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