CH7 Company Law Flashcards
- Identify the differences between unincorporated businesses (sole traderships and partnerships), limited liability partnerships and companies, show the advantages and disadvantages of incorporation and recognise the circumstances when the veil of incorporation can be lifted - Identify the procedures required to form a registered company or a limited liability partnership, including any practical considerations, and the nature and contractual force of a company's memorandum and articles of asso
In a company limited by shares, what are the three types?
- Fully paid shares
- Partly paid shares
- Share premium
If someone has fully paid shares in a company, what is their liability to contribute at winding up?
None
If someone has partly paid shares in a company, what is their liability to contribute at winding up? Who does it apply to?
The outstanding amount of the nominal value (the bit they have not yet paid). Applies to original or subsequent holder.
If someone has shares issues at a premium in a company, what is their liability to contribute at winding up? Who doe sit apply to?
Any unpaid premium (above the nominal amount) will be owed. ONLY applies to original shareholder.
Are there any shares in a company that is limited by guarantee?
No
What do the members agree to in a company limited by guarantee?
A guaranteed amount that will only be paid on winding up.
What is the veil of incorporation?
A ‘veil’ drawn between the members (shareholders) and the company, separating them for the purposes of liability and identification.
What is the purpose of lifting the veil usually?
To expose sharp practice
In terms of lifting the veil, for groups of companies, what might a subsidiary be regarded as in respect of its holding company? What is the example?
An agent. I.e. they are a single entity.
English subsidiary deemed to be agent of American holding company and therefore liable to UK tax.
In what two situations would the veil of corporation NOT be lifted?
- Where creditors of an insolvent holding company are not paid in full even though the holding company remains solvent
- Where a claimant proceeds against a subsidiary company that is not as asset rich as its holding company.
Can the courts lift the veil to reveal the true national identity/expose illegality? What is the related example?
Yes.
Daimler did not have to pay (German company) Continental Tyres until after the war.
What is the example of a quasi partnership in terms of lifting the veil? Ebrahim and friend.
Ebrahmi and friend owned company 50/50.
Both gave friend’s son 10% of their shares.
Friend and son tried to remove Ebrahimi.
Courts said no. It is blatantly a partnership so we will treat it as such.
Winding up could be ordered on grounds of being just and equitable.
What are the two examples of lifting the veil where a company is a sham? EE soliciting; English film.
- EE bound to not solicit customers from ex-ER after leaving service.
Workaround: EE formed company and carried on his work, soliciting customers in the process.
Veil lifted, injunction granted. - Funding available for making English films.
English company formed to make English film.
Staff and finance = American; film made in India.
Veil lifted, funding not available.
What happens in terms of lifting the veil if a director is disqualified but defies the order and becomes one anyway?
They will be jointly or severally liable along with the company for the company’s debts. I.e. they are not a separate entity.
What happens in terms of lifting the veil if a director is fraudulently or wrongfully trading?
Directors can be held liable for the company’s debts as the courts see fit.
A public company must obtain a trading certificate before commencing to trade. Failure to do so leads to what in terms of lifting the veil?
Veil is lifted and directors will be personally liable for any loss/damage suffered by a third party
What are the two types of company structure?
Limited and unlimited
What are the two types of limited company?
Public and private
Can companies change status? I.e. from limited to unlimited and vice versa?
Yes, once.
What, in terms of shareholder agreement, is required to change company status from limited to unlimited?
Consent of ALL shareholders
What, in terms of shareholder agreement, is required to change company status from unlimited to limited?
Special resolution: 75% of shareholders agree to it.
Is it possible to change from a company limited by shares to one limited by guarantee or vice versa?
No
For a PUBLIC company, can they be limited or unlimited?
Must be LIMITED
For a PRIVATE company, can they be limited or unlimited?
Limited or unlimited
Is there a minimum share capital for PRIVATE companies?
No
Is there a minimum share capital for PUBLIC companies?
£50,000
When can a PRIVATE company commence trading?
Once incorporated
When can a PRUBLIC company commence trading?
MUST have trading certificate BEFORE it can commence trading
Can a PRIVATE company offer securities (shares) to the public?
No
But they can offer to groups of people (just not to the world at large)
Can a PUBLIC company offer securities (shares) to the public?
Yes and may obtain a listing from the Stock Exchange or other investment exchange.
