Legal Capital in the UK Following the Companies Act 2006
RATIONALITY IN COMPANY LAW: ESSAYS IN HONOUR OF D.D. PRENTICE, J. Armour and J. Payne, eds., Hart Publishing, October 2008
45 Pages Posted: 11 Apr 2008 Last revised: 3 Jun 2008
The UK has recently undergone a significant process of law reform, culminating in the Companies Act 2006. This Act makes significant changes to UK company law, including the legal capital rules. The primary purpose of the legal capital rules is to regulate the conflict which potentially exists between creditors and shareholders in a company regarding how to allocate a company's capital, and to resolve that conflict in favour of the creditors. The efficacy and desirability of these legal capital rules is questionable. This paper assesses the function of the legal capital rules and considers a number of objections to these rules. In particular it is argued that the legal capital regime in place in the UK is expensive and largely ineffective as a creditor protection device and that a preferable regime would deregulate this issue and leave creditor protection to contract law, and to insolvency provisions in the event of the company's insolvency. The new provisions on legal capital in the 2006 Act are analysed in the light of these objections. The Act substantially deregulates the legal capital rules for private companies. However, due to the constraints of the EC Second Company Law Directive, no significant changes are made to the capital regime in place for public companies, and therefore the objections to the legal capital regime raised in this paper will exist even after the implementation of the 2006 Act. This paper then examines the possibility of the reform or abolition of the Second Company Law Directive, which would allow the deregulation of legal capital rules to take place in the UK in relation to all companies, and discusses the form that creditor protection might take in such a regime.
Keywords: Corporate law, legal capital, UK company law reform, Companies Act 2006
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