Company & Association Law Assessment - Essay Example

Company & Association Law – Assessment Item Table of Contents Part A 3 Part B 8 Part C 11 Introduction 11 Critical Evaluation 12 Discussion 15 Conclusion 17 References 19 Part A (1) Explain who were the Respective Parties to the Action. Why were there so Many Parties? The respective parties to the action included the Public Trustee of Queensland as Executor of the Estate of Joseph Edwin James (First Applicant), Pitgate Pty Ltd (‘Pitgate’) (Second Applicant), Ian Derek Meyer (‘Mr Meyer’) (First Respondent), Rosemary Lynn Meyer (‘Mrs Meyer’) (Second Respondent) and Meyer Gold Mining Pty Ltd (‘MGM’) (Third Respondent). Initially, there was a partnership amid Joseph Edwin James and MGM. Later, the partnerships structure changed and a new partnership came into force between Pitgate Pty Ltd and Meyer Gold Mining Pty. Mr. James acquired 49% in a same mining lease that was traded in the partnership between Pitgate and MGM. The Public Trustee represented the estate of Mr. James in the partnership and as a director of Pitgate. Similarly, the interest of Mr. Meyer in the partnership was represented by MGM. Thus, the involvement of these parties either directly or impliedly in the partnership constituted towards legal proceedings of so many parties. (2) What were the Legal Issues to be determined with regards to MDLA 415? The major legal issue to be determined with regards to MDLA 415 was firmly related to rights and benefits of Mr. Meyer in relation to the partnership. In this regard, the legal issue to be determined was whether Mr. Meyer is qualified to the benefit of an application for a Mineral Development Licence and whether the rights and interests possessed by him with respect to the application of MDLA 415 were for the benefit of the partnership or were solely for his own benefit. (3) What did the first Respondent argue with respect to the MDLA 295 and MLDA 415? With respect to MDLA 295 and MLDA 415, the first respondent namely Ian Derek Meyer argued that he had not treated Mr. James’s interest in MDLA 295 as part of the Chillagoe Perlite business. Ian Derek Meyer further clarifies that inclusion of MDLA 295 as an asset to be held by the applicants in accordance with the Court order was intended to assist in the finalisation of the administration of Mr James’s estate. As far as MDLA 415 is concerned, he argued that MDLA 415 was made to protect his personal interest, and that of his company “as a potential future operator of the Chillagoe Perlite venture”. (4) What did the Applicants Allege with respect to the Requirement for ‘Partners to Account to the Firm’ in respect of MDLA 415? With respect to the requirements for ‘partners to account to the firm’ in respect of MDLA 415, the Applicants alleged that Mr. Meyer did not classify assets or property, which the respondent could acknowledge as theirs. Instead, a list entailing all items that appeared to be recognized as partnership property was provided. Besides, the Applicants claimed that the accounts were a strong suggestion, which signified that no effort was made to bring the equipment, which was acknowledge by Mr. Meyer’s interests into the partnership. (5) What Did the Court decide With Respect To the Applicants’ Arguments on Partners having To Account to the Firm and MDLA 415? In Your Answer, Explain How the Court Applied the Relevant Law, In The Light of Relevant Facts and Law Cited in the Judgment. The court with respect to the Applicants’ arguments on partners having to account to the firm and MDLA 415 decided that Mr. Meyer does not hold his rights and interests in relation to MDLA 415. Furthermore, it was stated that he has fiduciary obligations to the partnership and holds such rights and interests, as he might have for their benefit. The court applied the case law Chan v Zacharia, which indicated that relationships amid the partners is a fiduciary one and even after the dissolution of the partnership, there lays a fiduciary obligation for partners to cooperate in and act in accordance with the ratified process for the realisation, application as well as distribution of partnership property. Grounded on this case law, the court found that Mr. Meyer was not personally a member of the partnership. Accordingly, based on this fact the court argued that the propositions expressed by Deane J in the case Chan v Zacharia do not apply to him. (6) With Regards To MDLA 415, What Declaration Did the Court Make and Why? In Your Answer, Explain The Law The Court Relied Upon In Reaching Its Decision To Make The Order. The court with regard to MDLA 415 declared that rights and interests, which Mr. Meyer has in MDLA 415, are matters that are subjected to constructive trust in favour of the partnership based on the authorities to which he has been referred. The court relied upon the case law Tasmanian Seafoods Pty Ltd v Peters where Margaret Wilson J granted specific performance in reference to the sale of a beneficial interest permitting the commercial collection of trochus. This order was made as she held that it could be the subject of a trust. Next, the court relied upon the case law Swift v Dairywise Farms in reaching its decision to make the order where akin to above case, it also postulated the