Corporations are one of the kinds of Business structures. Alike the Sole Proprietorship Concern, two or more persons are involved in a corporation. This is necessary to know that two kinds of bodies are there in a company. One is the body of directors and another is shareholders. Where directors are the part of management, shareholders present the ownership. In order to provide a meaning or a definition of a corporation, this can be stated “A Corporation is the legal association of people that have separated identity from it is owners (CliffsNotes, 2018). A corporation has several characteristics that make the same different from other business structures.
Corporations are not a natural person. It is a form of business venture that gets creates and developed by the group of certain people that are known as promoters and directors. Corporations come into existence by the virtue of applicable law. Further, it is to say that a is termed as a legal person because a corporation can do all the acts and deeds similar to a legal person. Following are the acts that a corporation can do by it is own name:-
A company or a corporation is able to act like a natural person as the same can do all the aforesaid acts. However, as mentioned that the same is not a natural person in actual, it requires a human brain to take the business decisions on behalf of this, to sign the contracts to file the suits and to do all the other acts that are necessary to carry out a business. A corporation has no eyes, nose or other organs but the same can run the business by it is own name with the help of directors and officers. A company is said to be legal person due to the reason that the same has a legal identification in the eyes of law, and the same is said to be an artificial person because it is created via a process other than the natural birth. Law gives birth to a company and directors develop the same with their efforts. Hence, in conclusion, this would not be wrongful to state that “Companies are said to be an artificial legal person.”
The separate Legal entity is one of the features of a corporation. A Company has an independent personality and the same cannot be misled with the directors or shareholders. Separate Legal personality is a significant rule in the area of corporations’ law. According to this rule, a company has it is a separate legal identity and directors will not be responsible for any act of a company. As discussed earlier that a company is a legal person, it runs the business by its own name and this is the reason that a company will be held responsible for every act that is done by it is own name.
Salomon v A Salomon And Co Ltd [1897] AC 22 is a very important case in the history of Corporation Law. In this case, a person name Salomon has transferred his current business to a company named “Salomon Ltd.” and became a member of the same along with other members of his family. In exchange for such transfer, Salomon has received debentures of the company i.e. Salomon Ltd. Later one, when the company started going into the process of liquidation, then being a secured creditor, Salomon has asked for his claim first over and above rest of the creditors of the company. Afterward, when this case went to the courts, and proceedings have started, Salomon argued that his claim was genuine as he was the secured creditor of the company. It was held in the decision of this case, that although, due to the existence of separate legal entity rule, company has it is separate identification from it is members as well as directors, however in this case the said will not be applicable (Law Explorer, 2015). The reason behind such decision was that whole management of the company was with Salomon and due to the same; his company cannot be treated as separate from him.
In order to protect the provision of Separate Legal Personality rule, this decision has given in the cited case. The company in the subjective case was of the UK. As this case was a lead one, it becomes base of the provisions of modern law (Inns, 2014). Under section 588G of Corporations Act, 2001 (cth), the personal liability of directors are defined. Hence this can be stated that this case has taken as a reference while development of Corporations Act, 2001.
Creation and development of every law are relevantly easy in comparison to enforcement. The same is with Company Law. There are many issues with the same. In Australia, the Corporations Act, 2001 is the legislation that governs all the corporations and companies in the country. As the economy is changing and companies are opening up themselves for the global transactions, in this scenario, the significance of the Corporations Act, 2001 becomes higher. However, this is also necessary to understand that as many companies will be there, cases related to breaches of duties of directors and other non-compliances will also be there accordingly. In such a situation, the said Act is the only guidelines that will provide the set of rules to the companies. Future of a law depends on the number of the people to whom the said will be applicable. As mentioned earlier that due to globalization, a number of companies are expected to increase, this can mention here that the importance of company Laws are also expected to increase. Although, in this situation, the other side of the coin cannot be ignored. Along with the significance, a number of challenges will also be high in the future. Due to such a high number of challenges, the amendment can be needed in future in Corporations Act, 2001. In addition to this, provisions related to corporate social responsibilities are also there in the act, the cause of which this act is expected to be the center of learning and reference. Future is uncertain and no one can predict the same, but this can be mention that some new provisions can be introduced in Company Law by way of amendments.
Although every possible provision is covered under, Corporations act 2001 yet there are some changes that are necessary for this area. Provisions related to duties of the director are mentioned under section 180 to 184 of the act (Robertson and Tilbury, 2016). These sections require a director to work in the best interest of the company instead of a specific shareholder. This is the reason that in many cases directors do the acts that are in against of the interest of shareholders. Therefore, provisions related to duties towards shareholders are needed to set out clearly in the law. Further, responsibilities of directors towards society and government also need to define under the law. It is common that in the absence of a penalty provision, the responsible person does not follow the liabilities in an ethical way. Although, penalty provisions are defined in the Corporations Act, 2001, yet some additions are needed in the same.
Further, section 198A of Corporations Act, 2001 gives the power to the director to manage the business affairs of the company (austlii, 2018). In conjunction with, according to this section a director of the company can do all the task except the one that is mentioned under powers of shareholders or not mentioned under the constitution of the company. It has noted that due to the powers are given in the said section, directors do misuse of their position, and hence some amendments in form of restriction are required to develop in relation to the subjective section. In conclusion, this can be stated that the current provision required some of the changes and amendments in order to provide a better economic development to the country and businesses.
Conclusion
Companies are the separate legal entities and the same cannot be held liable for the act of it is directors and officers. Similarly, directors also cannot be held personally liable for the acts that they do in the capacity of a director. In many of the case, courts have refused to apply the separate legal personality rule due to the unethical task is done on the part of the directors. Corporations Act, 2001 is the lead legislation in Australia that provides the set of rules and provision for the governance of the company. However, due to the globalization and recent changes in the economy, some of the amendments are required in the said act.
References:
Austlii. (2018) Corporations Act 2001 – Sect 198a. [online] Available from: https://classic.austlii.edu.au/au/legis/cth/num_act/ca2001172/s198a.html [Accessed on 30/07/2018]
CliffsNotes, (2018) Characteristics of a Corporation. [online] Available from: https://www.cliffsnotes.com/study-guides/accounting/accounting-principles ii/corporations/characteristics-of-a-corporation [Accessed on 30/07/2018]
Corporations Act, 2001 (cth)
Inns, J. (2014) Behind The Metaphor: Lifting The Corporate Veil. [online] Available from: https://jesse-dylan-inns.com/blog/2014/1/19/behind-the-metaphor-lifting-the-corporate-veil [Accessed on 30/07/2018]
Law Explorer. (2015) The Salomon principle and the corporate veil. [online] Available from: https://lawexplores.com/the-salomon-principle-and-the-corporate-veil/ [Accessed on 31/07/2018]
Robertson, A and Tilbury, M. (2016) The Common Law of Obligations: Divergence and Unity. United Kingdom: Bloomsbury Publishing.
Salomon v A Salomon And Co Ltd [1897] AC 22
Stim, R. (2016) Contracts: The Essential Business Desk Reference. 2nd ed. California: Nolo.
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