Business Law Definition of Corporate Group

Question: Describe about the Business Law for Definition of Corporate Group. Answer: Definition of corporate group is not provided in corporation laws. In the case Walker v Wimborne (1976), the High Court defines the Corporate Group as a which are associated by common or interlocking shareholdings, allied to unified control or capacity to control. Following are the legal concepts of Corporate Groups: There are number of subsidiary companies under a company which has ownership and control of the subsidiary company. There are number of controlled companies under a parent company. There are various provisions for Corporate Groups in Australia, and lifting of the corporate veil by courts is one of those provisions. Usually, every company in corporate group has a separate legal entity and shareholders of these companies enjoying limited liability, which create obstacles for those who are dealing with such companies. This paper lays down the discussion on following topics: Lifting of corporate veil, so that holding companies can be held liable for their actions in their subsidiary companies. Determine the liability of the parent and holding company as a shadow director. Concept of separate legal entity and limited liability is very important aspects of companys incorporation. Separate legal existence means that company is different from its shareholders, directors, agents, employees, etc. company can exercise following powers as a separate legal entity: Company can sue others and can be sued by others. Property of company is belong to the company. Company has its own right and liabilities. Company access all the powers accessed by an individual, which means company can own and dispose of its assets and other property. Company can enter into contract with other persons. Limited liability is other important provision of companys incorporation. As per this provision shareholders of the company are not liable for the debts of the company, they are liable only up to that amount which is unpaid on the shares held by them[1]. Lifting of corporate veil by court to determine the liability of shareholders of the company is always a serious issue, especially in case when shareholder is a company. Lifting of corporate veil is a way through which court can deny the concept of limited liability of the shareholders. Research conducted by Centre for Corporate Law and Securities Regulation show the number of cases in Australia in which request to lift the corporate veil is made to the court. Following table shows the number of cases in which request is made to lift the veil[2]: TIME PERIOD TOTAL NUMBER OF CASES LIFTED NON-LIFTED Before 1960 2 0 2 1960 3 1 2 1970 4 1 3 1980 15 6 9 1990 31 5 26 Total 55 13 42 Limited liability of the shareholders is a default rule, set up by the corporate law. Creditors are ready to enter into contracts with the entity whose shareholders are not liable for its debts. Shareholders with limited liability can easily invest in the projects which have higher risk. There are many reasons because of which default rule of limited liability is set up. Shareholders of the company with unlimited liability are always in fear of losing their assets if company fails to pay the debt. According to the CASACReport there are many benefits of conducting business operations through corporate group. This report also mentions the extent of harm suffered by the creditors of subsidiary companies due to the law of separate legal entity. Courts of Australia lift the corporate veil only in those cases where company is formed for fraudulent reasons or to safe the parent company from legal obligations, or where holding companies can directly liable for the acts of its subsidiary. In US, courts consider more factors than Australia in case of lifting of corporate veil such as cases involves fraud and misrepresentation, in case were subsidiary company is an agent of holding company, and holding and subsidiary company cannot treated separately[3]. In case of corporate groups principle of Solomon case may not help and court can order to lift the veil to check the economic conditions of the group. In case of D.H.N. food products Ltd. V. Tower Hamlets[4], court does not consider the principle of Solomon case. In this case court lifts the corporate veil and treats the three subsidiary companies as a part of the same group and entitled the three companies for compensation. Usually, two things are considered by the court to lift the corporate veil[5]: Shareholding pattern Control Circumstances which show that true facts are not disclosed by the company. The concept of corporate group is carefully used by the companies because company who enjoys the concept of separate legal entity is also liable to accept the limitations of this concept. In case of Adams V. Cape Industries[6] corporate veil is not lifted by the court. In this court, consider each company of the group as a separate legal entity. Court held that one company is not liable for the debts of another company under the same group. Concept of separate legal entity is a two-edge sword. At one side it was a good and on other side it was a bad decision. Both pros and cons are there in this doctrine. There are various disadvantages of this concept such as shareholders of the company who has limited liability, does not take much interest in the functions of the company because they are not liable for any debts of the company. Creditors of the company face high risk because of the concept of limited liability. In case of closely held companies and private companies economic benefit related to limited liability is not there. For example, expenses related to monitoring are reduced because shareholders and directors of the company are usually same. These entities usually take more risk because the directors of closely held companies earn personally and they are ready to take risk[7]. Concept of limited liability and lifting of corporate veil are applicable not only in case of shareholders only but also in case of directors of the company also. Usually, courts lift the veil only when liability in case of shareholders or directors of the company is involved. There are three situations in which court can order to lift the veil: When directors of the company are held liable In case of group companies In case of tort committed by company In case of group companies, if shareholders of the company are also the director of the company then in such case court lift the veil of piercing and impose liability on the shareholders on the company in the directors capacity. There are many reasons because of which court can lift the veil of companies which are closely held such as these companies are work as per the concept of partnership but they are incorporated[8]. Corporate Act 2001 defines various circumstances in which court lift the corporate veil and disregard the concept of separate legal entity: Section 588G [9] in this section directors are held liable for the debts of the company in case of insolvency. This principle is developing to safeguard the interest of creditors of the company and to protect the interest of unsecured creditors. In case of insolvency, creditors of the company can directly take interest in the company and directors are personally liable for debts of the creditors owned by the company. Section 267[10]- some situations in which charges are filed against the officers of the company. Section 292 and 295- in case of group companies related to financial statements. Section 588V to 588X[11]- in case when holding companies are held liable for the debts of subsidiary companies. Section 588FE[12]- any transactions between the company and its officers which are not commercial.