The Case Of Dhn Food Distributors Law Company Business Partnership Essay

Published Date: 02 Nov 2017

Part A

The modern company law in Australia, and in other countries such as China, Singapore, Malaysia, England, New Zealand, Canada and South Africa, which is described about the others on the heritage of the fundamental legal principle. The case Salomon v Salomon & Co Ltd [2] (1897) is one of the cases that illustrated of the separate legal entity principle. This case is jurisdiction for the legal principle that an incorporated company is a separate legal entity from its directors and principal shareholders. It is a legal person with its own legal personality separate from that of its shareholders or directors.

Mr. Salomon was a boot and shoe manufacturer. He sold the assets of his business to a company Solomon & Co Ltd. of which he was the sole. His creditors tried to seize the assets of the business. The Mr. Salomon is insufficient moneys to meet the debts of the creditors. However, it is impossible to dispute that once the company is "legally incorporated it must be treated like any other independent person with rights and liabilities appropriate to itself [3] ." So, the decision of the court was that Solomon & Co Ltd formed a separate legal entity from Mr Solomon. Mr Solomon's debts were not the debts of Solomon & Co. Ltd. The rule is that a properly formed limited liability company is a legal entity in its own right.

Furthermore, there are many legal consequences of the separate legal entity concept after the decision in Salomon’s case. Once a company is incorporated, some of the consequences would be flowing from the application of the separate identity principle. Firstly, the debts are undertaken into the company’s name is belong to the company as well as not to the controller or director or any other else. This is confirm by the House of Lord’s when make a decision in Salomon’s case. In this way, the debts or liabilities are liable by the company due to separate legal person. However, there have some exceptions in certain circumstances, that is, common law can be modified by statute law. For example, Section 588G and Section 197 of the Corporation Act 2001 applies that directors of a trustee company or directors on grounds public policy can be personally liable for corporate debts incurred during trading while insolvent [4] .

Secondly, assets purchased by the company’s name are belonging to the company. It does not belong or owned to the directors, shareholders and other else even though the shareholders who own 100% of the shares also do not have the right to own the assets of the company. This is because company is a separate legal entity and can own property in its own right [5] which means the company is legal owner with ownership right to the property. This is under the case of Macaura v Northern Assurance Co Ltd [6] (1925) which shows that a company holds its property separately from the property of its members.

Thirdly, a company, as a separate legal entity, can enter into contractual relations with the shareholder or director due to they are company controlling members. This can be illustrated in the case of Lee v Lee’s Air Farming Ltd [7] (1961). This case shows that the company could enter into an employment contract with Mr. Lee. Lord Morrison as he is a major shareholder of a company.

Lastly, employer in a company, as a separate legal entity, owes an obligation to provide a safe system of work with no matter of the injured employees may also be a director or controller of the company. For example, the High Court was making a decision in the Andar Transport Pty Ltd v Brambles Ltd [8] (2004). This case illustrates the consequences arising from the intersection between legal principles in corporate law and the employer’s duty of care to provide a safe system of work arising under employment law.

Part 2

The concept of a ‘lifting the veil’ can be best described as a legislature has judge that the separation of the individuality of the company and the members is not to be retained. Simply means that it is to ignore the separate legal entity of a company. Besides, its legal liabilities those are totally separate from those of its members when enrolment of new legal person is successfully completed. The court has drawn as a veil of incorporation avoids the members being held liable for the company’s liabilities regardless how close their connections with it. This is clearly shown in the Salomon’s case. There have exceptions to the general principle in Salomon’s case which is known as the veil is lifted and the law overlook the corporate entity. The Exceptions can be classified into those expressly provided by statute such as in section 214 of the Insolvency Act 1986 which makes directors liable for wrongful trading [9] . Thus, it can be found the exceptions to the general principle in the both state and common law.

