Chapter 7 - Company law Flashcards
What is a company under the Companies Act 2006?
A company is an entity registered under the Companies Act 2006 or any earlier Companies Act. It is distinct from its members and directors.
What does it mean for a company to have a separate legal personality?
A company is a separate legal entity from its shareholders and directors. This means:
- It is an artificial person.
- Members have limited liability.
- It can hold property.
- It has continual succession, meaning it continues to exist despite changes in membership.
Can a company be liable for torts or crimes?
Yes, a company may have liabilities in tort or crime. However, it is often difficult to prosecute a company successfully for a criminal offence.
Which of the following is NOT a characteristic of a company?
A) Continual succession.
B) Unlimited liability for members.
C) Ability to hold property.
D) Separate legal personality.
B) Unlimited liability for members.
What is the key consequence of a company’s separate legal personality?
Members of a company enjoy limited liability. They are only required to contribute specific amounts to the company’s assets, depending on the type of company, in the event of winding up.
What are the liability limits for members of a company limited by shares?
Fully paid shares: No further liability.
Partly paid shares: Any unpaid amount on the nominal value of the shares.
Share premium: Any unpaid premium over the nominal value, unless the shareholder is not the original holder of the shares.
What is the liability of members in a company limited by guarantee?
Members are liable to pay the amount they guaranteed in the event of the company’s winding up.
In a company limited by shares, when is a member NOT liable for unpaid premiums?
A) When the shares are fully paid.
B) When the member is the original shareholder.
C) When the member is not the original shareholder.
D) When the company is solvent.
C) When the member is not the original shareholder.
What does the “veil of incorporation” refer to?
The “veil of incorporation” separates the members and the company as distinct legal entities, shielding members from liability and identification in relation to the company’s activities.
Why might the court “lift the veil of incorporation”?
Courts may lift the veil to expose the commercial reality of a situation, especially when the separate legal personality of the company is being used to commit fraud, evade obligations, or act inequitably.
The veil of incorporation is always maintained, regardless of circumstances.
False. The veil can be lifted by courts or legislation in specific cases to ensure fairness or prevent abuse.
When can the veil be lifted for a group of companies?
When the subsidiary acts as an agent of the holding company, justifying treating them as a single entity.
How does the court handle companies used for tax evasion?
The court may treat the subsidiary’s assets or actions as part of the parent company to impose tax liabilities or prevent tax evasion.
Can creditors of an insolvent subsidiary hold a solvent holding company liable for debts?
No, unless there is a specific legal or factual basis for lifting the veil.
When might the veil be lifted to reveal true national identity?
In cases where the company’s members are primarily foreign nationals, and the company operates contrary to national laws (e.g., during wartime).
What is a quasi-partnership, and why might the veil be lifted?
A company operating like a partnership may have its veil lifted if dissolution is necessary for fairness, as it operates more as a partnership than a company.
How might a company be used to evade obligations?
A company might be formed to breach contractual agreements (e.g., an ex-employee soliciting customers of a former employer through a “sham” company). The court can lift the veil to hold individuals accountable.
What happens when a disqualified director participates in managing a company?
They can be held personally liable for the company’s debts under the Company Directors Disqualification Act 1986.
What is the distinction between fraudulent and wrongful trading?
Fraudulent Trading: Intentional deceit or defrauding creditors.
Wrongful Trading: Continuing business while knowing the company cannot avoid insolvency.
Directors involved in either can be held personally liable for the company’s debts.
In which of the following situations can the veil of incorporation be lifted?
A) A company operates solely to avoid tax.
B) Directors engage in wrongful trading.
C) A company acts as an agent of another.
D) All of the above.
D) All of the above.
What happens if a public company trades without a certificate of incorporation?
The directors can be held personally liable for any losses or damages suffered by third parties.
What are the two types of companies?
Limited companies - broken into public and private
Unlimited companies
What are the two types of limited companies?
Public companies.
Private companies.
What is an unlimited company?
An unlimited company is a rare type of company where shareholders have unlimited liability for the company’s debts.
What does a limited company by shares mean?
A limited company by shares is a type of company where the liability of its members (shareholders) is limited to the unpaid amount, if any, on the shares they own.
What does a limited company by shares mean?
A limited company by guarantee is a type of company where the members (often referred to as guarantors) agree to contribute a specific amount of money toward the company’s debts if it is wound up. This amount is usually nominal and defined in the company’s constitution.
can a company change its status between limited and unlimited?
