Lifting of Corporate Veil

PIERCING THE VEIL ON CORPORATE GROUPS IN
AUSTRALIA: THE CASE FOR REFORM

HELEN ANDERSON*
[Many large-scale businesses are conducted through the form of corporate groups, each company
being a separate legal entity enjoying limited liability. This can create problems for those dealing
with corporate group companies. This article makes two points: first, with reference to the theoretical
literature on limited liability and veil-piercing, that the corporate veil should be pierced to impose
liability on parent companies for conduct involving a lack of care and diligence or a lack of good
faith in the dealings of their subsidiaries; and secondly, that the piercing should be done via statute,
in effect codifying the liability of a parent company as a shadow director. It is argued that this would
overcome the vagueness of the present veil-piercing doctrine in Australia and send a message to
parent companies that they cannot shield themselves behind the veil of incorporation to deny
recovery to those affected by their decisions and their conduct.]
CONTENTS
I
II
III
IV
V
VI
Introduction............................................................................................................. 333
Theoretical Justifications for Limited Liability and the Corporate Veil................. 337
Arguments for Piercing the Veil ............................................................................. 341
A Directors..................................................................................................... 343
B Closely Held Companies............................................................................ 346
C Where the Company Has Committed a Tort .............................................. 348
Piercing the Corporate Veil on Corporate Groups .................................................. 352
The Case for Statutory Veil-Piercing for Corporate Groups................................... 359
Conclusion .............................................................................................................. 366
I INTRODUCTION
Limited liability and separate legal personality are arguably the most important
characteristics of incorporation. The company is an artificial legal entity separate
from its shareholders, whose liability for the companys debts is limited to their
contributions to the companys capital. Given the fundamental nature of these
characteristics, it is not surprising that piercing1 the veil of incorporation to make
shareholders liable for the debts of the company is a contentious issue amongst
* LLB (Hons) (Melb), GradDipBus (Acc), LLM, PhD (Monash); Associate Professor, Department
of Business Law and Taxation, Monash University.
1 The terms veil-lifting and veil-piercing are often used synonymously. The author has chosen
veil-piercing in this article, adopting the reasoning of Ramsay and Noakes: Ian M Ramsay and
David B Noakes, Piercing the Corporate Veil in Australia (2001) 19 Company and Securities
Law Journal 250. Learned minds differ, however: see, eg, Jennifer Payne, Lifting the Corporate
Veil: A Reassessment of the Fraud Exception (1997) 56 Cambridge Law Journal 284, 284 fn 2.
333
334
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scholars2 and litigants.3 This is so even where the shareholder is another

corporation.4
This article considers the liability of parent corporations within corporate
groups and makes recommendations for its reform in Australia. It is noteworthy
that corporate groups were not in existence at the time of the Limited Liability
Act 1855, 18 & 19 Vict, c 133, and were only just beginning to be recognised in
the United States of America at the time of Salomon v Salomon & Co Ltd
(Salomon).5 Phillip Blumberg notes legislation in New Jersey in 1890 that, for
the first time, allowed companies to acquire shares in other companies.6
Difficulties with corporate groups emerged shortly thereafter. By 1912, the term
piercing the veil had been coined in the US.7 Soon, plaintiffs were arguing that
subsidiaries were mere instrumentalities or alter egos of their parent
companies, in order to overcome the latters separate legal entity status.8
2 See, eg, Harvey Gelb, Piercing the Corporate Veil The Undercapitalization Factor (1982) 59
4
5
7
8
Chicago Kent Law Review 1; S Ottolenghi, From Peeping behind the Corporate Veil, to Ignoring
It Completely (1990) 53 Modern Law Review 338; Henry Hansmann and Reinier Kraakman,
Toward Unlimited Shareholder Liability for Corporate Torts (1991) 100 Yale Law Journal
1879; Robert B Thompson, Piercing the Corporate Veil: An Empirical Study (1991) 76 Cornell
Law Review 1036; Robert B Thompson, Unpacking Limited Liability: Direct and Vicarious
Liability of Corporate Participants for Torts of the Enterprise (1994) 47 Vanderbilt Law Review
1; Franklin A Gevurtz, Piercing Piercing: An Attempt to Lift the Veil of Confusion Surrounding
the Doctrine of Piercing the Corporate Veil (1997) 76 Oregon Law Review 853; Payne, Lifting
the Corporate Veil, above n 1; Robert B Thompson, Piercing the Veil within Corporate Groups:
Corporate Shareholders as Mere Investors (1999) 13 Connecticut Journal of International Law
379; David L Cohen, Theories of the Corporation and the Limited Liability Company: How
Should Courts and Legislatures Articulate Rules for Piercing the Veil, Fiduciary Responsibility
and Securities Regulation for the Limited Liability Company? (1998) 51 Oklahoma Law Review
427; Stephen M Bainbridge, Abolishing Veil Piercing (2001) 26 Journal of Corporation Law
479; Jason W Neyers, Canadian Corporate Law, Veil-Piercing, and the Private Law Model
Corporation (2000) 50 University of Toronto Law Journal 173; Kurt A Strasser, Piercing the
Veil in Corporate Groups (2005) 37 Connecticut Law Review 637; Robert B Thompson,
Piercing the Veil: Is the Common Law the Problem? (2005) 37 Connecticut Law Review 619.
In the United States at least, piercing the corporate veil is the most litigated issue in corporate
law: Thompson, An Empirical Study, above n 2, 1036; Robert B Thompson, Agency Law and
Asset Partitioning (2003) 71 University of Cincinnati Law Review 1321, 1325. There is less
veil-piercing in Australia, although what litigation there is has proven unsatisfactory and
unpredictable: see Ramsay and Noakes, above n 1, 261.
See Bainbridge, above n 2, 482.
[1897] AC 22. Corporate groups were recognised by courts in the United Kingdom by the 1860s.
Blumberg notes that in England the corporate power to acquire and own the shares of another
corporation could arise from provisions inserted in the memorandum [of association]
notwithstanding the omission of such power in the incorporation statute: Phillip I Blumberg,
Limited Liability and Corporate Groups (1986) 11 Journal of Corporation Law 573, 608.
Phillip I Blumberg, The Transformation of Modern Corporate Law: The Law of Corporate
Groups (2005) 37 Connecticut Law Review 605, 607. See also Blumberg, Limited Liability and
Corporate Groups, above n 5, 607, where he notes that limited liability was an automatic
consequence of the ability of companies to own shares in other companies. Further, at 576,
Blumberg states: This development appear[s] to have followed without any recognition that the
principle was receiving a dramatic extension.
I Maurice Wormser, Piercing the Veil of Corporate Entity (1912) 12 Columbia Law Review 496.
In the US, that parent corporations should be held accountable for their actions in managing their
subsidiaries was recognised in Taylor v Standard Gas & Electric Co, 306 US 307 (1939). This
broad principle of subordination became known as the Deep Rock doctrine: see Myron N
Krotinger, The Deep Rock Doctrine: A Realistic Approach to ParentSubsidiary Law (1942)
42 Columbia Law Review 1124.
2009]
Piercing the Veil on Corporate Groups in Australia
335
Part II of this article looks at the theory behind limited liability and the
maintenance of the veil of incorporation, which can be used as a shield by
controllers and shareholders as well as a sword against these parties.9 The
meaning of veil-piercing will be addressed to distinguish liability imposed
because a legal person occupies a certain position director or shareholder
from that imposed because of some action on the part of that person. It will be
observed that only a small number of writers suggest that liability ought to be
imposed on shareholders simply because they are the beneficiaries of the
corporate enterprise. Rather, most veil-piercing permitted by courts and
supported by commentary is based on the behaviour of a person while he or she
occupies a position as a corporate insider. The latter is arguably not veil-piercing
but rather liability imposed as a result of the application of distinct legal
doctrines; nonetheless, the convention of describing it as veil-piercing, common
amongst courts and commentators, will be maintained in this article.
Part III considers three specific circumstances where scholars contend that
veil-piercing, as broadly defined, ought to occur. These are where the directors of
the company have breached a duty owed to that company; where the company is
closely held and has behaved in a way deemed unacceptable; and where the
company has committed a tort. The scholars argue that in these situations there is
a lack of theoretical justification for keeping the veil, either because there is
effective control of the operations of the company by its directors (or shareholders), or because creditors are unable to self-protect, ex ante, against the risk of
loss. The arguments put forth with respect to these three situations will be
applied to the question of liability on the part of parent companies.
The approach to veil-piercing in the US is far more broad-ranging and litigated
than in Commonwealth countries, leading, in the US, to a laundry list attitude
to the identification of relevant factors which justify shareholder liability.10 The
American theoretical literature is considered not for the purpose of suggesting
that Australia adopts such an approach but rather to glean from it relevant
notions to inform the development of the law in Australia.
Part IV then examines the justifications for piercing the corporate veil on
corporate groups through reviewing some of the extensive literature on the
subject as well as by analogy to the circumstances considered in Part III. One of
9 Shareholders and their personal creditors have no access to company assets. This is called
liquidation protection and serves to protect the going concern value of the firm against
destruction either by individual shareholders or their creditors: Henry Hansmann and Reinier
Kraakman, What is Corporate Law? in Reinier Kraakman et al (eds), The Anatomy of Corporate Law: A Comparative and Functional Approach (2004) 7. It is also known as asset
partitioning: Henry Hansmann and Reinier Kraakman, The Essential Role of Organizational
Law (2000) 110 Yale Law Journal 387, 3934. Affirmative asset partitioning provides a pool
of assets owned by the company as security for its contracts. Defensive asset partitioning
protects the owners assets from the companys creditors and is the concept now known as
limited liability.
10 See, eg, Thompson, An Empirical Study, above n 2, 1063; Bainbridge, above n 2, 510, citing
Associated Vendors Inc v Oakland Meat Co Inc, 26 Cal Rptr 806, 81315 (Molinari J) (Cal Dist
Ct App, 1962); David Millon, Piercing the Corporate Veil, Financial Responsibility, and the
Limits of Limited Liability (Working Paper No 2006-08, School of Law, Washington and Lee
University, 2006) 1720 <http://ssrn.com/abstract=932959>. See also Ottolenghi, above n 2,
353; Gevurtz, above n 2, 86170.
336
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the principal reasons for maintaining the corporate veil is that a regime of
unlimited liability would make shareholders unwilling to invest, and to diversify
their investments, because of the need to monitor the company and fellow
investors. The point will be made that holding a parent company liable for the
debts of its subsidiary does not impose unlimited personal liability on any
individual shareholder, thus removing one of the most persuasive grounds for
maintaining the corporate veil.
Nevertheless, there need to be appropriate grounds on which the veil-piercing
is based. The mere fact that a subsidiary has incurred a debt that it cannot pay is
not, and should not be, enough to pierce the corporate veil. Otherwise, the
doctrine of limited liability would have no application within corporate groups.
Nor should the fact of control or domination of the subsidiary be the basis of the
veil-piercing. In almost all circumstances, such control of the subsidiary by the
parent company exists. Using control as the sole test for veil-piercing would be
tantamount to removing the veil altogether. Given that control alone should not
be sufficient to justify veil-piercing, Part IV also considers what those grounds
should be.
It is recommended that, in addition to control, a necessary element required to
pierce the veil on corporate groups should be an act of wrongdoing on the part of
the parent company, either through its own actions or through the actions of the
board of the controlled subsidiary. What should be recognised in a statutory veilpiercing scheme are the substantive grounds on which the veil should be pierced,
rather than the means, such as agency, by which it is done. It is suggested that
directors duties to act with care and diligence and in good faith be the model of
liability for parent companies facing veil-piercing. This would build on and
codify the present liability of parent companies as shadow directors.11
Part V then makes the case that veil-piercing on corporate groups be regulated
through statute, rather than leaving it to the common law. There are three bases
for this. First, it would remove the uncertainty and unpredictability that currently
bedevil common law veil-piercing, consequently reducing the cost of litigation.
Secondly, legislation would send clear signals to the controllers of parent
companies regarding proper uses of the corporate group form and provide
compensation to parties suffering loss when those signals are ignored. Finally,
legislation would overcome the judicial reluctance to pierce the veil on corporate
groups evinced by Australian courts. The aim of this article is not to discuss the
policy and controversy surrounding the misuse of separate legal entity and
11 This article is not about Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 (James
Hardie) and the cases that followed. Many fine authors have already given the problems that
arose there a thorough examination. Nonetheless, it is noteworthy that behaviour such as that
shown by James Hardie Industries could be addressed, if not redressed in that particular instance,
by the reform suggested here. See, eg, Peta Spender, Blue Asbestos and Golden Eggs: Evaluating Bankruptcy and Class Actions as Just Responses to Mass Tort Liability (2003) 25 Sydney
Law Review 223; Peta Spender, Second Michael Whincop Memorial Lecture: Weapons of Mass
Dispassion James Hardie and Corporate Law (2005) 14 Griffith Law Review 280; Edwina
Dunn, James Hardie: No Soul to Be Damned and No Body to Be Kicked (2005) 27 Sydney
Law Review 339; Susan Engel and Brian Martin, Union Carbide and James Hardie: Lessons in
Politics and Power (2006) 20 Global Society 475; Lee Moerman and Sandra van der Laan,
Pursuing Shareholder Value: The Rhetoric of James Hardie (2007) 31 Accounting Forum 354.
2009]
337
limited liability by those in control; rather, it attempts to design an efficient,

