Discuss about the Piercing the Corporate Veil on Sham Transactions.
‘Salomon is in the shadow. It is still alive but no longer occupies the centre of the corporation stage’ a quote taken from the journals written by Schmittoff, C. The present article makes an emphasis on justifying the said quote by analyzing the concept of the distinct legal personality and whether this concept still prevail with the application of piercing/lifting of commercial blanket of the company.
The House of Lords in Salomon v Salomon[1] have established a legal point which is prevalent till date and which emphasis that once a corporation is integrated then it acquires the status of an individual and has a distinct personality in law. This separate legal personality makes a distinction amid a company itself and its officer and shareholders. The rule emphasis that the acts that are taken by the company are carried out by its officers in the name of the company and which are binding upon the company itself and will not make the officers liable for the same. In Peate v Federal Commissioner of Taxation[2], a company was regarded as a one man company having its own personality. A company is an Eriptur persona, manet res, that is a mask, that is, it makes a distinction amid itself and its officers[3].
It is now important to understand whether the principle that is laid down in saloman case is prevalent or the same is coming under the shadow and thus no longer occupies the center of the corporation stage.
Fir the analysis it is first important to have few lines on the concept of separate legal personality
A distinct personality highlights two important principles, that is.:
Thus, the conceit of separate legal personality is simple, that is, the officers are not accountable for the acts that are carried out by them in the name of the company. That the separate legal personality principle also results in establishing the principle of limited accountability which emphasis that the financial obligation of the members are limited to the extent of their shareholdings.
However, this separate legal personality of the company is now gaining under shadow and it is right to submit that it no longer occupies the center of the corporation stage. This is mainly because the veil that makes a distinction amid the company and its officers are more than numerous times was pierced by the courts.
It was in 1973 that for the first time ‘piercing of the corporate veil’ was used by Bray CJ in Brewarrana v Commissioner of Highways[5] . The term lifting or piercing of corporate veil was rightly acknowledged in Australia in Commissioner of Land Tax v Theosophical Foundation Pty Ltd[6]. When the courts are willing to look behind the company and analyze the position of the real controllers of the company then it is an act of piercing the veil of the company and is analyses in Pioneer Concrete Services Ltd v Yelnah Pty Ltd[7].
The lifting/piercing of corporate veil mainly disregards the distinct character of the company.
In Australia, it was submitted by S Ottolenghi, that it is very hard to state the circumstances under which the blanket can be lifted/pierced and thus lifting of veil is a concept which has not much relevance in Australia. Rogers AJA in Briggs v James Hardie & Co Pty Ltd[8] has submitted that the piercing of veil is not a static concept and is used by the courts only at few occasions thereby not making the same as much of the relevance. In AGC (Investments) Limited v Commissioner of Taxation (Cth)[9], the court held the situations in which the veil can be lifted is highly circumscribed[10].
However, It is first important to analyze the situation in which the courts are found to be willing in piercing the veil of the corporation. There is no single ground in which the veil can be pierced.
In Dennis Willcox Pty Ltd v Federal Commissioner of Taxation[11], Woodward, Jenkinson and Foster JJ have laid down few instances where the courts are found to be willing to disassociate with the legal principle that is laid down in the salmon case and raise the situations in which the veil of the company can be pierced and the acts of the comoany are regarded as the acts of its officers making them personally liable for the acts.
In Balmedie Pty Ltd v Nicola Russo[12], Ryan, Whitlam and Goldberg JJ submitted that the concept of separate legal entity is trite in nature and submitted that there is a need that the company at times must be considered as the agent of the shareholders and the shareholders must be held answerable for the company’s acts.
It was analyzed that the shareholders are the alter egos of the company and thus are in the controlling position of the company thus, at times it become extremely important that the company must be regarded as the agent of the shareholder and thus the veil must be pierced so that the acts carried out by the company must be considered as the acts carried in the name of the shareholders by applying the law of agency and is rightly established in Brewarrana v Commissioner of Highways.
However, a different approach is taken in The Electric Light and Power Supply Corporation Limited v Cormack[13] wherein Rich AJ submitted that there is not always required that the veil is pierced by applying the principle of agency.
However, after the case, the courts in Australia are more eager to pierce the blanket and is established later in Ampol Petroleum Pty Ltd v Findlay[14].
Thus, it is found that the courts are now much willing to pierce the veil of the company on account of the principle of agency and thus are ready to disregard the salmon principles thereby creating a shown on the principle by availing the principle of piercing the corporate veil.
When any officer of the company try to evade his fiduciary or legal duty by taking the shield of the veil of the company, then, such acts are regarded as the acts of fraud and in such situation the veil of the corporation is disregarded and the acts of the corporation are the works of the officers. When the controller try to deny some pre existing right of the company by using the shield of the company veil, then, it is an act of fraud and the veil must be pierced and is held in Re Edelsten ex parte Donnelly[15].[16]
Thus, the courts are found to be willing to pierce the veil when a fraud is incurred by the officers.
