Good Policies And Business Ethics Enhance: An Analysis Of The Australian Corporation Act 2001 (Cth) Essay.

Background and rationale of the Corporation Act 2001 (Cth)

Discuss about the Good Policies and Business Ethics Enhance.

The introduction of company law has been done in order to govern the way in which organizations operate. In the recent years there have been various scandals and frauds which have been carried out in Australia in by companies and directors which have caused significant detriments to the stakeholders of the corporations. These frauds are mainly in relation to misusing the powers which have been provided to the officers and the directors of the company by law. The Australian Securities and Investment Commission in Australia keep a close eye on the way in which officers and directors of the corporation manage its affairs. Over the years the ASIC have been able to procure punishment for those who act in the violation of the corporate laws provided through the corporation Act 2001 (Cth). The functioning of an organization is largely dependent on the way in which it is managed.

As argued by Twomey, Jennings and Greene (2016) there are various risks which may arise in relation to an organization in case it is not managed property. There are several aspects of a corporation which have the need to be governed by law. These aspects include incorporation, disclosures, meetings, shareholders rights, share and dividends issue powers, duties of directors, financial reporting and misleading and deceptive conduct. All such aspects of the corporation if not governed adequately by law than it may cause serious detriments to the stakeholders of the organization and subsequently the organization itself. It is of significant importance for the mangers to understand the implications of the legislation in relation to the corporations they manage.

The law of corporation in Australia have been historically borrowed from the company law of United Kingdom. The Corporation Act if breached may result various implicates both civil and criminal. A corporation being an artificial legal person cannot be held liable criminally and thus the liability shifts to the officers and directors in situation where the courts may lift the corporate veil between them and the corporation which provides protection to the directors.  Understanding the implications of the legislation which not only allow the officers, directors and corporations to avoid legal implications but also ensure the effective functioning of the organizations and enhancement of its reputation in the society (Clarkson, Miller and Cross 2014).

The purpose of the paper is to analyze the application of the legislation on organization, discuss the high legal risk areas, implications on corporation and strategies to manage such risk along with their cost and benefits.

Legal, Management, Relationship issue

The Corporation Act 2001 (Cth) is a legislation of the commonwealth which provides for the laws which deal with company form of business structure being operated in Australia at the federal level as well as the interstate level.  Along with companies it also deals with other entities like managed investment schemes and partnerships. The legislation is the primary law on which the Australian Corporation Law is based. The statue had been simplified by the Corporate Law Economic Reform Program Act 2004 which has reduced the legislation form 3,354 pages to 200 pages long.  The legislations regulate matters in relation to the formation of companies, the way in which their functions are to be carried out , the duties of the officers and directors and provisions related to fundraising and takeovers (Bulchandani 2017).  The corporation law resulted out of a successful challenge done in the high court by New South Wales v Commonwealth (1990) 169 CLR 482. In the case the court held that the parliament does not have the power to make laws in relation to matters regarding the formation of a corporation. Thus referral of power had been done by all states and they adopted the provisions of the Corporations Act 2001 (Cth) (Tushnet 2017).

The corporation agreement taking place between the states and the commonwealth provided that all changes which were to be made in relation to the legislation have to be initially referred to the Ministerial Council for Corporations for getting approved. The scheme came under pressure as the federal government made attempts to rely on corporation powers to make rules for its agenda of industrial reforms. This made a few labour states to withdraw from the agreement (Cheeseman 2016).

The primary purpose of the legislation is to ensure that the corporations functions effectively and ethically. There are various stakeholders of a corporation such as shareholders, clients, investors, customers, employees, suppliers, financers and the community as whole. As a corporation is an artificial legal person and the provisions of corporate veil keep those who manage it protected corporation law seeks to ensure that officers and directors of the company ethically and legally manage the affairs of the corporation. There are several aspects of a corporation which are governed by legislation. These aspects include incorporation, disclosures, meetings, shareholders rights, share and dividends issue powers, duties of directors, financial reporting and misleading and deceptive conduct. The Corporation Act if breached may result various implicates both civil and criminal. A corporation being an artificial legal person cannot be held liable criminally and thus the liability shifts to the officers and directors in situation where the courts may lift the corporate veil between them and the corporation which provides protection to the directors (Glove and Doss 2017). 