economically justified legislative veil-piercing regime that precludes such
conduct.
I I T H E O R E T I C A L J U S T I F I C AT I O N S F O R L I M I T E D L I A B I L I T Y
C O R P O R AT E V E I L
AND THE
Many commentators have expounded the theoretical justifications for limited

liability and the retention of the veil between the company, as a separate legal
entity, and its shareholders.12 Put simply, in the contractarian analysis of the
corporation, limited liability is one of the default rules making up the standard
form contract which is corporate law.13 The aim of a set of default or off-therack rules is to lower the cost of transacting.14 Default rules save firms the cost
of negotiating and inserting terms into each of the contracts they form.15
Corporate law rules and norms deal with disputes between corporate stakeholders managers, shareholders, employees, suppliers, customers and the
broader community and aim to achieve a balance between the objective of
shareholder wealth maximisation and the protection of those who may be
adversely affected by the activities of the corporation.16 Being default rules, they
can be overcome by express contract terms to the contrary.17
As Stephen Bainbridge notes, [t]here is nothing intrinsically fraudulent about
deciding to incorporate or about dividing a single enterprise into multiple
corporations, even when done solely to get the benefit of limited liability.18 It is
perhaps surprising that creditors would agree to contract with an entity whose
shareholders have limited liability; after all, limited liability encourages
shareholders to invest in projects with higher risk, externalising some of the risk
12 See above n 2.
13 Bainbridge, above n 2, 486.
14 Frank H Easterbrook and Daniel R Fischel, The Corporate Contract (1989) 89 Columbia Law
Review 1416, 1444.
15 Michael J Whincop, Painting the Corporate Cathedral: The Protection of Entitlements in
Corporate Law (1999) 19 Oxford Journal of Legal Studies 19, 28.
16 Note here the comments of Cohen, above n 2, 430, with respect to achieving a balance between
efficient wealth maximisation and protection of those who miss out:

at no time in American history was a successful balance between these two goals reached.
Indeed, every theory of the firm propounded contains, to some extent, the tensions inherent in
the broader debate over what firms are for. This fact has made the thinking about the firm and
its regulation quite schizophrenic, and the history of corporate law see-saws between a paternalistic and free market approach.
He also comments, at 446 (citations omitted), that:
On the one hand society wants to promote free ordering in the belief that in so doing they are
increasing the general welfare; on the other hand, society wants to restrict private ordering for
paternalistic reasons and out of concern for the less fortunate or those less able to look after
their own interests. Society has never come to a satisfactory conclusion about the proper
balance between these two interests.
17 Bainbridge, above n 2, 486.
18 Ibid 483.
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of loss to the creditors themselves. The shareholders do not jeopardise their

personal assets, yet reap the rewards of the investment should it succeed.19
The aim of a default rule is to minimise the cost of transactions in general,
rather than for each individual party. This occurs when the default rule is the one
to which most people would agree. Known as the majoritarian default,20 the use
of default rules saves the majority the cost of having to expressly negotiate these
contract terms. For the minority who want to bargain out of the rule, their
transaction costs will be higher because they choose to negotiate a term to the
contrary. This is done, for example, when creditors obtain a personal guarantee
executed by a shareholder or director of a company, effectively piercing the
corporate veil.
Theorists have examined the reasons why limited liability, rather than
unlimited liability, is the default rule chosen by the majority.21 In essence, it is
because the difficulties for shareholders with an unlimited liability regime
exceed the difficulties for creditors with a limited liability regime. With
unlimited liability, shareholders would be concerned about the risk of losing their
personal assets in the event of nonpayment of a debt by the company. The risk
could be disproportionate to the return; a small investment could render the
shareholder liable for a large corporate debt, yet the return, should the company
be successful, would remain small.22 Shareholders would therefore need to
monitor the companys behaviour. To reduce their exposure to loss of personal
assets through many companies, and because monitoring is time-consuming and
costly, shareholders would limit their investments to a small number of
companies. This would effectively limit investors ability to reduce their risk
through the diversification of their portfolio of investments, which would in turn
drive up their required rate of return.23
19 Ibid 489.
20 Ian Ayres, Preliminary Thoughts on Optimal Tailoring of Contractual Rules (1993) 3 Southern
California Interdisciplinary Law Journal 1, 5. See also Russell Korobkin, The Status Quo Bias
and Contract Default Rules (1998) 83 Cornell Law Review 608, 614; Robert E Scott, A
Relational Theory of Default Rules for Commercial Contracts (1990) 19 Journal of Legal
Studies 597, 6068; Bainbridge, above n 2, 486.
21 The consideration of the appropriateness of limited liability and of the economic consequences
that would flow from its absence is not new. See, eg, Paul Halpern, Michael Trebilcock and
Stuart Turnbull, An Economic Analysis of Limited Liability in Corporation Law (1980) 30
University of Toronto Law Journal 117, 11819, who note debates taking place on the matter
around the time of the passing of the Limited Liability Act 1855, 18 & 19 Vict, c 133.
22 Unless the liability were imposed pro rata, as suggested by Hansmann and Kraakman, Toward
Unlimited Shareholder Liability for Corporate Torts, above n 2, 18924.
23 This is a summary and simplification of the work of a large number of prominent law and
economics scholars. A few of the leading publications in this area are: Richard A Posner, The
Rights of Creditors of Affiliated Corporations (1976) 43 University of Chicago Law Review 499;
Michael C Jensen and William H Meckling, Theory of the Firm: Managerial Behavior, Agency
Costs and Ownership Structure (1976) 3 Journal of Financial Economics 305; Jonathan M
Landers, A Unified Approach to Parent, Subsidiary, and Affiliate Questions in Bankruptcy
(1975) 42 University of Chicago Law Review 589; Henry G Manne, Our Two Corporation
Systems: Law and Economics (1967) 53 Virginia Law Review 259; Halpern, Trebilcock and
Turnbull, above n 21; Frank H Easterbrook and Daniel R Fischel, The Economic Structure of
Corporate Law (1991) 4150. The arguments are nicely summarised by Blumberg, Limited
Liability and Corporate Groups, above n 5, 61123.
2009]
339
Monitoring alone does not reduce risk. Shareholders facing unlimited personal
liability would want access to current financial information and would seek to
intervene in corporate decision-making to ensure that risky behaviour is avoided.
This would be costly and cause significant problems, particularly where the
company is large and management is separate from its shareholders. In addition,
shareholders would need to monitor their fellow investors to ensure that they
were not left bearing the debt alone. This again would cause considerable
problems for large corporations with extensive and changing membership.
Consequently, the economy would suffer from a lack of investment, particularly
in industries with an inherently high degree of risk. Share trading would also
suffer as incoming investors make sure they are investing in an entity with an
acceptable risk profile, adequate capitalisation and well-resourced fellow
shareholders. With limited liability, on the other hand, the potential amount of
each shareholders loss is finite and known, giving the shares a stable price and
aiding their transferability.24
Creditors do face problems with a limited liability regime but are considered to
be the cheapest cost avoider because of their capacity, at least in theory, to
protect ex ante against the risk of loss.25 Creditors apparent ability to self-protect
against the risk of loss, combined with the above concerns attributed to
shareholders, explains why the default rule is not in creditors favour. For
example, creditors are expected to reduce the risk of nonpayment by the
company by charging more for their services.26 Frank Easterbrook and Daniel
Fischel assert that, [a]s long as these risks are known, the firm pays for the
freedom to engage in risky activities. The firm must offer a better riskreturn
combination to attract investment.27
24 These arguments are well considered in Halpern, Trebilcock and Turnbull, above n 21.
25 Bainbridge, above n 2, 508. Bainbridge also notes, at 5012 (citations omitted), that:
contract creditors can protect themselves by bargaining with the controlling shareholder and
obtaining a modification of the default rule. To the extent contract creditors fail to do so, and
accordingly fail to adequately protect their own interests, there seems little reason for the law
to protect them. Thus, in many situations, it makes sense to impose liability on the cheapest
cost avoider (ie, the party who could have most cheaply taken precautions against the loss).
Doing so gives that party an incentive to take precautions, while minimizing the cost of those
precautions.
26 David A Wishart, Models and Theories of Directors Duties to Creditors (1991) 14 New
Zealand Universities Law Review 323, 335 (citations omitted), maintains that:
Creditors charge interest for the service they render. Built into that fee is compensation for the
risk of loss they bear. The greater the risk of loss, the more is charged to compensate for that
risk. Creditors cannot complain that insolvency as such has caused them loss because they
have contracted to bear that risk, and have built compensation for bearing it into the cost of
credit. If creditors do not charge for the probability of certain events happening, they should
not be supported in their foolishness. They should not survive to charge less than wiser people.
27 Easterbrook and Fischel, Economic Structure, above n 23, 51. See also Ross Grantham,
Directors Duties and Insolvent Companies (1991) 54 Modern Law Review 576, 57980.
Posner, above n 23, 501, also commented that the interest rate on a loan is payment not only for
renting capital but also for the risk that the borrower will fail to return it. However, Keay, noting
research by Cheffins, suggests that there is little evidence that creditors charge a higher interest
rate when dealing with a limited liability company, compared with other creditors: Andrew
Keay, Directors Duties to Creditors: Contractarian Concerns Relating to Efficiency and OverProtection of Creditors (2003) 66 Modern Law Review 665, 689, citing Brian R Cheffins,
Company Law: Theory, Structure, and Operation (1997) 501.
340
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In addition to the capacity to price-protect, creditors with superior bargaining

power can also be protected by devices such as loan covenants (restricting the
companys ability to sell or further pledge its assets), security over the
corporations major assets, retention of title clauses or personal guarantees from
the directors.28 Trade creditors in particular may have short-term credit periods,
which allow them to carefully assess creditworthiness with current information
about the companys financial stability. Creditors are also expected to diversify
away their risk of loss by dealing with many companies.29
In reality, there are many obstacles to the ability of creditors to self-protect
under a limited liability regime. The contention that creditors can self-protect is
based on the theoretical efficient markets hypothesis, which assumes that all
relevant information is available and immediately digested by the market,
leading to accurate assessment and pricing of risk.30 This does not always
happen in practice.31 Frequently, there is a lack of full or timely information
about the risk attaching to an investment or to a debtor companys financial
position. Small closely held companies are more likely to deprive creditors of
vital information about solvency than are larger companies with mandated public
disclosure or a board well separated from its shareholders.32
Moreover, the premium charged to compensate for risk may be insufficient if
the controllers of a company choose to take additional risks33 which creditors
may not have foreseen. Creditors may undertake to bear a particular level of risk
and charge for it based upon factors such as industry norms, financial ratios
relating equity to loan capital, the history of the enterprise, industrial relations
with employees and other similar factors. Creditors also vary in their ability to
protect themselves, as some creditors cannot make their own bargains.34 Indeed,
the ability of some creditors to protect themselves with charges over company
assets or loan covenants increases the risk to weaker parties who cannot
28 See Posner, above n 23, 504.
29 Diversification for creditors mimics its operation for shareholders under a limited liability
30
31
32
33
34
regime. The risk of a large loss from investment in a single company is reduced by being
exposed to a small loss from many companies on the basis that it is unlikely that all or most of
the entities will default on their obligations.
See Jeffrey N Gordon and Lewis A Kornhauser, Efficient Markets, Costly Information, and
Securities Research (1985) 60 New York University Law Review 761, 7701.
See Wishart, Models and Theories, above n 26, 3356. See also Ross Grantham, The Judicial
Extension of Directors Duties to Creditors [1991] Journal of Business Law 1, 23.
Wishart, Models and Theories, above n 26, 336.
Eisenberg notes that [i]t is almost impossible to deal adequately with this potential for ex post
opportunism by ex ante contracting: Melvin Aron Eisenberg, The Structure of Corporation
Law (1989) 89 Columbia Law Review 1461, 1465. See also Mark Byrne, An Economic
Analysis of Directors Duties in Favour of Creditors (1994) 4 Australian Journal of Corporate
Law 275, 277.
Lipson labelled these creditors low VCE creditors, many of whom have little or no volition,
cognition, and exit. This describes creditors who lack voluntariness in their dealings with the
company (tort creditors, taxing authorities, terminated employees), lack information (cognition)
about the true state of company affairs, and lack the ability to exit from these relationships
because of the absence of a market to sell their rights against the company: Jonathan C Lipson,
Directors Duties to Creditors: Power Imbalance and the Financially Distressed Corporation
(2003) 50 University of California Los Angeles Law Review 1189, 1193.
2009]
341
negotiate such protection.35 Some trade creditors may lack the knowledge and
expertise to make accurate assessments of risk and would be unable to calculate
an appropriate premium to compensate for this. With small debts, the cost of
obtaining information about the risk may be prohibitive. Creditors may lack
information about their fellow creditors to enable them as a group to negotiate
collectively for fuller particulars of risk.36
Suppliers of specialised products are frequently unable to diversify their client
bases. While their long-term relationship with the client may bring knowledge
that partly compensates for the lack of diversification, nonetheless, these
suppliers may lack the ability to seek customers elsewhere because of existing
contractual obligations to a possibly financially unstable customer. In addition,
suppliers may be unable to charge a premium to compensate for the risk of loss
due to the reality of economic conditions and competition in the market.37
Despite these grounds for recognising that many creditors can suffer loss under
a limited liability regime just as shareholders would be adversely affected by
an unlimited liability regime most commentators support the default rule
favouring shareholders.38 However, a number of special circumstances have been
claimed to justify piercing the veil. These will now be considered.
III ARGUMENTS
FOR
PIERCING
THE
VEIL
Judicial veil-piercing, broadly understood, is present in many parts of the

