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Business Law and Practice > Chapter 4: Nature and Formation of Companies > Flashcards

Chapter 4: Nature and Formation of Companies Flashcards

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1
Q

What are the different types of companies?

A
  1. Unlimited companies
  2. Limited companies
    - limited by share (private or public)
    - limited by guarantee
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2
Q

What are unlimited companies?

A

Rare.

Members of an unlimited company are personally liable for all the debts of the company, in the same way as the partners in a general partnership or a sole trader.

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3
Q

What is the benefit of an unlimited company?

A

One benefit - it is not obliged to publish its accounts and so enjoys a higher degree of confidentiality than a limited company

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4
Q

What is a limited company?

A

It restricts the liability of its owners (called members)

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5
Q

What are the 2 most common types of limited companies?

A

Companies limited by guarantee
Companies limited by shares

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6
Q

What is a company limited by guarantee?

A

Company limited by guarantee requires its members to pay a fixed, guaranteed amount (usually £1) in the event of the company being wound up.

No shareholders, but the company must have at least 1 member (or guarantor).

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7
Q

When is a company limited by guarantee typically used?

A

Usually used for not-for-profit organisations, such as charities where there is no need for members to make large capital contributions for the business to be capable of running.

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8
Q

What is a company limited by shares?

A

the members (also called shareholders) do not have any personal liability for obligations of the company beyond the amount they agreed to pay for their shares.

If a shareholder has fully paid for their shares and the company becomes insolvent, the shareholder has no personal liability to pay any more.

Companies limited by shares are classified either as private limited companies or public limited companies.

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9
Q

What is the main difference between a private limited company and a public limited company?

A

A private limited company is not permitted to issue its shares to the public - they are allowed to be sold only by private agreement.

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10
Q

How are public limited companies allowed to issue shares?

A

They are permitted to issue their shares to the public.

If the PLC is listed, they can also trade their shares on a stock market.

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11
Q

What is needed for a PLC to be able to publicly trade?

A

The PLC is subject to additional registration and filing requirements, most notably the need to have a minimum nominal share capital of £50,000 and a trading certificate

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12
Q

What are ‘promoters’?

A

Since a company is a legal entity that doesn’t exist until it registers at Companies House, someone has to go about arranging for investors and registration to bring the company into existence.

Such people are called the company’s ‘promoters’.

Simply someone who takes the necessary steps to form a company.

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13
Q

Who will not be considered promoters?

A

Professional advisors, such as solicitors and accountants, are not considered promoters simply because they give promoters professional advice.

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14
Q

What name requirements are there of a private company?

A

Must end in Limited or Ltd of the Welsh equivalent

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15
Q

What name requirements are there for a public company?

A

Must end in Public Limited Company or Plc or the Welsh equivalent

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16
Q

How will a private company be registered?

A

Any company limited by shares registered at Companies House that is not a Plc

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17
Q

What registration is needed for a public company?

A

Must be registered as a Public Limited Company

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18
Q

What is the minimum no. of directors a private company needs?

A

1

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19
Q

What is the minimum no. of directors a public company needs?

A

2

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20
Q

When is a company secretary required?

A

Private company - not needed

Public company - required and must be suitably qualified

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21
Q

What is needed for a public company to trade?

A

Requires a trading certificate to commence trading

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22
Q

What accounts and audit requirements are public companies subject to?

A

Accounts must be filed within 6 months of the accounting reference date + must be audited

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23
Q

What accounts and audit requirements are there for private companies?

A

Accounts must be filed within 9 months of the accounting reference date.

Certain small companies are exempt from audit.

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24
Q

Who creates a Memorandum of Association?

A

One of the things a promoter will do is create a Memorandum of Association.

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25
Q

What is a Memorandum of Association?

A

This is a statement authenticated/signed by persons wishing to become members of the company.

It indicates that the subscribers (signers) wish to form the company + agree to become members of the company.

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26
Q

What must be done with the Memorandum of Association?

A

The Memorandum of Association must be delivered to the Registrar of Companies along with the application for registration

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27
Q

What duties do promoters owe?

A

Like directors and partners in a partnership, promoters owe a fiduciary duty to the company - a duty of good faith.

E.g., a promoter must disclose any personal interests in any transactions entered into with/on behalf of the company + account for any profit made as a result.

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28
Q

What are ‘pre-incorporation contracts’?

A

In addition to gathering interested investors, often, before a company comes into existence, promoters will make contractual arrangements to enable the company to operate once it is registered and a certificate of incorporation is issued.

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29
Q

Who will be liable on pre-incorporation contracts?

A

Because the company is not yet in existence, it cannot be a party to such contracts.

Therefore, both common law and the Companies Act 2006 provide that a promoter will be personally liable on pre-incorporation contracts.

