SETTING UP A COMPANY

Question 1

1. Question 1
   A businessman and his brother are partners in a business that sells double glazed windows. The business was doing very well, and the brothers gave instructions to incorporate the business. Around the same time, a leading company in the double-glazing industry was selling off its double gazed windows at a fraction of their original cost. The businessman and his brother wanted to purchase as many of these double-glazed windows as possible to resell them at a profit. The businessman did not wait until the company was incorporated and entered into a contract with the sellers of the double-glazed windows ‘for and on behalf of the company’.

Which one of the following best describes the resulting contract?

1. A valid contract will exist between the businessman and the leading double-glazing company that both parties can enforce.
2. Although the businessman has attempted to enter into a contract on behalf of that company, no contract will exist.
3. A company that is in the process of being incorporated has full contractual capacity, providing that the process of incorporation is completed within a reasonable time.
4. Although no contract will exist at the time that the contract is made, the company can choose to assume the obligations contained in a pre-incorporation contract.
5. The leading double-glazing company will be able to enforce the contract against the company, but not against the businessman.

Answer 1

Option A is correct. The businessman will be a ‘promoter’ of the company and will be bound by the contract. This is because a valid contract will exist between a promoter and a third party that both parties can enforce. s.51(1) CA (2006) renders the promoter personally liable in all cases. A contract will exist between the promoter and the third-party company.

Option B is wrong. s.51(1) of the Companies Act 2006 states clearly that a contract will exist where a promoter of a company purports to enter into a contract on behalf of that company. A contract will therefore exist but only between the promoter (businessman) and the third-party company.

Option C is wrong. A company that is in the process of being incorporated does not have contractual capacity. A company has to be fully incorporated prior to entering into any contracts in its name. s.51(1) of CA 2006 does not allow a company to adopt pre-incorporation contracts.

Option D is wrong. s.51(1) does not allow a company to adopt pre- incorporation contracts as stated in Option C so therefore the company cannot assume the obligations contained in a pre-incorporation contract.

Option E is also wrong. s.51(1) states that the contract cannot be between the company and the seller because at the time of the contract, the company was not incorporated so it cannot assume any obligations and therefore the contract cannot be enforced against it. As stated above (see Option D), as a result of s.51(1) the promoter, the businessman, will be personally liable . A contract will exist between the promoter and the third party so the third party must seek to enforce the contract against the businessman.

Question 2

A client wishes to set up a private limited company selling pork sausages manufactured using pork from pigs bred and raised in the UK. Assume that an existing unconnected company called Biggs Butchers Limited is already registered at Companies House.

Which of the following would be the most likely to be permitted as a company name for a new company?

1. Her Majesty’s Butchers Ltd.
2. Biggs Butchers UK Limited.
3. The British Butchers Limited.
4. Biggs Sausages Limited.
5. Bigg’s Butchers Limited.

Answer 2

Option D is correct. The name is sufficiently different to be allowed. Any problems would be intellectual property issues rather than company law issues.

Option A is wrong. A company would not be allowed the words ‘Her Majesty’ as this is on the list of specified words or expressions for which the approval of the Secretary of State would be required.

Option B is wrong as Biggs Butchers UK Ltd would be similar to Biggs Butchers Limited. The addition of UK has previously led to the name being refused.

Option C is wrong. Using the word ‘British’ would be not be allowed, as it suggests a geographical area so needs the permission of the Secretary of State.

Option E is wrong. the apostrophe ‘s’ would not be allowed as special characters such as punctuation does not stop similarity with an existing registration.

Question 3

3.	Question 3
A successful sole trader, who is currently trading as ‘DBC Enterprises’, wants to incorporate his business as a private limited company. He wants to continue to use the DBC Enterprises name. He also wants to continue to control the business and to be the only director. He and his wife will subscribe for 50% of the shares each. The company will have one class of shares (ordinary £1 shares). The assets of the existing business have been valued at £100,000.

Which of the following statements most accurately reflects the position in relation to the incorporation of the company?

1. As the business is worth more than £50,000, the sole trader must incorporate the business as a public company and name it DBC Enterprises plc.
2. As the business is worth £100,000, the sole trader and his wife must subscribe for £50,000 worth of shares each.
3. There is no need for the company to have more than one director to be validly incorporated.
4. Either the sole trader or his wife must be named in the application for registration as the company secretary.
5. As she will not be a director, the wife need not be named in the application for registration as a person with significant control (PSC).

Answer 3

Option C is correct. The sole trader is proposing to register the company as a private company, DBC Enterprises Ltd. A private company need only have one director.

