Evisceration of Freedom on Contract in Corporate Context - Assignment Example

CASE REVIEW Name: Course: Instructor: Institution: Location: Case review Part A Question 1 The parties to this suit include the estate of the deceased James Edwin who’s interest being represented by the Public Trust of Queensland (plaintiff) who in this case is the appointed managers and receivers of a partnership where the deceased had proprietary rights as a partner .The rational for the appointment was to the run the business while holding it in trust for the beneficiaries and Pitgate Pty ltd (ACN 080 300 278 ) the second respondent who acquired a proprietary interest on the mine in October 1997 when the constitution was amended conferring rights owned by James Edwin as a partner to Pitgate, leaving James in possession of only a 49% interest accruing from mining lease (ML 20152) verses Ian Derek Meyer the first respondent who contracted with James, who holds a 51% interest on the mining lease and at the same time possessing proprietary interest in the partnership. The second respondent Rosemary Lynn Meyer was the wife of Meyer who came to help in the running of the business when James passed away and lastly the third respondent a company Mayer Gold Mining Pty Ltd(ACN 054 255 846),that is owned by the first respondent. It is important to note that the parties involved in the suit had different interests that where affected and as such need the court’s interpretation to that effect. Question 2 There are two basic legal issues that were facts in contention in this case and as such needed to be determined by court, they include first whether a person holding 51% interest in (MDLA415) lease granting a partnership company has permission to conduct business holds and enjoys the right of ownership absolutely or for the interest of the partnership. The second issue was whether the profits accruing from the (MDLA415) lease can be considered profits for the benefit of the partner as opposed to the benefit of the partnership. Question 3 Mr Meyer the first respondent in this case in his sworn written statement of defence alleged to have never considered the interests arising from a mineral development licence (MDLA) where James owned 49% interest to be forming part of the partnership business in order to warrant an interest in the profits realised from the chillagoe perlite company. It was rather an asset capable of facilitating the smooth running of the company business. Since it was not developed for the purpose of realising the benefits of Chillagoe Company, indicates the independence of the two. The reason why he acquired the 51% interest in the MDLA 415 was to ensure continuity and security of his interests and continuity of his operations. Therefore MDLA 295 was listed in the assets for the purpose of facilitating easy management of the deceased’s estate and could not to give rise to any right. Question 4 The applicants in requesting that the other party accounts for the profits accrued from MDLA415 alleged that the respondents did not give a reason as to why profits from the company should not be considered, the respondent also agrees that the application for the lease was awarded on the grounds of partnership, irrespective of the difference in the names registered. Its purpose was for a partnership activity. In addition the MDLA nominations documents needed signatures of both parties were signed by a trustee of James estate representing his interest in the partnership signed for Pitgate Pty ltd (ACN 080 300 278), and Meyer signed on the other hand without any objection .This implied that a partnership existed .Therefore Counsel for the applicants relied on section 32 of the partnership Act 1891(Old) which is to the effect that all profits obtained from a partnership business without the knowledge of the other partner must be disclosed. This is applicable to transactions executed even after the partner is dead and the partnership is dissolved. Question 5 In resolving this issue the Court stated that a partnership relationship gives rise to fiduciary duties, the fact that Mr. Meyer benefited from the profits accruing from MDLA 415, implied they were held in trust for MGM which on the other hand held for the advantage of the partnership. In Chan vs. Zacheria1.Justice Deane emphasised the idea that a partnership relationship imposes fiduciary duties on both sides which extends even after the dissolution of the partnership with the sole purpose of ensuring that the lied down procedure for distributing the property is observed. Hence accountability of all the expenses and income spent in the running of the partnership business are binding to the mining lease. Question 6 The Court found that James was an agent of a partnership therefore granting remedy thought by the applicants, basing on the fiduciary duty that arising from a partnership. Mr. Meyer cannot claim to hold the rights and interests from MDLA415 exclusively but rather for the benefit of the partnership business. In Tasmanian Seafood’s Pty Ltd v Peter2 .where a remedy of specific performance was granted for the purpose of beneficial interest, starting that it could be an issue of trust. Question 7 Property acquired with the purpose of using in the partnership is business property. The applicants relied on Section 23(1)3 to advance the claim that plant and machinery are property of the partnership. Which is to the effect that property initially procured using company finances with the purpose of enhancing the partnership is considered for the business and as such should be utilised for the that reason following the terms and conditions of the agreement. Hence basing