Critical Analysis of Company Law: Framework, Risk, and Accountability

This essay provides a comprehensive overview of company law, focusing on the UK legal framework established by the Companies Act of 2006. It examines the core principles of corporate governance and corporate finance, highlighting the distinct legal personality of companies and the implications of limited liability. The essay critically analyzes the balance between allowing companies to engage in reasonable risk-taking for societal benefit and ensuring accountability for directors, managers, and shareholders. It outlines the roles and responsibilities of directors, including their fiduciary duties and potential conflicts of interest, while also exploring the duties of managers and the rights of shareholders. The essay also touches upon the consequences of non-compliance with company law, including financial penalties and director disqualification. The essay concludes by emphasizing the importance of company law in regulating business activities and promoting responsible corporate behavior.

Company Law

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Company law is also commonly known as Corporate Law. This law basically is divided into
two areas: corporate governance and corporate finance. In the United Kingdom the Governance
of Corporate all the rights and responsibility that are possessed by the shareholders, employees
of the company creditors and also the directors of the company1. Corporate finance basically
refers to the two money raising methods which are available to the company's. The company law
majorly provides with all the legal formalities of the company and also the law tells the company
how they are supposed to carry out the procedure of formation of the structure. The law also
states the roles and responsibilities of directors of the company and also the shareholders. Every
work of function that is carried out by the company is regulated and governed by the law of
Companies.
The aim of this essay is to critically examine that: "The company law basically helps in
providing a Framework in which all the companies are free to engage themselves in reasonable
risk taking conduct that helps it benefiting the society while also ensuring that companies and its
directors and managers are held accountable".
MAIN BODY
In the United Kingdom all the companies that established are governed by the law of
Companies Act of 2006 UK was considered to be the first nation which drafted the statutes of the
modern company which allows investors to incorporate restricting the liabilities to Commercial
creditors in the event when the business becomes insolvent and also assigned he management to
centralised board of directors with the help of a simple process that includes registration.
Companies generally have a unique status in private law due to the reason that they have a
legal identity which is distinct from all the people to spend their money or invest in the company.
The act of 2006 of the company allows the creation of a wide range of Companies2. Every
individual who wants to start with their own business they have preferences to choose between
the unlimited and limited company. The law states that all the companies that are incorporated
under the term unlimited means that the incorporator of the company will be responsible for all
the damages and debt to be paid. Where hours in the case of a limited liability company the
1 Wymeersch E, 'Company Law In Europe And European Company Law' [2019] SSRN Electronic Journal
2 Hannigan B, Company Law (2019)

responsibility of the incorporators will be Limited to the number of shares of the guarantee
which they have taken.
After deciding on the type of company which is exactly to be formed by the ink operators it
is finally formed by going to various kinds of steps with the company’s house register. Anyone
who promotes the company to attract investment is bound by strict obligations that are fiduciary
to report all the relevant information about the company and its finances even prior to the process
of registration start for the investment. For the more if anyone who wants to contract under the
company's name before even the registration process is usually directly responsible for all those
responsibilities3. The Company's distinct legal personality was firstly recognised by the English
Law a very long time ago. Legal personality basically is very essential and it means that the
individual has legal rights and obligations. That is the company is possessing all the legal rights
and obligations that an individual might possess. The company under its distinct personality is
also allowed and has been given right by the law that they can sue and also they can be sued. The
corporation or a company with the first one who will be held responsible for any of the acts done
by the directors or its employees on the behalf of the company as a single and distinct individual.
The act of 2006 of the companies as well as all the other related secondary legislations
establishes a strict resign in the UK based companies all the companies that are registered in the
UK as well as it also includes foreign companies that are planning to operate or carry out any
kind of business activities in UK must have to comply with this act. The criteria of it are very
general and the consequences of it can be very serious which includes financial penalties,
disqualification of directors and also the personal liability of the company to pay off all the
penalties and debt4. The main purpose of the company laws to govern how the business and its
activities are carried out. The act of 2016 of the Companies Act was updated again in the year
2009.
All the legislations related to the company and the Companies Act of 2006 provides with
limited liability to the directors and also to the shareholders with the insurance that they need to
try and make all the activities and the act of the business work but the personal assets are not at
all at risk If in case the business fails. The members who own the companies are commonly
called as founders for investors of the company but they have very little power to say in how the
company is going to run and function unless they are also the directors of the company. The
3 Sheikh S, A Guide To The Companies Act 2006 (2017)
4 Ferran E, 'Corporate Mobility And Company Law' (2020) 79 The Modern Law Review