world. While courts and commentators have examined the issue in Australia and
elsewhere, the majority of the scholarship on the issue comes from the US. This
Part considers circumstances in which commentators contend that the corporate
veil ought to be pierced. Despite Easterbrook and Fischels famous comment that
[p]iercing seems to happen freakishly. Like lightning, it is rare, severe, and
unprincipled,39 there is a unifying theme underlying the arguments in favour of
veil-piercing. It is that some or all of the elements which are used to justify
limited liability and the veil of incorporation are not present,40 either because
there is effective control of the operations of the company by the directors or the
shareholders (leading to some action on the part of the company which is
deemed unacceptable) or because there is an inability by the creditors to self35 Keay, above n 27, 688. See also Judith Freedman, Limited Liability: Large Company Theory
and Small Firms (2000) 63 Modern Law Review 317, 351.
36 Gerard Hertig and Hideki Kanda, Creditor Protection in Reinier Kraakman et al (eds), The
Anatomy of Corporate Law: A Comparative and Functional Approach (2004) 72.
37 Van Der Weide argues that short-term creditors can quickly respond to bad firm behavior by
taking their business elsewhere (Mark E Van Der Weide, Against Fiduciary Duties to Corporate
Stakeholders (1996) 21 Delaware Journal of Corporate Law 27, 49), while Keay describes this
as typical of the gross overstatements that pervade some works that have contributed to the law
and economics literature (Keay, above n 27, 697).
38 See, eg, Strasser, above n 2; Bainbridge, above n 2.
39 Frank H Easterbrook and Daniel R Fischel, Limited Liability and the Corporation (1985) 52
University of Chicago Law Review 89, 89.
40 Easterbrook and Fischel make the point that piercing cases may be understood, at least roughly,
as attempts to balance the benefits of limited liability against its costs: Easterbrook and Fischel,
Economic Structure, above n 23, 55.
342
[Vol 33
protect ex ante against the risk of loss. In these circumstances, the balance
between the objective of shareholder wealth maximisation and the protection of
those adversely affected by a corporations activities arguably tips back in favour
of creditors.41
Strictly speaking, the concepts of limited liability and the veil of incorporation
are relevant only to the shareholders of a corporation and not to its officers. Veilpiercing is therefore, properly, a doctrine to overcome limited liability rather than
the separate legal entity of the company, but the widespread use of the term
requires its meaning to be clarified. Pure veil-piercing occurs where liability is
imposed simply because a legal person occupies the position of shareholder. It
will be seen below that this is sometimes suggested as a source of compensation
where the company has committed a tort and there are unmet liabilities to tort
claimants. It is this narrower, truer type of veil-piercing which is so often
successfully countered by the arguments in favour of limited liability.
The more common use of the term veil-piercing involves the imposition of
liability on one or more legal persons usually shareholders or directors
where those persons have caused the company to act in a certain way and
liability is sought to be attributed to them by virtue of their control of the
company and their actions as a result of that control. While most scholars42 quite
correctly ignore the liability of directors in their discussion of veil-piercing,
many, as do the judiciary, conflate pure veil-piercing of shareholders with the
broader sense of imposing liability on them as a result of their control over, and
actions under, the company. The laundry list of factors employed by courts and
commentators in the US is an attempt to clarify what actions and what control
will be sufficient to justify both piercing the corporate veil of this kind and the
imposition of personal liability.43 The motives for this wider type of veil-piercing
are compensation and deterrence, and form the basis of the argument in this
article that liability ought, in specified circumstances, to be imposed on parent
companies. The broader use of the term veil-piercing will be maintained in this
article to conform to its widespread application. Three circumstances where
commentators maintain that the corporate veil ought to be pierced will now be
41 See above n 16 and accompanying text.
42 Courts, on the other hand, frequently use the terminology of limited liability, separate legal entity
and veil-piercing (or veil-lifting) to refuse to impose liability on directors. This is commonly
observed in the cases dealing with the personal liability of directors for torts: see, eg, Trevor
Ivory Ltd v Anderson [1992] 2 NZLR 517, 5256 (Hardie Boys J). In Mentmore Manufacturing
Co Ltd v National Merchandising Manufacturing Co Inc (1978) 89 DLR (3d) 195, 202,
Le Dain J (for Urie, Ryan and Le Dain JJ) struggled with a very difficult question of policy,
namely:
the principle that an incorporated company is separate and distinct in law from its shareholders, directors and officers, and it is in the interests of the commercial purposes served by
the incorporated enterprise that they should as a general rule enjoy the benefit of the limited
liability afforded by incorporation.
Cf Andrew Willekes and Susan Watson, Economic Loss and Directors Negligence [2001]
Journal of Business Law 217; Helen Anderson, The Theory of the Corporation and Its Relevance to Directors Tortious Liability to Creditors (2004) 16 Australian Journal of Corporate
Law 73.
43 See above n 10 and accompanying text.
2009]
343
considered: where the veil is pierced to impose liability on the directors of the
company; where the company is closely held; and where the company has
committed a tort.
A Directors
Both common law and statute frequently impose personal liability on directors
in specified circumstances for a number of reasons. It is instructive to examine
these reasons before moving on to consider veil-piercing in more ambivalent
circumstances.
One reason for imposing personal liability on directors is to correctly attribute
liability to the party responsible for wrongdoing. The separate legal entity
principle enshrined in Salomon44 and the organic theory from Lennards
Carrying Co Ltd v Asiatic Petroleum Co Ltd 45 ensure directors have a unique
place in the law. On one hand, the director is separate from the company, so that
contracts made by the director in the companys name bind only the company
and not the director personally. The company is the proper plaintiff and
defendant. On the other hand, under the organic theory, the directors act as the
company, so that their actions and intentions are the actions and intentions of the
company, which cannot act or think for itself.46
However, the organic theory was never intended to act as a device to relieve
directors of personal liability for their own wrongdoing. Rather, its purpose is to
attribute mental states to the company in order to determine the companys
liability.47 This was confirmed by Lord Hoffmanns judgment in Meridian
Global Funds Management Asia Ltd v Securities Commission.48 The proper
determinant of whether the individuals own personal liability will arise when he
44 [1897] AC 22.
45 [1915] AC 705, 71314. Viscount Haldane LC spoke of the directors of the company not as its
agents but as the company itself, a process known as anthropomorphism: see David A Wishart,
Anthropomorphism Rampant: Rounding Up Executive Directors Liability [1993] New Zealand
Law Journal 175. See also John H Farrar, Frankenstein Incorporated or Fools Parliament?
Revisiting the Concept of the Corporation in Corporate Governance (1998) 10 Bond Law
Review 142, 155.
46 In Tesco Supermarkets Ltd v Nattrass [1972] AC 153, 170, Lord Reid stated that:
A living person has a mind which can have knowledge or intention or be negligent and he has
hands to carry out his intentions. A corporation has none of these: it must act through living
persons, though not always one or the same person. Then the person who acts is not speaking
or acting for the company. He is acting as the company and his mind which directs his acts is
the mind of the company. There is no question of the company being vicariously liable. He is
not acting as a servant, representative, agent or delegate. He is an embodiment of the company
or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company.
47 H L Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd [1957] 1 QB 159, 172, where
Denning LJ explained that the managers of a company who control what it does can be its
directing mind and will, so that their intentions can be attributed to the company to make it
liable this is known as the identification doctrine. See also Neil Campbell and John Armour,
Demystifying the Civil Liability of Corporate Agents (2003) 62 Cambridge Law Journal 290,
2926.
48 [1995] 2 AC 500, 5067. See also Smorgon v Australia & New Zealand Banking Group Ltd
(1976) 134 CLR 475, 483 (Stephen J).
344
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or she acts for a company is the principle of agency, not organic theory.49 With a
separate legal identity comes the possibility of separate individual liability.
Agents are not personally liable for contracts between the company (as principal)
and a third party, if made within the scope of actual authority. However, they
retain liability for their own wrongful acts,50 whether they are directors,
employees51 or parties outside the company. While some commentators have
maintained that directors should not bear personal liability for their actions,52
others disagree. For example, Neil Campbell and John Armour have argued that:
The function of the company law regime is to ensure that the company but not
shareholders bears liability. So in relation to shareholders company law rules
do have primacy over tort and other liability rules. But the regime has never
functioned to ensure that the company but not corporate agents bears liability.
In relation to corporate agents, neither civil liability law nor company law has
primacy there is no inconsistency between the two.53
A second reason for imposing personal liability on directors is to deter actions

that are detrimental to the company and other corporate stakeholders such as
creditors. As controllers of the company, directors are in a position to prevent the
company from engaging in insolvent trading,54 transactions that prevent
employees from recovering their entitlements55 and a multitude of actions
specified as civil penalty provisions under part 9.4B of the Corporations Act
49 See Jennifer Payne, The Attribution of Tortious Liability between Director and Company
50
51
52
53
54
55
[1998] Journal of Business Law 153, 159 (citations omitted), where it is noted that agency theory
is more generally accepted in English law and even Gower describes the law of agency as being
at the root of company law. According to agency theory a companys representatives act for it,
not as it. They retain their separate identity.
Not all courts agree. In Standard Chartered Bank v Pakistan National Shipping Co [Nos 2 and 4]
[2003] 1 AC 959, 968, Lord Hoffmann held: And just as an agent can contract on behalf of
another without incurring personal liability, so an agent can assume responsibility on behalf of
another for the purposes of the Hedley Byrne rule without assuming personal responsibility.
Lord Hoffmann was referring to Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465,
530 (Lord Devlin).
There is no doubt that an employee is principally liable for his torts and that the employer,
whether a company or otherwise, is vicariously liable under the doctrine of respondeat superior.
But see Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC
500, 5067 (Lord Hoffmann). The reason that employees are infrequently sued is because
employers are usually in a superior financial position to meet any damages claims.
See, eg, Ross Grantham and Charles Rickett, Directors Tortious Liability: Contract, Tort or
Company Law? (1999) 62 Modern Law Review 133, 139, where it was stated that:
the company law regime modifies the normal consequences of the directors actions, precisely
to ensure that responsibility for, and the legal consequences of, the tortious conduct or contractual undertaking are not sheeted home to the individual. Where the company law regime
applies, its essential function is to identify a different entity as the tortfeasor or contractor.
See also Andrew Borrowdale, Liability of Directors in Tort Developments in New Zealand
[1998] Journal of Business Law 96, 979; Ross Grantham, The Limited Liability of Company
Directors (Research Paper No 07-03, TC Beirne School of Law, The University of Queensland,
2007) <http://ssrn.com/abstract=991248>.
Campbell and Armour, above n 47, 296 (emphasis in original) (citations omitted). See also
Willekes and Watson, above n 42, 21819.
Corporations Act 2001 (Cth) s 588G(1) (Corporations Act).
Corporations Act pt 5.8A; see especially s 596AB(1).
2009]
345
2001 (Cth) (Corporations Act).56 Directors also face personal civil and/or
criminal liability for their actions under a huge raft of other legislation,57
including taxation legislation,58 trade practices law,59 environmental protection
law,60 and occupational health and safety law.61 Frequently, liability under these
provisions extends to others who are responsible for decision-making in the
company.62 This highlights the legislatures intention to target those in control
whose actions and omissions cause the company to breach the law.63
Thus it can be seen that the reasons identified above in Part II for maintaining
limited liability and the corporate veil are not present when considering the
liability of directors. While directors risk losing their own assets if personal
liability is imposed, they have control over the company in a way that
shareholders generally do not. They are able to monitor the actions of their
fellow directors to assess that only appropriate risks are taken. Liability is only
imposed under the provisions outlined above where there is some wrongdoing on
the directors part and is not simply imposed whenever there is a loss by a
creditor. Diversification as a means of reducing risk is therefore not required.
The issue of transferability of shares is not relevant. Given these facts, it is
56 There are other provisions imposing liability on directors under the Corporations Act. For
57
58
59
60
61
62
63
example, s 197 imposes personal liability on the directors of a trustee company for trustee
company debts that the company cannot discharge where there has been a breach of trust. There
are also a number of criminal offences for directors improper actions in relation to capital
raising (ch 6D), continuous disclosure obligations (ch 6CA) and capital reduction rules (ch 2J).
See Corporations and Markets Advisory Committee, Personal Liability for Corporate Fault:
Report (2006) (CAMAC Report) <http://www.camac.gov.au/camac/camac.nsf/byHeadline/
PDFFinal+Reports+2006/$file/Personal_Liability_for_Corporate_Fault.pdf>.
Income Tax Assessment Act 1936 (Cth) pt 6 div 9. In addition, Taxation Administration Act 1953
(Cth) s 8Y(1) provides that a person who is concerned in, or takes part in, the management of
the corporation shall be deemed liable for the companys taxation offences.
Under Trade Practices Act 1974 (Cth) s 75B(1), an individual may be liable if he or she is
involved in the companys contravention of certain parts of the Act. Directors would generally be
covered by this section, as a person directly or indirectly, knowingly concerned in, or party to,
the contravention (s 75B(1)(c)), if not more directly implicated by aiding, abetting, counselling
or procuring, or inducing the contravention (ss 75B(1)(a)(b)).
Environment Protection and Biodiversity Conservation Act 1999 (Cth) pt 17 div 18; Hazardous
Waste (Regulation of Exports and Imports) Act 1989 (Cth) s 40B. The principal state and
territory provisions for individual liability are: Environment Protection Act 1997 (ACT)
ss 147(1), (4); Protection of the Environment Operations Act 1997 (NSW) s 169(1); Waste
Management and Pollution Control Act 1998 (NT) s 91(1); Environmental Protection Act 1994
(Qld) s 183(2); Environment Protection Act 1993 (SA) ss 129(1)(a), (3); Environmental
Management and Pollution Control Act 1994 (Tas) ss 60(1)(a), (3); Environment Protection Act
1970 (Vic) s 66B(1); Environmental Protection Act 1986 (WA) s 118(1).
Occupational Health and Safety Act 2000 (NSW) s 26(1); Workplace Health and Safety Act 1995
(Qld) s 167(2); Occupational Health, Safety and Welfare Act 1986 (SA) s 61; Workplace Health
and Safety Act 1995 (Tas) s 53(1); Occupational Health and Safety Act 2004 (Vic) s 144(1);
Occupational Safety and Health Act 1984 (WA) ss 55(1), (1a).
See, eg, Environmental Protection Act 1997 (ACT) s 153(2)(b), which imposes liability not just
upon directors but also any other person responsible for the management of the activity in
relation to which the environmental harm happened.
Additionally, there is debate over whether directors have a common law duty to consider the
interests of creditors when the company is near insolvency: see, eg, Andrew Keay and Hao
Zhang, Incomplete Contracts, Contingent Fiduciaries and a Directors Duty to Creditors (2008)
32 Melbourne University Law Review 141.
346
[Vol 33
proper that the veil of incorporation be pierced to impose liability on corporate

