Legal Jargon – Company law

What is a company?

Company law really is a fascinating part of the law as its very responsive to factors that influence it. The public’s opinion of a company can be affected by anything; a change in senior management; Steve Jobs death, a scandal; the Tesco horsemeat affair, a celebrity endorsement; David Beckham’s H&M advert where he is runs around in boxer shorts, yes girls, we suddenly like H&M, don’t we?

The law governing companies in the UK is very complex as it is a composite of conflicting judicial commentary, extensive legislation; the Companies Act 2006 is one of the longest statutes in existence, and is subject to influences from the European Union too. The principal nexus within company law is the relationship between the directors of a company and the members, or shareholders of the company. The directors are responsible for the day to day management of the company, whilst the shareholders are usually the ones who supply equity, or money, to the company in order for it to grow. In return shareholders often receive a payment known as a dividend.

Separate legal personality and limited liability

There are two core features of companies, the first being their separate legal personality and the second being the limited liability of their members. The separate legal personality of a company simply means that a company is recognised in law as a legal entity in its own right. This independence enables a company’s business assets and liabilities to be segregated from personal assets and liabilities of a company’s members and directors. In everyday terms this means that a company can, for example, enter into a contract with another legal individual, own property, commit a crime, be the victim of a crime and commit a tort (a civil wrong). The limited liability of company’s members is related to its separate legal personality, but doesn’t follow automatically from it. When a company’s liability is limited, essentially it means that if a company were to go bankrupt, a creditor, someone who the company was indebted to, would not be able to take money from the personal assets of the directors and members of the company.

Are these two features desirable though? They are advantageous in that individuals are more likely to engage in enterprise if their personal assets, their home and car for example, are protected if their business fails. Clearly, this is good for the economy as a whole as it generates more business. However, the disadvantage of these features is that the fictional division between the company and its directors can lead to opacity whilst the company is in existence, and injustice once a company has been liquidated. For example, it is common opinion that the economic crisis which hit the American markets in 2008 due to sub-prime mortgages being sold by the banks, would have not occurred or perhaps would have been minimized at the very least, had the regulators or the public known exactly what activities the banks were engaging in. Added to this, injustices arise because often an investor is left without remedy or recompense if a company goes bankrupt.

The future

Do you remember the collapse of the American bank Lehman brothers in 2008? That day is seen as the day the world’s economies were plunged into oblivion. Since then not a week goes by without a well-known company going into administration, going bust. Do you remember Woolworths? HMV? Jessops? Hence, we have seen increased regulation of companies in general, and financial companies in particular. It has been argued that through increased regulation we are losing the fundamental idea of economics, Adam Smith’s free market economy, the idea that economic activity should be unhindered by governmental control or regulation. What do you think?

I hope you enjoyed this brief introduction to company law, next month we will be tackling the controversial topic of EU law.

Seema Kavi,
law undergraduate,
Oxford University.