Analyzing the Importance of Company Law and its Design in the UK

This essay delves into the critical importance of company law within the United Kingdom, primarily focusing on the Companies Act 2006. It highlights the Act's role in defining company functions and governance regulations, emphasizing the need for legal recognition of a company's artificial personhood. The essay examines how company law protects shareholders from corporate fraud by creating a legal separation between the company and its shareholders. It references the landmark case of Salomon v Salomon & Co Ltd to illustrate the concept of separate legal identity. Furthermore, it discusses the evolving responsibilities of directors and shareholders under the Companies Act 2006, underscoring the significance of company laws in safeguarding their interests and ensuring legal compliance. The essay also touches upon other relevant legislation affecting companies in the UK, such as the Companies (Audit, investigations and Community Enterprise) Act 2004 and the Insolvency Act 2000. The essay concludes by reiterating the necessity of implementing and adhering to company laws for the efficient operation of businesses, protection of stakeholders' rights, and avoidance of legal uncertainties.

Running head: IMPORTANCE OF COMPANY LAW
Importance of Company Law
Name of the Student
Name of the University
Author Note

1IMPORTANCE OF COMPANY LAW
It is evident that from the very beginning the principal statute that governs the Companies
Law in UK is the Companies Act 2006. In this regard, it is worth noting that the functions of a
company and the regulations regarding the governance of a company have been depicted in the
Articles of Association after the implementation of the Companies Act 20061. Therefore, the
essay is commissioned to examine the necessity of company law and why it has been designed.
A company can be regarded as an artificial person however; it existence and functions
must be recognized by the application of law2. In this regard, it is worth mentioning that the
artificial legal personality that exists within a company can be regarded as a veil which separates
the company from its shareholders. Therefore, it can be stated that for this purpose there is a
need to implement company law for the purpose of protecting the members of the company in
case of any corporate fraud. In Salomon v Salomon & Co Ltd (1897) AC 223 there was an issue
regarding the applicability of the separate legal identity of the company and that whether the
shareholders be held liable for the acts of the owners. It was held by the Court that the
shareholders were responsible under the Companies Act as the company was legally
incorporated. It is worthwhile to mention here that with the introduction of the Companies Act
2006, considerable changes have been observed in the role of the directors and shareholders. As
a result of these changes, the responsibilities of the directors and the shareholders have reached
to a new position. With the advent of the Companies Act 2006, the directors and the shareholders
of the companies have become aware of the existing legal principles and regulations governing
the company. Therefore, the application of company laws is required for the purpose of
safeguarding the interests of the directors and shareholders of a company.
1 Abraham, Santhosh, and Philip J. Shrives. "Improving the relevance of risk factor disclosure in corporate annual
reports." The British accounting review 46.1 (2014): 91-107.
2 Turley, Stuart. "Developments in the framework of auditing regulation in the United Kingdom." Auditing, Trust
and Governance. Routledge, 2015. 223-240.
3 (1897) AC 22

2IMPORTANCE OF COMPANY LAW
It has been emphasized that from the beginning, the Companies Act 2006 formed the
primary source of legislation on the UK company law. In addition to this, the other existing Acts
affecting the companies in UK can be summarized as the Companies (Audit, investigations and
Community Enterprise) Act 2004, Enterprise Act 2002 and the Financial Services and Markets
Act 2000, Insolvency Act 20004. In this regard, contemporary authors were of the perspective
that in order to form a company it is important that the company must have incorporated by
applying the relevant provisions of the Companies Act 2006 and the other existing Act as
mentioned above5. Therefore, it is noteworthy to mention the relevant provisions which
constitute the incorporation of a company. In United Kingdom, the provisions of Section 7 of the
Companies Act, 2006 states that the formulation of a company takes place with the subscription
of the names of one or more individuals to the memorandum of association by complying with
the specifications of the Act6. Therefore, for the purpose of incorporation of a company, it is
required to apply the provisions of Companies Act 2006 accordingly and in order to support
there is a need to implement company laws within the country.
It is important to note here that, company law helps in the regulation of various
corporations. In such process, company law regulates the functioning of the existing investors,
creditors, shareholders and directors and their interaction with each other. Company laws has
been designed or enacted by the legislature for the purpose of examining the issues faced by
business entities while performing their day to day activities. With the implementation of
4 Barker, Roger, and Iris H-Y. Chiu. "Protecting minority shareholders in blockholder-controlled companies:
evaluating the UK’s enhanced listing regime in comparison with investor protection regimes in New York and Hong
Kong." Capital Markets Law Journal 10.1 (2014): 98-132.
5 Keay, Andrew. "Comply or explain in corporate governance codes: in need of greater regulatory oversight?." Legal
Studies 34.2 (2014): 279-304.
6 Dhaliwal, Dan, et al. "Corporate social responsibility disclosure and the cost of equity capital: The roles of
stakeholder orientation and financial transparency." Journal of Accounting and Public Policy 33.4 (2014): 328-355.

