This may happen where a parent company forms or acquires a subsidiary ostensibly to do something for which the subsidiary needs a minimum level of resources but the parent does not give it adequate proprietors’ capital or loan money, or equip it to run its own business by loan of personnel or other resources or give it a reasonable chance of independently obtaining credit or resources from third persons. (Ford, Austin and Ramsay 1999, para 4.370)
The most frequently-cited decision concerning the identification of an implied agency relationship between members of a corporate group is the decision of Atkinson J in Smith Stone & Knight Ltd v Birmingham Corp where he established a number of questions in the course of identifying an agency relationship between the parent company and its subsidiary. Although his reasoning has received mixed and limited reception in Australia, it is still worth trying to determine the existence of agency relationship based on some of those questions.
- Was the parent in effectual and constant control?
A company that is able to exercise complete dominance and control over another is regarded as a strong indicator that an implied agency relationship exists. However, in Tate v Freecorns Pty Ltd, Burt J regarded the fact that a company controlled and wholly owned by the parent company “may throw some light”, “but it cannot be decisive”.
In ACN 007 528 207 Pty Ltd (in liq) v Bird Cameron (Reg), Besanko J followed Tate v Freecorns, stating that “too much emphasis on the other five [criteria] relates to control and control of itself cannot be a decisive indicator of agency”.
According to Hargovan and Harris, the decision made by Besanko J “provides a ratio ruling that control by shareholders and complete unity of shareholders and management are never sufficient to lift the corporate veil, and following from this case, are also insufficient to establish an implied agency” (Hargovan and Harris 2005, p. 463).
Significant statement was also made by Rogers JA in Briggs v James Hardie & Co Pty Ltd that:
As the law presently stands, in my view the proposition advanced by the plaintiff that the corporate veil may be pierced where one company exercises complete dominance and control over another is entirely too simplistic.
A cast number of examinations on the basis of an implied agency reveal that control, even overwhelming control, of a company is not sufficient on its own to create an implied agency between the company and the controller.
It is clear that Aussieair was the actual controller of PNGair as half of the directors in PNGair were appointed from Aussieair and the direction and guidance of PNGair were also provided by Aussieair. Nevertheless, as pointed out earlier, this fact does not on its own guarantee the existence of an agency relationship. Some other evidence is still needed in order to reach an agency relationship between Aussieair and PNGair.
- Were the profits treated as the profits of the parent?
The way in which profits are distributed may also play an important role in identifying implied agency. Such importance was reaffirmed by the decision made by Besanko J in Bird Cameron. In this case, Besanko J recognised the danger that an over-emphasis of the control test could lead to a result inconsistent with the separate legal entity decisions. Rather, he relied on the fact that the profits made by the company were not owned by the partners in the firm, but rather were owned by the company and distributed as franked dividends. Then his Honour said:
In this case, the profits generated by the general practice were received by BPM and that is an indicator that it was not an agent.
Since Besanko J depended his judgment largely upon the fact that profits were not transferred to partner, the way in which PNGair distributed its profits becomes relevant to Aussieair’s case in deciding agency relationship. However, it is given in the case that all of the profits were to be remitted to Aussieair in the form of dividends, which is opposite to the situation found in Bird Cameron. That is to say, such evidence is an indicator to the contrary of what was decided in Bird Cameron. Based on this point only, Aussieair and PNGair are still regarded as having agency relationship.
- Considering the commercial realities
There are a plenty of cases where the court was reluctant to infer an implied agency. With scant attention paid to commercial realities, Rogers CJ observed that “it was seldom that” groups “paused to consider which of the subsidiaries should become the contracting party”. In Stanborough v Woolworths Ltd, the tension was also illustrated between commercial realities and the separate entity doctrine. The decision in Commisioner of Taxation v BHP Billiton Finance Ltd even reinforces the view that it is unlikely to pierce the corporate veil because of corporate group taking advantage of the benefits of separate legal status and that commercial morality has no role to play in those situations (Hargovan and Harris 2011, p. 92). In Tate v Freecorns, Burt J paid scant regard to commercial realities and found practical facts which did not suggest an implied agency. Eventually, his Honour found no difficulty in denying such a relationship.
