The Corporations Act of 2001 - Assignment Example

Corporations Assignment Ans According to Section 588G of the Corporations Act of 2001, when a Company is in a of insolvency which has resulted due to debts, then the liability for those debts will be attached to the Director/s of the Company1. Similarly, Section 588V of the Corporations Act specifically pertains to the liability of holding companies for the debts incurred by their subsidiary companies that have led to insolvency. Thus both these sections attempt to pin the responsibility for corporate mismanagement leading to insolvency upon the Directors (on the basis of fiduciary duty) or upon the holding Company itself. Therefore these sections in effect, lift the corporate veil. These Sections are opposed to the principle laid out in the case of Salomon v A Salomon and Co2, wherein a company’s identity was recognized as being a separate entity, an entity that is entitled to the fundamental rights of privacy and protection that are normally granted only to individuals under the law, an entity with rights that are separate and distinct from those of the shareholders and management. The principle of establishing the Company as a distinct legal entity is setout in Section 124(1) of the Commonwealth Act which states inert alia that “a company has the legal capacity and powers of an individual.” The Salomon case is also significant because it has established the concept of limited liability, whereby individual members are not liable for the debts of the Company, and the extent of their liability is for Company debts is limited to the extent of the unpaid amounts on their shares.3 However Section 588G and V are significant because they also make the members of the corporation (the directors or the holding Company) responsible for the debts of a Company that have led to its insolvency, thereby attributing more responsibility. In order to promote innovation and flexibility in corporate management, fundraising, investments and other corporate activity have been a matter of self regulation under the personhood of a corporation, thus these Sections have been limited in certain conditions such as insolvency. Nesteruk has pointed out that due to these voluntary administration provisions, a corporation functions as a person with attendant rights and obligations. However, since a corporation does not have the same moral status conditioned by reason and desire, like individuals, this has resulted in an allegiance to financial markets.4 As Korten has pointed out, there has been an abuse of power behind the corporate veil and in the absence of a moral perspective, the corporation has become an entity solely motivated by the profit making incentive to replicate itself5. In the case of Limited liability partnerships, liability is restricted to the extent of investment with limited participation in management. Section 588G would be applicable in LLPs only to a limited extent. A partnership as an entity continues irrespective of ownership, however the impact of losses falls upon the partners. Therefore making Directors liable for debts will ensure that they take more responsibility for the actions of the partnership and lead to responsible investment. Ans 2: The nature of a fiduciary relationship was spelt out by Mollett J as follows: “A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit…”6 Thus the major aspects of fiduciary duty involve (a) acting in the best interests of the party for whom service is being provided (b) to avoid conflicts of duty and (c) to use powers for their proper purpose. Thus, the implication for the exercise of a fiduciary duty is when an alleged fiduciary enjoys the power or discretion to act in a unilateral manner on behalf of a beneficiary, thereby placing the beneficiary in a vulnerable position. On this basis, an auditor does not have such unilateral power to act on the Company’s behalf, therefore no fiduciary duty is owed. In a similar way, while a receiver may be an agent of the Company, he owes duties to more than one person in his capacity as a steward of assets, and they may have different interests, therefore it is not a strict fiduciary duty. A liquidator or an administrator are placed in a position of fiduciary duty to the Company as stated by Santow J in David Hill & 1 Ors v David Hill Electrical Discounts P/L (in liq) & 1 Ors7 “ that in view of the statuary duties imposed upon an administrator or court appointed liquidator, these positions are fiduciary in character. A similar provision may apply in the case of trustees, however when they are trustees for debenture holders, they enjoy unilateral power or discretion and are acting on behalf of the shareholders therefore the relationship will be fiduciary. Credits will not have a fiduciary duty to the Company since they do not have the power to act in a unilateral manner, rather the concept of limited liability places them in a vulnerable position so they cannot be classed as fiduciaries. The Partnership and Commonwealth Acts have lifted the corporate veil to some extent and made it possible to make directors personally liable for some of the debts and obligations of the Company. In this context, they have not overridden fiduciary law, because Directors still owe fiduciary duties to the corporation. Rather what they have done is to add to the scope of fiduciary duty by making Directors liable when their actions have caused an increase in debt leading to insolvency of the Company. Ans 3: (a) Corporate organization will have the advantage of creating a corporate climate that will foster ethical views and practices by individuals. Another advantage is that it recognizes that several individual decisions could be encompassed within the organizational framework of a corporation, and would also include the interaction between actors. Descriptively it would be more accurate because it would not ignore the character of the larger corporation to classify it as an individual person. Thus, the values and morals of individual persons will not be unthinkingly transferred to the corporation. The most important advantage therefore is the recognition of the inter-actional framework of corporations and the recognition of a collective morality, introducing ethical decision making. It would enable individuals in a corporate setting to function in one role at a time rather than three simultaneously –persons, occupants of roles and followers of rules. Possible disadvantages could be in hindering innovation and risk taking that is necessary for a corporation to thrive, because of the erosion of the “person” status and the protection under the law. Since the concept of limited liability and legal personhood status are provided to ensure protection from State imperialism, the removal of this status could hinder investment and corporate risk taking and protection from arbitrary State action. (b) This organizational framework could result in changes in terms of regulation. Since