on that argument the plant and machinery are properties of the partnership. Question 8 On the issue of the disputed plant and equipment the court found in favour of the respondent stating that the property in question belongs to Mr. Meyer as opposed to the partnership as the applicants had alleged. In O’Brien v Komesaroff4. The court stated that a property belonging to the partners used for the purpose of conducting partnership business cannot be said to belong to the partnership unless if it is expressly provided for in a consent agreement between the two partners. And lastly the partnership books of records do not indicate that the disputed property was purchased using partnership funds. Part B “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.Critically evaluate and discuss this statement with reference to relevant case law statute(if applicable). A company or corporate entity is defined as a legal person, this means it can sue or be sued. A case to this effect is Salomon vs. Salomon& Co5 where it was held: - that a company after registration attains the status of a separate legal entity, and is independent from its stakeholders6. The rational is to protect the share holders from liability arising during the course of duty. The definition of accompany was further expounded in Peate vs. federal commissioner of taxation7. Judge Windeye emphasised the legal status of a company. Throughout the common law counties, Australia included, the notion of legal personality of a company has for a number years developed and as such taking root in the corporate law of Australia. Hence whenever a company conducts any of the activity it does so in its own activity and not the employees. In Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners8. Lord summer had this to say:-during the course of the relationship of the stake holders, the law recognises the company as an independent legal person capable of being held liable of its activities as long as it is duly incorporated and is not a fraud. The shareholders cannot be held liable for debts that exceed their start up capital and have no proprietary interest to that effect. In the King v Portus; ex parte Federated Clerks Union of Australia9.The CJ affirmed the nation that a company is a distinct legal entity different from its share holders The limited liability of a corporation is encouraged for the rational of ensuring the security of stakeholders and to maintain economic efficiency. The liability of a limited corporation is restricted to the amount invested by each shareholder.10 However the legal personality of company is not absolute, there are instances when the company’s veil is pulled down or pieced. These include both common law grounds and statutory as discussed below:- The nation of piercing the corporate veil, also known as lifting the corporate veil is to the effect that individuals who are in breach are held personally liable for the acts committed as opposed to holding the corporation liable. It means that court looks past the legal personality of a company in which the cause of action would not be possible basing on the notion of legal personality11. Piercing of corporate veil is one of those areas that are easily enforced under the Australian corporate law. As a result most actions arising out of this notion are adjudicated using the common law approach and other statutory laws other than corporate law.12 A breach of law or fraud is one of the circumstances that can lead to piercing of the corporate veil.13 Fraud or sham is where a person charged with a fiduciary duty breaches his duty by using a corporation as a shield to protect the illegal acts committed. Under these circumstances the notion of piercing the veil is invoked. However, in order for the cause of action to be successful, it important to prove that shareholders in question had the motive of using company facilities with the sole purpose of stripping of the plaintiff’s right that existed.14 Agency: As a general rule a company is a separate legal entity and therefore, cannot act as an agent of its shareholders even in situations of company’s founded by one share holder or an agent of bigger company exercising Authority over it. This is established in Salomon’s case.15However a subsidiary company carrying business on behalf of a parent company exercising Authority over it is considered to be acting as an agent, and where the agent fails the parent company is held liable for the actions, therefore, piercing the corporate veil of the parent company. Agency is a relationship arising between the two people that is the agent and principle. It vests power to the agent to enter into any legal relationship on behalf of the principle. In addition it has the effect of binding the principle. In International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co16.Under corporate law the agency argument is that a company is an agent conducting business on behalf of the shareholders and as such, it acts are those of shareholder. This relationship is inferred by conduct or expressed in agreement giving rise to a principle and agent relationship.17 The courts in Australia hardly invoke the notion of piecing the corporate veil basing on the argument of agency. But rather prefer when it concerns small companies where the degree of control by the parent company is easily detected, giving rise to an agent principle relationship which permits the applicability of the notion of piercing the corporate veil.18 Corporate enterprise: This is another ground where the court in Australia can allow the applicability of the notion to piece the corporate veil. Corporate group enterprise is where numerous