Chapter 7 - Companies: the consequences of incorporation Flashcards
In law, what is the term person used to denote?
Natural/artificial person
Artificial person includes companies
What does a company having limited liability mean for its members?
Amount members will be asked to contribute is limited to the value of share capital owned
What may some lenders require directors and/or members?
Personal guarantee to assume debt obligation in the event of a non-payment by the company
Is the company itself liable without limits for its own debt?
Yes
For a company limited by shares, what is the liability of its members?
Members only liable for winding up for any outstanding about of nominal value of any unpaid share
For a company limited by guarantee, what is the liability of its members?
Amount owed by member at the time of winding up is the amount they are guaranteed to pay in the event of winding up
Can a company have liabilities in tort and crime?
Yes
Extremely difficult to prosecute a company successfully for an offence
What does a veil of incorporation do?
Separates members and the company for the purposes of liability and identification
When may the law lift the veil?
In a group situation, e.g. to produce a tax liability
Under legislation, usually to confer a personal liability on those running a company
What examples of lifting the veil only apply if directors are also members of the company?
Director is disqualified - director jointly/severally liable for debts
Fraudulent and wrongful trading - directors may be held personally liable where company wound up
Trading without a trading certificate - personal liability for directors for third party loss/damage
What companies can be limited by shares?
Private and Public
What companies can be limited by guarantee?
Private only
What companies have unlimited liability?
Private only
Can a company alter its status?
Yes once from either
Limited to unlimited with the consent of all members
Unlimited to limited by passing a special resolution and specifying kind of liability
What is the definition of a public company?
Limited company expressly registered under Companies Act 2006
What is the definition of a private company?
Registered company (limited/unlimited) not stated to be public
When a company is formed what does there need to be?
Memorandum of association
Application providing basic details
Statement of capital and initial shareholdings (if relevant)
Statement of guarantee if company limited by guarantee
Statement of proposed officers
Statement of compliance with Companies act 2006
After all docs have been submitted what happens next?
Registrar will issue incorporation certificate
Public company also needs a trading certificate
What happens when an off the shelf company is purchased?
Shares transferred to the buyer
Registrar notified of director’s and secretaries resignations
What are the benefits of an off the self company?
Easier as the company is ready to go
Avoids potential liability arising from pre-incorporation contracts
What are the drawbacks of an off the shelf company?
Need to change name
Transfer shares
Change directors and possibly the secretary
Alter the articles of association
What is a promotor?
Person who takes steps to get a company incorporated
Makes business preparations unless in a pro capacity
What duties does a promotor owe?
General duty to exercise reasonable care and skill
Fiduciary duties to disclose any personal interests
What is wrongful profit?
Promotor enters into and makes profit personally in a contract as a promotor in breach of fiduciary duties
What are the complex rules where a promotor makes a contract on behalf of an unincorporated company?
Company has no capacity to enter into contracts before existence
Cannot ratify contracts
Not bound by contracts
Cannot enforce contracts against 3rd party
How can a promotor avoid potential liabilities?
Not to make contracts until after company incorporated
Use an off the shelf company
Draft agreement
Can a promotor legally claim any remuneration/indemnity for their services/expenses before a company is formed?
No
In practice company makes payment
If a company name is sensitive what is required?
Approval of secretary of state
When will British and International be permitted as part of a company name?
If the size of the company matches its pretentions
Can a company change its name?
Yes, by passing a special resolution
Name change anything
Where do model articles apply?
Apply where a company is formed without registering articles
What do the stock exchange rules require listed companies have?
Have their own full-length articles containing a number of special provisions
What do the provisions of a company’s constitution do?
Bind the company and its members as if each had covenanted to the other to observe those provisions
Only applies to rights and obligations that affect members in their capacity as members
How may a company alter its articles?
By passing a special resolution, unless a provision of entrenchment exists
How may records be kept?
Hard or electronically
Who sets the rules for record keeping?
Companies Act 2006
Any contravention renders the company and every company officer in default guilty of an offence liable to a fine
Who has the right to inspect the register
Any person
Can pay to get a copy of any material
When must a company send the registrar a confirmation statement?
Any time within 12 months
No more than 12 months between submissions
What must every public company appoint?
