Chapter 5 - Companies: the consequences of incorporation

Question 1

Is a company a person in its own right?

Answer 1

Yes.

A company has a separate legal identity from its members and is, in law, a person in its own right.

Question 2

Are the liabilities of the company unlimited?

Answer 2

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.

Question 3

Can the ‘veil of incorporation’ be lifted?

Answer 3

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:

1. To produce tax liability
2. To give entitlement to compensation
3. To prevent evasion of excise duty
4. To reveal true national identity and expose illegality
5. Quasi-partnership
6. To prevent an evasion of obligations
7. To reveal national identity
8. Where director is disqualified
9. Fraudulent and wrongful trading
10. Trading without a trading certificate

Question 4

What is a company?

Answer 4

A company is an entity registered under the Companies Act 2006 (‘CA’06’) or any earlier Companies Act.

Question 5

In law, what does the term ‘person’ mean?

Answer 5

In law, the term ‘person’ is used to denote either a natural person (ie, an individual human being) or an artificial person (including companies).

Question 6

What is the amount owners of a company are required to contribute in the event of business failure?

Answer 6

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.

Question 7

What is a personal guarantee?

Answer 7

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).

Question 8

Define liability limited by shares (public or private).

Answer 8

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).

Question 9

Define liability by guarantee (private only).

Answer 9

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.

Question 10

Define unlimited liability (private only).

Answer 10

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.

Question 11

How many times may a company alter its status and how?

Answer 11

A company may alter its status once, as follows:

1. Limited to unlimited: with the consent of all members of the company.
2. 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.

Question 12

Define a public company.

Answer 12

A public company is a limited company expressly registered as a public company under the Act.

Question 13

Define a private company.

Answer 13

A private company is any registered company (limited or unlimited) that is not stated to be a public limited company.

Question 14

What are the features of public companies?

Answer 14

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.

Question 15

What are the features of private companies?

Answer 15

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

Question 16

What are listed companies?

Answer 16

Quoted companies are also known as listed companies. This is because their shares are listed (or quoted) on public stock exchanges.

Question 17

Which documents must be sent to the Registrar of Companies in order to form a company?

Answer 17

1. Memorandum of association
2. Application
3. Statement of capital and initial shareholdings (applicable to a company with a share capital)
4. Statement of guarantee (applicable to a company limited by guarantee)
5. Statement of proposed officers
6. Statement of compliance

Articles of association may also be submitted, but if none is supplied, the default articles will apply.

Question 18

Is a certificate of incorporation conclusive evidence that a company is registered in accordance with the Act?

Answer 18

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

Question 19

What are the advantages of ‘off-the-shelf’ companies?

Answer 19

1. It is obviously a quicker way of achieving the result of having a company ‘ready to go’.
2. It avoids any potential liability arising from pre-incorporation contracts (see section 3.3) as the company already exists.

Question 20

What are the disadvantages of ‘off-the-shelf’ companies?

Answer 20

The following changes may need to be made:

1. Change of name
2. Transfer of subscribers’ shares
3. Change of directors and possibly company secretary
4. Alteration of articles

Question 21

What is a promoter?

Answer 21

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.

Question 22

What duties does a promoter owe to a company?

Answer 22

1. A general duty to exercise reasonable care and skill
2. 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.

Question 23

If a promoter makes a contract on the company’s behalf before incorporating (a ‘pre-incorporation contract’), what will apply?

Answer 23

1. The company cannot ratify the contract since it did not exist when the contract was made.
2. The company is not bound by it even after incorporation and even if it has derived some benefit from it.
3. The company cannot enforce the contract against the third party unless the promoter and third party have given rights of action to the company.
4. 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.

Question 24

In what ways can a promoter avoid potential liability?

Answer 24

By:

1. not making contracts until the company has been incorporated;
2. using an off-the-shelf company; or
3. 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.

Question 25

What are the rules regarding company names?

Answer 25

1. The company will not be registered if the Registrar considers the name to be offensive, or if its use could constitute a criminal offence.
2. The approval of the Secretary of State is required if the name is sensitive in some way or likely to suggest some connection with central or local government, or any public authority. Words such as ‘British’ or ‘International’, for example, are only likely to be sanctioned if the size of the company matches its pretensions.
3. Words which indicate that the company is of another type or legal form are not permitted.
4. A company cannot be registered if its name is the same as or virtually the same as the name of an existing company.

Question 26

Can a company change its name?

Answer 26

Yes.

A company may choose to alter its name at any time by passing a special resolution to that effect or otherwise as provided for in its articles.

