Behind Subsidiaries Holding Parents Liable Essay

Question:

Discuss About The Behind Subsidiaries Holding Parents Liable?

Answer:

Introduction

The company form of business structure has been given the status of separate legal entity, which is amongst the key features of this form of business structure. As per the separate legal entity concept, the companies are treated as a separate person from the ones who are supposed to run the affairs of the company (French et al. 2016). There have been numerous case laws where this concept has been applied but the case where this concept was born was that of Salomon v A Salomon And Co Ltd [1897] AC 22. The Corporations Act, 2001 (Cth), which is the act which governs the affairs of the company, also contains provisions regarding this status of the companies. In the following parts, a discussion has been carried whereby this very concept, particularly in context of Australia has been elucidated.

Companies as Artificial Legal Person

As was stated in the introductory segment, one of the characteristics of a company form of business structure is that a company is deemed as a separate artificial legal person. This is amongst the leading reasons for the popularity of company form of business structure (Abbott, Pendlebury and Wardman, 2007). As per this concept, the company has an existence in the eye of law where it is treated separately from the members and management of such company. Also, the choice of the name of company is always restricted as one name can only be given to one company. This name helps the company in making a case against others and even to others, in making a case against the company (Latimer, 2012).

Also, owing to this artificial legal person status, even though a company is deemed as a “person” but the “artificial” segment of it gives it perpetual existence. So, the death of the management or directors does not mean the end of the company, effectively giving the company, an everlasting life (Kerr, 2014). A company does end, but only through liquidation, winding up, or an order of the court. As a result of this separate status of the company, for the debts of the company, the shareholders cannot be sued. They can only be asked to pay such sum of money, which is unpaid on their shares. Hence, the personal assets of the individual cannot be claimed upon by creditors in case the company fails to repay their debts (Gibson and Fraser, 2014).


In Salomon v A Salomon And Co Ltd the House of Lords affirmed the concept that once a company is incorporated, it is deemed as a legal entity and it is separate from its shareholders. In the quoted case, the company was given a corporate personality whereby the creditors of the insolvent company could not sue the shareholders of the company for paying up the pending dues of the company. In this case, Salomon had incorporated the limited company for his long standing personal business where he was a shoe manufacturer. All of the shares were held by him and he had attained debentures upon the transfer of his former business to this incorporated company (Kershaw, 2012).

Upon the failure of the company, the liquidator of the company made a contention that these floating charges should not be honoured, along with the contention to hold Salomon liable for the debts of the company, which led to Salomon making a case against them. The court held that the company had been incorporated in a proper manner and so, the court was not required to speculate upon the exorbitances and motives of the company’s incorporation. Just because the shares of the company were held by a single person, did not change the fact that the company was separate person in law and was distinctive from the individuals who directed its will and mind. The court stated that the corporate veil of the company could only be lifted when there was an extraordinary case (Swarb, 2017).

This is not the only case where the concept of separate legal entity was upheld by the court. Another leading matter in this regard is the case of Lee v Lee's Air Farming [1961] AC 12 in which in the company, Lee held all of the issued capital save for one share which the attorney of Lee held. The affairs of the company were effectively under his control. While he was on the job, he was killed and his widow made a claim for claiming the workers compensation, based on him being a worker. However, the New Zealand Court of Appeal rejected this claim based on the notion that Lee had effective control over the company but was not its employee. Upon the appeal being made to the Privy Council, the Council made inference from the case of Salomon and stated that the individual could work in dual capacity. In short, the Privy Council stated that the company is a separate legal entity and so, the shareholder and directors who enter a contract with the company, would be deemed as an employee of the company (Bourne, 2016).


The Corporations Act, 2001 affirmed the stand on company being an artificial separate person. Under section 119 of the Corporations Act, the company comes into existence, on the very day on which it is registered, as a body corporate. And upon its formation, the company is to be deemed as a separate person, which carries on the operations of the company, which includes getting into the contractual obligations (Federal Register of Legislation, 2017). Section 198A(1) of this act provides that the company’s business has to be managed as per the directions of the directors of the company. Section 198A(2) of this act covers that the powers can be exercised by the directors, which relate to the company (WIPO, 2015). This shows that the directors have only been given the power to run the affairs of the company on behalf of the company and not on their free will, which shows that the affairs of the company are run as per the will and mind of the directors but for the company, as per the objectives of the company (Cassidy, 2006).

