Incorporation and Corporate Personality Flashcards
What is a promoter?
Neither statute nor the courts have sought to provide a specific, precise definition of what a promoter is, but instead have provided broad guidance.
Bowen J in Whaley Bridge Calico Printing Co v Green (1880) LR 5 QBD 109 (QB), stated that a promoter is someone who engages in those ‘business operations familiar to the commercial world by which a company is generally brought into existence.’
How does s. 51 of the CA 2006 differ to the common law rules relating to pre-incorporation contracts?
Under the common law rules, whether a promoter was bound by a pre-incorporation contract would depend upon the intention of the parties as evidenced in the contract. Section 51 changes this so that a promoter who enters into a pre-incorporation contract with a third party will bound by that contract.
How can a company be bound by a pre-incorporation contract?
There are two ways in which a company can become bound by a pre-incorporation contract:
- the pre-incorporation contract would contain a term which provides that, upon incorporation, the promoter will cease to be liable under the contract if the company enters into a contract with the third party on the same terms as the pre-incorporation contract; or
- following incorporation, the company, the promoter and the third party could enter into an agreement which provides that the pre-incorporation contracts will be discharged, and a new agreement will be entered into between the company and the third party (this is known as ‘novation’)
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When will a pre-incorporation contract not be subject o s. 51 of the CA 2006?
Section 51 will not apply where
(i) a company was bought off the shelf after the contract was entered into but was in existence at the time the contract was entered into; or
(ii) whether the company once existed but has since been dissolved (Cotronic (UK) Ltd v Dezonie [1991] BCC 200 (CA)).
What documentation must be submitted to Companies House to incorporate a company by registration?
In order to incorporate a company by registration, the promoters must provide to Companies House the specified registration documents under s.9 of the CA 2006. These consist of:
(i) the memorandum of association
(ii) the application for registration and accompanying documentation
(iii) the statement of compliance
What information does Form IN01 require?
IN01 requires:
- whether the company will be public or private;
- whether the liability of the members will be limited or unlimited (and, if liability is to be limited, whether it will be limited by shares of guarantee);
- the proposed name of the company;
- the intended address of the company’s registered office;
- if the proposed company is to have a share capital, a statement of capital and initial shareholdings must be provided;
- if the proposed company is to be limited by guarantee, the application must contain a statement of guarantee;
- a statement of the company’s proposed officers;
- a statement of significant control;
- a copy of the proposed articles of association (unless the company wishes to use the model articles); and
- a statement of the type of company it is to be and its intended business activities
What limitations and restrictions exist in relation to a company’s name?
There are numerous restrictions and limitations on the names that companies can have:
- a company cannot choose for its name the same name as another company listed on the index maintained by Companies House;
- a company can only use certain letters, numbers and punctuation marks, etc. in its name;
- a name must not be registered if, in the opinion of the Secretary of State, it is offensive; and
- certain words and phrases will require approval from certain governmental and non-governmental bodies (for example, a company that wishes to use the word ‘insurance’ in its name must obtain a letter of non-objection from the FCA).
Explain the differences between a certificate of incorporation and a trading certificate
A certificate of incorporation is issued to a company upon its incorporation. Trading certificates are only issued to public companies. A public company cannot commence any business or exercise any borrowing powers until it has also been issued with a trading certificate. This certificate will only be issued if Companies House is satisfied that the additional registration requirements for public companies have been complied with (chiefly, the requirements as to minimum share capital).
What is an ‘off-the-shelf’ company and what are the advantages and disadvantages of such companies?
‘Incorporation agents’ or ‘company formation agents’ specialise in creating and selling companies. They will register the necessary documents with Companies House and then leave the company dormant and ‘on the shelf’ until it is purchased. Upon purchase, the incorporation agent with notify Companies House of the relevant changes (such as change of directors, registered office, and so on).
The advantages of buying a company off the shelf is that the promoter does not need to incorporate the company. This can be useful if the promoter lacks the necessary knowledge, or simply wishes to avoid the effort of incorporating a company. Purchasing such a company is often inexpensive and can be done very quickly.
The disadvantage of a company off the shelf is that it will not be tailored to the needs of the promoter and their business. Accordingly, the promoter may need to engage in work to tailor the new company to their needs (such as changing the company’s name, amending the share structure, amending the articles, and so on).
What is the difference between a person and an individual?
In law, the word ‘individual’ tends to refer to a natural person, whereas the word ‘person’ can be used to refer to natural persons and legal persons (e.g. companies, LLPs).
Explain the key consequences of a company having a corporate personality.
There are numerous consequences of a company having corporate personality, including:
- a company has a nationality, a domicile and a residence;
- a company can continue to exist indefinitely;
- a company has the capacity to enter into contracts;
- a company can own assets;
- a company undertakes its own business
- a company can sue and be sued
- a company can create, and participate in, other business structures; and
- company has some ‘human’ rights
In Salomon, how did the House of Lords disagree with the High Court and Court of Appeal?
In Salomon, the High Court held that the company was Salomon’s agent and so Salomon was liable for its debts. The Court of Appeal also held that Salomon was liable for the company’s debts on the grounds that the company was not formed in accordance with the Companies Act, and the other members were not genuine active members.
The HoL disagreed with both the High Court and Court of Appeal. it held that generally a relationship of agency will not exist between a company and its members. The House also stated that there was nothing in the CA 1862 which stated that members had to be unconnected or active, and so that company had been formed in accordance with the Act. The house held that Salomon was not liable for the company’s debts.
Why is Salomon considered to be such a seminal case?
- The HoL clearly stated that a validly incorporated company could legitimately be used to shield its members from liability (although this had been recognised previously)
- It implicitly recognised the validity of the ‘one-person company’ (that is, a company run only be one person, with several dormant nominee shareholders) almost a century before it was possible to formally create a one-person company in 1992
- It recognised the fact that a person holding shares in a company (even all the shares) is not enough to establish a relationship of agency of trusteeship.
When will the courts disregard a company’s corporate personality?
The courts will pierce the veil where:
(i) statute provides that a company’s corporate personality is to be disregarded, or
(ii) where a person is under an existing legal obligation or liability, or subject to an existing legal restriction, which they deliberately evade or whose enforcement they deliberately frustrate by interposing a company under their control, and all other, more conventional, remedies have proved to be no assistance.
What are the three conditions required for the evasion principle to apply?
The evasion principle will apply where:
- an existing legal obligation is placed upon a person (X);
- X interposes a company in order to evade or frustrate the obligation or liability in question; and
- the company being interposed is under X’s control
