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CIMA BA4 > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

Define ‘ A company’

A

A type of corporation.
An association of members formed
to conduct business or other activities
in the name of the association.

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2
Q

What is incorporation?

A

Incorporation is the legal process of forming a corporation or company, or registering a business as a limited company

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3
Q

How are most companies incorporated?

A

Most companies are incorporated under the Companies Act 2006, by complying with the registration

  • strictly known as “registered corporations aggregate” RCA
  • can be PLC or LTD
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4
Q

What are other types of corporation?

A

Statutory Corporations, e.g. some state-owned corporations

Corporations formed by Royal Charter, e.g. the BBC

Corporation Sole: The embodiment of an office in an individual, e.g. The Mayor of London. It is
possible to sue the Mayor as Mayor rather than personally as Sadiq Khan

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5
Q

What is liability?

A

the state of being legally responsible for something.

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6
Q

What is a tort?

A

A tort is a civil wrong
that causes harm or loss to another person
legal liability for the person who committed the act.

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7
Q

Company: what liability do members havefor the business’s debts ?

A

is limited to the capital they contribute;

only have to contribute any amount unpaid on their shares, if the company cannot pay its own debts.

The company has unlimited liability for its own debts and can be held liable for torts and crimes

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8
Q

What are Guarantee companies

A

. Member’s liability is limited to any amount they guarantee to contribute, (set out in company constitution and unalterable),

a type of corporation designed to protect members from liability

Guarantee companies can omit limited from their name

Typically charities

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9
Q

What are Unlimited companies?

A

 No limit to member’s liability.
 No requirement to file accounts.
 Rare in practice

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10
Q

What are communitity interest companies?

A

provide some sort of community benefit,
wishing to operate under a corporate structure

They may be limited by guarantee or shares

CICs are used by not-for-profit social enterprises

Good example would be a village shop run by the local community

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11
Q

What are the stipulations of CICs

A

Not available to political parties or political fundraisers

CICs are unable to obtain charitable status BUT charities can set up CICs as subsidiaries

Minimal regulations but CIC must produce and file annual report containing CIC relevant information

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12
Q

Company comparison: Formation regulations

A

Sole Trader: None

Partnership: Need an agreement, which may be formal or informal, written or oral

LLP: Must register with Registrar of Companies

Company: Must register with Registrar of Companies

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13
Q

Company comparison: Legal Status ( e.g who is the person)

A

Sole Trader: No separate legal personality

Partnership: No separate legal personality.
——Partners own the firm’s property and are liable on the contracts of the firm

LLP: An artificial legal person with full capacity

Company:An artificial legal person with full capacity

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14
Q

Company comparison: Transfer of ownership

A

Sole Trader: No special formalities

Partnership: Can transfer share of firm but cannot transfer right to participate in management

LLP: Can transfer share of firm but cannot transfer right to participate in management

Company: Freely transferable, subject to pre-emption rights in Company Articles, see later

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15
Q

Company comparison: Number of members

A

Sole Trader: 1
Partnership: Minimum 2
LLP: Minimum 2
Company: Minimum 1

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16
Q

Company comparison: Management

A

Sole Trader: Sole trader is manager

Partnership: All partners participate in management unless agreement specifies otherwise

LLP: All partners participate in management unless agreement specifies otherwise

Company: A member has no right to participate in management unless also a director

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17
Q

Company comparison: Agency

A

Sole Trader: Sole trader is his own agent

Partnership: Each partner is an agent and his actions bind the firm

LLP: Each partner is an agent and his actions bind the firm

Company:Members are not agents of the company, unless also directors

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18
Q

Company comparison: Liability of owners for business debts

A

Sole Trader: Unlimited Liability
Partnership: Unlimited Liability
LLP: Liability limited to capital member agrees to contribute
Company: Liability limited to share capital member agrees to contribute

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19
Q

Company comparison: Powers

A

Sole Trader: Carry on any business
Partnership: Carry on any business
LLP: Carry on any business
Company:
May be restricted to
powers set out in
objects clause of Memorandum

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20
Q

Company comparison:Termination

A

Sole Trader: When the sole trader chooses, or is incapable of continuing.

Partnership: Strictly, whenever any partner gives notice, or is incapable of continuing.
In practice most partnerships provide for firm to continue with the departing partner being paid off.

LLP: Perpetual succession
Firm can only be wound up in formal manner,

Company:Perpetual succession.
Firm can only be wound up in formal manner.

