Corporate Legal Issues And Law Enforcement Authorities In The Slater & Gordon Essay.

This is a case study that has been settled. It is important never to prejudge an issue that has been settled especially in
circumstances where there has been no admission of any liability. Without doing that, discuss the following:-

What were the corporate legal issues facing Slater & Gordon Limited? 
What avenues may be open to law enforcement authorities and directors confronted by these issues? 
In your view, should the corporate veil prevail in these circumstances? Explain. In doing so, briefly outline any earlier
major decided cases where similar issues have arisen, might those cases be significant?  

The present case study is based on the deception made by the directors of the above stated company Slater & Gordon Ltd. In the case, it has been observed that the directors of the company have failed to keep their promise and therefore, found guilty under the Corporation Act 2001. It has further been observed that all the deprived people are trying to sue the company for non-performing their duties and it has been observed that the people are taking class action against the company. The main reason that has been come into the light is that the alleged company has misrepresented certain financial statements in the market and the shareholders have to face lots of problems due to the same. Further, it has been observed that the acts of the alleged company have attracted the provisions of the Corporation Act 2001. The misrepresented acts of the alleged have created detrimental effect on the shareholders and shares of the company have been fallen down 51%. One of the officials of the rival company has shown his interest to file a class action against the alleged company. Class action gives an opportunity to a group of people to file case against any person collectively and in most of the times; the term is used to denote an action under the commonwealth system. However, in this case, a detailed study regarding the alleged company has been discussed. Further, all the acts done by the company have been discussed under the light of Corporation Act 2001. In addition to this, certain issues have been pointed out in this case and the whole matter is being discussed accordingly.

The main issue of the first part of the case is to determine the legal provisions that the alleged company has to face in respect of their activities.

Considering the case, it has been observed that the directors of the company have failed to perform their duties according to the provision of the Corporation Act. The directors in a  company is playing an important role in the corporation and certain provisions of the Act deal with the rights and obligations of the directors. It has been mentioned in section 180 of the Act that the directors of a company should act in good faith and they have certain duties for the shareholders. The suitable provisions regarding the same are section 180 to section 183 and the directors of the company have to act for the best interest of the company and the shareholders as well. Further, it has been mentioned in section 728 of the Act that no director of the company is allowed to describe a matter or document in such a way that results in misleading statement. According to section 728 (2) of the Act, the directors are required to acquire sufficient knowledge regarding the declaration they are making and interest of any other person should not be affected by such declaration. If the director has failed to act accordingly, they will have to face penalties under section 1041 of the Act. Further, they have to face penalties under section 1317E of the Act for non-performing their duties mentioned in section 180 to section 183 of the Corporation Act 2001.

Issue 2: Avenues Open to Law Enforcement Authorities and Directors

In this case, the directors of the alleged company have failed to secure their position by delivered certain misstatements and the shareholders of the company have to face dilemma regarding the same. They have failed to secure the interest of the shareholders by false statement.

Conclusion:

Therefore, the director of the company will face legal actions mentioned herein.

The main issue in this part is to determine whether the alleged authority can take any defense in respect of their acts or not.

It has been mentioned under the section 674 of the Act that the directors of the company owe certain duties to reveal evidence for the company to the shareholders and they should not reveal any confidential information of the company that affects the interest of the company and the shareholders of the company. If a director has failed to perform all these obligations, he will be held liable for the same. Under the Corporation Act, there are certain penalty sections that applied on the directors who failed to act in good faith. Considering the case, it can be stated that the acts of the directors have attracted the provisions of the civil penalties. According to the Corporation Act, if a director has failed to act with due care and diligence, he has to face penalties according to section 1317E of the Act. Further, it has been mentioned under the Act that in case they take active part in the delivery of misstatement, they will have to face penalties under section 1041 of the Act. However, there are certain sections laid down under the Act where the directors can defend their position. According to the section, the company should be a license holder under the provision of section 795B (2) of the Act.   

According to the allegations made by the official of the rival companies and contents of the case study, it can be stated that the directors of the company have failed to act prudently. However, they could defend them under section 1317S of the Act and in that case, the directors should have to mention that they are required to show the inconsistencies regarding the market integrity rules. There is another provision in the Corporation Act where the directors can defend them.