Group of companies have multiple levels at which the relationship between the subsidiary and the parent company will be intertwined [10] . The groups of company may be tax advantages or if the business is risky it may be commercially prudent to limit the exposure of the parent company [11] . The structure of individual companies in a group were overlook due to the Australian courts have been unwilling to employ the common law during there are determining liabilities. This was applies in the Salomon case as the director was sued for breach of duty to the companies because the companies were suffered financial difficulties. This is same as the case of Walker v Wimbourne [12] (1976). This case was described about the common directors, in several correlative companies, who transferred funds within the group to fulfil certain debts. That transferred funds are not consider to repay those debts. Besides, the directors were sued for breaching their duty to the companies because the companies were gone into liquidation. The directors were argued that of individual companies within a corporate group owe a duty to the group as a whole which repeal their duty to their individual companies. However, the directors’ argument was rejected by Mason J due to that directors of companies within a corporate group must adopt the fundamental principle which means each company in a group of companies is a separate legal entity possessed of separate legal rights and liabilities.

Besides, the case of DHN Food Distributors Ltd. v Tower Hamlets London Borough Council [13] (1976) offers an entirely different analysis. In this case, there have one company is the group owner of the land and another company is conducted its business on the land. So, problem of compensation on the compulsory purchase of land was held. Lord Denning suggested the corporate veil could be lifted and that the companies were in reality a group, and should be treated as one [14] . In the Court of Appeal Lord Denning MR stated that "these subsidiaries are bound hand and foot to the parent company and must do what the parent company says, virtually the same as a partnership, they should not be treated separately." [15] Therefore, it was held that there were realities of the situation and lifting the corporate veil.

Before discuss the limitations of common law and Corporations Act, 2001, there was some differentiation of the High Court and Court of Appeal. High Court of Australia is established by the Federal Government and is emphasise the importance of maintaining the separate legal entity principle while Court of Appeal is know that for better or worse the law esteem the separate entity rule when applies the companies within the same corporate group. For example, the High Courts have repeat discretion not to confuse a ‘legal entity’ with an ‘economic entity’ that is builds on the earlier High Court decision in case of Industrial Equity Ltd v Blackburn [16] (1997). However, Court of Appeal has consistent with the legal treatment of corporate groups at common law in Australia is in the case of Adams v Cape Industries [17] (1990). In the Salomon’s case, his subsequent appeal was discharged by the Court of Appeal, who likened the company to a trustee for Salomon. However, he is a separate legal entity by the High Court decision.

There have some limitations imposed by common law applied in Salomon’s case. Firstly, the corporate form cannot be used for the aims of fraud but the Salomon is used it. In the Salomon’s case, the liquidator seeks to avoid payment of his debentures on the reason that they were invalid due to fraud. Jones Re Darby, Ex parte Brougham [18] (1911) is the example of fraud. This case was established that one company was formed is to receive a mining licence and another company was formed is to purchase that licence at higher costs. The profits were gone to Darby and Gyde (another partner). Then, the second company was suffered loss and went into bankruptcy. The court permitted the liquidator of the company to recover the money from Darby and Gyde on the basis that they had used the company deliberately to commit fraud, and what they did through the company they were really doing themselves [19] . In this situation, therefore, the courts again being prepared to lift the veil of incorporation where a company has used to avoid a legal obligation.

Secondly, the courts have been planned to lift the veil of incorporation where it is considered that the company such as Salomon has been used as a sham or facade to hide real and dishonest purpose. Special conditions may justify lifting the corporate veil if the company structure is a mere facade hide the true facts. In Salomon’s case, the liquidator seeks to avoid payment of Salomon’s debentures on the reason that the company was merely a sham. This is same as the case of Woolfson v Strathclyde Regional Council [20] (1978). After the case of DHN Food Distributors Ltd., House of Lords were argued this Woolfson’s case in the two years when the views were disapproved. In this case, he concerned the question as to whether a group of companies could be regarded as a single entity for legal purposes; here whether a subsidiary and parent company could be regarded as a single entity in order to enable them to claim compensation for disturbance on a compulsory purchase [21] . Therefore, it was held that there was no basis on lifting the veil of incorporation as there were no reasons for treating the company structure as a mere facade.