agents such as directors in circumstances specified by the law.
B Closely Held Companies
For one- or two-person companies, the issue of imposing liability on shareholders may appear moot if the shareholders are also the directors, as noted
above, there are a number of established pathways to pierce the corporate veil
and make corporate wrongdoers liable in their capacities as directors. However,
where some of the shareholders of closely held companies are not directors nor
in control of the company, the issue of veil-piercing for those shareholders
becomes relevant.
Commentators have identified a number of reasons why the veil should be
pierced on closely held companies.64 In essence, it is because the justification
that shareholders need limited liability in order to encourage them to invest is
absent.65 Often these companies are run as though they were partnerships but
with the added benefit of incorporation. Their shareholders can therefore monitor
the management of the company, whether or not they personally participate in it.
There is not the same desire or need for diversification to reduce the risk of loss
as there is with public companies, where effective monitoring is not readily
achievable. The wealth of fellow shareholders is also more easily observed,
which is beneficial in the event that personal liability is imposed on them as a
group.
Furthermore, the constitutions of small companies frequently limit the
transferability of shares, making irrelevant the argument that limited liability is
required to facilitate share trading. Even where shares can be transferred, they
are not traded to strangers through a stock exchange but rather sold to parties
who have some closer knowledge of the company and who would be able to
demand further information to assess risk if that was required. In any event,
where small companies borrow, they lack the market strength to transfer the risk
of loss. Lenders such as banks are likely to require personal guarantees from
directors or other shareholders, and trade creditors might insist on security from
the company or else demand prepayment or retention of title clauses in their
contracts for the supply of goods.66
Easterbrook and Fischel observe that limited liability for closely held companies increases the probability of excessively risky behaviour.67 Bainbridge also
64 In the US, these include where the company is an instrumentality, alter ego or dummy of the
shareholders, cases involving misrepresentation, agency, undercapitalisation, and failure to

observe corporate formalities: Thompson, An Empirical Study, above n 2, 1064.
65 See, eg, Freedman, above n 35, 3313; see generally at 31920, 32735; Easterbrook and
Fischel, Economic Structure, above n 23, 556; Bainbridge, above n 2, 5001; Millon, Piercing
the Corporate Veil, above n 10, 68.
66 See Bainbridge, above n 2, 5003.
67 Easterbrook and Fischel, Economic Structure, above n 23, 55.
2009]
347
notes that with closely held companies

it becomes significantly more likely that shareholders will cause the corporation to act in ways that in fact externalize risk onto creditors. In the public
corporation context, the separation of ownership and control means that shareholders cannot cause the corporation to do anything. Decisions about risk
bearing are made by managers who likely are substantially more risk averse
than diversified shareholders. In contrast, in the close corporation, shareholders
and managers frequently are one and the same. Consequently, such shareholdermanagers can cause the corporation to externalize risk and, moreover, have
strong incentives to do so.68
In the US, courts are more willing to pierce the veil when there are few
shareholders. Robert Thompson reports that:
Among close corporations, those with only one shareholder were pierced in
almost 50% of the cases; for two or three shareholder corporations, the percentage dropped to just over 46%, and for close corporations with more than
three shareholders, the percentage dropped to about 35%.69
As these statistics demonstrate, one of the difficulties of having a regime of

unlimited liability for small companies is the requirement to draw the line. This
is especially so where the rule is a statutory one, enacted to provide certainty to
both plaintiffs and defendants. Noting that moral hazard is more prevalent in
small, closely held companies,70 Paul Halpern, Michael Trebilcock and Stuart
Turnbull have advocated an unlimited liability regime for these companies as a
means of reducing the incentive to transfer the risk of insolvency to creditors.71
However, they conceded that there would be difficulties
associated with attempting to distinguish by law small from large corporations
for the purpose of applying different liability regimes, and that the distinction
may induce some perverse and wasteful incentive effects as firms seek to
manipulate internal structures to ensure compliance with the requirements of
the preferred regime.72
Bainbridge has likewise concluded that it would be very difficult for the law
to try to draw a general line based on firm size. The limited liability rule thus
creates an efficient general presumption about the allocation of risks between
shareholders and creditors.73
68 Bainbridge, above n 2, 501 (citations omitted).

69 Thompson, An Empirical Study, above n 2, 10545. See also Thompson, Unpacking Limited
70
71
72
73
Liability, above n 2, 910. This is confirmed in Australia by the study by Ramsay and Noakes,
above n 1, 263; see also at 268.
Halpern, Trebilcock and Turnbull, above n 21, 148.
Ibid 1489.
Ibid 148.
Bainbridge, above n 2, 501.
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C Where the Company Has Committed a Tort

Unlike contract creditors, the involuntary tort creditor, injured by corporate
negligence, has a need for compensation but no ability to self-protect ex ante
against the risk of nonpayment.74 Where the company is insolvent, uninsured and
unable to compensate an injured plaintiff, it is natural for the claimant to look to
those behind the company for recompense. In the first instance, it is likely that
the claim will be made against the directors if there is some element of personal
culpability on their part. However, the law regarding the liability of directors for
torts committed qua director is highly unsettled and unsatisfactory.75 As noted
above in the discussion of directors personal liability, this confusion in the law
stems from a misconception of the meaning of limited liability and veil-piercing
in relation to corporate agents.76
In relation to shareholders, on the other hand, the issues are quite different.
Control still plays a role where the corporation is closely held77 or where the
defendant corporation is a subsidiary of a parent company. As will be seen
below, it is sometimes considered that the controllers of the offending company
ought to be responsible for compensating the plaintiff, both to punish personal
fault and to avoid shielding those persons from financial responsibility by the
veil of incorporation. For this reason, the discussion of tort liability for
shareholders often becomes mixed with that of directors, closely held companies
and corporate groups.
However, some leading academics have suggested that regardless of issues of
control or personal fault the corporate veil ought to be pierced. This is an
example of pure veil-piercing, as discussed above. It is noteworthy, however,
that courts in both Australia and the US are more likely to pierce the corporate
veil in contract rather than tort cases.78 This is surprising given that, when
74 They cannot diversify away the risk of nonpayment by multiple tortfeasors, and they lack ex ante
75
76
77
78
information about the financial position of the company to ensure that they are injured by a
prosperous tortfeasor.
See Anderson, above n 42 (and cases and commentators cited therein); Payne, The Attribution
of Tortious Liability between Director and Company, above n 49; Willekes and Watson,
above n 42.
Neyers, above n 2. Neyers argues that, although agency has the same effect as veil-piercing (in
that directors can be held liable for the debts of a corporation), it is in fact an affirmation of the
principle of separate legal entity. Agency allows the director to be an agent of another legal
person the company just as he might be the agent of a natural legal person: at 181. He
comments that the finding of a director as an agent of the company actually define[s] the
corporate veil rather than pierce[s] it: at 182, quoting Robert Flannigan, Corporations
Controlled by Shareholders: Principals, Agents or Servants? (1986) 51 Saskatchewan Law
Review 23, 26.
Thompson notes that in the US shareholders of publicly held corporations have never been held
personally liable for corporate obligations based in contract or in tort: Thompson, An Empirical
Study, above n 2, 1047. While the absence of contract liability for public company shareholders
could be justified by the theory discussed above in Part II (namely, the requirement of the default
contract term of limited liability), the particular vulnerability of tort creditors and their inability
to self-protect ex ante are not considered by courts: at 106870, 10724.
For Australia, see Ramsay and Noakes, above n 1, 265, 269. For the US, see Thompson, An
Empirical Study, above n 2, 1068. Thompson later updated the statistics from his landmark
study, with the same results he found that there is a lesser percentage of piercing in tort cases
than in contract settings and there is a lesser percentage of piercing within corporate groups than
2009]
349
combined with issues of control and personal wrongdoing, there are arguably
even more reasons to pierce the veil to allow tort creditors to recover. A number
of justifications have been identified by scholars for piercing the corporate veil
so as to make shareholders liable for the torts of their companies.
Because relations with tort creditors are neither consensual nor contained in a
standard form contract, the majoritarian default term of limited liability has no
relevance to tort creditors.79 Moreover, the moral hazard created by limited
liability may encourage excessive risk-taking, causing personal injury to a small
or large number of victims (irrespective of company size). Quite apart from the
lack of compensation for a particular tort victim, David Millon notes that the
overall social cost of the tortious activity may exceed the gain to the shareholders, which is an inefficient resource allocation decision.80 While entrepreneurial
activity has many social benefits, including the creation of employment,
investment returns, and goods and services for customers, it is possible that the
cost to parties injured by the activity may well be greater than its benefits to the
company or to society as a whole.81
The concession theory supports the argument that limited liability ought to be
seen as a privilege granted by the government, giving rise to an expectation that
companies operate in the public interest and justifying government interference
when they do not.82 Ronald Green maintains that:
Thanks to limited liability, shareholders can fund the activities of large corporations, receive dividends and capital gains on their investments, and yet remain
79
80
81
82
to individuals who are shareholders: Thompson, Corporate Shareholders as Mere Investors,

above n 2, 386 (citations omitted). Freedman cites a study of UK courts which came up with a
similar finding: Freedman, above n 35, 343 fn 156, citing Charles Mitchell, Lifting the
Corporate Veil in the English Courts: An Empirical Study (1999) 3 Company Financial and
Insolvency Law Review 15.
Millon, Piercing the Corporate Veil, above n 10, 7.
Ibid 78.
Ibid 8. Millon, at 3, observes that the economic efficiency grounds for limited liability
including, in the case of tort creditors, the ability to diversify away their risk are not present in
all cases:
The true policy basis for limited liability seems instead to be the reallocation of some of the
costs of doing business from business owners to those who transact (voluntarily or involuntarily) with the corporation. By requiring creditors to bear some of these costs, the law in effect
requires them to subsidize business activity. This policy does not depend for its legitimacy on a
clear demonstration of its efficiency. Instead, there seems to be little more at work than an
unquestioned assumption that the benefits of increased business investment will be worth the
social costs.
Cohen, above n 2, 444, explains that:
Under this understanding, limited liability entities have a responsibility to operate in the public
interest. Under the concession/communitarian view, the corporateness of the artificial entity
should be disregarded when the entity is being operated in a manner that runs counter to the
spirit of the grant of privilege, ie, when the public weal is damaged, rather than enhanced, by
the operation of the corporation.
See also David Millon, New Directions in Corporate Law: Communitarians, Contractarians, and
the Crisis in Corporate Law (1993) 50 Washington and Lee Law Review 1373.
350
[Vol 33
immune to some of the costs of misconduct or misjudgment by their corporate

agents.83
However, he questions maximising shareholder wealth as a companys

indisputable priority.84
Henry Hansmann and Reinier Kraakman go further and contend that limited
liability cannot be justified for either closely held or publicly traded corporations, maintaining that limited liability creates perverse incentives to spend
too little on accident prevention and to invest too much in hazardous industries.85
They concede that unlimited liability could encourage a number of liability
evasion measures: debt rather than equity financing; the premature liquidation of
firms which may face long-tail tort liabilities; and the disposal of personal
assets to make the shareholder judgment proof.86 However, they consider that
limited liability already provides incentives to conduct business through
undercapitalised companies and that unlimited liability would give shareholders
the necessary incentive to obtain appropriate levels of insurance.87 Imposing
unlimited liability for corporate torts on shareholders of all sizes of firms would
also avoid the line-drawing problem discussed above and remove incentives to
artificially configure the firms structure.88
However, Bainbridge rejects Greens communitarianism and concession theory
reasoning as being inconsistent with the contractarian model of the firm the
dominant paradigm of corporate law.89 Bainbridge maintains that the limited
liability corporation has contributed so much investment capital to society, from
which everyone has benefited,90 that shareholders owe nothing to society in
return. Furthermore, he repudiates Hansmann and Kraakmans arguments for
unlimited liability for corporate torts. He contends:
Under a rule of personal liability few people would be willing to become
shareholders. In such a world, large-scale businesses would be conducted by
highly-leveraged firms having a very small amount of equity capital and a very
large amount of secured debt. The mass tort plaintiffs Hansmann and Kraakman
are so concerned about, in particular, would have a difficult time satisfying
83 Ronald M Green, New Directions in Corporate Law: Shareholders as Stakeholders Changing
84
85
86
87
88
89
90
Metaphors of Corporate Governance (1993) 50 Washington and Lee Law Review 1409, 1415.
Green considers a number of mass tort claims where companies disregarded the risk of injury on
the basis that the cost of preventing the losses would have been difficult for managers concerned
with making profits for shareholders to justify: at 141921.
See ibid 141617.
Hansmann and Kraakman, Toward Unlimited Shareholder Liability, above n 2, 18824.
Ibid 18846, 190916.
Ibid 1888 (emphasis in original), where the authors conceded that:
Undoubtedly, some small corporations that are viable under limited liability would cease to be
so under unlimited liability, since they could not buy adequate insurance and their shareholders
would be unwilling to expose personal assets to the risks of a tort judgment. But there is no
reason to assume that such small firms should exist In fact, an important advantage of
unlimited liability is precisely that it would force such firms which are effectively being
subsidized by their tort victims out of business.
See ibid 1895.
Ibid.
2009]
351
their claims against such a firm. By encouraging equity investment, the limited
liability doctrine actually makes it easier for all creditors to be compensated.91
With respect to large corporations, Bainbridge answers Hansmann and

