Part A Potential Liability Since the House of Lords decision in Salomon v Salomon & Co Ltd, it has been recognised that an inflexible application of the concepts of separate entity and limited liability will imply that can lead to undesirable consequences. Under certain occasionally, the court will go behind the corporate veil. In refer to cases of Yap Sing Hock v Public Prosecutor where the Supreme Court Peh Swee Chin SCJ would suggest the veil to be lifted by statutes, e.g. the Companies Act 1965 itself for certain specific purposes. The lifting of veil clearly constitute there a violation of the primary principle but this has come to be treated correctly as an exception to the primary principle. There are two situation where Act has …show more content…
These directors should be persons of calibre, credibility and have the necessary skills and experiences to bring an independent judgement to bear on the issues of company strategy, performance and allocation of funds. Assuming Ali and Sunny reluctance to undertake or second guess business decisions especially struggling in a competitive market. This would caught them under Section 304(1) where the directors knowing that the financial affairs of the company is bad, but still carrying on business with the intention to deceive the creditors, therefore the court would held Ali and Sunny personally liable for the debts. Furthermore, the potential liability would be the seductive logic. It is describe as a possibility where the transition from fraudulent trading to the new duty of insolvent trading. According to Ramsay (2000), Director is likely to lie his chances to secure the capital injection where his skill and judgement is at the table are probably suspect as well. The court could lift the corporate veil in the circumstances as there was an element of fraud involved in the receipt of the secret profit. Cases such as Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd. For example, the director would be making own bet on the next roll hoping that the capital injection would save his job. For example, if directors wind up the
In order to prove the breach of section 184, the following rules and duties must have been violated. A director commits an offence if they are reckless or intentionally dishonest, and fail to exercise their powers and discharge their duties in good faith in the best interests of the corporation or for a proper purpose .As mentioned earlier Mr Palmer was reckless in decision making by waving loans and using the company assets for private benefits and the company suffered had to go in voluntary administration. The second offence that needs to the violation of section 184 is that when a director commits an offence if they use their position with intentional dishonesty or recklessly in order to directly or indirectly gain an advantage for themselves, or someone else, or cause detriment to the corporation. Mr Palmer acted as a shadow director and his nephew agreed with all the decisions the corporation made such as political donations and transferring funds to another firms owned by Mr Palmer that caused detriment to Queensland Nickel. The third offence is a person who obtains information because they are, or have been, a director of a corporation commits an offence if they use the information with intentional dishonesty or recklessly. As
This essay will explain the concepts of separate personality and limited liability and their significance in company law. The principle of separate personality is defined in the Companies Act 2006(CA) ; “subscribers to the memorandum, together with such other persons as may from time to time become members of the company are a body corporate by the name contained in memorandum.” This essentially means that a company is a separate legal personality to its members and therefore can itself be sued and enter into contracts. This theory was birthed into company law through the case of Salomon v Salomon and Co LTD 1872. This case involved a company entering liquidation and the unsecured creditors not being able to claim assets to compensate them. The issue in this case was whether Mr Salomon owed the money or the company did. In the end, the House of Lords held that the company was not an agent of Mr Salomon and so the debts were that of the company thus creating the “corporate Veil” .
In order to understand why a company would or would not disclose his contingent liabilities it is important to know exactly what a contingent liability is. As I have learned throughout all of my accounting studies a liability is simply an obligation or debt that a business owes to an individual or an organization. Now there are many liabilities that include services, payroll, notes, and accounts payable. When one of these liabilities becomes a contingent liability it means that it is something that is a potential situation at the time. Contingent liabilities depend on a future event. What this means is the company may or may
Woodward, S., Bird, H. & Sievers, S. (2005). Corporations Law in Principle 7th ed. Pyrmont, NSW: Lawbook Co.
In many misfeasance cases against directors, those breaches maybe relatively uncontroversial. This draws into focus the question of whether the director has any common law or statutory defence, including the Duomatic principle and ratification by shareholders (CA 2006 S.239), available to a claim against him for restitution to the company. S.239(6)(a) preserves the Duomatic rule that if an informal unanimous consent is reached among voting shareholders, it is unnecessary to pass such ratification resolution through general meeting or written resolution. The first part will examine the scope and requirements of this rule to illustrate the validity of such assent. S.239(7) leaves the door open for rules of law, which refers to common law principles, to continue guiding ratification. It will be assessed how these rules impose limitations on the general ratification power conferred by s.239.
This research report documents the findings of an empirical study of judicial findings (of superior courts) relating to the duty to prevent insolvent trading. The duty to prevent insolvent trading is the most controversial of the duties imposed upon company directors.
