Corporate structures, the veil and the role of the courts.

Author:Warren, Marilyn
Position::Australia
 
FREE EXCERPT

Contents I Preface: Professor Ford II Introduction III Directors' Liability IV Limited Liability and Corporate Groups V Direct Liability of Parent Entities A Chandler v Cape B The Australian Cases C Canada D Comparison of the Different Approaches to Liability VI Conclusion I PREFACE: PROFESSOR FORD

This lecture is in honour of Professor Harold Ford, an Australian doyen of corporations law and trusts law.

Professor Ford enrolled in the Articled Law Clerks course at the University of Melbourne prior to World War II, and completed it after six years of service in the Royal Australian Navy during the war. He won the Supreme Court Prize for Articled Clerks in 1948, and shortly after commenced his illustrious academic career at this university. (1)

He was Professor of Commercial Law at Melbourne Law School until his retirement in 1984, and was Dean of the Law School in 1964 and from 1967 to 1973. (2) Beyond the Law School, he was engaged in extensive law reform work, including chairing the federal government's Companies and Securities Law Review Committee. (3) In the Committee's final report, the Committee members acknowledged Professor Ford's 'industry and intellectual leadership' as being the 'driving force' in the Committee's achievements. (4) He was also the founding chairman of the Leo Cussen Institute. (5) He was made a Member of the Order of Australia in 1994 for his services to the law. (6)

For those who did not have the privilege to be taught by, or work with, Professor Ford, his influence is strongly felt through his seminal texts. Professor Ford's textbook Principles of Corporations Law (7)--which was unprecedented on its initial publication, Australian students and practitioners having previously relied on Gower's English text, with an Australian supplement--is indispensable to those studying or practising in the area. (8) Similarly, every good legal library has a copy of Ford and Lee's Principles of the Law of Trusts.

Those who were fortunate enough to be taught by, or work with, Professor Ford speak not only of an intellectual giant, but also of a kind and generous man of integrity. He was a respected teacher and mentor who influenced generations of law students and lawyers. It is a privilege to have been invited to give this lecture in Professor Ford's memory.

II INTRODUCTION

In this lecture, I have chosen to canvass a topic that has been the subject of intense discussion for a long time, but which remains fascinating and in significant parts unresolved. That is the problem of the 'veil'--to what extent can courts look behind legal structures to commercial realities in determining the disputes before them?

The topic of piercing the veil has been described as an 'unprincipled and "arbitrary"' area of the law. (10) In a sign of how controversial this area is, in the 2013 United Kingdom Supreme Court decision of VTB Capital plc v Nutritek International Corporation ('VTB'), (11) Lord Neuberger queried whether it was even possible for a court to pierce the corporate veil in the absence of a statutory mandate to do so. (12) His Lordship subsequently drew back from this position in the case of Prest v Petrodel Resources Ltd ('Prest'), (13) which was decided a few months after VTB. In Prest, Lord Neuberger was persuaded by Lord Sumption that the doctrine of veil-piercing did have a place in the law, albeit a narrow one.14 In reaching that conclusion, however, Lord Neuberger remarked that:

It is ... clear from the cases and academic articles that the law relating to the doctrine is unsatisfactory and confused. Those cases and articles appear to me to suggest that (i) there is not a single instance in this jurisdiction where the doctrine has been invoked properly and successfully, (ii) there is doubt as to whether the doctrine should exist, and (iii) it is impossible to discern any coherent approach, applicable principles, or defined limitations to the doctrine. (15) The fact that the highest court in the United Kingdom ('UK') was, very recently, having discussions about the existence of a purported legal principle that has been the subject of reams of legal writing is a sign of the unsettled nature of this topic.

Before I launch into substantive discussion, I will define the scope of this lecture. Commentators have noted that 'pure' veil-piercing is a narrow concept. (16) In Atlas Maritime Co SA v Avalon Maritime Ltd; The Coral Rose [No 1], (17) Staughton LJ drew a distinction between strict 'veil-piercing' and the looser notion of 'veil-lifting, saying that the former involves 'treating the rights or liabilities or activities of a company as the rights or liabilities or activities of its shareholders', while the latter involves 'hav[ing] regard to the shareholding in a company for some legal purpose.' (18) At the same time, some commentators and courts have used the terms 'veil-piercing' and 'veil-lifting' interchangeably. (19)

In this lecture, I will discuss the veil and scrutinise corporate structures in a broader rather than narrower sense. The debate surrounding veil piercing or lifting in its broad sense is a rich area for case law and academic discussion, and I do not purport to provide a comprehensive overview of the extant debates. Rather, I want to focus on a few areas which I think are interesting and usefully highlight the tensions the courts have to grapple with when faced with corporate structures.

