Corporate Group Structure Essay Example | Topics and Well Written Essays - 4000 words

Corporate Group Structure - Essay Example The existence of the limited liability principle further serves as a means whereby such parent companies may be able to legally escape the consequences of their risk taking and where there is additional scope provided for financial manipulation of accounts. The doctrine of limited liability allows a parent company's responsibility to be limited to its own liabilities and thereby increases the scope for risk taking and profit enhancing behavior, which are generally beneficial for the economy. In the wake of the corporate scandals, reforms have been introduced in most countries, with increased focus on corporate governance and accountability. There have also been further proposals to introduce a more comprehensive regime dealing with corporate liability, wherein parent corporations would also be held responsible for tortuous claims arising out of the actions of their subsidiaries. But such reforms have been opposed on the grounds that they would limit corporate flexibility and function as a deterrent to economic growth because they would hinder risk taking behavior. The analysis below examines the pros and cons of reducing the scope of limited liability and corporate flexibility. The limited liability basis of C... In this case, the Court held that a corporation has a separate and distinct legal personality apart from its owners and/or shareholders. Irrespective of the extent to which a shareholder has an interest in the Company, even if such an individual is the director in complete control of the Company's affairs, the acts and liabilities of the Company are held to be separate and not his/her acts or liabilities. The corporate body as an entity is impersonal and individuals may function in different capacities within an organization3, with their financial activities being shielded from the public eye, by virtue of the corporate veil. The corporation as a legal entity propagates itself and individuals associated with it are able to be exempted from liability for the debts of the Company. The limited liability aspect has been deemed beneficial for the improved efficiency of the securities markets.4 . Limited liability has been deemed to promote "innovation, investment and risk taking by the corporation."5 Limited liability is deemed to have a positive effect in terms of providing incentives for investment, diversification of portfolios and for the efficient operation of security markets. Corporate structure and limited liability: The significance of the Salomon case is that it established (a) a corporation as a separate legal entity and (b) the principle that the debts of a corporation are not the debts of its members, officers or directors. This decision establishing the independent legal personality of the corporation in relation to a single company that was rendered in the Salomon v Salomon6 case was extended to groups of companies by the decision rendered in the case of Adams v Cape Industries Plc7. Extension of