There are three main parties to this case; Flywell Ltd (F), the parent company, Jetover Ltd (J), the subsidiary, and the Australian Pilots Association (APA) which is representing the 200 pilots currently employed by J. F incorporated J as a wholly owned subsidiary of F and appointed four directors for J from the six directors of F. Two hundred of F’s pilots were made redundant and immediately rehired by J on lower wages and entitlement previously enjoyed at F. New pilots hired by F receive 20% more pay and entitlements for the same work than pilots of J.
The issue here is that are the original contractual entitlements received at F applicable to the pilots of J? Firstly it must be emphasised that through incorporation J is a separate legal entity from its founder, shareholders and directors as demonstrated in the landmark case of Salomon v Salomon & Co Ltd . Lord Halsbury LC made the judgement that once a company is legally incorporated it must be treated as a separate legal entity.
This important legal principle is accounted for in the Corporations Act 2001 s124(1) which states that “a company has the legal capacity and powers of an individual” . Since J is a separate legal entity, it can be argued that the contract between J and its pilots is a new contract which bears no relationship to the pilots’ former contract with F. This is portrayed in Bank of Tokyo Ltd v Kanoon , where the parent (Bank of Tokyo) and the subsidiary (Bank of Tokyo Trust Co) were deemed to be economically one, however under the law, the separation was fundamental and cannot be bridged .
Since the pilots accepted the job offer with J, the pilots are no longer employed by F and have no legal right to receive the same wages and entitlements as F’s employees. However, the precedent in the Saloman Case is not gospel and the ‘corporate veil’ can be lifted in certain circumstances . If the company is used: •as a sham to hide the real purpose of the controller
•to avoid existing legal obligation•for fraud•to assist in director’s breach of fiduciary duty•trade with the enemy (e.g. in times of war)•to avoid tax•as a puppet for the controller•to act as an agent in a corporate group its corporate veil may be lifted to allow the courts to see who is really controlling the company. Ian M Ramsay and David B Noakes define a sham as “something that is intended to be mistaken for something else or that is not really what it purports to be”.
It can be argued that J was created as a “mask” by F to avoid its legal obligation to pay its employees the higher wages and entitlements. In Kensington International Ltd v Republic of Congo the existence of sham transactions between Cotrade and Glencore and the corporate nature of Sphynx Bermuda and AOGC as sham companies allowed Justice Cooke of the High Court of England to pierce the corporate veil.
It was handed down that debts owed to Cotrade (a wholly owned subsidiary of the Republic of Congo’s state-owned company SNPC) were in fact debts owed to the Republic of Congo as the SNPC and Cotrade were not separate legal entities. Using this logic (precedent) J can be shown to be a sham company as it has no separate existence than to generate profit for F. This will allow the corporate veil to be lifted to show that through complete ownership (F only shareholder) and control (4 directors of J appointed from 6 directors of F) F and J are in fact one and the same.
The relationship between F and J meet the criteria to classify J as a subsidiary of the parent company F under Corporations Act s46 . F’s control over J’s board is demonstrated by F appointing the J’s 4 directors. F is the only shareholder of J and thus holds more than half of the voting rights (in fact holds all the voting rights).
The avoidance of legal obligation is another circumstance that allows the corporate veil to be lifted. In Gildford Motor Co Ltd v Horne, Horne was contractually obligated to not solicit any of Gildford Motor’s (GM) customers during his employment and for a period of 5 years after he has left the company. Shortly after resigning from his employment, Horne and his wife set up a similar company to GM. Horne solicited with GM’s customers through the newly incorporated company.
The Court of Appeal (UK) stated that the new company was a “mere cloak or sham” used by Horne to breach his contractual obligation. Similarly, it can be shown that F had a contractual obligation to its employees to pay a certain wage and provide certain entitlements in return for the standard of work provided by the pilots. The existence of legal obligation is demonstrated by F having to request the pilots to voluntarily take a reduction in pay and the pilots refusing.
