14. Introduction to companies

Question 1

What is the corporate veil?

Answer 1

Aka the veil of incorporation.

Term used to describe the separation of the legal personality of the company from its owners and directors.

Question 2

What is the law governing companies?

Answer 2

Companies Act 2006

Question 3

When may the veil of incorporation be lifted?

Answer 3

If the company is a sham or party to a fraud.
The directors may be liable to the company’s debt if, for example, the directors are guilty of fraudulent or wrongful trading.
(i.e. carrying out business with the intent to defraud creditors or where a company would go into insolvent liquidation, yet the directors failed to take steps to minimise the losses of creditors)

Question 4

What is meant by the term perpetual succession?

Answer 4

Companies continue to exist until they are wound up or dissolved. (or struck from companies register as a result of offence such as non-payment of annual fees)
Companies existence is not dependent on that of their shareholders or controllers.

Question 5

What is meant by limited liability?

Answer 5

The limited liability of a company’s members. They cannot be required to contribute any more than the outstanding amount of their shares.

Question 6

Confidentiality of a company

Answer 6

Information disclosed about a company depends on the type of company.
Nominee shareholders may be used so that the beneficial owners remain confidential.

Question 7

Who are the first members of a company?

Answer 7

Its subscribers.

Question 8

Who is bound by the Articles of Association?

Answer 8

Contact between :

• The company
• The company and its members
• The members to each other

Question 9

What are the rights of members?

Answer 9

• Attending and voting at general meetings
• Transferring shares to others
• Inspecting the register of members
• Inspecting the minutes of general meetings
• Receiving a dividend (if one is declared)
• Receiving their share in the surplus of any assets, if the company is wound up

Question 10

What is the minimum number of directors required?

Answer 10

Private - 1 director
Public - 2 directors
Every company must have at least 1 natural person as director

Question 11

How are directors appointed?

Answer 11

Appointed by ordinary resolution of shareholders or decision of other directors.

Question 12

What are de jure and de facto directors?

Answer 12

De jure directors - formally appointed and their name has been included in the register of directors
De facto directors - not formally appointed, but they fulfil the role of a director (difference between de facto and shadow directors is that the board is not necessarily accustomed to act in accordance with their directors or instructions)

Question 13

What is an ordinary resolution?

Answer 13

A resolution that must be passed by a simple majority of members

Question 14

What is a shadow director?

Answer 14

A person whose directions the directors are accustomed to act on. I.e. they are not formally appointed, but the remaining board act on their instructions.

Question 15

What is an alternate director?

Answer 15

Attend and vote at director’s meetings on behalf of a director, if that director is unable to attend.

Question 16

What are executive and non-executive directors?

Answer 16

Exc. directors are involved with the day to day running of a company. Non exc. directors are not but may assist by bringing their independent view.

Question 17

What is a corporate director?

Answer 17

A company acting as director rather than a natural person.

Question 18

Who cannot act as a director?

Answer 18

• A minor (under 16)
• Anyone without legal capacity
• An individual who has been bankrupt
• Someone who has been disqualified by the court

Question 19

What would cause the termination of a director?

Answer 19

• Retirement
• Removal by shareholders
• Resignation
• Death
• Disqualification under Company Directors Disqualification Act 1986

Question 20

What are the powers of directors and where are they derived from?

Answer 20

The directors derive their powers from the company’s articles of association. The model articles, for example, give the directors a general authority to exercise ‘all the powers of the company’ for the purposes of fulfilling their responsibility to manage the company’s business.

Question 21

What are the duties of directors?

Answer 21

Directors owe a fiduciary duty to the company and must act in a good faith and not seek profit personally. General duties include:

• Act within powers
• promote the success of the company
• exercise independent judgement
• exercise care, skill and diligence which may be reasonably expected from a person of his knowledge
• Avoid conflicts of interest
• Not accept benefits from third parties
• Declare interest in proposed transactions or agreements

Question 22

What are the duties of a company secretary?

Answer 22

• maintenance of statutory register and issuance of share certificates
• filing of documents with the registry i.e. annual returns
• co-ordinate and attend meetings
• prep meeting agendas, notices for meetings and prepare the minutes
• ensuring meeting are conducted in according with the law and the articles, ensuring a quorum is present.

Question 23

What type of companies must have a secretary?

Answer 23

Public companies

Question 24

What are the consideration one must have when considering to trade as a sole trader rather than a company?

Answer 24

• You are the sole owner of the business and have control over it
• Personally liable for all business debts and carry all the risk
• No statutory requirements governing the format of accounting records
• no need to have annual accounts audited (although you would be required to submitted accounts and tax computations to tax authorities)
• Business and assets affected if unable to carry on working

Question 25

What are the advantages of using a company?

Answer 25

• Limited liability
• perpetual succession - easier to pass down from generation to generation
• ideal vehicle for expansion - raising finance is easier as company may have increased borrowing ability
• tax purposes (i.e. low taxation if offshore centres)

Question 26

What are the disadvantages of using a company?

Answer 26

• Much disclosure of information - e.g. annual accounts, memorandum and AoA
• tightly regulated
• higher set up costs and annual running costs
• less flexible profit-sharing arrangements

Question 27

What is a private company?

Answer 27

• Must have word limited ( or ltd) in name
• not permitted to offer shares to public
• less onerous legal requirements

Question 28

What is a public company?

Answer 28

• must have words ‘public limited company’ or plc in name
• May issue shares to public
• Must have issued share capital of £50,000, with at least 25% paid up
• more onerous legal requirements

Question 29

What are listed and quoted companies?

Answer 29

Listed company- public companies listed on the London Stock Exchange
Quoted Company - equity share capital included on the official list in an EEA state or the New York Stock Exchange
-Both have strict legal requirements

Question 30

What are limited liability companies?

Answer 30

• shareholders’ liability is limited to outstanding amount of their shares
• company is liable without limit for its own debts
• owned by shareholders who have proportional right to profits
• Certain documents have to be filed before the company can begin to trade (eg Mem and Arts)
• Must prepare accounts each year and have them audited

Question 31

What are the features of a limited company?

Answer 31

• Separate legal personality
• Perpetual succession
• Limited liability
• Assets belong to company, not members
• Transferable ownership

Question 32

What are unlimited companies?

Answer 32

If the company goes into insolvent liquidation, the liquidator (but not the company’s creditors) can require members to contribute as much as may be required to enable the company to pay its debts in full.

Question 33

What is a company limited by guarantee?

Answer 33

• Liability of members is limited to the amount they undertake to contribute a fixed amount to the capital of the company in the event of its winding up.
• Often used by charitable or not-for-profit organisations

Question 34

What are protected cell companies?

Answer 34

• Developed in the late 1990s in Guernsey
• Cells do not have their own legal personality. The PCC is responsible for the upkeep of each of its cells.
• Each cell has its own members and constitution assets and liabilities (ring-fenced)
• Popular in captive insurance companies, umbrella funds and collective investment funds

Question 35

What are incorporated cell companies?

Answer 35

• Newer to PCC, each cell has its own legal personality.
• Provides comfort that assets are adequately ring-fenced (especially for investors in jurisdictions unfamiliar with the concept of protected cells).