the current framework means that corporate decision making is often less a question of individual moral choice and more a question of rules pertaining to organizational structure, therefore decision making may be geared towards the profit making incentive at the cost of ethical decisions. However the facility for performance in one role rather than the multiple three roles helps an individual in a corporation to make ethical decisions, conditioned by a single role rather than multiple ones. Therefore, in helping to enhance individual responsibility it will create better regulation than the system of a particular decision being just business, divorced from ethics. (c) The most significant impact would be in the case of the Company’s relationship with creditors, employees and environmentalists, and in all aspects where ethical decision making is involved. As opposed to the current framework of carrying out a decision on the basis of whether it will enhance the economic interests of the Company – to the detriment of small investors, creditors, etc through the use of limited liability aspects, the new organizational structure will enable individuals to separate their moral role from the rules of the Company, enhance their responsibility rather than lumping them under the collective umbrella of corporation on whom personal liability cannot be pinned. Therefore decision making principles will be changed so that morality will condition decision making, working to the benefit of environmental causes or employee interests. Ans 4: The case of Daniels v Anderson was important in that while it did allow for the fact that directors could not be expected to be well versed in aspects of the Company’s activities, nevertheless individuals who were non executive directors should also be subjected to the same standards of diligence and care required from Directors. Therefore in this context, Company auditors would be deemed to be non executive Directors and the same standards of duty might be expected from them, which would not be acceptable since they are in a position to exercise the level of unilateral power that would merit the imposition of such a fiduciary duty. This case formulates a statutory definition of care and diligence, which would not allow for individual differences in qualifications and the experience of individual directors. This case is significant for auditors because to found negligence of the auditors for failing to report anomalies as they were duty bound to do. In the case of Esanda the standards of duty and care as spelt out in Caparo v Dickman were applied in order to lay down clear guideline sin Australian law for the liability of auditors to third parties. The High Court held that the auditors did not owe a duty of care to Esnada merely on the basis of foreseeability of possibility of harm and Brennaj CJ held that in order to impose a duty of care on an auditor, he/she should have known (a) information would be communicated to plaintiff (b) such information would be communicated for a purpose that would lead plaintiff to enter into a transaction (c) plaintiff entered into such transaction based upon reliance on such advice8. Therefore this case limited the scope of liability of auditors to third parties on the basis that it would lead to (a) increase in cost of auditor services (b) less competition as smaller companies are forced out and (c) reduction in standard of services. (c) When an insolvent Company winds up, it is generally the institutional creditors that have priority in collection of debts owed by the Company, since they have provisions in place for collection unlike employees. The Corporations Act also provides priority for payment of creditors and outlines the order in which priority payments must be paid.(Section 556). Employees come ahead of other unsecured creditors but the right to collect entitlements is limited. When a Company is winding up, employees must be provided notice of termination and the period of notice that is deemed reasonable will depend upon seniority of the employee, number of years with the Company and other such factors. There is also an obligation for the employer to pay a severance payment. Entitlements Ans 5: Under the Corporations Law and the Bankruptcy Act 1966 (Cth), employee entitlements have been ranked above unsecured loans from creditors. The Insolvency (Tax Priorities) Legislation Amendment Act passed in 1993 has set changed the priority in ranking of payments to be made by an insolvent Company. In the winding up of a Company, the issue that arises is the hardship caused to employees, especially those who have been working for the insolvent Company for a long time. Issues that have been debated in this context include the possibility of including employees as first payees before the secured creditors. However the disadvantage that rises if secured creditors are not placed first is that it could impact business negatively. Banks would become more conservative, especially in enforcing their securities if the first payee preference was eschewed. It is only when an investment is secured that banks are likely to be more willing to lend funds. Therefore while the current law reform proposals have merit, there is one issue in particular that needs to be addressed and that is the issue of employee entitlements. While there is provision for severance pay and redundancy wages , they are not really adequate to enable employees to endure the hardship resulting from an insolvency and this is one area that needs to be emphasized, so that more provisions for employee entitlements can be included within the scope of the Insolvency provisions. Notable provisions that are being mooted also includes the amendment of the corporations law to make Directors personally responsible for payment of employee entitlements so that they do not invest the funds of the company unwisely before making provisions for such entitlements. A notable is insolvent trading by Directors, notably the kind of trading that leads to a Company’s insolvency. The new provisions of the Commonwealth Act (588G) have already made Directors personally liable for debts incurred by them which result in the company’s insolvency. Another proposal that has been mooted and rejected is the setting up of a trust fund for employees, however this again impacts adversely upon cash flows available for a business by stashing away funds that do not have to be paid for several years and making them unavailable to the Company for its daily business activities. Moreover, the provision to make Directors personally responsible may impact adversely upon them where the companies are small and assets of the Directors are limited. The problem of employee entitlements and prevention of employee hardship could be alleviated through the introduction of some employee entitlement scheme which could help to ensure that this area lacking in Insolvency law can be amended accordingly.   Read More