There are several legal, management and relationship issue which arise in relation to an organization and are addressed via the provisions of the legislations. The legislation along with the corporate governance principles laid down by the Australian Securities exchange provide for the way in which an organization is to be managed. The ASX corporate governance principles are mere guidelines. However even where they do not have to be followed by the company mandatorily any organization who dies not wish to o implement these principles have to do it on an “if not why not” basis. This means that they needs to provide an explanation to the ASX that if they do not select the organization to be managed by the ASX recommended principles than what is the reason behind non acceptance  of the principles.  The legislation governs the legal relationship between the states and the corporation (Allen and Kraakman 2016).  The managerial relationship between the corporation and the directors and also the general relationships between the stakeholders of the company with the company itself are all governed by the legislation. The legal issue which are shaped by the legislation includes whether the legislation   allows or the incorporation of a company or not. The allowance depends upon the facts that the company is formed for a proper purpose. The other legal issue which are shaped by the legislations are in relation to whether the directors and officers are complying with their duties or not.

They have a fiduciary obligation towards the company which means that their actions should always be directed towards pursuing the interest of the company rather than any form of personal interest of any interest belonging to a third party. Being the fiduciaries of the company it is also an duty of the directors to disclose any relevant facts which an organization must known as the directors or officers are able to make personal profits by making use of the position and information n the organization. The legislation also shapes the issues which may arise out of the relationship between then organization and its shareholders. This is because there are several shareholders in a company who may have different allocation of shares. They say in the company depends upon the allocation o shares they have in relation to the company. Any person who is a minority shareholder may be subjected to prejudicial treatment by a person being a majority shareholder or the director of the company. The legislation sets out rules in which protection to such shareholders are provided (Macaulay 2018).

The legislations are the primary law which deals with organizations which have been incorporated in the country. As discussed above the legislation is applicable on all states as well and therefore organizations incorporated in the respective states are also within the jurisdiction of the legislation. the application of the legislation initiates form the time in which a person wants to apply for the formation of a company in Australia. The legislation provides through the provisions of section 112 that what kind of companies can be formed in Australia. These companies include a public company which may be limited by shares or may be a no liability company or a proprietary company which may be limited by shares or guarantees (Bird, Cahoy and Prenkert 2014).  After the company is registered with the ASIC it comes into formation existence with as a separate legal entity in Australia. The incorporation of a public company requires at least three directors and a proprietary company can only be registered via one director.  The registration of the company imposes an obligation on the officers and directors (those people who are officers and directors of the organization within the means of section 9) which includes duties such as due diligence and care, acting for best interest of the company, not misusing the position and information of the company in a way which may target personal or third party interest and may case losses to the organization. The legislation applies for providing protection to those who are the stakeholders of an organization. As the officers and the directors are provided with supreme powers to manage the company they are in apposition where they can exploit the shareholders, creditors, the community and the creditors of the company. The legislation prevents any directors to indulge in operating the affairs of the business in relation to trading activities in the company does not have the capacity to pay its creditors.

The applications of the legislations on organizations in Australia also ensure that the directors who have fraudulently violated the provisions of this legislation may be made liable in their personal capacity to those who have suffered losses. The legalisation also indirectly provides for good corporate governance by the directors as if such provisions are not followed it leads to the violation of duties of directors.  Stakeholders like the community is provide protection as the legislation does not allow for activities which may be unethical in nature and which may harm the environment. The rules of the Act also apply to the way in which organizations indulge in raising funds from the public. The organizations are required to make proper and timely disclosures in relation to the disclosure documents as required under the provisions of section 728 and 674.any conduct which the organizations indulges into and it can be regarded as a misleading and deceptive conduct is also punishable by the legislation via the provisions of section 1041H (Means 2014).