directors basically are those people who are in charge of the daily affairs in operations of the
company. As in most of the companies or organisations the directors and the shareholders of the
company are the same and therefore the distinction between them is not important. The shares in
the company are typically issued by the directors of the company and they are also the personal
property of the owner’s. The owners of those shares have right under which they sell or transfer
their shares at any time whenever they want to. The members of the company or the shareholders
of the company have the right to different pieces of information that relates to the company and
various other things5. They may also demand that directors call a General Meeting of the
company in which they can discuss matters relating to the company. A variety of many other
responsibilities are placed on the board of directors which also includes the responsibility under
which they have to prevent the conflicts of interest that may arise while working for the
company.
The corporation or the company is also required to prepare the annual reports and also
reports that relate to annual return which must be submitted by the company to the company’s
house and must be distributed to all the shareholders or the investors of the company. The
corporation returns the money to its shareholders or the investors by way of dividend. This is one
of the benefits of being a shareholder in which they are being paid by the company in the form of
dividend. A stringent protocol for winding up a business also exists within an even stricter
regime in place if the company becomes solvent.
The directors of the company and the manager both have very important roles to play in the
functioning of the company but both of them are very different from each other. They are not just
different from each other on the basis of seniority. The director of the company is legally and
very much practically responsible for all the activities and acts done by the company6. Managers
are basically in charge of all the staff of the company that is the employee and it also looks after
the processes and functioning of the company. Whereas on the other hand directors are in charge
of the managers. At the end of the day managers are the one who are concerned with all those
things that already exist like the employees, the process and the facilities that are required in the
functioning and operations of the company. Directives on the other hand are responsible for all
5 Alcock A, Birds J, and Gale S, Company Act 2006 (Jordans 2019)
6 Engsig Sørensen K, 'Branches Of Companies In The EU: Balancing The Eleventh Company Law
Directive, National Company Law And The Right Of Establishment' (2018) 11 European Company and
Financial Law Review

the actions and decisions made by the managers but their primary responsibility is basically to
identify the vision of the company and then formulate and implement the plan to achieve that
plan for the vision of the company.
It is one of the duty of the director of the company to ensure that the shareholders and the
stakeholder’s interest in the company are recognised or are taken into account. There are mainly
six major duties of the director of the company. First one is that they shall support the
performance of the company. Second is that they must make all the decisions independently.
Third is that they shall take all the sound precautions and the experiences with due diligence.
Fourth duty of the director is to avoid in circumstances where the conflict of interest arises. Fifth
duty of the director is that they must not appropriate to recognise benefit from any of the third
parties7. And lastly it is the duty of the director to disclose any potential conflict of interest in a
transaction or an agreement which is proposed. The directors of the company are very different
and distinguished from that of the manager by the personal liability and responsibility they take
towards the company and the higher compensation they get as a result. The case of cook v deeks,
relates to the duty of the director to avoid any kind of interest that is conflicting. In this case to
keep the 4th director out of the contract the other three directors of the company to the
construction contract of a railway line on their own names instead of taking the contract or
making it on the name of the company. Despite the fact that the directors of the company ratified
their acts with their vote as shareholders it was recommended by the Privy Council that there
existed conflict of interest and the directors were held liable by the court.
The managers of the company are basically responsible for carrying out the plan on behalf
of the directors which they discussed in the General Meeting or the meeting of the board of
directors. Managers are concerned with putting the decision of the board and policies of the
company into action. Managers have very less legal obligations then that of the director. The
director of the company typically appoints and can also fire managers8. Managers do not really
have any legal requirement under which they are to be held accountable. It is the duty of the
manager to follow the code of ethics and must embody the culture by following the lead of the
board of directors.
7 Walmsley K, Butterworths Company Law Handbook (Butterworths 2020)
8 Broullk J, 'Relationship Between Goals Of Company Law And Harmonization Of Company Law In The
EU' [2020] SSRN Electronic Journal

All the activities of the company are directly or indirectly for the benefit of the society. But
the Companies Act must not be done negligently so that it harms the society in any manner.
Although there are various legal provisions that held Company liable for the activities done by
them negligently or intentionally under which they are held liable. If in any manner the activities
of the operations of the company are harming the society or causing any kind of disturbance to
the society the company will be held liable.
There are many types of circumstances in which the court will lift the veil of incorporation
and that will also require the shareholders and the directors of the company to contribute by
making payments of the unpaid debts to the creditors in the case when the company becomes
insolvent. However there are a variety of situations in which it is severely restricted by the law of
the UK. The said principle is derived from the case of Salomon v. A Salomon & Co. Ltd. In this
Landmark case of the company law a Whitechapel cobbler incorporated a company under the act
of the company of 1862 there were seven individuals which were required by this act for the
incorporation of the company. Mr Salomon wanted to fulfil this requirement by adding or by
having another six members so he included his family members to buy each one of those shares.
Then in lieu of payment due and the company he enabled the form to grant a debenture which
will be guaranteed upon his get ahead of any creditors in case when the company becomes
insolvent or is bankrupt. Later on the company got insolvent and the liquidators of the company
continuously threaten to see you Mr Salomon directly on behalf of all the unpaid creditors.
Although when the case was held by the court of appeal that Mr Salon had already defeated the
purpose of the Parliament that was that the company was to be registered by the shareholder even
if those shareholders were dummy he was liable to make compensation to the company for
indemnifying the company. Later on it was also held by the house of laws that the shareholders'
access must be handled separately from that of the legal separate entity that is the cooperation
itself full stop there for as long as a basic formal conditions of registrations are followed there
could not be any raising of the veil.
When there is a question of a limited liability in a company it only means that the limited
liability is of the shareholders of the company but not its director9. All the directors of the
company have unlimited legal liability that arises due to the position of the company as a legal
agent and a Trustee of its assets. Therefore it is important that directors are aware of all their
9 Company Act (Department of Investment Services of MOEA 2018)

