Business Law Flashcards
Formation of a general partnership
= relation which subsists between persons carrying on a business in common with a view of profit
No formalities required
Party receives a share of profits => prima facie evidence of partnership . Agreement to share losses poss proof of intention to form a partnership but NOT prima facie evidence.
Authority to bind the firm in a general partnership
Partnership Act provides that every partner is an agent of the firm and other partners
Agent can bind principal only if the agent acts with authority
Actual authority (in partnership agreement or through partner vote), actual implied authority (has been allowed to regularly so an act without express actual authority), or apparent authority (act of partner carrying on in usual way of business of the kind carried on by the firm)
Liability for debts and wrongdoing in a general partnership
Partners have unlimited personal liability (no veil of incorporation)
Liability is joint => creditor can choose to pursue one or all of the partners for their debt or tort
Liability for incoming partners in general partnership
Incoming= Not liable for anything before they became a partner.
No new partner may be added without the consent of all existing partners
Partners to not have the power to expel another partner unless that power has been expressly agreed to by the partners (eg in the partnership agreement)
Liability for outgoing partners in general partnership
Debts before retirement = Remains liable for all debts/obligations incurred before the partner leaves. Retiring partner and continuing firm can agree that the partner will not be liable to the firm for these obligations (through ‘hold harmless agreement)
Debts incurred after retirement = Retiring partner needs to give notice of their retirement: Actual notice given to existing creditors , and notice by way of an advert in London Gazette required for all new customers
Holding out as a partner in a general partnership
Person holds themselves out as partner may be liable even if not actually a partner
Also applies if a person knowingly allows another to hold the person out as a partner
Can apply to retiring partners if they have not given proper notice or failed to ensure name is removed from things eg stationary
Partnership property
Intention of parties is determining factor.
Unless contrary intention – property brought with money belonging to the firm is partnership property, as in property titled in the firm name
Similarly – property owned by one partner at the start of the partnership will only be treated as partnership property if it is expressly/impliedly agreed between the partners
Financial entitlements in general partnership
Division of capital and profits, and division of losses = shared equally (even if unequal initial contributions). Unless contrary intention in partnership agreement
Partner not entitled to interest on their capital contribution, and Not entitled to renumeration for acting in the partnership business (unless contrary intention in partnership agreement)
Partnership must indemnify partners for any payments made or liabilities incurred whilst acting in the course of the business of the partnership
Partnership management (general partnership)/voting rights
Partnership act – every partner has an equal right to take part in the management of the firm business (one partner, one vote). Partners free to agree otherwise.
Typically made by simple majority vote (unless part agreement provides otherwise)
BUT following require unanimous vote: Admission of new partner, Change in the nature of the partnership business, Alteration to the partnership agreement
Duties of partners in a general partnership
Fiduciary rel, duty to disclose info, duty to account for secret profits (ie any profit obtained without the consent of the other partners from any transaction concerning the partnership)
Termination of general partnership
Without court involvement: by expiration in agreement/purpose comes to end, by notice at will, by bankruptcy/death/charge, by illegality
Can be dissolved by court order: court considers partner does not have mental capacity. Partner can also apply if: Partner becomes permanently incapable of preforming their part of the partnership contract (permanent incapacity), Partner found guilty of conduct that would prejudicially affect the carrying on of the business,
Wilful or persistent breaches of partnership agreement, When business can be carried on only at a loss, and ‘just and equitable basis’
Effect of dissolution in general partnership (incl how property is subsequently distributed)
Partnership authority to bind firm will continue to wind up company and complete transactions
Distribution of property:
First used to pay off partnership’s debts
Assets insufficient to pay creditors => partners are personally liable for any shortfall
Assets sufficient to pay creditors => remaining assets used first to repay any advances (ie loans) any partner has made to the firm
If assets remain after loans repaid => used to return the partners’ contributions
If assets still remain => divided among the partners in the same proportion as profits
Losses paid first out of profits, next out of capital, and last by partners individually in the proportion in which they were entitled to share profits
Formation of LLPs
Registration required with the registrar of companies and LLP cannot trade until it has received a certificate of incorporation.
