The Separate Legal Personality of a Company - Assignment Example

The separate legal personality of a company means that shareholders of the company and directors of the company are not responsible for any liabilities that arise as a result of the actions of the company.” Word count (excluding title page & list of references page-& list of case laws- 1570 words) Introduction The limited liability is the salient feature of the company law. As per” s.3 of the Companies Act, 2006”, a shareholder is only accountable to the company for the unpaid amount of their shares. Thus, in case of insolvency of the company, shareholders are accountable for the liability of the company only to the extent of the capital subscribed by them, and any unpaid calls due from them as creditors cannot attach their personal assets for the debts of the company as the company is distinct from its shareholders. Therefore, the limited liability concept is enfolded in the canon that the company benefit from legal personality as it is distinct from its members, connoting that it can exercise its rights and duties, as held in Salmon v Salmon & Co [1987] AC 22 . Thus, the legal separation of company from its members is known as “Corporate Veil.”(Griffin 2006:7). However, a director can be held personally accountable for the company’s liabilities and can be fined, imprisoned or can be disqualified as a company director, if the director acts in contravention of the company law or any other law in force. Thus, in such cases, he cannot escape from his liability by Citing separate legal character of a company. This research essay will analyse how a director can be personally held liable for the debts or any liabilities of the company despite its separate legal entity characteristics. Analysis In general, directors are not accountable for the company’s debts provided they function outside their authority, in infringing their responsibilities or in scenarios indulged in wrongful trading or fraudulent activities. The functions of the directors of the company are multifarious and they will be treated as trustee or agent of the members as held in York and North Midland Rly v. Hudson and in G.E.Rly v. Turner. (Badruddin 2000:34) Even though a company is considered to be a separate legal personality, it can act or make business decisions through individuals empowered for that objective, usually directors, who in turn are liable to the members of the company. According to Companies Act 2006, as the members are considered to be the owners of the company and in case of limited company, the members will not be held accountable for the company debts, and the amount contributed to the company by way of shares by the shareholders will be used to pay to the creditors in case of insolvency of the company. A director can be held personally accountable for the company’s liabilities and can be fined, imprisoned or can be disqualified as the company director, if the director acts in contravention of the company law or any other law in force. Now, the Data Protection Act 1998, the Companies Act 2006, The Company’s Director’s Disqualification Act 1986, the Insolvency Act 1986, the Value-Added Tax Act 1994, the Enterprise Act 2002, the Environment legislations, and the Financial Services legislations have made the probability of making the directors personally liable under both criminal law and civil law if they fail to act with integrity and honesty (Scott &Wethered 2012:1134). The main aim of the above is to stop the functioning of the irresponsible directors with intent to usher an enhanced burden of accountability on all directors irrespective of the nature and size of the business they manage. Further, it is to be noted that the above laws are applicable to all categories of directors, whether they are non-executive, executive, part-time or full-time or nominee director and a director can be held accountable for the actions of his colleagues or fellow directors of the board of a company. In case, if the company is limited by guarantee, then, they will be accountable for the amount of their guarantee. If the company is not limited, then members are accountable for all the debts of the company. Section 173 of the Companies Act 2006 requires that a director should employ his independent judgment while taking business decisions and should not sacrifice their independence under anybody’s threat or influence. In “Boulting v ACTT [1963] 2 Q.B. 606”, it was held that a nominee director is having every right to refuse to carry out the instruction from his nominator if such instruction is likely to cause damages to the interest of the company (McLaughlin 2013: 280). Section 174 of the Companies Act 2006 demands that a director should exhibit highest magnitude of skill, care and diligence while carrying out his duty as a director. In Holland v Revenue and Customs & Another (2010) UKSC 51, it was held by the UK Supreme Court that a director who has been appointed as corporate director was not accountable to the underlying company for the actions of that corporate director provided if he had functioned faithfully and correctly .