A UK Limited Company Is Considered to Be an Artificial Legal Person - Case Study Example

A UK limited company is considered to be an artificial legal person Introduction According to Usa (2009), a limited company in the UK is defined as an artificial person having its own rights. In simple words, it is a different identity, which can exist separately and independently from the people responsible for managing it. As per section 3(1) of the Companies Act 2006, a “limited company” is formed when “the liability of its members is limited by its constitution” (Crown, n.d.). One of the major benefits of a limited company is that the shareholders or the directors of the company are not held to be liable to compensate for any kind of misconduct or actions of the company, while the company also remains protected from the misconduct of its liability owners, i.e. the shareholders and directors (Russell, n.d.). In this essay, discussion will be emphasizing the commonly perceived legal notion that in a limited company, because it is considered as a separate entity as per the Companies Act 2006, shareholders and directors cannot be held responsible for any liability that arises due to the action of the company. Accordingly, applicable and relevant provisions guiding this notion will be discussed henceforth along with an elaboration on the meaning of a limited company as per the stated Act. Provisions of Company Act 2006 Defining UK Limited Company as an Artificial Legal Person Companies Act 2006 was developed by the Parliament of the UK to reform its corporate sector and bring all the companies under the legal protection from the unethical and bias conducts of its directors as well as major shareholders. As per this particular legal provision, a company is termed to be limited company, if the liability of its members is limited by the constitutions of UK. This particular definition implies that the liability of the company will not be held by its members i.e. shareholders and directors in case of any negative actions of the company. However, the major intention to develop this particular Act was to protect the interests of the company and its internal and external stakeholders from getting affected by the misconducts of its members. With regards to this perspective, Section 171 to 177 of the Companies Act 2006 codifies few of the major duties to be performed by the directors of a limited company (Medhurst, 2010; Reisberg, 2008). The substantial performance of these duties is quite likely to assist the directors or the shareholders of the company to be held free from any kind of liabilities due to the misconduct of the company and vice versa (Portfolio Media, 2007). It is based on this double effect that the doctrine has also been argued as a “two-edged sword” by its critics (Puig, 2000). As mentioned above, according to the Companies Act 2006, a company can be denoted as limited by its liability if its members are termed within the constitution of UK (Department for Business Enterprise & Regulatory Reform, 2007). Differentiating its liabilities from that of its members, this Act determines a limited company as an artificial person as it can own property and can enter into contract as a separate entity (Applied Accountancy Limited, n.d.). In the modern business scenario of the UK, limited liability is the most commonly adopted types of businesses as defined by the law. The legal terms denote that companies are incorporated as limited company with an intention of preventing the members from any kind of financial liabilities due to the inappropriate actions of the company (Department of Business Innovation and Skills, 2011).Chapter 7 of the Companies Act 2006 specifies provisions for protecting the liabilities of the directors of a ‘limited company’ from the potential risk factors that might hamper their interests as separate legal persons. As mentioned in Section 232 of the Companies Act 2006, asserts that provisions mentioned in the limited company’s instruments or memorandum or any of its documents limiting any liability of the directors apart from situations where the directors are found guilty of “negligence, default, breach of duty or breach of trust in relation to the company” (Crown, n.d.). However, a director’s role to decide for the company is not affected by this provision wherein, sections 233, 234 and 235 allows the director of the company to obtain insurance facilities if provided by the limited company, to qualify indemnity provisions for third party and be qualified in the pension scheme indemnity provision (Crown, n.d.). These provisions and the legal definition of a limited company as per the Companies Act 2006 apparently denotes that directors of the company and that company are to be treated as two separate legal entities with differentiated liabilities as per the corporate laws of the country. Discussion Over the years, the Companies Act 2006 has been presenting the limited companies as the separate legal entity from that of its members. Under this Act, it has been mentioned that members of a limited company (i.e. shareholders or directors) should be entitled to decide for the company either by themselves or they can appoint members by way of third party indemnity in compensation to their liabilities for managing the performance of the limited company. Accordingly, these members of the limited company are asserted to share limited liability as under the constitution of the UK (Sheikh, 2013). This legal assistance allows all the members to obtain protection of their personal assets under any kind of lawsuits and judgments from the court against the limited company. Concerning the example of the shareholders’ liability in a limited company, it can be stated that their liability is limited to the nominal value of the shares given to them. For instance, if the bankruptcy of a limited company takes place, none of the shareholders shall have to repay the creditors to the company to compensate their loss of personal finance for the members. One of the major reasons for the formation of this act by the UK legislation was to encourage the growth of commercial enterprises and to increase the confidence among the people regarding the honesty of the business (Mwenda, 2010). One of the landmark cases in relation to the company law judged in the English Court is the case of Salomon v A Salomon & Co. Ltd (1897) wherein the notion that the shareholders and directors are entitled to enjoy limited liabilities for the actions of the company was taken into consideration while ruling the proportionate responsibilities of the company as a separate legal and entity and its members, which in this case was its founder Mr. Aron Salomon. In another similar case was of Re Hydrodan (Corby) Ltd, Millett J, again the provisions of treating the company as a separate legal entity was taken into account in order to distinguish between the extent of the company’s members liabilities and that of the company (Hudson, n.d.). This case became the landmark case in the English Court wherein the concept that limited companies are an artificial legal entity was ruled following the provisions of Companies Act 2006. The judgment of this case developed a notion among the people that whenever a business is to be started, it must be assured that the company is treated as a separate legal entity that signifies that the members of the company are different from the company in terms of assets and financial possession, which shall restrict both these entities from misusing the other’s property and legal identification (Forji, 2007). It is worth mentioning in this context that in the case of Solomon, the House of Lords also gave a clear definition to the legal principle that when a business organization being incorporated under the legal terms of limited company, the company must be regarded as a separate legal entity that is completely different from its shareholders and directors (Degenhardt, 2010). From the above-mentioned case, it can be analyzed that under the legal terms and conditions of the UK, a limited company is always treated as an artificial legal entity from that of its shareholders and directors. Apparently, the principle of limited liability aims to protect the shareholders, directors or managers of the limited company against personal liabilities in case of the insolvency or winding up of the company. The historical business perspective practiced in the corporate culture of the UK also depicts that prior to the 17th century, people were scared to invest in the business owing to their perceived notion that if the company suffers loss due to its financial liabilities, the members shall be liable to pay back the stakeholders. However, with the introduction of this particular legal provision to treat the liabilities of the company to be borne at a limited extent by its members owing to its identification as an ‘artificial legal entity’, the fear among the investors decreased substantially, facilitating the growth of the corporate sector to a substantial extent (Bachner, 2009). Conclusion From the above study of the limited companies in the UK, it can be ascertained that under the provision of the Companies Act 2006, a company must be treated as a separate and artificial legal entity. As per this doctrine, the shareholders and directors of the company are entitled to enjoy limited liabilities for the repayment of the debts of the company. The major intention of the English law and legislation in the formation of this particular provision was to protect the shareholders and directors from lawsuits or judgments of the court against their financial property, to compensate the losses caused due to the non-functioning of the company. It can also be explained that in any cases, bankruptcy, insolvency or winding up of the company, the members will not be responsible for the payment of debts. The formation of this law has also developed confidence among the investors to invest in limited company formations. References Applied Accountancy Limited. (N.d.). Companies Act 2006 – a summary of what it means for private companies. How decisions are taken by shareholders – from October 2007, 1-12. Bachner, T. (2009). 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