Kraakman by pointing to the high costs of recovering judgment debts from
individual shareholders and the significant procedural hurdles that would be
encountered.92 Where the pool of shareholders is always changing, the question
of who to sue becomes live, and a shareholder exodus problem arises.93
Bainbridge nonetheless concedes that it is hard to justify invoking the
corporate veil to protect the tort creditors of small corporations, for the reasons
outlined above. He admits that, while in the public corporation context
externalization of tort risk is simply a by-product of the corporations business
and affairs, in the close corporation setting externalizing such risks likely is the
very purpose of incorporating.94 Bainbridge acknowledges that the tort creditor
has no ability to bargain out of the default rule of limited liability and that the
company is likely to be the cheapest cost avoider (with the ability to organise
insurance or take precautions to ensure the accident is prevented).95 Nonetheless,
he maintains that the veil should not be pierced because of the line-drawing
issue. Despite arguments about excessive risk-taking, shareholders still have
incentives to avoid the accident or to insure adequately. They will lose their
investment when the defendant company is bankrupted by the plaintiffs suit.96
One solution that ensures compensation for tort claimants and maintains
limited liability and the corporate veil is a government-funded comprehensive
injury compensation scheme.97 However, these schemes fail to deter controllers
of parent companies from running underfunded and underinsured subsidiaries
that engage in high-risk activities. Moreover, the New Zealand experience shows
that accident compensation schemes are not always economically effective,98
despite the litigation cost savings that such schemes bring. Even if government
protection of tort claimants were to be considered, it is highly unlikely that
taxpayer-funded assistance would be provided for the payment of tort claims for
economic loss unrelated to personal injury or property damage.
91 Ibid 4978 (citations omitted).

92 Ibid 4967, citing Janet Cooper Alexander, Unlimited Shareholder Liability through a
Procedural Lens (1992) 106 Harvard Law Review 387, 3989.
93 Bainbridge, above n 2, 4968. This addresses issues raised by Hansmann and Kraakman,
Toward Unlimited Shareholder Liability, above n 2, 1896901.

Ibid 504.
Ibid.
New Zealand has had a no-fault accident compensation scheme since 1972. Its Accident
Compensation Act 1972 (NZ) established the Accident Compensation Corporation (ACC). The
Injury Prevention, Rehabilitation, and Compensation Act 2001 (NZ) is now the principal Act
under which the ACC operates.
98 The scheme has been criticised as being uneconomical and subject to widespread fraud: see
Stephen Todd, Negligence Liability for Personal Injury: A Perspective from New Zealand
(2002) 25 University of New South Wales Law Journal 895, 900 fn 21, where it is noted that in
1997 the unfunded liabilities from the scheme were estimated at NZ$8.2 billion.
94
95
96
97
352

IV PIERCING
THE
C O R P O R AT E V E I L
ON
[Vol 33
C O R P O R AT E G R O U P S
The justifications for and extensive literature on piercing the corporate veil on
corporate groups are now examined in light of the arguments in Part III
supporting veil-piercing against directors and closely held corporations in favour
of tort claimants. Again, the argument will be made that the justification for
limited liability namely, that a regime of unlimited liability would make
shareholders unwilling to invest and to diversify their investments because of the
need to monitor the company and fellow investors is not present in the case of
corporate groups.99
The Companies and Securities Advisory Committees Corporate Groups:
Final Report (CASAC Report) outlines the economic and commercial benefits
from operating a business through a corporate group.100 Reasons for keeping
different parts of the business separate include facilitating debt financing,
preserving intangibles such as goodwill and the corporate image of acquired
businesses, attaining taxation advantages and complying with regulatory
requirements.101 It is submitted that these reasons are not sufficient to warrant
the grant of limited liability, lacking as they do the justifications outlined above
in Part II. Interestingly, the CASAC Report openly acknowledges the detriment
likely to be suffered by the creditors of subsidiary companies, noting that one of
the listed benefits is the lowering [of the] risk of legal liability by confining high
liability risks, including environmental and consumer liability, to particular
group companies, with a view to isolating the remaining group assets from this
potential liability.102
However, there is a multitude of additional reasons to distinguish parent
companies from individuals as shareholders so that the former do not automatically enjoy the benefits of limited liability enjoyed by the latter.103 Holding a
parent company liable for the debts of its subsidiary does not impose unlimited
personal liability on any individual shareholder.104 Collection costs for creditors
are the same when recovering from the parent company as from the subsidiary.105 As in the case of one-person companies, there is a single shareholder
rather than a diverse group of individuals separated from management; the parent
99 For the sake of the discussion, the presumption is made that the subsidiaries of the parent
100
101
102
103
104
105
company are wholly owned. A 1998 study by Ramsay and Stapledon reports that [t]he vast
majority of controlled entities were wholly owned that is, 90 per cent: Ian Ramsay and Geof
Stapledon, Corporate Groups in Australia Research Report (Research Report, Centre for
Corporate Law and Securities Regulation, The University of Melbourne, 1998) 3.
Companies and Securities Advisory Committee, Corporate Groups: Final Report (2000) 34.
Ibid.
Ibid 4.
Blumberg, Limited Liability and Corporate Groups, above n 5, 6234.
Easterbrook and Fischel, Economic Structure, above n 23, 56.
This is in contrast to recovery from a large number of individual shareholders, where the cost of
taking action against them singly may exceed the benefit: Thompson, Unpacking Limited
Liability, above n 2, 20, citing David W Leebron, Limited Liability, Tort Victims, and
Creditors (1991) 91 Columbia Law Review 1565, 1612. Under a regime of joint and several
liability, this would not be a problem, but it would be if pro rata liability were introduced to
alleviate some of the negative effects of unlimited liability on shareholders, as suggested by
Hansmann and Kraakman, Toward Unlimited Shareholder Liability, above n 2.
2009]
353
company will be involved in important decision-making for the subsidiary,

avoiding the usual agency cost issue where the interests of manager and owner
diverge.106 In this matter, parent companies have much in common with
directors, in respect of whom the legislature has already shown a willingness to
pierce the corporate veil.
There is often a degree of economic integration between the parent company
and the subsidiary, and thus no increased information costs result from the legal
independence of the subsidiary.107 As with closely held companies, there is no
market for the subsidiarys shares, negating the argument that unlimited liability
affects the marketability of those shares.108 Parent companies also stand to reap
all the rewards from the transactions undertaken by the subsidiary,109 further
encouraging them to conduct dangerous and risky activities through subsidiary
companies with minimal capitalisation and a large amount of debt. Moreover, the
line-drawing problem put forward by Bainbridge does not occur when piercing
the corporate veil on parent companies.110 In the absence, therefore, of
legitimating reasons to maintain the corporate veil, corporate groups should not
enjoy an undisputed right to limited liability in all circumstances.
Nonetheless, it is submitted that there need to be concrete grounds on which
the veil may be pierced. The mere fact that a subsidiary has incurred a debt
which it cannot pay is not,111 and should not be, enough to pierce the corporate
veil. Otherwise, the doctrine of limited liability would have no application within
corporate groups. Nor is it suggested that the sole basis of veil-piercing should
be the fact that there is control or domination of the subsidiary by the parent
company.112 This would occur in almost all circumstances, so using control as
106
107
108
109
Blumberg, Limited Liability and Corporate Groups, above n 5, 624.

Ibid.
Ibid.
Thompson makes the point that shareholders get the residual gain from transactions undertaken
on their behalf, while directors enjoy control of the decision-making. In the case of parent
companies, they have both: Thompson, Unpacking Limited Liability, above n 2, 5.
110 See also Strasser, above n 2, 6389 (citations omitted):
The core idea is that a parent company as a shareholder in its subsidiary companies is in quite
a different economic role and performs quite a different management function than individual
investor shareholders, including public shareholders in the parent company itself. A parent
company creates, operates and dissolves subsidiaries primarily as part of a business strategy in
pursuit of the business goals of the larger enterprise, which the parent and all the subsidiaries
are pursuing together. The parent is not an independent investor. Whatever the corporate
formalities chosen, the parent typically has very real control over the operations and decisions
of the subsidiary and the extent to which the parent exercises that control is based on business
strategy for the enterprise rather than meaningful separation of the legally independent corporate entities. The various companies in the corporate group are really fragments that
collectively conduct the integrated enterprise under the coordination of the parent. Within
corporate groups, many of the contemporary economic efficiency justifications for limited
liability do not apply, and neither should the rules for applying that liability or determining its
outer boundary.
111 See Industrial Equity Ltd v Blackburn (1977) 137 CLR 567, 577 (Mason J); Walker v Wimborne
(1976) 137 CLR 1, 67 (Mason J); James Hardie (1989) 16 NSWLR 549, 5767 (Rogers AJA).
See also Ramsay and Noakes, above n 1, 2578.
112 Cf Nina A Mendelson, A Control-Based Approach to Shareholder Liability for Corporate Torts
(2002) 102 Columbia Law Review 1203, 12712, who argues that the fact of control should itself
be sufficient to subject shareholders to personal liability for corporate torts or statutory violations
354
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the only test for veil-piercing would be equivalent to removing the veil
altogether.113
In Australia, the courts will only pierce the veil if the corporate form has been
used for fraud, to shield the parent company from an existing legal obligation
(the sham/facade basis) or for corporate groups where the level of control is so
complete that [the parent company] is deemed to be directly liable for activities
of the subsidiary.114 On the other hand, in the US, where courts are more willing
to pierce the corporate veil than in Australia,115 courts have considered broader
factors such as fraud and misrepresentation, situations where the subsidiary has
acted as an agent,116 a lack of separation between the companies, and an
undercapitalisation of the subsidiary as justification for veil-piercing.117 These
are a combination of acts of acknowledged wrongdoing and legal (if improper)
behaviours, some amounting to no more than control itself.118
It is recommended that what is needed to pierce the veil, in addition to control,
is an act of wrongdoing on the part of the parent company, either through its own
actions or through the actions of the board of the subsidiary that it controls. What
should be recognised in statute119 are the substantive grounds on which the veil
should be pierced, rather than the means, such as agency,120 by which it is
done.121 Fault should be the principled basis for veil-piercing, instead of
113
114
115
116
117
118
119
120
121
in cases of corporate insolvency. Her emphasis is on limited liabilitys potential to encourage

excessive risk-taking: at 12325. Unlimited liability eliminates this moral hazard: at 1280. In
rebuttal, Millon, Piercing the Corporate Veil, above n 10, 49, contends that:
she goes too far in threatening controlling shareholders with liability without regard to whether
the decision in question was truly an irresponsible one. If third-party losses were not
reasonably foreseeable when those in control embarked on a particular course of action, they
are not the result of efforts to take advantage of limited liability. They are instead the incidental
by-product of business activity conducted by shareholders who otherwise have attempted in
good faith to provide compensation for victims of known risks.
See John Kluver, Entity vs Enterprise Liability: Issues for Australia (2005) 37 Connecticut Law
Review 765, 766, referring to CASAC Report, above n 100, 1518.
See Ramsay and Noakes, above n 1, 261. See also Thompson, An Empirical Study, above n 2,
1048.
This is sometimes also considered under the headings of instrumentality, alter ego or dummy for
the parent company.
Thompson, An Empirical Study, above n 2, 1063.
See Bainbridge, above n 2, 510.
Part V below makes the case for veil-piercing to be done through statute rather than the common
law.
See Neyers, above n 2, 181. Very critical of the agency ground for veil-piercing, Neyers makes
the point that there is nothing inherently wrong with the subsidiary being the agent of the parent
company. Ottolenghi, above n 2, 339, maintains that calling a subsidiary a puppet, instrumentality or sham contradicts it being an agent of the parent company. Calling it an agent
recognises its existence as a separate legal entity and attributes to it the power to negotiate and
finalise contracts on behalf of the principal, whereas a sham/facade means it is not regarded as
being an entity at all.
See Strasser, above n 2, 6578, who states that:
Traditional veil piercing asks abstract, generalized questions as a matter of corporate law,
questions that then are to guide the results in all the substantive areas of law in which veil
piercing issues arise. The core problem with this approach in corporate groups cases is that the
questions it asks do not relate well to the reasons for respecting or ignoring separate corporate
identities in different areas of law. No doctrine can be applied indiscriminately through the full
2009]
355
imposing liability according to an imprecise list of circumstances. In the same

