LEGT2741 Assignment (Week 5)

8/10/2019 LEGT2741 Assignment (Week 5)

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The legal issue concerning in this case is whether the trade union can argue to lift the

corporate veil upon the incorporated companies, Casino Ltd and Caterers Ltd, and

claim both of them were acting as one single entity so that the 60 employees can keep

their original contracts.

The fundamental subject of conflicting interest on both parties is based on the

principle in Salomons Case 1. This case established that companies have limited

liability and a separate legal identity from its directors and shareholders once the

companies are incorporated. And, in the incorporated groups case, each company is a

separate legal entity itself and outsiders can only enforce their rights against each

entity and not the whole group. This proposition can be further reinforced in Walker v

Wimborne 2, whereby the court refused to recognise the group as one single entity and

reiterated the point that each company within a corporate group is a separate entity

with their own duties and liabilities.

Due to the absence of statutory law on this matter, the courts have been reluctant to

deviate from this principle, which has caused numerous debate and confusion in

Australian law as to when could the courts justify the lift of the corporate veil.

Therefore, it is uncertain as to when would the courts be prepared to lift the veil since

there is no all embracing principle 3 for the judges to depart from the strict separate

entity doctrine 4.

1 Salomon v Salomon & Co Ltd [1897] AC222 Walker v Wimborne (1976) 137 CLR 13 Austin RP and Ramsay IM, Fords Principles of Corporation Law (12 ed, LexisNexis Butterworths,

2005) p 1264Hargovan , A Piercing the Corporate veil on Sham Transactions and Companies (2006) 24Companies and Securities Law Journal 436 .


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With this concept in mind, the discussion below attempts to sort legal actions for the

trade union. The possible legal actions that can be examined through previous

precedents in lifting the corporate veil are:

1. Sham and avoidance of legal obligations

2. Agency relationship.

1. Sham and Avoidance of Legal Obligations

The courts are prepared to lift the corporate veil when there are sufficient reasons to

believe that a company has been used as a sham to avoid legal obligations under

contract or statute, as was laid down by Gilford Motor Co Ltd v Horne [1933] All ER

109 .

Before applying this precedent to the case, more information is needed on Casinos

intention on establishing Caterers.

Assuming Casino wants to put an end to the bad publicity due to the industrial

disputes, it is reasonable that they would give in and settle the disputes by awarding

the employees with higher-than-usual wages. However, the formation of Caterers one

month later to take over Casinos catering and entertainment services, leading to the

redundancy of employees who were hired again on lower wage contracts has made

the intention of creating a subsidiary suspicious.


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Due to the timing issue of the new subsidiary and the content 5 of the lower wage

contracts, the union can argue that Caterers was formed as a sham to hide Casinos

true intention. Its true intention to use Caterers as a cost minimisation vehicle to lower

the remuneration packages to their employees can be seen as a dishonest scheme used

by Casino to conceal the true facts.

On this note, this is not to say that Caterers itself is a sham as the company has

complied with the registrations and obligations. The concern here is the involvement

of transactions of creating a faade or a mask to hide Casinos ulterior motives. 6

Base on the above circumstances, there are strong grounds for the court to ignore the

Salomon principle and lift the corporate veil on the grounds of misuse of the corporate

form as a sham.

Furthermore, it is evident that Casino is using Caterers to escape from the contractual

obligations with the employees by setting up Caterers to take control of the catering

and entertainment services. This argument is more convincing when turning to

Kensington International Limited v Republic of Congo 7 , an England High Court

case where the corporate veil is lifted. The legal issue raised were whether the

structure of the company was placed with the aim of evading liabilities; the facade

5 Harris, Lifting the Corporate Veil in Industrial Disputes (2004) 22 Companies and Securities Law Journal 69.6 Artedomus v Del Casale [2006] NSWSC 146. It was held that a covenanter cannot evade thecovenant by carrying on a business under a title or by forming a limited company which is a mere veil

for the covenanters own activities.7 Kensington International Limited v Republic of Congo [2005] EWHC 2684. It was held that theavoidance of existing liabilities through reliance on corporate structures is sufficient to lift the veil.


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was intended to conceal the identity of the controller and whether the structure was

dishonest 8.

