Introduction

The Salomon V Salomon & Co Ltd [1897] AC 22 case was a precedent to the modern company law in Australia which recognizes incorporated companies as legal entities separate from their parent company or their shareholders (Grantham & Rickett, 1998)¹. Within The Corporations Act 2001 (Cth) ², this principle is instituted as law where a company is said to be a separate legal entity with a separate personality and legal capacity. This implies that incorporated companies are separate entities and cannot be liable for debts incurred either by subsidiary companies or by parent companies, unless in a special case where the corporate veil is pierced to determine the reason behind the relationship between the corporations. It also means that shareholders of a corporate company cannot be liable to debts or torts incurred by the company (Harris, Hargovan & Adams, 2008)³. This principle has been practiced for over a hundred years in the Australian Judicial system and many corporate cases over the years have been based upon this principle. This paper researches, analyses and applies the relevant provisions of The Corporations Act 2001 (Cth) and relevant company law precedents to the case study of Iron Ore Ltd and Finance Pty Ltd v The Commissioner of Tax. It specifically analyses the principle of separate legal entity, circumstances of piercing the corporate veil, and the legal position held the Commissioner of Tax.

 

 

¹Grantham, R and Rickett, C 1998, ‘Corporate Personality in the 20th Century, (Eds) Hart Publishing, Oxford. P. 197-198.

² Corporations Act, 2001, (Cth) 119 (Austl) p. 6-8.

³ Harris, J, Hargovan, A, Adams, M 2008, ‘Australian Corporate Law (2^nd Ed)’, LexisNexis Butterworths, Victoria Ave Chatswood.

Legal issues

Iron Ore’s Pilbara project failed and its written down value was insufficient to pay Finance Pty Ltd the loan. This is a big loss to Iron Ore Ltd.  Finance Pty Writes off the loan as a bad debt to Iron Ore Ltd and wants a tax deduction on the debt. The commissioner of tax disallows the tax deduction and argues that Finance Pty is an extension of Iron Ore Ltd. The Commissioner of tax could have rationalized that Finance Pty should not receive a tax deduction due to the degree of control that Iron Ore Ltd exercised over it. It could also be due to Finance Pty Ltd acting as an agent for Iron Ore Ltd to cover its debts and losses.

Group Enterprises

Within a group of companies the separation of each company as a separate entity is usually respected by courts in Australia. Each company within a group of companies is viewed as a separate legal entity with its own legal rights and accounting for its own liabilities (Harris, Hargovan & Adams, 2008)³. One company within the group can not be held accountable for the liability of another within the group. This limited liability helps protect the assets of one company within the group in case the other company within the same group faces financial failure. The corporate veil protects the company from having its assets seized.

From the above case study, Finance Pty Ltd is an incorporated company and subsidiary of Iron Ore and so under the Corporations Act 2001, section 119, Finance Pty is a Separate entity from Iron Ore Ltd, and the Tax Commissioners argument that it is an appendage of Iron Ore cannot hold². But looking at the reformed statutory law in section 588V, it shows that a corporate veil may be lifted and make the holding company liable for the debts of its subsidiary company  if it is suspected within reasonable ground that the subsidiary company was insolvent when it incurred the debt (Harris, Hargovan & Adams, 2008)³.Agency

A case can be made against Finance Pty Ltd by the Commissioner of Tax based on the grounds of agency. For an agent relationship to exist the parent company is said to have a high degree of control of the subsidiary company in such a way that the subsidiary company is viewed to be an agent of the parent company. This argument has been refuted though on grounds that most parent companies usually have strong control over the operations of their subsidiary companies and so such an argument cannot be used to show an agent relationship. The acceptable way of gauging agency is by analyzing whether the profits of the subsidiary were treated as the profits of the parent company (Harris, Hargovan & Adams, 2008)³. In this case, the profits of Finance Pty Ltd were distributed to Iron Ore Ltd as dividends and were not claimed by Iron Ore Ltd. Based upon this ground then Finance Pty was not an Agent of Iron Ore Ltd and the argument that the operations of Finance Pty Ltd are fully controlled by Iron Ore can not hold since this does not give enough reason to pierce the corporate veil and hold the debt accountable to both companies (Nolan, 1993)⁵Fraud

A case can also be made based on grounds of fraud. Fraud in this case implies a controller using the corporation to evade a fiduciary or legal obligation.  In order for this to hold then the parent company must be proved to have the intention of using its subsidiary to deny the Tax office its pre existing legal right (Ramsay and Noakes, 2001, pp. 11⁶; Payne, 1997⁷