Employment Case. The main issue raised by this case is whether it is legitimate to pay those employee entitlements at a lower rate than what would be paid according to the holding company (Aussieair) in Australia.

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  1. THE BRIEF FACTS

This case deals with a dispute aroused from employer taking advantage of the corporate group to offer down-market salary and conditions to its employees in order to get a competitive edge. The group, made up of Aussieair (parent) and PNGair (subsidiary), made employees in Aussieair redundant and provided them with employment in PNGair based on pay rates in Papua New Guinea (PNG), which was effectively 25% lower.

  1. THE LEGAL ISSUE

The main issue raised by this case is whether it is legitimate to pay those employee entitlements at a lower rate than what would be paid according to the holding company (Aussieair) in Australia. Although the veil in corporate group shields the holding company from obligations of its subsidiaries, in some cases the court may deny such a veil. This is commonly referred to as “lifting” or “piercing” the veil. Considering this case, the employee associations could challenge directors’ argument should the veil in corporate group be ignored by juridical authorities. Therefore, it is of particular significance to determine whether the court should lift the veil covering Aussieair and PNGair.

  1. THE VEIL IN CORPORATE GROUPS

The veil in corporate group refers to the situation where creditors of one company in a group “can only look to that company for payment of their debts”. In other words, assets of the corporate group cannot be pooled to pay for the debts incurred by each company within the group: Walker v Wimborne.

The reason behind this is that each company within the group is a separate legal entity. One of the major legal consequences of a separate legal entity, being that shareholders have limited liability, was illustrated in the leading case Salomon v Salomon & Co Ltd. In The Albazero, Roskill LJ extended such principle to corporate groups and observed:

...each company in a group of companies ... is a separate legal entity possessed of separate legal rights and liabilities so that the rights of one company in a group cannot be exercised by another company in that group even though the ultimate benefit of the exercise of those rights would enure beneficially to those person or body corporate irrespective of the person or body in whom those rights were vested in law.

Similar observation was also noted in Adams v Cape Industries Plc.

The courts have repeatedly distinguished between “legal entity” and “economic entity”. Economic entity refers to the fact that a corporate group is regarded as an entity economically. In Bank of Tokyo Ltd v Karoon, Robert Goff LJ said:

... it would be technical for us to distinguish between parent and subsidiary company in this context; economically, he said, they were one. But we are concerned not with economics but with law. The distinction between the two is, in law, fundamental and cannot here be bridged.

This distinction suggests that not only the entire group is treated as an entity from outsiders’ perspective, but also every member inside the group should be treated separately. In this regard, the directors of Aussieair would argue that employment offered by PNGair was separate from the Aussieair in the sense that it should be based on salary rates where PNGair (not Aussieair) operated.

  1. LIFTING THE VEIL

Unlike lifting the veil in a single company where statutory rules and judge-made rules are very much clear-cut, the question as to whether the veil in a corporate group should be ignored is still under debate. It is believed that the most common ground argued in support of lifting the corporate veil was agency and that the agency ground is of particular relevance to corporate groups (Ramsay and Stapledon 2001, p. 15). As Ford, Austin and Ramsay explained, there are plenty of situations in which it gives rise to the court affirming the agency relationship:

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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 ...

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