LLP has separate legal personality.
Required information in incorp documents: Name of the LLP (must end in LLP or Limited Liability Partnership), Details of the LLP’s registered office location and address, Names and addresses of the members of the LLP, Details of people with significant control, if any
Membership in LLP
Must have at least 2 members - If carried on business without having a t least 2 members for more than 6 months, the person who carried on the business will be jointly and severally liable with the LLP for the debts of the LLP incurred after the initial 6 months and while the LLP only has one member
Admission of new member requires unanimous consent
Designated members (at least 2)- Role = perform the administrative and filing duties of the LLP
Registrar must be notified of changes within 14 days
Agency/authority in LLPs
Every member of an LLP is an agent of the LLP - BUT an LLP is not bound by anything done by a member if the member has no authority to act and the person they are dealing with knows they have no authority/does not know or believe that they are a member of the LLP
Outgoing member => Giving reasonable notice to other members, and Giving registrar at CH notice with 14 days
People with significant control (LLPs)
LLP required to keep register of PSCs
PSC = an ind who meets any one of following conditions:
Directly or indirectly holds rights over more than 25% of the surplus assets on a winding up
Directly or indirectly holds more than 25% of the rights to vote on those matters which are to be decided upon by a vote of the members of the LLP
Directly or indirectly holds the right to appoint or remove the majority of those entitled to take part in management
Otherwise has right to exercise or actually exercises sig influence or control over a trust, or the members of a firm that is not a legal person but meets any of the other specified conditions in relation to the LLP
Right to profit in LLPs
No provision otherwise => members entitled to share equally in capital and profits of the LLP
Members not entitled to renumeration (ie to be paid)
Management of LLPs
Absence of agreement otherwise => every member may take part in management of LLP
Majority of members may decide any ‘ordinary’ matters connected with the business of the LLP
No change may be made in the nature of the business of the LLP without the consent of all members
Liability for acts of members in LLP
Generally members of an LLP are not liable for the wrongful acts or omissions of other members committed in the course of the business of the LLP or with the LLP’s authority
LLP - docs to be filed at CH
Subject to more onerous filing requirements than general partnership (as incorporated)
Required to file with the registrar of companies: LLP’s annual accounts, Annual confirmation statements, Details of the appointment and removal of members, Details of any changes to the details of the members, Details of any changes to the registered name of registered office of the LLP
Liability for debts in LLPs
Limited liability => Only liability of a member is their capital contribution (where LLPs and partnerships differ)
Clawback provisions - ie Member of LLP withdrawn property within 2 years before LLP goes into insolvent liquidation, and it is proved that at the time of the withdrawal they knew or had reasonable grounds for believing LLP was unable to pay its debts, or would become unable to pay its debts as a result of the withdrawal, court may order the member to contribute to the assets of the LLP
Termination of LLP
VOLUNTARY => majority of members may apply to the registrar of companies for the LLP to be struck off the register and dissolved
Not possible if: LLP has traded or otherwise carried on business in last 3 months, LLP has changed name in last 3 months, LLP is subject of any insolvency proceeding
If applying to dissolve, Members required to notify other members, creditors, any employees, trustee of any pension fund. On receipt of app, the registrar of companies will published notice of the proposed striking off in the London Gazette (Allows interested parties opportunity to object). Registrar of companies will strike off 3 months after the date of the notice.
