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<p>In our <a href="https://www.linnearlegal.co.uk/resources/uk-corporate-law-overview-part-1/" rel="noopener">first article on corporate law</a>, we covered the <a href="https://www.legislation.gov.uk/ukpga/2006/46/contents" target="_blank" rel="noopener">Companies Act 2006</a> (the Act), which is the main legislation on corporate law in the UK. We also covered corporate structures, company formation, and the duties of directors and boards in relation to corporate governance.</p>
<p>In this second part of our blog on corporate law in the UK, we examine the areas of corporate finance – which is fundamental for company growth – and the dissolution of a company, a sometimes unavoidable area of corporate law that every business should have a good grasp of.</p>
<h3>What is corporate finance?</h3>
<p>Corporate finance is the area of corporate law pertaining to how companies manage and raise funds. When it comes to raising funds, companies can rely on a variety of options for raising capital to help their business grow, including the following.</p>
<h4>Equity finance</h4>
<p>Equity finance is the raising of capital through the sale of shares. This could be through:</p>
<ul>
<li><strong>Angel investors</strong>: an individual or group who invest in companies, usually at an early stage or with good potential for growth</li>
<li><strong>Venture capitalists</strong>: investors who invest in businesses with the potential for high returns and proven track records</li>
<li><strong>Corporate venture capitalists</strong>: a type of venture capitalist – but a corporation or investment entity of a corporation</li>
<li><strong>Private equity</strong>: usually investors investing for a medium to long-term and seeking to make operational improvements or to expand into new markets</li>
<li><strong>Equity crowdfunding</strong>: an increasingly popular and novel way of raising money for investment through online platforms</li>
</ul>
<h4>Debt finance</h4>
<p>Debt finance is funding provided on the basis that the business will repay the debt. This could be through:</p>
<ul>
<li><strong>Loans and overdrafts</strong>: usually, these are best suited for long-term purchases</li>
<li><strong>Peer-to-peer lending</strong>: an alternative to traditional bank lending, using an online platform where a business is matched with suitable lenders</li>
<li><strong>Invoice financing</strong>: borrowing against outstanding debtors</li>
<li><strong>Asset finance</strong>: where the asset provides the security of the debt (i.e. machinery or vehicles)</li>
</ul>
<h4>Export and import finance</h4>
<p>Export and import finance is a specialist area that involves raising funds against letters of credit or contracts.</p>
<h4>Other forms of corporate finance</h4>
<p>Corporate finance is a vast area of corporate law that can also include mergers and acquisitions (M&amp;A), joint ventures, and public listings on stock exchanges or initial public offerings (IPOs). M&amp;A and joint ventures often involve large companies buying other companies or merging into them, and IPOs involve private companies going public to continue growing by selling shares to the public.</p>
<p>Business owners should be aware of the legal processes that need to be followed to carry out financing. All of the below will be subject to the Companies Act and the specific procedures laid out for allotting shares, decision-making and filing obligations in relation to secured loans.</p>
<ul>
<li>See also: <a href="https://www.linnearlegal.co.uk/resources/how-to-issue-shares-in-your-company/" target="_blank" rel="noopener">How to issue shares in your company</a></li>
<li>See also: <a href="https://www.linnearlegal.co.uk/resources/what-data-privacy-notice-why-important/" target="_blank" rel="noopener">What is a data privacy notice and why is it important?</a></li>
<li>See also: <a href="https://www.linnearlegal.co.uk/resources/terms-and-conditions-for-smes/" target="_blank" rel="noopener">Terms and conditions for SMEs</a></li>
</ul>
<h3>Company dissolution and liquidation</h3>
<p>Dissolution and liquidation are two different methods of closing down a company. The key difference between the two is that dissolution concerns a solvent company, whereas liquidation is the process of shutting down a company that is usually insolvent.</p>
<h4>Dissolution</h4>
<p>A company can be voluntarily dissolved by a decision of the directors, or compulsorily dissolved by Companies House or via a court order.</p>
<h5>Voluntary dissolution</h5>
<p>Even where a company is voluntarily dissolved, the correct legal procedure must be followed. Applications for voluntary dissolution are made by filing <a href="https://www.gov.uk/government/publications/strike-off-a-company-from-the-register-ds01" target="_blank" rel="noopener">form DS01</a> with Companies House, signed by a majority of the directors.</p>
