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Wednesday, 13 May 1981
Page: 2318


Mr JOHN BROWN(5.0) —In our overriding amendment we have a clause which refers to clause 7 in the Companies Bill. That amendment states that we call upon the Government immediately to pursue a fundamental reform of the company law, including the provision of statutory powers to the courts to enable the lifting of the corporate veil in appropriate circumstances, including that whereby a holding and subsidiary company effectively operates as a unit and where a private company acts as a trustee for a trading trust. In backing up that amendment which we have moved I would like to make a few remarks about trading trusts. As I said, we believe that trading trusts, having small private companies as trustees, should be abolished, not left substantially unregulated with only a vague promise of future regulation, as has happened in the second draft of the Companies Bill. Trading trusts provide a classic instance of a tail, that is, tax avoidance by a private business, wagging a dog, that is, carrying on business activity with a proper legal structure.

Over the last 100 years or more-not that any of us would remember that; not even you, Mr Deputy Chairman-the Companies Act and the accompanying case laws have built up an elaborate set of rules to which business enterprises must adhere if they are to have such privileges as limited liability. Accounting rules, standards of skill, care and honesty for directors, personal liability of officers when a business is carried on fraudulently-these, along with many other legal protections for existing and potential shareholders, creditors and other interested parties are all based on the premise that the company in question owns and runs the business in its own right. If, instead, a small, grossly under-capitalised company is permitted to hold the business on trust, the value of these protections is, at best, doubtful and, at worst, negligible. In a manner which is wholly confusing to outsiders, the normal roles associated with the company's form are changed around. As an example, the recipients of surplus profits become trust beneficiaries instead of shareholders, although the trustee company itself is a shareholder. Management of the business is formally vested not in the directors but in the company itself in its capacity as trustee and so on. This is merely because tax planners saw that the company-trust combination might produce tax advantages for their clients.

There is no reason why Parliament should give in and allow many years of work in developing a sophisticated system of company law to be undermined. To allow only private individuals or properly established large-scale trust corporations to manage businesses on trust, as is the case in various parts of Canada, would both preserve the effectiveness of company law and reduce the range of tax fiddles available to private business. We are unsophisticated enough in the Opposition to believe that companies should be set up to enable business to be conducted properly, to enable the shareholders to be properly protected, to enable creditors who are dealing with a company to be properly protected also and not merely to have an opportunity to deceive people by having what is known as the corporate veil pulled across the eyes of those people who seek to do business with that company.

The Opposition's proposal that the National Companies and Securities Commission and the courts be directed and empowered to look behind the corporate entity, to ascertain those who control it or who hold shares in it, relates to the process known in common law as lifting the corporate veil. Some people euphemistically refer to the corporate veil as the purdah used by capitalist Muslims, but in this case we refer to it as that veil of secrecy which is placed across companies to prevent proper scrutiny of that company and all that it stands for.


Mr Dobie —Is that your business theology now?


Mr JOHN BROWN —Yes. We believe that this process of lifting the corporate veil is rendered necessary by the long established principle that the company, as a legal entity separate from its shareholders and director, is an artificial legal personality capable of perpetual succession and capable of sueing and being sued. The liability of the company to pay its debts extends to the assets of the company, but the individual shareholder is not liable beyond the amount unpaid on his shares. The misuse of the corporate personality in the shape of $2 companies is very well known. In fact, the offices of the Corporate Affairs Commission are littered with the number of $2 companies that have crashed, to the detriment of employees, creditors and shareholders. The immunity of shareholders and, in the absence of fraud, directors from liability for contractual or tortious wrongs upon the part of a company is in striking contrast to the joint and several liabilities of the partners in the partnership. The courts will not, except in certain limited circumstances, lift the corporate veil unless there is a specific legislative direction to do so.

The Opposition requests that these powers be granted and, indeed, that the NCSC and the courts be directed to look to those who should properly be liable in cases where the corporate vehicle is simply used as a shield against liability. I reiterate what I started to say in the first place in relation to this clause and that is that we would like the provision of statutory powers given to the courts to enable the lifting of the corporate veil in appropriate circumstances so that companies can be made accountable both to their creditors, their shareholders and their employees.