Note - this liability doesn’t disappear once the company is formed.
The promoter remains personally liable even after the company is formed unless different arrangements are made.

30
Q

How can a promoter protect themselves against personal liability?

A
  1. Prepare contract in draft + don’t execute until the company has been incorporated.
  2. Enter novation agreement.
  3. After incorporation, enter a contract with company to assign the benefit in exchange for the company’s agreement to indemnify the promoter for any liability to the other contracting party
  4. Set up the company faster by using a shelf company + then entering into the contract
31
Q

What is a novation agreement?

A

A contract between the three parties - the promoter, the company, and the outside contracting party - under which the parties agree to substitute the company for the promoter, thus releasing the promoter from personal liability on the underlying pre-incorporation contract.

32
Q

What are shelf companies?

A

Companies that are pre-incorporated, but have never traded, often set up by solicitors, that the promoter can simply purchase and take over by changing basic details like the members.

33
Q

When might a shelf company be a good option?

A

If a promoter is in a hurry to incorporate a company

34
Q

When might a shelf company not be appropriate?

A

The shelf company will be in a standard form, so it may not be suitable if a company with bespoke articles of association is required

35
Q

What is needed for a company to become incorporated?

A

The promoters of the company must file the Memorandum of Association with the Registrar of Companies at Companies House along with an application for registration.

36
Q

What must an application for registration include?

A
  1. Proposed name of the company,
  2. Location of registered office,
  3. Details of the company’s business activity and SIC code,
  4. Whether the company will be limited by shares or guarantee,
  5. Whether the company is private or public,
  6. Details of subscribers,
  7. Statement of capital and initial shareholdings,
  8. Statement of the proposed officers,
  9. Details of persons with significant control,
  10. Statement of compliance with the terms of the Companies Act 2006, and
  11. Payment of the relevant fee
37
Q

What is the location of a registered office?

A

The place where all communications or notices are to be addressed.

It must be in the jurisdiction in which the business is located, and it is usually the place where the company does business or its solicitor’s or accountant’s office

38
Q

What is a SIC code?

A

Standard Industrial Classification code

39
Q

What does a statement of the proposed officers include?

A

The people who run the company - its directors who may, but need not be members of the company.

+ company secretary

Includes their residential addresses.

40
Q

What rules surround what name a promoter can pick for their company?

A

i. it must not be the same as, or essentially the same as, the name of an already incorporated company,

ii. it must end in Limited or Ltd or Public Limited Company of Plc (or the Welsh equivalent if registered in Wales), as applicable

iii. it cannot be a name that is deemed offesive

iv. approval is required for a name that suggests any connection to Government or local authority, and

v. approval is required for a name that contains any sensitive words, such as Auditor, Chartered, Law Commission, or Medical Centre

41
Q

Who is exempted from having to use the word ‘Limited’ at the end of its name?

A

A company limited by guarantee - can be attractive for charities who want to profit a less corporate image

42
Q

How can a company change its name?

A

By special resolution, or as provided in the articles.

Company must:
i. Forward a copy of the resolution (or a statement that the change was per the articles) to the Registrar of Companies,
ii. Give the Registrar notice of the change +
iii. Pay a fee

43
Q

What must a company limited by shares also include in its Application for Registration?

A
  1. Statement of the total number of shares of the company to be taken by the subscribers of the Memorandum of Association
  2. Aggregate nominal value of those shares
  3. If the shares are to be divided into classes with varying rights, a description of those classes and rights, and
  4. The amount that will be paid up by shareholders + any amount left unpaid for the shares.
44
Q

What is the aggregate nominal value of shares?

A

A statement of the aggregate amount of the lease amount for which each share is to be sold, which is often stated as £1 per share in private companies + has nothing to do with what the shares are actually sold for.

45
Q

What will the Registrar do once they have received the application for registration?

A

Once the Registrar has inspected the registration documents, and assuming they are all in order, they will issue a certificate of incorporation containing the company’s unique registration number.

46
Q

What is a certificate of incorporation?

A

Essentially the birth certificate of the company.

It is from the date stated on the certificate that the company becomes a legal entity + can legally commence trading with the protection of limited liability

47
Q

What is a company’s constitution?

A

Simply its articles of association plus any resolutions or agreements adopted by the members to amend its articles of association.

48
Q

What are the model articles?

A

Apply automatically if a company hasn’t drafted and submitted amended or bespoke articles to Companies House.

49
Q

What usual provisions will be covered by the articles?

A
  1. Directors’ meetings and decision making,
  2. Appointment and removal of directors,
  3. Share capital (including issuing, allotting, and transferring shares),
  4. Rights attached to shares, including voting and dividends, and
  5. Shareholder meetings (including, e.g., notice and quorum requirements)
50
Q

What happens if the articles restrict the objects of the company?

A

The directors have a duty to adhere to the restriction

51
Q

What can happen if directors don’t adhere to the restricted objects?

