Corporations Are Not People - Essay Example

School: Topic: CORPORATIONS ARE NOT PEOPLE Lecturer: Introduction It is common practice that when a subsidiary company defaults in the payment of debts, its parent company will be held responsible for settling the difference. This is a practice that most financial and legal analysts including Elizabeth Warren feel is out of place and unjust since such practices amount to the treatment of the corporations as people. Once the parent company or corporate is made to be responsible for the inefficiencies of its subsidiaries, shareholders become the eventual sufferers because revenues that would have accrued as profits are used in settlements (Gobert, 1994). This paper therefore bases on s588V of the Corporations Act 2001 (Cth) to discuss the position that in cases of subsidiary defaults, the actual individuals or people in terms of management should be the ones to be held liable and not parent companies. Corporate legal personality Under the concept of corporate legal personality, businesses are noted to adopt a unique status that gives them backing in law to be seen as legal entities and thus claim independent legal existence (quote). As a result of the independent legal existence, businesses having corporate legal personality are given legal treatments independent of their officers, directors, and shareholders (Gobert, 1994b). In the case of Salomon v Salomon & Co Ltd, it can be deduced that the human faces or people behind the running of the corporation such as shareholders cannot be sued but the corporation itself since it has the right to purchase, sell and engage in other businesses in its own name (Salomon v A Salomon & Co Ltd [1896]). How corporate legal personality provides investor protection Based on the explanation of corporate legal personality and the case of Salomon v Salomon & Co Ltd given above, it would be understood that investors get a lot of protection under this principle. The reason this is said is that when investors are putting their monies into companies as shareholders, they get the assurance that they cannot be sued as individuals in case the companies or firms they are investing in become insolvent and cannot pay up its outstanding debts (Bervas, 2006). This form of protection is however questioned at times because even though shareholders may not be sued in person, when the corporation uses its money to pay off debts, it becomes the investment of investors that is indirectly used for this purpose (Geraghty, 2002). Overview of the corporate civil liability The concept of corporate civil liability can be said to have emanated from corporate personality because it determines the applicability of holding a corporation liable for acts of omissions and commission by natural person employed by the corporate (Niederhoffer, 2005). Since section 588V of the Corporations Act 2001 acknowledges the principle of corporate legal personality, it can be said that it supports the idea of corporate civil liability. More specifically, the Act professes for corporate liability to be used in civil law rather than criminal law (Wells, 2001). The reason for this is that unlike criminal liability, civil liability is easy to proof. Meanwhile, section 588V of the Act requires much evidence in finding a corporation guilty of offence when it contravenes. How 588v of the Corporations Act 2001 provides protection of creditors On the surface, one is likely to argue that since under corporate liability natural persons in charge of a corporation cannot be sued for acts and omission committed in the name of the corporation, then it is shareholders rather than creditors who are protected. Section 588v of the Corporations Act 2001 however helps in clearing this misconception. This is because the section actually seeks to promote the regulation of corporations by supporting corporate civil liability. The reason this is said is that even though the natural persons may not be directly held responsible, corporation are forced to emphasize on due diligence and the responsible management, knowing that indeed when there are any lawsuits, it will be the corporation as an entity, of which they head that will be brought to disrepute. Because of the level of corporation regulation the Act ensures, creditors, as much as shareholders are guaranteed of protection when they lend to corporations (Leigh, 1977). This is because even though shareholders may not be sued as individuals, the ultimate aim of the creditor will always be to get their monies paid whether the payment is done by shareholders as individuals or is done by the corporation as an independent entity. For example the section states that a contravening corporation is one that “is the holding company of a company at the time when the company incurs a debt”. For the creditor giving the money to the company therefore, there is some level of guarantee or assurance that even if the company is not able to make payment, the corporation will be tasked to do so (Bhaduri, Meissner and Young, 2007). How 588v of the Corporations Act 2001 provide the prevention of corporate wrongdoing As it has been indicated earlier, corporate civil liabilities supported by the section 588 of the Corporations Act 2001 go a long way to ensure the regulation of corporations. This is because instead of letting them go unaccounted, the section gives corporations responsibility over happenings and internal activities of their subsidiary companies. This is certainly an approach that in itself provides the prevention of corporate wrongdoings. The reason this is said is that when corporations are being run, they become away that they do not only represent and serve their interest but that of their subsidiaries also. Because of this, good corporate practices such as strong supervision will be endorsed as against negligence (Bervas, 2006). What is more, the Act states that the corporate contravenes the section if “one or more of its directors, is or are aware at that time that there are such grounds for so suspecting”. What this means for the corporations is that the outcome of the actions of their directors and other internal stakeholders is the direct responsibility of the corporation as an independent entity. In the light of this, corporate wrongdoings such as understatement of debts will not be condoned or promoted in any way, knowing that the occurrence of such practices would eventually come with its consequences, which will be borne by the larger corporation. Impact of 588v of the Corporations Act 2001 on growth of corporations Another important stance that will be taken in this paper is that section 588V of the Corporations Act 2001assist in the growth of corporations if stakeholders will accept the rationale behind the section in good faith and act on it accordingly. To act accordingly, it is expected that agency theory will be well applied where shareholders will act as principals, forcing managers and directors who are agents to act in the best interest of the corporation to avoid losses (Wells, 2001b). Once this is done, corporations will grow based on their approach to ensuring best practices. In corporations where the agency theory is not applied well however, the section will be seen as a bother to growth because such corporations will always be caught in the web of liability of wrongdoings they did not commit directly. Conclusion Based on the position of section 558V of the Corporations Act 2001 on corporate liability, it would be concluded that the practice of suing corporations instead of its natural people is not wholly an unjust practice as Elizabeth Warren claims. Instead of seeing this provision as unjust, it is important to see it as a means of regulation enforcer which forces all stakeholders concerned with the management of corporations to be watchdog in ensuring that the right thing is done within the corporations operations. For example if shareholders would want to avoid the risk of paying the debts of their subsidiaries with their investments, they ought to play their part in the agency theory by forcing the right agents to act in a manner that is appropriate to prevent wrongdoings and other forms of operational risks. References Bervas, A. (2006). Market Liquidity and its incorporation into Risk Management. Financial Stability Review 8, 63–79. Bhaduri, R., Meissner G. and Young J. (2007). Hedging Liquidity Risk Journal of Alternative Investments, 5(2), 34-56. Corporations Act 2001 - Sect 588V Geraghty, G. (2002). Corporate Criminal Liability. American Criminal Law Review. 39, 327. Gobert, J. (1994). 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