Constitution of Company and Promoters

Question 1

Company Names

Answer 1

The tort of passing off

Question 2

Objects clause?

Answer 2

Ashbury railway carriage & iron co v riche (1875)

Rolled steel products v British Steel (1985)

Question 3

Memorandum main contents?

Answer 3

Objects clause - s31, 39 CA2006
passing off prohibited names and use of Ltd
Formerly CA 1985 constitution of company must have memorandum and articles of association but now constitution is articles of association and any resolution to which chapter 3 of 2006 Act applies
Memorandum still required under s9 of companies act but use is reduced

Question 4

Name Clause

Answer 4

s 58&59 CA 2006 state public limited company must end with plc and private must end with Ltd
s66 - cannot be identical to other registered name
s53 - cannot be name regarded as offensive
s54 - cannot be name which suggests connection to government or local authority

Question 5

name clause cases?

Answer 5

Ewing v buttercup margarine company 1917
ewing traded under buttercup dairy company and might think there is a link
Contrast this with Aerators Ltd v Tollit 1902
Company can change its name by special resolution (s77)

Question 6

registered office clause - CA s9(2)(b)

Answer 6

Swedish central railway co v thompson (1925)
Important because establishes the nationality and domicile, address must be kept available for public inspection, determines jurisdiction company uses

Question 7

objects clause

Answer 7

purpose for which the company was incorporated, lists the things the company can do, if not on this then the company acting ultra vires
s(40) - rule operates internally, shareholder can bring action to restrain the company from carrying out ultra vires act

Question 8

alteration of memorandum

Answer 8

CA 2006 s21 - company can change its objects clause in the same way as any other provisions in the articles - as special resolution

Question 9

Why does a company need articles of association?

Answer 9

Every company in UK is required to have them. - public and private
Subject to provisions in companies act
Companies formed before 1st Oct 2009 may have adopted table A articles - known now as model articles and all companies after this date may have them
AoA regulate internal management of a company and provide rules which the company operates

Question 10

Membership Contract?

Answer 10

Terms of articles and memorandum represent contract between company and each member
Failure to honour = breach of contract
Hickman v Kent 1915 - membership rights
Wood v Odessa Waterworks Co - does each member have binding contract with each other?

Question 11

Company’s constitution, under s33, binds…

Answer 11

members to company
company to members
members to members
Peder v lushington 1877 - members can compel the company to obey the articles
Individual shareholders can sue to enforce the constitution
Rayfield v Hands 1958 - articles only create contractual rights and obligations in relation to rights as a member
Still confusion around whether s33 is enforceable between members
Provisions only apply to rights and obligations arising by means of contract of membership - members cannot use this to enforce rights under another contract as they are members of the company
Beattie v E&F Ltd - was not a dispute between the company and himself as a member, he was a director and an outsider so articles weren’t relevant

Question 12

How can a company’s articles be altered?

Answer 12

S 21(1) restates previous provisions and permits a company to alter its articles by special resolution 
Common law rules relating to alterations still apply
Special resolution (requiring atleast 75% agreement of shareholders) can be passed in one of two ways: written resolution signed by shareholders or special resolution passed at meeting of shareholders

Question 13

OUTSIDERS - as stated in Hickman…

Answer 13

An outsider, whether he is or becomes a member, cannot sue on the articles treating them as contracts between himself and the company to enforce those rights

Question 14

Salmon v Quinn & Axtens Ltd 1909

Answer 14

Salmon’s decision on acquiring and letting premises was ignored although it was included in the articles - court granted the injunction and held this was an attempt to bypass rules on decision making within the articles
Salmon enforced outsider right as he brought action as a member to enforce the articles

Question 15

Who is a promoter?

Answer 15

Someone who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose (Twycross v Grant 1877)
A person who acts merely in a professional capacity in company formation eg solicitor or accountant

Question 16

Duties of promoters?

Answer 16

Promoter must disclose any profit or potential CoI to an independent board of directors or existing or intended shareholders
In equity a promoter stands in a fiduciary relationship towards the company he is promoting but is not a trustee (Re Leeds and Hanley Theatres of Varieties Ltd [1902]), and therefore is subject to a number of fiduciary duties- Erlanger v New Sombrero Phosphate Co [1878].
In Saloman the HOL accepted that in the absence of an independent board of directors the disclosure duty will be discharged if full disclosure of all material facts is made to the original shareholders.
These duties are owed to the company and so an action for breach must be brought by the company not by its members (Foss v Harbottle [1834]).

Question 17

Remedies for breach of promoters duty?

Answer 17

If the promoter does not make a proper disclosure of legitimate profits or if they make wrongful profits the primary remedy of the company is to rescind the contract and recover its money: Erlanger v New Sombrero Phosphate Co [1878] - profit had not been properly disclosed
The company may, however, elect to rescind the contract concerned (as was the case with Erlanger) or may, where the right to rescind is not available, ask the promoter to account for his profit- Gluckstein v Barnes [1900].

Question 18

Payment to promoters?

Answer 18

A company cannot enter into a contract before incorporation - so a promoter has no legal claim against the company for fees and expenses.
Re National Mail Coach Co Ltd [1908] - company is not in existence and therefore cannot have entered into any contracts with the promoter

Question 19

What is a pre incorporation contract?

Answer 19

Made by a company or its agent before the company has been formed
A company cannot ratify a contract made on its behalf before it was incorporated because it did not exist.

Question 20

Liability of promoters for pre-incorporation contracts

Answer 20

s(51) of Companies Act 2006 - agent or promoter will always be liable
At Common Law:
-Kelner v Baxter [1866]- promotors of a hotel company entered into a contract on its behalf for the purchase of wine which the company when incorporated, ratified. The wine was consumed but before payment was made the company went into liquidation. The promotors as agents were sued on the contract. They argued liability has passed by ratification to the company. This was rejected and the promotors were personally liable - agency principle means company cannot ratify contract made on its behalf before incorporated

Question 21

Ways of promoters avoiding liability?

Answer 21

Contract is a draft

Clause stating that the personal liability of promoters is to cease - novation

Question 22

Agreement to the contrary?

Answer 22

Phonogram v Lane - This case was decided under the prior enactment of s36C (1985 CA).
The Court of Appeal rejected the argument that the words “for and on behalf of Fragile Management Ltd” that Mr Lane had used, amounted to words “subject to any agreement to the contrary” for the purposes of the statutory provision. Therefore Mr Lane was unable to avoid personal liability under the agreement. The court held that there should be a clear and express exclusion of liability otherwise the statutory provision should be given its full effect.
Gave his signature so personally liable.