Case Study

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CORPORATE VEIL Q2 – page 70 (text book) The legal issue here is whether the customers can lift the corporate veil to make John, Peter and Plasto Australia Pty Ltd (PAP) liable for the damages caused by Plasto Pty Ltd (PP). Generally, according to Salomon v Salomon Co Ltd, the company is a separate legal entity from its shareholders and directors. Therefore, customers cannot make John, Peter or PAP Ltd liable for the damages caused by the plasterboard that PP Ltd manufactured. However, based on the case of Creasey v Brachwood Motors Ltd, the corporate veil can be lifted when a company is created as a sham to avoid a legal obligation under a contract or statue. The court decided to lift the corporate veil and held that Breachwood Motors Ltd (BM) was liable for Welwyn’s debt to Creasey when Welwyn had transferred its business and assets to BM to avoid paying Creasey’s claim. Similarly, in this case, PAP Ltd is created to avoid a legal obligation. The new company is operated because John and Peter were afraid that their old company – PP Ltd could lose the legal actions and they did not have enough money to pay for the damages claim. As a result, all assets of PP Ltd and its business were transferred to PAP Ltd so that the company had no money and assets to pay for the customers’ claim. Applying the principle in Creasey’s case, PAP Ltd is liable for the damages caused by PP Ltd. This is similar to the case of Gilford Motor. Again, to apply the Salomon v Salomon Co case, PP Ltd is totally separated from John and Peter who are directors. Therefore, John and Peter are not liable for any damages claimed from PP Ltd’s customers. On the other hand, according to the according to the Corporation Act s588G (3), directors personally liable for company’s debts if they fail to prevent the company from incurring those debts when there are reasonable grounds for suspecting

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