Company Law - Challenges of Limited Liability

[m24]

Hello!

I wouldn't normally ask for help on a uni assignment, but I'm quite stumped on this one so any general advice would be much appreciated.

I also figure this is one of the most concentrated communities of students who are likely to be studying or have studied company law!

I'm faced with an essay question which reads as follows:

“The idea of limited liability presents different challenges for equity investors and company creditors”.

Critically assess the methods English law has developed in dealing with these challenges.

Quite simply, I've written most of my essay in reference to the principles of separate corporate personality and the circumstances in which the corporate veil may be lifted. However, I've really struggled to see what challenges, if any, equity investors may be faced with from this perspective.

This has led me to begin questioning whether I'm completely misunderstanding the question and I should actually be looking at limited liability in the context of disclosure obligations, security, indemnity and insolvency law.

Obviously, this would be an entirely different essay (cue mental breakdown).

Any ideas or help clarifying this would be greatly appreciated!

 

[Jaysen]

Hello!

I wouldn't normally ask for help on a uni assignment, but I'm quite stumped on this one so any general advice would be much appreciated.

I also figure this is one of the most concentrated communities of students who are likely to be studying or have studied company law!

I'm faced with an essay question which reads as follows:

“The idea of limited liability presents different challenges for equity investors and company creditors”.

Critically assess the methods English law has developed in dealing with these challenges.

Quite simply, I've written most of my essay in reference to the principles of separate corporate personality and the circumstances in which the corporate veil may be lifted. However, I've really struggled to see what challenges, if any, equity investors may be faced with from this perspective.

This has led me to begin questioning whether I'm completely misunderstanding the question and I should actually be looking at limited liability in the context of disclosure obligations, security, indemnity and insolvency law.

Obviously, this would be an entirely different essay (cue mental breakdown).

Any ideas or help clarifying this would be greatly appreciated!

Hmm, that's an interesting one.

When we're comparing equity investors and creditors, we're usually doing so in the context of your second interpretation, so the benefits of limited liability for shareholders v the the desire for creditors to be paid what they are owed.

I'm not entirely sure what challenges limited liability presents for equity investors though? Unless we're talking about your first interpretation (situations when limited liability may not apply due to personal guarantees and where the corporate veil is lifted).

In that case, they could both apply? The challenge for shareholders if they risk losing the protection of limited liability and the challenge for creditors due to limited liability.

 

[Syafiqkay92]

Hello!

I wouldn't normally ask for help on a uni assignment, but I'm quite stumped on this one so any general advice would be much appreciated.

I also figure this is one of the most concentrated communities of students who are likely to be studying or have studied company law!

I'm faced with an essay question which reads as follows:

“The idea of limited liability presents different challenges for equity investors and company creditors”.

Critically assess the methods English law has developed in dealing with these challenges.

Quite simply, I've written most of my essay in reference to the principles of separate corporate personality and the circumstances in which the corporate veil may be lifted. However, I've really struggled to see what challenges, if any, equity investors may be faced with from this perspective.

This has led me to begin questioning whether I'm completely misunderstanding the question and I should actually be looking at limited liability in the context of disclosure obligations, security, indemnity and insolvency law.

Obviously, this would be an entirely different essay (cue mental breakdown).

Any ideas or help clarifying this would be greatly appreciated!

Hi m24

I am not a law student nor a law graduate but I do have some experience being an equity investor of a small company that went bust. I also have some experience marking undergrad essay so my top tips is to answer the question directly. I would suggest you brainstorm a list of challenges faced by equity investors and creditors when achieving their objectives and prioritise the few that are significant. You can then discuss how English Law has developed to address these challenges.

One idea. Equity investors usually want return from the company, either in the form of dividend or increase in the value of their shareholding at some point in the future. However, if the management takes a risk, for e.g. pursuing risky business strategy and that risk materialise, equity investors ranked the lowest when it comes to recovering their holdings. So in this case, how do English Law protects equity investors from excessive risk taking by the management? I know equity investors have votes on certain action by the management but the day-to-day management is much more difficult to monitor and this day-to-day action could accumulate and led to the risk being materialised.

You probably know a lot of cases where equity investors lack recourse so you could probably start there? Compile a list of cases (manageable and reasonable amount, say 3?), summarise their challenges and evaluate how English Law has developed to address them. You can also do this for creditors too but before you do anything, make sure you have the bigger picture first and prioritise.

Hope this helps you strategise.

 

[m24]

Hmm, that's an interesting one.

When we're comparing equity investors and creditors, we're usually doing so in the context of your second interpretation, so the benefits of limited liability for shareholders v the the desire for creditors to be paid what they are owed.

I'm not entirely sure what challenges limited liability presents for equity investors though? Unless we're talking about your first interpretation (situations when limited liability may not apply due to personal guarantees and where the corporate veil is lifted).

In that case, they could both apply? The challenge for shareholders if they risk losing the protection of limited liability and the challenge for creditors due to limited liability.

Hi m24

I am not a law student nor a law graduate but I do have some experience being an equity investor of a small company that went bust. I also have some experience marking undergrad essay so my top tips is to answer the question directly. I would suggest you brainstorm a list of challenges faced by equity investors and creditors when achieving their objectives and prioritise the few that are significant. You can then discuss how English Law has developed to address these challenges.

One idea. Equity investors usually want return from the company, either in the form of dividend or increase in the value of their shareholding at some point in the future. However, if the management takes a risk, for e.g. pursuing risky business strategy and that risk materialise, equity investors ranked the lowest when it comes to recovering their holdings. So in this case, how do English Law protects equity investors from excessive risk taking by the management? I know equity investors have votes on certain action by the management but the day-to-day management is much more difficult to monitor and this day-to-day action could accumulate and led to the risk being materialised.

You probably know a lot of cases where equity investors lack recourse so you could probably start there? Compile a list of cases (manageable and reasonable amount, say 3?), summarise their challenges and evaluate how English Law has developed to address them. You can also do this for creditors too but before you do anything, make sure you have the bigger picture first and prioritise.

Hope this helps you strategise.

Thank you both! Your comments have been really helpful in confirming my understanding of the question in context.

I've gone with my first approach and focused on the principles of separate corporate personality and limited liability. While the challenges for creditors were pretty clear; no recourse against shareholders/parent-company unless fraud in most cases etc, the challenges for equity investors were less obvious. I did find though that because a company is able to own property, sue and be sued in its own name; equity investors become legally separated from their investments. For example, investors have no legal property rights over assets owned by a company. They also face challenges holding directors to account for their actions as directors do not hold any fiduciary duty to individual shareholders, but rather to the company (i.e. interests of shareholders as a whole).

I've consulted a few Corporate LLM graduates who agree its an awful essay question, but I'll let you know what the resulting feedback is!