Companies as Legal Persons - Essay Example

?COMPANIES AS LEGAL PERSONS A company is founded through an association of persons who share common visions and purpose and thus come together for a common purpose. Companies may be formed with a purpose of exploiting person’s skills, exploiting talents and resources or with a motive to pursue specific goals as the persons forming it may be interested. For instance, companies may be formed by an association of persons as a nonprofit organization, profit oriented or as a business, and financial entities taking the form of banks or monetary institutions (Anon, 2006, p. 6). Countries and their governments differ in their legal frameworks concerning the formation, dissolution as well as the types of companies to be run within the country. Through the legal frameworks, entrepreneurs who wish to run companies are guided in matter pertaining to establishing and running the companies. The formation of a company may be seen under the law as separate from the association of persons in that it can be held responsible under certain circumstances to be distinct and thus be liable in civic responsibility in which the persons forming it fail to take responsibility. Whenever the persons forming a company fail to perform or deliver as expected in terms of responsibilities and tax conformation, a company stands as a legal person who can take limited liability and who can equally be held responsible under law. Furthermore, the existence of a company as a legal entity confers the company the power to form associations with other companies to form corporate whose responsibilities upon dissolution must be terminated through a certificate of dissolution in order to avoid future responsibilities charged over it as a legal person. Under the UK law (CA 2006) provisions, companies are interpreted to be separate from their directors and shareholders and under very few circumstances are companies taken in a common sense with their controllers (Commune, 2006, p.3; Anon, nd, Para 1-4). Nevertheless, under certain conditions and provisions, the director or the persons running the company may be interpreted to be part and thus be held responsible for the case of debts and other liabilities. Such instances may be whenever the director(s) may owe the company on shares or in form of assets. Under such discussion, a company owns property and assets distinctly from the proprietors and as such, the directors and the shareholders have no, legal provision to take any property from the company even though they may be having a hundred percent shareholding capacity. This therefore implies that future management has power to sue any previous director under the circumstances of mishandling the company though it belonged to them. On the other hand, the UK law also acknowledges that a company is wholly responsible for its liabilities and debts and under such, the directors or even shareholders have no obligation to pay a company’s debts (Masons, 2010, para 1-3). The legal framework of the United Kingdom acknowledges three types of companies; two of which are private companies but limited by guarantees or by shares and then the public limited companies. This paper intends to substantiate the authenticity of the company being a distinct entity or a different person from the persons who form it under the law as provided for under the United Kingdom 2006 company law frameworks (Anon, nd, para 1-5). In understanding a company as a distinct person or entity within the country’s framework, we shall consider a number of case studies under which, a company is wholly held responsible to argue its way out in instances of legal procedures where the directors or shareholders are not held responsible for any eventuality. Case 1: Mr. Smith envisions and starts a company, which is limited by shares. Besides registering it under his sole directorship, he equally decides to buy a share from the company worth one pound and does it by full payment and as such, his share becomes fully bought. The company records good performance within the initial couple of operation years and it is in a position to settle fully the 30 pound-worth credit stock that it would operate on say for periods of 30 days. However, there is a dramatic turn of events, which finds the company’s sales fall instantly thus constricting the revenues and profits. As a result, the company is not able to repay the supplier who advances the credit for operations to the company. This equally affects the cash balances as well as the ltd, which is succeeded by severe losses for the company. As a result, the company ultimately goes into liquidation despite the fact that it has not fully paid the supplier the credit dues it owes him. Mr. Smith is under no obligation to pay the supplier or better still to put more money into the company as his shares are already fully paid. The only special circumstances under which he would be obliged by the law to pay the supplier or otherwise would be in instances where he has dealt with the company dishonestly or better still, under circumstances that he had committed personal guarantee to the supplier’s debt in case of such an occurrence. Without such an obligation, Mr Smith is not to be held liable for the repayment of such a debt – the company had in its distinct form and state as a legal person committed to the contracts between the supplier and itself. This therefore implies that in the event that the company does not have enough assets or money to commit to the debt, then the supplier would suffer the loss. Under such, Mr Smith thus stands to protect his personal assets or the assets outside the company despite the supplier’s loss unless he would have leased or mortgaged his assets to secure loans for the company (Anon, nd, Para 6-10). Case 2: On the other hand, while taking all the conditions in the first case to be constant and changing the share value, which Mr. Smith buys from the company, collapse of the company, would have a different approach altogether. If we consider Mr Smith, buying shares worth fifty thousand pounds unlike the first case where he had bought just one pound worth shares liquidation of the company would have a different turn altogether. When under such circumstances, in the event that the company fails to pay the debts as accrued, one of the most likely approach to get the repayment actualized is through following up with Mr Smith to have the 50000 pounds worth to the company claimed to pay the debt with the supplier. The supplier has the legal provision to sue the director over the share worth value to have it committed to the repayment of the supplier’s dues by the company. Under such, Mr Smith is bound to suffer double loss in that if he had lost his shares through the collapse of the company, he equally is to suffer the debt as it is to the supplier (Anon, nd, Para 11-12). Other types are limited by guarantee mostly used by charities and other community organizations. However, in order to protect the persons running the authority or charity organization from the liability claims, the organizations are registered as limited companies. Under such circumstances, the liabilities of the organization or authority are interpreted as distinct from its management committee. This is in the light of understanding that such organizations, authorities may be responsible over its employees, finance contracts as well as equipment, and as such, there is need to safeguard the management or the persons who run it in the event of insolvency. Therefore, under such circumstances, a company is preferred for the fact that it is held as a separate person over its dues in the event of debts and claims. In company’s limited by shares or by guarantee, the liability of the shareholders or the management is restricted only to the event of misconduct such as fraudulent trading or in illegal doings (Anon, nd, Para 4). Section 994 (1) defines instances when a member to a company may rise to petition on behalf of a company’s interest as well as the interest of members (to whom he would be a member) in matters of improper representation of the affairs in a judicial proceedings. Under the chapter, the legal framework defines the ‘conducts’ of the company’s affairs to allude not only to the directors but also to other stakeholders of a company. A derivative claim on the other hand is interpreted through law to hold a company liable for the acts of negligence or bleach by the directors while acting on the behalf of the company. Under such instances, in the event of insolvency, the law holds all parties responsible including the shareholders (Eristavi, 2010, p. 1;). In conclusion, the above discussion reveals that as claimed by the guiding statement to this paper, a company is in the eyes of law a distinct person and different from the person(s) forming it (Anon, nd, p.a). Companies’ liabilities are exclusive from the interests of the persons who form or run the company. Whenever a company is declared insolvent or it is collapsed, the position of the shareholders or the directors to be held responsible towards settling outstanding debts is only limited to the debts that the shareholders may owe to the company. Moreover, they may be responsible in the instances that their conducts would have been responsible in causing the failure of the company (Anon, nd, para 1-13). Therefore, the liability of individual shareholders or the management would only be referred to under the provisions of law; otherwise, the company is wholly responsible for its own debts and commitments in agreements. References Anonymous, nd. Limited Liability Companies (UK). [Online] Available at: [Accessed 28 June, 2013]. Anonymous, nd. Companies limited by guarantee. [Online] Available at: [Accessed 28 June, 2013]. Anonymous, nd. TOPIC 2: CORPORATE PERSONALITY: The Foundation of Company Law. [Online] Available at: [Accessed 28 June, 2013]. Anonymous, nd. Why Form an LLC. 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