Discuss about the Corporate Governance and CEO Compensation.
The main issue of the case is to determine whether Geek Ltd can sue Michael for all the damages sustained to them or not.
The subject matter of the case is based on the provision of Companies Act 1993 of New Zealand (Reddy, Abidin & You, 2015). Further, the doctrine of separate liability of a company can be applied in this case. According to Companies Act, the directors owe certain duties for the company and in case the directors have failed to perform according to the provision of the Act, they will be held liable for breach their duties. The duties of the directors have been mentioned under section 131 of the Companies Act. There are certain other provisions that mentioned the liabilities of the directors.
According to section 131 of the Act, every director should have to perform their in good faith and they should have to act for the best interest of the company. They should not think about their own interest while they are working for the company. Further, according to section 133 of the Act, the directors should not exceed their limitations and they should not continue their trading recklessly. According to section 135 of the Act, no directors are allowed to do their business in such a way that can cause harm to others or to the creditors (Bottomley, 2016). In addition, as per section 137 of the Act, the directors should have to do their business with great care and skills.
In case, a director of a company has done any wrong thing, the liability will not impose on the company and the director will solely be liable for the act. This concept is based on the principle of corporate veil. According to this doctrine, a company is a separate legal entity and it could not hold liable for the wrongful acts of the directors. However, in case the company has been incorporated for wrongful purpose, the corporate veil will be pierced.
In this case, it has been observed that three friends have incorporated a business on model airplane. They formed the business together and decided to share their profit accordingly. Considering the brief of the case, it has been observed that Michael was the manufacturer of the planes and his first plane has been crashed and it causes damage to Geek Ltd. It can be stated that he will personally be held liable for the negligent act and he has failed to perform his duties according to the provision of Companies Act. Due to the doctrine of corporate veil, company should not be held liable in this case. However, the liability can be imposed on every member in case of a partnership firm. However, being the manufacturer, Michael should perform his duties with great care and with due diligence; but he has failed to do it.
It has been mentioned in Salomon v Salomon & Co. [1897] AC 2 that a company is a legal personality separate from its stakeholders. The term stakeholder means the director, shareholders and other related persons. Therefore, a company will not be held responsible for any wrongful acts of the stakeholders and the company will enjoy certain duties and obligations to this effect. In Salomon’s case, it has been held that the owners of a company could not be held liable for any debts of the company and their liabilities will be limited up to their shares.
Further, in case of limited liabilities, the owner of a company is not required to answer for any obligation of the company and they will not hold responsible for the acts or debts of the company. The liability of the owners will be limited up to their unpaid shares. The directors will not be held liable for the personal debts or obligation of the company. It has been observed in Roundabout Ltd v. Byrne [1959] IR 423 that if any dispute has been cropped up between the employees and the company, the owner of the company will not held liable for the same. Further, it has been stated in Battle v Irish Art Promotion Centre Limited [1968] IR 252 that a company can represent it before the court by any solicitors or barristers, as it is a separate legal entity.
The corporate veil of the company can only be pierced if a company has been incorporated for certain fraudulent purpose. According to Re a Company (1985)[1985] BCLC 333, corporate veil of a company can be lifted either by legislative provision or by the decision of court. However, it can be stated that the concept of limited liability and separate legal entity is fundamental to each other. The doctrine of separate entity of the company has been confirmed in the case of Lee v Lee’s Air Farming Ltd. [1961] NZLR 325. According to Goddard (1998), “separate legal identity allow[s] a company to enter into obligations, own property, and sue and be sued.”
There are certain advantages in the limited liabilities companies. It can be stated that the possibility of risk during the insolvency of the company is comparatively less when the shareholders get limited shares. Further, the monitoring cost gets reduced inn this system. The shares in the limited liabilities companies are free. However, Freedman (2007) that the benefits of limited liabilities companies are applicable for the large companies and the small companies cannot enjoy any positive sides of limited liability has argued it. The creditors have to bear large risk, as the information is not explained under limited liability.