When the controller of the company incorporates a company in order to hide the real purpose formulates a company then it is an act of sham and façade and the courts were found to be willing to pierce the veil of the company on the said ground. In Sharrment Pty Ltd v Official Trustee in Bankruptcy[17], it was submitted that a company is considered as sham when the company is formed to portray something which it is not actually is. It is an imitation or a company in disguise and is not true in its formation[18].
However, some commentator has agreed that piercing/lifting the veil/blanket on the ground of sham or façade is not appropriate because under the said ground the very identity of the company was disregard[19]. In fraud argument a company was considered to be validly incorporated with the intent of fraud. But, in sham argument the very existence of the company was brought in question which cannot be true as once all the legal formalities relating to incorporation are comply with then a company does comes into existence. The real purpose of the company can then be analyze, that is, whether for deception, sham etc But, in sham argument the incorporation of the company itself is brought in question. Likewise, in Peate v Federal Commissioner of Taxation it was held that how a company can be a sham if it is properly incorporated by complying with the rules of incorporation.
Thus, it was not found rightful to pierce the veil of the corporation on the ground of sham and is rightly analyzed in ICT Pty Ltd v Sea Containers Ltd[20].
Thus, the courts are found to be reluctant in piercing the veil of the corporation on the ground of sham and façade.
When a parent company is shielding several subsidiary company, then, at times there requires a need that the veil which makes a distinction amid the parent company that from the subsidiary company must be pierced so that the controlled/parent company should be held answerable for the acts that are taken by its subsidiary companies and is held in Taylor v Santos Ltd[21].
The main reason for piercing the veil is that group enterprise which is taking the advantage of limited liability by establishing a corporation must also be accountable for the corporate responsibilities that exist towards its subsidiary companies and is analyses in James Hardie & Coy Pty Limited v Putt[22]. In Bluecorp Pty Ltd (in liq) v ANZ Executors and Trustee Co Ltd[23] it was held that when there is ordinary venture or ownership that exist amid the parent company and its subsidiaries then it is advisable that the veil amid the two must be pierced in order to construe them as one and the acts of the subsidiary falls on the shoulders of the parent company[24].
However, the courts were found to be reluctant in piercing the veil on the ground of group enterprise in Walker v Wimborne[25] and Industrial Equity Ltd v Blackburn[26]. It was submitted that when a corporation is formed it is a distinct entity in law and in any group every company has its own existence. Thus, one company cannot be compelled to pay off the debts of another company.
It is found that no piercing is done by the courts on the ground of control alone and something extra is required to pierce/lift the blanket amid the group and its subsidiary, however, in Qintex Australia Finance Ltd v Schroders Australia Ltd[27] it was regarded as an important concept which must be used wisely.
In RMS Glazing Pty Ltd v The Proprietors of Strata Plan No 14442[28], it was held that in order to bring justice and fairness at times it become extremely important to lift/pierce the veil. In order to bring fair outcome sin any company the shareholder himself can seek the piercing of the veil of the company and is held in Harrison v Repatriation Commission[29].
Conclusion
It is submitted that the leading case of salmon has evolved a great principle of separate legal entity. However, this separate legal principle is not static in nature and there are numerous grounds which are found in Australia where the courts are found to be willing to lift/pierce the veil/blanket of the company.
However comparing the statically data, it is found that from 104 cases that comes before the courts and the tribunals, around 40 cases were selected in which the veil was pierced (38.46%) and in 64 of the cases the veil was not pierced. However, with passage of time the trend began to change and in the early nineties the courts are eager to pierce the veil in about 38.98%. Further the courts are found to be hearing cases related to peering of veil in 57% of the cases. It was also found that when the companies are prosperity in nature the courts are willing to lift/pierce the veil in 42% cases.
It is thus concluded that the statements is considered to be correct in some respect.
It can be submitted that ‘Salomon is in the shadow. It is still alive but no longer occupies the centre of the corporation stage’ implying that there are situation wherein the distinct personality is pierced. However, it is correct to state that the veil of incorporation is as opaque and impassable as an iron curtain because there are various occasions where the courts are not willing to pierce the veil of the corporation in any manner whatsoever.
Reference List
Books/article/Journals
Hargovan, A, ‘Piercing the Corporate Veil on Sham Transactions and Companies’ (2006) 24 Company and Securities Law Journal 436;
Harris J and Hargovan A, ‘Corporate groups: the intersection between corporate and tax law Commissioner of Taxation v BHP Billiton Finance Ltd’ (2010) 32 Sydney Law Review 723.