As made clear in the section above, Aussieair retained all profits gained by PNGair in the form of dividends. However, the aircrafts and facilities owned or leased by Aussieair, which were necessary to run an aviation business, were either sold or subleased to PNGair in July 2011. Soon after that, in August, PNGair got the aviation commercial license transferred from Aussieair, which means it could operate its domestic and international airline business from that date. It is clear that prior to the date when pilots and senior managers of Aussieair were made redundant (in September 2011), PNGair had already owned the property and equipments that were necessary for their business.
- Improper use of corporate group
Recent cases have also appreciated facts that companies abused the corporate veil for questionable purposes. In Australian Liquor, Hospitality and Miscellaneous Workers Union, Western Australian Branch v Burswood Resort Management Limited and Burswood Catering and Entertainment Pty Ltd, the court held that not to pierce the corporate veil and regard the member’s service as with one person in that circumstances would be unjust, inequitable and unconscionable:
Whilst it should not be lightly pierced, the corporate veil should not be allowed in proper circumstances in an administrative tribunal such as this to prevent the Commission acting according to equity, good conscience and the substantial merits of the case (i.e. where it is used to justify wrong, protect fraud, or bring about an inequity which otherwise would not have been occasioned).
Public awareness has been raised upon a number of practices and cases. James Hardie’s actions in seeking to shelter group assets from tort victims is one of the most dramatic both legally and morally. Dunn called for law reform so as to restrict the application of the limited liability principle (2005 p. 352). Strasser concluded from a number of cases involving corporate groups that “a substantially reformulated version” has been under developing subconsciously (2005 p. 664).
Regarding Aussieair’s cost cutting exercise, it should be pointed out that the Board of Directors got awarded in AGM. This is a strong indication that the transactions made by Aussieair earlier were driven by an unjust, inequitable and unconscionable purpose.
- CONCLUSION
Since the veil-piercing issue plays an essential role in this case and the law in Australia has not yet fully worked out certain answers regarding this issue, there is no guarantee for the success of the legal action taken by the employee associations. However, it is revealed from analysis above that it is highly probable that they can succeed in their legal proceeding. Although Aussieair can argue in respect to commercial realities and property owned by PNGair itself, emphasis is likely to be placed on their control of PNGair, transfer of profits generated by PNGair and questionable purposes.
Reference list:
Hargovan A and Harris J, ‘The Relevance of Control in Establishing an Implied Agency Relationship Between a Company and its Owners’ (2005) 23 Company and Securities Law Journal 69, p. 463.
Ford H, Austin R and Ramsay I, Ford’s Principles of Corporations Law (9th Edtion, Butterworths, Sydney, 1999), para 4.370.
Ramsay I and Stapledon G, ‘Corporate Groups in Australia’ (2001) 29 Australian Business Law Review 7, p. 15.
Dunn E, ‘James Hardie: No Soul to be Damned and No Body to be Kicked.’ [2005] Sydney Law Review 15, p. 352.
Strasser K, ‘Piercing the Veil in Corporate Groups’ (2005) 37 Conn. L. Rev. p. 664
Hargovan A and Harris J, ‘Together Alone: Corporate Group Structures and Their Legal Status Revisited’ (2011) 39 Australian Business Law Review, p. 92.
Bibliography:
Baxt R, ‘Tensions between commercial reality and legal principle - should the concept of the corporate entity be re-examined?’ (1991) 65 Australian Law Journal pp.352-353.
This journal discussed issues aroused prior to and after the judicial authorities paid scant regard to commercial reality than to lift the veil. In practice, considerable effort has been made in this area to bring legislative direction to the court. It helped me in understanding the confusion that the courts have on this area.