subject area pertaining to trust. Accordingly, a constructive trust is identified to arise in settings where the law recognises that it would be unjust for a person to retain assets for his or her personal benefit. In this regard, it has been ascertained that trustees are required to act in a good faith and there exists fiduciary relationships between the trustee and other interested party. On this context, it is observed that those trustees performing their action to gain personal advantage are recognised to breach this relationship. (7) On What Grounds did the Applicants claim that the Plant and Machinery Was Partnership Property? The Applicants claim that the plant and machinery was partnership property referring to sec 23(1) of the Partnership Act 1891 (Qld). The act articulates that all property originally brought into the partnership or listed on account of the partnership or for the purposes and on account of the partnership business are to be acquired and applied by the partners predominately for the purposes of the partnership and in accordance with the partnership agreement. Accordingly, the provision of this Act further entails transactions to be categorised under the partnership stock that has been carried out after the liquidation of a company as a result of demise of any partner. Correspondingly, the claims made by the Applicants were firmly grounded on the above extended provisions of the Partnership Act 1891 (Qld). (8) What Did The Court Decide With Respect To The Plant And Equipment? Explain How The Court Reached Its Decision, Including Relevant Law And Evidence. The court with respect to the plant and equipment decided that the financial statements of the partnership, which were produced during the tenure of late Mr. James included no record pertaining to the disputed plant and equipment as partnership property. Nor there was any entry recorded in the capital accounts of the partnership supporting MGM in recognition of the contribution of plant and equipment. Correspondingly, it was decided that the disputed plant and equipment is not partnership property and Mr. Meyer have the right to retain them. The court applied the statement mentioned in the Mason J in O’Brien v Komesaroff, which indicated that not all the property of each partner used for the purposes of partnership business can be said to be brought into the partnership. . Furthermore, the court claimed that there tends to exist no further facts or evidences to be obtained from Mr James as a result of which the property can be categorised as disputed property. In order to draw comprehensive understanding, the court relied on the case of McLelland CJ in Eyota Pty Ltd v Hanave Pty Ltd. Part B (1) What Section Of The Corporations Act 2001 Deals With Compliance Of Financial Reports With Accounting Standards? Do All Company Financial Reports Have To Comply With Accounting Standards? The section 296 of the Corporations Act 2001 deals with compliance of financial reports with accounting standards1. Financial report of all company for a financial year must comply with the accounting standards however, a small proprietary company’s report is exempted from complying with particular accounting standards if: a. The report is prepared based on a shareholder direction (section 293) and b. The direction stipulates that the report does not have to conform to those accounting standards2. (2) Is A Liquidator An ‘Officer’ For The Purposes Of The Corporations Act 2001? What Is The Relevant Section? Yes, a liquidator is an ‘officer’ for the purposes of the Corporations Act 2001. The section 9 of the Corporations Act 2001 is identified to be relevant section for determining the position of a liquidator3. (3) What Section of The Corporations Act 2001 Governs The Calling of General Meetings By Members? What Does This Section Require? The section 249F of the corporations Act 2001 governs the calling of general meetings by members. Under section 249F, members holding at least 5% of the votes have an independent power to call and hold a general meeting. At the same time, a meeting arranged by members under section 249F can be postponed by the directors of a company so long as the power of postponement granted by a company is constitutional and at the same time, the power is applied in the interests of a company as a whole and not for the benefit of the directors4. (4) What Section of The Corporations Act 2001 Deals With The Deadline For Reporting To Members? The section 315 of the corporations Act deals with the deadline for reporting to members5. (5) A Member Requests A Copy Of The Constitution. Does The Company Have To Comply? What Section Of The Corporations Act 2001 Applies? Yes, a company must provide an up-to-date copy of the constitution to a member who requests it not later than 7 days. The section 139 of the Corporations Act 2001 applies in this context6. (6) How Does A Company Change The Address Of Its Principal Place Of Business? The section 146 of the Corporations Act 2001 deals with the change of address of principal place of business. Under this section, a company must lodge with ASIC notice of a change of the address of its principal place of business within 28 days after the date on which the change occurs. However, it is important