There are various legal risk which any organization operating in Australia may be subjected in relation to the application of the legislation. One of the primary areas in which an organization indulges in is that of rising public funding. Any organization which is registered with the ASX has the rights to rise funding from the public in order to increase its capital. When an organization wants to raise funds there are several legal provisions provided by the legislation which they need to comply with. These provisions are in relation to the contents of the offer document which is also known as a prospectus document. The prospectus document requires both general and specific disclosure under the provisions of section 708 and 710 of the Act (Morgan, 2015). It provides that such documents must contain all information which may be revenant for a person who wants to invest in the shares. The prospectus document must contain all correct are relevant information. Any misstatement in relation to the document may lead to the breach of section 728 of the Legislation which would not only make the organization liable for the breach but also any person who has made the organization breach such provisions of law. In addition under the rules of section 674 any information which a reasonable shareholder will feel to have affected the share price of the company would also have to be disclosed continuously to the ASX and the failure to do so will result in the breach of this section for the organization as well any person who has made the organization to violate the legal principles. One of the primary examples of this situation had been seen in the case of Australian Securities and Investment Commission v Sino Oil and Gas Limited. In this case the director who had difficulties in understanding English along with the company  had been held liable for the breach of section 728 and 674 of the legislation. in another case of ASIC v Fortescue Metals Group Ltd (2011) 190 in this case although the directors were no held liable for the breach of directors duties they were held liable in relation breach of disclosure obligations and the provisions of misstatement in prospectus (Frank and Bix 2017).

Another area of legal risk which is present in relation to the legislations is that related to the way in which a meetings of an organization needs to be carried out. Any organization which is operating in Australia have the obligation of carrying out periodic meetings where plans and performance of the company needs to be discussed. The failure to carry out the meetings as asked under the provisions of section 349 of the Act would lead to the contravention of the legislation by the company and any person who was indulged in making the company violate such provisions. Risk may also be posed to the organization if they it has acted in a way which is derogatory to its minority shareholders. The court may order the organization to compensate the minority shareholders in case their interest has been wrongly dealt with. The capital maintenance doctrine is also made a part of the legislation through the provisions of section 254. The organization is not allowed to indulge into actions through which it would take into consideration reducing the share capital of the company in to the detriment of its shareholders. The organizations may also be subjected to the risk related to the breach of section 1041H of the Legislation if their actions in relation to a financial product such as securities are those which are misleading or deceptive or those which are likely to mislead of deceive (McAdams et al. 2015).

The focus of this section would however be on one of the areas of the legislation which pose the highest risks to the organizations and is one of the most litigated areas of the legislation. This area is that of the duties of directors and others officers  of a company. One of the key functions of the management is in relation to business decision making and such decisions can make the directors and officers of the organization fall into trouble if they are not been taken in a way which a reasonable officer or director in the same position would take. One of such examples had been seen in the case of Australian Securities and Investments Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023 (Scarborough 2015). In this case the directors of the company were also the shareholders of the company. These had indulged into providing financial advice to the section of public who were very vulnerable and were not in a position to recover any financial losses based on a poorly developed model by  one of the directors. The model subsequently failed and the clients of the company had been subjected to losses. The ASIC filed a case against the directors where it was found by the court that the director had actually violated the provisions of section 180(1) by causing harm to the reputation of the company and indulging in a conduct which may be held as a misleading or deceptive conduct.  The provisions had also been discussed by the court in the case of ASIC v Rich [2005] NSWSC, Asic v Adler and 4 Ors [2002] NSWSC 171, ASIC v Healey & Ors [2011] FCA 717 and ASIC v Hellicar [2012] HCA 17. In these cases it had been clarified by the court that the duty is owed to the company and is also applicable on the non executive directors of the organization. The duty may also been breached of a director was also an officer of the company. The duty can also be breached by a chair who has not been able to properly vote as a proxy for the members of a company in the annual general meeting. Where the directors do not act properly they cause financial as well as loss of reputation of the organization. The breach of the duty not only affects the directors but also the organizations directly in situations where they have indulged in insolvent trading, breach of financial reporting obligations or disclosures obligations in relation to the company. Another duty is that of the duty of good faith honesty and proper purpose of the organization. The duty is provided via the provisions of section 181 of the legislation. This duty does not pose much risk to the organization but to its directors and officers. There are three separate elements in relation to this duty which are good faith, proper purpose, and best interest.  Even if the actions taken by the directors is in the best interest of the company it would not comply with the provisions of this legislation in case the actions are no for a proper purpose of the organization. The best interest of the organization may also vary according to the circumstances in which the organization is in as discussed through the case of Hutton v West Cork Railway Co (1883) 23 Ch D 654. The best interest of the organization would be considered as the best interest of its shareholders as a while in circumstances where the company is solvent within the meaning of section 92A of the legislation. On the other had if the organization is not solvent that the courts would state that the best interest of the organization is the best interest of its creditors.  Proper purpose is any purpose which is set out by the constitution but not a purpose in which the directors and officers prevent takeovers or restrict voting rights of the shareholders of the company (Scarborough 2015). 

