Circumstance and Consequence of Lifting the Veil of Incorporation - Essay Example

PART A Introduction During the period of high liquidity adversity, the directors are required by law to exercise the duty of special care in dealings outside those of the business. The directors must ascertain the company’s ability in repaying their obligation as and when they fall due for repayment. This is relevant when the business if facing a high liquidity catastrophe and where some form of financial structure is depicted in the business[Hel08]. Where director depict that the company would be in deficiency of capacity to repay the debt or after repaying the debt, the director must ensure that the company do not incur further debt. Section 588G-Z contains some key provisions of the corporation act concerning the regulation of insolvent trading. Duty Sections 588G (1) impose an obligation on directors from getting into activities that would make the company engage in insolvent trading. The section is relevant and applies when; When the director was acting as a director at the time of incurring such debt. The business is insolvent at the time of incurring such debt or turn to be insolvent when it incurs such liability. There is a justifiable ground to conclude that the insolvency is consequential from the debt incurred. By directors failing to prevent the company from incurring such debt, he/she will be held liable if at the time of incurring such debt, the director is aware of the consequences that the debt will bring to the business. Statutory defense for director There are only to defend for directors in order to escape liability for insolvent trading. First, the director may conclude that the debt was executed devoid of their authority or consent and or at the time when the debt was being executed, they didn’t have any justifiable cause to anticipate that the business wouldn’t be in a position to pay its debt. Circumstance and consequence of lifting the veil of incorporation The rule of legal entity is a basis of the company law. Salomon v Salomon & Colimited (1897) shed a veil involving a corporation and its shareholders[Chr84]. Several time the, veil is unclear through which an individual cannot figure out the members of the company. nevertheless extremely in some occasion, both the government and the court ignore the legal entity nature of the business and look to the actualities behind it with a scrutiny to inflict legal responsibility on the shareholders, rather than the business, more often than not in the importance of the public. This method is called lifting the veil of corporation. Whether and when the business veil ought to be lifted is a decision that is taken exceptionally; to take it lightly or liberally may destroy in the mainly basic method the exceptionally basis on which the structure of the corporation law stands. The commercial veil does not cover up the internal issues of the business from view[Muz08]. On the opposite, the government has for all time made it an indispensable situation of the acknowledgment of legal entity that it must go with the broader publicity. The third parties may not have an option in opposition to its shareholders although they are however permitted to spot who these shareholders are, the portion they hold, list and names of directors, what its constitution is, the capital and structure is and how it has been acquired as well as its income statement account What fundamentally the commercial veil does is to defend shareholders from individual legal responsibility for the debts of their corporation. The following are some of the factors that can be lead to lifting the veil of incorporation Reduction in number of directors Where the number of company directors falls below two and the company is still in operation for the next six months, then every director who with full consent of the reduction in the number continues with business operation after a period of six months shall be held liable jointly for the company’s debt during that period[Jul07]. the provision provides that a registered corporation ought to have a minimum of two directors and where the directors falls to less than two and the company continues with the operation for a period of more than six months then the court may lift the veil of incorporation Declaration of shares by substantive shareholder of a company Every individual who holds substantial shares in a company shall give notice in writing of their full names, address, number of shares held in a company. Failure to comply shall warrant the court to lift the veil of incorporation. Where the shares of a corporation are held by a trust and the management of the business is in the hands of the trusts, the court may as well lift the veil of incorporation in order to reconcile the company’s assets with the terms of the trust. In The Abbey, Malvern Wells Ltd. v. Ministry of Local Government Planning,Dankwerts J. was ready to acknowledge the reality that a corporation held the entire of its assets on benevolent trust when all the shares in it were so held and its articles of association provided that the trustees were to be its prevailing body. Fraudulent Transactions by the Company after Winding Up Where at the process of wounding the business, it emerges that the company didn’t not prepare proper books of accounts for a period of 2 years straight away prior to the start of the winding up of the stage involving incorporation and beginning of winding up whichever is the shorter every representative of the corporation who is in default, unless he shows that he acted truthfully, shall be legally responsible to a penalty. where the business is in the process of wounding up and the court is contented that the business has been executed with the main motive of defrauding the company’s creditors or for whichever fraudulent activities, the court my on application of the authorized receiver or creditor affirm that any individual of the company who executed the transaction knowingly shall be held liable devoid of the limitation of liability for the entire debt of the company has the court may order. PART B The directors According to section 9 of the corporation act, it define the director of a company as any person who occupies or act in the capacity of a director by whatsoever name called as well as whether or not legitimately elected or approved and whatsoever person in accordance with whose directors r instruction are accustom to act as defacto director. OHS solution is currently facing a serious predicament due to director’s fault. It is evidence that the business has been operating for more than six months and the company’s directors are fully aware of the IT problem the company is current facing[Jul07]. The consequence of the IT problem would lead to insolvency