ACCA F4 - Corp and Business Law (ENG)

180 12: Corporations and legal personality  Part D The formation and constitution of business organisations

A corporation is a legal entity separate from the natural persons connected with it, for example as

members or directors.

2 Limited liability of members

The fact that a company's members – not the company itself – have limited liability for its debts protects

the members from the company's creditors and ultimately from the full risk of business failure.

A key consequence of the fact that the company is distinct from its members is that its members have

limited liability.

Limited liability is a protection offered to members of certain types of company. In the event of business

failure, the members will only be asked to contribute identifiable amounts to the assets of the business.

2.1 Protection for members against creditors

The company itself is liable without limit for its own debts. If the company buys plastic from another

company, for example, it owes the other company money.

Limited liability is a benefit to members. They own the business, so might be the people whom the

creditors logically ask to pay the debts of the company if the company is unable to pay them itself.

Limited liability prevents this by stipulating the creditors of a limited company cannot demand payment of

the company's debts from members of the company.

2.2 Protection from business failure

As the company is liable for all its own debts, limited liability only becomes an issue in the event of a

business failure when the company is unable to pay its own debts.

This will result in the winding up of the company and enables the creditors to be paid from the proceeds

of any assets remaining in the company. It is at winding up that limited liability becomes most relevant.

2.3 Members asked to contribute identifiable amounts

Although the creditors of the company cannot ask the members of the company to pay the debts of the

company, there are some amounts that members are required to pay in the event of a winding up.

Type of company Amount owed by member at winding up

Company limited by shares Any outstanding amount from when they originally purchased their

shares from the company

If the member's shares are fully paid, they do not have to contribute

anything in the event of a winding up.

Company limited by guarantee The amount they guaranteed to pay in the event of a winding up

2.4 Liability of the company for tort and crime

As a company has a separate legal identity, it may also have liabilities in tort and crime. Criminal liability

of companies in particular is a topical area but, is outside the scope of your syllabus.

Key term

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