Separate Legal Personality of a Establish Company in UK and Insolvency Act 1986

27 Oct

The role of a company must be understand while establish company in UK. A crucial point to understand is the relationship between the company and its members and more importantly the directors. This article explains how a director may be made liable to the debts of the company and what saves the regular members of the company from extra liabilities in an England company register.

Separate Legal Personality of a Company

Two factors that play a key role in the incorporation of a company are separate legal personality and the liability that is limited. A company is considered as a separate person. In terms of companies, a separate person regards to the independence that a company has in terms of its rights and responsibilities. The company is independent from its legal persons that may include its members and directors. Technically, under law, the word “separate person” is a subject of responsibilities and rights. Hence, this sense of separate person makes it possible to consider a company as a separate person.

Traits of a Separate Legal Personality

Before anyone set up a new company UK, the general properties of a company must be known. The following traits are a part of a company’s entity once it has been formed under the statutory laws:

  • Any company formed has a lawful entity and is independent and distinct from the legal persons that are the members of the company.
  • The belongings and assets of a company are not owned by the members. Rather they are owned by the company itself. Moreover, there is no insurable interest given to the member or creditor on the assets. However, in case of a creditor that is secured, the insurable interest may be given to him/her.
  • A company has the authority to sign any agreement with any of its members. Moreover, it is possible for a person to be completely in charge of a company in the form of a solo shareholder or director and simultaneously be an employee of the company.
  • However, if any person owns majority or all of the shares of a company, the business of the company will not be regarded as the business of that person. The ownership of the business will rest with the company under law.
  • From the word ‘person’, a general presumption is that it includes a company. However, the final judgement may be given after analysing the context.
  • A company takes on the nationality of the country where it gets its registration done. The company then remains a national of that country throughout the life of that company.
  • A company may also own a domicile. The domicile is the area where the company is registered and just like nationality, the domicile does not change throughout the existence.
  • At the time of war, it may be possible that any enemy or an unbiased character rises against the company. There is no formal test to find the enemy but the character of any person in control can be used to determine whether he is an enemy or a neutral character.
  • A company’s residency will be considered in the area where it has its house and runs the major business. Moreover, the central administration and the major control resides in the residential area of the company.

Insolvency Act 1986

The Insolvency Act 1986 provides a whole subsection that sets out rules for the penalisation of directors and other officers of a company at the time of any fraud that is done or at the time of liquidation. The main idea behind presenting this section in this article is to show the separate legal personality of a company. Any legal rights given to a company are independent of the members. Hence, the Insolvency Act 1986 presents a solution to the dispute between separate legal personality and the piercing of corporate veil by penalising the directors and other officers.

Generalised Solution against the Law Breaking Directors and other Officers

According to the Section 212 of Companies Act 1986:

  • During the situations of liquidation, the section is applicable on the following:
  • The person under consideration has remained or still is in the company’s office.
  • The person has played the role of liquidator of the company. Or the role in administration or administrative receivership of the company.
  • Any person who does not comply with the definition mentioned in the above two points and is a participant or has participated in past in promoting, forming or administering the company.
  • Provided:
  • Any of the above mentioned person has been found guilty for any misconduct or breach of duty or has misapplied or become answerable for or retained any asset or amount of money belonging to the company, the section will be applicable on him.
  • The misconduct or breach of duty regarding the company mentioned in previous point refers to any person who has played the role of liquidating or administering the firm, and has made any breach of duty in terms of liquidation or administration of the company.
  • If any application is submitted to the court by any liquidator or official receiver, the court may analyse the matter of the accused person subjected to subsection (1). And the person may be made liable by the court to any of the following:
  • To make payments, or restore the loss by any method along with an added interest that the court justly suggests.
  • To make a contribution of an amount of money for compensating for the breach of duty that has been done, in a way that the court suggests.
  • No person who has remained responsible for the liquidation and governance of the company can make an application, unless, he has been released and the court has granted him a leave.
  • A contributory may also not get the chance of making an application unless the court grants him a leave for this purpose. however, the authority of making an application will be allowed for utilisation if the contributory makes sure that he will not benefit from the verdict given by the court on the application.

Rulings for any Fraud in Trade

The Section no. 213 of the Companies Act 1986 is a remedy to any fraud that may be done in the trade:

  • If it is found that in the process of liquidation of a company, any business has been specifically run to harm the creditors’ rights by defrauding them, whether they are creditors to a company or to any other person, the penalty in the next statement will be followed.
  • When any liquidator submits an application to the court, the court has the right of declaring the person who is accused and proved of carrying on the business for defrauding the creditors as mentioned above, liable to any form of fine or contribution as proposed by the court.

Rulings regarding Unfair Trading

Section 214 provides the remedies to any wrongful trading in a company:

  • The court ought to apply penalty on any person in the form of making a contribution towards the belongings of the company upon the request of any liquidator if the next statement holds true.
  • When any person just some time prior the bankruptcy of the company foresees the possibility of windup, and the person is the director of the company at that time, the court may declare against him. However, the court shall not declare against him if the act took place before the 28th of April 1986.
  • Another scenario where the court shall not make any declaration is when despite the fulfilment of above mentioned criteria, the person intended and took every suitable measure to save the company from loss.
  • When considering the above stated two situations, it must be known by a person that what facts does a director take into consideration or the tasks that are performed by him or the inferences drawn by the director. Also the person should have the following qualities:
  • The level of expertise and the kind of knowledge related to the company that should be present in someone who wants to act as a director.
  • The general knowledge and skills and experience gained by a director.
  • The tasks that are referred to in the statement above include all the tasks that fall under the duties of a director.
  • The condition of bankrupt windup of a company may be defined as the situation when the company is unable to make complete payments of its debts or any other liabilities. This may include the expenses of liquidation.
  • The section when refers to directors includes the shadow directors in it. Moreover, this subsection does not show any prejudice to the previous section.

Regulations for the Proceedings under subsection 213 and 214

Section 215 states that:

  • When it is the hearing of any application, the liquidator who submitted the application is responsible for presenting evidences or bringing witnesses.
  • If the court decides to declare against the accused person under either the subsection 213 or 214, it should give any additional order as such that the declaration becomes effective. The court may do either of the following:
  • Any person that is under the declaration should be given the liability in the form of a charge that may cover any debt or regulation which the company owes to him. The liability may include any mortgage or charge or the mortgage’s interest or the security on the company’s belongings that again the company owes to him. It may be that the any of these forms of security may be owed by the company to any agent of the liable person.
  • The court must also take care of giving such orders ever so often that must be made to impose any charge that is ordered under this subsection. 
  • Just like company formation agents UK, there may be agents acting on behalf of the liable person. Any person that is assigned as an agent of the liable person may include:
  • Someone who has been given the ownership of any charge, debt, mortgage or mortgage’s interest per the order of the originally liable person. However, this may exclude the following.
  • Any person who has been assigned under worthy consideration given in fair dealing whereas the real matter that formed the basis of the declaration is ignored. An exception is the consideration given due to marriage.
  • If the declaration made by the court is related to any of the company’s creditors, the court may order the company to owe either complete debts or a part of any debt to that person. Also, any interest on the debts may rank in the form of priority following all the company’s debts and the interest on those debts.
  • The Sections 213 and 214 remain effective despite of the fact that the person related to the declaration may be liable criminally respective to issues that form the basis of the declaration to be given under the section.

Special focus has been given in this article on the separate legal personality and Insolvency Act 1986 of an England company register. As it is a requirement of the separate legal personality that the company will remain separate from its legal persons that are the members, hence the members cannot be made liable to more than what has been decided at the time of set up a new company UK.

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