Idoport Pty Ltd v National Australia Bank Ltd - Case Study Example

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 STUDENT NAME PROFESSOR’S NAME COURSE TITLE DATE The expression ‘lifting the corporate veil’ in corporate law refers to the courts overlooking the doctrine of separate legal entity of that of the company (Bainbridge, 2001). The separate legal entity doctrine having been established in the case of Salomon v Salomon & Co Ltd [1897] AC 22, this law consequently applies in Australia. According to the Corporations Act (2001) (Cth) section 124 it affirms that a company comes into existence when it is registered by the Australian Securities and Investments Commission and by virtue of registration a company becomes a separate legal entity having the capacity and powers equal to that of an individual. In understanding the nature of the doctrine of piercing the corporate veil, one needs to know the objectives of piercing the veil. Lifting of the veil is a way in which creditors may be compensated through contractual damages, preventing the shareholders from unjust enrichment, deters future improper conduct and that it is way in which corporations may be regulated by the state in regards to how they conduct themselves (Barber, 2001). Idoport Pty Ltd v National Australia Bank Ltd [2004] NSWSC 695 is amongst the most recent decisions in Australia to hold that there is no common, unifying principle that informs the decision of the courts to lift the corporate veil (Harris and Hargovan, 2010). This position demonstrates that there is no clarity in interpreting and deciding whether or not to lift the veil of incorporation. However there is an acceptance by the courts that the separate entity doctrine may and can be abused by those who engage in business and hence the corporations may hide behind the corporate veil (Bainbridge, 2002). The case demonstrates the fact that where there is breach of contract by a corporate entity, the corporations director are not liable for inducing the breach a principle that was also laid out in O’Brien v Dawson (1942) 66 CLR 18. Corporations have the tendency of creating other business for commercial benefit and this serves the purpose of reducing commercial risks and liability, attracting capital and for business expansion. However, there is a tendency that group entities may be abused due to control by the parent company as was the case in Idoport Pty Ltd. In the decision of Einstein J in Idoport Pty Ltd v National Bank of Australia Bank Ltd stated that it is important to establish whether there was a motive in creating separate legal entities before establishing that a corporation is a sham or a façade. This demystifies the traditional view that if there exists an agency relationship between the members of a two corporate entities, then the courts can lift the veil of incorporation as established in the case of Smith, Stone and Knight Ltd v Birmingham Corporation (1939) 4 All ER 116. In the case of Briggs v James Hardie & Co Pty Ltd (1989) 7 ACLC 841 decided before Idoport Pty Ltd v National Australia Bank Ltd Rogers AJA also stated that there is no common underlying principle that informs the decision of the courts to pierce the corporate veil. Rogers AJA argued that the decision in Salomon v Salomon & Co Ltd was decided in a period where the laissez faire principle was considered supreme a different economic circumstance and hence it was demanded by the courts to maintain the rigidity of the doctrine of separate legal personality. In this case therefore there is a proposition that the doctrine that a company is a separate legal entity should only be applied as a general rule and that the courts should only depart from the general rule if the separate legal entity principle is used to propagate fraud, further criminal activities, defeat public convenience such as justifying wrongs’ (Briggs v James Hardie & Co Pty Ltd). There is argument that in the decision of Briggs v James Hardie & Co Pty Ltd the court applied a wrong principle because when it comes to subsidiaries the parent company has the authority to control the actions of the subsidiary and that the courts should not pierce the veil of incorporation because one corporation controls the dominion over the subsidiary. This therefore means that the courts have to look at each case according to the merits and decide whether the actions of the corporation warrant the lifting of the veil of incorporation. This is in agreement with the decision in the case of DHN Food Distributors Ltd v London Borough of Tower Hamlets [1976] 3 All ER 462 where Goff LJ suggested that there are different considerations that are looked at in deciding whether to pierce the veil of incorporation in actions on tort. This position that there is no common unifying principle in piercing the corporate veil was further applied in the case of Century Medical v THLD Ltd (1999) NSWSC 731 with an addition to the statement that the courts have to really look and scrutinise the evidence before it in deciding to pierce the veil of incorporation. The problem in the law lies in answering the question when do we lift the veil of incorporation? There is a general belief that in most cases the courts are reluctant in deciding on whether to lift the veil of incorporation (Halsbury’s Laws of Australia) and that the courts have a tendency to reinvent itself each time parties argue about lifting the veil. According to the decision in Dennis Wilcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267 