companies both parent and subsidiary conduct business under the control of one management. The following aspects can indicate the existence of corporate enterprise:-where the Authority is seen to be exerted on the subsidiary company, where the agent and principle relationship exists. However in situations where corporate enterprise is conducting business in a manner that portrays each individual entity as identical. It is advisable to pierce the corporate veil in order to hold the parent company liable for the acts and omissions of the subsidiary company. The court may pierce the veil where there is sufficient proof of common enterprise and ownership.19 In Briggs-v-James-Hardie-&-Co-Pty-Limited-&-Ors20. Rogers AJA started that the idea to have the veil of a company which is exercising Authority and dominion over another should be pierced is too basic, this is because in reality a parent company usually exercises control over subsidiary companies21. Sham or facade: This is a ground that can invoke piercing of the corporate veil, as long as it can be proved that the company was incorporated with the intention of being used as a shield for illegal activities carried out by the corporate controllers. In Sharrment Pty Ltd vs. official Trustee in Bankruptcy22. J Lockhart defined a sham to mean a thing that is ambiguous and nonexistent, it can also be counterfeit that is designed to appear original yet it is not. It is important to note that sham and fraud complement one another this is because fraud cannot be successful where the company is real and not disguise.23 Unfairness/justice: The court can grant piercing of the corporate veil on grounds that the decision if entered will promote Justice .In RMS Glazing Pty Ltd vs. The Proprietors of Strata Plan No 144421444224. In this case the accompany and director brought cause of action of which most of the claims where successful, however on the issue of costs the company argued that the director be held liable. J Cole declined on the grounds that it would be unjust to the director if the corporate veil of the company is not pierced at this stage of the trail. Therefore, for the rational of attaining Justice the court in Australia can grant an order for the piercing of corporate veil The piercing of the corporate veil can also be based on the breach of Statutory duty as discussed hereunder:- The directors and any other employees mandated with the duty of executing company activities infringes on the trade practises enshrined in the Trade practices Act 1971(Cth) are personally held accountable for the breach under section 75B25.this provision removes the indemnity provided by the company to its employees for acts committed during the course of business. Therefore, piercing the corporate veil An employee of a corporation can also be held liable for failure or refusal to remit taxes as prescribed by the law. This is stipulated in the Income Tax Assessment Act 1936(cth),under part IVA. This kind of action goes against the legal personality of accompany and hence piercing the veil. The Environmental Protection Act 1970 (Vic) also allows lifting of the corporate veil in cases where persons pollutes the environment by dumping and discarding wastes or helps another to commit acts resulting to pollution of the environment. In this situation the liability is placed on the individual by imposing a cost of commitment. The lifting of corporate veil may also occur in situations where a person obliged with the duty of overseeing and ensuring the safety of its employees at the work place fails to put in place measures to that effect. That person is held liable for the risk on the health of workers. Section 26(1)26of the Occupation Health and Safety Act 2004. It is also applicable where it’s implied that the actions of a company are the same as those of shareholders. In such a case Piercing of the corporate veil may be the only remedy available where the law cannot attain its objective. In the case of Dennis Wilcox Pty Ltd vs. Federal Commissioner of Taxation.27Justice Jenkinson lied down the circumstances under which the principle of separate legal personality is paid no attention to this include circumstances where the company is a fraud and was incorporated for the purpose of encouraging fraudulent behaviours and acts.28 This exception intimates that the much as the practice of piercing the corporate veil is not a common phenomena, Australian courts are accommodative when it comes to its application. In a nutshell the notion of piercing corporate veil is used in corporate law to hold the company liable for acts that would not be possible basing on the doctrine of a separate legal entity. References Baxt R and Lane T, ‘Developments in Relation to Corporate Groups and the Responsibilities of Directors – Some Insights and New Directions’ (1998) D. Parker, 'Piercing the Veil of Incorporation: Company, Law for a Modern Era' (2006) 19 Australian Journal of Corporate Law J Payne, ‘Lifting the Corporate Veil: A Reassessment of the Fraud Exception’ (1997) 56 Cambridge Law Journal Ramsay, I. “Piercing the Corporate Veil in Australia” (2001) 19 C&SLJ 250 at 257 H A J Ford, R P Austin and I M Ramsay, Ford’s Principles of Corporations Law, 9th ed, 1999. Bainbridge, Stephen M2001.Abolishing veil piercing’, the Journal of Corporation Law 7. Huss, Rebecca J.2001.’Revamping Veil Piercing for all limited liability entitie: forcing the common Law doctrine into the statutory Age. ‘University of Cincinnati law review 8. Roche, Vincent M2003.” blashing the corporate shield: the untenable Evisceration of Freedom on contract in corporate context. ‘The journal of corporation law. Read More