Company Law

I INTRODUCTION

Company Law, the law relating to commercial institutions and their regulation and operation. The cornerstone of company law is the limited company, an institution that allows trade and commerce to flourish.

II LIMITED COMPANIES

Until the 19th century, a group of people engaging in trade could only be a partnership. There were exceptions in the form of companies chartered by Royal Charter or by an act of Parliament, but these were rare. Trading in a partnership means that each partner is liable for all of the debts of the partnership. This situation deterred many people from becoming involved in a trade because the risk of being broken by the collapse of a business was so great. The commercial life of the country was therefore deprived of much-needed investment.

The solution was the invention of the limited company. Members of a limited company subscribe capital for its formation, but once it is legally formed and registered, they are not at risk of becoming liable for any other payments. The company acts as a legal individual of its own, and, therefore, any debts it has are not passed on to anyone else. Many lenders circumvent this risk by demanding that loans or credit extended to small companies are also secured by the personal guarantee of the company’s members.

In the 1980s a distinction was drawn in the United Kingdom between a limited company, which may vary in size, and a public limited company (plc), which is always of great size. Shares in public limited companies are traded on the stock exchange, whereas most limited company shares are only bought and sold by private agreement.

Similar regimes exist throughout the world. A limited company has its equivalents, such as the incorporated company in the United States or the “party” in Australia. It is usually a legal requirement that the appropriate title or abbreviation (for example, “Ltd”, “Inc.”, or “Pty”) is included in the company name so that people know the type of entity with which they are dealing.

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III REGULATION OF COMPANIES

Companies in the United Kingdom are closely regulated by law. A record is kept by the registrar of companies of every company, each of which must report its registered address and the names of its directors. A company can only engage in those activities that are specified in its articles of association (formal constitution); however, these are usually widely drawn to permit a range of trading activities. A company must deliver annual reports of its trading activities; unless the company is dormant or active only on the smallest scale, these must be professionally audited (checked for their correctness).

The company secretary is primarily responsible for supplying this information. Directors of companies have a number of duties involved with the reporting of this information, though most of their duties are to the shareholders in a company. The Board of Trade has wide powers to investigate companies, and may seek through the courts to have a person disqualified from holding the office of director in any company. The courts themselves possess this power when a person is convicted on certain criminal charges. In either case, disqualification is usually applied when the person has been involved in some way in some sort of fraudulent trading, most commonly by allowing the company to continue trading when it is clear that it will not be able to pay its debts.

Directors are almost always given the power to conduct day-to-day management of the company. In all but the smallest companies, there will be general meetings of shareholders, at least annually. Their main influence lies in the power they have to remove and appoint directors. For most companies of any size, the most important shareholders today are institutions with large sums to invest, such as pension funds.

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IV INSOLVENCY

Companies are insolvent when they are unable to pay their debts as they fall due, or when their liabilities exceed their assets. A creditor (someone owed money by the company) may then petition for the winding-up of the company, and the company then goes into liquidation. All its assets—property, goods, and whatever it is owed by others—are then gathered in by the liquidator and used to pay the creditors. In practice, some creditors will have security over certain particular assets of the company, and taxing bodies such as the Inland Revenue have priority in recovering the debts owed to them. Unsecured creditors often only receive a small proportion, or nothing, of what is owed to them.

An innovation has been the concept of administrative receivership, or, in the United States, Chapter 11 bankruptcy. A creditor in a powerful enough position has long been able to appoint a receiver, who will attempt to save a technically insolvent company by keeping it going. The new provisions allow such a person to be appointed by the court so that the company can be kept going in the hope of saving the jobs of its workers and eventually earning enough to repay all its creditors in full.


Contributed By:
David Watson