H A J Ford, R P Austin and I M Ramsay, Ford’s Principles of Corporations Law, 9th ed, 1999, [4.350],
J Payne, ‘Lifting the Corporate Veil: A Reassessment of the Fraud Exception’ (1997) 56 Cambridge Law Journal 284, 290.
Ramsay, I and Noakes, D, Piercing the Corporate Veil in Australia, (2001) 19 Company and Securities Law Journal 250-271.
S Ottolenghi, ‘From Peeping Behind the Veil to Ignoring it Completely’ (1990) 53 The Modern Law Review’ 338, 352;
Schmittoff, C. M., ‘Salomon in the shadow’ [1976] Journal of Business Law 305
Case laws
AGC (Investments) Limited v Commissioner of Taxation (Cth) (1991);
Ampol Petroleum Pty Ltd v Findlay (1986).
Brewarrana v Commissioner of Highways (1973) 4 SASR 476, at 480,
Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549,
Bluecorp Pty Ltd (in liq) v ANZ Executors and Trustee Co Ltd (1995) 18 ACSR 566.
Commissioner of Land Tax v Theosophical Foundation Pty Ltd (1966) 67 SR (NSW) 70.
Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267.
Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners (1923) AC 723.
Harrison v Repatriation Commission (1996).
ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640 .
Industrial Equity Ltd v Blackburn (1977) 137 CLR 567.
James Hardie & Coy Pty Limited v Putt (1998) 43 NSWLR 554
Qintex Australia Finance Ltd v Schroders Australia Ltd (1990) 3 ACSR 267;
RMS Glazing Pty Ltd v The Proprietors of Strata Plan No 14442 (1993)
Peate v Federal Commissioner of Taxation (1964) 111 CLR 443;
Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254.
Re Edelsten ex parte Donnelly (1992).
Salomon v Salomon & Co [1897] AC 22;
Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530.
Taylor v Santos Ltd (1998)
The Electric Light and Power Supply Corporation Limited v Cormack (1911) 11 NSWSR 350 .
Walker v Wimborne (1975-76) 137 CLR 1.
[1] Salomon v Salomon (1932).
[2] Peate v Federal Commissioner of Taxation (1964).
[3] Ian M Ramsay and David B Noakes, Piercing the Corporate Veil in Australia, (2001) 19 Company and Securities Law Journal 250-271.
[4] Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners (1923) AC 723.
[5] Brewarrana v Commissioner of Highways (1973) 4 SASR 476, at 480.
[6] Commissioner of Land Tax v Theosophical Foundation Pty Ltd (1966) 67 SR (NSW) 70.
[7] Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254.
[8] S Ottolenghi, ‘From Peeping Behind the Veil to Ignoring it Completely’ (1990) 53 The Modern Law Review’ 338, 352.
[9] AGC (Investments) Limited v Commissioner of Taxation (Cth) (1991).
[10] S Ottolenghi, ‘From Peeping Behind the Veil to Ignoring it Completely’ (1990) 53 The Modern Law Review’ 338, 352.
[11] Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267.
[12] Balmedie Pty Ltd v Nicola Russo (1998).
[13] The Electric Light and Power Supply Corporation Limited v Cormack (1911) 11 NSWSR 350.
[14] Ampol Petroleum Pty Ltd v Findlay (1986).
[15] Re Edelsten ex parte Donnelly (1992).
[16] J Payne, ‘Lifting the Corporate Veil: A Reassessment of the Fraud Exception’ (1997) 56 Cambridge Law Journal 284, 290.
[17] Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530.
[18] Anil Hargovan, ‘Piercing the Corporate Veil on Sham Transactions and Companies’ (2006) 24 Company and Securities Law Journal 436.
[19] H A J Ford, R P Austin and I M Ramsay, Ford’s Principles of Corporations Law, 9th ed, 1999, [4.350],
[20] ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640 .
[21] Taylor v Santos Ltd (1998).
[22] James Hardie & Coy Pty Limited v Putt (1998) 43 NSWLR 554.
[23] Bluecorp Pty Ltd (in liq) v ANZ Executors and Trustee Co Ltd (1995) 18 ACSR 566.
[24] Jason Harris and Anil Hargovan, ‘Corporate groups: the intersection between corporate and tax law Commissioner of Taxation v BHP Billiton Finance Ltd’ (2010) 32 Sydney Law Review 723.
[25] Walker v Wimborne (1975-76) 137 CLR 1.
[26] Industrial Equity Ltd v Blackburn (1977) 137 CLR 567.
[27] Qintex Australia Finance Ltd v Schroders Australia Ltd (1990) 3 ACSR 267;
[28] RMS Glazing Pty Ltd v The Proprietors of Strata Plan No 14442 (1993).
[29] Harrison v Repatriation Commission (1996).
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