INSOLVENCY => as with limited company. Fixed charge receiver or an admin receiver may be appointed by certain secured creditor of the LLP
Taxation in LLPs
Not a taxable person => does not pay corporation tax (instead members taxed individually for income tax and members also liable for their share of the gains made on disposal of assets of the LLP)
Inheritance tax purposes – members treated the same as partners in general part
Stamp duty exception:
General – no stamp duty land tax owed if property is transferred to LLP within one year of LLP’s incorporation if:
Transferred by person who: Is/was a partner in the partnership comprised of the members of the LLP; or Holds the property as a bare trustee for a partner in such a partnership; and
The proportional ownership of the property in the LLP remains the same as the proportional ownership of the property in the partnership
Unlimited companies
(Rare) - Members are personally liable for all the debts of a company (like a general partnership)
Companies limited by guarantee
Requires members to pay a fixed, guaranteed amount (usually £1) in the event of the company being wound up
Usually used by not-for-profit orgs
No shareholders but company must have at least one member
Companies limited by shares
Members (shareholders) do not have personal liability beyond the amount they agreed to pay for their shares
Shareholder has fully paid or their shares and company becomes insolvent => shareholder has no personal liability to pay any more
Either private limited companies or public limited companies (Additional filing requirements for public => will be private unless it fulfils those registration requirements)
Public Limited Companies (PLCs)
Permitted to issue their shares to the public, and if the PLC is listed, to trade their shares on a stock market
Subject to additional registration requirements eg: Need to have minimum nominal share capital of £50k, and Trading certificate
Must end in Public Limited Company or PLC (or Welsh equiv)
Must be registered as a PLC
Minimum of 2 directors
Company secretary required and must be suitably qualified
Accounts must be filed within 6 months of the accounting reference date and must be audited
Private Limited Companies (Ltd)
Not permitted to issues its shares to the public, allowed to be sold only by private arrangement
No min/max amount re trading or stat requirement for minimum shareholding
Minimum of 1 director
Company secretary not required
Accounts must be filed within 9 months of the accounting reference date
Certain companies are exempt from audit
Formation of companies - promoters and docs to file to create company
= people that arrange for investors/registration before it is registered at companies house (as it does not exist until then) ie someone who takes necessary steps to form a company
Memorandum of association
= a statement authenticated/signed by persons wishing to become members of the company
Indicates that the subscribers (signers) wish to form the company and agree to become members of the company
Must be delivered to the registrar of companies along with the application for registration
Owe fiduciary duties
Duty of good faith owed to the company
Liability of promoters on pre-incorporation contracts
Promoter personally liable on pre-incorporation contracts
Liability does not disappear once the company is formed – promoter remains personally liable unless different arrangements are made
Promoter can protect themselves by:
Prepare contract in draft and do not execute it until the company has been incorporates
Enter into a novation agreement after the company is incorporates (ie substituting company for promoter in contract)
After the company is incorporated, enter into a contract with it assigning the benefit of the contract to the company in exchange for the company’s agreement to indemnify the promoter for any liability to other contracting party if the promoter is held personally liable on the contract
Set up the company faster by using a shelf company
Shelf companies
Ie companies that are pre-incorporated but have never traded that the promoter can purchase and take over by changing basic details like the members
shelf company will be in standard form, so may not be suitable if company with bespoke articles of ass is required
Company registration - docs and info needed
Promoters must file memorandum of association with registrar of companies at Companies House along with an application for registration
App for registration must incl: Proposed name of company, Location of registered office, Details of company’s business activity and SIC (standard industrial classification) code, Whether the company will be limited by shares or guarantee, Whether private or public company, Details of subscribers, Statement of capital and initial shareholdings, Statement of the proposed officers, Details of persons with significant control, Statement of compliance with the terms of the CA 2006, Payment of the relevant fee
Requirements for company name
Must comply with certain rules: Must not be the same as, or essentially the same as, the name of another incorporated company, Must end in Limited or Ltd or Public Limited Company or Plc (or Welsh equiv), Cannot be a name that is deemed offensive, Approval is required for a name that suggests any connection to government or local authority, approval required for a name that contains any sensitive words eg auditor, law commission, medical centre
