This case study reveals that the major issue which has to be decided in this case is to state whether or not the advice given by Bob’s daughter, Alice, is correct.
In order to run a business in Australia, the first thing which has to be decided by any individual, is the form of their business. An individual could opt for a sole proprietorship, where the business is solely under the control of the proprietor. When the business is to be expanded beyond sole proprietorship especially when the number of owners of the business is to be increased, a partnership form of business can be opted for. A corporation form of business structure is adopted when the requirements are beyond sole proprietorship and partnership and where the requirement of capital is especially high (Latimer, 2012).
The company form of business has a lot of advantages due to which it is the most opted form of running the business in the nation. A company is a separate legal entity due to which it is treated different from its owners, employees and managers. Due to this doctrine, the company has a perpetual succession (Gibson and Fraser, 2014). In other words, the company can continue even when the people responsible for running die, the company’s existence is not affected. The company has also the power of raising a case against any other person and similarly, the other people can make a case against the company. Even though this structure has a number of advantages, it also has certain disadvantages. The costs of establishing and running the company form of business are quite high. The adherences to various legislations, which are applicable over the companies, are quite high in number (Abbott, Pendlebury and Wardman, 2007).
In Australia, the companies are governed by the Corporations Act, 2001. As per section 124(1) of this act, the companies have been given the legal capacity, as well as, the powers as a person has (Federal Register of Legislation, 2017). Hence, the company has to be treated distinctively from its operators. Through this very section, the company has been given the power of issuing or canceling the shares, the debenture issuing, and the registration of a company, granting of options for unissued shares, and charging the uncalled capital (WIPO, 2015). Through this very act’s section 1.5.1, the separate legal entity status has been provided to the company and this is the reason why the directors and the officers of the company are treated in a different manner. Hence, even the statue provides the separate legal status of the company, to each and every form of the companies (Australasian Legal Information Institute, 2017).
The Salomon v Salomon & Co Ltd [1897] AC 22 case saw the inception of the separate legal entity status. In this case, Salomon was the manufacturer of boots and shoes and he trade through the company in a manner that the company was deemed as the agent of Salomon. This approach was held as wrong by the court when the matter was being discussed with regards to liabilities to be borne by the company or by Salomon. The court stated that the business of any company had to be carried for the shareholders of such a company. And in companies, the principal agent relationship was absent and due to this reasons the company cannot be deemed as the agent of its shareholders. The company has a legal and distinctive feature and so, it has to be treated as if the same was a separate person. So, the liabilities of a shareholder had to be differentiated from the liabilities of the company. The court held that the company had a separate legal entity from Salomon and so, Salomon had to personally bear the debts he owed and could not be placed over the company (Kershaw, 2012).
Apart from the case where this concept was born, other cases have also upheld the concept of separate legal entity. In the New Zealand case of Lee v Lee’s Air Farming [1961] AC 12, the court held that the claims of Lee could not be upheld as the company had a separate legal entity in this particular matter (Bourne, 2016). In another case of Industrial Equity Ltd v Blackburn (1977) 52 ALJR 89, this concept was again upheld. The notion that the subsidiary was merely a component of the holding company was rejected by the High Court. In this case, the profits of the holding company were determined by the court on the basis of this doctrine (High Court of Australia, 2017).
As per the case study given, each and every person is allowed to catch only 50 tones of scallops for every year and in case this limit is breached, a fine is to be imposed which amounts to $100,000. As highlighted in the legal principles segment, the company is a separate legal entity from its owners. So, if Bob forms a new company, this new company would be separate from Bob. Due to this reason, the limit for catching the fish would be calculated separately for Bob and the company. This would allow Bob to double his catch by forming a new company, and would thus prove the advice of his daughter correct.
Conclusion
This case study reveals that the advice given by Bob’s daughter, Alice, is correct.
This case study reveals that the major issue which has to be decided in this case is to state whether or not the holding company (New Nirvana Ltd) can be held liable for the negligence of its subsidiary company (Nuclear Blast Sounds Pty Ltd).
Whenever a subsidiary, which is wholly owned, is formed, the same is commonly held as just being the extension of the parent company. However, this does not mean that the holding or the subsidiary do not have separate legal entity status. There are cases where the holding company is treated as being the shadow director of the holding company. Section 9 of the Corporations Act, 2001, provides that any individual upon whose directions the company functions or undertakes its operations, has to be deemed as the shadow director of that company. When the board of the wholly owned subsidiary is appointed by the holding company, in essence, it is run by its parent company. When such happens, the holding is deemed to satisfy the conditions which have been laid down in section 9 of the Corporations Act due to its control over the board, which runs the business of the subsidiary company (Bonomelli, 2014).
When a company is to be held accountable for the actions of its holding company or for the actions undertaken by its owners, the court uses the doctrine of piercing the corporate veil. Through the application of this principle, if the court has reasons to believe that the corporate structure of the company is being misused or is being used to escape the liabilities of an old company, the court can lift the corporate veil and hold the ones responsible for the acts, personally. This allows the real culprits to be held liable for their wrongdoings. In the matter of Creasey v Breachwood Motors Ltd [1993] BCLC 480, this very thing was done by the court. The court was of the view that the new company was formed only to allow the old company to escape its liabilities which were borne due to the negligence undertaken by it. And the court stated that it was crucial to hold the old company liable for the undertaken negligence (French et al. 2016).
For holding the companies liable for the tort of negligence, it is crucial to show that the company had a dominating control over the other. Till the time it can be shown that the holding company had a dominating control over the subsidiary, which could influence the actions of such subsidiary, the holding cannot be held liable for the actions of the subsidiary (Kerr, 2014). Berkey v. Third Avenue Ry 244 N.Y. 602 (1927) was such a case where the plaintiff was injured due to the defendant’s negligence. The plaintiff made a case in the court and asked for getting compensated for the injuries which he sustained. However, the court refused to hold the defendant liable due to the lack of dominating control over the subsidiary by the parent company (Lezcano, 2015).
