LEGAL FRAMEWORK

Setting up and Winding up a Firm

A: Why is it important to know about law in the business world?
B: Well, the setting up, running and winding up of a firm requires many different legal procedures. If
you want to start a business from scratch and you have no previous experience, a visit to your local
solicitor is a must. He will advise you whether it is best to trade as a partnership, as a limited company,
or whether it is necessary to take out a patent if you have an original invention.

A: What is the best solution?

B: It all depends. According to the terms laid down in the 1890 Partnership Act, a partnership has no
legal personality of its own and partners are therefore fully liable for the firm’s debts. In 1879,
however, the House of Lords ruled in the case of Salomon v. Salomon that a company is a separate
entity from its members.

A: Hang on a minute. What has the House of Lords got to do with all this?
B: The House of Lords is the Supreme Court in the English legal system. If there is an appeal against a
decision in the lower courts, it may be referred to a higher court for judicial examination – the House of
Lords being at the top of the tree, as it were.

A: O.K. I’ve got you.

B: Now, given the nature of the English Common Law system with its rules of precedent, this means
that even today company members are not liable for their company’s debts.

A: Fine, but how would I go about registering a company?

B: Well, you’d have to have a memorandum of association and articles of association drawn up. These
are documents containing information about the company’s directors, secretary, registered office, and
so on. You would also pay a fee to the Companies’ Registry.

A: What about the everyday running of a business?

B: Most large firms have a legal or litigation department or else consult legal advisers, who are
specialized in company law. When a tender is accepted…

A: What’s a tender?
B: I suppose you could define it as an offer to supply goods and services. Anyway, as I was saying,
when a tender is accepted, a contract must be drawn up to make the agreement between the parties
legally binding. If one of the parties is subsequently guilty of a breach of contract, the injured party
may sue for damages or even obtain an injunction, which is a court order requiring a person to do or
stop doing a certain act, as the case may be.

A: But law suits are very costly, aren’t they?

B: You can say that again! Suitable threats are usually sufficient to obtain an out-of-court settlement.

A: What about liquidating a firm?

B: Winding up a firm can either be compulsory (by order of the court) or voluntary. In the first case the
creditors of the company present a petition for winding up to the court. The court then appoints a
liquidator who takes over the control of the company from its directors, that is to say, collects money
owed to the company and then distributes assets proportionately among the creditors and shareholders,
the Inland Revenue always being the first on the list.

A: Surprise, surprise!
B: Yes – anybody in the case of a voluntary winding up, it is the company that appoints the liquidator.

A: Does everybody always get their money back, then?

B: No. When a company is wound up, the creditors may not always receive full payment – as is the
case with an unlimited concern that goes bankrupt.

Resuming questions and answers:

1. Who do you need to consult if you want to set up a firm?

- a solicitor
2. What sort of advice will that person give?
- He will give advice concerning how to trade and whether it is necessary to take out a patent.
3. How do you register a company?
- You must have a memorandum of association and articles of association drawn up and pay a fee
to the Companies’ registry.
4. Why must a contract be drawn up?
- In order to make the agreement between the two parties legally binding.
5. What can happen if one of the parties fails to respect the terms of the contract?
- The injured party may sue for damages or even obtain an injunction.
6. What are the two methods of winding up a firm?
- Winding up a firm can either be compulsory or voluntary.
7. Are a firm’s creditors always paid in full?
- No, the creditors may not always receive full payment.