This case deals with a dispute aroused from employer taking advantage of the corporate group to offer down-market salary and conditions to its employees in order to get a competitive edge. The group, made up of Aussieair (parent) and PNGair (subsidiary), made employees in Aussieair redundant and provided them with employment in PNGair based on pay rates in Papua New Guinea (PNG), which was effectively 25% lower. 1. THE LEGAL ISSUE The main issue raised by this case is whether it is legitimate to pay those employee entitlements at a lower rate than what would be paid according to the holding company (Aussieair) in Australia.
Although the veil in corporate group shields the holding company from obligations of its subsidiaries, in some cases the court may deny such a veil. This is commonly referred to as “lifting” or “piercing” the veil. Considering this case, the employee associations could challenge directors’ argument should the veil in corporate group be ignored by juridical authorities. Therefore, it is of particular significance to determine whether the court should lift the veil covering Aussieair and PNGair. 1. THE VEIL IN CORPORATE GROUPS
The veil in corporate group refers to the situation where creditors of one company in a group “can only look to that company for payment of their debts”. In other words, assets of the corporate group cannot be pooled to pay for the debts incurred by each company within the group: Walker v Wimborne. The reason behind this is that each company within the group is a separate legal entity. One of the major legal consequences of a separate legal entity, being that shareholders have limited liability, was illustrated in the leading case Salomon v Salomon & Co Ltd.
In The Albazero, Roskill LJ extended such principle to corporate groups and observed: … each company in a group of companies … is a separate legal entity possessed of separate legal rights and liabilities so that the rights of one company in a group cannot be exercised by another company in that group even though the ultimate benefit of the exercise of those rights would enure beneficially to those person or body corporate irrespective of the person or body in whom those rights were vested in law.
This distinction suggests that not only the entire group is treated as an entity from outsiders’ perspective, but also every member inside the group should be treated separately. In this regard, the directors of Aussieair would argue that employment offered by PNGair was separate from the Aussieair in the sense that it should be based on salary rates where PNGair (not Aussieair) operated. 1. LIFTING THE VEIL
Unlike lifting the veil in a single company where statutory rules and judge-made rules are very much clear-cut, the question as to whether the veil in a corporate group should be ignored is still under debate. It is believed that the most common ground argued in support of lifting the corporate veil was agency and that the agency ground is of particular relevance to corporate groups (Ramsay and Stapledon 2001, p. 15). As Ford, Austin and Ramsay explained, there are plenty of situations in which it gives rise to the court affirming the agency relationship:
This may happen where a parent company forms or acquires a subsidiary ostensibly to do something for which the subsidiary needs a minimum level of resources but the parent does not give it adequate proprietors’ capital or loan money, or equip it to run its own business by loan of personnel or other resources or give it a reasonable chance of independently obtaining credit or resources from third persons. (Ford, Austin and Ramsay 1999, para 4. 370)
The most frequently-cited decision concerning the identification of an implied agency relationship between members of a corporate group is the decision of Atkinson J in Smith Stone & Knight Ltd v Birmingham Corp where he established a number of questions in the course of identifying an agency relationship between the parent company and its subsidiary. Although his reasoning has received mixed and limited reception in Australia, it is still worth trying to determine the existence of agency relationship based on some of those questions.
1. Was the parent in effectual and constant control? A company that is able to exercise complete dominance and control over another is regarded as a strong indicator that an implied agency relationship exists. However, in Tate v Freecorns Pty Ltd, Burt J regarded the fact that a company controlled and wholly owned by the parent company “may throw some light”, “but it cannot be decisive”.
In ACN 007 528 207 Pty Ltd (in liq) v Bird Cameron (Reg), Besanko J followed Tate v Freecorns, stating that “too much emphasis on the other five [criteria] relates to control and control of itself cannot be a decisive indicator of agency”. According to Hargovan and Harris, the decision made by Besanko J “provides a ratio ruling that control by shareholders and complete unity of shareholders and management are never sufficient to lift the corporate veil, and following from this case, are also insufficient to establish an implied agency” (Hargovan and Harris 2005, p.463).
Significant statement was also made by Rogers JA in Briggs v James Hardie & Co Pty Ltd that: As the law presently stands, in my view the proposition advanced by the plaintiff that the corporate veil may be pierced where one company exercises complete dominance and control over another is entirely too simplistic.