way that legislatures and courts pierce the veil to render directors liable for their
wrongful conduct, it is proposed that legislation be enacted to impose upon
parent companies (rather than upon their directors) the equivalent of current
directors duties in particular, the duties of care and diligence122 and of good
faith.123
This would build on the present liability of parent companies as shadow
directors. Under the Corporations Act, the term director is defined to include a
person in accordance with whose instructions or wishes the directors of a
company are accustomed to act.124 Therefore, a parent company in control of a
subsidiary can be considered to be a shadow director of that subsidiary and thus
subject to directors duties.125 For this reason, the changes to the legislation
recommended in the next Part would not result in significant upheaval to the
substance of the law. Rather, the suggested changes would act as a signalling
mechanism to parent companies that their control, and their wrongdoing through
that control, would result in a statutory piercing of the veil.
It is not easy to use fault as a reason to pierce the corporate veil when shareholders are individuals. Attributing fault and calculating the degree of
participation in the affairs of the company elements necessary to attract
liability are complicated questions.126 However, it is much easier to determine
when there is a single parent company as shareholder.127 Easterbrook and Fischel
make a strong case for parentcompany liability related to fault in the broad
sense of the word:
the moral-hazard problem is probably greater in parentsubsidiary situations
because subsidiaries have less incentive to insure. In publicly held corporations,
the inability of managers to diversify their firm-specific investments in human
capital creates incentives to insure. The same is not true for managers of subsidiaries if, as often will be the case, they are also managers of the parent.
Bankruptcy of the subsidiary will not cause them to lose their positions in the
parent or suffer any other loss of firm-specific human capital (though they
might suffer a reputational loss). If limited liability is absolute, a parent can
form a subsidiary with minimal capitalization for the purpose of engaging in
risky activities. If things go well, the parent captures the benefits. If things go
122
123
124
125
126
127
spectrum of the many discrete legal areas of procedure, jurisdiction, tax, and substantive law,
not to mention statutory law of general application. The only transcendental principle universally applicable is that the decision to respect or ignore separate corporate identities in
corporate groups cases in different substantive legal areas should be guided by the policies of
those areas, not by the abstract and generalized ideas at the core of the traditional doctrine.
Millons idea of a coherent principle is to pierce the veil where a company has not behaved in a
financially responsible manner: Millon, Piercing the Corporate Veil, above n 10, 46.
Corporations Act s 180.
Corporations Act s 181.
Corporations Act s 9 (definition of director para (b)(ii)).
These are contained in Corporations Act pt 2D.1 div 1 and elsewhere, including the duty to
prevent insolvent trading under s 588G.
Gelb, above n 2, 18.
However, Bainbridge makes the case for direct liability for shareholders at fault even where the
shareholder is an individual: Bainbridge, above n 2, 51617.
356
[Vol 33
poorly, the subsidiary declares bankruptcy, and the parent creates another with
the same managers to engage in the same activities. This asymmetry between
the benefits and costs, if limited liability were absolute, would create incentives
to engage in a socially excessive amount of risky activities.
It does not follow that parent and affiliate corporations routinely should be
liable for the debts of those in which they hold stock. Far from it. Such general
liability would give small or unaffiliated firms a competitive advantage.128
The justification for statutory rather than common law veil-piercing will be
examined in the next Part. What follows here is a consideration of some of the
possible grounds for breach of those sections. Tort would be an obvious place to
start. Part III considered the theoretical justifications for piercing the corporate
veil where a company had committed a tort. Those same reasons apply where the
parent company has effective control of the subsidiary.129 Parent companies can
ensure that their subsidiaries do not engage in excessively risky activities and
carry an adequate amount of insurance to cover foreseeable risks.130 It appears to
be almost universally accepted that the corporate group form will be used
precisely to quarantine the assets of the parent from the risky behaviour of the
subsidiary, without any consideration for the harm to be suffered by the
subsidiarys creditors, especially its tort creditors.131 As discussed above,
Thompson and other commentators have demonstrated that the principles of
separate legal entity and limited liability were not brought into the law with the
idea of corporate groups in mind. Corporate groups are the accidental beneficiaries of these principles, and thus the availability of the corporate group form
should not be taken as licence to abuse the creditors of a parent companys
subsidiaries.132
Undercapitalisation is another area of fault where the parent company could be
considered to have breached its duties of good faith or care and diligence to the
128 Easterbrook and Fischel, Economic Structure, above n 23, 567 (citations omitted).
129 Strasser, above n 2, 658 (citations omitted), comments:
For the tort claimant, the core tort policies of compensating injured parties, allocating costs to
the activities that cause them, and discouraging negligent or intentionally harmful conduct are
key. In corporate groups cases, whether the parent company should be liable to the subsidiarys
tort claimant should be based on the extent to which such liability furthers these policies.
130 Thompson, Unpacking Limited Liability, above n 2, 379.
131 Thompsons empirical study was confirmed by Ramsay and Noakess own observations. Ramsay
and Noakes, above n 1, 258, quoting Thompson, An Empirical Study, above n 2, 1071, stated:
Furthermore, courts appear reluctant to become involved in cases where parties have clearly
reached a contractual bargain in relation to which piercing the corporate veil would produce a
different result.
As Professor Thompson notes:
Because the market-related reasons for limited liability are absent in close corporation[s] and corporate groups, the most important justification for limited liability is
permitting parties in a consensual relationship to use the corporate form to allocate the
risks of the transaction and the enterprise.
Interestingly, the opposite situation applies in some jurisdictions in Europe: Hertig and Kanda,
above n 36, 96.
132 See also below n 181.
2009]
357
subsidiary.133 This is particularly relevant to creditors in various situations:

where the transaction is too small to justify a full examination of the companys
finances; where the creditor lacks the requisite bargaining power to demand
financial information or a personal guarantee from a director; and where the case
involves involuntary tort creditors and employees. Undercapitalisation could
occur because of a lack of initial capital or a reduction in the subsidiarys assets
over time because of siphoning, commingling of assets of the parent company
and subsidiary134 or excessive dividends. Present legislation such as Corporations Act s 588V, which imposes liability on parent companies for the insolvent
trading of their subsidiaries, fails to address the core issues surrounding
undercapitalisation. Such legislation only applies to debts incurred by the
subsidiary when there are reasonable grounds for suspecting its insolvency.135 It
does not capture any of the prior transactions taking place while the subsidiary
was solvent, which may have nevertheless contributed to its later insolvency.
The question necessarily arises as to what would amount to adequate capitalisation.136 The advantage of imposing the equivalent of directors duties on parent
companies is that the amount would not need to be specified in advance.137 Just
as the law of directors duties has worked effectively without the need to specify
exactly which actions would cause a breach, so too the parent company
equivalent would allow courts to consider the circumstances of a particular group
at the time of the alleged breach to determine the adequacy of capitalisation.
Adequacy might not refer to whether the subsidiary has sufficient capital to
cover a possible loss138 but rather whether there exists enough of the share-
133 While this is a recognised ground of veil-piercing in the US, it has not been accepted by
Australian courts: CASAC Report, above n 100, 18.
134 Gevurtz, above n 2, 875.

135 Corporations Act s 588V(1)(c).
136 See generally Freedman, above n 35, 3358, discussing the practical and theoretical objections to
minimum capital requirements.
137 Gevurtz, above n 2, 884, asks:
Does either the existence of [laws requiring minimum capital amounts] or their disappearance
tell us anything about legislative views of piercing for inadequate capital? The answer is
probably no. The problem with legislative minimum capitalization requirements is that different businesses have different capital needs. Hence, the old statutes set a token sum suitable for
the smallest venture. This is hardly a legislative determination as to what is adequate capital
for any corporation, no matter what its business. The repeal of these provisions simply recognizes the futility of attempting to attack the adequate capital question through across-the-board
legislative requirements. Case-by-case judicial evaluation through piercing decisions is a
different matter.
138 See Millon, Piercing the Corporate Veil, above n 10, 28 (citations omitted), who notes that:
If the point of the courts reliance on the undercapitalization idea is that the shareholders are
expected not only to contribute initially but also to maintain at all times a particular net worth
in the corporation for the benefit of corporate creditors, such a requirement would not differ
fundamentally from a rule of unlimited liability. Either way, the shareholders would function
as personal guarantors of corporate obligations. The cost of such a requirement to the shareholders could be prohibitively high, and the benefit of limited liability as a risk reallocation
device would be lost. The threat of veil-piercing should not amount to a requirement that all
corporations maintain a shareholder-financed insurance fund.
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holders own money at stake to give them an incentive not to engage in

excessively risky activities.139
A subsidiarys lack of insurance might be another ground for finding that the
parent company did not act with care and diligence. This would interact with the
issue of capital adequacy, as sufficient insurance coverage renders capitalisation
less relevant. Like putting some of the shareholders own capital at risk,
insurance can work as a deterrent against excessive risk-taking, as accident
prevention measures help to reduce the cost of the premiums.140 In the context of
directors liability in tort, Vanessa Finch comments that:
Personal liability may leave risk evaluation and spreading to those individuals
who are the best acquirers of information concerning corporate risks, levels of
capitalisation, internal control systems and insurance. It thus offers firms a
flexibility of response that may be preferable to externally-imposed rules on
minimum insurance or adequate capitalisation. Making the director liable thus
protects against legislative over-or-under provision for tort risks, and it permits
managers to select the optimal strategy for covering risk from among insurance,
self-insurance or risk-reduction though the control of firm activities.141
Fraud and misrepresentation would also be factors in a court pronouncement

that a parent company as shadow director did not act in good faith. This may link
with undercapitalisation but obviously would go further. Misrepresentation could
take many forms: it could relate to the particular entity with whom the external
party is doing business, the level of capitalisation of that entity or the actual
transaction entered into by the parties.
The advantage of a legislative response to the question of piercing the
corporate veil on parent companies as outlined above is that all of the circumstances which justify piercing the corporate veil do not need to be spelt out in
advance.
139 Easterbrook and Fischel, Economic Structure, above n 23, 59 (citations omitted), recommend
that:
The firm should have a duty to notify the creditor of any unusual capitalization. It is cheaper
for the firm (which has the best information about its capital structure) to notify creditors in
the unusual case than for creditors to investigate in all cases. Allowing creditors to look
beyond the assets of the undercapitalized corporate debtor provides the debtor with the incentive to disclose its situation at the time of the transaction. The creditor then can decide not to
transact or charge increased compensation for the increased risk. Alternatively, the creditor
could ask for prepayment, personal guarantees, or other security. Under any of these alternatives, the debtor will have to pay for engaging in risky activities and thus will have better
incentives to balance social benefits and costs.
140 Gevurtz, above n 2, 887. Some authors argue that insurance actually encourages risky behaviour
rather than deters it. In the context of directors liability, see Vanessa Finch, Personal Accountability and Corporate Control: The Role of Directors and Officers Liability Insurance (1994)
57 Modern Law Review 880, 8889. For discussion of mandatory insurance, see Freedman,
above n 35, 3402.
141 Finch, above n 140, 883 (citations omitted).
2009]
V THE CASE
FOR
S TAT U T O RY V E I L - P I E R C I N G
GROUPS
FOR
359
C O R P O R AT E
This Part makes the case for legislation to be enacted to pierce the corporate
veil on corporate groups in the circumstances specified in Part IV, rather than
leaving the task to the common law. There are three reasons for doing so. First, it
would overcome one of the principal objections to veil-piercing, namely, that
veil-piercing is uncertain, discretionary and therefore costly and unreliable.
Secondly, through its new clarity, it would provide effective deterrence, reliable
compensation and minimal litigation costs. Thirdly, while courts would be left to
determine the circumstances under which the parent company had failed to
comply with its duty of care or good faith to the subsidiary, the clear signal from
the legislature that it is appropriate to pierce the corporate veil would potentially
overcome the judiciarys demonstrated reluctance to do so.
In the US, the concept of statutory enterprise liability has a long history.142
This is not the case in Australia.143 In the CASAC Report, the single enterprise
principle for corporate groups was rejected.144 Piercing the corporate veil in
relation to torts committed by subsidiary companies was considered undesirable,
as this liability would undermine the separate entity principle and could have
negative consequences for the economy.145 The report then suggested that this
area should be dealt with by specific legislation where the extension of liability
beyond the tortfeasor company is desirable in the public interest.146 However,
the Corporate Responsibility and Employment Security Bill 2002 (Cth) (CRES
142 Blumberg notes that entity law became an insuperable barrier to effective federal regulation, so
143
144
145
146
from 1933 various pieces of legislation by the US government ignored the separate legal entity
of the company and focused on control as well as a range of other factors indicating integration
of the parent company and the subsidiary: Blumberg, Transformation, above n 6, 60810. Even
so, Blumberg observes that when financial liability is at stake, rather than disputes over
jurisdiction and other procedural matters, entity law generally prevails: at 611. See also Phillip I
Blumberg, The Increasing Recognition of Enterprise Principles in Determining Parent and
Subsidiary Corporation Liabilities (1996) 28 Connecticut Law Review 295. See generally Adolf
A Berle Jr, The Theory of Enterprise Entity (1947) 47 Columbia Law Review 343.
Similarly, in the UK, courts are reluctant to pierce the veil within corporate groups. In
Adams v Cape Industries plc [1990] 1 Ch 433, 5434, 547, 549 (Slade LJ for Slade, Mustill and
Ralph Gibson LJJ), the Court of Appeal refused to pierce the corporate veil to find that a British
parent company was the principal (for the purposes of claiming agency) of a US subsidiary
merely because it exercised extensive control over the subsidiary. The Court would only do so if
the subsidiary was a mere facade or sham. See also Freedman, above n 35, 3423.
CASAC Report, above n 100, 3940. The Committee did recommend that the law should
provide that a wholly-owned corporate group can opt-in to be a consolidated corporate group
for all or some of the group companies, by resolution of the directors of each relevant group
company: at 39. This would entail the parent company and each group company being collectively liable for the contractual (but not tortious) debts of all group companies, subject to
contrary agreement. This was not made into law. Their recommendation on pooling, at 176
(recommendation 22), was enacted through the passing of the Corporations Amendment
(Insolvency) Act 2007 (Cth) sch 1 item 133, which inserted div 8 into pt 5.6 of the Corporations
Act. This allows pooling of corporate group assets when each of the companies in a group is
being wound up and where there is the approval of eligible creditors: s 571(1). This legislation,
however, is not relevant to the theme of this article, which is concerned with the creditors of
insolvent subsidiaries having access to the assets of solvent parent companies.
CASAC Report, above n 100, 122.
Ibid.
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Bill),147 which would have permitted veil-piercing of solvent parent companies

