7: Companies: incorporation Flashcards
What is the veil of incorporation?
Referee to the veiling of the company as a separate legal entity
Legal identify and liability is different from that if its members.
What are the main consequences of incorporation?
Management is sepearte from ownership
Co is subject to CA2006
Enters into contracts in its own name
Perpetual succession
Owns its own property
Co. liable for own debts and can sue and be sued in own name
Liability limited to:
- amount unpaid of their share capital
- amount agreed to contribute (by guarentee)
What does ‘lifting the veil of incorporation’ mean?
In certain circumstances the courts can look through the company to the identify of the shareholders
Members or directors become personally liable for debts
Only done when the veil is a ‘facade concealing the true facts’
What reasons are there for lifting the veil?
Groups of companies
- when subsidiary is acting as agent of the parent
To reveal national identity
- in times at war, illegal to trade with companies we are at war with
- funds or shareholders in enemy country - no!
Sham company
- company registered for improper purpose
- ie. evade legal obligation or hide identity
Quasi partnerships
- business which is registered as a company, run as if it was a partnership
Statutory occasions
What statutory occasions are there for lifting the veil?
Only when director is also members of a company;
- Company Directors Disqualification Act 1986. Director who is disqualified participates in management
- Insolvency Act 1986. Wrongful or fraudulent trading
- CA06. Public company trades without trading certificate
In all instances, directors can be made personally liable for something
Three types of company?
Public - limited by shares
Private - limited by shares or guarantee
Private - unlimited (no need to file accounts)
How can a company alter its status?
Amends its name and articles and notifies the registrar
- private company can apply to registrar to be reregistered as public (and vice versa)
- limited company can become unlimited with consent of all members
- unlimited company can change to limited by special resolution
Company compare: definition?
Plc: must be registers as a public company under CA2006
Ltd: any company not a public company
Company compare: name?
Plc
Ltd - some charities are exempt from this
Company compare: capital?
Plc: must not be less than authorised minimum of 50,000, and must have allotted shared of at least that amount
Ltd: no minimum
Company compare: raising capital?
Plc: may raise by advertising its securities for public subscription
- can be listed on stock exchange or similar
Ltd: prohibited from offering shares to public
Company compare: payment for shares?
Plc: shares must be at least 25% paid up
- rules on non-cash consideration
Ltd: no restrictions
Company compare: reduction of capital?
Special resolution needed in both
Plc: approved by courts
Ltd: statement of solvency also made by directors
Company compare: purchase of own shares out of capital?
Plc: not allowed. Only done from distributable profits
Ltd: permitted subject to articles
Company compare: start of trading?
Plc: must obtain trading certificate from registrar
Ltd: can begin from date of incorporation
Company compare: director minimum?
Plc: two
Ltd: one
Company compare: loans?
Plc: members approval needed for loans and quasi loans
Ltd: not applicable unless public
Company compare: secretary?
Plc: required, must be qualified
Ltd: optional, need not be qualified
Company compare: accounts?
Plc: must lay before general meeting and file accounts within 6 months of end of accounting period
Ltd: need not lay accounts in AGM. Must file within 9 months.
- SMEs have lesser requirements
Company compare: audit?
Plc: yes
Ltd: yes unless company is small or micro sized
Company compare: AGM?
Plc: must he held each year
Ltd: need not hold one
Company compare: resolutions?
Plc: cannot pass written resolution
Ltd: can pass written resolutions instead of calling meetings. Subject to exclusions
Company compare: pre-emption rights?
Plc: cannot be excluded
Ltd: can be excluded
8 registration documents?
Memorandum of association
- signed by all subscribers, agreeing to be members of company
Application
- name
- liability level
- public or private
- registered office country and address
Articles
- model articles apply if no articles supplied
Statement of capital and initial shareholdings
- number of shares
- aggregate nominal value
- details of each class of share
- how much paid up on each share
Statement of guarantee (if applicable)
- maximum amount each will contribute
Statement of proposed officers
- details of directors and first company secretary, consent to act
Statement of compliance
- confirmation that CA2006 has been complied with
Registration fee
What does a registrar do after receiving 8 documents?
Inspect documents and ensure CA2006 is fulfilled
Issue certificate of incorporation - conclusive evidence CA2006 is fulfilled
Company exists from date on that certificate!
Plc must also get a trading certificate
What does a registrar do after receiving 8 documents?
Inspect documents and ensure CA2006 is fulfilled
Issue certificate of incorporation - conclusive evidence CA2006 is fulfilled
Company exists from date on that certificate!
Plc must also get a trading certificate
How does a plc apply for a trading certificate?
Apply to the registrar stating:
- nominal value of share capital over £50,000
At least a quarter of nominal value and premium must have been paid up
Amount of prelim expenses and who has to pay them
Any benefits for the promoters
What are the consequences if a plc trades before a certificate is issued?
Company and officers liable to a fine
Criminal offence to carry on business - but CONTRACTS ARE STILL BINDING
Directors personally liable if company defaults within 21 days of due date
Ground for winding up if not obtained within one year
Ads and dis of an off the shelf company?
A company that has already been formed
Ads:
- cheap and simple
- can trade immediately
- no problem of pre-incorporation contracts
Dis:
- Articles may be unsuitabls
- altering articles will incur costs
- need to change officers
What is a promoter?
No statutory definiton
Anyone who makes business preparations for a company, or undertakes to form a company and who takes the necessary steps to accomplish that purpose
Excludes people acting in their professional capacity
3 fiduciary duties of a promoter?
Exercise reasonable care and skill
Disclose interest in transactions and not make a secret profit
Disclose any benefits acquired
3 remedies available if company makes a secret profit?