Option A is wrong. The company does not have to register as a public company. Having capital of over £50,000 is one of the criteria that enables it to do so, but does not oblige it to do so.

Option B is wrong. There is no minimum prescribed share capital requirement for a private limited company. The share capital of the company can be as little as £1 (or less). The only requirement is that the share (or shares) are given a nominal (or par) value.

Option D is wrong. A private limited company need not have a company secretary.

Option E is wrong. A PSC includes those persons who hold more than 25% of the shares, whether or not they are directors

Question 4

4. Question 4
   Which of the following statements best describes the position in relation to the articles of association of private, public and listed companies?
5. A private limited company set up under the Companies Act 2006 will automatically have the Model Articles for private companies limited by shares unamended if it does not submit its own articles.
6. A private limited company set up under the Companies Act 2006 must adopt the Model Articles for private companies limited by shares unamended.
7. Only private limited companies set up prior to the Companies Act 2006 coming into force will have Table A articles.
8. If a public company does not submit its own articles with the application for registration, registration will be refused.
9. A public listed company will always have bespoke articles as the Model Articles for public companies are unsuitable for these types of company.

Answer 4

Option A is correct. If a private company limited by shares or public company does not submit any articles with the application, the Model Articles for private companies limited by shares will automatically apply.

Option B is wrong. A private company can choose whether to adopt the Model Articles for private limited companies, either unamended or with amendments, or to use bespoke articles. It is not obliged to use them.

Option C is wrong. Both private and public companies set up before the CA 2006 came into force could use Table A articles.

Option D is wrong. A public company will still be registered even if it does not submit any articles (provided that all the other requirements of the Companies Act 2006 are complied with).

Option E is wrong. Bespoke articles are probably the most suitable for listed companies, but that does not mean that they will always have them, so this statement does not ‘best describe’ the situation.

Question 5

Which of the following statements best describes the documents which will form part of a company’s constitution?

1. A company’s constitution consists of its articles of association only.
2. A company’s constitution consists of its memorandum of association and articles of association.
3. A company’s constitution consists of all the documents which were lodged at Companies House in order to register the company.
4. A company’s constitution consists of its memorandum of association, articles of association, certificate of incorporation and the statement of capital which was lodged with Companies House at the time that the company was incorporated.
5. A company’s constitution consists of its memorandum of association, articles of association, certificate of incorporation, current statement of capital, shareholder resolutions and agreements, court orders and legislation which affect the company’s constitution.

Answer 5

Option E is correct. Under section 17 of the Companies Act 2006, a company’s constitution comprises the company’s articles, memorandum of association and the resolutions and agreements specified in section 29, principal amongst which are shareholder special resolutions and agreements and court orders and legislation which affect the company’s constitution
Options A and B are wrong as the memorandum and articles of association only form part of the company’s constitution.

C is wrong as it is not only the registration documents that form part of the constitution but also subsequent documents that may alter the constitution.

D is wrong as it does not include all the relevant documents and note that it is the current statement of capital which forms part of the constitution.

Question 6

Two partners have decided to incorporate their business as a private limited company. They have agreed that each of them will subscribe for one £1 ordinary share (‘the Shares’) and they will both be directors of the new company.

Which of the following statements most accurately reflects the information which must be included in the Memorandum of Association (‘Memorandum’) of the company?

1. The Memorandum will give the name of the company and will state that the partners wish to form the company.
2. The Memorandum will state that the partners wish to form the company and have agreed to subscribe for the Shares.
3. The Memorandum will include details of the type and nominal value of the Shares.
4. The Memorandum must include the objects of the company.
5. The Memorandum will include details of the shareholders and directors of the company.

Answer 6

Option B is correct. Where a company is being set up under the Companies Act 2006, the Memorandum consists only of a statement that the subscribers (here the two partners) wish to form a company and have agreed to subscribe for at least one share each. All it does is to provide what has been described as a ‘historical snapshot’ that reflects the situation of the company at the time that it was created.

Options A, C and E are wrong. The application for registration, not the Memorandum, contains the important information in relation to the company, including the name, details of shareholders, statement of capital and directors.

Option D is wrong. Prior to 1 October 2009 when the 2006 Act came into force, the Memorandum was a more detailed document which included the objects of the company, but this requirement was abolished by the 2006 Act.

Question 7

A shareholder buys 100 ordinary £1 shares in a company and is entered on the company’s register of members. The company has two other members who are directors of the company and three other directors.

Which of the following statements best describes the shareholder’s rights and obligations under the statutory contract created by a company’s constitution?