limited by guarantee => exempt from having to use the word limited
Change: By a special resolution of its members or as provided in the articles, Company must forward a copy of the resolution to the registrar of companies, give the registrar notice of the change, and pay a fee
Certificate of incorporation
Registrar will issue once all above submitted and in order
Will incl company’s unique registration number
Becomes a legal entity from the date on the certificate and so can commence trading
Company’s constitution
= company’s articles of association plus any resolutions or agreements adopted by the members to amend its articles
Every company is required to have articles which prescribe the internal workings of the company (but they are NOT required to file it a CH in order to register the company)
Sec of State has model sets of articles which apply automatically if a company has not drafted and submitted amended or bespoke articles to CH
Public doc and bind all members
Legal effect of articles of ass v shareholder agreements
ARTICLES OF ASS:
Articles forma contract between the company and each of the shareholders, and the shareholders with each other
Right of shareholders to enforce provisions of the articles relates to their membership rights only
Shareholder unable to enforce the articles acting in any other capacity eg if they also act as a director of the company
Excluded from Contract (rights of third parties) act 1999
SHAREHOLDER AGREEMENTS:
Shareholders may enter into additional contract to regulate their affairs
Private contractual agreement which binds only those members who sign it
Alteration of the articles of ass
By special resolution only
Alteration in the best interests of the company
Generally for shareholders to decide whether alteration in the best interests of the company
BUT if alteration made that no reasonable person would consider to be for the benefit of the company, a shareholder who did not vote in favour could challenge by making an app to the court
Court agrees => alteration will be set aside
Court will consider whether alteration was bona fide made in the best interests of the company as a whole
Alteration adversely affects minority interests
Not sufficient grounds for objection if the alteration is made in good faith in the interests of the company
BUT alteration cannot be in interests of company as a whole if it discriminates against some other members rather than others, so courts will consider whether the benefit derived from the alteration is one that any individual hypothetical members could enjoy
Lifting of veil of incorporation
Where:
Fraudulent and wrongful trading
PLCs require trading certificate => if trading without, directors can be held personally liable for any losses arising as a result
Group accounts
Companies are members of a group => may be necessary to prepare group consolidated accounts which recognise the common link between them
But even where group accounts required, subsidiary companies are not liable for the debts of the other subsidiaries or parent company, nor is the parent company liable for debts of the subsidiaries
Appointment of directors (company)
Private company must have at least 1 and public must have at least 2 (and at least 1 of those must be a natural person)
Procedure for appointing new directors
Typically found in the company’s articles
Model articles for company limited by shares = director can be appointed by ordinary resolution of the shareholders or a decision by the directors
Notice of change
Company must notify the registrar of companies within 14 days of any new director appts and any change to the details of existing directors
Types of directors (companies)
De jure directors = been formally and properly appointed and registers at CH
De facto directors = not been formally appointed/registered at CH but who carries out all the duties of a director
Shadow directors = regularly influences the acts of a company’s directors (CA06 => treated the same way as de jure/de facto)
Exec = responsible for day-to-day running of the company and are employees
Non-exec = usually consultants and take more of a supervisory role
Alternate director = attends/votes at board meetings when director is unable to attend
Nominee director =appointed to board to represent interests of a particular stakeholder eg a shareholder
De jure directors and have all rights/duties expected of other directors
Powers of directors (company)
Derived from the articles
Model articles = give directors power to exercise all the powers of the company except where the article specifically provide otherwise
Shareholders still retain element of control over directors
Model articles state the shareholders may be special resolution direct the directors to take or refrain specified action
Must act as a board - Ie must exercise powers collectively. Can delegate powers
Directors as decision makers
Shareholders are owners of the company => certain decisions that require shareholder involvement (usually those that alter constitution of the company or whether directors have a financial interest)
Company decision = resolution
=> some decisions by directors require shareholder approval
And some decisions are reserved to the shareholders by legislation (CA06) or in the articles of association
