The Doctrine of Limited Liability in Australian Law

Introduction

Under the Australian corporate law or the company law, a corporation is referred specifically as a legal person.^[1] This means the corporation is regarded as a subject who has rights and has capability of entering into contracts, owning property, can be sued and has the ability to sue in its own name.^[2] This means that a corporation under the Australian corporation laws is a juristic person that is treated as a person legally in most instances and is empowered of owning property, can sue or be sued, and even execute contracts.

According to Burnett,^[3] the main motivation of creating a company or a corporation in Australia is the offered limited liability to the company’s shareholders. The doctrine of limited liability states that a shareholder of a company can only loose what they contributed to the corporation as shares. However, Presser^[4] pointed out that there are exceptions to the limited liability’s general concept. This implies that in some circumstances, the courts have to examine deeply the corporation, and this is referred to as piercing the veil or lifting the incorporation veil.^[5] When a court pierces the veil, it holds the company’s shareholders liable for the corporation’s obligations personally and directly.

The invocation of the veil doctrine is done when the distinction between the shareholders and the corporation is blurring.^[6] Ramsay^[7] noted that despite the fact that a corporation or a company acts as a separate legal entity, it does so through the human agents. Therefore, there are two major ways in which a corporation becomes liable to the Australian corporate or company law. That is through secondary liability, where the human agents that compose it act in their line of employment, or through direct liability for the infringement committed directly.

Lifting of the corporate veil has two theories, that is the self theory or the “alter ego,” and the other is the instrumentality theory.^[8] Anderson^[9] indicated that the alter-ego theory makes consideration whether there exists boundaries between the shareholders and the corporations. On the other hand, the instrumentality theory evaluates the corporation’s use by the shareholders in ways that are beneficial to the owner instead of the corporations. Therefore, it is upon the court to make a decision on the theory it applies of the two doctrines.^[10] Generally in Australia, piercing of the corporate veil by the courts is very rare since the courts are very reluctant, and it is only done when imposition of liability one to reach a result that is equitable.

The Concept of Separate Legal Personality-The Veil Doctrine

The clause of separate legal personality has an important ingredient in it, and that is the limited liability. The limited liability of the shareholders to the corporation gives the investors certain insurance in the corporation from their private lives. Therefore, the maximum a shareholder of a corporation can lose is the paid amount for the shares and this is his or her investments value.^[11] Therefore, the claims to the corporation by the creditors may be satisfied with the assets of the corporation to settle their claims, and they cannot proceed to the separate or the personal assets of the owners or the shareholders.^[12] This according to McLaughlin^[13] caps the risk to the investor, and subsequently their potential for gain. Corporations evidently exists to shield their shareholders from being individually liable for the corporations debts

The doctrine of limited liability, in fact goes hand in hand with the separate legal personality concept. The significance of the concept of limited liability is that it protects the company members and itself, and also helps in facilitation of the commercial ventures that is of the company’s interest.^[14] This principle acts further by encouraging and attracting investment in the corporate from individuals and other limited companies, which is needed to speed up development. Similarly, the principle facilitates better strategies for development by the company, in addition to raising the standards of corporate organization managerial.

Burnett described the separate legal personality concept as “…essential use of language metaphorically, naming a formal group with a legal separate single entity by analogy with a natural person”^[15]

The Australian corporate laws, in fact requires the shareholders of the company to make a response to the organizational realities of the company, and also making intelligible and conforming with organizations treatment as legal actors.^[16] This implies that the conception of a corporation is prescriptive, descriptive, ideological and analytical. However, Burnett^[17] pointed out that the conception of law that a company before law is a legal person to some extent is satisfying and seems proper. However, the problem is very much complex. In his argument, he states that the concepts have life “in law” of their own because of their ability to influence ex ante the judges’ thinking and to be involved ex post by judges to make justification of their conclusion.

Limited liability concept

The key concept behind the company’s legal personality is that it is separate from its owners’ or shareholders. This is based from the limited liability clause of separate legal personality. The concept of the limited liability is aimed at providing investors certain insurance of their own personal properties and lives from their businesses. Therefore, the only amount that a shareholder of corporation can lose is the paid amount for the shares which is his or her investment value.^[18] The corporation’s creditors who have claims against the corporation may be satisfied by the corporation’s assets and cannot go beyond to the personal assets of the shareholders

The treatment of the separate legal personality by the courts under the Australian common law jurisdictions

The piercing of veil doctrine, under the Australia common law jurisdictions is one of the methods in which the courts mitigate the logical fulfillment strenuous demands of the concept of separate legal personality. According to Presser,^[19] the problems of getting some principle through all different decisions of the courts stems basically from the cases false unity. As much as they involve many different issues, they are still associated with the veil concept metaphor

Interpretations of the limited liability concept verses lifting the veil illustration

Salomon V. Salomon & Co^[20]

The Salomon case also referred to as the Salomon V. Salomon & Co case is the precedence and the foundational case for the corporate personality doctrine, and guide to the judiciary of corporate veil lifting.^[21] In the Salomon case, the House of Lords affirmed the legal principle that a company is considered generally, upon incorporation to be a new separate legal entity from its shareholders. This was done by the court in relation to what was a company of one person, who was Mr. Salomon.

