Foundations of Australian Corporations Law


Sole Trader

According to the Corporations' Act 2001, this business is of unlimited liability where the person initiated the business is solely responsible for all the liability and loss incurred during the business1. The advantages of sole trade business are that a person can have complete control over the management of the business as well as over the decision-making process. No fees of formation will be charged upon the sole trader. No complexities of administration related to the accounts of the company or corporation tax returns will be faced by the sole trader. Very less amount of paperwork has to be done and this kind of business structure2. On the other hand, various other disadvantages are attached to setting up a business as a sole trader.

Under the structure of the business, the person has to face unlimited liability and all the possession and property of the person will always be at risk the same has contended in the case of Gas Lighting Improvement Co. Ltd. v Commissioners of Inland Revenue3. There are no benefits associated with the employees under the structure of the business and every work has to be managed by the sole trader. Extra efforts to be put by the sole trader and apart from this the entire hundred per cent of the benefit and profits gained from the business will be taxed. It must be noticed that in the business structure of the sole trader ship, the income is regular. There is a stereotype attached to the sole trader business structure that many companies do not engage with a sole trader as they cannot be as reliable as any other business structure.


The company is the most common form of business structure. It is a separate legal entity from the shareholders and directors in which the personal assets are not at risk. Liability will only be imposed if the product and activity are established4. The company is usually owned by the shareholders where they are a separate legal person from that of the company. The advantages of a company are that liability is limited as per the share in the company. Directors are benefited from tax advantages and are not bound by the minimum wage.

Companies are more credible and any other company cannot use a similar name or trademark5. Moreover, the major element of control in the business structure of the company. There are certain disadvantages like the payment of fees at the time of formation of the company and the complexities of the tax return and annual accounts are attached to the business structure of a company.


A partnership is a kind of business where two or more than two people invest together and create a business and each partner equally liable for the profits and liabilities of the business. There are three types of partnership, a general partnership where the partners are liable for profits and business according to their share in the business6. The limited partnership is their general partner's limited partners and their possessions are protected from the company and actions of the other partners.

Limited Liability Company means that all the partners are protected from the liability and their possessions are not at risk by the creditors who are seeking payments. The advantage of a partnership is that burden of operating a business can be shared, less amount of tax has to be paid when the profits are split and usually the partnership business are confidential. Disadvantages of a partnership are that sometimes it provides unlimited liability and there is a high risk of disagreement between the partners which can cause a delay in the decision-making process.


It must be noted that Teresa and Alison operate in a partnership company where Alison had purchased a cute supply of glass jars for which the money has to be paid within 30 days. The company's funds are not enough to meet the expense of glass jars. Moreover, the terrorist was not consulted by Alison when the glass jars were purchased. Now Alison was insisted to pay for the jars from the personal savings. It must be noted that whenever a company run under the business structure of partnership then the directors of the company are to pay the debts of the company as they also the agents of the company. They will only be liable for any activity that contravenes the regulations of the company.

According to section 13 of the Partnership Act 1963, liabilities of partners is described with says that each partner in a firm will be jointly live with any other partners regarding the debt obligation of the firm7. Therefore, in light of section 13, Allison will be liable to pay for the glass jars purchased by Teresa. It must be noticed that departments are also the agents of the form which make them liable. Under the Corporations act 2001 and according to the partnership Act 1963, section 14 talks about the liability of form for the wrongs8. In a partnership firm, each partner must disclose every transaction done in the course of business and therefore any omission by the director will make them liable and according to section 16, each partner in a partnership firm is jointly liable.


Issue - The issue of the case was the claim of unsecured creditors regarding their liability to pay the debt of the company. The major issue was that the company has a separate legal entity, can a shareholder be made liable against the debt by exposing the shareholder to unlimited personal liability.

Rule - Corporation Act 2001 and companies Act 1862 will be applied under this case. the court had contended that Solomon had incorporated company against the true intention of the companies Act 1860 to and had conducted the business being an agent of Solomon and therefore he will be responsible for paying the debt. However, it was unanimously held that the company was newly incorporated and was an independent person with all the rights and liability therefore the agent is not liable to pay the debt of the company. Lifting of the corporate veil was also duly determined indicates.

Application - Separate legal entity was established in this case according to the English common law. Initially, Soloman had initiated business as a sole proprietorship, and later on, he had incorporated the family members. Later the shares were transferred by Solomon. however, later the company went into liquidation and the claim to recover the right against the debentures as a claim for the unsecured creditors. Solomon contended that he was an agent of the company and as the company under the corporation Act as a separate legal entity is not liable to pay the debt to the creditors.

The case of Macau versus Northern assurance company9 was referred to where the corporate veil was lifted it was established that the company has its legal personality and is independent of its shareholders10. Therefore any rights and obligations of the company are discrete from the directors and they are only responsible for the extent of their contribution to the business, the same has contended in the landmark case of Farrar v Farrars Ltd.11A company can own property and raise that which is independent of its member. When a company can sue and be sued therefore the separate legal entity will not make Solomon pay the debt of the company.