Even though the artificial legal person status has been embedded in the Australian companies, along with the companies of thee other world, with changing time, this concept has also grown. This is with particular reference to the identification of where the affairs of the company have been conducted in a manner which requires the separate legal entity concept to be upheld and where there is a need to pierce the corporate veil (Bonomelli, 2014). With the advancements of this age, and the growing minds of the individuals, the case laws where this concept is effectively used, is being manipulated and at times, the theme of holding the company as an artificial legal person proves to be a costly affair for the different stakeholders.

The leading example of this is the use of this concept in an unfair manner in the different cases associated with James Hardie Industries Limited, for instance ASIC v Macdonald (No. 11) [2009] NSWSC 287 and Peter James Shafron v Australian Securities and Investments Commission (2012) HCA 18; 286 ALR 612 (Norton Rose Fulbright, 2012). Even though the key management personal associated with this company were penalized and even disqualified, it does raise a question on the time delay which is taken from an incident occurring, to the relevant individuals being punished. The future of company law thus has to change to cope up with this misuse of the company being an artificial legal person, where they use this “artificial legal person” to their benefit and where the piercing of corporate veil takes a lot of time to be effective. This makes it very clear that the present day law, even though punishes the ones who are responsible for misusing this status, need to be more stringent and stricter so that the wrongdoers think twice about misusing the “artificial legal person” status. Particularly, the penalties which can be imparted to the wrongdoers need to be raised as these were formed years ago. Hence, there is a need to raise the maximum amount of pecuniary penalty which can be awarded in such cases so that the individuals have to face a higher penalty which actually puts a hole in their pocket as the present penalties are just not sufficient in this regard.

Conclusion

To conclude the discussion carried above, the companies are deemed as artificial legal person as a result of which, the companies are treated separately from the director and the other key personnel who run the business of the company on the behalf of the company. There have been not one, but different case laws in which this concept has been upheld but Salomon was the key case where this concept was upheld and which have been quoted time and again. The Corporations Act also upholds this status of the companies and the companies are deemed as artificial separate legal person upon the registration of the company. However, the present day corporate law falls short of stopping the individuals from misusing the corporate status of the companies for their own personal use. This highlights the need for a change to be brought in the corporate law so as to raise the maximum limits of pecuniary penalty which can be awarded to the wrongdoer.

References

Abbott, K., Pendlebury, N., and Wardman, K. (2007) Business Law. 8th ed. London: Thomson.

Bonomelli, M. (2014) Wholly-owned subsidiaries: same same but different. [Online] Lexology. Available from: [Accessed on: 25/09/17]

Bourne, N. (2012) Bourne on Company Law. 7th ed. Oxon: Routledge.

Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.

Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: [Accessed on: 25/09/17]

French, D., Mayson, S., and Ryan, C. (2014) Mayson, French & Ryan on Company Law. 31st ed. Oxford: Oxford University Press.

Gibson, A., and Fraser, D. (2014) Business Law 2014. 8th ed. Melbourne: Pearson Education Australia.

Kerr, D. (2014) Hiding Behind Subsidiaries: Holding Parents Liable. [Online] The GULS Law Review. Available from: [Accessed on: 25/09/17]

Kershaw, D. (2012) Company Law in Context: Text and Materials. 2nd ed. Oxford: Oxford University Press.

Latimer, P. (2012) Australian Business Law 2012. 31st ed. Sydney, NSW: CCH Australia Limited.

Norton Rose Fulbright. (2012) The James Hardie Decisions: Australian Securities & Investments Commission v Hellicar & Ors [2012] HCA17; Shafron v Australian Securities & Investments Commission [2012] HCA 18. [Online] Norton Rose Fulbright. Available from: [Accessed on: 25/09/17]

Swarb. (2017) Salomon v A Salomon and Company Ltd: HL 16 Nov 1896. [Online] Swarb. Available from: [Accessed on: 25/09/17]

WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: [Accessed on: 25/09/17]

How to cite this essay: