Chapter 7 - Companies: The consequence of incorporation Flashcards
What are the characteristics of a sole trader
The owner is the business and is personally liable for all debts
No legal formalities are required
This form is inappropriate for large business or those involving a degree of risk
What are the characteristics of a Partnership?
Defined by Partnership Act 1890 as the relationship which subsists between persons carrying on a business in common with a view of profit
What are the Limited liability partnership
An artificial legal entity with perpetual succession. It can hold property in it’s own right, enter into contract in its own name, create floating charges, sue and be sued
Liability of the members are limited
What’s a company?
Corporation is an artificial legal person
What is a veil of incorporation?
Company is a separate legal entity from its shareholders
What are the consequences of Incorporation?
- Perpetual Succession
- Separate ownership and management
- Legal rights
- Governed by Law:
- Liability for Debts
What does Perpetual Succession mean?
Company continues to exist irrespective of changes in shareholders
How is management seperated from ownership in a company?
Management is handled independently while shareholders own the company
What legal rights does a company have as a separate legal entity
It can own property, enter contracts and sue or be sued in its own name
What law governs companies in the UK
The companies Act 2006
Who is responsible for a company’s debts
The company itself is responsible for its debts
What is the extent of shareholders’ liability for a company’s debts
Limited to the amount unpaid on their share capital or any agreed contributions (if limited by guarantee)
What does it mean to lift the veil?
Courts can look beyond the company’s separate legal identity to hold members or directors personally liable for its actions or debts
When can the veil be limited?
Only in circumstances such as when the company is a facade concealing true facts e.g. Woolfson v Strathclyde
How are subsidiaries are generally treated in relation to their parent companies
Subsidiaries usually retain their separate legal status, except in cases where they are deemed agents of the parent.
What’s a sham Company?
One registered for an improper purpose, for example to evade legal obligation or to hide the national identity of a business
What is a Quasi-partnership
Quasi partnership is a business which is registered as a company but is run as if it were a partnership
What’s a statutory occasion
Refers to a situation where specific laws and statutes allow the corporate veil to be lifted
Under the Company Directors Disqualification Act 1986, what happens if a disqualified director participates in managing a company
Become jointly or severally liable for the company’s debts
What action under the Insolvency Act 1986 can make directors personally liable
Wrongful or fraudulent trading
What is the consequence if a public company trades without a trading certificate under section 767 of the companies act 2006
Directors can be personally liable for any loss or damage to third parties
What is the purpose of lifting the veil of incorporation in statutory cases?
Hold directors personally liable for actions that breach specific laws
When considering whether the veil should be lifted, what assumption should you make if no specific situation applies?
Assume the veil will stand and the courts will not look behind the company’s separate legal identity
How can a company alter its status between partnerships and LLPs etc
Private company can apply to the registrar of companies to be re-registered as a public company or vice versa
A limited company can change to an unlimited company with the consent of all the members
An unlimited company can change to a limited company by passing a special resolution
What’s the naming difference between a public company and a private company
Public = Plc (s.58)
Private = Ltd (ss.59-62)
What are the capital requirements for a public company vs a private company?
Public companies must have a minimum capital of £50,000
Private companies have no minimum capital requirements
What are the rules on share payment for a public company vs a private company?
Public companies must have at least 25% of shares paid up
Private companies have no restrictions on share payment
How does capital reduction differ in public companies vs Private companies?
*Public companies need a special resolution and court approval (s.641)
*Private companies require a special resolution and solvency statement (s.642)
Can public companies vs private companies purchase their own shares out of capital
*Public companies can only do so from distributable profits
*Private companies are allowed to purchase their own shares subject to articles (S.709)
When can a public company vs a private company begin trading?
*Public companies need a trading certificate from the Registrar
*Private Companies can begin trading immediately upon incorporation
What are the rules on loan to directors for public companies vs private companies?
*Public companies need members approval for loans or quasi-loans to directors
*Private companies have no such restrictions unless they are public
Does the secretary need to be qualified for public and private companies
Public - Must be qualified (s.271)
Private - Optional Need not be qualified (s.270)
What are the differences in Accounts between Public Companies and Private LTD companies
*Must lay before general meeting and file accounts within 6 months of end of accounting period s.442
Private: No need to lay accounts before a general meeting must file within 9 months. Smaller companies may benefit from less stringent reporting requirement
Are accounts audited for public companies vs private companies?
Public: Accounts must be audited
Private: Audit is required unless the company qualifies as small or micro-sized
Is an AGM required for public companies vs private companies?
Public: Must hold an AGM each year
Private Company: No requirement to hold an AGM
Can resolutions be passed in writing for public vs private companies?
