Company law topic 1 Flashcards
sole trader
a sole trader is one who operates their business on their own. they have unlimited liability towards their creditors and if this liability is not paid then their personal assets such as their house may be at risk. they will obtain assets through personal savings or through loans by the bank.
Creation of a company
All companies have shares. and these shares are owned by the shareholders. through doing this. these shareholders obtain limited liability and are only obliged to pay back the unpaid shares in the company if requested by directors or through the company becoming insolvent. however companies can also obtain full liability if they wish. the majority of shareholders can elect or remove a director as they wish. all shares must have a nominal value.
all Companies must be created the same way.this is seen in the companies act 2006 s7. Firstly, the subscribers must sign their names into the memorandom of association. this is usually the members who wish to set up the company and they will become the first members of the company. they all agree to take at least 1 share in the company see section 8. these companies may be formed by 1 person if they wish. the memorandom of assiciation must be handed in with the application for registration which contains whether the company wants to become public or private etc… see S9 (2).
the company must have a constitution, this contains the rules of the company for example when board meetings should be set up as well as desegnating powers to the different organs of the company. shareholder and directors being the two main organs. section 20 of the companies act details a standard model which can be followed.
After all this is in order, the registrar will issue a certificate of incorporation and the company will come into existence.
public and private companies
private company.
A private company must follow the above stages first. it may be brought into existence with one person. this person must pay at least 1p or £1 to start up the company. the private company may not list its shares on the market to the public as this is an offence. shareholders will be limited to their unpaid shares in debt to the company and will be limited in liability. they must have LTD at the end of their name as seen in section 58 + 59. assets will be owned by the company. they will usually raise money from bank loans or through personal savings.
public companies.
the only difference with public companies is that they must pay at least 50,000 pounds to start up the company. this however can be paid as 12,500 pounds then the rest paid later. public companies may list their shares on the stock exchange although they do not have to. they must have plc at the end of their name.
what happened in the case of Solomon v Solomon
solomon had his own sole traider business and he was a sole traider.
his family wanted to have more power in the business and so he created another company. this company at the time needed 7 people to start up the company and so they all took 1 share in the company each. this company then bought over the sole trader business with 10,000 pounds in debentures making him the secured creditor over the assets of the company. this was by way of floating charge. 9,000 pounds by way of cash and 20,000 in £1 shares.
while this only changed the name of the company this changed a lot as of the legal consequences. he was originally unlimitedly liable to all his creditors as a sole trader business however now he was only limited to the unpaid shares that he had in his company with his sons, daughters and wife. also he was the secured creditor over his assets so any assets left he would own. when doing this he paid off all of the creditors.
after this the comapny went bust and he tried to keep it afloat with his own money however it eventually became insolvent and there was the question of paying off the crditors. there was 1,000 pounds left and the problem was whether to give this to the creditors or back to mr salomon as he was the only secured creditor.
because the company was not set up for any fraudulent purposes, mr salomon was able to keep the money and the veil did not need to be pierced. the court looked at the motives of mr salomon and his company
what happened in gilford motor co ltd v horne
in gilford motor co ltd v horne a principle was made as to when it is appropriate to pierce the corporate veil. it was known as the evasion principle.
this was: Was there a legal right against the person who was controlling the company?
Had the right existed independantly of any involvement of the company?
Was the company made up so that the company would defeat the legal right or frustrate the enforcement through seperate legal personality?
” the veil would only be pierced to deprive someone of the advantage they gained through avoiding an existing obligation”. “ the only way the veil could be breached”
what happened in Prest v Petrodel resources ltd
in Prest v Petrodel resources ltd, there was a dispute around a couples seperation. the wife had applied for financial provision order. however the houses that the couple owned were in he hands of other companies that the husband had set up. these 8 houses were in the company of 2 companies.
so the question was, could the wife get these properties from the companies?
the court looked to gilford motor co ltd v horne for help through the ‘evasion principle’
so if Mr prest set up these companies to evade the obligations that he owed his wife then the court would have permission to pierce the veil. moreover they would pierce the veil if it was necessary to do so. SECTION 213 of the insolvency act explains fraudulent trading however mr prest did not set them up for fraudulent trading.
it was held in the end that the properties should go to the wife because the attributed the shares to the husband. in effect it can be said that they pierced the veil however the courts say that they didnt.
it is a significant case in that it underlines the limited circumstances “deliberately evades or deliberately frustrates by interposing a company under his control through eveding n obligation or liability” in which the veil may be pierced in the future.