with respect to employee entitlements in specified circumstances,148 was not
passed.149 The Corporations Amendment (Insolvency) Act 2007 (Cth), which
allows pooling of the assets of companies within an insolvent group, did not
address the issue of contribution orders being made against the assets of solvent
companies within a group.
Blumberg, arguably one of the worlds leading scholars on corporate groups,
remarks that in the US piercing has led to hundreds, if not thousands, of
irreconcilable cases each year,150 describing it as jurisprudence by metaphor
or epithet.151 Easterbrook J stresses, in relation to the laundry list approach to
veil-piercing grounds, that:
Such an approach, requiring courts to balance many imponderables, all important but none dispositive and frequently lacking a common metric to boot, is
quite difficult to apply because it avoids formulating a real rule of decision.
This keeps people in the dark about the legal consequences of their acts 152
As noted above, Australia has far fewer veil-piercing cases153 Australia

does not have the extensive and growing laundry list of factors justifying veilpiercing,154 and the courts have shown reluctance to pierce the corporate veil in
147 No Explanatory Memorandum was provided for the Bill and it was not read a second time. It
148
149
150
151
152
153
154
follows earlier versions of the Bill, and Riley noted that they have never been seriously
debated: Joellen Riley, Industrial Legislation in 2001 (2002) 44 Journal of Industrial Relations
198, 207. Another version of the Bill was introduced in 2003 but was again unsuccessful.
See CRES Bill sch 2 item 2, inserting s 178A, which provided for employee entitlements against
the company.
The CRES Bill differed from the contributions power under the New Zealand companies
legislation, which does not require proof of fault or day-to-day control over the actions of the
related company: see Companies Act 1993 (NZ) s 271(1). This article does not recommend nofault veil-piercing. CRES Bill sch 1 item 1, inserting s 588YA(2), would have allowed the court
to consider both the extent of control by the related company over the insolvent company and
the extent to which the circumstances that gave rise to the winding up of the company are
attributable to the actions of the related body corporate or an officer or officers of the related
body corporate.
Blumberg, Transformation, above n 6, 612.
Phillip I Blumberg, The Law of Corporate Groups: Procedural Problems in the Law of Parent
and Subsidiary Corporations (1983) 8.
Secon Service System Inc v St Joseph Bank & Trust Co, 855 F 2d 406, 414 (Easterbrook J)
(7th Cir, 1988). Strasser, above n 2, 637, notes that in the US,
[a]lthough there is near unanimity among the commentators that the present rules neither guide
good decision-making nor produce consistent or defensible results, and there are many proposals for reform or abolition of the present law, one sees little discernable movement in the case
law toward a better approach.
See also Thompson, Unpacking Limited Liability, above n 2, 23; Gevurtz, above n 2, 8578.
However, in relation to the agency basis of veil-piercing in Australia there is a continuing
debate over the application of Smith, Stone & Knight Ltd v City of Birmingham [1939] 4 All ER
116: see Jason Harris, Lifting the Corporate Veil on the Basis of an Implied Agency: A ReEvaluation of Smith, Stone & Knight (2005) 23 Company and Securities Law Journal 7; Anil
Hargovan and Jason Harris, The Relevance of Control in Establishing an Implied Agency
Relationship between a Company and Its Owners (2005) 23 Company and Securities Law
Journal 459, 459.
See above n 10 and accompanying text.
2009]
361
the case of corporate groups.155 There was considerable confusion over the
correct test to apply when considering whether directors can do what they
believe to be in the best interests of the group as a whole, or whether they must
take into account only the interests of each individual company, regardless of the
effect on other companies in the group and their related creditors.156 In
Briggs v James Hardie & Co Pty Ltd (James Hardie), Rogers AJA said:
The proposition that a company has a separate legal personality from its corporators survived the coming into existence of the large numbers of fully owned
subsidiaries of companies and their complete domination by their holding
company There was continued adherence to the principle recognised by
Salomon, notwithstanding that for a number of purposes, legislation recognised
the existence of a group of companies as a single entity.157
That particular question was answered by the insertion of s 187 into the
Corporations Act.158 Moreover, in Qintex Australia Finance Ltd v Schroeders
Australia Ltd, Rogers CJ Comm D noted with concern that there is today a
tension between the realities of commercial life and the applicable law.159 His
Honour complained that [t]he result has been unproductive expenditure on legal
costs, a reduction in the amount available to creditors, a windfall for some, and
155 An example is the High Courts decision in Walker v Wimborne (1976) 137 CLR 1, 67, where
156
157
158
159
Mason J said that

the emphasis given by the primary judge [in that case] to the circumstance that the group
derived a benefit from the transaction tended to obscure the fundamental principles that each
of the companies was a separate and independent legal entity, and that it was the duty of the
directors of Asiatic to consult its interests and its interests alone in deciding whether payments
should be made to other companies. The creditor of a company, whether it be a member of
a group of companies in the accepted sense of that term or not, must look to that company for
payment. His interests may be prejudiced by the movement of funds between companies in the
event that the companies become insolvent.
In Industrial Equity Ltd v Blackburn (1977) 137 CLR 567, 577, Mason J also upheld the separate
legal entity principle in relation to the dividends which could be distributed by a parent company,
despite its complete control over the funds of the subsidiary. See also Pioneer Concrete Services
Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254, 264 (Young J).
One test to decide this derives from Walker v Wimborne (1976) 137 CLR 1 and appears in the
quote above in n 155. The other comes from Charterbridge Corporation Ltd v Lloyds Bank Ltd
[1970] Ch 62, 74, where Pennycuick J held:
Each company in the group is a separate legal entity and the directors of a particular company
are not entitled to sacrifice the interest of that company. This becomes apparent when one
considers the case where the particular company has separate creditors. The proper test, I
think, in the absence of actual separate consideration, must be whether an intelligent and
honest man in the position of a director of the company concerned, could, in the whole of the
existing circumstances, have reasonably believed that the transactions were for the benefit of
the company.
(1989) 16 NSWLR 549, 576 (citations omitted).
Section 187 provides:
A director of a corporation that is a wholly-owned subsidiary of a body corporate is taken to
act in good faith in the best interests of the subsidiary if:
(a) the constitution of the subsidiary expressly authorises the director to act in the best
interests of the holding company; and
(b) the director acts in good faith in the best interests of the holding company; and
(c) the subsidiary is not insolvent at the time the director acts and does not become
insolvent because of the directors act.
(1990) 3 ACSR 267, 268.
362
[Vol 33
an unfair loss to others. Fairness or equity seems to have little role to play.160
Ian Ramsay and David Noakes remark that:
Comments such as those of Rogers CJ, and a general concern resulting from
holding companies walking away from insolvent subsidiaries leaving creditors
of the subsidiaries unpaid, led to the Australian Commonwealth Parliament
amending the Corporations Law in 1993 to introduce s 588V.161
The idea of comprehensive legislation in Australia to relax the separate legal

entity principle for corporate groups is not new; the Harmer Report, which
preceded the passage of Corporations Act s 588V, was in favour of piercing the
veil where the court was satisfied that it was just to do so.162 Three specific
criteria to which the court should have regard in making this determination were
specified. These were:
the extent to which the related company took part in the management of
the company
the conduct of the related company towards the creditors of the [defaulting] company and
the extent to which the circumstances that gave rise to the winding up of
the company are attributable to the actions of the related company.163
The Harmer Report made it clear that [i]t should not, of course, be sufficient
that creditors have merely relied on the assets of the related company in their
decision to deal with the company.164 However, this recommendation was not
adopted.
The legislation proposed in this article is narrower than that suggested by the
Harmer Report and more likely to be accepted as it simply codifies the existing,
but little utilised,165 shadow director liability.166 At present, there is only one
section within the Corporations Act that mentions the expression shadow
director.167 Even the section that allows for the existence of shadow directors
160 Ibid 269.
161 Ramsay and Noakes, above n 1, 259. See also Ian M Ramsay, Holding Company Liability for
162
163
164
165
166
167
the Debts of an Insolvent Subsidiary: A Law and Economics Perspective (1994) 17 University of
New South Wales Law Journal 520.
Law Reform Commission, General Insolvency Inquiry, Report No 45 (1988) vol 1, 146
(Harmer Report).
Ibid. See also the draft legislation in Harmer Report, vol 2, 73.
Ibid vol 1, 147.
See, eg, Emanuel Management Pty Ltd (in liq) v Fosters Brewing Group Ltd (2003) 178 FLR 1,
704 (Chesterman J). See also Standard Chartered Bank of Australia v Antico [Nos 1 and 2]
(1995) 38 NSWLR 290; Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR
504; Bluecorp Pty Ltd (in liq) v ANZ Executors & Trustee Co Ltd (1994) 13 ACSR 386;
Hill v David Hill Electrical Discounts Pty Ltd (in liq) (2001) 37 ACSR 617; Forge v Australian
Securities and Investments Commission (2004) 213 ALR 574; Harris v S (1976) 2 ACLR 51;
Ho v Akai Pty Ltd (in liq) (2006) 24 ACLC 1526.
When it is raised, it is often in tandem with a discussion of the liability of individuals as
de facto directors. For a detailed analysis of the difference between shadow and de facto
directors, see Chris Noonan and Susan Watson, The Nature of Shadow Directorship: Ad Hoc
Statutory Intervention or Core Company Law Principle? [2006] Journal of Business Law 763.
Corporations Act s 729(1) mentions the term shadow director in the note.
2009]
363
Corporations Act s 9 does not use the term.168 This is in stark contrast to
parallel legislation in the United Kingdom which uses the term 29 times, in many
cases to stress that the liability to be imposed on directors has application also to
shadow directors.169 This is in addition to numerous references to shadow
directors in other British corporate legislation.170
Both cases and commentary on liability as shadow directors generally
concentrate on the difficulties in establishing the requisite degree of control by
the individual or parent company over the decision-making of the subsidiary.171
For this reason, a codification of the law could not only bring the availability of
the remedy against the parent company into prominence but also clarify its
requirements. This would operate in the same manner as the introduction of
s 588V,172 which not only signalled to parent companies that the insolvent
trading liability of s 588G could be extended to them directly, rather than
through the mechanism of identification as a shadow director of the subsidiary,
but also clarified what would need to be proven against the parent company.
Elements from Corporations Act ss 9, 180 and 588V could be used to craft
such a provision dealing with a failure to use care and diligence. One possibility
is the following:
A corporation contravenes this section if:
(a) the corporation is the holding company of a company; and
(b) at that time, the directors of the company are accustomed to act in
accordance with the corporations instructions or wishes; and
(c) having regard to the nature and extent of the corporations control over
the companys affairs and to any other relevant circumstances, the corporation, or one or more of its directors, fails to exercise their powers or
168 The predecessor to s 9 was Corporations Law s 60(1). Note the words of sub-s (b) (emphasis
169
170
171
172
added): a person in accordance with whose directions or instructions the directors of the body
are accustomed to act. The present section Corporations Act s 9 (definition of director
para (b)(ii)) uses the expression instructions or wishes.
Companies Act 2006 (UK) c 46; see, eg, s 239(5)(a). For an excellent exposition of the UK
provisions and their use, see the leading case of Secretary of State for Trade and Industry v Deverell [2001] Ch 340. See generally Noonan and Watson, above n 166.
See, eg, Insolvency Act 1986 (UK) c 45, ss 6A, 206, 208, 21011, 214, 216, 249, 251; Company
Directors Disqualification Act 1986 (UK) c 46, ss 4, 6, 89, 22. Leading cases in the UK
include: Re Lo-Line Electric Motors Ltd [1988] 1 Ch 477; Re Unisoft Group Ltd [No 3] [1994] 1
BCLC 609; Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180; Re PFTZM Ltd (in liq) [1995] 2
BCLC 354; Secretary of State for Trade and Industry v Deverell [2001] Ch 340. See also Kuwait
Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187.
See, eg, Michael D Hobson, The Law of Shadow Directorships (1998) 10 Bond Law Review
184, 187, 1912; Robert Baxt, Liability of Shadow Directors for Insolvent Trading Australian Authorities Starting to Bite (1996) 14 Company and Securities Law Journal 121, 1234;
Martin Markovic, The Law of Shadow Directorships (1996) 6 Australian Journal of Corporate
Law 323, 32732, 33647; Robyn Carroll, Shadow Director and Other Third Party Liability for
Corporate Activity in Ian M Ramsay (ed), Corporate Governance and the Duties of Company
Directors (1997) 162, 17583; Pearlie M C Koh, Shadow Director, Shadow Director, Who Art
Thou? (1996) 14 Company and Securities Law Journal 340, 34351. The other main issue
concerning commentators is the liability of parties, such as banks, who appoint directors to the
board or who require companies to act in a specified way in order to qualify for financial
assistance. An example of such a case is Kuwait Asia Bank EC v National Mutual Life Nominees
Ltd [1991] 1 AC 187.
Corporations Act s 588V was inserted by Corporate Law Reform Act 1992 (Cth) s 111.
364
[Vol 33
discharge their duties as a shadow director of the company with the