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21
Q

Private vs Public: Registration (Name etc)

A

Private: Name ends Limited, Ltd or private limited company.

Public: Name ends plc or Public limited company.
Memorandum of association (MOA) must state that
company has been registered as a public company.

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22
Q

Private vs Public: Capital

A

Private:
1) No minimum.
2)Cannot offer shares to the public

Public:
1) Minimum £50k, of which at least 25%, plus any
premium, must be paid up.
2)Can offer shares to the public.

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23
Q

Private vs Public: Listing

A

Private:Can’t list on the stock exchange.

Public: CAN obtain listing subject to satisfying stock
exchange rules.

Not all plcs are listed, e.g. John Lewis plc is owned by a trust for the benefit of its employees.

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24
Q

Private vs Public: Members

A

Both:
Minimum one: rights will be enforceable against the company.

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25
Q

Private vs Public: Directors

A

Private:Minimum one
Public:Minimum two, of whom one can be company
secretary if desired .

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26
Q

Private vs Public: Commencement of Business

A

Private:Can trade as soon as incorporated.
Public:Plc needs a s.761 registrar’s trading certificate,

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27
Q

Private vs Public: Consequences of not having s.761 certificate

A

Private:None

Public:
1) Transaction with third party is valid
2) Directors can be fined
3) If company fails to meet its obligations within
21 days of a formal demand being made, directors
can be held personally liable
4) Grounds for winding up the company if not issued within 12 months of incorporation

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28
Q

Private vs Public: Accounts and publicity

A

Private:File within nine months of yearend
Public:File within six months of year-end

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29
Q

What is the veil of incorporation

A

where members are shielded
from those who deal with the company

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30
Q

What is a separate legal personality

A

All companies have a separate legal personality
distinct from their members.

This means they can sue and be sued in their own name

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31
Q

What are the implications of seperate legal personality? (What can you do)

A

1) perpetual sucession
2) ability to own property
3) transferability of shares
4) raising finance

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32
Q

Separate legal personality: Perpetual succession

A

death or bankruptcy of a member
does not affect
the continued existence of the company

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33
Q

Separate legal personality: Ability to own property

A

company assets belong to the company, not the members

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34
Q

Separate legal personality: Transferability of shares

A

easy to transfer
ownership of a company
from one member to another

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34
Q

Separate legal personality: raising finance

A

Raising finance is generally easier for companies because:

1) Companies can grant fixed and floating charges over its assets as a security

2) Companies can issue shares without giving up management rights

3) They appear better organised and easier to appraise
–accounts are filed etc, regular documentation - banks are generally happier to lend to

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35
Q

What is lifting the veil on incorporation?

A

Occasionally it is necessary
for the law to allow t
he veil to be lifted

to find the controlling mind of the company

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36
Q

Lifting the veil of incorporaion: statutory examples

A

s.213 Insolvenct Act (IA) 1986 - Fradulent Trading

s,214 IA 1986 Wrongful trading

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37
Q

s.213 Insolvenct Act (IA) 1986 - Fradulent Trading

A

Under this:
Carrying out trade with the intention of defrauding creditors
can be liable

On winding up of the company, the person liable may be forced to contribute to the assets of the company

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38
Q

s,214 IA 1986 Wrongful trading

A

If a company goes into liquidation,

directors may be forced to contribute to the assets of the company

if they knew that the company had no reasonable prospect of avoiding insolvent liquidation

or ought to reasonably have known

39
Q

Lifting the veil of incoporation: case law

A

courts will lift: in cases of:
fraud, other illegality, or simply sharp practice

40
Q

Lifting the veil of incorporation: groups of companies

A

Courts generally treat companies in groups
as separate entities

this means holding companies are not generally liable for the debts of their subsidiaries

41
Q

Company formation: What is a promoter

A

Anyone who does anything to form or float a company,

including
issuing a prospectus,
negotiating preliminary agreements,
instructing solicitors
and obtaining directors

not a statutory definition as the term is essentially one of business rather than law

Notes a person acting in a professional capacity is not a promoter e.g. an accountant

42
Q

What are the duties of a promoter (general)

A

1) Common Law duty–to exercise reasonable skill and care
2) Equitable fiduciary duty

43
Q

What is Equitable fiduciary duty

A

Duty of utmost good faith to company

44
Q

Failure of the promoter to disclose, will allow company:

A

1) To pay promoter at his cost price
2)rescind contract and recover company assets
3) sue promoter for breach of duty
4) sue to recover secret profit of promoter

45
Q

Omissions, errors or misleading statements in a prospectus….

