Corporation Shareholders Companies

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The concept of an independent corporation, governed and managed by directors who are accountable to shareholders, was a perfect one. It has enabled ordinary people to raise money from the public and invest that amount without bearing the danger of personal risk. It also led to the starting of entrepreneurial activity which could not have been possible otherwise. Moreover, this concept propelled the growth of economic activities at a significant pace in various parts of the world. However, the development of this concept was based on conditions which require the corporation as well as the directors to obey certain fundamental rules.

In previous years, the directors believed that they could depend on their companies as they had limited liability and a separate legal existence (Pandey, 2007). However, the liability of directors and officers has increased in a significant manner over the past few decades. Accordingly, the current legislations and court verdicts have demonstrated an increasing exposure to personal actions against directors. In general, directors have a personal liability to any party that has an interest in the affairs of the company. These parties can include shareholders, potential shareholders, creditors, investors, employees, customers, suppliers, liquidators, regulators, the government and competitors.

The explanations for the strategies of company law and policy in Australia can be studied by monitoring the events over the last decade. In fact, the incidents that took place in this period easily explain the pressure created upon parliaments and courts to sanction stringent rules for the maintenance of professional integrity in corporations.

It has been observed that all legislations of Australia imposing liability on specific office-holders include directors in the given definition. Usually, directors can be liable irrespective of their involvement in the contravention, or their knowledge about the factors leading to it. However, in a large amount of cases, statutory defenses are available to directors like due diligence or reasonable steps defenses if they can prove that they have satisfied the applicable criteria for the defense.

The Federal structure of Australia's corporate law is not in accordance with the changing business practices worldwide and hence comprises of a number of weaknesses. In recent times, certain cases have also emphasized the need to make amendments in the existing company law for ensuring the fair and honest execution of corporate practices within the country. In fact, the paper discusses about the control of Australian law on corporations in the country and the need of judges or parliament to impose more liability on company directors & shareholders to keep a check on their activities.

Structure of Corporate Law

In Australia, the corporate law is state law, but has a number of features related to the federal structure. Subsequently, the corporate law serves as an act of every state in the country. The participation of shareholders in the companies in which they have invested takes place in accordance with the delegated authority model of corporate governance. Accordingly, the directors of the company have the responsibility for monitoring the management and administration of various processes. In Australia, the interests of company directors are mainly represented by the Australian Institute of Company Directors (AICD).

In fact, due to the existence of a cooperative scheme in the decade of the 1980s, the efforts made by the commonwealth parliament for regulating the companies faced a great deal of problems. At the same time, a report was published by the Senate Standing Committee on Constitutional & Legal Affairs on the role of Parliament in relation to national companies' scheme.

In this report, various problems related to the cooperative scheme were identified, such as the absence of uniform pattern of administration by the Commission of Corporate Affairs, duplication of functions by the National Companies & Securities Commission and State Corporate Affairs Commission. In fact, a need for more effective enforcement on a national basis was largely felt.

Regarding the Committee, the government needs to assume the entire responsibility for corporate regulation. This resulted in the implementation of the Corporations Act 1989 and the Australian Securities Commission Act 1989 (Ramsay, 2008). However, in the subsequent years, it was found that such kinds of acts and other laws framed by the administrators proved to be inadequate for controlling the wrong procedures adopted by the corporates.

Need for imposing Liability

As an affair of public policy, it is of prime significance that companies work in accordance with the legislative provisions of the country. The fundamental problem lies in making these companies comply with these legislations. In the absence of proper monitoring of directors, there is an increased threat of directors not fulfilling their responsibilities in an ethical and professional manner.

Accordingly, it is essential to impose a liability on the directors and managers of various corporations. The basic motive behind imposing a liability is to enable the directors for executing effective risk-management practices in order to ensure that the corporation complies with its obligations. In fact, the need for imposing any kind of liability has been ignored in the past, but the current business environment makes it indispensable.

Hence, it is widely believed that the Parliament or judges need to play a more responsible role for imposing liabilities on the directors and shareholders of the company for corporate wrongs. In fact, both the parliaments as well as the judges need to ensure that the companies manage their affairs with transparency, diligence, accountability and responsibility. Moreover, legislations involving policies and practices for enhancing the performance accountability and efficient management control by the board of directors are also required to be put into place (Controlling Corporate Wrongs: The Liability of Multinational Corporations, 2008).

In response to the situation, the Federal Parliament introduced a statutory standard of reasonable care and diligence. The Parliament can pass a referendum in order to make amendments for providing additional power to the authorities for regulating the corporates. At the same time, a referral of power can be made by the state governments to the national government in relation to the regulation of the companies. In fact, the judiciary (judges) can also play a major part in this process.

In addition, the system of regulation of power can be divided between the centre and the state. Under this system, the incorporation of companies will be regulated by the state governments and issues related to takeovers and raising of funds by the companies will be dealt by the national government. Such a system is already in existence in the United States of America.

The government as well as the parliament have the responsibility to regulate companies functioning or domiciled in their area of jurisdiction (Controlling Corporate Wrongs: The Liability of Multinational Corporations, 2008). Accordingly, the parliament should formulate and implement legislations and regulatory mechanisms. Simultaneously, proper monitoring and supervision should be done to ensure a control over the activities of the companies. The imposition of any kind of liability on the directors of a company serves as an incentive for working in accordance with the law and desist them from any kind of behaviour which can harm the company, its stakeholders, the environment and society as a whole.

The parliament should constitute a number of national policy committees for concentrating on issues related to law, accounting and finance, sustainability, taxation and economics. Similarly, certain task forces should be formed to deal with the matters associated with corporate governance. In order to impose liability on directors and shareholders for preventing any kind of corporate wrongs, a number of measures can be undertaken by both the parliaments as well as the judges.

  • The performance of the directors can be enhanced by concentrating on their educational and professional development (Personal liability of directors for corporate fault, 2005).

  • The interests and viewpoints of the directors should be appropriately represented before the government and legal bodies.

  • A proper code of professional and ethical conduct should be developed to keep a check on the fraudulent practices adopted by the directors of various companies.

  • The standards of vigilance and competence of directors with regard to effective, honest and diligent management should be reviewed on a regular basis.

  • The judicial system (judges) needs to ensure that proper punishment or penalties need to be imposed in cases where the involvement of directors in fraudulent practices is reported and subsequently established.

In fact, the major challenge for the judges is to develop a system for monitoring the procedures without reducing the capacity of the company and its managers to accomplish the corporate objectives. It is certain that the directors in Australian companies will have to work in a legal environment that is constantly undergoing reconsideration and changes in the near future.


It has been observed that adequate measures have not been taken by the parliament or the judges in relation to this issue. A prominent reason for this has been the lack of attention given to the importance of this issue and the implications related with it. However, with the constantly increasing influence of globalization and the entrance of multinational corporations in nearly all parts of the world, the situation definitely demands increased concern. Such an approach would surely prove to be of great significance in enhancing the efficiency of the corporations.

Thus, it can be believed that both the parliament and judges should show an increased intent to impose liability on company directors and shareholders for corporate wrongs. In fact, the parliament is expected to play a greater role in such situations as it is better equipped to impose liability. It has been observed that parliaments represent the spirit of the common man and thus have the liability to administer the manner in which public policy is executed.

This is essential in order to work for accomplishing the objectives of socio-economic growth, proficient administration and the desires of the people as a whole. In addition, the parliament has a greater involvement in framing the laws and regulations for controlling any kind of wrong practices in the companies. Hence, the parliament and the judges need to view their roles in a new perspective, especially with the constant changes in the business environment.