Incorporation and its Effects: Separate Legal Personality, Limited Liability, the Corporate Veil and Corporate Groups

Model answer - Question 1

Issue. The issue is the legal effect of incorporation and the consequences of treating the company as a person distinct from shareholders and directors.

Rule. Section 119 provides that registration brings the company into existence as a body corporate. Section 124 gives it legal capacity and powers. The foundational authority is Salomon: proper incorporation creates a person distinct from even a dominant or near-sole shareholder.

Application to Salomon. Salomon's company owned the transferred boot business and incurred its own debts. Salomon's near-total ownership and management control did not make the company's liabilities his personal liabilities. Because he could deal with the company in a different legal capacity, his secured-creditor position was capable of recognition independently from his position as shareholder.

Other consequences. The company can own property, contract, sue and be sued, employ its controller, borrow from a shareholder, and continue despite changes in membership. A shareholder does not own particular company assets merely by owning shares: Macaura. A controller may also contract as employee: Lee. The company is not ordinarily the shareholder's agent or alter ego merely because of control.

Conclusion. Separate legal personality is the organising principle of company law. Analysis must therefore begin by identifying the legal person whose property, obligation, contract or conduct is in issue.

Model answer - Question 2

Issue. The issue is the extent of member exposure for company debts and whether limited liability is the same doctrine as separate personality.

Rule. They are connected but distinct. Separate personality means the company is the primary debtor for its obligations. In a company limited by shares, s 516 limits the member's contribution on winding up to any amount unpaid on the shares.

Application. If a company borrows $500,000 and a shareholder owns fully paid shares, the lender's contractual claim is ordinarily against the company, not the shareholder. If the shareholder has separately guaranteed the debt, however, the guarantee creates personal contractual liability. Likewise, directors may incur liability under specific statutory rules or for their own wrongful conduct. Thus “limited liability” is not immunity; it is a limitation arising from the member's status as member.

Conclusion. Separate personality allocates the company's rights and debts to the company. Limited liability limits the member's exposure merely by reason of membership. Always ask whether a separate source of personal liability exists.

High Distinction IRAC - Question 3

Issue. The central issue is whether Stella can rely on the separate personality of Stella Designs to avoid an existing contractual restraint, and whether equitable relief can extend to the company even though the company was not an original party to Stella's employment contract.

Rule. The starting point is Salomon: Stella Designs is a person separate from Stella. Mere ownership and control are not enough to make the company bound by Stella's personal contract. However, Gilford Motor Co Ltd v Horne is closely analogous. There, a former employee subject to a restraint used a company to carry on the prohibited business, and injunctive relief was granted against the individual and company. Jones v Lipman similarly demonstrates that an interposed company will not necessarily defeat equitable enforcement of a pre-existing obligation.

Application. Stella's strongest argument is orthodox separate personality: Stella Designs did not sign the employment contract and therefore is not automatically contractually liable merely because Stella controls it. That proposition is correct as far as it goes. The problem is the timing and purpose of the incorporation. Stella left LV while bound by a six-month non-compete, retained copies of recent LV designs, incorporated a company controlled only by herself and Evan, and almost immediately arranged for that company to supply designs to a direct competitor during the restraint period. Those facts closely resemble the use of a company as a vehicle to facilitate the very conduct the covenant prohibits.

The report that Stella may provide LV designs strengthens LV's argument for urgent preventative relief, although a rumour is not by itself proof. LV would still need to establish the restraint's enforceability under the applicable restraint-of-trade principles and satisfy the ordinary requirements for interlocutory or final injunctive relief. But on the corporate-law issue, Stella should not expect the company's separate personality to operate as a mechanical shield for an arrangement deliberately structured to continue her prohibited activity.

Conclusion. LV has a strong basis to seek an injunction against Stella and, by analogy with Gilford Motor, against Stella Designs to prevent the corporate vehicle being used to facilitate the continuing breach. The better analysis is not that every controlled company loses separate personality, but that equity can restrain the company where its involvement is the means by which the controller seeks to evade an existing legal obligation.

Structured discussion answer - Question 4

Starting rule. Salomon treats each company as a separate legal person. Briggs shows that a holding company's ownership and control of a subsidiary do not, without more, justify collapsing the distinction. Rogers AJA regarded mere domination and control as too simple a test because control is inherent in many parent-subsidiary relationships.

Case for strict entity law. It promotes certainty. Creditors, investors and managers can identify the entity holding assets and incurring liabilities; risk can be allocated by contract; separate subsidiaries allow distinct ventures to be financed and managed; and automatic group liability could make the risk of investment less predictable. It also respects the statutory choice to incorporate each company separately.

Case for enterprise liability. Commercially, groups may centralise management, branding, treasury and strategy. Strict entity law can allow value to sit in one group company while risky activities sit in another. The greatest fairness concern is the involuntary tort creditor: unlike a bank or supplier, a worker injured by asbestos or a member of the public harmed by the business did not choose which subsidiary to contract with, price the credit risk, demand security or seek a parent guarantee.

Australian compromise. The law generally maintains separate personality but uses targeted statutory exceptions rather than a universal enterprise-liability rule. A key example is ss 588V-588X concerning holding-company liability for insolvent trading by a subsidiary. This approach preserves entity certainty while intervening for defined risks.

Evaluation. A strong tutorial answer should recognise that neither model is cost-free. A broad enterprise rule may undermine certainty and legitimate risk partitioning; rigid entity treatment can produce harsh results where the claimant had no opportunity to choose the debtor. The current law's targeted statutory approach is therefore defensible in structure, but the tort-creditor problem identified in Briggs remains a powerful policy criticism.