Question

Joe is the sole director and shareholder of Homes Building Pty Ltd, a company that builds prestigious homes in Perth, Western Australia by mainly using sub-contractors and a few employees. Joe knew that due to the downturn in the building industry, the company’s business was in trouble. For the last 6 to 8 months, Joe had been making late payments to his sub-contractors and had accrued $200,000 in overdue payments. Joe had also missed some payments to the Australian Taxation Office (ATO) for taxes deducted from employees pay as well as superannuation contributions.

Joe sought advice from his accountant, Bill from Water & Young. Bill advised Joe that he should to take urgent steps to stop the company from collapsing. Bill introduced Joe to Ken, a pre-insolvency adviser who offered to restructure Homes Building Pty Ltd for $25,000, which Joe accepted.

Ken advised Joe to register a new company Homes Building (WA) Pty Ltd, with Joe still remaining the sole director and shareholder of the newly formed company. This name was chosen so as not to alert the building industry that there had been a change. Ken also advised Joe that the newly formed company should purchase the most valuable asset of Homes Building Pty Ltd, being its future business projects. This was formally done by drawing up a Purchase Agreement and obtaining a valuation through a friend to give an impression that everything was above board. However, the amount paid for the future business projects was below market value.

After the restructure, Homes Building Pty Ltd had no assets left, but had an abundant amount of outstanding liabilities. Ken appointed a friendly liquidator to wind up Homes Building Pty Ltd and deregister that company. By doing this, the creditors, the sub-contractors and the ATO have no means of being paid for their outstanding debts from Homes Building Pty Ltd.

With reference to the concept of the veil of incorporation and lifting the veil of incorporation, discuss if Joe could be held liable for the debts of Homes Building Pty Ltd.

Answer 1

Veil of corporation or corporate veil means that the acts of corporation is not the act of its directors, shareholders and managers. It limits the personal liability of the directors, shareholders and manager to the amount that business performs and do not bring in personal assets and liabilities of the individuals. However, there are various situation, in business, that requires legal authorities to life this corporate veil or veil of incorporation and find out the reasons behind the downfall of certain companies that failed.

Lifiting of Corporate Veil

There are various instances where corporate veil is required to be lifted. We will mention them and discuss a bit about and each and then move on to out case study.

1) When Company tries to avoid Legal Obligations: When there are legal obligations such as tax payments, fee payments etc and company fails to do so.

2) Where the Character of the Company is to be determined: When it becomes necessary to know if companies is owned by enemy country or the managers and shareholders are of enemy country and if the company works in the interest of enemy country

3) Where fraud is detected: If a company commits a fraud within the organisation.

There are few others but we will move to out case study.

"This name was chosen so as not to alert the building industry that there had been a change. "

This line clearly signifies that Joe and partner did not want to disclose the formation of new company. Rather, they hid the name on purpose and hence, it is a misconduct on purpose.

"However, the amount paid for the future business projects was below market value."

They decided to purchase the valuable asset from the new company. For that they asked their friend to value asset lower that the market value. Which is again considered as ftaud and misconduct.

"By doing this, the creditors, the sub-contractors and the ATO have no means of being paid for their outstanding debts from Homes Building Pty Ltd."

Clearly, they liquidated all the liabilites and de registered the company, The creditors and all other debts were unpaid. They did not do this with the consent of the people who have direct interest in the company.

Therefore, we can conclude that in the interest of the returns to the deserving party not being paid, fraudly transferring assets of the company at a low valuation to another company, the corporate veil can and should be lifted. Joe will be held liable for his actions and his personal asset can be used to pay off the debt as this was clear case of fraud and misconduct.

if you have any doubt, ask me in the comment section.