duties and responsibilities and they make sure that they properly discharge them all. Even if the
company is performing its operations and without any illegal activities there may arise situations
in which the operations of the company are harming other people for the society in any manner.
This may also come under the negligent act of the company. Negligence basically is act or
omission because of which the company may be held liable as such a negligence would have
caused damage or severe harm to some other individual or Society at large10. The company has
legal responsibility and duty to take care of others even if the society is not directly related to the
company then also the company will be held liable in case there is any negligence on part of the
company. It is the duty of the court to decide whether the negligent Act was the fault of the
company or was the responsibility of the director which he should have seen.
There are many cases in the law that leads to the company and their negligent act. In the
situation when it is being done by the company then in such cases the court always sees that
there is a duty of care by the company. There are certain cases where the company even doesn't
have a duty to care but still they are held liable for the act done by them. Such cases impose
vicarious liability on the company under which they are held strictly liable to pay for the
compensation and the damages caused by the activities of the company to the individual or
Society at large to whom the harm has been caused.
All the companies are basically established or Incorporated for the Welfare of the society for
the country. The working and operations of the company are directly or indirectly related with
that of the society11. The companies are all established so that they can walk for the people and
also help in increasing the economic conditions and improving them for the country. It comes
under the fiduciary duty of the company to take care and take all the reasonable precautions in
carrying out the business operations so that no harm is done to any other person or individual.
There are various companies that deal with dangerous and harmful exposure to its employees and
the people who are staying near to their company. This is the responsibility of the company to
make sure that the activities are done while taking precautions and in no way it can be harming
the employees working or the people living new to the company.
Even though the company is doing and performing all its operations for the Welfare of the
society still they have a duty to care under which they have to make all the precautionary
10 Miah M, 'Critically Examine The Seven General Duties Of The Directors Under Company Act 2006'
[2020] SSRN Electronic Journal
11 Cilliers H, Benade M, and Henning J, Company Law (Butterworth 2018)

measures so that they do not harm any individual or the society either intentionally or
unintentionally. The provisions of the law shall be made according to the fact that even though
the activities of the company are for the Welfare of the people but still the company, its directors
and the managers shall be held responsible in case there is any harm caused to the society due to
the activities or operations of the company. Even if there is any negligence acting done by the
company then also the Agents of the company shall be liable for the company itself shall be
liable to the society12. The company itself is a legal entity and any work done by an agent is also
reflective upon the company and therefore in many of the cases even the work done by the
directors or managers of the company will hold the Company liable for the compensation to be
paid to the people or society to harm have been done.
CONCLUSION
It is concluded from the above discussion that a company is a legal entity which have a
separate entity and it is known by its own name. Any act which is done on the name of the
company in such a case the company shall be held liable. The directors of the company plays a
major role in carrying out the operations of the company as they are the ones that regulates and
governs the functioning of the company. For regulating the company the directors of the
company employs a manager who looks after the activities and manages the employees and other
operations of the company. Even if the director has the employee as a manager in such a case if
the manager did not fulfil his duties properly the directors will be held liable for the act done by
the manager. Even if the work done by the director of the company has harmed any other
individual or Society at large then that shall meet the company or the director liable for the
compensation or any other legal damages to be paid to the society.
12 Lim E, 'Attribution In Company Law' (2019) 77 The Modern Law Review

REFERENCES
Books and Journals
Alcock A, Birds J, and Gale S, Company Act 2006 (Jordans 2019)
Broullk J, 'Relationship Between Goals Of Company Law And Harmonization Of Company Law
In The EU' [2020] SSRN Electronic Journal
Cilliers H, Benade M, and Henning J, Company Law (Butterworth 2018)
Company Act (Department of Investment Services of MOEA 2018)
Engsig Sørensen K, 'Branches Of Companies In The EU: Balancing The Eleventh Company Law
Directive, National Company Law And The Right Of Establishment' (2018) 11 European
Company and Financial Law Review
Ferran E, 'Corporate Mobility And Company Law' (2020) 79 The Modern Law Review
Hannigan B, Company Law (2019)
Lim E, 'Attribution In Company Law' (2019) 77 The Modern Law Review
Miah M, 'Critically Examine The Seven General Duties Of The Directors Under Company Act
2006' [2020] SSRN Electronic Journal
Sheikh S, A Guide To The Companies Act 2006 (2017)
Walmsley K, Butterworths Company Law Handbook (Butterworths 2020)
Wymeersch E, 'Company Law In Europe And European Company Law' [2019] SSRN Electronic
Journal