A

….render a promoter liable to any person who loses money on those shares

46
Q

What is an issue to public via a prospectus called?

A

Offer for sale

47
Q

What is a pre-incorporation contract

A

A contract made
in the name of the company
before the company comes into existance

48
Q

What is s.51 CA 2006

A

In a pre-incorporation contract
the person acting as the company’s agent will be liable on the contract.

49
Q

Anyone liable under s.51 has the right to….

A

enforce the contract
exactly as if the contract had been made in his name
rather than in the name of an unformed company

50
Q

Once the company is formed, the promoter and third party can give

A

the company the right to sue and be sued on pre-incorporation contracts

51
Q

Procedure for registering companies (1st Half 1- 6)

A

The following information/documents have to be sent to the registrar of companies

1) Proposed name
2) Fee
3) country - Where the registered office is to be situated “E & W, or W, S or NI”
4) adress - A statement of the intended address of the registered office
5) Whether the liability of the members is to be limited and if so, whether it is to be limited by shares or by guarantee
6) whether the company is to be a private or public comapny

52
Q

Procedure for registering companies (2nd half 7-11)

A

7) a statement of capital and initial shareholdings or a statement of guarantee
8) articles of association, to the extent that company does not intend to use the model articles
9) memorandum of association
10) Statement of the proposed officers (directors and company secretary if applicable),
— including a service address as well as a residential address
11) statement of compliance
—-states that all requirements of the companies act have been met

53
Q

What must you do if you buy a company off the shelf?

A

MUST change register of members
MAY change articles, name and anything else

54
Q

Advantage of buying a company off-the-shelf

A

-it is able to trade immediately,
-as it is already incorporated,
-hence avoiding the problems associated with promoters and pre-incorporation contracts

55
Q

What is streamlines company registration

A

All registration documents can be delivered electronically at one time to the registrar by the person forming the company, from 31 May 2017

-This will also satisfy HMRC requirements for information about the new company

56
Q

What is a certificate of incorporation

A
  • Issued by registrar
  • the company’s life commences from the date on the certificate of incorporation
  • Private companies can commence trading from this date
57
Q

What does the certificate of incorporation state:

A

Name and registered number of a company
Date of incorporation
Whether limited or unlimiited
If limited, whether by shares or a guarantee
Whether publiv or private
Whether registered office is to be situation in E&W, W, S or NI

58
Q

What additional certificate do PLCs require?

A

A s 761 certificate

59
Q

What does a statutory book contain?

A

-Register of
directors and secretaries
charges
members
directors interests in shares of company
psc - people with significant control

-Minutes of general meetings
-directors’ service contracts

60
Q

Statutory book: Register of directors and secretaries

A

Contents: Names, addresses, DOB, nationality, occupation, other directorships
Location: Registered office

61
Q

Statutory book: Register of charges

A

Contents: Description of property, amount, name of person benefiting from the charge
Location: Registered office

the security a company gives for a loan

62
Q

Statutory book Minutes of general meetings

A

Contents:
Location: Registered office

63
Q

Statutory book: directors service contracts

A

Contents:
Location: Registered office or other place of business

64
Q

Statutory book: register of members

A

Contents: Names, addresses, number of shares held, date of acquiring and disposing of shares
Location: Registered office, other place of business, or with professional registrar

65
Q

Statutory book: register of directors interests in shares of the company

A

Contents: Including those of spouse and minor children.
Notify company within 5 dats of change, company amends register within further 3 days
Location: Registered office or with register of members

66
Q

Statutory book: register of people with significant control

A

Contents:
own >25% shares or voting rights; can appoint/remove majority of directors; can exercise significant influence or control
Location: Registered office, other place of business, or with professional registrar

67
Q

In relation to the statutory book, what can a private company choose to use

A

A private company can choose to use the central register held by the registrat and not keep its own separate registers of members, directors and secretaries

68
Q

What are Annual accounts?

A

Directors must produce accounts including directors’ report
Present accounts to members in general meeting
Deliver accounts to Registrat, <6 months plc, < 9 months private company
Quoted companies must produce a strategic report

a company who has its equity share capital officially listed on a particular stock exchange

69
Q

What are accounting records

A

1) must be sufficiently comprehensive to show and explain the company’s transactions

2) retain reconds for three years (private company), 6 years plc

3) maintainted at any appropriate place

4) shareholders have no right of inspection

70
Q

What is a confirmation statement?

