Basic principles of company law-
The separate personality of a company-
It has a separate legal personality. A company continues to exist even if its shareholders and/or
directors change.
Directors, owe their duties to the company, not to the shareholders.
Shareholders usually have rights against the company, rather than against the directors, and
third parties contract with the company,
Limited liability-
shareholders’ liability (i.e. shareholders’ responsibility for the company’s debts) is limited.
The creditors to whom the company owes money can assert their rights in full against the
company but if the company has insufficient funds to meet its liabilities the company’s
creditors cannot then pursue their claims against the shareholders.
If their company becomes insolvent the shareholders will be liable to lose the money that they have
invested in the company by subscribing for its shares, but that is the extent of their liability.
Limited companies as popular commercial vehicles-
Limited liability is the quality that has caused companies to become such useful commercial tools.
The personal assets of shareholders are distinguished from the assets of the company. The concept
of limited liability is fundamental to:
passive investment: the shareholders can invest in a company following an assessment of
the risks of losing that investment, knowing that the rest of their personal assets are safe
and without having to take an active role in management;
why many entrepreneurs seek to conduct business through the medium of a limited liability
company; and
why groups of companies have developed: riskier business divisions can be conducted
through separate companies within the group without the less risky companies becoming
vulnerable to creditors of the riskier companies.
s74 Insolvency Act 1986 enshrines the concept of limited liability, confirming that the shareholders
of a limited company are, generally speaking, not liable to a liquidator in the event of such a
company’s insolvency.
Limits to the doctrine of limited liability-
. In certain, much debated, situations the court can ‘pierce the corporate veil’ in the interests of
justice; for example if the company is considered a façade.
This is usually by contractual means.
Properly entered into, these contracts are effective and enforceable: for example a creditor can
require a guarantee from the shareholder(s) of a company, which will then circumvent the limited
liability of the shareholder(s).
,The use of these strategies comes down to commercial factors: the bargaining power of the parties
and the ingenuity of their advisors.
It is only possible to grasp why these devices are needed if you can appreciate the underlying
fundamental concepts of limited liability and separate legal personality.
Share capital and the principle of maintenance of share capital-
Companies can raise finance by issuing shares.
A company’s share capital is divided into individual shares and s.542 CA ‘06 requires each
share has a fixed nominal value, sometimes referred to as a par value.
One of the most common nominal values for private limited companies is £1. As an example,
a company may have a share capital of £100,000 divided into 100,000 shares of £1 each.
The nominal value of a share does not usually bear any relationship to the market value of that
share. For this reason a person wishing to subscribe for shares in a company may be required to pay
more than the nominal value for those shares.
If an investor pays more than the nominal value, the extra value is the premium and such
shares are said to be ‘issued at a premium’.
A company's issued share capital is regarded as a permanent fund available to creditors. The amount
paid up on the issued share capital of a company is a fund of last resort available to creditors should
the company fail. To maintain this fund of last resort, a company is not allowed to return the share
capital to shareholders except in certain limited circumstances.
This is known as the principle of maintenance of capital and is one of the key principles of
company law. However, many private companies have a relatively small share capital and in
such cases the protection for creditors will be very limited.
Publicity requirements-
All limited liability companies are required to register at Companies House and deliver a
confirmation statement to the Registrar of Companies each year detailing any changes to the
shareholders and their shareholdings and the directors (and company secretary if there is one).
A company is also required to make certain filings at Companies House when it changes such things
as its articles, officers, registered office, accounting reference date and share capital. Companies are
also required to file annual accounts.
People with significant control-
On 6 April 2016, the ‘people with significant control’ (‘PSC’) regime came into effect
obliging most UK companies (and LLPs) to maintain a register of PSCs
and from 30 June 2016 to supply to Companies House the information on this register along
with the company’s confirmation statement, which replaces the previous annual return that
companies were required to file.
New companies need to supply this information on incorporation.
The PSC regime is set out in Part 21A CA ‘06.
, It applies to all UK companies apart from those with shares listed on the Main Market of the
London Stock Exchange (as these companies are already subject to similar requirements
under the LPDT rules).
To be a PSC, an individual must meet one or more of the five conditions set out in Sch 1A Part 1 CA
‘06, which are set out below.
Where the owner or controller of a UK company is a legal entity such as a company or LLP,
that legal entity will need to be put on the PSC register if it is a registrable relevant legal
entity (‘RLE’).
Definition of PSC (Part 1, Schedule 1A CA 2006)-
A person with significant control over a company is an individual who meets one or more of the
following conditions:
The person holds, directly or indirectly, more than 25% of the shares in the company;
The person holds, directly or indirectly, more than 25% of the voting rights in the company;
The person holds the right, directly or indirectly, to appoint or remove a majority of the
board of directors of the company;
The person otherwise has the right to exercise, or actually exercises, significant influence or
control over the company;
The person has the right to exercise, or actually exercises, significant influence or control
over an arrangement such as a trust, which is not a legal entity but which meets any of the
other specified conditions in relation to the company, or would do so if it were an individual.
Definition of RLE-
Where an owner or controller of a UK company is a legal entity, it will need to be put on the
company’s PSC register if it is an RLE. This depends on two factors:
It would have met one of the conditions for being a PSC if it had been an individual, and is
itself an entity that is subject to the PSC regime or is a listed company; and
It is the first relevant legal entity in the company’s ownership chain.
For example, if a UK company, A, is wholly owned by another UK company, B, only company B needs
to be entered on company A’s PSC register as a RLE. It is not necessary for A to trace ownership up
the corporate chain beyond B (for example, if B is wholly owned by company C, company C does not
need to appear on the PSC register of company A). This is because information about the ownership
of company B can be found on B’s PSC register.
Duty and sanctions-
s790D CA ‘06 - duty on companies to take reasonable steps to identify their PSCs and RLEs.
Failure to do so is a criminal offence, which can be committed by the company and any
officer in default, with a maximum penalty of a fine or up to two years’ imprisonment.
There is also a duty on PSCs and RLEs to notify the company of their status within one month of
becoming a PSC or RLE
Criminal offence to fail to do so (s.790G CA ‘06).