There are various implication of the risk identified above on the managers and the officers of the organizations and the organizations as well. The main reasons for which the organization indulges into such risks via their managers and directors is that of making money in an unethical manner. Another reason which may be cited in relation to such risks is the failure of the managers to be aware of the circumstances in which they may invoke the above discussed provisions (Bowie 2017). For instance the provisions of section 180(1) of the legislation asks the directors to involve in informed decision making where they are allowed to reasonably rely on the advice of a third party. However even in this case they have actually relied on the advice of a third party to take the decision they may be liable for the breach of the section where they have not taken steps which a reasonable director in their position would take for the purpose of verifying the advice which have been provided to them. There are various implications of the breach of the legislation. The breach may be related to a civil or criminal penalty provision. A civil penalty provision can be invoked by the ASIC in relation to the breach of the above discussed provisions by the corporation or its directors under the rules provided in section 1317E of the Legislation (Kraakman and Hansmann 2017). The civil penalty includes orders of pecuniary penalties for the organization and/or the directors as well as compensation orders whereby the directors or the organization is asked to compensate those who have been affected due to their actions. On the other hand provisions in relation to criminal penalties can be invoked by the ASIC against the directors in from of a strict or absolute liability under the provisions of the Criminal Code. The implication of the civil penalties in the organization is that they have to pay a significant penalty in form of pecuniary penalties which may affect is capital as well subsequently its trading and financial stability.

There are various strategies in place which can be deployed for the purpose of avoiding the legal risks identified above. These strategies are depicted through the corporate governance principles provided by the ASX. There are seven principles of the directors of an organization adopt they would be able to comprehensively comply with the provisions of the legislation and thereby minimizing the risk identified above (Melvin 2014). In the latest edition of its corporate governance principles, the ASX have provided eight principles for the proper governance of an organization. According to the first principle a solid foundation and oversight of the management is asked for. The second principle asks for structuring the board effectively. Through this principal the ASX signifies that the board of an organization has to be an adequate mixture of the independent directors and executive directors. This is because those directors who do not have any interest in relation to the organization and are also known as the independent can carry out supervisory roles in relation to the organization in a affective manner. As these directors lack time and expertise the executive directors can handle the areas in relation to business decision making.  The third and one of the most influential principle provided by the ASX asks the directors to function ethically and responsibly. Where the directors would be acting ethically and responsibly in relation to the organization they would be able to eradicate one of the primary reasons why the above mentioned risk is cased which is that of fraud and dishonesty. The forth principle asks the directors to Safeguard integrity in corporate reporting. By being responsible towards corporate reporting they will be able to meet the requirements of the provisions like section 728 and 674 of the Act along with other requirements like financial reporting and providing correct financial statements. Making timely and balanced disclosure as asked by the fifth principle of the ASX recommendations will also help the directors to avoid the above discussed risks. Other principles like respecting the rights of security holders, Recognising and managing risk and remunerating fairly and responsibly will also help the directors to avoid the risk related to the breach of the legalisation (Michalos 2017).

1. The first and foremost recommendation which the paper makes to organizations is to adopt the corporate governance principles provided by the ASX. Adopting these principles into the organization would ensure that the directors are able to comply with the provisions of the legislation which would subsequently lead to the compliance by the organizations as well.
2. The second recommendation which the paper makes to the managers is to keep them informed about the existing legal provisions and the way in which they have been interpreted by the courts. One of the ways in which this can be done is that the organization may subscribe with The ASIC or the ACCC for regular updates.

Conclusions

Concluding the paper it can be stated that the Corporation Act has significant impact of the functioning of an organization. The provisions of the legislation not only pose a legal risk to the organization but also to the mangers in their personal capacity. These risks are primarily caused due to the unethical intentions and actions of the managers who have the duty to carry out the functions of the organization as well as lack of knowledge in relation to the existing laws and their interpretation. These risks case a serious threat to the financial stability of the organizations. However the directors and managers of such organization have the option of minimizing such risks by informing themselves about the existing laws and adopting the corporate governance framework provided by the ASX.

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