What must a PRIVATE company’s name end with? What are the exceptions?
Ltd. (or Welsh equivalent)
Exceptions: charities, education, promotion of science
What must a PUBLIC company’s name end with?
PLC (public limited company) or Welsh equivalent
Are there any rules relating to loans that apply to a PRIVATE company?
No
What is the rule relating to loans for a PUBLIC company?
The following loans need members’ APPROVAL:
- Persons connected with directors
- Quasi loans
- Credit transactions to directors/connections
Does a PRIVATE company need to have a company secretary?
No
How many directors does a PRIVATE company need to have?
At least one.
How many directors does a PUBLIC company need to have?
At least two.
Does a PUBLIC company need to have a company secretary?
Yes - must have one
In a PRIVATE company, what can be used instead of calling meetings to make decisions?
Written resolutions
Can a PUBLIC company use written resolutions instead of meetings to make decisions?
No
Does a PRIVATE company need to hold an AGM?
No
Does a PUBLIC company need to hold an AGM?
Yes
What does a PRIVATE company need and not need to do with respect to their accounts? (Laying out and filing)
Non need to lay out at AGM (since they do not need to have one)
Must file within 9 months
What does a PUBLIC company need and not need to do with respect to their accounts? (Laying out and filing)
Must lay out accounts at AGM
Must file within 6 months
Are there any advantages to being small or medium sized for a PRIVATE company?
Yes, audit exemptions (small) and less stringent filing regime
Are there any advantages to being small or medium sized for a PUBLIC company?
No
Does a PRIVATE company have to vote in order to re-appoint existing auditors?
No, they may be deemed to be re-appointed.
Does a PUBLIC company have to vote in order to re-appoint existing auditors?
Yes
For a PRIVATE company, are pre-emption rights excluded?
May be excluded
For a PUBLIC company, can pre-emption rights (right of existing shareholders to buy new shares first) be excluded?
May NOT be excluded
In terms of payment for shares, what obligations does a PUBLIC company have?
Additional rules apply, including that shares must be at least 1/4 paid up and concerning valuations for non cash considerations
Does a PRIVATE company have any additional rules relating to payment of shares?
No
For a PRIVATE company, what two things are needed for a reduction in capital?
Special resolution and directors’ solvency statement
For a PUBLIC company, what is needed for a reduction in capital?
Special resolution confirmed by the court
Does a PRIVATE company have the power to redeem or purchase shares out of capital?
May do so subject to conditions
Does a PUBLIC company have the power to redeem or purchase shares out of capital?
N/A
What is the role of the company secretary?
To make sure all the rules and regs are met (amongst other things)
What are the advantages of setting up an off the shelf company?
- QUICKER
- Avoids potential liability arising from PRE-INCORPORATION CONTRACTS as the company already exists
What are the disadvantages of setting up an off the shelf company? NADS
- Probably have to change NAME
- Must transfer of subscribers’ SHARES
- Must change of DIRECTORS and possibly company SECRETARY
- Alteration of ARTICLES
What additional things does a PLC need to submit/obtain? CAC
- Obtain trading CERTIFICATE prior to trading
- Submit APPLICATION stating all RULES have been met (e.g. nominal value of share capital is not less than the ‘authorised minimum’.
- Submit statement of COMPLIANCE
What does the memorandum of association contain (3 points) and what format must it be in? It must also be what by whom?
- Must be in PRESCRIBED FORM.
- Must state that subscribers WISH to form a company
- Must state that subscribers agree to become MEMBERS
- Must state that, in the case of a company with SHARE CAPITAL, they agree to take at least one share each.
- Must be AUTHENTICATED (signed) by each subscriber.
What must the application itself state? Five things.
- Proposed NAME
- Whether LIABILITY is to be limited (shares or guarantee)
- PRIVATE or PUBLIC
- Registered OFFICE: England and Wales, Wales, Scotland, or NI
- Intended ADDRESS of registered office (address for delivery of legal documents that may be served on the company and where company registers must or may be kept)
What must the statement of capital and initial shareholdings state? Applicable only to a company with a share capital.
- Total NUMBER of shares
- Their AGGREGATE nominal value
- Details of INDIVIDUAL CLASSES of shares
- Amount to be PAID/UNPAID on each share
What must the statement of guarantee state? Applicable to a company limited by guarantee only).