that the notice of change be in a prescribed form7. (7) Can Company Financial Records be kept in Electronic Form? What Section Applies? Yes, company financial records can be kept in electronic form provided they must be convertible into hard copy. At the same time, hard copy must be presented within a reasonable time to a person who is authorized to inspect the records. The section 288 of the Corporations Act 2001 is applied in this context8. (8) Which Section Allows ASIC to Make Specific Exemption Orders? The section 340 of the Corporations Act 2001 No. 50, 2001 allows ASIC to make specific exemption orders9. Part C Introduction One of the basic features entailed by company law is that it considers a company as a distinct legal entity separate from shareholders. According to a company law, a company as a person enjoys certain rights as well as it also acquire obligations that are particularly different from members in the company. Moreover, when a company is created as a legal entity, there often tends to exists certain fundamental attributes accompanied to it. Since, company is treated as separate legal entity different from shareholders; shareholders are exempted from company debts on condition that they held the paid subscribed shares. The doctrine of distinct legal entity and the feature of limited liability promote entrepreneurship to the extent it removes the risks of business failure away from creditors, entrepreneurs and other risks bearer. However, in certain circumstances principle of separate legal personality as well as limited liability is disregarded and the company in recognised as the association of persons rather than the collection of capital. This disregard may primarily arise during situation where the legality personality of a company is used for improper practice that serve as detrimental to third parties. In such circumstances, managers and shareholders are made responsible for debts and liabilities of a company arising thereof from the misconduct of a company. This process is largely termed as ““piercing the corporate veil” or “lifting the veil”10. Against this backdrop, the purpose of this essay is to critically evaluate and discuss the statement “There is no common, unifying principle, which underlies the occasional decision to pierce the corporate veil’: Idoport Pty Ltd v National Australia Bank Ltd [2004] NSWSC 695 supported with relevant case law and statute.” Critical Evaluation The House of Lords in case of Salomon v Salomon asserted that the legal tenet, which determines the formation of a company as a new legal enterprise that is different from its shareholders. A company is defined as per the High Court decisions in the Peate v Federal Commissioner of Taxation as: “[A] new legal entity, a person in the eye of the law. Perhaps it were better in some cases to say a legal persona, for the Latin word in one of its senses means a mask: Eriptur persona, manet res11.” More than a century, the distinct legal entity tenet has been continuously supervise from Anglo-Australian company law. The maxim of “piercing the corporate veil” initially came into light during the year 1973. The doctrine of “lifting the corporate veil” and “piercing the corporate veil” are often argued to be used interchangeably over the years. However, clear distinction was made by the English courts between the two maxims. Accordingly, in the case Atlas Maritime Co SA v Avalon Maritime Ltd (No 1), the court made a clear distinction between the two concepts where it was affirmed that: “To pierce the corporate veil is an expression that I would reserve for treating the rights and liabilities or activities of a company as the rights or liabilities or activities of its shareholders. To lift the corporate veil or look behind it, on the other hand, should mean to have regard to the shareholding in a company for some legal purpose12.” Nevertheless, the differences in the meaning of these two tenets is not being highly recognised by the Courts in Australia. The courts are often identified to use doctrine of “lifting corporate veil” when there is effect of “piercing the corporate veil”. Correspondingly, it is argued that doctrine of piercing the corporate veil lacks uniformity and clarity. In this regard, it has been further argued that it is quite challenging in Australia to distinguish doctrines related to company, which validate the circumstances where court can explicitly practice lifting of the corporate veil. In the case Commissioner of Land Tax v Theosophical Foundation Pty Ltd, the court labelled the term “piercing the corporate veil” as an “esoteric”. Likewise, few experts such as Professor Farrar have claimed it to be “incoherent and unprincipled”13. Accordingly, the tenet of “piercing the corporate veil” has often been subjected to contention and controversy. It is argued that courts are likely to consider a fact-based approach in circumstances that entails the issue of “piercing the corporate veil”. At the same time, it has been widely claimed that there tends to exists no discernible basis for courts to define the appropriate use of the tenet of “piercing the corporate veil”. Broadly speaking, difficulties in determining a commonly applicable test is firmly related to the generation of complication