Chapter 7 Flashcards
Define ‘ A company’
A type of corporation.
An association of members formed
to conduct business or other activities
in the name of the association.
What is incorporation?
Incorporation is the legal process of forming a corporation or company, or registering a business as a limited company
How are most companies incorporated?
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
What are other types of corporation?
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
What is liability?
the state of being legally responsible for something.
What is a tort?
A tort is a civil wrong
that causes harm or loss to another person
legal liability for the person who committed the act.
Company: what liability do members havefor the business’s debts ?
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
What are Guarantee companies
. 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
What are Unlimited companies?
No limit to member’s liability.
No requirement to file accounts.
Rare in practice
What are communitity interest companies?
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
What are the stipulations of CICs
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
Company comparison: Formation regulations
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
Company comparison: Legal Status ( e.g who is the person)
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
Company comparison: Transfer of ownership
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
Company comparison: Number of members
Sole Trader: 1
Partnership: Minimum 2
LLP: Minimum 2
Company: Minimum 1
Company comparison: Management
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
Company comparison: Agency
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
Company comparison: Liability of owners for business debts
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
Company comparison: Powers
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
Company comparison:Termination
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.
Private vs Public: Registration (Name etc)
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.
Private vs Public: Capital
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.
Private vs Public: Listing
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.
Private vs Public: Members
Both:
Minimum one: rights will be enforceable against the company.
Private vs Public: Directors
Private:Minimum one
Public:Minimum two, of whom one can be company
secretary if desired .
Private vs Public: Commencement of Business
Private:Can trade as soon as incorporated.
Public:Plc needs a s.761 registrar’s trading certificate,
Private vs Public: Consequences of not having s.761 certificate
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
Private vs Public: Accounts and publicity
Private:File within nine months of yearend
Public:File within six months of year-end
What is the veil of incorporation
where members are shielded
from those who deal with the company
What is a separate legal personality
All companies have a separate legal personality
distinct from their members.
This means they can sue and be sued in their own name
What are the implications of seperate legal personality? (What can you do)
1) perpetual sucession
2) ability to own property
3) transferability of shares
4) raising finance
Separate legal personality: Perpetual succession
death or bankruptcy of a member
does not affect
the continued existence of the company
Separate legal personality: Ability to own property
company assets belong to the company, not the members
Separate legal personality: Transferability of shares
easy to transfer
ownership of a company
from one member to another
Separate legal personality: raising finance
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
What is lifting the veil on incorporation?
Occasionally it is necessary
for the law to allow t
he veil to be lifted
to find the controlling mind of the company
Lifting the veil of incorporaion: statutory examples
s.213 Insolvenct Act (IA) 1986 - Fradulent Trading
s,214 IA 1986 Wrongful trading
s.213 Insolvenct Act (IA) 1986 - Fradulent Trading
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
s,214 IA 1986 Wrongful trading
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
Lifting the veil of incoporation: case law
courts will lift: in cases of:
fraud, other illegality, or simply sharp practice
Lifting the veil of incorporation: groups of companies
Courts generally treat companies in groups
as separate entities
this means holding companies are not generally liable for the debts of their subsidiaries
Company formation: What is a promoter
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
What are the duties of a promoter (general)
1) Common Law duty–to exercise reasonable skill and care
2) Equitable fiduciary duty
What is Equitable fiduciary duty
Duty of utmost good faith to company
Failure of the promoter to disclose, will allow company:
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
Omissions, errors or misleading statements in a prospectus….
….render a promoter liable to any person who loses money on those shares
What is an issue to public via a prospectus called?
Offer for sale
What is a pre-incorporation contract
A contract made
in the name of the company
before the company comes into existance
What is s.51 CA 2006
In a pre-incorporation contract
the person acting as the company’s agent will be liable on the contract.
Anyone liable under s.51 has the right to….
enforce the contract
exactly as if the contract had been made in his name
rather than in the name of an unformed company
Once the company is formed, the promoter and third party can give
the company the right to sue and be sued on pre-incorporation contracts
Procedure for registering companies (1st Half 1- 6)
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
Procedure for registering companies (2nd half 7-11)
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
What must you do if you buy a company off the shelf?
MUST change register of members
MAY change articles, name and anything else
Advantage of buying a company off-the-shelf
-it is able to trade immediately,
-as it is already incorporated,
-hence avoiding the problems associated with promoters and pre-incorporation contracts
What is streamlines company registration
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
What is a certificate of incorporation
- Issued by registrar
- the company’s life commences from the date on the certificate of incorporation
- Private companies can commence trading from this date
What does the certificate of incorporation state:
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
What additional certificate do PLCs require?
A s 761 certificate
What does a statutory book contain?
-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
Statutory book: Register of directors and secretaries
Contents: Names, addresses, DOB, nationality, occupation, other directorships
Location: Registered office
Statutory book: Register of charges
Contents: Description of property, amount, name of person benefiting from the charge
Location: Registered office
the security a company gives for a loan
Statutory book Minutes of general meetings
Contents:
Location: Registered office
Statutory book: directors service contracts
Contents:
Location: Registered office or other place of business
Statutory book: register of members
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
Statutory book: register of directors interests in shares of the company
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
Statutory book: register of people with significant control
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
In relation to the statutory book, what can a private company choose to use
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
What are Annual accounts?
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
What are accounting records
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
What is a confirmation statement?
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
What do the constitutional documents of a company define?
the company’s existence and determine how it is structured and controlled
What is the memorandum of association?
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
What are the articles of association?
They set out the internal regulations of a company
- the means by which it is managed and run
Historically, what did the articles of association contain?
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
What does S.31 CA 2006 state?
that a company’s objects are completely unrestricted
Impacts of S.31 CA 2006?
-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
If a company wants to use its own articles, it must
submit them when registering the company, otherwise model articles will apply
What are the main provisions of model articles
1) Share capital and shares
2) meetings
3) directors
4) dividends
5) notice to members
Model articles: share capital and shares
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
Model articles: meetings
can only conduct business if a quorum is present
Model articles: directors
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
Model articles: dividends
directors decide
Model articles: notice to members
directors responsibility to call meetings and issue notice
articles as a contract
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
How can the articles be altered?
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
How can companies entrench provisions in its articles?
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
What are the restrictions on alterations
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
What are weighted voting rights?
Despite everything above, it has been possible to effectively freeze provisions in the Articles by applying weighted voting rights to certain procedures
What are the implications of seperate legal personality? (liability)
-Members liability is limited to any amount upaid for shares, however the company has unlimited liability for its own debts
What does a s.761 require
1 Minimum capital £50,000
2 Minimum paid up 25%
3 Details of preliminary expenses and amounts paid
to promoters
In lifting the veil on companies, courts will treat group as one entity if,…
corporate structure is being used as a facade
then Statute provides for group to be treated as single economic entity
What does LLP stand for?
A limited liability partnership
is a partnership in which some or all partners have limited liabilities
What does CIC stand for
community interest companies
What liability does the company have for business debts
he company has unlimited liability for its own debts and can be held liable for torts and crimes
What are the duties of a promoter (bullet)
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
