Law of Business Organisation - Coursework Example

Law of Business Organisation Name Institution Course Lecturer Date The law of business organization is rules governing companies, corporations and business relations that perform economic roles. The laws sets separate legal personalities and offers the parties within the business organizations limited liabilities for losses encountered in the organization. Large companies are publicized on the worlds’ stock exchange list. There are specified rules and regulations imposed on directors in the management of business affairs in a profitable approach. However, unresponsive laws may call for the law of business organization to keep on evolving due to inactions of directors that may lead to adverse financial situation for a firm. One such law is the legal corporate separate personality principle that aims separates a Company from its members through a corporate veil1. This ensures that a company is viewed as a totally separate legal entity. Consequently, its obligations fall to the shareholders a particularly the adverse debts and business losses occurring in the business. From s 588 G, directors in a business can be held responsible for incurred losses due to their position in the company. That shifts the shareholders’ obligations from losses as they have indirect role in decision making process of the company. Piercing corporate veil can be a judicial imposition on exceptional on the separate legal entity principle. It can separate the company liabilities by holding a director responsible for events or operations in an organization that put a company in an adverse position. If the veil is lifted, the obligations that fall on the company and hence the shareholders following the action and inaction of the directors can shift to directors and ensure that they are more careful when concluding on investments or making decision when there is foreseeable insolvency. Due to defenses available for directors in most cases, the law appears more flexible in dealing with incidences that are more close to fraud, illegality and oppression within a company. In some instances the court can ignore this principle of personal liability when it engages matters of shareholders’ interest. S 588 H lead to higher possibilities for directors to evade legal obligations. It can be held as the veil that disables the law from imposing liability to directors in a company. In most cases, absolute civil liability set on directors can aim at reducing and penalizing the directors for insolvency hence protect the companies and giving shareholders a chance to recover some money by imposing a personal liability on directors2. The rule will thus emphasizes that the separate personality in a company be recognized in the court in order to solve the global financial crises by making directors more sensitive to economic and moral considerations of their decisions in their organization3. The approach will be fair to shareholders and well to the general taxpayers by dealing with and making directors more accountable in the process of decision making and taking responsibilities for organizational loss. The lifting of the veil thus should be designed in the interest of assuring justice. This will consequently lead to care and certainty when making decision and reduce the events of global financial crises4. S 588 G of Corporation Act 2001 determines the director’s duties to present the company from insolvent trading. The scope of this obligation actually states the specific time the person was a director and when the company may have incurred debts. If a company is insolvent at that time through the incurred debt and there are reasonable grounds to establish that the company can be insolvent. Actually, a director is taken as someone with skills to and knowledge to determine the company direction and avoid any action or inaction that might cause the company a great loss. When it is ascertained that insolvency was foreseeable and the director fails to prevent a company from incurring such debts, the director contravenes the section due to failure to take reasonable actions. The case is determined by looking at what a reasonable person in similar circumstances would do in the time when an action taken led to insolvency. The section stipulates a process by which directors will ultimately take direct responsibilities for their poor decisions. However, the propensity of the s 588 G in bringing relieve to investors or shareholders of an company by making directors responsible for loses is reduced by s 588 H that sets up defenses that directors can highly rely on to escape even in the face of such negligence that exposed the company to insolvency. In fact it is stated as for the purpose of contravening subsection 588 G (2) for the sake of incurring debt. There are a number of defenses that a director can raise following such a claim that in their tenure they never took a reasonable ground to protect the company from becoming insolvent. The reasons range from illness, other good reason, was not taking part in company management or had taken all reasonable steps to avoid the incurring of the debts. There is wide-range of options that a director can use as escape route to failed responsibilities and that will ultimately shift the company debts to the investors. The doctrine of corporate veil has substantial effects on directors as it may hold them personally liable following company’s obligations. The legal concept separates personalities where it states the personalities of shareholders and personality of a corporation and hence protects the shareholders from being personally liable for the debts incurred by the company during their tenure. The shifts of obligations may have increased the losses encountered in economic crisis as many directors fail to see any forthcoming legal