The last limitation under common law is agency. The agency, in Australia, argument has been generally accepted as a valid reason for lifting the veil of incorporation. In the Salomon’s case, Salomon is act as a director of the company. At the same time, however, he also acts as an agency of the company in dealing transaction. In some circumstances, therefore, a company may act as an agent for others such as shipping agent. It is also possible for a company to act as the agent for its own shareholders or directors. This is under the case of Smith, Stone & Knight Ltd v Birmingham Corp [22] (1939). This case is describe about Birmingham Corporation is a parent and Smith, Stone & Knight Ltd is a subsidiary. The subsidiary of parent was carries out a business on the premises but was rejected compensation for the acquisition because it’s short period in occupation. This argued about the subsidiary is found to be acting as an agent of a parent company and entitling the parent company to compensation. This is successfully argued under the courts lift the corporate veil based on avoiding the commercial reality of the separate entities in existence and treats the group of companies as one [23] .

The Corporations Act, 2001 provides some of the limitations by lifting the veil of incorporation in relation to the group and subsidiary companies. The first limitation is insolvent trading. Under section 588G of Corporations Act, 2001 says that director’s duty to prevent insolvent trading by company. This section 588G applies in subsection (1) if a person is a director of a company at the time when the company incurs a debt is under s 588G(1)(a); and the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt is under s 588G(1)(b); and at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be is under s 588G(1)(c); and that time is at or after the commencement of this Act is under s 588G(1)(d). Under s 588G applies subsection (3) says that a person commits an offence if a company incurs a debt at a particular time is under s 588G(3)(a); and at that time, a person is a director of the company is under s 588G(3)(aa); and the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt is under s 588G(3)(b); and the person suspected at the time when the company incurred the debt that the company was insolvent or would become insolvent as a result of incurring that debt or other debts (as in paragraph (1)(b)) is under s 588G(3)(c); and the person’s failure to prevent the company incurring the debt was dishonest is under s 588G(3)(d). This section is applies to Salomon’s case due to Salomon avoid payment to the unsecured creditor. Therefore, he consent the offence that he is insufficient moneys to meet the debts of the unsecured creditors.

The second limitation is directors’ liability as trustee. Under section 197 of Corporations Act, 2001 says those directors liable for debts and other obligations incurred by corporation as trustee. Under s 197 subsection (1), a person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation, has not, and cannot, discharge the liability or that part of it is under s 197(1)(a); and is not entitled to be fully indemnified against the liability out of trust assets is under s 197(1)(a).This is so even if the trust does not have enough assets to indemnify the trustee. The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection. This section is applies to Salomon’s case due to Salomon is a managing director and full control of the company with the power to out-vote all of the other members. On appeal, however, the Court of Appeal in rejecting Salomon's appeal held that Salomon was a trustee for the company which was his mere shadow. The question for the High Court was, if the defence company was façade, that could controlling director be jointly and severally liable for repay some money or debt? If yes, the court could make an order that the director could be liable to repay all the funds originally received by the company. Thus, the judge would have to lift the corporate veil on the reason that the receipt of that money by the company was to be treated as a receipt by the director.

The third limitation is group liability for insolvent trading. Under section 588V of Corporations Act, 2001 says that lifts the corporate veil by making the holding company liable for the debts of its subsidiary. This is a corporation contravenes s 588V subsection 1 if the corporation is the holding company of a company at the time when the company incurs a debt is under s588V(1)(a); and the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt is under s588V(1)(b) ; and at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be is under s588V(1)(c); and that time is at or after the commencement of this Act is under s588V(1)(e). Under s588V(2) says that a corporation that contravenes this section is not guilty of an offence. This section is applies to the Walker’s case due to each company within the company is responsible for its own debts. Therefore, the holding company liable for the debts of its subsidiary when lifts the corporate veil make.