to the business since, the clients using the company’s website will shun aware from the company due to poor website. In this regards, Satish will be held responsible for the insolvency trading due to poor management of the company’s IT system. Sections 588G (1), impose provision that bestow an obligation on directors from getting into activities that would make the company engage in insolvent trading. The law section 588G-Z provides that when a business has a liquidity emergency, its executives and executive must assume an extraordinary concern in their trade with those outside the business. Directors should deem their corporation’s aptitude to forfeit the entire its money owing as and when they turn out to be due. This is chiefly so when the business is in financial complicatedness and some structure of financial organization arrangement is in place[Ram95]. If a sensibly knowledgeable manager would give a final verdict that the business is in deficiency of the capability or would be in short of that aptitude after sustaining the arrears, they must not cause the business to sustain additional debts. Case study In RMS Glazing Pty limited v The Proprietors of Strata Plan No 14442 The court heard the dispute based upon the benefit of fairness in relative to piercing. An entity company took legal action against the plaintiff corporation and Mr Lo Surdo (an executive as well as the shareholder of the plaintiff) for loss consequential to indenture entered into with the plaintiff. The company worn on a number of its allegation as well as, on the matter of expense sought an order in opposition to Lo Surdo individually. The entity business disputed that the corporation was a ‘body of straw’ and that, for the reason Lo Surdo had played an vigorous part in the case and had a portion in the conclusion, the focal point of fairness mandated that an order be made against Lo Surdo. Cole J differed, finding that with the corporation’s documentation of cost-effective business it might not be thought to be a body of straw. It can therefore be concluded from the case study and the provision that the director of OHS solution Satish is fully liable for the insolvent trading and thus satish must bare the liability of the company since, the law (588G (1) provides that the director must prevent the company from being insolvent when their consent are clear about the company’s present dealings that might lead to bankrupt and insolvency[Rom02]. The exemption to the ruling is that, where the business incur liability without the consent of the directors, then they will not be held liable for the company’s insolvency. Improper accounting documentation The company failed to observe business ethics such as proper documentation of the accounting books and its is eminent that the business is having poor accounting system and they are all messed up and thus, Emma was unable to table the financial information to the shareholders during the board February meeting. It is the duty of the fiancé director to ensure that the business is having a proper financial accounting and are up to date in order to save the business from insolvency trading. In this regards, Emma the finance director is about to breach the duty to prevent insolvency trading Case study Windeyer J, in Peate v Federal Commissioner of Taxation, 65 stated that: “If a business is accordingly incorporated and listed under the Act and the appropriate accounts are documented in due form and the agreed returns are completed, it persist to subsist as a lawful body. In that logic it is an actuality and not a sham.” Ying is about to breach the contract of preventing insolvent trading since, Ying is a director and has gone guarantor to OHS solution for $50,000.This act is considered an option of saving the company out of bankruptcy[Fio13]. It can be observed in the OHS predicament that Ying who is non-executive director is intending to make a move towards acquiring OHS solution due to its financial liquidity problem. The move is considered has breaching the duty to prevent insolvent trading since, Ying is part of the directors of the company and thus Ying is bound by the duty of trust and that of ensuring that going concern assumption of the company is guaranteed. The court under paragraph 1229 of section 588(M) states that “court might be anticipated to view at two distinct concerns when ascertaining whether the duty of preventing insolvent trading had been breached by the directors. The first issue would be the situation that specific business was in inclusive of the company’s size, the type of business, the nature of the business, the provision of the articles, the content of the board as well as the allocation of job amongst the board and other employees. The second issue that the court be anticipated to look at would be, in the point of view of the situation referred to, what might be a justifiable person considered the director of the company usually be anticipated to guarantee that he/she might be well conversant of any insolvency predicament facing the business. Case study Creasey v Breachwood Motors limited (1992) 10 ACLC 3052, Creasey worked for Breachwood Welwyn limited as its general manager pursuant to a written indenture. This corporation carried on the trade of a garage trading in cars from premises owned by Breachwood Motors Ltd. F and S were the shareholders and directors of both these business In 1988, Creasey was sacked by Breachwood Welwyn limited and he claimed compensation for unlawful removal from office against this corporation. In November 1988, Breachwood Welwyn limited stopped doing business and in December 1988 Breachwood Motors limited acquired its business and sustained its business under similar business name. This takeover was carried out devoid of consideration to the separate body of Breachwood Welwyn limited and the centre of concern of its debts holders particularly Creasey, if his assert for illegal removal from office were to be successful. As a consequence of the accomplishment of F, S and Breachwood Motors Ltd, Creasey found himself with a judgment against Breachwood Welwyn Ltd, an insolvent corporation, the source of which had been detached to Breachwood Motors Ltd. Breachwood Motors limited declined to meet any part of the verdict. One of the inquiries which had to be determined was whether the corporate veil could be pierced. The Court held that the corporate veil could be pierced[Ram95]. Not anything might give good reason for F and S's demeanor in intentionally changing Breachwood Welwyn Ltd's resource and trade into Breachwood Motors limited in entirety taking no notice of their responsibilities as directors and shareholders. This predestined that Breachwood Motors limited were legally responsible for the liability of Breachwood Welwyn. Read More