Company Law and Financialization

This assignment delves into the complex relationship between company law and financialization. Students are expected to examine how financialization has influenced company law through the lens of UK Company Law Review. Key aspects include analyzing legal perspectives on director duties, earnings quality across different reporting regimes, and the implications of limited liability in a context of shadow banking. The assignment requires critical analysis of scholarly articles and legal texts to provide insightful commentary on this evolving field.

Legal Aspects of Business

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1 ...........................................................................................................................................1
Main features of Limited liability partnership........................................................................1
TASK 2............................................................................................................................................3
Duties of director....................................................................................................................3
a. Duties of director to act within power (section 171)..........................................................4
b. Duties of director to promote the success of company (section 172).................................6
CONCLUSION ...............................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Legal aspects mean the legal rules, regulation and legislation which need to be abided by
an enterprise from the time of its incorporation till the time of its dissolution. The main
legislation an enterprise need to comply is Company's Act, 2006. This act lays down all the
regulation a business need to abide by for its formation and carrying out its organisational. The
directors of an organisation are bestowed with certain liabilities and obligations along with son
rights. The law regulates the use of power and enforcement of those obligations to endure fair
use and application. In the present report certain aspects of the company-law is discussed. The
first aspect is related with the limited liability partnership. Another aspect defines duties of
directors as outlined under company's act.
TASK 1
Main features of Limited liability partnership
Limited liability partnership is A separate legal entity which works in accordance with
the law. The UK law has given this kind of business enterprise an unlimited capacity. It is
legalized to regulate full range of commercial business activities and enter in to agreement. In
year 1890, partnership act was introduced for governance and regulation of partnership ventures
(Barbu and et.al., 2014). This act is useful for individuals who desire to create partnership for
purpose of doing commercial activities. However, this act was not applicable to limited liability
partnership but certain provision of Partnership Act 1890 may be relevant and applied to these
ventures. Further, LLP is significantly a general partnership in form, with one central difference,
instead of a general partnership where individuals are liable for partnership’s liabilities debts and
obligations (Hossain, 2013). The LLP act 2000 has been developed within 18 chapters. This
venture usually protects its individual’s partners against personal liability for same specific
partnership liabilities. Below given are some essential characteristics of LLP. Corporate entity: As per legal provision under section 1(2), these types of ventures
usually become a body corporate after incorporation. Company also possess a separate
legal personality from its members and it has its own rights and liabilities separate from
that of its members. As specified in case “Salomon v Salomon & Co Ltd”, House of lords
stated that company by duly incorporated and it is independent person with its rights and
liabilities appropriate to itself (Liu and Skerratt, 2018). Thus, legal contract of corporate
veil between company and its owners was firmly created by this case.
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 Incorporation: In order to create a limited liability partnership, there is requirement of 2
persons. In order to become legal individual, usually members of business enterprise are
required to mention their name in document of incorporation (Lennox and Li,
2012Schwarcz, 2014). This documents will contain all important and necessary
information about LLP. However, declaration of compliance that it satisfies requirements
of LLP act 2000 must be sent to registrar. After receiving document, registrar will issue
certificate of incorporation. These important partnership ventures have been formulated
by parties for maximizing profitability. Amount of share capital which is required for
regulation of business operations are also shared by partners and ventures. These
important units need to be follow all the legal aspects which are stated by government in
the companies act 1950. Incorporation of these ventures can also be cancelled by
registrar if some circumstances.
 Membership: It is also considered as legal requirement that first members needs to sign
document of incorporation. This will enable the company to undertake new partners
through legal agreement with existing partners (Barker, 2016). However, members of
business enterprise can also decide rights and obligations of members through a mutual
consent and agreement. In some circumstances, if members are not able to agree on rights
and duties, then partnership will have been governed by LLP regulation 2001.
 Name: It is also considered as important feature of this partnership that its name is
required to be mentioned in the document of incorporation. It is necessary that name of
these types of venture should end with “LLP”. All other relevant information like
company name, address, membership information and article of association is need to be
provided by members to registrar for incorporation.
 Taxation: According to section 10, trade, business or a profession which is carried on by
the limited liability partnership through its members (Kemp, 2014). Major effect of this
section is to ensure that members of these ventures are get taxed on the basis of profit
they have earned, which is also considered as similar in the law of partnership. However,
even though the members of venture enjoy Limited liability benefits, the laws also protect
them with the regards to taxation (Truyens and Van Eecke, 2014). It is stated that
members in the organization will be taxed on the profits which are arising out for the
accounting period ending during the relevant tax year. For these venture with the
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turnover in excess of 15 million, the standard account information has not to be
completed in full but the separate taxation computations and set of organization accounts
needs to be accompanied with the tax return.
 Liability for debts: As per the LLP act 2000, the liability of members for debts in these
kinds of ventures for settlement of debts is limited to the contribution of capital (Firth,
Mo and Wong, 2012). If the venture goes in to liquidation and debts which occurred after
this liquidation needs to be settled by the members of LLP (Djelic and Bothello, 2013).