Decision and facts of the Salomon case

Salomon was leather merchant and a shoe manufacturer for three decades. He formed a company when his business become solvent called Aron Salomon & Company Ltd and subsequently sold his business to it. Under the requirement of Companies Act 1862 (UK),^[22] which required 7 subscribers to a company, the whole family of Salomon comprising of 5 children, and his wife subscribed to satisfy the statute

The value of the Salomon’s business was £39,000 which seemed to be inflated. After the business sale, he took £20,000 paid shares and debentures worth £10,000, secured by a flouting charge. From the purchase price, the balance remained as debt unsecured.

The company faced financial crisis soon and need funds injection, of which Salomon advanced £5000 browed from Broderip. To get the loan, the debentures were cancelled by Salomon ad reissued to Broderip. However, Broderip payment fell into arrears and he consequently enforced his security.

The company was liquidated thereafter and payments made to Broderip. However, balance of indebtedness remained secured by the debentures. Moreover, Salomon applied for reversion of entitlement. Ramsay^[23] indicated that if the claim was granted, there would be no funds to pay the other creditors unsecured. The argument of the liquidators were that the debentures were invalid and fraudulent

The court held that the company was acting as an agent and a nominee of Salomon and therefore he was to personally indemnify the creditors of the company. Moreover, te court of appeal rejected his appeal and held that he was the company’s trustee which was merely his shadow. Salomon further appealed to the House of Lords, which rejected the rulings of the lower courts. Lord MacNaghted indicated that.

“The company is at law a different person altogether from the subscribers to the Memorandum and, although it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. That is, I think, the declared intention of the enactment”^[24]

The House of Lords judgment brought out the concept of company as a legal entity. The independence and separation from the individuals involved in the management of the company and structure was defined in the Salomon’s case. Therefore, if the creditors transacted with the company, the recourse has to be made with the company not the people behind it.

Lee v Lee’s Air Farming [1961] AC 12 & Industrial Equity Ltd v Blackburn (1977) 52 ALJR 89^[25]

In this case Lee formed Lee Air Farming Ltd that deals with aerial top dressing. All the shares were held by him except one held by his lawyer. He was the managing director of the company and the chief pilot of the company. However, Lee got killed in the aero plane crush. Under the workers compensation insurance of the company, his widow sued the company but was rejected the court of appeal of New Zealand on the basis that Lee as the governing director was not a employee. The widow subsequently appealed the decision to the Privy Council.

It was affirmed by the court that the court was a legal entity. Lord Morris stated that;

“A contractual relationship could only exist on the basis that there was consensus between two contracting parties. It was never suggested (nor in their Lordships’ view could it reasonably have been suggested) that the company was a sham or a mere simulacrum. It is well established that the mere fact someone is a director of a company is no impediment to his entering into a contract to serve the company. If, then, it be accepted that the respondent company was a legal entity their Lordships see no reason to challenge the validity of any contractual obligations which were created between the company and the deceased.”

Significance of the cases

From the cases it has been established that a company acts on its own name and right, and not through its owners or agents. For example, in the case of Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners,^[26] the court affirmed that a legal company acts independently if the shareholders. Moreover under this case, the courts established a very important doctrine under the Australian constitutional law that shareholders of a company has no liability to the debts of the company beyond their capital investments

In the case of The King v Portus; ex parte Federated Clerks Union of Australia,^[27] the judges stated that the company is an entity on its own from the shareholders, and therefore they are not liable for debtors the company owes the creditors.

Conclusion

In conclusions, an Australian corporation law that governs corporations and companies in Australia identifies corporations as legal people that act on their own. As much as companies are managed, owned and run by individuals, their liability is limited to the company’s liability. The concept of separate legal personally and the concept of limited liability under the Australian constitution considers the companies independent and separate from the owners. However, the veil doctrine outlines instances where the courts can go beyond the limit of a company depending on how the company was being managed. The cases highlighted in the essay affirm that a corporate is separate from the shareholders, and therefore their personal and privates properties should not be attached because of the debt of the company’s creditors.

References

[1897] AC 22 at 51.

2012. “Corporations: Piercing the Corporate Veil”. The Australian Law Journal. 86, no. 9: 586.

Anderson H. 2009. “Piercing the Veil on Corporate Groups in Australia: The Case for Reform”. Melbourne University Law Review. 33, no. 2.

