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CIMA BA4 Fundamentals of Ethics, Corporate Governance and Business Law > Chapter 7 Company Administration > Flashcards

Chapter 7 Company Administration Flashcards

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1
Q

What is the definition of a company?

A

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

> Most companies incorporated under Companies Act 2006

= Registered corporations aggregate => private or public limited companies

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2
Q

What are the other types of corporations?

A

Statutory Corporations e.g. some state-owned corps
Corporations formed by the Royal Charter e.g. BBC
Corporation Sole: Embodiment of an office in an individual (e.g. The Mayor of London)

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3
Q

What is the liability for companies?

A

Liability is limited to the capital members of the business contribute. Only have to contribute any amount unpaid on their shares, if company can’t pay its own debts.

COMPANY HAS UNLIMITED LIABILITY FOR ITS OWN DEBTS AND CAN BE HELD LIABILE FOR TORTS AND CRIMES

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4
Q

What are guarantee companies?

A

Typically charities. Members liability is limited to any amount they guarantee to contribute, on winding up.

Guarantee companies can omit limited from their name

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5
Q

What are unlimited companies?

A

a) no limit to member’s liability
b) no requirement to file accounts
c) rare in practice

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6
Q

What is a Community Interest Companies (CIC) ?

A
  1. Used by not-for-profit social enterprises that provide some sort of community benefit, wishing to operate under a corporate structure.
  2. May be limited by guarantee or shares e.g. village store run by community
  3. Prohibited from distributing profits to members but if limited by shares rather than guarantee they can issue investor shares which = dividends.
  4. Not available to political parties
  5. Unable for charitable status
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7
Q

What are the formation regulations for the different companies and other entities?

A

Sole Trader - None
Partnership - Need agreement which may be formal or informal or written
LLP - Must register with Registrar of Companies
Company - Register with Registrar of Companies

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8
Q

What is the legal status required of companies and other entities?

A

Sole Trader - No sep legal personality
Partnership - No sep legal personality. Partners own property and are liable on the contracts of the firm
LLP - artificial legal person with full capacity, with perpetual succession, capacity to contract, own property, sue and be sued
Company - (same as above)

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9
Q

What is the transfer of ownership for different companies?

A

Sole Trader - No special formalities
Partnership - Can transfer share of firm but cannot transfer right to participate in management
LLP - (same as above)
Company - Freely transferable, subject to pre-emption rights in Company Articles

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10
Q

What are the number of members in different companies & entities?

A

Sole Trader - 1
Partnership - Minimum two
LLP - Min two
Company - Min one

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11
Q

What is the management within the different companies and entities?

A

Sole Trader - Sole trader is manager
Partnership - all partners participate in management unless agreement specifies otherwise
LLP - same as above
Company - member has no right to participate in management unless also a director

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12
Q

What is the definition of separate legal personality?

A

All companies have a separate legal personality distinct from their members. Means they can sue and be sued in their own name

Company = legal person, distinct from its owners

Members shielded from those who deal with the company by VEIL OF INCORPORATION

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13
Q

What are the implications of being a separate legal personality?

A

Liability is limited to any amount unpaid for shares, company has unlimited liability for its own debts

  1. PERPETUAL SUCCESSION - death of member does not affect continued existence
  2. ABILITY TO OWN PROPERTY - company assets belong to the company, not the members
  3. TRANSFERABILITY OF SHARES - easy to transfer ownership of a company from one member to another
  4. RAISING FINANCE - generally easier for companies.
    a) Companies grant fixed and floating charges over its assets as security (floating charge applies to freely disposable assets)
    b) Companies can issue shares without giving up management rights
    c) Appear better organised and easier to appraise
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14
Q

What is the lifting of the veil of incorporation?

A

It is necessary for the law to allow the veil to be lifted to find the CONTROLLING MIND of the company

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15
Q

What are the statutory examples of lifting the veil of incorporation?

A

5.1.1 - Insolvency Act (IA) 1986 - Fraudulent trading
Carrying on trade with intention of defrauding creditors can be liable. Winding up the company person is liable and may be forced to contribute to assets of the company

5.1.2 - Wrongful trading
If company goes into liquidation, directors and shadow directors may be forced to contribute to the assets of the company if they knew or ought reasonably to have known that the company had no reasonable prospect of avoiding insolvent liquidation.

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16
Q

What is the case law on lifting the veil for groups of companies?

A

Courts treat companies in groups as separate entities: holding companies are not generally liable for debts of their subsidiaries
ADAMS vs CAPE Industries

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17
Q

What is the definition of 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

18
Q

What are the duties of a promoter?

A

Common law duty - exercise reasonable skill and care
Equitable fiduciary duty
> disclose interest in transactions with the company
> independent board
> members in general meeting where an ordinary resolution will be sufficient for promoter to keep any profit made on transactions with company
> avoid conflict of interest with the company

19
Q

What will it allow company to do if there is a failure to disclose as a promoter?