actions being imposed upon them following their miscalculated actions5. Where a court may determine that a business was not carried out in accordance with corporate legislation but it was façade of illegal activities, it then holds shareholders personally liable for obligations falling on the company6. Under legal concept; lifting the corporate veil, absolute civil liability in line with s 588 G may follow and lead to directors being personally liable following the company’s obligations. Generally, debt contracts are designed to confer superior claims to debt holders in regard to firm assets. If a firm defaults on debt obligations, debt holders can seize firm’s assets to recoup the investment. However, there are only remedial rights conferred on debt holders. Eventually, debt holders are not allowed to seize the firm assets until the firm defaults on its obligations7. Publicly traded companies have thus been diffused where day-to-day management of such firms is delegated to professional managers and the board of directors. The shareholders delegate all the management processes for the firm to the board as well as other senior management. However, the shareholders bear the risk of any firm’s failure though there are certain rights conferred to shareholders in order to manage the risks that may face their company. Hence, by design, these rights conferred only gives shareholders a right to vote of take a legal recourse that is preemptive or remedial. Limitations The separate personality principal is limited to an obligation of preventing a company from incurring losses only when the company is bankrupt .As a result, this limits the operation of an organization of section 588G to organizations that have failed financially or almost failing financially. Consequently, the law may fail to save the situation. This does not save the company from untrustworthy directors as the situation may be too late to solve. The law is only limited to only the companies that is at a great loss and therefore may not apply to creditors who are not suffering from any great loss or any damage in a company. It therefore becomes a remote law for profit making companies. The law also is limited to director or stakeholders only and fails to consider other persons involved in business operations. It is therefore unfair and unjust to the organization and especially to the directors. S588H is limited in this rule in a case whereby the director was in absentia from management of an organization because of calamities, misfortunes or sickness during the time of debt incurrent. It therefore, holds an innocent director liable to a loss in an organization unfairly of the management as they were not part. It also fails to consider if the director took reasonable steps to prevent the loss that is, if the director was present at the time of organization’s loss. . Benefits The corporate separate personality ensures that the company assumes a separate identity from that of its members. As a result the members are not directly responsible for the company’s debts or losses. It therefore, ensures prevalence of justice where individuals are liable for their fraud, dishonesty and irrationalness. This promotes responsible business behavior and ensures profitability in an organization. A company being separate from its members facilitates transfer of shares. Shares have crucial role of raising capital in an organization. Exchange of shares in an open market promotes transparency. The transparency enables scrutiny by outsiders thus; reducing opportunity for fraud. As an outcome it improves profitability and marketability of the organization thereby increasing opportunities for business transactions within an organization. The law creates continuous succession after being legally created by a corporation. A company can subsequently be terminated by law. Company s therefore thrives even after death of its members because they are not affected. Also it create opportunity for succession of untrustworthy and fraud directors without affecting the organization operations8. Drawbacks The principle fails to protect the rights of directors. The principle gives liability to directors. These benefit the creditors and discourage and charges directors for debts incurred during management. Conclusion The law as to separate personality principle has evolved drastically in recent years. The number of cases being forwarded by creditors however is small. It is recognised that the realistic application of the principles by which a director is guided is difficult. The assessment of the effectiveness of the law is a process that requires regular attention. It can be in a day to day proposition. The assessment process requires updated financial data and a sensitive analysis whereby a director or can assess the feedback varied events. Such steps are taken to help the directors to prove that they acted knowledgably and diligently ensuring full gratitude of the facts. It therefore ensures directors in a position to determine debts and loss in the company. Bibliography Amaeshi, K. M., Osuji, O. K., & Nnodim, P. (2008). Corporate social responsibility in supply chains of global brands: A boundaryless responsibility? Clarifications, exceptions and implications. Journal of Business Ethics, 81(1), 223-234. Cody, T., Hopkins, D., Perlman, L. & Kalteux, L. (2007). Guide to limited liability companies. Chicago, IL: CCH. Cornelissen, J. (2011). Corporate communication: A guide to theory and practice. Sage Publications. Dannefer, D. (2003). Cumulative advantage/disadvantage and the life course: Cross-fertilizing age and social science theory. The Journals of Gerontology Series B: Psychological Sciences and Social Sciences, 58(6), S327-S337. Davies, P., Worthington, S., Micheler, E. & Gower, L. (2012). 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