Limited Liability Essay -- Business Finance

The term â€Å"Limited liability† is generally used to describe a situation where a person is excused entirely or in part from incurring a debt after taking an action which would have required under the prevailing rules of the legal system that they pay money. The doctrine of limited liability as it relates to corporate law is central to the principle that a company upon incorporation assumes a corporate personality independent of its members. This means that a new legal person is created at law and accordingly has its own assets, liabilities and rights, inter alia, to enter into and be bound by its own contracts. In some respects, the name, â€Å"Limited liability† Company is greatly misunderstood. It is a common faux pas to think that the liability of the company for its various debts is limited and that the doctrine was created as a loophole by which the company can get out of its contractual obligations. This is however not the case as on the occasion of insolvency, a company must liquidate all its assets to meet the demands of the creditors. Where the value of these assets is insufficient, the company will call on the unpaid share capital of its members or the amount which they have agreed to contribute to the assets of the company in an event of it being wound up . It is the liability of these members that is limited and not that of the company. There are also exceptional circumstances where courts will allow creditors pierce the â€Å"corporate veil† making it mandatory for shareholders to satisfy creditors’ claims. Hence for the shareholder, limited liability mea ns participation in a company with limited risk. For the creditor however, it means the very real risk that in the event of bankruptcy he could remain unpaid for g... ...panies and subsidiaries- The corporate veil [1991] company Lawyer 12(1) pp 16-17 Ireland P (2010), â€Å" Limited liability, shareholder rights and the problem of corporate irresponsibility†, Cambridge journal of Economics, vol 34, pp837-856 Ibid Hatfield was one of a long series of fatal rail accidents in which Rail track’s working practices and safety record was implicated. Blankenburg,S and Plesch, D (2007) â€Å"Corporate rights and responsibilities: restoring legal accountability† Retrieved on 12th of February 2012 from http://www.stwr.org/multinational-corporations/corporate-rights and responsibilities- restoring-legal-accountability-html Ireland P (2010), â€Å" Limited liability, shareholder rights and the problem of corporate irresponsibility†, Cambridge journal of Economics, vol 34, pp837-856 ibid ibid