Rescind contract - not always possible
Obtain damages - must prove loss
Recover the profit - must prove promoter failed to disclose profit
How do pre-incorporation contracts work?
Company prior to incorporation does not have contractual capacity and person contracting is personally liable. Clear and express works to state otherwise
- company CANNOT RATIFY the contract
- company is not bound by the contract
- company cannot enforce contract against third party
How can a promoter protect their position?
Agreement of novation
- discharging the original contract and replacing with a new one
Postposing finalising contracts until company is formed
Agreeing with company that it will meet its expenses
Buying an off the shelf company
Including a term giving the company the right to sue under the contracts
- does not remove promoter’s liability
5 rules when choosing a company name?
Must have Ltd or Plc
Cannot be the same or virually the same as another in index of names
Cannot use certain words which are illegal or offensive
Must have secretary of state’s consent to use certain words, or any name suggesting a connection with the government or local authority
- places are fine, ‘council’ is not
Cannot use words indicating company is another type or legal form
Company can trade under a ‘business’ name, but this will be subject to same rules
Disclosure of company name - where?
Must be at certain locations and on certain documents
Name must also be legible on company seal, if one exists
Breach can lead to fine
How to change company’s name?
Passing a special resolution and notifying the registrar
SoS ca require a company to change name in these events:
Name is too similar to another
- 12 months
Name is misleading to nature if the activities and this can cause harm to public
- no time limit
Misleading info were given when applying for name that required approval
- 5 years
What do articles do?
Form part of the company’s internal constitution, along with other agreements or resolutions
- set out the manner in which company is to be governed
- regulate the relationship between company and shareholders, in terms of shareholders rights
When do model articles apply?
When company is formed without registering articles, or when articles do not exclude or modify model articles
Company may adopt the model articles in part of full
Company deemed to have adopted them if not express or implied provision to exclude them
Company may draft its own unique articles
Effect of being bound by articles?
Articles bind:
- Members to everything (company and each other)
Do not bind:
- Company to non members
- Members in any other capacity. Articles only enforced if individual is trying to protect their rights as a member only
How else can articles be used?
Another contract may incorporate the articles as an implied term of contract with third party, contract would be binding
How can articles be altered?
Altered by special resolution of shareholders with 75% majority
Copies of amended articles must be sent to registrar within 15 days
Some articles may be ‘entrenched’ so can only be altered by different set procedure
A member is NOT BOUND by any alteration made after they become a member that requires them to increase liability or contribute further
What 5 registers need to be kept?
Members
Directors and company secretary
- addresses maintained but not publicly disclosed
People with significant control
- someone who owns or controls more than 25% of shares or voting rights
- OR someone who has the power to appoint or remove majority of board members
Charges
Other documents
- resolutions and minutes of general meetings must be kept for 10 years
- other reports, contracts and provisions must also be kept
Where must registers be kept?
At company’s registered office
Available for public inspection
May be kept electronically or in hard form
Non compliance renders company and every officer liable to fine
What details does the registrar maintain?
Certificate of incorporation
Trading certificate (if public)
Certificates of registration of charges
Annual accounts
Confirmation statement
Special resolutions and some ordinary resolutions
Changes of directors
What registers can the public inspect?
Any of the registers the registrars have, apart from:
Directors residential addresses
Contents of any charges
A&R: confirmation statement?
Confirms no changes to key info have happened during year, or what changes are
No more than 12 months can pass between each statement
A&R: accounting records?
Must keep accounting records with sufficient info to show and explain company’s transactions
Details of all money received and spent
Record of assets and liabilities
Statement of inventory at end of year
A&R: Annual accounts?
Accounts include:
Balance sheet and P&L showing true and fair view
Statements must be approved and signed on behalf of board, copy with registrar
A&R: Directors report?
Names
Principal activities of company
Auditor not unaware of info
Recommended dividend
Likely future developments and risks and uncertainties
Approved by board
Some ESG stuff
What companies must put info in directors report about ESG?
Quoted companies
Large unquoted comlanies
Large LLPs
A&R: Directors Remuneration report?
Quoted companies only, subject to members approval
A&R: auditor’s report?
- accounts audited and framework applied
- scope of the audit
- accounts give a true and fair view
- directors report is consistent with accounts
A&R: strategic report?
Large and medium sized companies must prepare this as part of their statements
- fair review of company’s businesses
- description of principal risks and uncertainties facing business
Balanced analysis of performance
Quoted companies need to mention ESG
A&R: Companies (Misc Reporting) Regs 2018?
Additions:
- report on engagement with stakeholders
- statement in strategic report ok how directors have promoted success of the company
- how corporate governance code has been applied
- within remuneration, additional disclosures such as ratio of CEO’s pay to UK employees pay
Penalty for non compliance with A&R?
Company or officer being fined
Or imprisonment!
Change in requirements for SMEs?
Micro entities
- simple or no P&L
- balance sheet required with minimum info
At least two of
- turnover under £632k
- balance sheet assets under £316k
- employees under 10
Small companies
At least two of:
- turnover under £10.2mil
- balance sheet assets under £5.1m
- employees under 50
What companies are exempt from audit?
Micro and small companies
Dormant companies
Non-profit companies
Subsidiary companies whose parent company guarantees liabilities
If exempt, 10% of members can vote for audit to still happen
Auditor has right of all access. Can be removed by ordinary resolution with special notice
What does a company secretary do?
Chief admin officer of the company
Appointed and removed by directors
No statutory duties, but typically:
- makes return to registrar
- keeps registers
- gives notice and minutes of meetings
Actual and implied authority to bind into contracts of administrative nature
How can a company secretary be qualified?
One of.
- is a solicitor, barrister or member of accounting body
- Has held the role of secretary for at least three of the five yeats
- Appears capable by virtue of another position or qualification