Public: Cannot pass written resolutions
Private: Can pass written resolutions instead of calling meetings (s.288).m This is subject to some exclusions
Can pre-emption rights be excluded in public companies vs private companies?
Public - Pre-emption rights cannot be excluded
Private Companies - Pre-emption right can be excluded
To register a company, the following documents must be submitted to the Registrar of Companies
- Memorandum of Associates
- Application Form
- Articles of Association
- Statement of Capital and Initial Shareholdings
- Statement of Guarantee (If applicable)
- Statement of proposed Officers:
- Statement of Compliances
- Registration fee
What is the Memorandum of Associations?
Signed by all subscribers, declaring their intention to form a company and become its members
What does an Application form include?
*The proposed name of the company
* Whether the members will have limited liability (by shares or guarantee)
*Whether the company is to be private or public
*Details of the registered office
What is the articles of association?
If no articles are provided, model articles will apply
What is the statement of Capital and Initial Shareholding and what must it state
*The number of shares
*Their aggregate nominal value
*Details of each class of share
*How much has been paid up on each share
What is the statement of Guarantee?
Maximum amount each member undertakes to contribute
What is the statement of proposed offiers
This gives details of the first directors (and company secretary, if applicable) and their consent to act
What is the statement of Compliance
Provides confirmation that CA 2006 has been complied with
What is the registration fee
On receipt of the above documents the Registrar must:
*Inspect documents and ensure Companies Act requirements fulfilled
*Issue certificate of incorporation which is conclusive evidence that Companies Act requirement fulfilled: s. 15 CA 2006
The company exists from the date on the certificate of incorporation
A public company must also obtain a trading certificate.
To obtain a trading certificate must apply to the Registrar stating
*Nominal value of allotted share capital at least 50,000
*Confirm at least 25% of the nominal value and all premium amounts are paid
*Provide details of preliminary expenses and promoters’ benefits
What happens to a company if it trades before the certificate is issued:
*The company and any officers in defaults are liable to a fine
*It is a criminal offence to carry on business but any contracts are still binding on the company
*The directors are personally liable if the company defaults within 21 days of due date
*Grounds for winding up if not obtained within one year s.122 Insolvency Act 1986
What’s an off-the shelf company?
One that’s already been formed.
What are the advantages of having an off-the shelf company?
*Cheap and simple to buy
*Can trade immediately
* No problem of pre-incorporation contracts
What are the disadvantages of having an off-the shelf company?
*Articles of Association may be unsuitable e.g. name, share capital and structure
*Altering the Articles will incur costs and may be inconvenient
*Needs to change officers
What’s a promoter?
No statutory definition of a promoter - Anyone who makes business preparations for a company or undertakes to form a company and who takes the necessary steps to accomplish that purpose (excludes people at professional capacity
What fiduciary duty does a promoter have?
*Exercise reasonable care and skill
*Disclose any interest in transactions with the company and not to make a “secret profit” and
*Disclose any benefit acquired to an independent board and or to the shareholders
If the promoter is known to have made money, what are the remedies available to the company and what problems will this have
Rescind the contract - Not always possible e.g. if third party has rights under the contract
What is a pre-incorportation contract?
Contract made by a person acting on behalf of an unformed company. Position at common law is that the company does not have contractual capacity and the promoter is therefore personally liable
Summary
- Company cannot ratify the contract
- Company is not bound by the contract
- Company cannot enforce the contract against a third party
What does the Section 51 Companies Act 2006 state in terms of contracts before existence of a company
*If someone makes a contract on behalf of a company before it exists, they are personally liable, unless the contract explicitly states otherwise
*To avoid personal liability, the terms must be expressly stated and the person is not liable
What protections does a promoter have?
- Agreement of Novation - Replace original contract with a new one after the company is formed. Discharging the promoter’s liability
- Postpone finalising contracts - Wait until the company is fully incorporated before entering into contracts
- Buy an off-the-shell Company - Purchase a pre-existing company that is ready to contract immediately, avoiding pre-incorporation risks
- Agree on Expense Reimbursement: Get the company to agree in advance to cover the promoter’s expenses
- Include a clause Under the Contracts (Rights of Third Parties) Act 1999: Gives the company the right to sue under the contract though it does not remove the promoter’s liability
What is the criteria for choosing a name
*Either have LTD or PLC
*Can’t be the same as others
*Can’t use illegal or offensive words
*To use certain words e.g. chartered, England, Royal, National must have Secretary of state’s consent
*Cannot use words indicating the company is of another type or legal form
What’s an article of association
*Set out the manner in which the company is to be governed
*Regulate the relationship between the company and its shareholder
What are model articles and who prescribes them?
Default rules provided by law.
Default articles of association prescribed by the Secretary of State under Companies Act 2006
When do model articles apply to a company?
