Additionally, whether the concept of corporate veil applies to the corporate groups (between Casino Ltd and Caterers Ltd). 2. Is it possible to lift or pierce the corporate veil of corporate groups on the basis that: (a) there is an implied agency relationship between the companies in the group? (b) the subsidiary company is incorporated to avoid a contractual obligation? 3. Has the company breached Section 596 of the Corporations Act?
The Salomon case establishes that an incorporated company is a separate legal entity from its participants, namely founders, shareholders, directors, employees and agents. Consequently, a company could enter into contracts in its own rights and possess assets and liabilities distinct from its members. In legal terminology, this rule is referred to as the ‘corporate veil’. According to the Walker case at 6 per Justice Mason, a corporate group is “a number of companies associated by common or interlocking shareholdings, allied to unified control or capacity to control. Accordingly, Lord Justice Roskill in Albazeo case observed: “… each company in a group of companies … is a separate legal entity possessed of separate legal rights and liabilities … the existence of those principles . … is impossible to deny, ignore or disobey … ” 2. (a) When an agency relationship exists in the corporate groups, the corporate veil could be pierced. Piercing the corporate veil is a judicially imposed exception to the separate legal entity principle of a company in which the actions of the corporations and the shareholders will be treated as one.
Based on the SSK case, there are six mandatory criteria to be fulfilled to successfully infer the existence of agency relationship between corporate groups. These criteria are: 1) Were the profits treated as profits of the parent? 2) Were the persons conducting the business appointed by the parent? 3) Was the parent the head and brain of the trading venture? 4) Did the parent govern the venture; decide what should be done and what capital should be used? 5) Did the parent make profits by its skill and direction? 6) Was the parent in effectual and constant control?
It is important to note that in the Bird Cameron case, Justice Besanko stated that the first criteria of the 6 point test formulated in SSK case above identifies issue that is important in determining the existence of an agency relationship, but he rejected the other five criteria on the basis that “…too much emphasis on the other five criteria relates to control and control of itself cannot be a decisive indicator of agency …” Instead, four matters are identified for determining the existence of agency relationship: 1. The entity which owned the business 2. The entity which controlled the operation and management of the subsidiary
The entity which received the profits of the business conducted by the subsidiary 4. The reason or reasons for the proposal whereby the subsidiary came to conduct the general practice, and, in particular, were they good commercial reasons? (b) Using the case precedent ALHMWU, a company that is incorporated to avoid an existing contractual obligation may have its corporate veil lifted. 3. CA s596AA states that the purpose of the Act is to protect the entitlement of company’s employees from agreements that are entered into with the intention of defeating the recovery of those entitlements.
Employee entitlements that are protected include, amongst others, wages payable by the company for services rendered. CA s596AB prohibits a person from entering into agreements with the intention of, or with intentions that include the intention of: (a) Preventing the recovery of employees entitlements; or (b) Significantly reducing the amount of entitlement that the employees can recover. CA s596AC states that a person will be liable to pay compensation for contravention of s596AB: * to employees who suffer loss or damage because of it for actions taken to give effect to an agreement or transaction involved in the contravention. Applications Casino Ltd. and Caterers Ltd. are separate legal entities. The fact that Casino Ltd wholly owns Caterers Ltd. gives rise to the concept of corporate groups existing between the two companies. Regardless of this, one company is separate from the other company and the concept of corporate veil applies. The court may pierce the corporate veil when there is an implied agency relationship inside the corporate groups.
By applying the 6 point test from SSK case in an orderly manner, Casino Ltd. may have argued that the profits earned by Caterers Ltd. are separate from them, given that distribution was made in the form of dividends. However, in reality the profits belong to Casino Ltd. This is because all the profits are given to them and Caterers Ltd. gets nothing. This means that the first criterion is satisfied. Additionally, since all the directors of Caterers Ltd are appointed from the directors of Casino Ltd. , this means that the second criterion is also satisfied.
The fact that the incorporation of Caterers Ltd. was preceded by a meeting between the Board of Directors and senior managers of Casino Ltd where the reason for the creation of Caterers Ltd. was being discussed fulfilled the next criteria. Subsequently, a resolution was passed by the Board of Directors of Casino Ltd. to ensure that the management put into place matters that will allow Caterers Ltd to pursue the strategic objectives based on the plan devised by senior managers of Casino Ltd, thus fulfilling the fourth and fifth criteria.
Finally, the last criterion is also satisfied due to the implications of the prior five criteria, and also because the management of Casino Ltd. was in effect, the controllers of Caterers Ltd. Therefore, it could be said that there exist an implied agency relationship between Casino Ltd and Caterers Ltd. Alternatively, applying the case precedent Bird Cameron to determine the existence of agency relationship, firstly, Casino Ltd. is the owner of Caterers Ltd because the parent company wholly owns its subsidiary. Subsequently, Casino Ltd. is likely to control the operations and management of Caterers Ltd. iven that the directors of Caterers Ltd. are appointed by the parent company and a resolution has been passed whereby the management of Casino Ltd. will help Caterers Ltd to pursue their strategic objectives. Moreover, all the profits earned by Caterers Ltd are distributed to Casino Ltd. Finally, the reason for the creation of Caterers Ltd. being to manage the catering and entertainment services of the holiday resort was actually part of the services provided by Casino Ltd, therefore it could be argued that business of Caterers Ltd was merely an extension of Casino Ltd.
Since all the four points are satisfied, the trade union could argue that there is an implied agency relationship between Casino Ltd and Caterers Ltd. In the case ALHMWU, it could be argued that Caterers Ltd. had been formed to avoid a binding contractual agreement between Casino Ltd. and its employees. The case precedent which presents similar facts to the current case suggests that the incorporation of the subsidiary company to reduce the terms and conditions of the staff entitlement was not an insubstantial reason.
The workers union argued that the company had actually attempted to avoid a contractual agreement with its employees through restructuring, therefore the court had decided in favour of the employees. Following this line of reasoning, the corporate veil between Casino Ltd and Caterers Ltd could be pierced. Finally, the trade union could enforce the contractual agreement made between Casino Ltd and its employees by relying on CA s596, whereby the establishment of Caterers Ltd would have impacted on the contractual agreement. Particularly, the creation of Caterers Ltd. aused the redundancy of 60 employees of Casino Ltd. who were then offered new but identical positions in the Caterers Ltd. Unfortunately, they were subjected to new wages and conditions which were not as favourable as the ones they had while working for Casino Ltd. As Section 596AB clearly prohibits a person from entering into relevant transaction with the intention of, or with intentions that include the intention of preventing or reducing the amount of entitlements of the employees, Casino Ltd. may found themselves in breached of this section.