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Assignment 1 - Written Mini-research Essay
Part A
Salomon v Salomon & Co Ltd [1897] AC 22 recognised the legal principle that a company is a separate legal entity.
REQUIRED
Discuss Salomon v Salomon & Co Ltd [1897] AC 22 case and the meaning of the legal principle “Separate Legal Entity (7.5 marks)
Consider how the legal principle “Separate Legal Entity” impacts on outsiders dealing with the company. Consider what steps outsiders should take prior to engaging with an unrelated company. (7.5 marks)
Part B
Companies in Australia are regulated by several organisations and regulators. These regulators impact on day-to-day operations of companies.
REQUIRED
Consider two regulating bodies and expand on their role in the regulation of companies. (7.5 marks)
Discuss the role of accounting standards in assisting with the regulation of companies in Australia. 7.5 marks)
Important: Answers must refer to cases, legislation, accounting standards, articles or law reports.
Answer:-
Part A
Salomon v Salomon & Co Ltd [1897] AC 22 case and true meaning of the legal principle “Separate Legal Entity”:
Salomon converted his boot-making enterprise, which had previously been managed as a single sole proprietorship, to a legal company named Salomon Ltd., which was created with members consisting of oneself including his family members. The cost for this transfer was made to Salomon here in the form of equities and debt instruments with floating charges (secured debt) on the corporation's assets. Once the corporation's operations failed as well as it was dissolved, Salomon's rights of recoveries (secured by floating charges) against the debt securities took precedence over unsecured creditors' claims, who'd have received nothing from such liquidation proceeds (Puig, 2000).
The liquidator intended to ignore Salomon Ltd.'s distinctive existence, distinctive from corporate member Salomon, and in order to hold Salomon individually responsible for the corporation's debts as though he proceeded to operate the firm as a single sole trader. Here, in this case, the main issue is whether, despite a corporation's independent legal existence, shareholders/controllers can be considered accountable for its debts in excess of capital fund contribution, exposing such individuals to endless personal liability...
The ruling in said case circumstances was that a business is a distinctive/separate legal entity distinctive from corporate members, thereby shielding Mr. Salomon, owner of corporation A. Salomon and Company Limited, from individual accountability to business creditors of he founded. The tribunal also strongly maintained the theory of corporation identity, as laid forth in Companies Act, such that lenders of any insolvent business could not sue the corporation's shareholders to recoup outstanding debt obligations (Roness, 2017).
Separate Legal Entity:
Legal entity theory asserts states that each business in a corporation unit is considered as a distinctive legal entity distinguishable from other corporations within a group, as well as thus has legal rights. This is affirmed in the decision of Salomon-v/s-Salomon by Court of Law.The idea is beneficial to the corporation entity however has significant negative consequences for the stakeholders involved. Limited liability further means that stockholders are not individually responsible for the liabilities of their corporation. Applying lawsuits, the concepts of limited liability as well as the distinct legal entity being tested against the framework of a corporation. In the case of Salomon vs. Salomon, the court confirmed the legislative legal doctrine that, following registration, every company is ordinarily deemed to be a seprate and distinct legal entity separate from its all shareholders. The core premise of Corporation Act is embodied in sec. 119, which stipulates that every company constitutes the corporate body corporation as it is incorporated. Additionally, s124 stipulates that at the point of formation, a business enjoys the legal competence and rights of an entity as well as all relevant powers of corporate body (Adriano, 2015).
The legal principle "Separate Legal Entity" impacts on outsiders dealing with the company:
This doctrine permits each business as a corporate unit to be recognized as a distinctive lawful entity from its other companies in group. It has serious ramifications in tort situations because tort creditors/lenders of a group business might only pursue their legal rights against debtor corporations. To this degree, the debtor corporation's owners are not responsible for the corporation's debt obligations beyond its initial capital contribution (Belinfanti and Stout, 2017).
As a result, the doctrine of a distinct legal entity does have a negative impact, particularly on outsiders like creditors who face an unwanted and uncompensated burden. Because the corporation can transfer assets across businesses inside the group, this enables the group to avoid liabilities from creditors, owing to the concept that creditors can just look at assets of debtor corporation itself.
The rigid execution of the distinct legal entity rule in the case of a company group might be seen as a rigorous interpretation of Salomon's own since it prohibited sufficient justification in respect of rule as well as policy. However, the principle's numerous levels of protection should be reconciled with business realities, wherein the regulation recognizes a collection of businesses to be considered as a unified body.