degree of care and diligence that a reasonable person would exercise if
they:
(i) were a director of the company in the companys circumstances;
and
(ii) occupied the office held by, and had the same responsibilities
within the company as, the director.
Similar provisions could be drafted with respect to the other directors duties.
One of the advantages of the proposed legislation is that it would not be the
equivalent of the American laundry list. The difference is that courts would not
be looking at grounds for piercing as such but rather would be looking to see
whether there was a lack of good faith and due care and diligence on the part of
the parent company, just as courts already do in relation to directors duties to
their companies. Any apparent harshness arising from such a provision would be
ameliorated by the application of the business judgment rule (as applies to
directors duties),173 adapted to the particular circumstances of corporate groups.
The proper plaintiff to take action against the parent company would be the
subsidiary or, if it is insolvent, its liquidator.
The certainty provided by the enactment of such legislation would send a
crucial message of deterrence to controllers of parent companies who might
otherwise choose to use the corporate group form to engage in excessive risktaking. Easterbrook and Fischel extol the virtues of such deterrence:
We also use deterrence (say, the threat of punishment for fraud) rather than
other forms of legal control when deterrence is the least-cost method of handling a problem. Deterrence is a particularly inexpensive method. The
expensive legal system is not cranked up unless there is evidence of wrongdoing; if the anticipated penalty (the sanction multiplied by the probability of
its application) is selected well, there will not be much wrongdoing, and the
costs of the system are correspondingly small. A regulatory system (one entailing scrutiny and approval in advance in each case) ensures that the costs of
control will be high; they will be incurred even if the risk is small.174
At the same time, the flexibility afforded by a section equivalent to directors

duties would ensure that the technicalities in highly specific legislation are not
exploited. In relation to the drafting question, Thompson comments on why
legislation leaves fraud undefined in securities law: [t]he reason is clear, a fear
that a more specific definition will provide a roadmap for fraud as planners
devote their energy to schemes that are within the spirit of the law but cleverly
fall outside the proscribed definition.175 This is one of the reasons why more
targeted legislative solutions are undesirable. The discussion of undercapitalisa-
173 Corporations Act s 180(2).

174 Easterbrook and Fischel, Corporate Contract, above n 14, 1421. See also Neyers, above n 2,
178.
175 Thompson, Is the Common Law the Problem?, above n 2, 625.
2009]
365
tion above176 illustrates the potential difficulties that can arise when legislation is
unduly prescriptive.
Moreover, there can be difficulties in framing actions against corporate
controllers under existing legislation. An example is the use of s 52 of the Trade
Practices Act 1974 (Cth) (TPA) to deal with misrepresentations to creditors
about the capitalisation or creditworthiness of the subsidiary. Liability is imposed
on the company, but other parties involved in the contravention can be liable as
well.177 However, for liability to be imposed, proof of subjective knowledge on
the part of the other parties is required. In Yorke v Lucas, the High Court held
that even in strict liability provisions, where contravention by the principal does
not require proof of intent, the liability of the accessory requires proof of
knowledge.178 This finding was based on the interpretation of the meaning of the
expression person involved in the contravention.179 The requirement of proving
knowledge can be avoided by invoking the state equivalents of the TPA,180 but
the example demonstrates the types of difficulties creditors might face if they
frame their claim against the parent company under legislation not designed to
deal with it. Even if misrepresentations were adequately dealt with under trade
practices legislation, other aspects of default or neglect on the part of the parent
company, such as a failure to adequately insure the subsidiary, are not captured
by existing legislation.
Finally, the proposed legislation would overcome the judicial reluctance to
pierce the veil on corporate groups evinced by Australian courts. Thompson
quotes an American court, which appears to sum up nicely the position of its
Australian counterparts:
The doctrine of limited liability is intended precisely to protect a parent corporation whose subsidiary goes broke. That is the whole purpose of the doctrine,
176 See above nn 1339 and accompanying text.

177 The damages remedy under s 82(1) of the TPA provides for an action to be taken against that
other person [the company] or against any person involved in the contravention. Pursuant to
s 75B of the TPA the latter is defined as:
a person who:
(a) has aided, abetted, counselled or procured the contravention;
(b) has induced, whether by threats or promises or otherwise, the contravention;
(c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the
contravention; or
(d) has conspired with others to effect the contravention.
178 (1985) 158 CLR 661, 670 (Mason ACJ, Wilson, Deane and Dawson JJ). This is consistent with
the decision in Giorgianni v The Queen (1985) 156 CLR 473.
179 This interpretation was determined from an examination of the meaning of the expression in the
legislation: TPA ss 82, 75B. Section 75B was inserted by Trade Practices Amendment Act 1977
(Cth) s 45, and was based on ss 76 and 79(1), as they then existed. They in turn were based on
Crimes Act 1914 (Cth) s 5, repealed by Law and Justice Legislation Amendment (Application of
Criminal Code) Act 2001 (Cth) sch 1 item 1.
180 For example, under s 11 of the Fair Trading Act 1999 (Vic) liability is imposed directly on a
person.
366
[Vol 33
and those who have the right to decide such questions, that is, legislatures,
believe that the doctrine, on the whole, is socially reasonable and useful.181
It is therefore recommended that in order to overcome the moral hazard arising

from the use of the corporate group form182 Parliament should enact legislation
as suggested above to pierce the corporate veil on parent companies.
VI CONCLUSION
This article considered the liability of parent corporations within corporate
groups. It began with an examination of the theory behind limited liability and
maintaining the veil of incorporation. Despite creditors facing problems with the
limited liability of shareholders, as an issue of balance, it remains the majoritarian default. Essentially, this is because the difficulties for shareholders with an
unlimited liability regime exceed the difficulties for creditors with a limited
liability regime. Such difficulties include a disproportionate loss for shareholders
should the company fail, the requirements of monitoring and intervening in
management to avoid this eventuality, and a disincentive to diversify, leading to
capital markets being starved of investment.
However, scholars and courts, particularly in the US, show some support for
veil-piercing where some or all of the elements which are used to justify limited
liability and the veil of incorporation are not present. This occurs where there is
effective control of the operations of the company by the directors or the
shareholders, or where there is a lack of ability for the creditors to self-protect
ex ante against the risk of loss. The balance between the objective of shareholder
wealth maximisation and the protection of those adversely affected by the
activities of the corporation therefore tips in favour of the creditors.183
Three instances of veil-piercing were examined: where the veil is pierced in
order to reach the directors of the company, where the company is closely held
and where the company has committed a tort. Directors face personal liability so
that the law can both correctly attribute liability to the party responsible for
wrongdoing, either at common law or under statute, as well as deter actions
which are detrimental to the company and other corporate stakeholders, such as
181 Radaszewski v Telecom Corporation, 981 F 2d 305, 311 (8th Cir, 1992) (Arnold CJ), quoted in
Thompson, Corporate Shareholders as Mere Investors, above n 2, 388.
182 See Department of Premier and Cabinet (NSW), The Report of the Special Commission of
Inquiry into the Medical Research and Compensation Foundation (2004) vol 1, 74. It is
interesting to note that in relation to the James Hardie asbestos claims this report stated:
Save for the possibility that [James Hardie Industries Ltd (JHIL)] was a shadow director of
Coy, no basis appears for finding that the relationship between those companies was other than
an ordinary relationship between parent and subsidiary unattended by fiduciary duties of the
kind the Foundation sought to establish.
Then, at vol 1, 98, the Commissioner, David Jackson QC, stated:
I am satisfied that JHIL was a shadow director of Coy at the relevant times. The directors of
Coy were, in my view, accustomed to act in accordance with JHILs instructions on the payment of dividends and management fees, in strategic restructuring of the James Hardie group,
and on the acquisition of assets for use in Coys Building Boards Australia business. Of
course, it does not follow that there was a breach of those duties.
183 See above nn 16, 401 and accompanying text.
2009]
367
creditors. In the case of closely held companies, the reasons for shareholders
needing limited liability as an encouragement to invest namely, the need to
monitor and its cost, the disinclination to diversify and the inability to freely
transfer shares are absent. As regards tort creditors, their lack of consent to
the majoritarian default term of limited liability and their inability to self-protect
ex ante makes them worthy claimants. A removal of limited liability would
encourage more acceptable levels of risk-taking or the introduction of protection
strategies such as adequate capitalisation or insurance.
Corporate groups have much in common with directors and closely held
companies, and many of the same reasons for piercing the corporate veil apply to
corporate groups. The point was made that holding a parent company liable for
the debts of its subsidiary does not impose unlimited personal liability on any
individual shareholder, thus removing one of the most persuasive grounds for
maintaining the corporate veil. Nor is monitoring an issue, due to the control of
the subsidiary by the parent company. A common rule for all parent companies
would remove the line-drawing problem that exists for closely held companies.
However, this article does not advocate control as the sole ground for piercing
the corporate veil on parent companies.
It was recommended that legislation be passed to recognise the substantive
grounds on which the veil should be pierced, rather than the means by which it is
done. The directors duties to act with care and diligence and in good faith were
suggested as the model of liability for parent companies facing piercing of the
corporate veil. This approach would build on and codify the present liability of
parent companies as shadow directors. What would amount to a breach of the
duty would be left for courts to decide, as they presently do in the case of
directors duties. However, a number of areas of likely breach were suggested,
drawn from the literature concerning the laundry list of factors which underpins
American veil-piercing. These included tort, undercapitalisation, lack of
adequate insurance of the subsidiary, and fraud or misrepresentation.
Finally, the case was made for legislation to be enacted to pierce the corporate
veil on corporate groups, rather than leaving it to the common law to do so. This
would overcome the uncertainty of present veil-piercing in Australia, provide
effective deterrence and reliable compensation, and minimise litigation costs.
Such legislation would send a clear signal to the courts that it is appropriate to
pierce the corporate veil.

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PIERCING THE VEIL ON CORPORATE GROUPS IN

AUSTRALIA: THE CASE FOR REFORM

of Business Law and Taxation, Monash University.

Melbourne University Law Review

scholars2 and litigants.3 This is so even where the shareholder is another

Piercing the Veil on Corporate Groups in Australia

Melbourne University Law Review

Piercing the Veil on Corporate Groups in Australia

limited liability by those in control; rather, it attempts to design an efficient,

Many commentators have expounded the theoretical justifications for limited

Review 1416, 1444.

15 Michael J Whincop, Painting the Corporate Cathedral: The Protection of Entitlements in

Corporate Law (1999) 19 Oxford Journal of Legal Studies 19, 28.

efficient wealth maximisation and protection of those who miss out:

Melbourne University Law Review

of loss to the creditors themselves. The shareholders do not jeopardise their

Piercing the Veil on Corporate Groups in Australia

Melbourne University Law Review

In addition to the capacity to price-protect, creditors with superior bargaining

Piercing the Veil on Corporate Groups in Australia

Judicial veil-piercing, broadly understood, is present in many parts of the

and Small Firms (2000) 63 Modern Law Review 317, 351.

Anatomy of Corporate Law: A Comparative and Functional Approach (2004) 72.

Melbourne University Law Review

Piercing the Veil on Corporate Groups in Australia

Melbourne University Law Review

A second reason for imposing personal liability on directors is to deter actions

Piercing the Veil on Corporate Groups in Australia

Melbourne University Law Review

proper that the veil of incorporation be pierced to impose liability on corporate

shareholders, cases involving misrepresentation, agency, undercapitalisation, and failure to

Piercing the Veil on Corporate Groups in Australia

notes that with closely held companies

As these statistics demonstrate, one of the difficulties of having a regime of

68 Bainbridge, above n 2, 501 (citations omitted).

Melbourne University Law Review

C Where the Company Has Committed a Tort

Piercing the Veil on Corporate Groups in Australia

to individuals who are shareholders: Thompson, Corporate Shareholders as Mere Investors,

Melbourne University Law Review

immune to some of the costs of misconduct or misjudgment by their corporate

However, he questions maximising shareholder wealth as a companys

Piercing the Veil on Corporate Groups in Australia

With respect to large corporations, Bainbridge answers Hansmann and

91 Ibid 4978 (citations omitted).

Procedural Lens (1992) 106 Harvard Law Review 387, 3989.

Toward Unlimited Shareholder Liability, above n 2, 1896901.

Melbourne University Law Review

Piercing the Veil on Corporate Groups in Australia

company will be involved in important decision-making for the subsidiary,

Blumberg, Limited Liability and Corporate Groups, above n 5, 624.

Melbourne University Law Review

in cases of corporate insolvency. Her emphasis is on limited liabilitys potential to encourage

Piercing the Veil on Corporate Groups in Australia

imposing liability according to an imprecise list of circumstances. In the same

Melbourne University Law Review

Piercing the Veil on Corporate Groups in Australia

subsidiary.133 This is particularly relevant to creditors in various situations:

Australian courts: CASAC Report, above n 100, 18.