Since the pilots provide the same standard of work for J and through lifting the corporate veil, F and J are determined to be one and thus the pilots may be entitled to their previous remuneration. reasey v Breachwood Motors Ltd is another example where restructuring was used to avoid a legal obligation. Creasey was employed by Breachwood Welwyn Ltd and was also a creditor. Breachwood Welwyn transferred all of its assets to Breachwood Motors Ltd, which they controlled, to avoid having to repay Creasey. The court held that one of the key reasons for the restructure was to avoid legal obligations to pay its employee legal entitlements. The corporate veil was lifted and it was held that Breachwood Motors Ltd would be liable for the debt payable to Creasey.
This precedent further supports the application of Gildford Motor Co Ltd v Horne to this case. The existence of an agency relationship between the parent company and subsidiary provides ground for lifting the corporate veil. Justice Atkinson’s decision in Smith Stone & Knight Ltd v Birmingham Corp provides the criteria for determining an agency relationship. There are 6 criteria that must be present to infer an agency relationship between F and J: 1.Were the profits treated as the profits of the parent?
All the profits of J were transferred to F in the form of a dividend. However, there is no evidence that F treated the profits of J as its own prior to receiving the dividend. Applying the decision in Industrial Equity Ltd v Blackburn , it can be argued that F and J are separate legal entities in a corporate group because F only recognised J’s profits as its own after the dividend was paid out. Even though this is the case in principle, the existence of J as nothing more than a puppet of F, should allow the assumption that F considered J’s profits its own.
2.Were the persons conducting the business appointed by the parent? The 4 directors of J were appointed from the Board of 6 directors of F. 3.Was the parent the head and the brain of the trading venture? F is the only shareholder of J and thus holds all the voting rights for the appointment of the directors of J that will manage the company.
4.Did the parent govern the adventure, decide what should be done and what capital should be embarked on the venture? F incorporated the company, appointed directors to J from its own Board and receives all of J’s profits. 5.Did the parent make the profit by its skill and direction? F appointed its own directors to manage J and since J is also an airline company, it is fair to assume F would have passed on its industry knowledge and policies to J. Also J hired pilots previously employed by F and it is reasonable to assume these pilots would have received skills training while employed at F. 6.Was the parent in effectual and constant control?
J is a wholly owned subsidiary of F and thus under the constant control of F. In Harrington v Dow Corning Corp Mackenzie J stated that the subsidiary must under the complete control of the parent to the extent that it has no independent functions of its own. Now it can be established there is an agency relationship between F and J. The corporate veil can be lifted and F and J viewed as one. This means the employees of J employed under the same scope as the employees of F should receive the same wage and entitlements.
However, the precedent of Smith Stone & Knight Ltd v Birmingham Corp has received a mixed response in Australia with some courts following and some courts declining the decision by Justice Atkinson. A recent Australian precedent that followed the ruling of Justice Atkinson and one that is very relevant to the case is Burswood Catering and Entertainment Pty Ltd v ALHMWU (WA branch) . BCE a wholly owned subsidiary of BRM was used to pursue catering contracts and avoid the collective agreement between BRM and the union representing the staff. BCE started to employ some staff previously employed by BRM under new contracts with different conditions from what they received at BRM.
The corporate veil was lifted by establishing an agency relationship between BRM and BCE and the fact that BCE was incorporated to avoid legal obligation. Since the employees of BCE were engaged in similar work previously performed at BRM the commission granted a new order imposing a new award on BCE with similar terms and conditions to that of the collective agreement of BRM. In some cases, the corporate veil will be lifted if it will bring about a fair or just result as demonstrated in RMS Glazing Pty Ltd v The Proprietors of Strata Plan. It can be demonstrated that lifting the corporate veil will allow the employees of J, that carry out the same work as employees of F, to be paid the same wage and receive the same entitlements.
This allows for a fair and just result. In conclusion, it appears that the corporate veil can be lifted through demonstrating a sham, avoidance of legal obligation, an agency relationship between F and J and a fair result. However F can argue that F and J should be considered a separate legal entity under Salomon’s case and Corporations Act s124(1) because it allowed for J “to become a significant operation in its own right”. The chances of APA getting the former employment entitlements to apply to the pilots of J will depend on lifting the corporate veil and viewing F and J as one entity.