Dunn E, ‘James Hardie: No Soul to be Damned and No Body to be Kicked.’ [2005] Sydney Law Review 15, p. 339-353.
Hargovan A, ‘Corporate Governance Lessons from James Hardie’ (2009) 33 Melbourne University Law Review, pp. 984-1021.
The former review clearly explained the situation of that exercise whilst the letter one brought James Hardie’s practice into examination of another case (ASIC v Macdonald). These two gave me a busic understanding about the complicated restructure of the James Hardie Group and its impacts.
Hargovan A and Harris J, ‘The Relevance of Control in Establishing an Implied Agency Relationship Between a Company and its Owners’ (2005) 23 Company and Securities Law Journal 69, pp. 459-464.
The authors in this journal gave a detailed explanation of the Bird Cameron case and several implications from the Bird Cameron decision. I referred to some of those impications in the essay.
Hargovan A and Harris J, ‘Together Alone: Corporate Group Structures and Their Legal Status Revisited’ (2011) 39 Australian Business Law Review, pp. 85-94.
This article focuses on the BHP Billiton case and further discussed some limits of seperate entity doctrine. It gave me a clear idea about the BHP Billiton case, which I used in my essay.
Harris J, Hargovan A and Adams M, Australian Corporate Law, 3rd Edition 2011, LexisNexis Butterworths, chapter 5, pp. 161-203.
This chapter mainly deals with the legal characteristics of a company. It is very helpful in a number of ways. Firstly, it provided me with a general guidance upon the veil of corporate group as well as veil-piercing exercises. Secondly, it listed several questions and points in the end of this chapter for revision purposes. Lastly, a cast number of relevent materials were offered either in the main text or in the end of this chapter, including cases, key statements and academic journals.
Ramsay I and Stapledon G, ‘Corporate Groups in Australia’ (2001) 29 Australian Business Law Review 7, pp. 7-32.
This article basically provides a comprehensive discription about Australian corporate groups on the basis of empirical study. It is extremely useful in that empirical evidence revealed many insights into the current situation of these groups, perticularly regarding the viel-lifting issue relevent to this essay.
Strasser K, ‘Piercing the Veil in Corporate Groups’ (2005) 37 Conn. L. Rev. pp. 637-665.
This article took a various cases regarding corporate groups into careful consideration, comparing the reasoning of and reactions to those decisions. Eventually, Strasser reached that a substantially reformulated approach in dealing with veil-piecing in corporate groups has been developing. It made me appreciate that traditional approach in this area has several weaknesses that could give rise to severe consequences.
Industrial Equity Ltd v Blackburn (1977) 137 CLR 567
Walker v Wimborne (1976) 137 CLR 1
Salomon v Salomon & Co Ltd [1897] AC 22
The Albazero [1977] AC 774 at 807
Adams v Cape Industries Plc [1990] Ch 433
Bank of Tokyo Ltd v Karoon [1987] AC 45
Smith Stone & Knight Ltd v Birmingham Corp [1939] 4 All ER 116.
Tate v Freecorns Pty Ltd [1972] WAR 204.
ACN 007 528 207 Pty Ltd (in liq) v Bird Cameron (Reg) (2005) 91 SASR 570.
Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549.
Briggs Qintex Australia Finance Ltd v Schroders Australia Ltd (1990) 3 ACSR 267, similar statement made by his Honour in Briggs v James Hardie & Co Pty Ltd as well.
Stanborough v Woolworths Ltd [2005] NSWADT 203.
Commisioner of Taxation v BHP Billiton Finance Ltd (2010) 182 FCR 526.
Australian Liquor, Hospitality and Miscellaneous Workers Union, Western Australian Branch v Burswood Resort Management Limited and Burswood Catering and Entertainment Pty Ltd [2004] WAIRComm 12952
Australian Securities and Investments Commission v Macdonald, (No 11) [2009] NSWSC 287