3IMPORTANCE OF COMPANY LAW
Company laws in United Kingdom it has proved to be beneficial in protecting the liability of the
investors and the shareholders of a company to the extent of which the operation of a business is
affected by the acts of its agents. Companies will be able to able to operate more effectively and
will be able to incur greater profits with the application of company law7. In this regard, there has
been active intervention on the part of government authorities for the purpose of facilitating
investment on profitable basis. In this regard, it is necessary to protect the investors operating
business from personal liability in relation to the debts incurred by such business. Therefore, for
the purpose of protecting the interests of the investors from the wrongful acts of the business,
there is a necessary to implement company laws.
With the application of company law, the operational duties vested with the directors of
the company can be delegated to the subordinates for the proper functioning of the business8. In
this way the day to day operations of the company could be managed efficiently and the
investors would be free from personal liability and the liability of such investors should be
limited to the shares allocated to them. For this purpose, there is a need to incorporate company
laws which will be beneficial in governing the activities of the business of a company. Therefore,
the legal provisions of the Companies Act 2006 provided appropriate remedies to the issues
faced by the companies of UK9. In some cases, it can be observed that the directors of the
company have decided to expand the business for the purpose of development of the company.
In this regard, the provisions of the Companies Act 2006 has been designed in such a way in
order to provide appropriate solution to the issues faced by the directors while carrying out their
7 Hynes, Niki, et al. "Use, abuse or contribute! A framework for classifying how companies engage with country
image." International Marketing Review 31.1 (2014): 79-97.
8 Sikka, Prem, and John Stittle. "Debunking the myth of shareholder ownership of companies: Some implications for
corporate governance and financial reporting." Critical Perspectives on Accounting (2017).
9 Nicotra, M., Marco Romano, and M. Del Giudice. "The evolution dynamic of a cluster knowledge network: the
role of firms’ absorptive capacity." Journal of the Knowledge Economy 5.2 (2014): 240-264.

4IMPORTANCE OF COMPANY LAW
responsibilities. The provisions and the regulations depicted in the company laws can be
efficiently applied in cases when there is an authority on the part of the company raise issues
regarding debt and equity capital with the issuance of shares to the general public10. For this
purpose, it is necessary the company should adhere to the rules and regulations mentioned in the
relevant Companies Act. It can be stated that, for efficient functioning of the companies, there is
a necessity to incorporate company laws which would prove to be beneficial for both the
directors and the shareholders in the long run11. It is worthwhile to mention here that for the
purpose of meeting certain legal obligations, it is important on the part of the company to adhere
to the legal provisions depicted in the company laws of the particular country12. Failure to
comply with the existing company laws can create uncertainty in the operation of business.
Therefore, it is important for the owners of the company to comply with the relevant company
laws for the purpose of avoiding uncertainty in business13.
In the conclusion it can be stated that the Companies Act 2006 covers the laws applicable
for the proper functioning of the companies in UK. However, the requirements have been
amended from time to time. Therefore, it is worth stating that for the purpose of efficient
operation of the day to day business activities in a company, it is necessary to implement
company laws. In this regard, it can be stated that with the implementation of company laws, the
rights and obligations of the shareholders and investors can be protected to a large extent.
10 Lim, Ernest. "Judicial Intervention in Directors’ Decision-Making Process: Section 172 of the Companies Act
2006." (2016).
11 Idrees, Barrister Muhammad Hassan. "Directors Duties Under Companies Act 2006 of UK." (2016).
12 Bessonova, Anastasiya V., et al. "Legislation On Public Companies In Various Legal Sys-Tems." Turkish Online
Journal Of Design Art And Communication 7 (2017): 338-342.
13 Collings, Steven. "Financial Reporting for Smaller Companies." Interpretation and Application of UK GAAP: For
Accounting Periods Commencing On or After 1 January 2015: 65-81.

5IMPORTANCE OF COMPANY LAW
References:
Abraham, Santhosh, and Philip J. Shrives. "Improving the relevance of risk factor disclosure in
corporate annual reports." The British accounting review 46.1 (2014): 91-107.
Barker, Roger, and Iris H-Y. Chiu. "Protecting minority shareholders in blockholder-controlled
companies: evaluating the UK’s enhanced listing regime in comparison with investor protection
regimes in New York and Hong Kong." Capital Markets Law Journal 10.1 (2014): 98-132.
Bessonova, Anastasiya V., et al. "Legislation On Public Companies In Various Legal Sys-
Tems." Turkish Online Journal Of Design Art And Communication 7 (2017): 338-342.
Collings, Steven. "Financial Reporting for Smaller Companies." Interpretation and Application
of UK GAAP: For Accounting Periods Commencing On or After 1 January 2015: 65-81.
Dhaliwal, Dan, et al. "Corporate social responsibility disclosure and the cost of equity capital:
The roles of stakeholder orientation and financial transparency." Journal of Accounting and
Public Policy 33.4 (2014): 328-355.
Hynes, Niki, et al. "Use, abuse or contribute! A framework for classifying how companies
engage with country image." International Marketing Review 31.1 (2014): 79-97.
Idrees, Barrister Muhammad Hassan. "Directors Duties Under Companies Act 2006 of UK."
(2016).
Keay, Andrew. "Comply or explain in corporate governance codes: in need of greater regulatory
oversight?." Legal Studies 34.2 (2014): 279-304.

6IMPORTANCE OF COMPANY LAW
Lim, Ernest. "Judicial Intervention in Directors’ Decision-Making Process: Section 172 of the
Companies Act 2006." (2016).
Nicotra, M., Marco Romano, and M. Del Giudice. "The evolution dynamic of a cluster
knowledge network: the role of firms’ absorptive capacity." Journal of the Knowledge
Economy 5.2 (2014): 240-264.
Sikka, Prem, and John Stittle. "Debunking the myth of shareholder ownership of companies:
Some implications for corporate governance and financial reporting." Critical Perspectives on
Accounting (2017).
Turley, Stuart. "Developments in the framework of auditing regulation in the United
Kingdom." Auditing, Trust and Governance. Routledge, 2015. 223-240.