MAXIMUM amount that each member undertakes to contribute to the net assets in the case of a wind up while they are a member or within one year thereafter.
What should the statement of proposed officers contain? The what and what of who and who? Requirement for public company? Requirement for private company?
Particulars and consent of:
1. The first director(s)
2. The company secretary (optional for private companies)
What does the statement of compliance say?
That you have met all the provisions in the Companies Act 2006.
What is the final thing that would be required if the company does not want to use the default ones?
Articles of Association
What documents does a company need to submit to the Company Registrar? Five things.
- Memorandum of association
- Application
- Statement of capital/statement of guarantee
- Statement of compliance
- Articles of Association (IF you want to deviate from the standard Articles in the Act)
What is a promoter?
In addition to anyone who takes procedural steps (solicitor, accountant), a promoter includes anyone who makes business preparations for the company.
What two duties does the promoter owe the company? With the second duty, what generally happens if they do not comply and what is the exception? How may disclosure be made? Who may disclosure be made to in a public company? A private one?
- General duty to exercise CARE and SKILL
- Fiduciary duty to DISCLOSE any personal interest in a transaction and, sometimes, to account for monies received.
Generally, profits received from promoting the company and not disclosed (SECRET PROFIT), must be surrendered. Except if they disclose them and the company gives PERMISSION to retain.
Disclosure may be made through the LISTING PARTICULARS or PROSPECTUS.
Disclosure in a private company should be to existing and prospective MEMBERS or to the BOARD.
What is a pre incorporation contract?
A contract that the promoter enters into purportedly in the name of the company before the company is ‘born’ (received its certificate of incorporation)
What are the consequences of a pre incorporation contract?
Capacity to enter contracts?
Can company ratify?
Can company enforce? Exception?
Who is liable?
- Company has no capacity to ENTER into contracts when it does not yet exist and therefore cannot be bound.
- Company cannot RATIFY contract as it did not exist when contract was made.
- Company cannot ENFORCE contract against third party unless promoter and third party have given rights of action to the company under the Contracts (Rights of Third Parties) Act 1999.
- Contract takes effect in same way as one made with the PROMOTER and they are PERSONALLY LIABLE for it.
How can the promoter avoid becoming personally liable? WOND
- WAIT until company has been incorporated
- OFF THE SHELF company
- Agree a DRAFT ONLY with a third party on the basis that the company, once formed, will enter into the agreed form
- NOVATION (contract between promoter and TP with provision stating that once company exists, it will replace promoter in contract).
What is the situation with expenses for the promoter?
Cannot legally claim them, but, in practice, will generally agree that the first directors (which they may be one of) will pay
What do you need to do to change a company’s name (two things)? When might you be forced to change the company’s name and who could do it?
- Passing a special resolution (75%)
- Notify the Registrar and obtain new certificate of incorporation
- Secretary of State may force a company to change its name. If same/virtually same as another company; misleading to the public.
Where must you disclose the company name? What will a breach result in?
At place of business, on certain documents and on company seal.
Breach of either may result in fine
What can the Articles of Association also be called?
The company’s constitution
Model articles of association are available for private and listed companies. Can they adopt alternative articles?
Yes
What is the contractual effect of the company’s constitution (articles of association)?
- Binds company to its members
- Binds members to members
- Does NOT bind company to third parties
- Applies ONLY to members acting in their capacity as members
In certain cases, if a contract does not contain a specific term but the articles do, then the contract may be deemed to incorporate the relevant term. True or false?
True
Do changes to the articles affect the future, past or present?
Future only
What must a company do to change its articles?
Pass a special resolution (75%)
How can you change the articles if they contain a ‘provision for entrenchment’?
Can a company provide that a provision for entrenchment can never be replaced or amended?
What must they do when one is included or removed?
Need agreement of ALL members OR a court order
No
Notify the Registrar
What timeframe must a copy of any amended article be sent to the registrar within?
15 days
Can a member be bound by any alteration made AFTER they became a member insofar as it requires them to take more shares or increases their liability in any way to pay money to or contribute to the company?
No
What records must a company keep at their registered office and have available for inspection (8 things)?