Anderson, Helen. 2012. “Challenging the Limited Liability of Parent Companies: A Reform Agenda for Piercing the Corporate Veil”. Australian Accounting Review. 22, no. 2: 129-141.

Australia. Corporate and Financial Services Regulation Review: Consultation Paper. Canberra: Treasury, 2006.

Australian Legal Group. Corporate Headlines: A News Sheet from the Australian Legal Group. [Sydney]: The Group, 1990.

Burnett, Brian. Australian Corporations Law Guide. North Ryde, NSW: CCH Australia, 1994.

Burnett, Brian. Australian Corporations Law. Sydney: CCH Australia Ltd, 1997.

CCH Australia Limited. Australian Corporations Law. North Ryde, N.S.W.: CCH Australia, 1996.

Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners, (1923) AC 723 at 740 – 741 .

International Corporate Legal Responsibility. Alphen aan den rijn: Wolters kluwer law & bus, 2012.

Lee v Lee’s Air Farming (1961) AC 12

McLaughlin, Sue. Unlocking Company Law 2nd Edition. Hoboken: Taylor and Francis, 2013. <http://public.eblib.com/EBLPublic/PublicView.do?ptiID=1181031>.

Presser, Stephen B. Piercing the Corporate Veil. New York, N.Y.: C. Boardman, 1991.

Ramsay, I. M., and D. B. Noakes. 2001. “Piercing the Corporate Veil in Australia”. COMPANY AND SECURITIES LAW JOURNAL. 19: 250-271.

Salomon V. Salomon, House of Lords. (1896), [1897] A.C. 22 (H.L.)

The King v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 42,

Burnett, Brian. Australian Corporations Law. Sydney: CCH Australia Ltd, 1997. ↑
Ibid ↑
Burnett, Brian. Australian Corporations Law Guide. North Ryde, NSW: CCH Australia, 1994. ↑
Presser, Stephen B. Piercing the Corporate Veil. New York, N.Y.: C. Boardman, 1991. ↑
Australia. Corporate and Financial Services Regulation Review: Consultation Paper. Canberra: Treasury, 2006. ↑
Ibid.,44 ↑
Ramsay, I. M., and D. B. Noakes. 2001. “Piercing the Corporate Veil in Australia”. COMPANY AND SECURITIES LAW JOURNAL. 19: 250-271. ↑
Australian Legal Group. Corporate Headlines: A News Sheet from the Australian Legal Group. [Sydney]: The Group, 1990. ↑
Anderson H. 2009. “Piercing the Veil on Corporate Groups in Australia: The Case for Reform”. Melbourne University Law Review. 33, no. 2. ↑
2012. “Corporations: Piercing the Corporate Veil”. The Australian Law Journal. 86, no. 9: 586. ↑
International Corporate Legal Responsibility. Alphen aan den rijn: Wolters kluwer law & bus, 2012. ↑
Anderson, Helen. 2012. “Challenging the Limited Liability of Parent Companies: A Reform Agenda for Piercing the Corporate Veil”. Australian Accounting Review. 22, no. 2: 129-141. ↑
McLaughlin, Sue. Unlocking Company Law 2nd Edition. Hoboken: Taylor and Francis, 2013. <http://public.eblib.com/EBLPublic/PublicView.do?ptiID=1181031>. ↑
Ibid.12 ↑
Burnett, Brian. Australian Corporations Law. Sydney: CCH Australia Ltd, 1997. ↑
CCH Australia Limited. Australian Corporations Law. North Ryde, N.S.W.: CCH Australia, 1996. ↑
Burnett, Brian. Australian Corporations Law Guide. North Ryde, NSW: CCH Australia, 1994. ↑
Australia. Corporate and Financial Services Regulation Review: Consultation Paper. Canberra: Treasury, 2006. ↑
Presser, Stephen B. Piercing the Corporate Veil. New York, N.Y.: C. Boardman, 1991. ↑
Salomon V. Salomon, House of Lords. (1896), [1897] A.C. 22 (H.L.) ↑
Australian Legal Group. Corporate Headlines: A News Sheet from the Australian Legal Group. [Sydney]: The Group, 1990. ↑
International Corporate Legal Responsibility. Alphen aan den rijn: Wolters kluwer law & bus, 2012. ↑
Ramsay, I. M., and D. B. Noakes. 2001. “Piercing the Corporate Veil in Australia”. COMPANY AND SECURITIES LAW JOURNAL. 19: 250-271. ↑
[1897] AC 22 at 51. ↑
Lee v Lee’s Air Farming (1961) AC 12 ↑
Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners, (1923) AC 723 at 740 – 741 . ↑
The King v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 42, ↑

Exploring the concept of limited liability and the doctrine of piercing the veil in Australian corporate law | Analytical Essay Example