BULAW 5915 Corporate Law QuestionsAssessment Answer
Corporate governance is a set of rules, policies and practises which are suppose to be followed by an organisation. It is not legally bide by the law. It is a collection of practises and processes through which company’s objectives are set and operations are done to achieve them with best interest of its shareholders. It maintains positive relationship between the stakeholders of the company.
Corporate governance helps stakeholders to know the accountability of a company. It provides rights to the board of directors, management, shareholders and creates a sense of responsibility in the working of a company. It ensures that the stakeholders have faith in the operations of the company.
Corporate governance include the following responsibilities-
- Equitable and rightful treatment of shareholders
- Transparency and disclosure of company’s financial statements to stakeholders
- Ethical behaviour and integrity in the working of an organisation
- Protecting interest of stakeholders
- Responsibilities of board of directors
- Role and responsibilities of management
Corporate governance is not a legal term as it is not enforced by law, but it is a responsibility of an organisation, which must be fulfilled for the following reasons-
- Reliability on firm
- Sense of trust and faith in the operations of the firm
- More access to the capital market
- Decrease in the cost of capital
All the above points should be followed by the company to protect its shareholders from fraud, false and illegal practises, secret profits and corruption.
Out of various advantages of corporate governance, the most favourable advantage is that it leads to the increased capital market share and helps in decreasing cost of capital. Various studies shows that corporate governance leads to the decreased cost of equity, due to the strong legal system ,extensive disclosure of company’s practises, good governance etc.
Studies also show that the companies with less disclosure and transparency and less support from stakeholders rely on debt capital and less capital market share. Poor corporate governance leads the company to less equity and more debt structure of capital. Examples of poor corporate governance are-
- Support to illegal activities
- Poor disclosure of company’s financial statement with the auditors
- Poorly structure board of directors and no proper board meetings
- Ethical violations in the operations of the company
- Stakeholders having accountability and reliability issues
- Avoiding interest of stakeholders
These are some of the examples of poor corporate governance.
a. Meaning of Limitation of liability
Limitation of liability is a clause added by a company to limit the right of a party in the event of a lawsuit filed against the company. It limits the liability of a company and reduces the potential damage that it may suffer in case a legal action taken by a party against the company.
The limitation of liability limits the amount to be paid by one party to another in case of a loss. The contract is signed with the agreement of both parties. Limitation of liability helps in balancing the risk between the parties involved in signing a contract. Both the parties can limit their responsibilities towards the other party by adopting a number of ways. To limit the financial responsibility a certain amount is fixed, which is paid in case of loss.
There are various limitations in limitation of liability clause. It does not include the accident or death caused due to the negligence of a party. Some of the countries have restricted the right to limitation of liability. It is important to know the scope of this clause.
Scope of Limitation of liability
- Limitation of liability never limit the liability in case of vandalism or damage occurred due to the negligence of one party
- Limitation of liability does not include the liability in occurrence of harm, injury or death to any one of the party due to the other party.
- In case of any unusual activity, which leads to the consequential loss, the clause of limitation of liability does not apply. The indirect losses are not covered under the clause of limitation of liability
- Limitation of liability is only applied where the parties are bind by law. Clause must be in a properly agreed contract.
Two situations where limitation of liability can be ignored
In case of death or any harm occurred to one party due to the ignorance of another party, the limitation of liability can be ignored. Here, the party is free from its liabilities.
Limitation of liability can be ignored in case of misrepresentation of data. Also in case of non performance of duties mentioned in contract leads to the breach of contract and then limitation of liability can be ignored.
b. Advice to Anakin and Daala
In the given case, Anakin and Daala should ask Leia to bring evidence for the allegations charged by her. Also, they do not have any right to ask Liea to sell her shares. They should ask the shareholders for the formation of a prescribed constitution.
Advice to Liea- Liea should produce evidence for the allegations she is making: Liea should not sell her shares as the other shareholders have no right to ask her to sell them. Liea should look for evidences to support her claim against Anakin and Daala. Also, she should prepare and get signed a contract with all the shareholders who include the consequences in case a member is negligible or illegal towards his/her duties and responsibilities.
Beverley, Cindy and Dixie are in breach of their insolvent trading duties as they have not made payment to their creditors and have no any other option but to declare them insolvent. Here Annie is not in the breach of her duties as she had resigned from the board of director’s post before the deal was signed.
The consequences of breach of trading duties- The consequence that may arise for Cindy, Dixie and Beverly is that their creditors may file a case against them. One of the creditors is already threatening them. Also in this case they may be forced to shut down the firm. The two sisters and their mother may have to make payments to the creditors from their private property.
What can Beverley, Cindy and Dixie do- Beverly, Cindy and Dixie can take pay their creditors from their private property. They can fire Sam for not disclosing the financial facts of the firm to its board of directors. They can ask Sam to pay a particular percentage of the losses suffered. They can also file a complaint against Sam, and make him responsible for the losses. Beverley, Cindy and Dixie can also declare themselves bankrupt.
a. Advising Carlos and possum that Krazy Kars is not bound by the contract-
In the given case, Krazy Kars constitution states that any deal that is below the amount of $100,000 will be handled by Michele. Therefore, the contract that Michele has signed with MRC ltd will be legally bide only if the cost of manufacturing cars (plus 10% of the cost) does not exceeds this limit.
Here, I would ask Carlos and possum to ask their accountant to calculate the cost of manufacturing of 200 cars (plus 10% of the cost). In case the amount exceeds the limit then Carlos and possum can sign a lawsuit against Michele that he signed a contract which was not approved by the majority of directors.
If the manufacturing cost amount of 200 cars adding after 10% profit is less than $100,000, then Carlos and Michele will be liable towards the contract signed between Michele with Sebastian.
Michele was asked to bring new ideas from Australia trip, but he signed a contract with MRC cars. If the above said agreement was written on papers with signature then Carlos and possum can file a lawsuit against ,Michele as he was not suppose to sign any deal. In case, it was not under a written contract, they cannot force it on Michele as it is not legally bide. They can ask Michele to reimburse the loss from this deal as he violated the agreement made between the three directors, but they cannot enforce it on Michele.
b. Advising Sebastian that Krazy Kars is bound by the contract-
Sebastian signed a deal with Michele, the managing director of Krazy Kars. According to the deal, MRC pvt ltd will be provided with 200 manufactured cars from Krazy Kars in the next financial year. The cost will be including 10% profit. As the deal was signed fair and square between the managers of two company on papers, there is no doubt that the contract is not bide and enforceable by law. In case Michele ask to null the contract, MRC pvt ltd can file a lawsuit against the company as the company has signed a contract with the managing director and the company is responsible for the acts of an individual managing director. MRC pvt ltd can enforce the contract by law.
Also, there is an option of revising the contract signed between the companies, if both the parties agree to negotiate terms and conditions again.