Conclusion:

Therefore, the company can take effective actions under this section.

The preceding issue in this part is to discuss whether the scope of corporate veil has been lifted in this case or not.

Issue 3: Should the Corporate Veil Prevail in These Circumstances?

According to the known corporate rules, a company is a separate legal juristic person in the eye of law and it should not be responsible for any wrongful acts of the director or any shareholders. This differences have been explained with a good fugitive namely corporate veil and it has been observed by the court in the case of Salomon v Salomon and Co. that a company is a separate legal entity and the directors of the company are manage the operational activities of the company only. It has been mentioned in section 232 of the Corporation Act that the director should perform their act honestly. It has been mentioned in Australian Growth Resources v.

Van Reesma that if a director of the company fails to act in good faith and infringes the provision of the Corporate Act, they need to be adjudged according to their acts. However, it has been mentioned by the court that if a company has been formed to defraud others, then the company will be held liable for any wrongful acts and in this case, the separate liability of the company will not be applied. According to the Corporation Act, the term piercing the corporate veil denotes a situation where certain liabilities have been imposed on the companies and the court will hold the directors personally liable for the actions or debt. One of the leading case for lifting the corporate veil is WALKOVSZKY v. CARLTON. According to this case, when in certain circumstances, the corporation is working as an agent of the shareholders and the directors of the company is acting as the principle, the wrongful acts of the directors will be adjudged separately and the corporate veil of the company will be pierced. However, it has been mentioned in the contents of section 728 of the Act that the directors if misrepresented any provisions of the Act, they will be held liable for the same solely. It has further been observed in the Act that the directors are obliged to act in good faith and to deceive the shareholders for any reason is going against the moral provision of the Corporation Act. In such circumstances, the corporate veil of the company is to be lifted and the directors should be adjudged accordingly.

It has been observed in the case that the directors of the alleged company have misled the statement made to the shareholders for the financial information. The directors have promised it to the shareholders that the financial condition of the company will be good and they will get their share accordingly. The director of the company has failed to perform their duties as per the provision mentioned in section 180 to section 183 of the Corporation Act. Further, it has been observed that the director of the company misled the shareholders of the company and did not disclose important information to the shareholders according to section 674 of the Act. Therefore, the director should have to face the penalties solely. Further, it is to be stated that the corporate veil of the company in this case should be pierced.

Conclusion:

Therefore, the corporate veil of the company is required to be pierced in this case.

After a thorough look over into the case study, it has been observed that there are several provisions for taking class action against the company. The directors of the company have failed to perform their obligations in good faith. It has further been stated that the directors have failed to disclose necessary documents to the shareholders. Further, they had made false promise to the shareholders regarding the profitability of the company, kept the shareholders in darkness, and failed to act on behalf of the interest of the shareholders. The directors of the alleged company have attracted the provisions of section 674 and section 728 of the Corporation Act. To conclude, it can be stated that the corporate veil in this case is required to be pierced to identify the offences of the directors.

Reference:

'ASIC Home | ASIC - Australian Securities And Investments Commission' (Asic.gov.au, 2018) <https://www.asic.gov.au/> accessed 24 April 2018

Australian Growth Resources v. Van Reesma (1988) 13 ACLR 261 at 272

Chapple, Larelle, Victoria J. Clout, and David Tan. "Corporate governance and securities class actions." Australian Journal of Management 39.4 (2014): 525-547.

Choi, Ka Wai Stanley, et al. "Responsive Enforcement Strategy and Corporate Compliance with Disclosure Regulations." (2016).

Huggins, Anna, Roger Simnett, and Anil Hargovan. "Integrated reporting and directors’ concerns about personal liability exposure: Law reform options." Company and Securities Law Journal 33 (2015): 176-195.

Ramsay, Ian. "Increased Corporate Governance Powers of Shareholders and Regulators and the Role of the Corporate Regulator in Enforcing Duties Owed by Corporate Directors and Managers." European Business Law Review 26.1 (2015): 49-73.

Salomon v A Salomon & Co Ltd [1896] UKHL 1

WALKOVSZKY v. CARLTON 24 A.D.2d 582 (1965)