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Implications Of Limited Liability Notes

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Class 3 - Implications of Limited Liability Blake Dawson Waldron, Litigation Update - Judgments in James Hardie appeals handed down today The article outlines the main findings in the James Hardie appeals: Non-Executive DirectorsThe NSWCCA overturned the trial judge's findings, setting aside declarations of contravention, pecuniary penalties and disqualification orders made against the nonexecutive directors o Central to this conclusion as that ASIC didn't prove the NEDs passed a resolutio approve the draft announcement to the ASX and further that ASIC had a duty o fairness to call a relevant witness and failed to do so - undermining the cogenc their case General Counsel?

The appeal of GC Shafron was allowed in part - the court overturning the finding that failed to advise the board of the limited nature of reviews of a cash flow analysis. It h not been proven that he knew of this limited nature But the Court did find he failed to advise the board of the need to disclose a deed of covenant and indemnity to the ASX and further allowed ASIC's cross appeal finding th Shafron contravened the CA in failing to advise the gboard about aspects of the actua estimates of asbestos liability

The ex-CFO, Morley, unsuccessfully appealed against the finding that he failed to advise the board to he limited nature of the reviews of cash flow analysis.

The former CEO, McDonald, did not appeal his $350,000 penalty and 15 year disqualification order

James Hardie Industries NV The appeal against the finding by the trial judge that it engaged in misleading conduct and statements likely to affect market behaviour and failure in disclosures was unsuccessful.

Piercing the Veil of incorporationThere are a number of cases where courts have ignored the separate personality of the company under the force of some conflicting principle or policy - such cases are those where it is said the otherwise "opaque and impassable veil" has been pierced. The primary categories of case are those relating to o Fraud o Improper Conduct o Agency

Limited recognition accorded to the unity of the enterprise of a group of companies under common ownership
? But these are not exclusive (can be more than one) or exhaustive - indeed Gower suggests that these should not be called categories because that assumes they are principle/predictable when in fact "they reveal no consistent principle beyond a refusal by the legislature and the judiciary to apply the logic of the principle laid down in Salomon's Case where it is too flagrantly opposed to justice, convenience or the interests of the Revenue" ? The authors suggest to question this Many statutory provisions contain directions to pierce the veil of incorporation o s 588 G - when debts are incurred by the company when it is insolvent or its solvency is impaired by incurring the debt o s 588V-X - Where the company is a subsidiary of another company, that holding company may also be liable in relation to those debts where it knew/ought to have known of the state of its financial affairs o Personal liability of directors for debts incurred by the corporate trustee where the trustee isn't entitled to be fully indemnified by the beneficiaries of the trust - usually because the trustee has waived such indemnity rights o Also, since many groups of companies are a 'financial unit' the Act requires preparation of consolidated accounts oFraud or improper conduct Gilford Motor Co Ltd v Horne [1933] 1 Ch 935

Facts: The plaintiff company sold/serviced motor cars. Horne was its managing director and under his service contract was bound not to entice customers away from the plaintiff. After terminating his contract he opened a business under his own name selling parts and servici cars. His solicitor wrote to the plaintiff seeking a copy of his service contract - a few days af which a company was incorporated under the name J M Horne & Co Ltd which took over Hor business (J M H was his wife's name

Proceedings: The plaintiff sought an injunction restraining Horne, through J M Horne, from attempting to entice away his customer's. Horne admitted to soliciting clients of the plaintiff breach of the agreement prior to the incorporation of the company. But he argued, inter alia it might not be enforced against the company.

Lord Hanworth MR:

His honour cited and accepted the findings of Farwell J in the court below that the "defendan company was the channel through which the defendant Horne was carrying on his business (despite the fact that his ex-colleague and wife were directors of the company).

