Corporate Law Case Study

1860 Words8 Pages
Capital Pty Ltd is inquiring into the Commissioner of Tax’s notice disallowing the tax deduction for bad debt. The Commissioner based the argument on the premise that Capital Pty Ltd is a mere appendage of Eastfield Ltd. This being the case, it is necessary to examine the exact relationship between Capital Pty Ltd and Eastfield Ltd and determine the likelihood of the courts lifting the corporate veil.

Separate Entity
Salomon v Salomon & Co established the key principle that an “incorporated company is a separate legal entity from its founder, shareholders and directors”. To further this point, the Albazero case provided authority within a group of companies, whereby each company is a separate legal entity with distinct legal
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This is verified by the fact that all of the profits of Capital were to be distributed to Eastfield through a dividend payment. Secondly, the subsidiary must be actively conducting the business as appointed by the parent. Since Capital Pty Ltd was initially set up for the financing needs of Eastfield, and solely used the workforce of Eastfield, this second criteria is met. Further, since Eastfield ‘decided on a strategic plan which called for a new corporate structure’, essentially supplying the debt finance for Eastfield, it can be said that Eastfield was the head and brain of this trading venture, thus meeting the third criteria. Additionally, as Eastfield decided all decisions regarding this capital funding structure, the 4th agency principle is met; whereby the parent company governs the venture and determining capital structure. Since ‘Capital earned significant interest income…from the repayment of the various loans…undertaken by Eastfield’ it can be established that the parent company, Eastfield, maintained profits through its own skill and direction towards the subsidiary. Lastly, the parent company must be in constant and effectual control, which is confirmed by the fact that all the directors of the subsidiary company, sit on the board of the parent company, thus establishing constant and effective control. Through the above mentioned, it can be significantly argued that Capital and Eastfield meet all 6 requirements that
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