However, rights are available to members that they can also decide the amount of
contribution of capital. Further, they are also having rights to withdraw their share from
partnership at any time.
TASK 2
Duties of director
In the Companies Act 2006, under chapter 2, general duties of directors are discussed:
Director is main and principle management authority of a company, therefore it is very
important person to act within powers delegated to him/her. The directors are the heart of the
company. They are solely responsible for complete management and smooth flow of business
activities of company. These powers are vested to the directors so that they can act for the
betterment of business enterprise and ensures that business operations are carried out smoothly
(Barbu and et.al., 2014). The power given are bestowed to directors with certain limits for instant
they cannot go beyond their power which sometimes can prove to be harmful for the company.
The reasons behind restricting use of these power is ensuring protection of organisation through
misuse of these powers. The powers given are such which were necessary for a person for
position of director as it enables business decision making along with smooth running of
business operations.
Section 170:
This section defines general duties of the directors with their scope and nature:
 Under section 171 to 177 general duties owed by directors of the company are specified,
 A director who cease to be in this position is still subject to certain duties:
a) referred in section 175 (to avoid conflict of interest)
b) referred in section 176 (not accepting any benefits from third party)
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 The duties are based on the common law and equality principles. These rules and
principles have implications on duties owed by director to company.
 General duties are applicable in the same manner as rules and principle are applicable.
General duties are relevant for to the shadow directors as well to extent they can be applied.
a. Duties of director to act within power (section 171)
Section 171 of Companies Act, 2006:
Duty to act within power: A company's director shall
a) act in conformity with the constitution of the company
b) the powers shall be exercised for the purpose for which they are bestowed.
This is the first duty among all other duties defined in companies act 2006. The director
must act within the constitution of the company. The constitution of the company is divided into
two different documents:
1. Memorandum of association
2. Article of association
Main reason to incorporate this section in the Companies’ Act is to protect interest of
organization from the illegal and unlawful acts of director for their personal benefits (Liu and
Skerratt, 2018). The unlawful act of directors includes acquisitive use of assets of a company for
their personal benefits and undertaking such mechanism which confiscated takeovers by outside
bidders. Section 170 of the Companies Act, bestows obligation of directors with certain rules and
principles along with certain powers to perform in section 171 these duties are made more
specific and certain restrictions were also imposed on use of powers.
According to this section, directors can use their powers within the company's
constitution and purpose of its use needs to be reasonable. And should be for the best interest of
the organization. Directors while exercising their powers must observe constitution of the
business and they are bound to exercise power in a bonafide interest of the organization.
Directors are responsible to perform their duties for betterment of the whole company and act for
interest of shareholders.
Directors as fiduciary agent of company: directors are fiduciary agent of the company
therefore they can exercise powers beyond the limits of the memorandum and article of
association of the organization. As a fiduciary agent of the company they cannot use powers for
their own benefits (Barker, 2016). This rules enable power to stakeholders to sue the directors in
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case of misuse of powers by directors. Performance of act is beyond constitution of the company.
Constitution of a business provides rights to shareholders to challenge actions of director in the
court. Shareholders holds complete right to sue the directors if individuals practice their power
beyond their capacity. The shareholders are given rights to sue directors when they practice
beyond their given powers.
Case laws:
Hogg v/s Cramphorne
In this case directors of the company allotted share to such individuals who were a threat
to the business as they have a fear for the organisation in takeover bid. Reason for this allotment
was that the directors wanted to retain their position in board of the company. In court it was
held that directors did not use their powers properly and allotments of new shares was not in
honest way, so court held that allotment as void. Directors held guilty of acting beyond their
powers. It was concluded that directors cannot exercise their power beyond limits and for their
personal benefits.
Criterion properties Plc v/s Stratford UK properties LLC:
In this case managing director of organisation enters into an agreement with a
shareholder that shares held by that particular shareholder will be bought by the company at a
higher rate. In agreement a term was also included that any change in the formation of board of
directors or dismissal of managing director will not alter the agreement (Bilchitz and
Ausserladscheider Jonas, 2016). The managing director was removed subsequently for the act
beyond his power. The company then went to the court to cancel the agreement and its
enforceability. In the court it was held that the agreement was not entered with a proper use of
the powers of the directors and it does not have a binding effect on the company.
Form the above two case laws it can be interpreted that directors are vested certain
power by the company's act 2006 and they act as a fiduciary agent of the company which
imposes certain restriction on the use of the powers bestowed upon them in the capacity as
director.
With a critical analysis of this section it can be stated that section 171 of companies act
2006, provides the parameter to evaluate and judge the actions of the directors (Gelter and
Helleringer, 2015). The parameters reflect that whether the act performed by the director is
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proper or improper. And whether the act is within the power given by the constitution of the
company or not.
b. Duties of director to promote the success of company (section 172)
Section 172 of Company's Act 2006:
Duty to promote the success of the company:
1. A director must act within his power and in a good faith, he/she shall promote the success
of the company for providing benefits to company as a whole and its members. In doing
this matters the director shall consider:
a) evaluating long term consequences of a decision
b) company's employee interest
c) the requirement of encouraging business relationship with consumers, suppliers etc.
d) the effect of business operations of company on environment and community,
e) the desire of the company to maintain a reputation in business conduct with high standards,
f) to act fairly among members of the company.
