Nature of Companies and Choice of Medium

Question 1

What is the cornerstone of company law?

Answer 1

In limited companies, shareholders are not usually personally liable for debts of the company, however the law imposes numerous controls to prevent abuse.

Question 2

What are the features of a registered company?

Answer 2

Separate legal personality from its owners

Perpetual succession regardless of ownership changes

All assets owned by the company itself

Enters its own contracts and is fully liable for all its debts.

Question 3

Salamon v Salomon & Co Ltd 1897

Answer 3

Company was held to be a separate entity to the owner, and the veil of incorporation was upheld.

Question 4

Macaura v Northern Assurance 1925

Answer 4

Macaura sold his timber to a company he owned, but the insurance was in his name. Insurance company did not have to pay because he didn’t own the timber.

Question 5

What is the Veil of Incorporation?

Answer 5

The veil is a hypothetical ‘curtain’ between the company and its shareholders. It can only be lifted in exceptional circumstances where there is wrongdoing.

Question 6

Gilford Motor Co v Horne 1933

Answer 6

In this case, the veil was lifted as the company was set up purely to perpetrate a fraud.

Question 7

Daimler Co Ltd v Continental Tyre and Rubber Co Ltd 1916

Answer 7

In this case, the Continental Tyre Co was known to be owned by Germans, even though it was an English company. The court upheld that this constituted trading with the enemy in wartime due to the ‘identification theory’.

Question 8

What is the identification theory?

Answer 8

Where the court attributes the intention or knowledge of a person identified with the company as the intention of the company.

Question 9

What are Limited by Shares companies?

Answer 9

The liability of the members for debts of the company is limited to any sums unpaid on shares owned - therefore they only lose their investment.

Question 10

What are Limited by Guarantee companies?

Answer 10

The liability of the members is limited to an agreed fixed amount (usually for schools and charities)

Question 11

Differences between public and private companies

Answer 11

Public must have 2 directors; Private just 1
Public must have £50,000 share capital; Private just £1
Public min. 2 members; Private min. 1
Tight financial and audit control; Much less control
Outside shareholders; Cannot sell shares on open market

Question 12

What are general partnerships?

Answer 12

Partnerships under Partnership Act 1890, there is no limited liability for partners.

Question 13

What are LLP’s?

Answer 13

Partnerships under LLP Act 2000, there is limited liability up to the amount of contributed capital.

Question 14

Features of a sole trader:

Answer 14

Liable for all debts
Taxed as self-employed
Business ceases when owner dies or retires

Question 15

Features of a partnership:

Answer 15

Partners can be owners and managers
No incorporation formalities
Cannot buy and sell partnership
Can have formal agreements instead of PA 1890
Not a separate legal entity
Partners are liable for business and other partners.

Question 16

What is apparent or ostensible authority?

Answer 16

Where the partner is not authorised but seems to be and indicates that he is and the creditor reasonably believes that he is authorised to enter into the contract.

Question 17

Features of an LLP:

Answer 17

No limit on members
Pay Income Tax still instead of corporation
Have to disclose accounts
Limited Liability for partners

Question 18

Why is it easier for companies to raise finance?

Answer 18

As creditors usually require security on loans, it is easier for companies to give fixed charges on assets than partnerships. Partnerships can also not give floating charges.