Therefore, under the English common law and the company law, the rule of Solomon remains predominant which provides an exception in the case of limited circumstances and suggests that the grounds are not exhaustive and description must be left upon the judges. Therefore, it was concluded by the House of Lords according to companies Act 1862 once the company is legally incorporated it must be treated as a separate legal entity that has its liabilities12.


In the case of Salomon vs Salomon & Co Ltd13, the court had opined that the corporations have a separate legal entity from its shareholders and there are only certain circumstances under which they can be held liable this entire process is known as the piercing of corporate veil. The liability of the member of the company is limited and is responsible for the liability only when certain things go wrong on the part of the director14. The corporate veil is a shield that protects the directors from any liability in the company. According to Corporations Act 2001, the piercing of corporate veil is only possible under certain situations. If it is proved that there is a breach of certain duties from the end of the directors or they are involved in any insolvent trading or corporate crime only under these situations the piercing of corporate veil is permissible under the Corporations Act 2001(Cth).

Under the situation of fraud or improper conduct where it is proved that the company is taking advantage of the veil, the piercing of the corporate veil is permissible. It is a common notion that parent company acts for other companies but where a subsidiary company starts acting as an agent of the parent company then under such a situation liability can be imposed upon the parent company. Therefore, to make the parent company liable, the corporate veil can be lifted. also, the court has the discretion to uplift the corporate will under the situation where it is proved that the company is trying to avoid the legal obligation, the same has been opined in the case of Bacha F. Guzdar vs Commissioner of Income-15. For example, if it is proven that the company has the money of the creditor and is transferring the same to some other entity to avoid a particular payment then under such a situation of avoidance of legal liability, the corporate veil can be lifted.


Issue - Whether the company is a separate legal entity and whether a director can come under a contract of employment under the company which he had own as a sole proprietor.

Rule - Corporations act 2001

Workers compensation act 1992

Common law

Application -

Geoffrey had formed accompany in New Zealand which used to spread fertilizers on the farmland from the air. It must be noted that he was the sole director and employed as a chief pilot but he has died in a plane crash. Thereafter the wife of Geoffrey had claim compensation of 2,430 pounds under the worker's compensation act of 1992 regarding the death of Mr Geoffrey in this case. It must be noted that the company was insured for the worker compensation and accordingly the court of appeal of New Zealand held that we cannot be a worker when he was the employee at the same time16. Therefore, the role of the lifting of corporate veil came into the picture to identify whether the company was a separate legal person or not in this present case17.

It was contended that on the ground of being a director of a company there is no importance of entering into a contract by the person. If a company is a separate legal person then there is no ground to challenge the actual validity of any contractual obligations existing between the company and the person or agent who is employed. The corporate veil was lifted to identify whether the company is trying to avoid any legal obligation and it was concluded that the control of the company remains with the company irrespective of the agent of the companies is18.


The theory of lifting of the corporate veil helps to identify the actual person behind the veil. This doctrine is used in extreme situations like exploitation and deception where the company is utilized by the employer or the agent of the company. Therefore, after the piercing, it was contended that the company and Lee had different and altogether distinct entities therefore the wife of the deceased is entitled to receive the compensation.


Bacha F. Guzdar vs Commissioner of Income-Tax1955 AIR 740

Chandler v Cape plc [2011] EWHC 951 (QB

Corporations' Act 2001

Farrar (n 8). See also, John Lowry & Arad Reisberg, Pettet’s Company Law: Company Law and Corporate Finance (4th edn, Pearson 2012).

Farrar v Farrars Ltd., (1888) 40 ChD 395.

Gas Lighting Improvement Co. Ltd. v Commissioners of Inland Revenue (1) (1930) 12 TC 503. NO. 36

Gerbic, Philippa; Lawrence, Martin (2003). Understanding Commercial Law (5th ed.). LexisNexis. ISBN 0-408-71714-9.

Lee v Lee’s Air Farming Ltd [1961] AC 12

Macaura v Northern Assurance Co Ltd [1925] AC 619

Marc Moore, ‘A Temple Built on Faulty Foundations: Piercing the Corporate Veil and the Legacy of Salomon v Salomon’ (2006) JBL 180.

Max Radin, ‘The Endless Problem of Corporate Personality’ (1932) 32 Colum. L. Rev. 643.

Mayson, French & Ryan, Company Law (29th edn, OUP 2012).

Metropolitan Saloon Omnibus Co. Ltd. v Hawkins, (1859) 4 Hurl & N 87.

P.W. Ireland, ‘The Rise of the Limited Liability Company’ (1984) 12 International Journal of the Sociology of Law 239

Peter B.Oh, ‘Veil-Piercing Unbound’ (2013) 93 B.U. L. Rev. 89

Salomon vs Salomon & Co Ltd [1896] UKHL 1

Section 13 of the Partnership Act 1963

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