Co5121: Law of Business Organisation - Law Assessment Answers

December 28, 2017
Author : Julia Miles

Solution Code: 1ABEJ

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Breaches of corporate law

Introduction

The corporate law specifies how directors, employees, investors and other shareholders are required to interact with each other and with the company. A breach of the corporate law usually has far-reaching consequences such as the collapse of a company. Often, there is a subtle distinction between corporate law and ethics. Therefore, directors, shareholders, and other stakeholders may act in contravention of the corporate law in the belief that it is a question of ethics – one with less legal consequences. Breaches of corporate law have seen the collapse of many corporations all over the world. The nature of corporations may make detecting, preventing or remediating offenses resulting from breaches of corporate law complicated. Mostly, modern corporations can be defined as:

  • Being legally independent: A corporation has a separate legal liability of the directors, shareholders or employees. It is represented as a person in its right. Directors may rely on this weakness to commit offenses and leave the legal consequences of such actions to face the company.
  • Having limited liability of shareholders: Shareholders are only liable to the extent of the shares they own in the company. There is a significantly reduced sense of personal responsibility on their part. Shareholders are not often actively involved in the management of corporate affairs. Furthermore, they may be denied access to information by directors by the confidentiality of some of the company’s information. This situation leaves most shareholders watching the progress of the company from far and waiting for annual announcements of dividends.
  • Having delegated management: Most corporations are managed by executives who are given the responsibilities by a board of directors. Although there are well-defined structures for enforcing accountability, the lack of a centralized force of management authority makes the accountability structures naturally weak.

Considering these factors, the collapse of a corporation becomes more understandable. The most frequent reason for a collapse is usually poor management of debts. Directors tasked with deciding on the financial performance of a company refuse to follow qualified recommendations or decide to use their opinions to run the affairs. A lot of times the management may be absolved from guilt due to lack of evidence to hold them. But a non-legal approach may be able to find the real cause of a collapse in such a situation. Therefore, it is an indication that the corporate law could be having weaknesses that condone corporate offenses.

Breaches of corporate law that occurred with WA Inc and Alan Bond

In the case of WA Inc, it is estimated that underhand dealings between representatives of the state government and renowned business people led to the loss of more than 600 million dollars of public money. First, there is the infamous dropping of gold tax in favor of certain business people. The alleged waiver of gold tax allowed a few individuals to trade gold at abnormally high profits at the expense of the public. Then, there was the appointment of John Horgan to lead the West Australian Development Corporation at a ridiculous salary of $800,000 annually. These questionable business dealings with Burke and his companions led to the collapse of numerous major businesses some of which were owned by those implicated in the scandal such as Alan Bond. Since most of these companies were cross-owned by government representatives and prominent business people, they had borrowed money from the government or used it as a financial guarantee. Upon their collapse, the government lost all the monies tied to these companies. Several breaches of corporate law were established from the cases:

  • Breach of requirement on conflict of interest: The corporate law requires directors to avoid a conflict of interest by any means possible. Persons involved in the WA Inc scandal were clearly in breach of this requirement. Despite knowing that their actions, in multiple instances, amounted to a conflict of interest, they went ahead with the dealings. For instance, Burke allegedly accepted donations to his party from business people who in return of the gold tax waiver.
  • Breach of duty to care: Despite many of the directors of the collapsed companies knowing that their dealings were not sustainable, they continued to engage in these dealings. According to the corporate law, directors have the duty always to act in the interest of the company. What was demonstrated by the actions of the people involved in WA Inc was contrary to this requirement. They caused the various businesses to collapse instead of protecting them.

Breaches of corporate law that occurred with HIH and Larry Adler

The collapse of HIH is thought to be one of the largest corporate collapses in Australia’s history. The collapse of the insurance giant can be attributed mainly to corporate mismanagement. The former director of the company, Mr. Adler confessed to several accusations that can be interpreted as breaches to corporate law. First, he admitted to not having acted in the best interest of the company. The corporate law requires directors always to act in the best interest of the company. He also admitted to spreading false information and using it for financial gain. The corporate law under Directors’ Duties requires directors to disclose company information that is accurate and a true reflection of the actual situation. Mr. Adler also admitted to acting knowingly in dishonesty. Other former executives of the company were also charged with various offenses. However, most of the offense committed in the HIH collapse were breaches of directors’ duties.

Recent concerns over Leighton in Australia

Leighton Holdings, which has since 2015 changed to CIMIC Group Limited, have been faced with allegations of corruption that even led to the name change. Some former executives of the company have been accused of engaging in bribery with an Iraqi oil company. Another CIMIC official is alleged to have conned an Indian business partner in a coal deal. The accusations in these allegations amount to breaches in corporate law, particularly on directors' duties. Directors are expected to present truthful information at all times. If the allegations are founded on solid evidence, the accused persons may serve jail terms for acting in contravention of the corporate law as required of them.

Recent collapses

In 2014, Vocation Limited closed down business a week after entering voluntary administration, citing termination of customer contracts. The Federal government annulled the federal registration of two colleges operated by the company. The government also seized further funding of the organization's activities. As a result, the company was forced to shut down operations owing to cash flow problems. Many reasons for the failure have been proposed by both corporate affairs commentators and the organization's officials. However, what set the chain of events in motion is the management’s disregard of the relevant legislation. The organization's executives flouted rules governing the training sector for their business. Such disregard of regulations is equally a breach of corporate law since company directors are required to ensure that their businesses run legitimate affairs. Vocation Limited is only one of the recent examples – many other corporations have been forced to shut after blunders committed by management cause them to run out of operating cash or find them in conflict with the law.

Possible changes to the corporate law

Perhaps instituting changes to the corporate law might be the key to increasing corporate management efficiency and enforcing more transparency. First, it should be clear to all managers that the corporate law is founded on ethics. Although ethics are not equivalent to the rules and are usually not attached with legal consequences, their force on decisions executives take should even be greater than that of legal consequences. Only through basing one’s decision-making on an ethical framework will they be able to find themselves in the right place all the time. Other changes that might be useful may include:

  • Emphasizing integrity as a key component of the law: Directors’ duties should demand an even higher degree of integrity. Being honest in making decisions and taking actions reduces the possibilities of committing blunders that go unnoticed. As witnessed in the HIH case, one thing went wrong after another, but it was never reported until the company collapsed. Increasing integrity can make processes more open and hence their consequences, if any, become clearer.
  • Enforce more accountability: Enforcing accountability means that the consequences of every action are prepared for. Corporate executives should be made accountable for each action and not just for the general direction of the company. If more accountability is demanded at a lower level of operation, wrongdoings will become evident while it is still early enough to prevent damage. If such is the case, there will be more careful in taking actions which will be in the best interest of both companies and the public.

Although these interventions are based on ethical values, it is evident that they have a legal impact. Therefore, the implementation of these changes will not only be appealing to a certain ethical framework but to legal obligations as well.

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