Directors as agents of the company (authority to act and signing)
Actual authority = expressly granted in the articles or by resolution
General rule – articles usually require the board to act collectively, but articles/a board resolution may delegate authority
Apparent authority = authority a third party reasonably believes the director has based on communication from the company
Director usually has no power to bind a company except when directors act as a board, apparent authority does not arise often (but could arise through past dealings)
Execution of contracts and documents
Companies may execute documents by affixing their seal or by the signature of two directors, a director and a secretary, or a single director if signed in the presence of a witness who attests the signature
Directors duties
(in summary)
Breach of duty could result in need to compensate company for any loss caused/account for any profit or benefit gained, but Shareholders could ratify conduct by passing an ordinary resolution (if director also a member, their vote would be disregarded)
duties = Basic fiduciary duty, Liability may extend beyond term (Eg may not exploit property, info or opportunities of which the director became aware while a director), Duty to act in accordance with company’s constitution and exercises powers only for purposes for which they are conferred, Duty to promote the success of the company, for benefit of members as a whole (incl concept of ‘enlightened shareholder value’), Duty to exercise reasonable care, skill and diligence, Duty to exercise independent judgment, Duty to avoid conflicts of interest, Duty not to accept benefits from third parties, Duty to declare interest in proposed or existing transactions or arrangements
Calling a board meeting (company)
Calling a meeting:
Any director may call by giving reasonable notice of the meeting to other directors or by authorising company secretary to give notice. Reasonable notice depends on facts
Contents of notice
Does not need to be in writing
Must indicate proposed time and date, location, and how they will communicate
Notice must be given to each director unless they have waived their entitlement to notice of that meeting
Electronic meetings possible – just a requirement that each director be able to communicate
Written resolution - Can be passed without holding a meeting, but usually only approved if all approve rather than a majority
Vote required for decisions at board meetings
Made by majority vote
Model articles allow for chairman to have casting vote in the event of deadlock
Directors are prohibited from voting on resolutions in which they have an interest
Quorum
Ie number of directors who must participate to make meeting valid
Usually no less than 2 (model articles)
Personal interest => may be prevented from counting in the quorum
Removal of directors
Power given to shareholders under CA06. Carried out by majority vote (ordinary resolution).
Not possible to remove a director by written resolution
Statutory power usually may not be overridden by eg the articles or director’s services contract
BUT may be limited by Bushell v Faith clause which gives weighted voting rights to a director who is also a shareholder in the event of a resolution to remove a director
May trigger contract rights
Ie to compensate for loss of office and damages for termination of the service contract
28 days’ notice required
Before a general shareholders meeting
Company must give notice to the director
Director has right to make a written representation and to speak at the meeting
Disqualification of directors
Can be in rel to general misconduct in connection with companies, unfit to be a director
Company secretary
legal requirement for public company to have a qualified company secretary (private companies have no such requirement)
Usually appointed and removed by the directors
Qualification
Directors have duty to take reasonable steps to ensure secretary has requisite knowledge and experience to discharge the functions of secretary and has one or more of the required qualifications:
Held office of public company for at least 3 of 5 years immediately preceding appointment
Is a member of a specified list of accountancy/secretarial bodies
Is a barrister/advocate/sol admitted in the UK
Is a person who, by virtue of holding or having held any other position or being a member of any other body, appears to the directors to be capable of discharging the functions of secretary of the company
Powers and duties
None prescribed by legislation, but usually responsible for:
Maintaining the books and records
Taking minutes at shareholder and board meetings
Making sure the company is in compliance with statutory obligations
Powers usually expressly delegated by the board of directors but can also be implied or apparent
=> company can be bound by acts of secretary even if they were not authorised by the board, if the contracts were of an administrative nature ie of the type that a third party could reasonably assume would be within the powers of the secretary
Company auditor
Under CA06 all companies must prepare accounts
CA06 requires large companies to hire a specialist accountant (i.e. auditor)
Small companies (ie those with an annual turnover of less than approx £10m and no more than 50 employees) do not require auditing
Accounts require auditing => auditor will be appointed by the directors