pertaining to piercing cases. In this context, the rigid use of the piercing tenet is criticised on the ground of unreality14. Courts in Australia have identified several grounds that may contribute towards the application of the doctrine of “piercing of the corporate veil”. The few major factors that are recognised by the courts in Australia include agency, group enterprises, fraud, sham or façade and unfairness/justice. With respect to “agency”, a company is considered as shareholder’s agent, which act on behalf of the shareholders. Accordingly, the action performed by a company is deemed to be performed by the shareholders. In this regard, agency principle requires “piercing of the corporate veil” to reveal the shareholders where the conduct of a company is deemed to be an act of negligence. Similarly, the contention of “fraud” is often related with the improper use of the corporate assets or authority held by the controller of a company. In general, the breach of fiduciary obligation is often categorised as an act of fraud. In such circumstances, the tenet of “piercing of the corporate veil” is often applied15. The maxim of “Sham or façade” is another factor that is applied to pierce the corporate veil on the basis that the formation of the company was merely to conceal the actual objectives of the company’s controller. However, the Supreme Court of the New South Wales in ICT Pty Ltd v Sea Containers Ltd propounded that the “Sham or façade” does not provide a clear explanation of the “piercing of the corporate veil”. “Group enterprises” demanding the application of piercing of the corporate veil” is said to be occurred when a company’s identity is conceal and is indistinguishable. In such situations, a parent company is made liable for the misconduct or any other actions on behalf of the concealed company. Nevertheless, this type of group performance is argued to be inappropriate and has been subject to controversy. In this regard, it has been evident that in Walker v Wimborne, the High Court has revealed its firm disinclination to apply the tenet of “piercing of the corporate veil”16. In addition, it has been ascertained that in certain circumstances parties may strive to pierce corporate veil as a means to seek fair outcome. In this regard, the court in RMS Glazing Pty Ltd v The Proprietors of Strata Plan No 14442 stated that where there is the interest of justice, the tenet of corporate veil could not be disregarded17. Thus, from the foregoing evaluation, it can be firmly stated that the application of the tenet of “piercing of the corporate veil” is surrounded with numerous criticism and controversy. At the same time, there is no common principle that governs the appropriate application of the tenet of “piercing of the corporate veil”. Hence, there is a greater requirement for the law making bodies to identify unifying principle that explicitly governs fair and appropriate use of the tenet of “piercing of the corporate veil”. Discussion Based on the above evaluation, it has been apparently ascertained that decision to pierce the corporate veil is not crystal clear and lacks in unifying principle. Besides, it has been identified that requirements, which advocates for “piercing of the corporate veil” is extremely stringent. In addition, many scholars have also claimed that the tenet of the veil piercing may have adverse impact on the performance and the growth of an economy and thus, it should be abolished. For further discussion on this topic, it would be vital to shed light on the issue pertaining to limited liability and the perpetuation of the “piercing of the corporate veil” as a distinct legal entity along with shareholders obligation. Limited liability is recognised as a default rule of standard under the corporate law. This default rule is argued to promote entrepreneurship by reducing the degree of risks that would otherwise not been apparent in the case of unlimited liability. In this regard, the critics of limited liability have claimed that this doctrine is superficial and allows companies to shift the cost of their precarious actions on innocent parties18. Notably, the proponents who have firmly agreed upon this contention are seen to adopt “enterprise liability” as a means to substitute the “piercing of the corporate veil”. Apparently, it has been identified that “enterprise liability” primarily espouse control element, which is conventionally the part of veil-piercing evaluation. At the same time, “enterprise liability” is ascertained to eliminate certain requirements held in the traditional veil-piercing evaluation such as it firmly erodes the aspect that corporate frauds can severely harm third parties. In this concern, the detractors of the enterprise liability have claimed that replacing limited liability with enterprise liability would create a strict liability, which may in turn severely increase the accountability of a parent company against the action of a subsidiary. Moreover, it is also ascertained that significant contention has been made towards complete abolition of limited liability principle or to the extent related to tort creditors19. The rationale behind such propagation is strongly associated with the fact that practice of limited liability tends to