<p>The company must comply with the legal provisions covering notification of interested parties (e.g. creditors, employees, shareholders) within seven days of making the application. If no objections are raised, the company will be struck off and dissolved after two months.</p>
<p>Not every company will be eligible for voluntary dissolution and companies will need to check that they meet the criteria set out in sections 1004 and 1005 of the Act before making an application.</p>
<p>If they do not meet the criteria, then a members’ voluntary liquidation may be an option.</p>
<h5>Compulsory dissolution</h5>
<p>Sections 1000, 1001 and 1002A of the Act give the Registrar the power to strike off a company.</p>
<p>This can happen if, for example, if the company has failed to meet its legal obligations (see <a href="https://www.linnearlegal.co.uk/resources/uk-corporate-law-overview-part-1/" rel="noopener">Part 1 of the blog</a> for more on this) (e.g. filing accounts or confirmation statements).</p>
<p>A company can also be dissolved by order of the court.</p>
<h4>Insolvency</h4>
<p>The main piece of legislation covering the insolvency of companies is the Insolvency Act 1986.</p>
<p>In simple terms, insolvency occurs when a company cannot pay its debts as they fall due or its liabilities exceed its assets. The application of these tests is not always straightforward and there is plentiful case law on the subject.</p>
<p>When a company is insolvent, the following may happen:</p>
<ul>
<li>Entry into a <strong>company voluntary arrangement</strong> (CVA): a formal agreement between the company and its creditors to repay debts over time</li>
<li><strong>Creditors’ voluntary liquidation</strong>: a process initiated by the directors to voluntarily wind up the company, and its assets are sold to repay creditors</li>
<li><strong>Administration</strong>: a process where a licensed insolvency practitioner (administrator) takes control of the company with the aim of rescuing it from insolvency</li>
<li><strong>Court-ordered liquidation</strong>: where the court orders the liquidation of the company, usually on the request of a creditor</li>
<li><strong>Receivership</strong>: a secured creditor appoints a receiver to recover money owed, typically by selling assets pledged as security</li>
</ul>
<p>&nbsp;</p>
<p>The above is not an exhaustive list, and insolvency can be very complex, particularly for directors, as there are specific offences set out in the Insolvency Act, such as wrongful and fraudulent trading, that they may fall foul of.</p>
<p>Under the Insolvency Act, directors must prioritise the interests of creditors over those of the company or its shareholders, and failing to do so can lead to severe consequences.</p>
<p>It is vital that businesses seek professional legal advice when dealing with the Insolvency Act to ensure compliance with legal obligations and to mitigate the potential of personal liability.</p>
<h4>Penalties for failing to comply with insolvency law</h4>
<p>During insolvency proceedings, directors must not allow the company to continue trading and must cooperate with insolvency practitioners. Failing to comply with insolvency laws or attempts to conceal assets may result in directors being held personally responsible for debts if found guilty of wrongful or fraudulent trading. They can be banned from acting as company directors for up to 15 years. Fraudulent behaviour can also lead to prosecution and imprisonment.</p>
<p>Given the gravity of these risks, seeking timely and expert legal advice is essential.</p>
<h3>Speak to a lawyer</h3>
<p>Corporate law is a vast and complex framework that touches on every aspect of running a business, from simply choosing a company’s name to dealing with events like insolvency. For business owners, understanding and adhering to legal obligations is critical to safeguarding a business and its stakeholders. It is not just a matter of compliance for compliance’s sake. The consequences of not complying with the law can be devastating – both professionally and personally.</p>
<p>At Linnear Legal, we offer legal advice tailored to your business’s needs. To navigate the complexities of corporate law and ensure your business is best positioned for success, <a href="https://www.linnearlegal.co.uk/get-in-touch/">speak to one of our lawyers today</a>.</p>


UK corporate law: overview (part 2)

Learn about corporate financing, share issuance and company dissolution in England & Wales. Explore raising capital and navigating insolvency with legal compliance.

UK corporate law: overview (part 2) | Linnear Legal

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