Applying this to the case, the fact that Casinos directors are also the directors of

Caterers highlights the masterminding and full control of Caterers. Thus, the sole

restructuring of the catering and entertainment services and to offer unfavourable

employment contracts to the redundant employees seem like a dishonest and

deliberate evasion of liability. In addition, Caterers coincidentally dealt with all

concerns with the catering and hospitality employees who received generous contracts

and with the assumption that Casino did not want to keep the promise, it is reasonable

to conclude the Casino was using Caterers to conceal from its liabilities.

Although this case is not binding in Australian law, the result is persuasive as it

provides a clear message that Salomons case does not necessarily give directors the

privilege to enjoy the corporate veil if the intention for the creation of corporations is

to evade contractual obligations 9.

Having previous precedent as support, it is highly likely that the unions legal course

of action against Casino and Caterers can be succeeded.

Casino Ltd could possibly defend itself by justifying the legitimate commercial

purpose for the incorporation of Caterers Ltd 10. The fact that Caterers Ltd was

established for strategic planning in a view of long-term growth of the company could

not be considered as a sham. Moreover, the company could argue that it is practical

8 Kensington International Limited v Republic of Congo [2005] EWHC 2684. Justice Cooke found that

there was no separate existence.9 Creasey v Breachwood Motors Ltd (1992) 10 ACLC 3,05210 ACN 007 528 207 Pty Ltd (In Liq) v Bird Cameron [2005] SASC 204


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for Casino to develop a subsidiary to specialize in catering and entertainment services,

as the size of the holiday resort is large together with a large number of employees.

2. Agency Relationship

A further argument the trade union could put in place to argue for the lift of the

corporate veil is on the agency ground. The union could allege that there is an implied

agency relationship between Casino Ltd and Caterers Ltd and thus the two companies

are in fact one single entity. Smith Stone & knight Ltd v Birmingham Corp. 11(SKK)

sets the proposition that the corporate veil can be lifted if an agency relationship

existed between the companies in which the subsidiary can be seen as an implied

agent or an internal department of the parent company and there is no separate entity

present.

For an agency relationship to exist, the following six criteria must be satisfied.

1. Was Caterers profits treated as the profits of Casino

2. Was Caterers conducting the business appointed by Casino

3. Was Casino the head and brain of the trading venture

4. Did Casino govern the venture and decide what should be done and what capital

should be used

5. Did Casino make profits by its skill and direction

6. Was Casino in effectual and constant control

11 Smith Stone & Knight Ltd v Birmingham Corp. [1939] 4 All ER 116


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Casino Ltd has explicitly stated that they will receive all of Caterers profit in the

form of dividend, which satisfies the first question. Moreover, Caterers was appointed

by Casino to act as a significant operation in its own right both within and outside

the resort, which adheres to the second question. Three of Casinos directors are also

the directors of Caterers and that the strategic plan was devised from and has to be

approved by the managers of Casino makes it reasonable to infer that Casino is the

brain of Caterers and has effectual control over Caterers. At first instance, it appears

that the union can successfully take legal action under the agency ground as all

evidences also point towards that Caterers is acting as an agent for Casino and thus

there is essentially only one entity.

However, it is important to examine the nature of the six questions before any

conclusion is made. Apart from the first one, all the other five are based on control

that the parent company has on the subsidiary. This might not be the best approach as

parent companies often have full control over its subsidiaries. Therefore, despite

being criticised in previous case 12, control is not a plausible test for agency

relationships. Therefore, the six questions should only be treated as a collection of

relevant factors that may be taken into account 13 when determining whether the

corporate veil should be lifted.

A better analysis of the agency relationship can be examined using Bird Camerons 14

ratio ruling where it relies on critical facts to deal with the agency relationship.

12 Hobart Bridge Co Ltd v FCT (1951) 82 CLR 372. Kitto J disapproved the lifting of the corporateveil.13

Harris. J Lifting the Corporate Veil on the Basis of an Implied Agency: A revaluation of Smith,Stone and Knight (2005) 23 Companies and Securities Law Journal 7.14 ACN 007 528 207 Pty Ltd (In Liq) v Bird Cameron [2005] SASC 204


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In this case, despite Casino has full control of Caterers; it does not give rise to an

agency relationship as control itself cannot be a decisive indicator of agency. 15