A
  1. Pay promoter his cost price
  2. Rescind contract and recover company assets
  3. Sue promoter for breach of duty
  4. Sue to recover secret profit

Omissions/ errors in prospectus => promoter liable to any person who loses money on those shares.

20
Q

What is the definition of a pre-incorporation contract?

A

Contract made in the name of the company before the company comes into existence.

21
Q

What does S.51 CA 2006 in pre-incorporation contracts state?

A

A contract which purports to be made by or on behalf of a company at a time when company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it - he is personally liable on contract
> Promoter & third party can give company, right to sue and be sued on pre-incorp contracts

22
Q

What is the procedure for registering companies?

A

Following info/ documents have to be sent to the Registrar of Companies

  1. Proposed Name
  2. Fee
  3. Whether registered office is to be situated in Eng & Wales
  4. Statement of intended address of registered office
  5. Whether liability of the members is to be limited and if so - whether by shares or guarantee
  6. Whether the company is private/public
  7. Statement of capital and initial shareholdings
  8. Articles of association
  9. Memorandum of Association
  10. Statement of proposed officers
  11. Statement of compliance.
23
Q

What happens when you buy a company off the shelf?

A

> MUST change register of members

> MAY change articles, name and anything else

24
Q

What is the advantage of buying a company off-the-shelf?

A

It is able to trade immediately (already incorporated)

=> avoiding problems associated with promoters and pre-incorporation contracts

25
Q

What is a streamlined company registration?

A

Registration documents can be delivered electronically at one time to the Registrar by the person forming the company, from May 2017.

26
Q

What is the certificate of incorporation?

A

Issues certificate of incorporation and company’s life commences from the date on the certificate of incorporation. Private companies can commence trading from this date.

27
Q

What does the certificate state?

A

> Name and registered number of company
Date of incorporation
Whether limited/ unlimited
If limited, whether by shares or guarantee
Whether public or private
Whether registerd office is situated in England and Wales

28
Q

What additional certificate do Plcs require?

A

S.761 certificate

29
Q

What are the 7 statutory books?

A
  1. Register of directors and secretaries - regist office
  2. Register of charges - regist office
  3. Minutes of general meetings - regist office
  4. Register of members - regist office/ other place of business
  5. Directors’ service contracts - regist office
  6. Register of directors’ interests in shares of the company - regist office
  7. Register of people with significant control (PSC) - own more than 25% of business
30
Q

What is kept in the annual accounts?

A
  1. Directors produce accounts inc directors report
  2. Present accounts to members in GM
  3. Delivery accounts to Registrar, < 6 months plc
  4. Quoted companies must produce Strategic Report
31
Q

How should accounting records be kept?

A
  1. Must be sufficiently comprehensive to show transactions
  2. Retain records for 3yrs Ltd or 6yrs (plc)
  3. Maintained at any appropriate place
  4. Shareholders have no right of inspection
32
Q

What is a confirmation statement?

A
  1. All companies must electronically confirm details held by Registrar at least annually in confirmation statement
  2. No set date, but no more than 12 months must elapse between incorporation and first confirmation statement
  3. Contain details of regist office, share cap, members, directors & secretary
33
Q

What is the memorandum of association?

A

> These are the constitutional documents of a company which define the company’s existence and determine how it is structured and controlled.

> The memorandum of association = simple document which states subscribers wish to form a company and become members of it. It is statement of historical record.

= Prescribed form - signed by all subscribers and delivered to registrar as part of registration process

34
Q

What are the articles of association?

A

These set out the internal regulations of the company, the means by which it is managed and run

Object clause included - set out object of what company is to do

35
Q

What does the Companies Act 2005 state?

A

S.31 CA 2006 States that a company’s objects are completely unrestricted.

  • Most articles will not mention objects at all, unless company wishes to restrict its activities in some way. Done by particularly specialised companies.
36
Q

What are the main provisions of model articles?

A
  1. Share capital and shares - issue new shares, allow and register share transfers, buy back its own shares
  2. Meetings - only conduct business if quorum is present
  3. Directors - minimum is one in private co, two in plc, no max
  4. Dividends - directors decide
  5. Notice to members - directors’ responsibility to call meetings and issues notice
37
Q

What are the articles as a contract?

A

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

38
Q

What is the alteration of the articles?

A

S.21 CA 2006 allows alteration by special resolution. Private company can pass a written resolution with a 75% majority

Copy of amended articles must be sent to Registrar within 15 days of the amendment taking effect

S.22 CA 2006 allows companies to entrench provisions in its Articles - cannot be drafted into articles, never be amended or removed.

39
Q

What are the restrictions on alterations of the articles?

A
  1. Alteration void if it conflicts with the Companies Act or constitution
  2. Cannot be used to compel a member to take more shares
  3. Not made with retrospective effect
  4. Must be made in interests of company as a whole
  5. Not prevented simply because alteration inflicts hardship on a member
40
Q

What are weighted voting rights?

A

Possible to effectively freeze provisions in the Articles by applying weighted voting rights to certain procedures

CIMA BA4 Fundamentals of Ethics, Corporate Governance and Business Law (7 decks)

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