The purpose of this essay is to advise Josh, Gayle and Sunny on whether they can
commence action against Gamma Ltd and Beta Ltd. For the purpose of this essay, two
issues are to be dealt with:
1) Whether Gamma Ltd and Beta Ltd is a separate legal entity: and
2) Whether the veil of incorporation would be lifted by the courts.
In relation to the first issue, it is required to determine the position of Gamma Ltd and
Beta Ltd. Salomon v Salomon & Co Ltd provides that an incorporated company is a
separate legal entity from its founder, shareholders and directors. It is a legal person
with its own separate legal personality which is entirely separated from its shareholders
and directors. Due to a company being a separate legal personality, it is capable of
being sued or sue, buy or sell property in its own name, entering into a contract. The
status of separate legal acts as a shield which prevents the court from looking beyond
the façade of the company to the shareholders who comprise it.
On the facts, both Gamma Ltd and Beta Ltd are incorporated companies, therefore
following the principle of Salomon, they are separate legal entities which are separated
from their shareholders. Therefore the shareholders of Gamma Ltd and Beta Ltd are
protected by the veil of incorporation, thus will not be liable for the debts and liabilities of
the company and will immuned from lawsuits. However there are exceptions to the
principle of separate legal entity which allow the courts to lift the corporate veil which will
be addressed in the next issue.
In relation to the second issue on whether the courts will lift the veil of incorporation,
it is required to discuss on what basis would the courts lift the corporate veil. In the
, current case Josh, Gayle and Sunny are advised to raise three exceptions to the
principle of separate legal entity which allow the courts to lift the corporate veil. The
three basis are as follows:
1) Agency;
2) Fraud, façade or sham; and
3) Justice and equity.
In establishing the basis of agency, it must be shown that one company is carrying on
the business of another so that transaction entered into by the subsidiary can be
deemed as transaction of the holding company. Atkinson J in the case of Smith Stone
and Knight v Birmingham Corporation provides for six criteria, due to insufficient
facts, only four out of the six will be addressed:
1) Were the persons conducting the business appointed by the parent?
2) Was the parent the head and brain of the trading venture?
3) Did the parent govern the venture, decide what should be done and what capital
should be embarked on the venture?
4) Was the parent ineffectual and constant control?
In relation to the first criteria, it must be shown that the persons conducting
businesses of the subsidiary company is appointed by the parent company. On the
facts, Josh was appointed to Gamma Ltd by Beta Ltd. This can be seen in the facts of
the current case where Beta Ltd removed Josh from his position as the managing
director of Gamma Ltd and replaced that position with another director. Thus it can be
safely inferred that Beta Ltd (AKA the parent company) controls the appointment and
commence action against Gamma Ltd and Beta Ltd. For the purpose of this essay, two
issues are to be dealt with:
1) Whether Gamma Ltd and Beta Ltd is a separate legal entity: and
2) Whether the veil of incorporation would be lifted by the courts.
In relation to the first issue, it is required to determine the position of Gamma Ltd and
Beta Ltd. Salomon v Salomon & Co Ltd provides that an incorporated company is a
separate legal entity from its founder, shareholders and directors. It is a legal person
with its own separate legal personality which is entirely separated from its shareholders
and directors. Due to a company being a separate legal personality, it is capable of
being sued or sue, buy or sell property in its own name, entering into a contract. The
status of separate legal acts as a shield which prevents the court from looking beyond
the façade of the company to the shareholders who comprise it.
On the facts, both Gamma Ltd and Beta Ltd are incorporated companies, therefore
following the principle of Salomon, they are separate legal entities which are separated
from their shareholders. Therefore the shareholders of Gamma Ltd and Beta Ltd are
protected by the veil of incorporation, thus will not be liable for the debts and liabilities of
the company and will immuned from lawsuits. However there are exceptions to the
principle of separate legal entity which allow the courts to lift the corporate veil which will
be addressed in the next issue.
In relation to the second issue on whether the courts will lift the veil of incorporation,
it is required to discuss on what basis would the courts lift the corporate veil. In the
, current case Josh, Gayle and Sunny are advised to raise three exceptions to the
principle of separate legal entity which allow the courts to lift the corporate veil. The
three basis are as follows:
1) Agency;
2) Fraud, façade or sham; and
3) Justice and equity.
In establishing the basis of agency, it must be shown that one company is carrying on
the business of another so that transaction entered into by the subsidiary can be
deemed as transaction of the holding company. Atkinson J in the case of Smith Stone
and Knight v Birmingham Corporation provides for six criteria, due to insufficient
facts, only four out of the six will be addressed:
1) Were the persons conducting the business appointed by the parent?
2) Was the parent the head and brain of the trading venture?
3) Did the parent govern the venture, decide what should be done and what capital
should be embarked on the venture?
4) Was the parent ineffectual and constant control?
In relation to the first criteria, it must be shown that the persons conducting
businesses of the subsidiary company is appointed by the parent company. On the
facts, Josh was appointed to Gamma Ltd by Beta Ltd. This can be seen in the facts of
the current case where Beta Ltd removed Josh from his position as the managing
director of Gamma Ltd and replaced that position with another director. Thus it can be
safely inferred that Beta Ltd (AKA the parent company) controls the appointment and
