaluated in the leading case of CSR Ltd v Wren (1997). The court in the leading case of CSR v Young, (1998), held that the parent company will reimburse the liabilities of the subsidiary company, that is, the loss that is caused to the children of the employees of the subsidiary because of the wrongful acts of the subsidiary itself. In the leading case of Stone and Knight v Birmingham Corporation (1939), the court has pierced the veil amid the subsidiary and the parent when the acts of the subsidiary are found to be controlled and owned by the parent company. (Latimer 2012)

Piercing the Veil of the Company

In Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988), the court held that when the creation of the new company is to incur fraud on the aggrieved parties then the new company is held to be on the same footing as the old company and the aggrieved was held liable to sue the new company for the losses so incurred because of the wrongful acts of the old company. in Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) and Peate v Federal Commissioner of Taxation (1964) veil is pierced on the establishment of sham and fraud. (Bottemley et al, 2017)

Also, under section 236-237 of the Corporation Act 2001, any former employee of the company has the right to bring a statutory derivative action against the wrongful person if the company itself is not taking action against such person provided it is in the interest of justice and the action is carried on honestly and is held in  Westgold Resources NL v Precious Metals Australia Ltd [2002].. (Adams, 2002)

The facts simply submits that,

Cosmo Mining Services Pty Ltd (CMS) is a company wherein Terry holds the position of an employee. Cosmo Mine Ltd (CM) is the parent company of CMS. However, as per the rule held in salmon case, once a company is formulated,  then such a company has its own existence in law. so, both CMS and CM have their own identity and the acts of one company is considered to be the acts of its own.

It is found that CMS has undertaking mining activities which have resulted in the contamination of the nearby river. The water of the river is supplied to the mine and Gunbarrel (the place where Terry lives). Because of the use of the water, Terry and other residents have suffered cancer.

It is thus submitted that CMS is indulged in tortuous action of negligence and because of the acts and omission of CMS, loss is inflicted upon Terry.

Thus, Terry has the power to sue CMS under the law of tort.

But, it is submitted that CMS is directly owned and controlled by its parent company CM. CM leases all the equipments from a bank and the same are sub leased to CMS. The leasing charges are also paid by CM on behalf of CMS.

Thus,  CMS is wholly and solely controlled by CM. Thus, as per CSR v Young and Stone and Knight v Birmingham Corporation it is rightful to pierce the veil amid CMS and CM and consider the acts of CMS as the acts of CM. So, Terry can avail his right under section 236-237 of the Corporation Act, 2001 so as to bring statutory derivative action. Terry can take the action as CM is not acting in any manner to take action for the wrongful acts of CMS. Thus, Terry being the former employee of CMS has the right to bring derivative action against CM.

Now, it is also analyzed that CMS conducted a general meeting and decided that  in order to avoid the liabilities that are raised because of the use of contaminated water, it is best to sell the business of CMS to a new company. in order to avoid the liability, a new company, Lazarus Pty Ltd, is formulated and the business of CMS is sold to the new company.

It is submitted that the act of CMS to formulate a new company is nothing but to incur fraud on the injured parties including Terry. It is an act of sham and thus by applying the law in ………………..it is submitted that the formation of Lazarus Pty Ltd is not right and the formation of the new company must be disregarded.

Terry has the right to take action even against Lazarus Pty Ltd as its incorporation is nothing but to incur fraud on Terry.

So, Terry has the right to bring action both against CMS/CM and Lazarus Pty Ltd.  

Conclusion 

It is crystal clear that Terry has suffered loss and thus it is the duty of CM or CMS to bring justice to the loss that is caused to Terry. However, no action is taken by CM nor by CMS. Since a tortuous action is carried on by CMS, thus, its parent company should be held liable for such loss by lifting the veil amid CMS and CM.

Now, since no action is undertaken by CM for the redress of Terry. Thus, Terry has been right under section 236-237 of the Corporation Act 2001 to bring a Statutory Derivative action against CM as he being the former employee of CMS.

References

Adams, Michael . (2002). Essential Corporate Law: Second Edition. Cavendish Australia.

Bottomley , Stephen, ‎ Hall, Kath ‎ Spender, Peta. (2017) Contemporary Australian Corporate Law. Cambridge University Press.

Gibson, Andy & Fraser,  Douglas. (2013). Business law. Pearson Higher Education AU.

Latimer, Paul. (2012). Business Law. Federation Press.

 Tomasic, Roman, Bottomley, Stephen and McQueen, Rob. (2002) Corporations Law in Australia, Federation Press.

Witting, Christian. (2018) Liability of Corporate Groups and Networks. Cambridge University Press.

Case laws

CSR Ltd v Wren (1997) 44 NSWLR 463.

CSR v Young, (1998).

Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267.

Lee v Lee’s Air Farming Ltd [1960] UKPC 33

Salomon v A Salomon and Co Ltd [1897] AC 22.

Peate v Federal Commissioner of Taxation (1964) 111 CLR 443.

Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530.

Stone and Knight v Birmingham Corporation (1939).

Westgold Resources NL v Precious Metals Australia Ltd [2002] WASC 221.