Gavin Howe
Company law, or corporate law, in the UK is governed by the Companies Act 2006, the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives, and court cases. It is the primary legal vehicle for organising and running a business. Company law can be divided into two main fields: corporate governance and corporate finance. Corporate governance mediates the rights and duties of shareholders, employees, creditors, and directors. Corporate finance involves debt finance, which means getting loans, usually with a fixed annual interest repayment. The UK was the first country to draft modern corporation statutes, allowing investors to incorporate, limit liability, and delegate management to a centralised board of directors.
| Characteristics | Values |
|---|---|
| Legal vehicle to organise and run business | Companies formed under the Companies Act 2006 |
| Governance | Mediates the rights and duties among shareholders, employees, creditors and directors |
| Finance | Debt finance, corporate finance |
| Insolvency | Governed by the Insolvency Act 1986 |
| Directors | Must carry out responsibilities with competence, in good faith and undivided loyalty to the enterprise |
| Directors' liability | Directors must contribute to payment of company debts in winding up if they kept the business running up more debt when they ought to have known there was no reasonable prospect of avoiding insolvency |
| Shareholders | Hold sole voting rights in the general meeting |
| Shareholders' rights | Comprehensive code safeguarding minority shareholders |
| Registration | Simple registration procedure for investors |
| Liability | Limited liability |
| Taxation | Corporation Tax, VAT |
| Corporate capacity | Unlimited unless articles specifically state otherwise |
| Corporate structure | Single economic unit of multiple companies with identical shareholders and controlling minds |
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What You'll Learn
Company law and corporate law
Company law, also known as corporate law, is the body of law that governs corporations formed under the Companies Act 2006 in the United Kingdom. It regulates the rights, relations, and conduct of persons, companies, organisations, and businesses. Corporate law can be divided into two main fields: corporate governance and corporate finance.
Corporate Governance
Corporate governance in the UK mediates the rights and duties among shareholders, employees, creditors, and directors. British law is often described as "shareholder-friendly", as shareholders typically exercise sole voting rights in general meetings, excluding employees. The general meeting holds the right to change the company constitution, issue resolutions, and remove members of the board. Directors, on the other hand, are responsible for carrying out their duties with competence, good faith, and undivided loyalty to the enterprise.
Corporate Finance
Corporate finance involves the process of obtaining loans, usually with a fixed annual interest repayment. Lenders, such as banks, may contract for a security interest in the company's assets, allowing them to seize the property in case of default on loan repayments. Creditors are protected by the courts, which can set aside unfair transactions or recoup money from negligent directors. If a company cannot pay its debts, UK insolvency law requires an administrator to attempt a rescue, and if that fails, the company's assets are liquidated and distributed to creditors.
Other Aspects of Company Law
Company law also covers the formation, funding, and dissolution of corporations. It deals with the creation of the business entity, the establishment of management duties, shareholder rights, and the application of relevant regulations. Corporate lawyers assist with various aspects of running a business, including contract writing, dispute resolution, and ensuring compliance with laws. They also advise on business structure, bylaws, and internal affairs.
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Corporate governance
The Code is a consolidation and refinement of different reports and codes concerning opinions on good corporate governance. The first step towards the Code was the Cadbury Report in 1992, produced in response to major corporate scandals associated with governance failures in the UK. The Cadbury Report made three basic recommendations: firstly, that the CEO and chairman of companies should be separate to ensure the absence of CEO duality. Secondly, that directors should be responsible for internal financial and auditing controls. And thirdly, that non-executive directors should have specific duties to carry out.
The Listing Rules require public listed companies to disclose how they have complied with the Code, and explain where they have not applied it – in what the Code refers to as 'comply or explain'. Private companies are encouraged to conform but are not required to disclose compliance. The Code is updated periodically, with the most recent edition published in 2014.
The FRC provides guidance to assist company boards when implementing the Code, including the Best Practice guide to Audit Tendering, which sets out board responsibilities for establishing, monitoring and reviewing risk management and internal control systems.
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Corporate finance
In the UK, there are two main options for limited companies to raise money: debt finance and equity finance. Debt finance involves taking out loans, usually with a fixed annual interest repayment. Lenders, such as banks, will often contract for a security interest over the assets of a company, allowing them to seize the company's property to satisfy debts in the event of default on loan repayments. Equity finance involves issuing shares to build up a company's capital. Shares typically grant the right to participate in dividends and the right to vote in company affairs.
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Debt finance
Debt financing can benefit businesses by providing them with access to capital for various needs, including working capital and capital expenditures. Companies can borrow money from various sources, including banks, financial institutions, or private lenders. The interest on the debt is tax-deductible in most cases.
There are several types of debt finance:
- Senior debt is debt that provides the holder with the first claim to repayment and recourse to secured assets in the event of insolvency.
- Mezzanine finance is less secure than senior debt and is either unsecured or secured but ranking behind senior debt. The risk to the holder of mezzanine debt is higher, so the return to the investor in terms of interest is also higher.
- Acquisition and leveraged finance involve handling the financing for leveraged buyouts, public takeovers, private acquisitions, recapitalisations, and asset purchases.
- Leasing and asset finance involve acting for lessors, financiers, lessees, manufacturers, export credit agencies, and operators.
- Trade and export finance involve organising pre-export financing for companies in industries such as oil, gold mining, and steel mining.
- Structured finance involves pooling different types of debt with a fixed income stream, such as mortgages, car loans, and credit card debt obligations, and then packaging the debt in a shell company that sells it as bonds to investors.
- Debt capital markets involve issuing publicly traded debt securities to investors, who expect the full amount lent to be repaid with interest.
Before applying for debt finance, small businesses should review their cash flow to ensure they can meet repayment schedules and seek legal advice to understand the long-term impact on their business.
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Company registration
In the UK, company law regulates corporations formed under the Companies Act 2006. The company is the primary legal vehicle for organising and running a business. Most businesses register as either a limited company or a sole trader.
A limited company is legally separate from its owners. It has 'limited liability', meaning owners are responsible for business debts only up to the value of their investment. To set up a limited company, you must appoint a director (who will be responsible for running the business) but you do not have to appoint a company secretary. You need at least one shareholder, who can be a director, and at least one guarantor, who can also be a director. You must also identify people with significant control (PSC) – anyone with more than 25% of the shares or voting rights.
You will need to register your company with Companies House before you start trading, although you do not need to start trading straight away – your company can remain dormant. You can register by post using form IN01, which takes 8-10 days and costs £71. You will also need to create a Government Gateway user ID and password for your company. When you get your 10-digit Unique Taxpayer Reference (UTR), you will need to add Corporation Tax services to your business tax account. You will usually be set up for Corporation Tax at the same time as registering your company, unless your company is dormant.
There are some things you may need to do once you've registered your limited company, such as adding Corporation Tax services to your business tax account. You can also choose to register for VAT before your company meets the requirements if you want to reclaim VAT on business expenses.
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Frequently asked questions
Company law, or corporate law, is the law that regulates corporations formed under the Companies Act 2006.
Company law can be broken down into two main fields: corporate governance and corporate finance.
Corporate governance mediates the rights and duties among shareholders, employees, creditors and directors.
Corporate finance refers to the process of getting loans, usually for a fixed annual interest repayment.
The Companies Act 2006 is an act of the Parliament of the United Kingdom that forms the primary source of company law in the country. It provides a comprehensive code of company law and made changes to almost every facet of the law in relation to companies.