? On this basis his honour was prepared to conclude that the company was formed "as

device, a stratagem in order to mask the effective carrying on of a business by Mr E B Horne" , to enable him, under a "cloak or sham" to engage in business in respect of w he feared the plaintiff might object
? An injunction must go against the company - the rule in Smith v Hancock states tha "If the evidence admitted of the conclusion that what was being done was a mere clo sham, and that in truth the business was being carried on" by someone else then rel should be granted accordingly
? His hour was prepared to conclude that the company was such a "mere cloak or sham and a mere device for Horne to continue to commit breaches of the service contract. Injunction granted against Horne and J M Horne & Co Ltd Jones v Lipman [1962] 1 WLR 832

Facts: Lipman contracted to sell land to the Joneses, but before completion sold and transfe it to a company, of which he and his clerk were sole shareholders, at a significantly reduced price. The Joneses sought specific performance of the contract against both Lipman and the company.

Russel J commented that two things arose from the evidence (1) The defendant company was always under the complete control of Lipman (2) The acquisition of the company by the defendant and transfer of property was solely defeat the plaintiff's right of specific performance to leave them to claim whatever damages claim they might established He then outlined the plaintiffs argument

(1) That SP would be ordered against a party to a contract who has it in his power to compel another person to convey the property in question - and the first defe had the power to do this (2) That specific performance would also be ordered against the defendant company in s circumstances

? On the first of these points he thought that it follows that SP could not be resisted by vendor, who by absolute ownership of a company in which the property is vested, is i position to cause the contract to be completed. His honour commented on Gilford v Horne - saying it applied in this case. The defendant company being a "device and a sham, a mask which he holds before his face in an attempt to avoid the recognition by the eye of equity" - in such a case an equitable remedy is rightly granted against the company.

Specific Performance of the contract between the plaintiff and first defendant orderedRe Darby Ex parte Brougham

Facts: Two undischarged bankrupts promoted a company which derived secret profits from the sale of grossly over-valued assets to another company which it promoted. o Result: The liquidator of the second company recovered the secret profit fraudulently derived - it was just an "alias for themselves" as if they were just announcing they would call themselves" Rothchild and Co - it was merely a name under which they carried on business. X Bank Ltd v G o Facts: In an action for deceit and breach of a fiduciary duty, the plaintiff alleged the defendant created an elaborate structure of corporations/trusts to put his assets beyond the plaintiff's reach o Orders: The defendant's assets were frozen and the CA noted "the authorities revealed the court would use its power to pierce the corporate veil if it was necessary to achieve justice irrespective of the legal efficacy of the corporate structure under consideration Wallersteiner v Moir - Lord Denning was prepared to treat a group of companies under the control of a notorious financier as his "puppets" - "He controlled their every movement. Each danced to his bidding. He pulled the strings. No one else got within reach of them. Transformed into legal language, they were his agents to do as he commanded. He was the principal behind them. I am of the opinion that the court should pull aside the corporate veil and treat these concerns as being his creatures" o?

Agency Smith Stone and Knight Ltd v Birmingham Corporation (1939) 161 LT 371

Facts: SSK was a paper manufacturer owning a factory in Birmingham which it led to a subsidiary (Birmingham Waste Co Ltd - BW) on a yearly tenancy. The municipal authority wi to acquire the premises for construction of a technical college - it served notice on SSK whic lodged a claim for compensation for removal costs and disturbance to business. Initially the claim was made on behalf of BW but later its claim was amended to be on its own behalf - alleging that SSK owns all of the capital and profits of BW< and BW carries on its trade as a separate department of an as agents for SSK.

The company and the authority were unable to agree on the terms and hence were referred arbitration - a preliminary point raised was whether SSK could claim compensation or the cl had to be made by BW. The point was important because the statute denied claims for disturbance for occupiers without a greater interest than 1 year tenancy. Atkinson J: His honour, noting the plurality of ways the cases could be framed, went on to note all the characteristics of BW:The directors of BW were all directors of SSK and executed a trust for the share which held (the other shares being held by SSK), saying they held it on trust for the claiman

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