A

1) All companies must electronically confirm the details held by the Registrar at least annually in confirmation statement (previously called annual return)
2) There is no set date, but no more than 12 months must elapse between incorporation and firstconfirmation statement, and then between confirmation statements (there is a rolling window for making the statement)
3) Contains details of registered office, share capital, members, directors and secretary

71
Q

What do the constitutional documents of a company define?

A

the company’s existence and determine how it is structured and controlled

72
Q

What is the memorandum of association?

A

a document that states that the subscribers wish to form a company and become members of it

it is therefore a statement of historical record

It must be in prescribed form, signed by all subscribers and delivered to the registrar as part of the initial registration process

73
Q

What are the articles of association?

A

They set out the internal regulations of a company
- the means by which it is managed and run

74
Q

Historically, what did the articles of association contain?

A

An objects clause
-setting out what the company was formed to do, which restricted the company’s activity to that area

The companies act 2006 amended the law - s.31 CA 2006

75
Q

What does S.31 CA 2006 state?

A

that a company’s objects are completely unrestricted

76
Q

Impacts of S.31 CA 2006?

A

-most articles will not mention objects at all, unless a company wishes to restrict its activities in some way (only really charities e.g.)

The law now contains example model articles which set out standard practices for operating a company,
-These are usually the articles adopted when setting up a company

77
Q

If a company wants to use its own articles, it must

A

submit them when registering the company, otherwise model articles will apply

77
Q

What are the main provisions of model articles

A

1) Share capital and shares
2) meetings
3) directors
4) dividends
5) notice to members

78
Q

Model articles: share capital and shares

A

C has capacity to issue new shares on passing of ordinary resolution
C must allow and register share transfers
C can buy back its own shares

79
Q

Model articles: meetings

A

can only conduct business if a quorum is present

80
Q

Model articles: directors

A

minimum one in private co., two in plc - no maximum
Directors have delegated authority to exercise all the powers of the company, unless restricted by:
CA 2006
-constitution
-articles
-special resolution

81
Q

Model articles: dividends

A

directors decide

82
Q

Model articles: notice to members

A

directors responsibility to call meetings and issue notice

83
Q

articles as a contract

A

S.33 CA 2006 - the articles and constitution bind the company and its members in contract as if each had signed these documents as a deed

84
Q

How can the articles be altered?

A

S.21 CA 2006 allows alteration by special resolution (75% majority)

A copy of the amended articles must be sent to the registrat within 15 days of the amendment taking effect

85
Q

How can companies entrench provisions in its articles?

A

S.22 allows companies to entrench provisions in its articles
-requiring any alternation to be agreed by a larger majority , up to 100% of its members

Such entrenched provisions CANNOT be drafted so that the article can never be amended or removed

86
Q

What are the restrictions on alterations

A

1) Alternations void if it conflicts with the CA or the constitution

2) Cannot be used to compel a member to take more shares

3) Cannot be made with retrospective effect

4) Must be made in the interests of the company as a whole

5) will not be prevented simply because alternation inflicts hardship on a member or members

87
Q

What are weighted voting rights?

A

Despite everything above, it has been possible to effectively freeze provisions in the Articles by applying weighted voting rights to certain procedures

88
Q

What are the implications of seperate legal personality? (liability)

A

-Members liability is limited to any amount upaid for shares, however the company has unlimited liability for its own debts

89
Q

What does a s.761 require

A

1 Minimum capital £50,000
2 Minimum paid up 25%
3 Details of preliminary expenses and amounts paid
to promoters

90
Q

In lifting the veil on companies, courts will treat group as one entity if,…

A

corporate structure is being used as a facade

then Statute provides for group to be treated as single economic entity

91
Q

What does LLP stand for?

A

A limited liability partnership

is a partnership in which some or all partners have limited liabilities

92
Q

What does CIC stand for

A

community interest companies

93
Q

What liability does the company have for business debts

A

he company has unlimited liability for its own debts and can be held liable for torts and crimes

94
Q

What are the duties of a promoter (bullet)

A

1) Disclose interest in transactions with the company

2) To independent board or to members in general meeting
–where an ordinary resolution will be sufficient for promoters to keep any profit made on transactions with the company

3) avoid conflict of interest with the company

CIMA BA4 (17 decks)

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