At the same moment, courts have noted that a corporation's corporate veil might be shattered in order to deprive shareholders of the safeguard that the concept of a distinct legal entity typically offers. Piercing corporate veil alludes to a lawfully enforced exception to distinct legal entity concept in which courts overlook the corporation's distinctiveness and consider a shareholder accountable for the company's conduct as if they were shareholder's individual. It should be emphasized that there have been common laws and legislative exceptions to lifting veil in regard to torts made by a corporate business (Waqas and Rehman, 2016).
The primary exceptions are circumstances whereby an agency exists among subsidiary as well as parent corporations. In the case of subsidiary acting as agent, the simplified exercising of supervision over the subsidiaries by parent corporation is inadequate. An agency connection has arisen in the Smith, Stone & Knight Limited versus Birmingham Corporation, wherein a parent firm had the power to exert total dominion as well as supervision over subsidiary and having in fact exerted that authority. The corporate reality, at the other side, demonstrates that each holding corporation has the capability to exert total authority over subsidiary. Corporate veil should've been penetrated in both the Industrial Equity Limited v Blackburn as well as Walker versus Wimborne if the controlling test had served (Shashkova, 2016).
Despite the fact that the ruling in Salomon's suit had certain negative consequences over the period. Since it established the foundation for the establishment of contemporary capitalist society within the corporate veil shelter, however, it is equally evident that this is being countered periodically by a collaborative effort of legislators and judicial. Therefore, precedents aided in establishing the essential requirements for the formation and operations of Corporation.
Therefore, the corporate veil serves as a safeguard for people who are working for a corporation with good-faith. In reality, the recognition of an Incorporated as a distinct legal entity renders it accountable for the activities performed by its employees, and that this veil prevents the individual from being individually liable for actions performed in favor of the business in the competence of his status in a corporation.
Part B
Two regulating bodies and their role in the regulation of companies.
A regulatory body, usually described as a regulatory entity, is a governmental body or any public entity accountable for exerting independent power over some aspect of a company's acts in a regulatory and monitoring role (Sivathaasan, 2016). This is formed by legislation in an attempt to develop norms in a certain arena of business, or activities, in private sectors of the economy as well as subsequently to put those norms into effect. Regulatory interventions take place beyond the purview of the administration.
Because the rules and regs they embrace have the legal authority, portion of their feature is primarily legislative; however, since they could as well undertake hearings and transmit judgments regarding compliance to their legislation, they as well exercise a jurisdictional role, which is often conducted before such a quasi-judicial authority known as administrative law judiciary, who isn't even a member of judicial process. In this sense, the below are the two primary regulatory bodies that govern corporations in Australia, as well as their important roles:
ACCC:
Australian Competition-and-Consumers Commission or ACCC, founded in year 1995, is an independent statutory authoritative figure of the Australian Federal Government tasked with imposing the Competition and Consumers Act, 2010 as well as a variety of other regulations, encouraging competition, market integrity, and regulating nationwide architecture. ACCC is led by Chair, 2 Deputy Chairs, as well as 4 Commissioners and therefore is headquartered in Canberra (Smullen and Clutton, 2021).
ACCC has role of increasing Australia's welfare by promoting competitiveness as well as fair dealing within companies in the Australian market, as well as consumer safety. ACCC has a role of regulating companies and people to assure that the CCA is followed. This also has the authority to supervise foreign corporations doing business or engaged in operations in Australia.
ACCC has considerable authority to issue judgments or pursue legal actions in consumer safety as well as anti-competitive behavior cases. This has the authority to determine whether purchases of stocks or resources may entail in decreased competition within the marketplace, in violation of CCA. State / local consumer affairs authorities are also in charge of enforcing fair dealing and buyer protection laws.
The ACCC's functions as a competitive, consumer and government entity are exercised in an open and responsible way. The foundation of ACCC, the selection of Commissioners as well as personnel, corporation planning, adequate standards for investigation methods, and public disclosure of judgments and results are all part of its commitment to responsibility. It has accountability commitment is backed by administration and leadership frameworks, as well as corporate and government-wide procedures and practices.
ASIC:
The Australian Securities-Investments Commission or ASIC is the corporation, markets, and finance-related services regulatory authority in Australia. The body assists Australia's economic credibility and well-being through assuring that the country's financial marketplaces are ethical and open, with investors as well as consumers who are confident. This is an organization of the Commonwealth Administration that is autonomous of the Commonwealth Government. The Australian Securities-Investments Commission was established in the year 1991 as well as is based in Sydney (Kavame Eroglu and Powell, 2020).
As the company regulator, ASIC's mission is to:
Facilitating and strengthen the operation of the commercial and corporate sectors, as well as their stakeholders
Establish financial-services providers and issue Australian finance-related services and credit licensing
Encourage entrepreneurs' and consumer' trust and informed engagement in the corporate sectors
Efficiently as well as properly manage the legislation (across which ASIC exercises governance), namely adopting the appropriate measures to examine and provide effect to such regulations, and
As quickly as possible, acquire and evaluate information, as well as render information on corporations and other organizations publicly accessible. ASIC manages a variety of business registries to aid in this procedure.