Moreover, there is nothing to suggest that Caterers was undercapitalised or has been

denied resources 16. In fact, Casino has explicitly passed on human resources to

Caterers when it offered new employment contracts to the redundant employees,

which indicates that Caterers was actually independently existed. 17

Moreover, the Bird Cameron case has placed a great emphasis on the importance of

considering the fundamental purpose of the incorporation of the subsidiary when

determining whether there is an agency relationship 18 and the proposition set in the

case was that the corporate veil should not be lifted unless there is no legitimate

commercial purpose for the incorporation. 19 From the facts, Caterers was established

by a strategic plan to specialize in catering and entertainment services which were in

the long-term interest of the company. This reason is in every sense appropriate and

would very likely be accepted as a legitimate commercial purpose.

Base on the above discussion, it is likely that the Salomons principle can be upheld.

Therefore, there is little probability that the union would succeed in alleging that

Casino Ltd and Caterers are one single entity.

15 ACN 007 528 207 Pty Ltd (In Liq) v Bird Cameron [2005] SASC 20416 Hargovan, A and Harris, J The Relevance of Control in Establishing an Implied AgencyRelationship between a Company and its Owners (2005) 23 Companies and Securities Law Journal459.17ACN 007 528 207 Pty Ltd (In Liq) v Bird Cameron [2005] SASC 204. Besanko J suggested (at[112]) that overwhelming control maybe relevant in lifting the corporate veil where the controller hasnot provided any resources to the company.18 Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254. Besanko J in Bird Cameronrelied on this view.19

Hargovan, A and Harris, J The Relevance of Control in Establishing an Implied AgencyRelationship between a Company and its Owners (2005) 23 Companies and Securities Law Journal463


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In light of this case, the union can suggest the Australian court to explore the

jurisdiction in Canada, in which the judges there have developed a more relaxed

ruling from the SSK case. The Canadian corporation law may acknowledge an agency

relationship and to lift the corporate veil if the parent company places excessive

control over the subsidiary and that the subsidiary has no independent function. 20

Hence, excessive controls by parents upon their subsidiaries are legitimate grounds to

lift the corporate veil when the parents control demonstrates a lack of identity on the

subsidiary. 21

However, with respect to Caterers case, it seems that this ruling could not applied

due to the fact that Caterers does not seem to have lost its identity as it has significant

operations of catering and entertainment services for Casino.

Another possible ground that the Canadian court may use to lift the corporate veil is

when failure to do so would be unfair and lead to a result flagrantly opposed to

justice. 22 Nevertheless, it is arguable whether the Australian courts would attempt to

use this ruling as the courts of Australia are only concerned with the legality of the

perpetrators actions and would not consider the morality issues of the case.

The supporting case for the issues of morality is the James Hardie 23 case. In the case,

the court had not lift the corporate veil upon asbestos related injury and death claims

on the defendants medical subsidiary. 24 This reflects how rigid the courts stand are

20 Aluminum Co of Canada v Toronto (City) [1944] 3 D.L.R 609. Rand J. stated that the corporate veilmay be pierced when it can be said that the company is in fact the puppet of the [parent] when thedirecting mind and will of the [parent] reaches into and through the corporate faade of the [subsidiary]and becomes, itself, the manifesting agency.21 Hargovan, A and Harris, J Piercing the Corporate Veil in Canada: A Comparative Analysis (2007)28 The Company Lawyer (UK) 58, 5922 Approach of Justice Murphy Le Car GmbH v Dusty Roads Holdings Ltd 2004 CarswellNS 138 (SC).23 Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 54924

P. Prince , J Davidson, S. Dudley, In the shadow of the corporate veil: James Hardie and Asbestoscompensation. (2004)http://www.aph.gov.au/library


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in adhering to the Salomon rule and simply ignore the morality of the case and relies

solely on the legality of the law.

In conclusion, I am of opinion that the union should not take legal action against the

company under the grounds of agency due to the fact that there is lack of consistent

precedents in Australian courts related to this matter. Thus, it is uncertain as to when

would the courts be willing to lift the corporate veil under the agency relationship.

Rather, it is advised that the union should take action on the grounds of sham and

avoidance of legal obligations and allege that the company has created the subsidiary

to mask the ulterior intention in order to evade the obligations to the employees, as the

chance of success in this course may be higher when compared to the other one.

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LEGT2741 Assignment (Week 5)