Jenkisnon J stated that the court should only do so where there is proof in fact or the law that the corporation is a mere sham or a façade, or that the corporation is used to evade legal or fiduciary obligation or in the perpetration of fraud (Dennis Pty Ltd v Federal Commissioner of Taxation). In analysing legal precedents when it comes to lifting the veil of incorporations the courts have done so using this basis the company is a fraud or a sham (Donnelly v Edelsten (1994) 13 ACSR 169), agency (Gamac Grain Co Inc v HMF Faure & Faure & Faircough Ltd 1968 AC 1130), group enterprises (Briggs v James Hardie & Co Ltd & Ors) and where the subsidiary commits a tort (Spreag v Paeson Pty Ltd (1990) 94 ALR 674). In analysing the Corporations Act (2001) (Cth) the law is clear on instance where the courts are allowed to lift the veil of incorporation that is where the holding company is liable for the subsidiary’s debts (s. 588V), where the directors are liable for unpaid tax (s. 588FE), the directors are guilty of insolvent trading (s.588G), and personal liability of directors of trustee corporations (s.197) however if liabilities are incurred outside Australia if it is a foreign company then section 197 will not apply as was held in the case of Hanel and Another v O’Neil (2004) 22 ACLC 274. In both case law and statutory provisions there is no one single way in which the courts can all pierce the veil of incorporation and this means that the courts have discretion on whether or not to pierce the veil (Ramsey, 2001). In determining whether or not there can be a unifying set of principle in piercing the veil of incorporation it is worthy to compare the common law position and the civil law jurisdiction position. In civil law jurisdiction the juridical basis of creating exceptions to pierce the corporate veil, then the concept to be applied is whether there is an abuse of rights this is in reference to the decision of the International Court of Justice (ICJ) in Re Barcelona Traction, Light and Power Co Ltd [1970] ICJ 3 where the domestic law permits piercing of the veil in instances of evasion of obligations, fraud, misuse or malfeasance. In common law both in the English and Australian jurisdiction there is no general doctrine such as the ‘abuse of rights’ but there is a variety of rights that may be used to pierce the veil. It is left to the courts and the law to determine the specific incidents that may necessitate the lifting of the veil of incorporation. It is noteworthy to assert that in using the different principles in lifting the veil of incorporation most courts in the common law system tend to consider whether corporations are abusing the separate legal entity doctrine in performing their duties. However according to the recent decision in the English Courts in Prest v Petrodel Resources Ltd [2013] UKSC 34 Lord Neuberger noted that in Commonwealth jurisdictions there was little or no consensus in regards to principles in lifting the veil of incorporation and therefore courts should only pierce the veil as a last resort. The decision in Prest v Petrodel Resources Ltd implies that before parties seek to lift the corporate veil, then they ought to have exhausted other remedies in equity, contract and in tort before seeking to lift the veil of incorporation. In conclusion, there are no clear criteria or a set of principles that are used to determine whether or not the courts should lift the veil of incorporation as held in the case of Idoport Pty Ltd v National Australian Bank Ltd. The courts have to exercise their discretion in determining whether or not they should lift the veil of incorporation and this means that lifting the veil acts as a remedy to those aggrieved by the actions of the corporation. In light of the recent decision in the UK Prest v Petrodel Resources Ltd lifting the veil of incorporation should be a measure of last resort and this means that it is a remedy available to aggrieved parties just like equitable and common law remedies. The courts however determine whether or not to lift the veil of incorporation when in examining facts and the law, there is proof that the corporation is abusing their powers and hiding behind the ‘curtain’ that is the veil of incorporation. Instances where the veil of incorporation have been lifted despite there being no unifying principle have been where there is proof of fraud, the corporate entity is a sham or a façade, evasion of legal obligations, group entities and according to statutory provisions under the Corporations Act (2001) (Cth). Thus the decision in lifting the veil of incorporation rests on the discretion of the courts and the unique circumstances of each case. References Bainbridge, S (2001), ‘Abolishing Veil Piercing’ Journal of Corporation Law 479 at 480 Barber, S (2001), Textbook of Company Law, 3rd edn, Old Bailey Press, p.12 Corporations Act 2001 (Cth) Dennis Wilcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267 Halsbury’s Laws of Australia [120-310] Lifting the Corporate Veil Harris, J & Hargovan, A (2010), ‘Corporate Groups: the intersection between corporate and tax law Commissioner of Taxation v BHP Billiton Finance Ltd’ Sydney Law Review vol.32, 723-738 Idoport Pty Ltd v National Australia Bank Ltd [2004] NSWSC 695 Prest v Petrodel Resources Ltd [2013] UKSC 34 Lord Ramsey, I (2001), ‘Piercing the Corporate Veil in Australia’ C&SLJ vol.19, pp. 250 Re Barcelona Traction, Light and Power Co Ltd [1970] ICJ 3 Salomon v Salomon & Co Ltd [1897] AC 22 Read More