By Australian financial services license framework, the ASIC provides financial licenses as well as monitors firms that offer financial products to assure that they function effectively, openly, and effectively.
Therefore, ASIC is in role of assuring that corporate, as well as finance-related services regulations, are followed to the advantage of customers, investors, stockholders, and lenders.
Roles of accounting standards in assisting with the regulation of companies in Australia:
One of the most significant roles of different accounting standards for companies in Australia is to provide a degree of uniformity in the marketplace that is unmatched. This is owing to the truth that all publicly trading corporations that are dependent on investors are typically required to follow an identical set of standards. For example, while compiling financial accounts, all companies in Australia must follow accounting standards. As a result, investors would be enabled to assess the corporation's performance simply contrasting this to a broader range of accounting standards (Preiato, Brown and Tarca, 2015).
Even those who verify that all business financial statements are proper must follow a series of requirements unique to their position. In other terms, auditing personnel must adhere to accounting standards, which comprise a plethora of regulations governing appropriate reporting processes. Among the most significant is that auditors must be unbiased of the corporation being audited. Analyses the option to see why that's crucial. If auditing were not unbiased, top management could easily employ relatives with the necessary qualifications to provide clean findings as required (Cohen, Karatzimas, and Venieris, 2015).
All ASs addresses the issue of fair reporting, which must be satisfied through credible estimations as well as judgment-call values. Although the simple usage of the term "reasonable" typically leaves opportunity for diverse interpretations, regulating bodies prefer to keep a careful eye on subjective analyses. These include inventory appraisal methodologies and documentation procedures that might provide the firm with a competitive edge. For example, a firm may value its inventories at an exceptionally minimal value in order to reduce its actual cost of sales account. As a result, net profit will increase. Consequently, accounting standards prohibit such misrepresentation.
Accounting standards offer accountants with daily guidance to support the smooth running of the corporation. An accountant's obligation is to offer financial information/data which is pertinent, trustworthy, unbiased, and comparative - all of which may be accomplished by adhering to relevant accounting standards. Having the capacity to conform to ASs instills trust in the industry. The firm is perceived as trustworthy, which benefits the corporation's financial scenario (Francis, Huang, and Khurana, 2016).
References
Books and Journals:
Adriano, E.A.Q., 2015. The natural person, legal entity or juridical person and juridical personality. Penn St. JL & Int'l Aff., 4, p.363.
Belinfanti, T. and Stout, L., 2017. Contested visions: The value of systems theory for corporate law. U. Pa. L. Rev., 166, p.579.
Cohen, S., Karatzimas, S. and Venieris, G., 2015. The informative role of accounting standards in privatising state–owned property: comparing Greek Governmental Accounting Standards and IPSAS. Global Business and Economics Review, 17(1), pp.51-62.
Francis, J.R., Huang, S.X. and Khurana, I.K., 2016. The role of similar accounting standards in cross‐border mergers and acquisitions. Contemporary Accounting Research, 33(3), pp.1298-1330.
Kavame Eroglu, Z.G. and Powell, K.E., 2020. Role and Effectiveness of ASIC Compared with the SEC: Shedding Light on Regulation and Enforcement in the United States and Australia.
Preiato, J., Brown, P. and Tarca, A., 2015. A comparison of between‐country measures of legal setting and enforcement of accounting standards. Journal of Business Finance & Accounting, 42(1-2), pp.1-50.
Puig, G.V., 2000. A two-edged sword: Salomon and the separate legal entity doctrine. eLaw Journal: Murdoch University Electronic Journal of Law, 7(3), pp.1-9.
Roness, P.G., 2017. Types of state organizations: Arguments, doctrines and changes beyond new public management. In Transcending new public management (pp. 77-100). Routledge.
Shashkova, A.V., 2016. Emergence of corporation as independent legal entities (analysis of the case of Salomon v. Salomon and Co. Ltd). Law and Politics, (6), pp.799-805.
Sivathaasan, N., 2016. Corporate governance and leverage in Australia: A pitch. Journal of Accounting and Management Information Systems, 15(4), pp.819-825.
Smullen, A. and Clutton, C., 2021. The ACCC: Guardian of viable markets and consumer rights. Guardians of Public Value, p.323.
Waqas, M. and Rehman, Z., 2016. Separate Legal Entity of Corporation: The Corporate Veil. International Journal of Social Sciences and Management, 3(1), pp.1-4.