A

They breach their duty + may be subject to:
1. an injunction preventing the restricted action if it has not already been carried out, or

  1. an equitable action by the company for any damage caused.

However, the company action that was beyond the scope of what was authorised is nevertheless valid.

52
Q

What is the effect if the articles do not restrict the objects of the company?

A

The company is free to carry on commercial activity of any kind.

The model articles don’t include any restriction and, thus, most newly formed companies are unrestricted.

53
Q

What is the legal effect of the articles of association?

A

The articles form a contract between the company and each of the shareholders, and the shareholders with each other.

The right of shareholders to enforce provisions of the articles relates to their membership rights only.

A shareholder is unable to to enforce the articles acting in any other capacity, e.g., if they also act as a director of the company.

54
Q

What is a shareholders’ agreement?

A

A private contractual agreement which binds only those members who sign it.

E.g., shareholders might agree among themselves that the company’s constitution cannot be changed without unanimous consent or they might agree that none of them will compete with the company (which unlike partners, shareholders otherwise could do).

55
Q

What can the articles not contain?

A

Cannot contain a provision that requires unanimous consent to change the constitution as the Companies Act doesn’t permit that.

Under the Companies Act a special resolution is required to change the articles + that cannot be changed.

56
Q

How can a company alter its articles?

A

A company can alter its articles by special resolution.

However, an alteration cannot require a shareholder to increase their liability to the company, that is, force a shareholder to subscribe for more shares.

57
Q

What do ordinary shareholder resolutions require?

A

Simple majority of the shareholders.
- more than 50%

58
Q

What do special resolutions of the shareholders require?

A

Must be approved by at least 75% of the members.

59
Q

What does ‘entrenching’ an article mean?

A

The Companies Act allows for certain provisions of the articles to be ‘entrenched’ - to require a more onerous process for alteration than those required for a special resolution.
- e.g., approval by all members.

60
Q

When can provision for entrenchment be made?

A

In the company’s articles on formation or by a special resolution of the members

61
Q

What notice is needed if a company includes an entrenching restriction?

A

The company must give notice to the Registrar that its articles include such a restriction.

62
Q

What can an entrenching restriction not do?

A

A provision purporting to prevent amendment of a company’s articles will be ineffective because, regardless of the provision, the articles may be revised if a special resolution of the members if passed.

63
Q

When can a shareholder challenge an alteration of the articles?

A

If the shareholders make an alteration that no reasonable person would consider to be for the benefit of the company, a shareholder who did not vote in favour of the alteration can challenge it by making an application to court.

If the court decides that no reasonable person would deem the alteration to be a benefit to the company, it can set the alteration aside.

In making its determination, the court will need to decide whether the alteration was bona fide made in the best interests of the company as a whole

64
Q

What is not sufficient grounds for objection to an alteration of the articles? What is the flip side of this?

A

That an amendment adversely affects minority shareholders is not sufficient grounds for objection if the alteration is made in good faith in the interests of the company.

However, the alteration cannot be in the interests of the company as a whole if it discriminates against some members rather than others, so the courts will consider whether the benefit derived from the alteration is one that any individual hypothetical member could enjoy.

65
Q

What is the effect of a company being a legal entity distinct from its members?

A

Means that the company:
1. Owns property in its own name,

  1. Enters contracts in its own name,
  2. Can borrow money + grant security in its own name,
  3. Is taxed separately from its members,
  4. Can sue (and be sued) in its own name, and
  5. Can carry on in existence even with changes to its members - it has perpetual succession
66
Q

What is the veil of incorporation?

A

The concept of separate legal personality means that members of a limited company have no personal liability for the debts of the company, except in certain circumstances.

67
Q

When has the veil of incorporation been lifted?

A

The only times where directors or shareholders have been liable is because of other legal provisions.

This is most likely to happen if the company is formed to carry out a fraud or to avoid an existing obligation.

68
Q

In what scenarios have directors or shareholders been found personally liable?

A
  1. Fraudulent and wrongful trading,
  2. PLCs trading without a trading certificate
  3. Group accounts
69
Q

What is fraudulent and wrongful trading?

A

If a director causes the company to trade while knowing the company is insolvent, the director may be charged with the civil offence of wrongful trading or the criminal offence of fraudulent trading + incur personal fines and other penalties.

70
Q

What happens if a PLC trades without a trading certificate?

A

The directors of the PLC can be held personally liable for any losses arising as a result.

71
Q

What are group accounts? Why might it lead to lifting the veil?

A

If companies are members of a group, it may be necessary to prepare group consolidated accounts which recognise the common link between them.

Note –> even where group accounts are required, the subsidiary companies are not liable for the debts of the other subsidiaries or parent company, nor is the parent company liable for the debts of the subsidiaries.

Business Law and Practice (11 decks)

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