Company secretary
Must have necessary knowledge and experience as deemed by directors
Appointed by directors
Do private companies need to appoint a company secretary?
Not obliged to do so
Who acts as a company secretary?
Sole director of a private company
What liabilities are company secretaries subject to?
Civil and criminal
Does the Companies Act 2006 define the role of a company secretary?
No
What powers does a company secretary?
Power to contract on behalf of the company in respect of administrative matters, including employment
How long must a company keep underlying records?
Private company - 3 years
Public company - 6 years
What must the directors report include?
Director’s names
Principal activities of company
Auditor statement that all info has been made aware
Approval and signature on behalf of board of directors
Where the accounts are audited, what must the auditors report identify?
Accounts audited
Financial reporting framework applied
What must the auditor’s report state?
Whether director’s report is consistent with accounts
Under 2006 companies act, what must large and medium sized companies prepare?
Strategic report
In 2018, what additional director’s report disclosure requirements were introduced?
Company emissions
Energy consumption
Energy efficiency
Only applies to quoted companies, large unquoted companies and large LLPs
When must a company’s accounts be filed at the Registery?
Private company - within 9 months
Public company - within 6 months
Who can file abbreviated accounts?
Small and medium sized companies
What are the requirements to be classified as a small company?
2 out of:
- Max turnover £10.2 mil
- Max balance sheet £5.1 mil
- Max 50 employees
What are the requirements to be classified as a medium company?
2 of:
- Max turnover £36 mil
- Max balance sheet £18 mil
- Max employees 250
What are the filing advantages of a micro-entity?
Can file a simple P&L or no P&L at all
What are the requirements to be classified as a micro-entity?
2 of:
- Max turnover £632k
- Max balance sheet £316k
- Max employees 10
What is a company required to to do carry out audit of its annual accounts
Appoint auditors
Must be appointed for each financial year
Appointed by directors or members passing an ordinary resolution
In the event of default, appointed by Secretary of State
What companies are exempt from appointing auditors?
Micro and Small
Dormant
Non-profit
What companies are never exempt from appointing auditors?
Insurance and banking
What happens where an audit exemption applies?
Audit can be required by 10% plus of the members
Members representing min 10% of the nominal value of issued chare capital
What rights of access does an auditor have?
Access to books and accounts
Duty to carry out a proper investigation
What is the assumption of an auditor in a private company?
Reappointed unless company decides otherwise
What does the comanies act 2006 (Strategic report and directors report) regulations 2013 require quoted companies to do?
Report on environemental matters within strateigc report section of annual report
Related to environmental sustainability
Is a company always liable without limits for its own debts?
Yes
Can a public company have unlimited liability?
No
Must be limited liability
Can the company commence trading once it is incorporated, provided they obtain a trading
certificate within the first 12 months following incorporation?
No
What must a public company’s shares be?
Must be at least one quarter paid up on allotment.
When a company applies for registration, should a copy of its proposed articles of association be
supplied to the Registrar?
No
If none provided, model articles prescribed by the Secretary of State apply.
Can company secretaries rely on the contractual effect of the articles to seek redress for breach of contract?
No
Claimant must be a member
Can a member be forced to buy more shares by an alteration made after them becoming a member?
No
Is a company required to keep a register of debentureholders?
No
Does a private company limited by shares need to produce a directors’ remuneration report?
No, only quoted companies need to do so
Does a company limited by guarantee have share capital?
No
Is borrowing within the implied usual authority of a company secretary?
No
Company not bound on any deal made
What do compulsory notes do micro-entities have to submit to the registrar?
Advances to directors
Financial commitments
What type of company is not required to appoint an auditor?
A not-for-profit company that is subject to public sector audit
If a company produces group account, does it have to produce a consolidated directors’ report.
Yes
In an ordinary partnership, can a partner assign their interest in the partnership to another person?
Yes, but other person doesn’t become a partner
Does the Companies (Miscellaneous Reporting) Regulations 2018 require companies to make disclosures in relation to compliance with money laundering regulations?
No
Is a statement that subscribers wish to form a company required in the memorandum of association?
Yes
Can a company be ordered to change its name by the Registrar?
No, only be secretary of state