Three are types of people
Five are registers
- Register of MEMBERS
- register of DIRECTORS
- Register of PEOPLE with SIGNIFICANT CONTROL
- Register of Directors’ residential addresses (protected info)
- Copies of Directors’ SERVICE CONTRACTS and INDEMNITY PROVISIONS restricting directors’ liability
- Records of RESOLUTIONS and MINUTES (for 10 years)
- Director’s STATEMENT and AUDITOR’S REPORT
- Register of CHARGES and copies of charges (any security offered in order to obtain finance)
What record is a company NOT required to keep?
Register of debenture holders (IOUs)
Who can a company be required to give a copy of articles and other constitutional documents to free of charge on request?
Shareholders and creditors
The Registrar of Companies maintains a register in respect of each company at Companies House. What does the register contain (four things)?
Three are certificates
- Certificate of INCORPORATION
- TRADING certificate
- Certificates of registration of CHARGES
- Information contained in DOCUMENTS delivered to the registrar in accordance with any statutory provision, including annual accounts and returns, special and some ordinary resolutions and changes of directors.
Can anyone inspect the register and, for a fee, require a copy of any material on it? What are the two exceptions?
Yes
- Directors’ residential addresses
- Details of any charges (they can have an overview though)
What replaced the annual statement?
Confirmation statement
What does the confirmation statement do?
Confirms no changes to key particulars or gives details of changes.
What might you need to include in the confirmation statement?
Three things that are basic details
Three things that are key changes
- Address of registered office
- Type of company and principal activities
- Share capital
- Details of members/those who have ceased to be members
- Changes to those with significant control
- Changes to directors and secretaries
Annual accounts must be approved by who and filed where by when?
- Approved and signed by the directors
- Filed at the Registry within 9 months (private company) or 6 months (public company) after the end of the accounting period.
Director’s report must contain what three things?
- Names of directors
- Principal activities of company
- statement that the auditor is not unaware of any relevant audit information
Which companies must disclose director’s remuneration?
Quoted companies
What four things must the auditor’s report contain?
- Identify the accounts audited and the financial reporting FRAMEWORK applied in their preparation
- Describe the SCOPE of the audit
- State that, in the auditor’s opinion, the accounts give a TRUE AND FAIR view of the companies financial position
- State that the DIRECTOR’S REPORT is consistent with the accounts.
Which companies must prepare a strategic report as part of their financial statements?
Large and medium sized companies.
What should a strategic report contain?
- A fair review of the company’s business
- A description of the principal risks and uncertainties facing the business
- Report on environmental matters to the extent that it is necessary to understand the development, performance or position of the company’s business
What is the purpose of a strategic report?
To allow members to assess how well the directors have performed their duty to promote the success of the company
What four additional reporting requirements were introduced with the Companies (Miscellaneous Reporting) Regs 2018?
- Disclosures: extent of engagement with employees, suppliers, customers, and others
- Large companies: must include statement describing that directors have regard to matters in s.172 of Companies Act 2006
- Companies with either over 2000 employees or global turnover >£200m and global BS of >£2billion must include statement of corporate governance arrangements
- Quoted companies with more than 250 employees must include additional disclosures on remuneration
Which companies are excepted from having to carry out audits?
- Micro and small companies (unless insurance or banking)
- Dormant companies (unless banking or insurance)
- Non-profit making companies subject to public sector audit
- Subsidiaries whose parent guarantees their liabilities at the balance sheet date
What is a micro company - turnover, BS, EEs?
Turnover: less than of equal to £632k
BS: less than or equal to 316k
EEs: less than or equal to 10
What is a small company - turnover, BS, EEs?
Turnover: less than or equal to10.2m
BS: less than or equal to 5.1m
EEs: less than or equal to 50
What is a medium company - turnover, BS, EEs?
Turnover: less than or equal to 36m
BS: less than or equal to 18m
EEs: less than or equal to 250
What is the role of the company secretary? Five points.
Are they an EE?
Are they a director?
What do they do in respect to meetings?
What are they responsible for in terms of filing?
What power do they have in terms of binding the company?
- EE of company
- Officer of the company (faces potential civil and criminal liability alongside the directors)
- Convenes the meetings of the board, issues the agenda and drafts the minutes
- Responsible for the various statutory registers and for filing documents with the Registrar
- Has power to contract on behalf of the company in respect of its administrative operations, including the employment of office staff and management of the office generally. Thus may bind through implied actual authority as well as any express or ostensible authority. Limits: buying land, borrowing money, other acts usually undertaken by directors.
