LAW CORPORATION

Law Corporation

Law Corporation

Introduction

According to the company act, every organization or an entity is obliged to have at least 1 director. A director is a person who jointly oversees the activities of the company or organization. According to the section 588G, a director is require to prevent the company from incurring debt if the company is already in the state of insolvency at the time the debt is incurred. A director can be of two types: one is an inside director who is also an employee of the organization and the second is an external director who is not an employee of the organization but is a major share holder of the company.

Discussion

Role of the director

The fundamental legal duties of directors are to work in good faith in the "well being of the company" and for a proper purpose; and to exercise care and skill. These are originated from common law and are common to all directors. The duties are owed to the company, meaning the shareholders collectively, both present and future, not the shareholders at a given point in time.

The main responsibility of the board of directors is to determine a broad strategy of the company and to ensure its implementation. To do this successfully requires "high quality" leadership. It also requires that the directors have sufficient freedom of action to exercise their leadership. The board can only fulfill its responsibilities if it meets regularly and reasonably often.

The directors must ensure that the company's activities are in compliance with law and does not perform any unethical or illegal work. A director is elected on the first share holder meeting of the company. A director should be fully aware of the company's policy and financial and should be working in according to it. The director should make sure that the company should not trade when it is insolvent. The director is obliged to exercise his complete powers and duties in the best interest of the company. According to the company law, it is unlawful for the director to gain advantage to himself or to someone else, keeping the company at stake (www.ecgi.org).

Duty to prevent insolvent trading

A company is declared insolvent if the company is unable to pay its debt. A director must prevent a company from trading while insolvent or incurring a debt which would make it insolvent. It is the prime responsibility of the director to ensure the financial status of the company and make sure that the company is in state of paying its debt (ASIC 2008, pp. 1-6). The company should stop its operation, if the next incurring debt may change the status of the company to insolvent.

There are three financial tests, for the company to identify itself in the zone of insolvency.

1)Balance sheet review- Here the directors should keep a thorough view on the liabilities and assets of the company in the company's balance sheet. The director should ensure that the assets of the company should be in excess to its ...