Contractual emplyment entitlements

The acts of the companies may be a sham intended to give the appearance of legal rights which are different to the actual legal rights. Lord Diplock identified as sham “acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intended to create”. In this case, Flywell would argue that it set up a subsidiary to act as a potential competitor; that the pilots were in fact redundant to Flywell’s needs and that Jetover, wanting to hire pilots at a lower cost, properly took advantage of the fact that the redundant pilots were available to hire them.  The Pilot’s Association would argue that the transactions were a sham, used as a mask to hide the truth which was the pilots being denied their entitlements under their valid employment contracts with Flywell and being rehired into the same positions on lower pay. The pilots could rely upon the authority of the Gilford Motor case in which a company was setup to avoid a non-compete obligation and to hide the breach of this obligation. The court held that was a sham. The facts suggesting a sham are that the pilots were made redundant and all of them were immediately hired by Jetover performing the same work, in Australia and paying Australian tax. The facts that are unhelpful to the pilots are the minutes of the Flyover Board meeting and the fact that Flyover has subsequently hired other pilots at the higher salary which the redundant pilots had been paid.

If the Association was successful, the court could rule that the transactions were a sham so the redundancies and the new contracts with Jetover would be set aside, leaving the pilots in the position they were previously, employed by Flywell on the terms of their former contracts.

The Pilot’s Association argument is not an easy one.  Even though, on the authority of the Gilford Motors case the court will pierce the corporate veil if a transaction is designed to avoid the company’s legal obligations, it will not do so lightly. In Dennis Willcox Pty Ltd v FCT the court said that “the separate legal personality of a company is to be disregarded only if the court can see that there is, in fact or in law, a partnership between companies in a group, or that there is a mere sham or façade in which that company is playing a role, or that the creation or use of the company was designed to enable a legal or fiduciary obligation to be evaded”.

The courts will lift the corporate veil where a company is used as nothing more than an artificial device by the defendants for the purpose of ‘shielding themselves from their pre-existing liabilities under contract, tort or statute’. The Association must prove that Jetover was used to avoid Flywell’s legal obligations to the pilots. According to the January 2010 board meeting minutes the directors of Flywell wanted to create a new corporate entity (Jetover) for strategic reasons in the long term interests of the company. If the statement in the minutes is accepted as true, the aim of Flywell was not to avoid its legal obligations to the pilots; although the Pilot’s Association will argue that the minutes are part of the sham, designed to hide the real purpose. From the facts, it is difficult to explore this further but the Association would be supported by Flywell management’s request that the pilots take a voluntary reduction in their pay, which the pilots refused, before Jetover was incorporated and the pilots made redundant. The Association would need to show that Flywell had constructed Jetover and the transfer of staff simply to force the pilots into taking the reduced pay and conditions which they had previously refused.

The Association could also argue that the court should pierce the corporate veil by identifying an implied agency relationship between Flywell Ltd and Jetover Ltd. In the Smith, Stone & Knight case, Justice Atkinson identified six indicia of an agency relationship between a parent and subsidiary. Most of them are satisfied by the Flywell/Jetover facts but the case has been criticised in Australia and other Australian authorities are less helpful for the pilots. The Court will consider how the subsidiary’s profits are distributed to the parent; in the Bird Cameron case, Justice Besanko refused to find an agency relationship because the company operated its own independent business despite its control by another party, and importantly the profits of the company were not owned by the other party but instead owned by the company and distributed to the other party as a dividend.  Jetover’s profits are distributed to Flywell as a dividend and both companies operate seemingly independent businesses although the facts are not sufficient to determine the latter point. As such, the Association may find it difficult to prove an agency relationship.

If Jetover was acting as the agent of Flywell, the Association would argue that the actions of Jetover in hiring the pilots are the actions of Flywell. If that were so, then Flywell made the 200 pilots redundant, but then, through the acts of its agent, immediately rehired all of them into the same roles on lower pay. In that event the redundancies are not valid because the positions were not actually redundant and the pilots would ask the courts to reinstate their previous employment contracts. The sham argument seems to be a stronger argument as the agency position is more complex in this claim and may present difficulty because the pilots have signed new contracts with Jetover, which the Association would want to avoid so that the pilots could be reinstated at Flywell on their former contracts.

The stronger argument for the Association is that the redundancy and rehire arrangements were a sham and constructed by Flywell in order to avoid paying the pilots the salary and benefits they were entitled to under their contracts and force them to resign and accept other jobs at reduced pay. Although the Association may have a strong moral argument, the legal one is not easy as the courts are reluctant to pierce the corporate veil, despite economic reality, and the Association would need to show that Jetover was created and the associated acts were done with the purpose of avoiding Flywell’s legal obligations to the pilots. This will be difficult because the minutes of the board meeting suggest Flywell had strategic aims in the restructure although, depending on what other evidence there was to support that, the court might conclude the minutes were not true. The outcome of any case is unpredictable because the cases turn on their individual facts and some recent key cases such as the Patrick Waterfront Dispute and the James Hardie restructure were not decided in court but instead were resolved in negotiated settlements; in both these cases the settlements were encouraged by sustained public criticism in the news and media.

Bibliography

Harris, Jason, Anil Hargovan, and Michael Adams, Australian Corporate Law (LexisNexis Butterworths, 2nd ed, 2009)
The Veil Doctrine in Company Law, Amin George Forji, September 28, 2007. www.llrx.com, accessed 27 August 2010
Paper: Piercing the corporate veil – August 2000, Della Stanley and Helen Condon, http://www.aar.com.au/pubs/insol/insolaug00.htm
http://www.industrialrelations.nsw.gov.au/About_NSW_IR/National_IR_System/Workplace_information/Notice_of_termination_and_redundancy.html

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