Based on the case scenario, Doris, Betty, and Charlie formed a company called Bechdo Pty Ltd. The three members are the directors and Betty who is major shareholder holds 40% followed by Charlie and Doris who hold 20% each while the 20% is held by the rest. Based on the company constitution, a managing director has capacity to enter into a contract o behalf of the company up to a maximum of $100,000. Moreover, he/she can enter into contracts to the value of $900,000 upon getting consent for the board of directors. In this case, Bechdo Pty Ltd operates without a managing director since none was elected. The major issue is that Betty being the majority shareholder went ahead and entered into contract with BB Ltd, Jillo Pty Ltd, and
The removal of a director by the board in the FDC case creates legal and ethical issues, which ultimately led to the onset of commercial issues. Despite the legal, ethical and commercial issues, this case is strongly indicated that there are some problems in the mechanism of removal directors stipulated in the Corporations Act 2001 (Cth) (“Corporations Act”) S 203D and S 203E. This indication is underpinned by some cases in the Australian court in which directors are removed also by the board. Therefore, this paper will analyse the legal, ethical and commercial issues regarding with the removal of FDC’s director, discuss the problem in the procedure of removal directors stipulated in the legislation, and compare other regulations in the common law and civil law countries. Finally, drafts of new mechanism of dismissal directors will be provided in this research to reform Section 203D
“The business judgment rule, as a standard of judicial review, is the common law recognition of the statutory authority that has been vested in the board of directors (Shu-Acquaye, 2004).” “Under the rule, which operates as a standard of judicial review, the burden is placed on the party challenging a decision of the directors to establish facts rebutting that presumption (Skinner, 2006).” “Courts invoke the business judgment rule in assessing the conduct of directors and determining whether to impose liability in a particular case (Shu-Acquaye, 2004).” This rule does not provide unlimited protection for directors though. “Although, the business judgment rule is designed to foster the complete exercise of managerial power granted to directors, it is not an unfettered power (Shu-Acquaye, 2004).” “Consequently, the business judgment rule does not afford protection to directors who exercised "unintelligent" or "unadvised judgment," or who submitted to "faithlessness, fraud, or self-dealing (Shu-Acquaye, 2004)."” “Application of the business judgment rule is based on a demonstration that informed directors did in fact make a business judgment sanctioning the matter being examined. A director's obligation to inform himself, in preparation for his decision, derives from the fiduciary capacity in which he serves the company and its stakeholders (Shu-Acquaye, 2004).” “So long as the directors’ decision was reasonably informed and can be attributed to any rational business purpose, a court will not substitute its own notions of sound business judgment for that of the directors, unless that presumption is rebutted (Skinner, 2006).” Prior to the court’s decision in Smith v. Van Gorkom, the court was reluctant to hold boards liable for breach of
Section 184 of the Corporate Act, imposes criminal liabilities on directors, which covers situations where directors are reckless, intentionally dishonest and cause detriment to the company. Directors have a responsibility to their company and shareholders, which is to honestly believe that they are acting in the best interest of the company and for a proper purpose at all time. In s 184(1) of the Corporations Act, directors must always act in good faith and for the best interests of the company. The good faith and interest provisions are civil obligations as well under s 181 of the Act. However, a director or officer will be committing a criminal offence if he or
Breaches of s180-184 of the Corporations Act 2001 (Cth), and Breaches of Common Law and Equitable Principles
The introduction of the provision of safe harbor on the directors will be having certain obligations on its implementation (Taylor, 2012). The Australian Institute of Company Directors stated that it has been observed where companies went into administration just to avoid the complication of trading insolvent. It further stated that the directors are quite concerned about their own liabilities and their decision making power, which basically obstruct them from choosing trading insolvent (Vadi, Vissak and Olivas-Lujan, 2013). The decision of a director of a company will not be applicable to the company or himself but to the future and present aspect of every person who is involved in the company. Most of the cases notice that the companies are placed in to administration even before it is required due to the structure of the current law (Wardrop, 2011). The Australian Institute of the Company’s Director further laid down that in its opinion, the application of the provision of the safe harbor would actually bring innovative result in the business sector, thereby resulting in increased competition. It stated that will place innovation in the market rather than making a company to struggle, leaving no option in its
The auditors should not be manage or part of the staff of the company not only working under the supervision of the financial vice president.
This is not an easy burden to meet. In determining whether or not a third party has met this burden, a court will consider several factors, including: the absence of business records, undercapitalization of the business, failure to observe mandatory formalities, fraudulent representation by shareholders and/or directors, the promotion of fraud or illegal activity, payment of personal obligations by the corporation, commingling of assets, conduct that manipulated or ignored the corporate form, or is otherwise found to be an “alter ego” of the corporate mangers or shareholders. It is not necessary that the third party make a showing of the existence of all those factors in order to support a finding that the corporate veil should be pierced. Once pierced, or lifted, courts can look beyond the independent personality of a corporation and hold individual shareholders, board members, or employees liable for the obligations of the corporation. In deciding whether the burden has been met, courts will weigh two competing interests. The first being fairness, or the desire to reach an equitable outcome, and the second being societies interests in upholding the principle of limited liability.
Contingent Liability is a condition that refers to the possibility of a future event happening and addresses the responsibility of the party liable should the event take place. In today’s real estate market both sellers and buyers may have contingencies stated in the terms and conditions for selling and purchasing a home. The most common contingent liability are guarantees to debt.