3 - Incorporation And Corporate Responsibility Flashcards
What is a promoter?
Broad guidance only.
Bowen J in Whaley Bridge Calico Printing Co v Green (1880) LR 5 QBD 109 (QB), stated that a promoter is someone who engages in those ‘business operations familiar to the commercial world by which a company is generally brought into existence’.
How does s. 51 of the CA2006 differ to the common law rules relating to pre-incorporation contracts?
Common law rules - whether a promoter was bound by a pre-incorporation contract would depend upon the intention of the parties as evidenced in the contract.
S. 51 of CA2006 - changes this so that a promoter who enters into a pre-incorporation contract with a third party will be bound by that contract.
How can a company be bound by a pre-incorporation contract?
- The pre-incorporation contract could contain a term which provides that, upon incorporation, the promoter will cease to be liable under the contract if the company enters into a contract with the third party on the same terms as the pre-incorporation contract; or
- Following incorporation, the company, the promoter and the third party could enter into an agreement which provides that the pre-incorporation contract will be discharged, and a new agreement will be entered into between the company and the third party (known as ‘novation’).
When will a pre-incorporation contract not be subject to s. 51 of the CA2006?
Section 51 will not apply where (i) a company was bought off the shelf after the contract was entered into but was in existence at the time the contract was entered into; or (ii) the company once existed but has since been dissolved (Cotronic (UK) Ltd v Dezonie [1991] BCC 200 (CA)).
What documentation must be submitted to Companies House to incorporate a company by registration?
The promoters must provide to Companies House the specified registration documents under s. 9 of the CA2006. These consist of (i) the mem & arts; (ii) the application for registration and accompanying documentation; and (iii) the statement of compliance.
What information does Form IN01 require?
- whether the company will be public or private;
- whether the liability of the members will be limited or unlimited (if limited, whether by shares or guarantee);
- proposed name of the company;
- intended address of the company’s registered office;
- if proposed company is intended to have a share capital, a statement of capital and initial shareholdings must be provided;
- if the proposed company is to be limited by guarantee, the application must contain a statement of guarantee;
- a statement of the company’s proposed officers;
- a statement of significant control;
- a copy of the proposed articles (unless adopted model articles); and
- a statement of the type of company it is to be and its intended business activities.
What limitations and restrictions exist in relation to a company’s name?
- cannot choose the same name as another company listed on the index maintained by Companies House;
- can only use certain letters, numbers and punctuation marks etc. in its name;
- name must not be registered if, in the opinion of the Secretary of State, the use of that name would constitute an offence;
- name must not be registered if, in the opinion of the Secretary of State, it is offensive; and
- certain words and phrases will require approval from certain governmental and non-governmental bodies (e.g. a company that wishes to use the word ‘insurance’ in its name must obtain a letter of non-objection from the FCA).
Explain the difference between a certificate of incorporation and a trading certificate.
Certificate of Incorporation - issued to a company upon its incorporation.
Trading Certificate - ONLY issued to public companies. A public company cannot commence any business or exercise any borrowing powers until it has also been issued with a trading certificate. This certificate will only be issued if Companies House is satisfied that the additional registration requirements for public companies have been complied with (chiefly the requirements as to minimum share capital).
What is an ‘off-the-shelf’ company, and what are the advantages and disadvantages of such companies?
‘Incorporation agents’, or ‘company formation agents’ specialise in creating and selling companies. They will register the necessary documents with Companies House and then leave the company dormant and ‘on the shelf’ until it is purchased. Upon purchase, the incorporation agent will notify Companies House of the relevant changes (such as change of directors, registered office and so on).
The advantages of buying a company off the shelf is that the promoter does not need to incorporate the company. This can be useful if the promoter lacks the necessary knowledge, or simply wishes to avoid the effort of incorporating a company. Purchasing such a company is often inexpensive and can be done very quickly.
The disadvantage of buying a company off the shelf is that it will not be tailored to the needs of the promoter and their business. Accordingly, the promoter may need to engage in work to tailor the new company to their needs (such as changing the company’s name, amending the share structures, amending the articles and so on).
Explain the key consequences of a company having a corporate personality.
- a company has a nationality, domicile and residence;
- can continue to exist indefinitely;
- capacity to enter into contracts;
- can own assets;
- undertakes its own business;
- can sue and be sued;
- can create, and participate in, other business structures; and
- has some ‘human’ rights.
In Salomon, how did the House of Lords disagree with the High Court and Court of Appeal?
In Salomon, the High Court held that the company was Salomon’s agent and so Salomon was liable for its debts. The Court of Appeal also held that Salomon was liable for the company’s debts on the grounds that the company was not formed in accordance with the Companies Act, and the other members were not genuine active members.
The House of Lords disagreed with both the High Court and the Court of Appeal. It held that generally a relationship of agency will not exist between a company and its members. The House also stated that there was nothing in the Companies Act 1862 which stated that the members had to be unconnected or active, and so the company had been formed in accordance with the Act. The House held that Salomon was not liable for the company’s debts.
Why is Salomon considered to be such a seminal case?
Regarded by many as the most important case in company law for three reasons:
- The House of Lords clearly stated that a validly incorporated company could legitimately be used to shield its members from liability (although this had been recognised previously).
- It implicitly recognised the validity of the ‘one-person company’ (that is, a company run only by one person, with several dormant nominee shareholders) almost a century before it was possible to formally create a one-person company in 1992.
- It recognised the fact that a person holding shares in a company (even all the shares) is not enough to establish a relationship of agency or trusteeship.
When will the courts disregard a company’s corporate personality?
The courts will pierce the veil where:
(i) statute provides that a company’s corporate personality is to be disregarded; or
(ii) where a person is under an existing legal obligation or liability, or subject to an existing legal restriction, which they deliberately evade or whose enforcement they deliberately frustrate by interposing a company under their control, and all other, more conventional, remedies have proved to be of no assistance.
What are the three conditions required for the evasion principle to apply?
- An existing legal obligation is placed upon a person (X);
- X interposed a company in order to evade or frustrate the obligation or liability in question; and
- The company being interposed is under X’s control.
