The concept of limited liability and the plight of creditors within corporate governance and company law: a UK perspective

The focus of this paper is to analyse the effects of shareholder primacy governance on creditors, the characteristics of the firm, and how creditors can protect themselves. The governance of the firm is legally vested on directors and the law places on them specific duties requiring them to act in a certain way to promote the success of the company. The governance of the firm has evolved to be known as corporate governance. The mode of corporate governance such as the shareholder oriented governance and the characteristics that come with the firm (legal personality and limited liability) have negative implications on creditors. Shareholder primacy model of corporate governance seems to find its support from the Companies Act so does limited liability which limits the liability of the Members to the subscribed shares. Legal personality of the firm means that the firm is a juristic person with rights and obligations of a natural person in that it can own its own property. The presence of limited liability brings about the shareholder primacy model of governance. The problem is not the shareholders but the foundation on which they find there protection which is the law. With the presence of the above concepts, the implication on creditors is higher risk. This paper argues that if creditors’ interests are taken into account from inception, creditors will be better protected as they would be an ongoing concern for the company. Although the law provides circumstances when the corporate veil can be pierced as a mechanism to protect creditors, it is argued in this paper that clear and concise rules must be put in place as to when the veil can be pieced.

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