Discuss about the Management Structure In The Modern Corporation.
Company is the separate legal entity and has its legal existence in the eyes of law. Company is artificial person that is incorporated by its members and has separate legal entity. In this case, Company has been filling case against George who was the ex-employee of company due to his breach of legal act. This case shows the terms and condition of the employment contract and separate legal entity law which one company should understand before filling a case against individual employees.
- Whether there has been breach of contract of employment between the Formula Factors and George?
- What are the legal actions taken by Factor Company against George?
In such case law the issue has arisen between the Formula Factors and George is the matter of breach of contract of employment. George has contract with its company that he will not compete directly to the business of company after his termination. After termination from the Formula Factors, George has incorporated a company with his son which has direct competition with the business of Formula factors directly. However George does not have any position of director or member in such company but everyone treat him as their boss in such company as he deals with the all working of company. Here in the report we will discuss the significant issue that whether the Formula Factors can be held the George liable for his action or not Hannigan, 2018).In this case the law of separate corporate personality and breach of contract of employment both has their significant effect. The law of separate corporate personality says that the legal existence of an organization is different from its directors and members. It has its own contractual capacity. It can sue others or can be sued by others for any default. This concept of separate corporate personality is also known as veil of corporate which provides protection to its directors and members from direct adverse results of company’s actions. However in some cases, judiciary made efforts to make piercing in such corporate veil and avoids the separateness of company from its members (Stephens, 2017).
It is also called as lifting of corporate veil. There are many cases in which the shareholders and directors held liable for the actions of company. The law also mentioned that the concept of separate corporate personality may be altered or may be cast aside by the statue for imposing liability on human constituent of the company (Kraakman, 2017).
For properly understand the concept we can take an illustration of company which has taken loan from any bank for running its business. Although the loan has taken on the name of company but in case of any default or failure of repayment, the bank will held liable the authorized person for the same. Here the concept of separateness disregarded (Velasco, 2017).
Law
Salomon v A Salomon and Co Ltd (1897) AC 22 is the landmark case law regarding the concept of lifting of corporate veil. Salomon was a boot making company and on its liquidation some of the unsecured creditors claimed their debts. Liquidator held the Salomon personally liable for the payment of debts of unsecured creditors by stating the fact that Salomon had incorporated the company in contrary to the true intent of companies act. For taking the benefits of concept of separate corporate personality, he had incorporated the company under the companies act (Deakin, et al. 2017)
The Court of appeal has disregarded the concept of separateness and declared the company in default and held liable the members of company to pay the debts to the extent of their capital contributions (Murray, 2014). The court will take its decision on the fact that company is separate legal entity and the entire working person will be treated separate from the company.
In the case of Lee v. Lee's Air Farming Ltd. [1960] 3 All ER 420 In 1954, it was held that Mr. Lee’s accountants created a company in which he was a principle shareholder and director. The company performed the work of aerial top dressing for the farmers. Mr. Lee died in an accident and his wife claimed insurance amount under workers insurance policy but the insurer denied from paying the insurance amount by stating that Mr. Lee cannot be an employee because he was a director in company (Kraakman, 2017).
On such matter the Privy Council has declared that company can appoint any member in service including principle shareholder i.e. a person acting in one capacity can make a contract himself in another capacity. As the company has separate legal entity the contract made with the company has its own existence and it does not affect the contract with any other party (Van Zyl, andSmite, 2016).
In another case, Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415 it was held that lifting of veil is possible only in two situations such as concealments principle and evasion principle. This case has shown that Factor Company will be failed to file case against George due to the lack of evidence.
After assessing all the cases and given details on the different case laws, it was found that company cannot file case agents George as he was nowhere legally indulged in the business. There is no proof that he is working as competitor against Company. Nonetheless, he is using the loophole of company. If in case, company is able to find any legal proof against the fact that George is the real person who takes all the imperative decisions of the newly incorporated company then only he could be liable and punished for his intentional wrong doing. In the given case law George is liable to the breach of contract of his employment contract with Formula Factors. He had a contract with Formula Factors to not to run a business but after the termination from his job he has started a company with his son by considering the fact that the company is a separate legal person so that he can obtain the benefits of the veil of corporate concept (Eisenberg, 2017). Also George does not take any managerial involvement in such company apart from the handling of functioning of company. All in all he has a full control over the functioning of company and giving competition to the business of Formula Factors indirectly through the company of his son. In that case he is enjoying the benefit of the concept of separateness of legal entity of a company. On the other hand the Formula Factors has their claim that George went against to the contract and has started his own business entity with the name of his son to compete the business of Formula Factors. In the above mentioned situation Court may be held liable the George for destroying the true intent of the concept of separateness. Also the Court can release the George from all the obligations and litigations imposed on him by Formula Factors as its discretion by stating the fact that he only promised to not to run business himself. Here the business is running by his son and he has no interest in the company. George can escape his default by stating the no interest factor in the company (Chen, Li, andZou, 2016). Therefore, it could be inferred that Factor Company will be failed to take any legal action against George due to the lack of the available evidence.
Conclusion:
Conclusively it can be stated that George cannot be held liable for the breach of contract as per the law of separate legal personality. Although he has commenced the business with the intention to compete the business of Formula Factors but he does not made any act in conflict of law and taking advantage from the loopholes of the rules. For that reason, the Court at its discretion can disregard the concept of separateness and make him liable for the breach of contract of employment. Hence the concept of veil of corporate and lifting of corporate veil both provide significant benefits and consequences to parties related to companies. Any one taking the advantages of concepts in wrong intent shall be deemed in default of conflict of law. This could be inferred that George will not be liable in this case. However, if the same is proofed by the company then it could be inferred that Factor Company first should collect the evidence that George is the Active owener of that newly incorporated company then only it could fill the legal case against George. Till then, Factors Company will be failed to fill any legal case against George.
References
(Hannigan, B. (2018). Company law. Oxford University Press, USA.
Chen, Z., Li, O. Z., and Zou, H. (2016).Directors? and officers? liability insurance and the cost of equity. Journal of Accounting and Economics, 61(1), 100-120
Deakin, S., Gindis, D., Hodgson, G. M., Huang, K., andPistor, K. (2017). Legal institutionalism: Capitalism and the constitutive role of law. Journal of Comparative Economics, 45(1), 188-200.
Eisenberg, M. A. (2017). Legal models of management structure in the modern corporation: Officers, directors, and accountants. In Corporate Governance (pp. 103-167). Gower.
Kraakman, R. (2017). The anatomy of corporate law: A comparative and functional approach. Oxford University Press.
Lee v. Lee's Air Farming Ltd. [1960] 3 All ER 420 In 1954
Murray, J. (2014). Social Enterprise Innovation: Delaware's Public Benefit Corporation Law. Harv. Bus. L. Rev., 4, 345.
Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415
Salomon v A Salomon and Co Ltd (1897) AC 22
Schulman, S. H., Moscow, C., and Lesser, M. R. (2017). Michigan Corporation Law and Practice.Wolters Kluwer.
Stephens, B. (2017). The amorality of profit: transnational corporations and human rights. In Human rights and corporations (pp. 21-66).Routledge.
Van Zyl, G., and Smit, M. (2016). Delinquent directors: company law. Without Prejudice, 16(8), 19-22.
Velasco, J. (2017). EMPOWERING COURTS IN CORPORATE LAW: Remarks to the Journal of Corporation Law, Spring 2016. Journal of Corporation Law, 42(3), 767.
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