(Sealy & Milman 2011:117). In Industrial Development Consultants v Cooley [1972] 1 WLR 443 where the plaintiff company’s managing director was held by the court guilty and directed that he should recoup the loss suffered by the plaintiff company as he involved in moral turpitude activity by diverting the company’s business to his company. Apart from the Companies Act 2006, directors’ general duties are footed upon some equitable principles and common law rules. Under Section 172 of the Companies Act 2006, a director has to act in good faith and should work for the success of the company in the best interest of the shareholders. In Re Smith & Fawcett Ltd, [1942] Ch 304 (Court of Appeal),it was observed by Lord Greene that directors are required to employ their authority in a bonafide manner that what they perceive it in the best interest of the company. If there has been a wrongful trading, a director of a company which is under insolvency can be made accountable for debts of that company if the court finds adequate evidence that the director is responsible for that and in such case, the court can tear the corporate veil as held in Re Chancery Plc (1991) BCC 171 at 172. (Keay 2007:116). If a shareholder is also a director of the company, and he was involved in the wrongful trading, that upon company’s wounding up, he will be instructed to make good loss of the company due to wrongful trading under section 214 of the Insolvency Act 1986. In such scenarios, the director cannot seek the advantage of his limited liability as a shareholder of the company. In Ward v Perks, Re Hawkes Hill Publishing Company Ltd (In Liquidation) [2007] BCC 937, it was held that a director’s demeanour should be footed upon “rational anticipations of what the future might hold.” In Earp v Stevenson, Re Kudos Business Solutions Ltd (In Liquidation), [2011] EWHC 1436 (Ch), it was held that Stevenson as the sole director of the company was held accountable to make good the losses suffered by the company under section 214. Thus, Stevenson cannot claim relief under the separate legal entity doctrine. In Re Continental Assurance Company Ltd [2001], the English courts have inclined to exhibit benevolent interpretation on what directors have done, and they held them not accountable provided, they have not functioned in a completely reckless manner.(Keay 2013:137). Though Companies Act provides offer limited liability to directors, however, in some cases, they may be personally liable to the debts of the company. For instance , if a director has given his personal guarantee for securing a loan from a bank or other financial institution , in case ,if the company defaults the repayment , the bank may compel the director to pay the debts of the company . However, the general creditors cannot compel the directors to pay their debts if the company fails to meet the obligation provided the director has not extended personal guarantee to them. In case, if there is any balance due to HRMC like VAT and payroll taxes or corporation tax, HRMC may initiate actions against the directors of the company, and directors have to be personally liable for the repayment of the above amounts (Taxaidorg.uk 2012). In case of fraudulent trading, if a director has knowingly misguided the creditors that their debts would be paid back by the company but in reality, if the company’s financial position does not accommodate the same, then , in such cases , a director will be held to personally liable, and he will also face criminal sanctions for his conduct. In cases of moral turpitudes like drawing excessive remuneration from the company, declaring illegal dividends, diverting the company’s business to another company and enriching secret profits, in such case, a director of a company will be held personally liable despite the fact of company’s separate legal entity. In case of misrepresentation and deceit, where a director gave false assurance to a supplier as regards to the financial status of the company, in such cases, the director will be held personally liable for company debts. Conclusion Thus, the dictum “The separate legal personality of a company means that shareholders of the company and directors of the company are not responsible for any liabilities that arise as a result of the actions of the company” shall be held invalid by courts if it finds that a director has involved in wrongful or fraudulent trading, deceit or misrepresentation, involved in the moral turpitude activities , has not applied due skill, care and diligence or not used his independent judgement while carrying out his duty as a director. List of References Badruddin. (2000) 1st edn. Company Director under Company Law. London: Deep and Deep Publications. Griffin, S. (2006) Revised edn. Company law: fundamental principles. London: Pearson Education Keay, A. (2007) 1st edn. Company’s Directors Responsibility to Creditors. Sydney: Routledge Keay, A. (2013) 1st edn. The Enlightened Shareholder Value Principle and Corporate Governance. New York: Routledge McLaughlin, S. (2013) 2nd edn. Unlocking Company Law. London: Routledge Scott &Wethered (2012) 3rd edn. Charity Law Hand Book. London: Spiramus Press Ltd Sealy, L S & Milman, D. (2011) 1st edn. Annotated Guide to Insolvency Guide 2011. London: Sweet& Maxwell Taxaidorg.UK. (2012). Tax Debts and Liability for Company Tax Bills. [online] Available fromhttp://taxaid.org.uk/situations/company-director/tax-debts-and-liability-for-company-tax-bills> [21 February 2014] List of Case Laws “Boulting v ACTT [1963] 2 Q.B. 606” Earp v Stevenson, Re Kudos Business Solutions Ltd (In Liquidation), [2011] EWHC 1436 Holland v Revenue and Customs & Another (2010) UKSC 51 Industrial Development Consultants v Cooley [1972] 1 WLR 443 Re Chancery Plc (1991) BCC 171 at 172 Re Continental Assurance Company Ltd [2001] Re Smith & Fawcett Ltd, [1942] Ch 304 (Court of Appeal) Salmon v Salmon & Co [1987] AC 22 Ward v Perks, Re Hawkes Hill Publishing Company Ltd (In Liquidation) [2007] BCC 937 York and North Midland Rly v. Hudson and in G.E.Rly v. Turner Read More