company laws and their meanings to the organization

Question 1a) Explain to Sal and Omon the significance of Limited Liability for them

Business association’s law most commonly referred to as business law is a part of the law that affects companies and business organizations such as corporations, partnerships, and organizations concerned with humanitarian or commercial activities. The company or juristic person has separate legal personality. Therefore, the people investing their money in the business have limited liability. A limited company is where the liability of associates is limited by shares or guarantees. Limited liability is when an individual’s financial liability is limited to a fixed sum, known as the person’s investment in the company or partnership. When a company with limited liability is sued, then the plaintiffs are suing the juristic person and not the owners or investors. The significance of limited liability to Sal and Omon is that in case the business fails, then they do not risk their personal possession, and they cannot be made responsible for any unfulfilled company obligations and debts that are more than the amount that each of them invested.

Question 1b) Explain, using case law, under whose name the stock of new shoes belonging to the company should be insured, and why it would be a terrible idea for them to be insured under Sals name.

Case law is a set of existing rulings or precedents to make new interpretations of the law, and are not the same as statutory law. Case law in civil and common law traditions create differences in the way courts render decisions. If the stock of new shoes belonging to the company is insured under Sal’s name, in case of any loss, it implies that it is not the company that is insured but Sal, since the insurance policy creates, s a contract between the insurer and the insured. Sal will be required to pay part of the loss while the insurer pays the rest. Therefore, it is a terrible idea to insure them under Sal’s name, but should be insured under the company name.

Question 1c). Will Omon be able to take the matter to court instead of arbitration? Explain using relevant case law.

The articles of association of Shoes Limited require that if the owners are in dispute with the company, they should be decided by an independent arbitration. However, Omon wishes to take the matter to court. This should only happen if negotiations with Sal or invoking any other formal mediation process fail. The mechanisms available for the courts to resolve the dispute could be for Omon to start a minority shareholder’s action against Sal since both Sal and Omon are equal shareholders. Omon can ask the court to procure an account on who owns the company. But what Omon can do depends on the written agreements are in place between him and Sal. If Sal’s expenditures have a significant impact on the business, then Omon can apply to the court for an interim injunction to help the business function until the dispute is resolved. Omon can go to court; where the court may appoint a provisional director to break the ties between him and Sal, who has the powers to make decisions as a director and not as a shareholder.

Question 1d). Explain on what basis the liquidator will distribute the remaining assets of the company, and how might Billy have better protected his position?

Shoe limited is insolvent because it is indebted to Natbank on a floating charge of £5000, Milbank on a floating charge of £2000, Royal bank on a fixed charge over books debt of £1000, Billy on a debt of £2000 for leather supplied, and Carol for one month’s wages. In limited liability companies or partnerships, the liquidator will distribute the remaining assets to Omon and Sal according to the balance in each member’s capital account. They have capital accounts that start off with their initial investments in the business and are increased when profits allocated to them and decreased when profits are distributed to them. In case, there is no sufficient cash to pay each one of them, the amount in the capital account, then whatever cash or assets that remain are split according to the relative size of their capital accounts, which is fifty-fifty. However, Billy can send bills for the full amount of debt to the company, and if he was a secured creditor whose debts are attached to the assets. He can claim property and sell it to cover the debt.  Creditors can only claim assets that are stated as collateral in secured loans, and they can continue to send bills stating how much the company owes and demand payment.

Question 1e) Explain the differences between an incorporated company and a partnership

A partnership is a type of unincorporated business organization were general partners manage the business and are equally liable for its debt. Other individual partners known as limited partners may invest. However, they cannot be directly involved in the management and are liable to the extent of their investment. Each partner shares equal responsibility for the company’s profits or losses, and its debts and liabilities. The partnership itself does not pay income taxes, but each partner has to report their share of business profits or losses on their individual tax returns. A company is incorporated by drawing up a memorandum of association, which is lodged with the company’s house. In the UK, a private limited company or public limited company are generally called corporations. Corporations such as Plc may be subject to takeovers or mergers since shares can be purchased by anyone, shareholders do not actively participate in the activities of the business. In case of issuance of stocks, a PLC can raise capital which an LLC cannot.


Question 1f) Explain using relevant case law, whether Sal and Omon could claim under a statutory scheme to compensate employees injured at work if one of them were to be injured at work

The eligible workers are entitled to compensations from the employers for sustaining work-related injuries or illness. The specific benefits are subject to state laws concerning workers’ compensation, as well as company-specific policies on workers’ compensation claims.

Question 2) Explain what the general duties of directors are under the Companies Act 2006, and how they reflect the common law

The Companies Act 2006 includes seven general duties as follows:

  • to act within the powers of the company;
  • to promote the success of the company;
  • to exercise independent judgment;
  • to avoid conflicts of interest;
  • not to accept benefits from third parties;
  • to declare an interest in proposing transactions or arrangements with the company;
  • To exercise reasonable care, skill and diligence.

The Companies Act 2006 (CA 2006) contains a number of provisions which affect directors including the statutory codification of directors’ duties. There are seven duties that broadly reflect and codify the law which was in existence prior to the CA 2006. The codification is not exhaustive. The directors still have certain duties under common law and equity.         Therefore, the pre-CA 2006 law on directors’ duties will remain highly relevant.

The Companies Act 2006 (2006 Act) is still young. The statutory statement of directors’ duties (the statutory statement) is younger still: in the case of sections 171 to 174, and in the case of sections 175 to 177.

There is, nevertheless, already a significant body of 2006 Act-related case law, in particular in relation to sections 171, 172 and 174. Taken together, these cases help to answer a question much debated by market participants in recent years: does the statutory statement merely codify the common law obligations of company directors, or does it mark a radical departure?

The latest case law

In the debates on directors’ duties that have raged since codification, the case law is a resource that is at risk of being overlooked. More weight has sometimes been placed on less authoritative sources such as ministerial statements and the explanatory notes to the 2006 Act.

The 2006 Act states, somewhat delphically, that:

  • The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director (section 170(3)).
  1. The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties (section 170(4)).
  2. While it is always necessary to submit the pre-2006 Act cases to the “section 170(3) and (4) test”, it cannot be doubted that the old common law rules and equitable principles remain if not intact, then of continuing relevance.
  3. The post-2006 Act cases vary in authoritativeness too, from persuasive opinions of the Scottish Court of Session to decisions of the Court of Appeal. Most recently, dissenting opinion in a judgment handed down by the House of Lords addressed the relationship between the 2006 Act and case law. A number of the judicial statements referred to in this article is undeniably dicta of one sort or another.


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