Free Liability to Creditors and Types of Companies Case Study Example
As a legal person, a company can be sued by any person if the directors had entered into a contract with the person and failed to honor the deal, therefore, resulting to financial loss to either party. However, recent case laws have shown that there are instances when directors can be held liable or personally liable for any financial loss to a creditor or any other party. An instance where a company’s director makes statements on behalf of the company that can be considered as lies or misrepresentation of the company can result to the civil suit against both the company and the directors (Shenkman, et al., 2003).
A director can be considered personally liable to a creditor or any other party if; he has made negligent misstatements on behalf of the business, for example, false statements that have caused financial loss to creditors. Secondly, breach of contract by a director that results to financial loss to the party involved can result to a civil suit to the directors. Also, directors can be sued personally is they authorized others to commit wrongful acts that resulted to a financial loss to creditors. All these examples show that directors can be held liable in some cases and the limited liability aspect of the company could be ignored if the directors’ actions resulted in a financial loss to a creditor or any other party.
However, Simon cannot be personally sued by the creditors because he has not committed the above wrongs. A case that supports this argument is Salomon versus A. Salomon Company limited of 1897. This case was key in establishing a corporate as a separate entity in 1897. Salomon operated a shoe selling business as a sole trader; afterwards he sold the company and incorporated it as A. Salomon Company Limited. The only people in the business were Salomon, his wife, and five children who took each a share that was worth a pound each.
The company purchased the business for 39000 pounds and Mr. Salomon subscribed to 20000 shares, the company did not pay 10000 pounds but instead issued a debenture and gave him a floating charge on its assets. When the company failed the liquidator of the company argued that the floating charge should not be honored and Mr. Salomon should pay the company’s debts. The courts held it that the company that is legally incorporated must be treated as an independent person, therefore, it is supposed to cover its debts.
Therefore, the creditors of Slowgo PTY Ltd cannot personally sue Simon even though he is the majority shareholder and the managing director of the company. The company is an independent person that can be sued or sue a party in a court of law, therefore, should be treated as such. The assets of the company should be liquidated to settle the debt, but Simon cannot pay up using his personal assets.
There are different forms of companies that are registered, but apart from these types of companies there are various other set ups that a business can take the form of. There are advantages and disadvantages that go hand in hand with the business that has been incorporated. Ace, Brenda, Chris and Deidre want to form a company in which they will get the benefit of selling the shares through an initial public offering and also be a limited liability status. A limited liability company (LLC) incorporates elements of corporate structures and partnership.
Private companies limited by shares are a form of a company that has the word limited LTD at the end of the name. Private companies may range from small companies owned by a family to a large group that is a makes substantial trading. However, private companies cannot offer or sell their shares to the public, therefore, do not have the ability to raise funds easily. The benefit that the private companies have is that they are limited liability. That means that if a company acquires a debt the private assets of the shareholders may not be used to settle the debt. Instead, they may use the shares up to the proportion of the shares that one is entitled to. The other benefit of this business is that it does not require a minimum capital threshold to start (Books, 2011).
Public limited company (PLC) represents a form of a company that is usually larger and its shares are available to the general public. This business ends with PLC in its name and is subjected to more stringent laws than the private companies. A public limited company is supposed to start up with a set minimum share capital and it is supposed to register its annual financial reports to the business house. It is must have a company secretary and hold annual general meetings each year, this is dispensable for a private limited company. The key benefit of this company is that it is simpler for it to raise funds by offering its shares to the public. Public limited companies are listed in the stock exchange where shares are traded.
Holding companies are those that own other companies or own more than 50% of the shares of another company or companies. The holding companies have the majority of voting rights and can appoint or fire majority of the directors. A subsidiary company has its shares acquired by another company to the value of more than 50% of the shares. People may sometimes refer unlimited companies as sole traders or the partnership. However, these forms of business are not formal companies because they cannot be registered in the house of companies. These companies have no shareholders but rather have guarantors.
Unlimited companies are not very common because people mostly do not appreciate their benefits and can only be suitable where the risk in the business is very low. In addition, a company that is limited liability partnership is used to enjoy tax benefits and limited liability benefits by a firm of lawyers or accountants (Tyagi & Kumar, 2003). For these rationales, it would be wise for Ace, Brenda, Chris and Deidre to form a limited liability company because it has many benefits than the other forms of companies. They may be able to raise funds easily by selling the company’s shares to the public and also enjoy the limited liability benefit.
Books, H., 2011. Articles on Types of Companies, Including: Corporation, Delaware General Corporation Law, European Company Statute, Public Limited Company, Startup Co. London: Hephaestus Books.
Shenkman, M. M., Weiner, S. & Taban, I., 2003. Starting a Limited Liability Company. New York: John Wiley & Sons.
Tyagi, M. & Kumar, A., 2003. Company Law. 1st ed. New Delhi: Atlantic Publishers & Dist.