Legal Personality and Limited Liability Flashcards
What is the key feature of separate legal personality?
A) The company and its shareholders are the same legal entity
B) The company is a distinct legal entity from its shareholders
C) Shareholders must personally cover company debts
D) The company cannot own property in its own name
B) The company is a distinct legal entity from its shareholders
(Under s16 CA 2006, a company is a separate legal person once incorporated.)
When does a company acquire separate legal personality?
A) When it files annual accounts
B) When the directors sign a resolution
C) On the date of its incorporation
D) When it registers for VAT
C) On the date of its incorporation
(s16 CA 2006 states that a company becomes a legal person from incorporation.)
What does limited liability mean for shareholders?
A) They must pay company debts in full
B) Their liability is limited to their share investment
C) They are responsible for all legal claims against the company
D) They must cover debts if the company goes bankrupt
B) Their liability is limited to their share investment
(Under s74 Insolvency Act 1986, shareholders are not personally liable beyond their investment.)
Which of the following is NOT a consequence of separate legal personality?
A) The company can enter contracts in its own name
B) The company is liable for its own debts
C) Shareholders are automatically liable for company losses
D) The company can sue and be sued in its own name
C) Shareholders are automatically liable for company losses
(Limited liability means shareholders’ personal assets are protected.)
A shareholder in TechCorp Ltd has invested £5,000 in shares. The company becomes insolvent owing £200,000. How much is the shareholder personally liable for?
A) £200,000
B) £5,000
C) £50,000
D) Nothing
B) £5,000
(The shareholder’s liability is limited to their share investment – they do not owe more.)
XYZ Ltd signs a contract with a supplier. Later, the company cannot pay. Can the supplier sue the shareholders directly?
A) Yes, shareholders are personally liable
B) No, the company is a separate legal entity
C) Yes, if the shareholders own more than 50% of the shares
D) No, but only if the company has no assets
B) No, the company is a separate legal entity
(The company itself is liable for contracts, not its shareholders.)
A director transfers company funds into their personal account before the company goes bankrupt. What legal principle may apply?
A) Limited liability
B) Lifting the corporate veil
C) Shareholder protection
D) Contractual liability
B) Lifting the corporate veil
(Courts may pierce the corporate veil if a company is used for fraud or deception.)
ABC Ltd borrows £100,000 from a bank. The director personally guarantees the loan. If ABC Ltd becomes insolvent, who is responsible for repayment?
A) The company only
B) Only the shareholders
C) The director who gave the guarantee
D) The company’s creditors
C) The director who gave the guarantee
(Personal guarantees override limited liability, making the director personally responsible.)
A company’s shareholders are also its directors. Can creditors automatically hold them personally liable for company debts?
A) Yes, because they control the company
B) No, because the company has separate legal personality
C) Yes, if the company cannot pay its debts
D) Yes, but only if the company has fewer than five shareholders
B) No, because the company has separate legal personality
(Even if shareholders are also directors, separate personality protects them.)
XYZ Ltd is a subsidiary of ABC Plc. XYZ Ltd goes bankrupt with £500,000 debt. Can creditors automatically claim against ABC Plc?
A) Yes, because ABC Plc is the parent company
B) No, unless ABC Plc guaranteed XYZ Ltd’s debts
C) Yes, if ABC Plc owns more than 50% of XYZ Ltd
D) No, because shareholders are always personally liable
B) No, unless ABC Plc guaranteed XYZ Ltd’s debts
(Parent companies are not liable for subsidiary debts unless they provide explicit guarantees.)
