Chapter 5 - Companies: the consequences of incorporation Flashcards
Is a company a person in its own right?
Yes.
A company has a separate legal identity from its members and is, in law, a person in its own right.
Are the liabilities of the company unlimited?
The liability of the company itself is always unlimited.
However, the liability of the members of a company for the debts of the company may be limited.
Can the ‘veil of incorporation’ be lifted?
The ‘veil of incorporation’ said to be drawn between the company and its members may be lifted in certain circumstances.
This may be done by the courts in order to defeat fraud, sharp practices or illegality.
The ‘veil of incorporation’ might be lifted in the following situations:
- To produce tax liability
- To give entitlement to compensation
- To prevent evasion of excise duty
- To reveal true national identity and expose illegality
- Quasi-partnership
- To prevent an evasion of obligations
- To reveal national identity
- Where director is disqualified
- Fraudulent and wrongful trading
- Trading without a trading certificate
What is a company?
A company is an entity registered under the Companies Act 2006 (‘CA’06’) or any earlier Companies Act.
In law, what does the term ‘person’ mean?
In law, the term ‘person’ is used to denote either a natural person (ie, an individual human being) or an artificial person (including companies).
What is the amount owners of a company are required to contribute in the event of business failure?
The amount members will be asked to contribute will be any amount that is unpaid on their shares (including any premium).
This means that their total liability is the value of the share capital that they own.
What is a personal guarantee?
It is a promise by a person (the directors or shareholders) to assume a debt obligation in the event of non-payment by the borrower (the company).
Define liability limited by shares (public or private).
Liability is limited to the amount of the nominal value, if any, unpaid on members’ shares held by them (including any premium payable by the current owner in respect of them).
Define liability by guarantee (private only).
Liability is limited to such amount as the members undertake to contribute to the company’s assets in the event of it being wound up.
A company limited by guarantee cannot be registered with a share capital.
A company limited by guarantee is often a charity or trade association.
Define unlimited liability (private only).
There is no limit on the members’ liability. They can be compelled to contribute as much as may be necessary to pay the company’s debts in full.
An unlimited company does not need to file annual accounts, subject to certain conditions.
How many times may a company alter its status and how?
A company may alter its status once, as follows:
- Limited to unlimited: with the consent of all members of the company.
- Unlimited to limited: by passing a special resolution to that effect and specifying whether the company is to be limited by shares or guarantee
A company limited by shares may not re-register as a company limited by guarantee, and vice versa.
Define a public company.
A public company is a limited company expressly registered as a public company under the Act.
Define a private company.
A private company is any registered company (limited or unlimited) that is not stated to be a public limited company.
What are the features of public companies?
Liability: Must be limited
Share capital: Subject to authorised minimum (currently £50,000).
Ability to commence trade: Must have trading certificate before it can commence trading
Public offers: Can offer its securities to the public (and may obtain a listing from the stock exchange or other investment exchange).
Name: Must end with ‘public limited company’ or ‘plc’
Loans: Loans to persons connected with directors and quasi-loans and credit transactions to directors or connected persons need members’ approval
Directors: Must have at least two directors
Company secretary: Must have one
Written resolutions: Not applicable.
AGMs: Must hold AGM
Accounts and reports: Must lay these before general meeting. Must file within 6 months
Small- and medium-sized companies: Not applicable.
Appointment of auditors: Must appoint auditors each year if necessary
Pre-emption rights: May not be excluded
Payment for shares: Additional rules apply to public companies, including that shares must be at least ¼ paid up (s.586) and concerning valuations for non-cash consideration
Reduction of capital: Needs special resolution confirmed by the court
Power to redeem or purchase shares out of capital: Not applicable.
What are the features of private companies?
Liability: May be limited or unlimited.
Share capital: No minimum.
Ability to commence trade: May commence trading once incorporated.
Public offers: Prohibited from offering its securities to the public
Name: Must end with ‘limited’ or ‘Ltd’ (or Welsh equivalent) although certain companies (including charities) may be exempt from this requirement (ss.59–62).
Loans: Only loans made directly to directors need members’ approval.
Directors: Must have at least one.
Company secretary: Need not have one
Written resolutions: May pass written resolutions instead of calling meetings
AGMs: Need not hold AGM.
Accounts and reports: Must file within 9 months
Small- and medium-sized companies: May qualify as small- or medium-sized, and take advantage of audit exemptions (small companies) and less stringent regime for filing.
Appointment of auditors: Existing auditors may be deemed to be re-appointed, subject to conditions
Pre-emption rights: May be excluded.
Payment for shares: Not applicable.
Reduction of capital: Needs only special resolution and directors’ solvency statement
Power to redeem or purchase shares out of capital: May do so, subject to conditions
What are listed companies?
Quoted companies are also known as listed companies. This is because their shares are listed (or quoted) on public stock exchanges.
Which documents must be sent to the Registrar of Companies in order to form a company?
- Memorandum of association
- Application
- Statement of capital and initial shareholdings (applicable to a company with a share capital)
- Statement of guarantee (applicable to a company limited by guarantee)
- Statement of proposed officers
- Statement of compliance
Articles of association may also be submitted, but if none is supplied, the default articles will apply.
Is a certificate of incorporation conclusive evidence that a company is registered in accordance with the Act?
This certificate is conclusive evidence that the company is registered in accordance with the Act and is a body corporate. If irregularities in formation procedure or an error on the certificate are later discovered, it is nonetheless valid and conclusive
What are the advantages of ‘off-the-shelf’ companies?
- It is obviously a quicker way of achieving the result of having a company ‘ready to go’.
- It avoids any potential liability arising from pre-incorporation contracts (see section 3.3) as the company already exists.
What are the disadvantages of ‘off-the-shelf’ companies?
The following changes may need to be made:
- Change of name
- Transfer of subscribers’ shares
- Change of directors and possibly company secretary
- Alteration of articles
What is a promoter?
A promoter is a person who takes the procedural steps to get a company incorporated; the term ‘promoter’ includes anyone who makes business preparations for the company.
However a person who acts merely in a professional capacity in company formation, such as a solicitor or an accountant, is not on that account a promoter.
What duties does a promoter owe to a company?
- A general duty to exercise reasonable care and skill
- A fiduciary duty to disclose any personal interest in a transaction and, sometimes, to account for monies received. Generally speaking, any profits which they make from promoting the company and fails to disclose must be surrendered to the company. However, if they disclose them and the company gives consent, they may retain any legitimate profits.
If a promoter makes a contract on the company’s behalf before incorporating (a ‘pre-incorporation contract’), what will apply?
- The company cannot ratify the contract since it did not exist when the contract was made.
- The company is not bound by it even after incorporation and even if it has derived some benefit from it.
- The company cannot enforce the contract against the third party unless the promoter and third party have given rights of action to the company.
- The contract takes effect (subject to any agreement to the contrary) in the same way as one made with the promoter and they are personally liable on it.
In what ways can a promoter avoid potential liability?
By:
- not making contracts until the company has been incorporated;
- using an off-the-shelf company; or
- agreeing a draft only with the third party on the basis that the company, once formed, will enter into the agreed form with the third party.
Where a promoter is already liable on a pre-incorporation contract, they may be able to arrange for the company to novate the contract (ie, enter into a new contract on identical terms), in which case they should also secure the third party’s consent to the promoter thereupon being released from personal liability.