Limited to unlimited: Requires the consent of all shareholders.
Unlimited to limited: Requires a special resolution (>75%).
True OR False A company limited by guarantee can change to a company limited by shares.
False. It is not possible to switch between a company limited by guarantee and a company limited by shares.
What is the liability requirement for public and private companies?
Public: Must be limited liability.
Private: May be limited or unlimited.
What is the minimum share capital for a public company?
£50,000.
Does a private company require a minimum share capital?
No, there is no minimum requirement for private companies.
What is the trading certificate requirement for public and private companies?
Public: Must obtain a trading certificate before commencing trading.
Private: May commence trading once incorporated.
Can public and private companies offer securities to the public?
Public: Yes, they can offer securities to the public and may list on stock exchanges.
Private: No, they are prohibited from offering securities to the public.
How must the names of public and private companies end?
Public: Must end with “public limited company” or “plc.”
Private: Must end with “limited” or “Ltd” unless exempted (e.g., charities).
What are the minimum director and secretary requirements?
Public: Must have at least two directors and one company secretary.
Private: Must have at least one director and does not require a company secretary.
Are Annual General Meetings (AGMs) mandatory for public and private companies?
Public: Yes, AGMs are mandatory.
Private: No, they are not required to hold AGM.
What are the filing deadlines for accounts and reports?
Public: Must file within 6 months of the financial year-end.
Private: Must file within 9 months of the financial year-end.
Are small or medium-sized companies eligible for audit exemptions?
Public: Not applicable.
Private: Yes, if they meet the criteria for small or medium-sized companies.
How does the appointment of auditors differ?
Public: Must appoint auditors each year if necessary.
Private: Existing auditors may be deemed reappointed under specific conditions.
Can pre-emption rights be excluded?
Public: No, they may not be excluded.
Private: Yes, they may be excluded.
What is required for a public company to reduce its capital?
A) Special resolution and directors’ solvency statement.
B) Only a directors’ meeting.
C) Special resolution confirmed by the court.
C) Special resolution confirmed by the court.
INTERACTIVE QUESTION 13: TYPES OF COMPANY
Alex, Barry and Carol have operated as a partnership for five years trading in domestic carpets. The business has been successful and they are now considering expanding the business operations by opening three new shops and an additional wholesale unit. The partners are aware that the expansion will require new business capital. They are considering the formation of a company rather than continuing as a partnership.
What types of company may be formed under the Companies Act 2006? Which type of company is suitable for this business?
The main categories of companies which may be formed under the CA’06 are a public company limited by shares, and a private company, which may be limited by shares or by guarantee or be an unlimited company.
A private company limited by shares is the most suitable type for a small business venture of this kind. It offers the advantages of being a corporate entity separate from its members, giving them the protection of limited liability. This means that on a winding-up of the company, each shareholder would only have to contribute any amount that was not already paid up on their shares. The main restriction on a private company is that it may not offer its shares or debentures to the public. However, it is subject to fewer restrictions than a public company including not needing a company secretary or an AGM. It may use capital to finance the purchase of its own shares and it may give financial assistance for the purchase of its shares. If the company ranks as a small or a medium-sized company for the purposes of its annual accounts, the accounts delivered to the registrar need not contain all the material required in the accounts of a public company and need not be audited.
What is an “off the shelf” company?
It is a company that has already been incorporated and is available for purchase, allowing quick access to a “ready-to-go” company.
What are the advantages of purchasing an “off the shelf” company? (2)
Faster process to have a company operational.
Avoids potential liabilities from pre-incorporation contracts since the company already exists.
What are the disadvantages of an “off the shelf” company? (4)
Need to change the name.
Transfer of subscribers’ shares.
Replacement of directors and possibly the company secretary.
Alteration of articles of association
What is the purpose of a certificate of incorporation? (3)
It is issued by the Registrar of Companies.
Confirms that the company is registered under the law and is a legal entity.
Serves as conclusive evidence of incorporation, even if irregularities or errors are found later.
What additional requirement must a public company meet before trading? (2)
A public company must obtain a trading certificate, which involves:
Submitting an application confirming that the company’s allotted share capital meets the minimum authorized value.
Providing a statement of compliance.
True OR False If a public company trades without a certificate, transactions will be invalid.
False. The transactions remain valid, but company officers may face fines or personal liability.