However, it can be stated that the concept of limited liability and separate legal personality is inter-related to each other. According to the conceptual definition of separate legal entity, company will not be held liable for the acts of the directors and vice versa. On the other hand, according to the definition of limited liability, the director or manager of a company will be held liable to the extent of their shares in the company. The doctrine of separate legal entity can be effective for the company law. However, there are certain problems found in this process. The first abuse regarding the same is the rise of phoenix companies. It has been observed that the directors are incorporated the phoenix companies to settle their illegal money and invest shares in the newly corporate companies with certain ill motive. Therefore, in such cases, the doctrine of separate entity will not be applicable in such cases. However, the importance of the doctrine cannot be avoided
The issue of the case attracts the fundamental rules of the exception of separate liability of a company. According to the common legal principle, a company is a separate legal entity and the directors could not held personally be liable for the acts or debts of the company. However, there are certain exceptions to this rule. The situation where the corporate veil of the company can be lifted or raised is known as piercing corporate veil. According to the Common law, the corporate veil of a company can only be lifted by the legislative provisions or by the decisions of the court (Ware, 2016). In a case, if the directors of a company are using the company to fulfill their illegal desires and use the company for fraudulent purpose, the corporate veil of the company can be pierced. Further, in certain cases, it can be observed that the directors are intermingling their personal interest with the interest of the company and this deny the concept of best interest of the company. According to the Court, this mentality should be stopped and therefore, the corporate veil of the company in these cases should be lifted or raised. Such mentality of the directors can be found in the case of phoenix companies. In this cases, the directors are incorporating another subsidiary company to entertain their fraudulent acts and transfers shares in these companies. This principle has been established in the case of the Evans v. Thompson 124 Wn.2d 435 (1994). Similar principle has been followed in the case of Gilford Motor Co Ltd v Home [1933] CH 935. According to the Common law of New Zealand, the court can held the directors of a company personally liable for the debts of the company if the directors have failed to submit their annual corporate filings and unable to maintain the meeting minutes in a proper manner. Further, the capitalizations of the company should be well reversed and failed to pay the tax return in timely manner.
The legal nature of the company is a well-known factor and a company has the right to sue or to be sued. It can be represented before the court through the barristers. However, it is a fact that a company could not operate all its liabilities itself and the directors are the mind of the company. They hold all the important works of the company. Considering the importance of the director, the Companies Act, New Zealand imposed certain duties on the directors. According to section 131 of the Act, it is the duty of the directors to do their business in good faith and according to section 135 of the Act, the directors should not do any acts that can harm the creditors or a third party. These provisions reflect the role of the directors. Further, the directors are restricted to transfer any confidential information of the company to other. In case, they have failed to perform their business in certain adverse conditions and do not fulfill the norms of the Act, they can be held liable for the wrong personally.
The main issue of this case is to determine whether Alina and Peter can be able to meet all the requirements regarding the declaration of dividends.
The subject matter of the case is based on the process of declaration of dividends. The process of dividends has been discussed under the Companies Act 1993 of New Zealand. Dividend is a sum of money that has been paid by a company on regular basis to the shareholders and the same has been allocated from the profits of the company. According to section 53 of the Act, dividend is a distribution that the companies are authorizing to the shareholders. It has been mentioned that the process of distribution should not attract the provision of section 59 or section 76 of the Act (Taylor, 2017). Further, certain restrictions have been provided under section 53 (2). According to the section, a company should not issue dividends in the respect of each share of the shareholders and the value of the dividends should not exceed the value of the share. However, if the amount paid to the shareholders satisfy their liability regarding the liabilities of the shareholders. However, according to the Act, the directors can pay a dividend only if the company is solvent and there is no chance for the company getting insolvent immediately after paying off the dividends. Dividends can be issued only in the current account of the shareholders.
According to the case, it has been observed that the financial condition of the present company is not good. Many payments are pending and the business of the company is going on loss. Further, according to the law, dividends are only payable to the shareholders. Therefore, it is to be decided whether Alina and Pete hold any share in the company or not. Further, it can be assumed that the condition of the company is not solvent and there is a possibility that the company can become insolvent after the declaration of dividends.
Conclusion:
Therefore, it can be stated that the requirements for declaring dividends have not been fulfilled in this case.
Reference:
Battle v Irish Art Promotion Centre Limited [1968] IR 252
Bottomley, S. (2016). The constitutional corporation: Rethinking corporate governance. Routledge.
D Goddard (1998). “Corporate Personality – Limited Recourse and its Limits” in R Grantham and C Rickett(eds) Corporate Personality in the 20th Century (Oxford, Hart Publishing, 11, 11. Ibid, 18.
Evans v. Thompson 124 Wn.2d 435 (1994)
Freedman n.1 above, 331-2.
Gilford Motor Co Ltd v Home [1933] CH 935
Lee v Lee’s Air Farming Ltd. [1961] NZLR 325
Re a Company (1985)[1985] BCLC 333
Reddy, K., Abidin, S., & You, L. (2015). Does corporate governance matter in determining CEO compensation in the publicly listed companies in New Zealand? An empirical investigation. Managerial Finance, 41(3), 301-327.
Roundabout Ltd v. Byrne [1959] IR 423
Salomon v Salomon & Co. [1897] AC 2
Taylor, L. (2017). THE CALCULATION OF” DUE DEBTS” UNDER THE INSOLVENT TRANSACTIONS REGIME IN THE COMPANIES ACT 1993 (NZ): DAVID BROWNE CONTRACTORS LTD v PETTERSON. INSOLVENCY LAW JOURNAL, 25(4), 233-238.
Ware, D. (2016). Great Expectations: What shareholders and directors expect from New Zealand public company boards.
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