When a company is formed without registering articles or when registered articles do not exclude or modify the model articles
What’s an article of association?
Set of rules that govern how a company operates.
What options does a company have regarding model articles?
*Adopt a model articles in full or in part
*Be deemed to have adopted the model articles if no provision excludes or modifies them
*Draft its own unique articles
What happens if a company does not expressly exclude or modify the model articles?
Company is deemed to have adopted the model articles
Can a company create its own articles of association instead of using model articles?
Yes they can draft their own
What legal effect do the articles have under Section 33 of the Companies Act 2006
They bind the company and it’s members as if they signed the contract
Who do the articles of association bind?
Company to its members, members to the company and members to one another
Who do the articles of association not bind?
Non-members and members acting in other roles
What is required to alter a company’s articles of association?
A special resolution with a 75% majority vote
What’s the time duration after articles are amended and what must be done
15 days to send copies of the amended articles sent to the Registrar of Companies
What are entrenched provisions in articles?
Provisions that are hard to change, requiring either a specific procedure, unanimous agreement or a court order
How can entrenched provision be altered?
Only using a specific procedure e.g., all members agreeing or through court order
What does Section 25 of the Companies Act 2006 protect members from?
Being bound by an alteration that
Increases their liability
Requires them to contribute more money to the company
Can an article be altered to increase a member’s liability after they join the company?
No this is prohibited by Section 25?
What are the five registers that a company must keep
- Members
- Directors and company secretary
- People with significant control
- Charges
- Other documents
What are the contents of the register of members
Names, addresses, date become/ceased, number of shares type, amount paid up
What are the contents of the Directors and company secretary if applicable
Name, occupation, nationality, other directorships within the
last five years and date of birth. Addresses of directors are
maintained but are not publicly disclosed.
What are the contents of PSC register
Names of people who own or control the company. A PSC is someone who owns or controls more than 25% of the shares or voting rights, or someone who has the power to appoint or remove the majority of the members of the board of directors.
What are the contents of the charges register
Name of chargee, type of charge, property charged, amount
and date created.
What are the contents of Other documents register
Resolutions and minutes of general meetings must be kept for ten years. The Directors’ statement and auditor’s report must also be kept, plus directors’ service contracts and details of any indemnity provisions restricting directors’ liability.
What details are maintained by the Registrar of companies of each company
*Certificate of incorporation
*Trading certificate if its a PLC
*Certificate of registration of charges
*The annual accounts
*The confirmation statement
*Special resolutions
*Changes of directors
What’s a confirmation statement?
Reports changes to:
*Address of the registered office
*Type of company or principal business activities
*Details of officers and shareholders
*Members who have left since the last statement
What financial records must companies maintain under Section 386?
Records all money received and spent, assets and liabilities and year-end inventory
What financial records must companies maintain under Section 393?
*Balance sheet
*P&L
*Approval and signatures from the board
What information is included in a Director’s report?
Name of Directors, company activities, risks, future plans and environmental impacts
Who needs to prepare a director’s remuneration report?
Quoted companies, subject to members’ approval
What must an auditor’s report confirm?
That accounts give a true and fair value and directors report is consistent with accounts
What is required in a strategic report?
Under Companies Act 2006
*A fair review of company’s business
*Description of the principal risks and uncertainties facing the business
Under the Companies (Miscellaneous Reporting) Regulations 2018 what disclosures are required?
*Report on engagement with stakeholder
*Statement is required in strategic report as how the directors have compiled with their duty to promote the success of the company
*Statement of corporate governance arrangements stating which corporate governance code has been applied and how it was applied
*CEO pay to UK employees pay ratio
What are the requirements of a micro entity?
Less than 632k Turnover
Less than 316k BS assets
Less than 10 employees
What are the requirements of a small entity?
Less than 10.2m turnover
Less than 5.1m BS assets
Less than 50 employees
What are the requirements of a medium entity?
Less than 36m turnover
Less than 18m BS assets
Less than 250 Employees
What companies are exempt from audit requirements?
*Micro and small companies
*Dormant companies
*Non-profit making companies
*Subsidiary companies whose parent company guarantees their liabilities outstanding at the balance sheet date
What type of company is legally required to have a company secretary?
Public companies
What qualification are required for a public company secretary?
Be a solicitor, barrister or a member of a professional body e.g., Icaew
Have 3 years experience in public company within 5 years
Show capabilities from other roles or qualification
What are the duties of a PLC secretary?
Filing returns with Registrar, keeping registars and preparing minutes and notices for meetings
What is the difference between actual and implied authority for a company secretary?
Actual - Delegated by the board
Implied - Limited to admin contracts, not commercial contracts or borrowing