The scenario given here affirms that the holding company cannot be held liable for the actions undertaken by the subsidiary company and its negligence. This is because the holding company played no role in the setting of the concert, which was the sole responsibility of the subsidiary. There was an absence of supporting points which could necessitate the piercing of corporate veil. Due to these reasons, the subsidiary company would have to bear the costs of its negligence and the holding company would not be liable for the same.
Conclusion
This case study reveals that the holding company (New Nirvana Ltd) cannot be held liable for the negligence of its subsidiary company (Nuclear Blast Sounds Pty Ltd).
This case study reveals that the major issue which has to be decided in this case is to state whether or not Don can bring actions against Millennium Pty Ltd in a successful manner. Further, it also has to be seen if the company has any legal position in this case.
The company is managed by the replaceable rules or through the constitution. The replaceable rules can be adopted along with the constitution and even the constitution can be modified as per the discussions between the members of the company (ICNL, 2017). Under section 140 of this act, through the adoption of a constitution, an agreement is created between the directors of the company, the members, and the company secretary and even between the members themselves (Australian Government, 2017). It is crucial that the Articles of the company are properly formed and clearly stated each and every point in a transparent manner. The articles of the company state the terms of appointment of an individual, the responsibilities of the officers and directors’ apart from the ones provided in the legislation (Cassidy, 2006).
The facts given in the case study resemble the case of Eley v Positive Life Assurance Co Ltd [1876] 1 Ex D 88. The plaintiff had in this matter been appointed as the attorney of the company and this appointment was made for the entire lifetime of the company. The plaintiff had been made the member of the company where the articles covered the appointment of the plaintiff. The plaintiff made a case against the company when he was removed from this post and he claimed that as the articles of the company created a contract between him and the company, he had to be compensated for the breach of contract. The court held that his members’ rights were not affected when he was removed from the position, as the articles only contained his rights as being the member, and not as the solicitor of the company. Due to these reasons, the plaintiff’s claims were dismissed by the court (Dignam, 2011).
Another matter which is helpful here is the case of Hickman v Kent or Romney Marsh Sheepbreeders Association [1915] 1 Ch D 881. In this case, the articles of the company provided that the arbitrator had to be approached in cases of any dispute, before going to the court. The plaintiff raised a case in the court and did not approach the arbitrator as required by the articles. The court highlighted that section 140(1) of the governing act made a contract between company and the members. Plus the articles had to be upheld by plaintiff and the defendant. Due to these reasons, the claims of the plaintiff were stayed by the court when the defendant applied for the same (Swarb, 2015).
Being the member of the company, Don had to adhere to the terms contained in the articles. On the basis of Eley, Don’s rights as a member were not hampered when he was removed from the position of a lawyer. And on the basis of Hickman, the company can get the proceedings initiated by the Don to be stayed by the court.
Conclusion
This case study reveals that Don will fail in his actions against Millennium Pty Ltd. Further, the company would be able to attain a stay over the proceedings raised by Don.
References
Abbott, K., Pendlebury, N., and Wardman, K. (2007) Business Law. 8th ed. London: Thomson.
Australasian Legal Information Institute. (2017) Corporations Act 2001. [Online] Australasian Legal Information Institute. Available from: https://www.companydirectors.com.au/director-resource-centre/organisation-type/organisation-definitions [Accessed on: 06/06/17]
Australian Government. (2017) Corporations Act 2001. [Online] Australian Government. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 06/06/17]
Bonomelli, M. (2014) Wholly-owned subsidiaries: same same but different. [Online] Lexology. Available from: https://www.lexology.com/library/detail.aspx?g=90cc6c72-de1a-4ba7-91d0-7cd7a798c5ed [Accessed on: 06/06/17]
Bourne, N. (2012) Bourne on Company Law. 7th ed. Oxon: Routledge.
Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.
Dignam, A. (2011) Hicks & Goo’s Cases and Materials on Company Law. 7th ed. Oxford: Oxford University Press.
Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 06/06/17]
French, D., Mayson, S., and Ryan, C. (2014) Mayson, French & Ryan on Company Law. 31st ed. Oxford: Oxford University Press.
Gibson, A., and Fraser, D. (2014) Business Law 2014. 8th ed. Melbourne: Pearson Education Australia.
High Court of Australia. (2017) Industrial Equity Ltd v Blackburn. [Online] High Court of Australia. Available from: https://eresources.hcourt.gov.au/showbyHandle/1/230830 [Accessed on: 06/06/17]
ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on: 06/06/17]
Kerr, D. (2014) Hiding Behind Subsidiaries: Holding Parents Liable. [Online] The GULS Law Review. Available from: https://www.gulawreview.org/entries/commercial/hiding-behind-subsidiaries-holding-parents-liable [Accessed on: 06/06/17]
Kershaw, D. (2012) Company Law in Context: Text and Materials. 2nd ed. Oxford: Oxford University Press.
Latimer, P. (2012) Australian Business Law 2012. 31st ed. Sydney, NSW: CCH Australia Limited.
Lezcano, J.M. (2015) Piercing the Corporate Veil in Latin American Jurisprudence: A Comparison with the Anglo-American Method. Oxon: Routledge.
Swarb. (2015) Hickman V Kent Or Romney Marsh Sheep Breeders ‘ Association; 1915. [Online] Swarb. Available from: https://swarb.co.uk/hickman-v-kent-or-romney-marsh-sheep-breeders-association-1915/ [Accessed on: 06/06/17]
WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 06/06/17]
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