permit shareholders to shift the risk factor of their deeds, which tends to raise burden to innocent creditors. On the other hand, many scholars have argued for the retention of the veil piercing standards at its entirety. It is claimed that tenet of limited liability serves as a major driver for economic growth. In this regard, the most recent argument placed with respect to “piercing of the corporate veil” claims that the tenet of veil piercing should be replaced with direct liability of shareholders who are firmly engaged in the perpetration of fraud or other malpractice. Notably, such practice is ascertained to lead towards a situation where shareholders can ensure that they are not exposed to risk of increased liability unless they are personally involved in wrongdoing. Nevertheless, in consistent to current trend, it is apparent that the tenet of “piercing of the corporate veil” is unprincipled, which has contributed towards the evolution of haphazard situation for lawmakers as well as corporations20. Conclusion The central contention of the essay has been to critically evaluate and discuss the statement, “There is no common, unifying principle, which underlies the occasional decision to pierce the corporate veil’: Idoport Pty Ltd v National Australia Bank Ltd [2004] NSWSC 695.” The critical evaluation of the statement offered valuable insights and knowledge regarding the tenet of “piercing of the corporate veil”. Accordingly, the tenet of “piercing of the corporate veil” has been subjected to frequent contention and controversy particularly with regard to the extent of its uniformity and clarity. According to company law, a company is a distinct legal personality separate from shareholders. However, the principle of distinct legal personality is argued to revoke in certain circumstances where the controller of a company is identified to engage in wrongdoing. In such circumstances, the shareholders of a company as well as the mangers are held liable for wrongdoing, which is often termed as “piercing the corporate veil”. Notably, it is claimed that a fact-based approach is usually considered by courts in situations that entails the issue of “piercing the corporate veil”. Additionally, no discernible source substantiates that the courts are required to define the use of the tenet of “piercing the corporate veil” clearly. Insofar as the rigid use of the piercing tenet is criticised on the ground of unreality. Due to the absence of unifying principle underlying the occasional decision to pierce the corporate veil, argument for the abolition of the doctrine is widely claimed. Alternately, few scholars have advocated the use of “enterprise liability” while some have insisted to continue with the traditional standards of “piercing the corporate veil”. Nevertheless, it cannot be denied that criticism surrounding the tenet of “piercing the corporate veil” is not a negated one. It is thus essential to bring some reform in the purview of “piercing the corporate veil” in order to clearly define the scope of its application by the courts. References Anderson, H., 2009. Piercing the Veil on Corporate Groups in Australia: The Case for Reform. Melbourne University Law Review, Vol. 33, pp. 333-367. Australasian Legal Information Institute, 2014. Commonwealth Consolidated Acts. Corporations Act 2001 - Sect 288. [Online] Available at: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s288.html [Accessed August 13, 2014]. Australasian Legal Information Institute, 2014. Commonwealth Consolidated Acts. Corporations Act 2001 - Sect 146. . [Online] Available at: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s146.html [Accessed August 13, 2014]. Australasian Legal Information Institute, 2014. Commonwealth Consolidated Acts. Corporations Act 2001 - Sect 296. [Online] Available at: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s296.html [Accessed August 13, 2014]. Australasian Legal Information Institute, 2014. Commonwealth Consolidated Acts. Corporations Act 2001 - Sect 315. [Online] Available at: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s315.html [Accessed August 13, 2014]. Australasian Legal Information Institute, 2014. Commonwealth Consolidated Acts. Corporations Act 2001 - Sect 9. [Online] Available at: http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html [Accessed August 13, 2014]. Australasian Legal Information Institute, 2014. Corporations Act 2001 No. 50, 2001 - Sect 340. ASICs Power to Make Specific Exemption Orders. [Online] Available at: http://www.austlii.edu.au/au/legis/cth/num_act/ca2001172/s340.html [Accessed August 13, 2014]. Bainbridge, S. M., 2005. Abolishing LLC Veil Piercing. Bainbridge.Doc, 77-106. Farzana, S., 2009. The Concept of Piercing the Corporate Veil in Corporate Law: A Critical Analysis. The Chittagong University Journal of Law, pp. 129-151. Harris, J. & Hargovan, A., 2010. Corporate Groups: the Intersection between Corporate and Tax Law. Sydney Law Review, Vol. 32, pp. 723-738. Hameed, I., No Date. The Doctrine of Limited Liability and the Piercing of the Corporate Veil in the light of fraud: A critical multi-jurisdictional study. Limited Liability and the Corporation, pp. 1-36. Harris, J., 2005. 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