Corporate and Commercial Law

Corporate law is to do with companies. It is about how they are controlled and run. But Corporate Law is also about how companies are bought and sold and financed. In one way or another a lot of our work comes down to how people put money into a business and how they get money out.

Commercial law is to do with the things companies (and sometime individuals) do in business. Above all it’s about contracts: about buying things and about selling things, and about the terms – the contracts – on which they do so. Sometimes the things bought and sold are stuff, but often it is services of various kinds. In one way or another a lot of our commercial work comes down to helping clients to identify business risks (and hopefully opportunities) and working out how to deal with them.

Shareholder agreements are contracts between the shareholders in a company. Usually a shareholders agreement involves all the shareholders of the company, but it doesn’t need to.

Every company has a constitution – the company’s articles of association – but a shareholder agreement will supplement this. What the shareholder agreement says will depend on the circumstances, but usually one of the main issues to be covered is around how the company is to be run, how decisions are to be taken and ultimately who controls it. A shareholder agreement may also cover things like the transfer of shares.

If you are going into business with someone else, or indeed several other people, and you are not forming a company together, the chances are you are in a partnership with them.

Partnership agreements formalise the arrangements between the partners in a business. They cover things like how decisions will be made, how accounts will be kept, how profits will be shared and what will happen if one of you wants to leave. Agreeing these things will hopefully give your business a stable foundation and help to avoid disputes arising in the future.

If you’re in business as a sole trader, then you don’t have limited liability. Similarly if you are in business as a partnership. If the business gets into trouble, you’re going to be liable for its debts. There will be no limited liability.

However if your business operates through a company or an LLP – a limited liability partnership – the position is different. The clue is in the names: “limited company” and “limited liability partnership”. With companies and LLPs you have limited liability.

Nevertheless I recently had a client whose business partner – someone he owned a company with was telling him he was going to be made bankrupt because the company had debts.
My client’s business partner didn’t seem to understand what limited liability meant. – So what is it?

In relation to a company, it means the shareholders in a company won’t be liable for the company’s debts. In relation to LLPs, it means the members of the LLP won’t be liable for the LLP’s debts. The same generally applies to the directors of a company. This is because the company is a separate legal person, and debts of a company are the company’s debts, not those of either its shareholders or directors. Hence the director and shareholders have no liability.

That at least is the theory and it’s (almost entirely) correct. As shareholders and as directors they don’t.

In the real world however it may not always be quite as simple as that.

Let’s say, the company owes some money to a bank. It may have been a condition of that loan that the directors give personal guarantees, whereby they will agree to repay the bank if the company does not. So in this situation the directors may be responsible for some (or all) of that debt, but only (generally) if they have given a guarantee.

Something similar may also sometimes apply in relation to company credit cards, to equipment leases and to arrangements with suppliers: the credit card company, the equipment supplier or the supplier who has granted credit may only have agreed to do so on the basis that there was an individual who will be standing behind the company’s obligations to pay.

But any obligation like this would be a separate obligation which the individual concerned would have entered into. Generally in the absence of these, limited liability means no liability (strictly speaking no liability beyond what they have already contributed as shareholders).

Nevertheless, there are three important exceptions to all this.

• The first is for some years it’s been possible, very occasionally and in very limited circumstances, to “lift the corporate veil”. This means to go behind the corporate veil to “attack” the shareholders and directors behind the company. It hasn’t happened very often, but the Finance Act 2020 looks set to extend the ability of the tax authorities in particular to lift the veil in relation to tax. This means directors and shareholders of a company may now find themselves liable for the company’s unpaid taxes.
• A second exception relates to fraud, in particular fraud in relation to creditors (hopefully you won’t be going there).
• The third also relates to creditors, but it is rather wider. It applies to directors rather than shareholders, and it means directors can, in one important situation, find themselves liable for the company’s debts.

If you are a director of a company, and the company is failing, and you know (or really ought to know) that the company won’t be able to avoid insolvency, you have a duty to do all you reasonably can to protect the interests of the company’s creditors. So, for example, if you carry on trading in this situation and racking up further debts, you may have to make a contribution to the company’s assets.

This is a really important thing to bear in mind, if you are a director and the company is getting into trouble. If you think it may be “getting close” as it were, it’s important to take advice.

Contracts can be complicated things.

They are points – questions – which really every contract needs to deal with.

• Who is going to do what, for whom, when and for how much?
• To this we might perhaps add a few more questions. For example, what if it all goes wrong?
• What happens if someone doesn’t do what they say they are going to do?
• When you’re thinking about a contract (i.e. about entering one) it’s always a good idea to keep an eye on the why too. Why are we doing this, and will this get us to where we want to be?
But, even if there are sometimes other questions to consider too, the who, the what, the for whom, the when and the how much, are always key.
• Who? If you are the buyer, who are you dealing with?
• Will they be able to do what they are promising to do for you?
• Will they have the funds to do it?
• Might they go bust before finishing it?
• Might they be distracted by other (perhaps to them more important) things?
• Conversely, if you are the seller, will these people be able to pay you?
• Whether you are the seller or the buyer, are these people you can work with?

You can have the best contract in the world, but if the other party is wrong, or won’t be able to do what they say they will do, it’s not going to help you. So think about who you are contracting with (and make sure the contract is clear about this).

What? is obviously key. If you are buying something – whether it is a bit of kit, or a service of some kind – what is it precisely you are buying? The contract really needs to set out what this is. If you don’t, you may end up with something other than what you wanted.

Who is going to do what, for whom, when and for how much?

For whom? may seem a less obvious question to ask. Or at least the answer may seem obvious. Who and what are perhaps more obviously key.

But let’s say I’m a would-be buyer; I want the goods or services, so I’m going to be the buyer, aren’t I? Well normally, yes, but perhaps not always. If I’ve got a group of companies, for example, then it may be better for one member of that group to buy something rather than another.

Or again consider this. I was once acting for an NHS hospital, and they wanted to make an arrangement with some of the doctors who worked at the hospital. The problem was there were various things (mainly regulatory issues) that were making it difficult, perhaps impossible, to do what they wanted to do. What could they do?

Well, we were able to suggest that (instead of the hospital itself) it was a hospital charity that made the arrangement with the doctors. The same result (broadly at least), but arrived at through a different organisation. The doctors would do what the hospital needed, but they would do it for the hospital charity rather than the hospital itself.

When? is obviously important. The contract needs to say when it will be performed. And, if the timing is critically important, it should also make it clear too that “time is of the essence”, meaning that timing is crucial to the contract, so that if the time-scales are not met you can cancel the contract. If I need something before Christmas, it may be no good if it arrives in the New Year.

For how much? Whether you are the buyer or the seller, it’s good to know how much you are going to have to pay, or the amount you can expect to receive. Ideally perhaps this means a figure. If I’m buying 1000 widgets and the contract says they are going to cost me £500, everyone knows where they stand. But of course this is not always possible.
Sometimes there are uncertainties, and there might be risks in agreeing a fixed price. Maybe my materials costs are going up, so I agree with my buyer to charge for them separately at the going market rate. But if it’s not possible to agree on a price at the outset, the contract needs to be clear how the eventual price will be determined. Otherwise there is uncertainty, and uncertainty is always likely to lead to disputes. How much is very much key. It doesn’t have to be an agreed figure, but there does have to be a way for an agreed figure to be determined.