Question 27

Can the Secretary of State order a company to change its name?

Answer 27

Yes.

The Secretary of State may order a company to change its name for a number of reasons, including where it is considered to be the same as or virtually the same as an existing company name or that it might otherwise mislead the public.

Question 28

Are companies required to have articles of association?

Answer 28

Yes.

Every company is required to have articles of association (‘articles’) and model articles apply where a company does not register its own.

Question 29

What are articles of association?

Answer 29

Articles prescribe regulations governing the management of the company’s affairs, the rights of the shareholders and the powers and duties of the directors.

Question 30

Do articles form part of the constitution of a company?

Answer 30

Articles form part of the constitution of a company and bind the company and its members.

They do not bind the company to third parties.

Question 31

Can articles be altered?

Answer 31

Yes.

Articles may be altered by the company in general meeting.

However, where the articles contain ‘provision for entrenchment’ such provisions can only be altered with the agreement of all company members or by court order.

A copy of any amended article must be sent to the Registrar within 15 days.

A member will not be bound by any alteration made after they became a member insofar as the alteration requires them to take more shares or increase their liability in any way to pay money to or contribute to the company

Question 32

Define company records?

Answer 32

The term ‘company records’ refers to any register, agreement, minutes, accounting records or other documents required to be kept by the Act.

Question 33

What records are a company required to keep?

Answer 33

1. A register of members
2. A register of directors and (if applicable) company secretaries
3. A register of people with significant control
4. A register of directors’ residential addresses
5. Copies of directors’ service contracts and indemnity provisions restricting directors’ liabilities
6. Records of resolutions and minutes of members’ and directors’ meetings (for a period of 10 years)
7. Directors’ statement and auditor’s report
8. A register of charges and copies of charges

Question 34

What does the register of each company contain?

Answer 34

1. the certificate of incorporation
2. the trading certificate (if it is a public company)
3. certificates of registration of charges
4. the information contained in documents delivered to the Registrar in accordance with any statutory provision

Question 35

What are the exceptions to the right to inspect a company’s register?

Answer 35

1. Protected information on directors’ residential addresses

2. The contents of any charges

Question 36

When must a confirmatory statement be sent?

Answer 36

Every company must send a confirmation statement to the Registrar. The statement can be sent at any time, but no more than 12 months may elapse between statement submissions. The purpose of the confirmation statement is to keep the Registrar informed about certain changes to the company.

Question 37

Give examples of examples of information requiring confirmation?

Answer 37

1. The address of the registered office of the company
2. The address (if different) at which the register of members or debenture holders is kept
3. The type of company and its principal business activities
4. The total number of issued shares, their aggregate nominal value and the amounts paid and unpaid on each share
5. For each class of share, the rights of those shares, the total number of shares in that class and their total nominal value
6. Particulars of members of the company
7. Particulars of those who have ceased to be members since the last return
8. The number of shares of each class held by members at the return date, and transferred by members since incorporation or the last return date
9. The particulars of directors, and secretary (if applicable)

Question 38

What qualification requirements must a company secretary for a public company satisfy?

Answer 38

At least one of:

1. Employment as a plc’s secretary for three out of the five years preceding appointment
2. Membership of one of a list of qualifying bodies: the ACCA, CIMA, ICAEW, ICAS, ICAI or CIPFA
3. Qualification as a solicitor, barrister or advocate within the UK
4. Employment in a position or membership of a professional body that, in the opinion of the directors, appears to qualify that person to act as company secretary

Question 39

What is the power of a company secretary?

Answer 39

The company secretary is recognised as having the 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.

However, a company secretary’s implied authority is limited and does not extend to buying land, for example, nor to borrowing money, nor to doing other acts usually undertaken by the directors.

Question 40

What are Accounts and Audit requirements?

Answer 40

1. Accounting records
2. Annual accounts (including group accounts)
3. Directors’ report (including consolidated report)
4. Directors’ remuneration report
5. Auditor’s report
6. Strategic report
7. Companies (Miscellaneous Reporting) Regulations 2018
8. Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018

Question 41

Define micro-entities.

Answer 41

Private companies which comply with two or more of the following requirements:

Turnover: <= £632k
Balance Sheet: <= £316k
Employees: <= 10

Question 42

Define small companies.

Answer 42

Private companies which comply with two or more of the following requirements:

Turnover: <= £10.2m
Balance Sheet: <= £5.1,m
Employees: <= 50

Question 43

Define medium-sized companies.

Answer 43

Private companies which comply with two or more of the following requirements:

Turnover: <= £36m
Balance Sheet: <= £18m
Employees: <= 250