2. To act within the powers given under the act of the betterment and benefits of the
company.
This is a core duty of the directors as stated in the section 172 of companies act 2006.
the directors shall act in a bonafide interest for the benefits and best interest of the company not
what a court may consider (Collison and et.al., 2014). All the powers given to the directors and
management of the company are unavoidable and they shall be used every time for the benefits
of the shareholders of the company. These are the powers that can be exercised without any
intervention of the court. The powers are irrevocable and can be used for enhancing the success
of the company.
Case law:
Lonrho Ltd. V shell petroleum Ltd:
In this case it was held that the directors of the company shall not only consider the
interest of the shareholders but it shall take into consideration the creditors of the company and
their interest as well.
West Merica Sofetwear Ltd V. Dodd:
In this case it was held that when the insolvency starts to approach the company the
directors of the company shall take into consideration the interest of the creditors (Company Act,
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2006, 2018). So when a case of insolvency comes the fiduciary duties of the directors shifts
towards the creditors of the company.
CONCLUSION
From the above report, it is concluded that limited liability ventures are considered as
separate legal entity as per the provision of LLP act 2000. These ventures are usually
incorporated approval of registrar and getting a certificate of incorporation. In order to get
separate legal entity, members are required to mention their names in document of incorporation.
Liability of members in these kinds of ventures is limited to the capital contribution.
Analysis of case of “Salomon v Salomon & Co Ltd”, provides clear understanding that a
company which is incorporated under LLP act 2000, is considered as corporate entity and has its
own liability instead of its members. In addition to this, Director is the main and principle
management authority of a company so it is very important that a director shall act with in the
powers delegated to him/her. The directors are the heart of the company. With a critical analysis
of this section it can be stated that section 171 of companies act 2006, provides the parameter to
evaluate and judge the actions of the directors. The parameters reflect that whether the act
performed by the director is proper or improper.
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REFERENCES
Books and Journals
Barbu, E.M and et.al., 2014. Mandatory environmental disclosures by companies complying
with IASs/IFRSs: The cases of France, Germany, and the UK. The International Journal
of Accounting. 49(2). pp.231-247.
Barker, R., 2016. The Duties and Liabilities of Directors—Getting the Balance Right. The
Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-
for-Profit Board Members. p.249.
Bilchitz, D. and Ausserladscheider Jonas, L., 2016. Proportionality, Fundamental Rights and the
Duties of Directors. Oxford Journal of Legal Studies. 36(4). pp.828-854.
Collison, D and et.al., 2014. Financialization and company law: A study of the UK Company
Law Review. Critical Perspectives on Accounting. 25(1). pp.5-16.
Gelter, M. and Helleringer, G., 2015. Lift Not the Painted Veil: To Whom Are Directors Duties
Really Owed. U. Ill. L. Rev. p.1069.
Liu, S. and Skerratt, L., 2018. Earnings quality across different reporting regimes: Listed, large
private, medium-sized, small and micro companies in the UK. Journal of Applied
Accounting Research. 19(1). pp.2-19.
Padhi, P.K., 2012. Legal Aspects of Business. PHI Learning Pvt. Ltd.
Sweet, J. and Schneier, M., 2012. Legal aspects of architecture, engineering and the
construction process. Nelson Education.
Beamish, P., 2013. Multinational joint ventures in developing countries (RLE international
business). Routledge.
Andrews, C.J., 2018. Lightning injuries: electrical, medical, and legal aspects. CRC Press.
Weske, M., 2012. Business process management architectures. In Business Process Management
(pp. 333-371). Springer, Berlin, Heidelberg.
Hossain, K. ed., 2013. Legal Aspects of the New International Economic Order. Bloomsbury
Publishing.
Kemp, R., 2014. Legal aspects of managing Big Data. Computer Law & Security Review, 30(5),
pp.482-491.
Truyens, M. and Van Eecke, P., 2014. Legal aspects of text mining. Computer law & security
review, 30(2), pp.153-170.
Firth, M., Mo, P.L. and Wong, R.M., 2012. Auditors’ organizational form, legal liability, and
reporting conservatism: Evidence from China. Contemporary Accounting Research,
29(1), pp.57-93.
Djelic, M.L. and Bothello, J., 2013. Limited liability and its moral hazard implications: the
systemic inscription of instability in contemporary capitalism. Theory and society, 42(6),
pp.589-615.
Lennox, C. and Li, B., 2012. The consequences of protecting audit partners’ personal assets
from the threat of liability. Journal of Accounting and Economics, 54(2-3), pp.154-173.
Schwarcz, S.L., 2014. The Governance Structure of Shadow Banking: Rethinking Assumptions
About Limited Liability. Notre Dame L. Rev., 90, p.1.
Online
Company Act, 2006. 2018. [Online]. Available
through:<https://www.legislation.gov.uk/ukpga/2006/46/contents>.
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