III DIRECTORS' LIABILITY

A good place to start might be the collapse of Queensland Nickel Pty Ltd ('Queensland Nickel'), which has received considerable media attention in recent months. As has been widely reported, Queensland Nickel went into voluntary administration in January 2016. (20) Queensland Nickel operated the Yabulu refinery--employing all the workers there and contracting with suppliers--but did not own any of the refinery assets. Instead, those assets are owned by QNI Metals Pty Ltd ('QNI Metals') and QNI Resources Pty Ltd ('QNI Resources'). (21) Between them, QNI Metals and QNI Resources hold all of the shares in Queensland Nickel. (22)

On 11 April 2016, FTI Consulting released its administrators' report on Queensland Nickel. The report estimated that Queensland Nickel owed over $200 million to secured and unsecured creditors. (23) According to news reports, these debts include workers' entitlements, unpaid council rates and the cost of remediation of the refinery site. (24)

On 22 April 2016, Queensland Nickel's creditors voted to put the company into liquidation, in accordance with the administrators' recommendation. (25) The first courtroom hearing involving Queensland Nickel has already occurred. In mid-April 2016, QNI Metals and QNI Resources sought an interlocutory injunction in Queensland's Supreme Court to block FTI Consulting, as administrators of Queensland Nickel, from seeking to recover $190 million from them. (26) Burns J was due to hand down judgment on the interlocutory injunction on 29 April 2016, but on the afternoon of 28 April, the applicants advised the Court that they were withdrawing the interlocutory injunction application. (27) According to an article in The Australian, Burns J was critical of this last-minute move, stating in Court: 'I've wasted enough time this week on this matter writing a judgment that won't be delivered.' (28) These kinds of situations with gaping debts and sheltered assets reveal the promise and the problem of limited liability. Limited liability encourages desirable economic activity by separating out the reward from the risk. (29) Contracts that advance shareholders' interests can be entered into while ensuring that recourse can only be made against company assets rather than shareholders' personal assets. (30) This construction is an accepted reality of business. The risk of insolvency is instead borne by creditors whom, it is argued, are able to factor that risk into their required return. (31)

An existing incursion into the corporate veil is that limited liability applies to shareholders but not to directors. Courts can and do look through the company to its actors and penalise those who, for example, fail the duty enshrined in s 181 of the Corporations Act 2001 (Cth) to act in good faith in the best interests of the company.

To return to Queensland Nickel as an example, the administrators' April report into the company expressed the opinion that there had been 'reckless' conduct by the directors. (32) The administrators stated that since mid-2012, 'over $189.3M of related party loan balances has been forgiven' by Queensland Nickel for the benefit of director-related parties. (33) The report also noted an additional $26 million was transferred as donations to political parties, transfers which may have indirectly benefited a director of Queensland Nickel. (34)

The administrators also expressed the view that Clive Palmer, a former director of Queensland Nickel, 'appears to have acted as a shadow/de facto director of [Queensland Nickel] at all material times from February 2012', excluding three periods in which he was an appointed director (most recently ending in February 2015). (35) Mr Palmer has denied this allegation. (36)

Recognition of shadow directors is a powerful way in which the courts look past corporate structures to the commercial realities behind them. However, it is not lightly exercised. The extension of directors' responsibilities to those who assist in decision-making carries the risk of inculpating myriad professional advisers. For example, it is not uncommon for lenders to get involved in attempts to save troubled companies. (37) In this context, the analysis of exactly what role has been played by the alleged shadow director must be extraordinarily precise.

The relevant test was set out in the trial judgment in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd ('Buzzle'), (38) which was approved on appeal by the New South Wales Court of Appeal: (39) 'the directors collectively in the exercise of their powers...

To continue reading

REQUEST YOUR TRIAL