1. The shareholder can sue any of the other members of the company if his membership rights are infringed.
2. The shareholder can sue any of the directors of the company if his membership rights are infringed.
3. Any of the directors can sue the shareholder if he does not abide by the terms of the company’s constitution.
4. The shareholder can sue someone who is not a member of the company if that person has infringed rights granted to him by the company’s constitution.
5. The shareholder can only sue the company if his membership rights are infringed.

Answer 7

Option A is correct. The shareholder has been entered on the register of members of the company and so is a member of the company. The statutory contract imposes obligations upon the members when dealing with each other, so that means that the shareholder may bring an action for breach of contract against other members of the company where his rights have been infringed.

Option B is wrong. Only if the directors were members of the company could the shareholder bring an action against them. On the facts, not all of the directors are members. Three of them are what are described as ‘outsiders’ – non-members.

Option C is also wrong. ‘Outsiders’ cannot enforce rights under the constitution.

Option D is wrong. As above, the shareholder cannot enforce his rights against ‘outsiders’.

Option E is wrong. The shareholder can bring an action against the company to enforce his rights under the constitution, but it is not his only option.

Question 8

A private limited company was incorporated in 1988. This was done in the cheapest way possible with no articles being specifically drafted for the new company. It adopted the default articles at the time, known as Table A articles. It has never chosen to change its constitution in any way.

Which of the following best describes the present status of the company’s constitution?

1. It has the Model Articles for private companies limited by shares because these are the default option today.
2. It has the Model Articles for private companies limited by shares because Table A was repealed by the Companies Act 2006.
3. It still has Table A articles.
4. It has no articles, but it does have a Memorandum of Association.
5. It has a hybrid of Table A and Model articles

Answer 8

C is the correct answer. If no bespoke articles were drawn up at the time that the company was incorporated, then the default articles at the time were Table A and, as the company has not changed its constitution in any way, remain so.

Options A and B are wrong. The articles of the company are decided at the time of incorporation, or later by special resolution, but are not altered by a new default set being created by statute.

Option D is wrong. It is impossible for a company to exist with no articles at all
Option E is wrong. Such a hybrid is only possible if the articles were subsequently changed (by special resolution of the members).

Question 9

A client and her friend are shareholders in a private limited company. The client holds 100 ordinary £1 (fully paid) shares. The friend holds 100 £10 non-cumulative, non-participating 5% preference shares.

The company has Model Articles for private companies limited by shares.

Which of the following statements best describes the rights of the client and her friend in relation to their shares?

1. Both the client and her friend will be able to vote at all shareholder meetings.
2. The client’s shares give her the automatic right to a dividend every year.
3. The client’s shares give her the right to be paid her share of surplus assets on a winding up before her friend is paid.
4. The friend’s shares give him the right to be paid any dividend before the client.
5. The friend will be entitled to a fixed dividend of 25p (5% of £10) every year.

Answer 9

Option D is correct. Preference shares give the holder the right to preferential claims on payment of a dividend, so the holder of preference shares will be paid before the holder of ordinary shares, who will only be paid if there are any profits left over after the preferential shareholders have been paid.

Option A is wrong. Ordinary shares will normally give the shareholder the right to attend and vote at shareholder meetings, unless the articles state otherwise. Preference shares do not normally carry the right to vote, unless the articles (or the terms of the share issue) state otherwise. Note that the company has Model Articles for private companies limited by shares which do not give preferential shareholders the right to vote.

Option B is wrong. A dividend will only be paid if one is declared, which will only be the case if the company has sufficient profits.

Option C is wrong. On winding up of the company, the preferential, not the ordinary, shareholders will normally be entitled to be paid their share of surplus capital first.

Option E is wrong. If the company has insufficient profits in a particular year, neither the preferential nor the ordinary shareholders will be paid. As these are non-cumulative preference shares, the right to the dividend does not carry over to the next year.

Question 10

In 2018, a client set up a private limited company and subscribed for one ordinary £1 share.

In 2019, the company issued a further £99,000 £1 ordinary shares. The client purchased the shares from the company for £1.50 each.

In 2020, the company re-registered as a public company and issued a further 100,000 ordinary £1 shares. The shares were purchased by an investor, who paid £200,000 for the shares.

In 2021, the company listed on the London Stock Exchange and the shares started trading at £2 per share. The investor sold his 100,000 shares for £2 each.

Which of the following statements most accurately reflects the position in relation to the issue and transfer of the shares?

1. In 2018, the company did not have a share capital.
2. In 2019, the nominal value of all of the company’s shares was £150,000.
3. In 2020, the nominal value of the investor’s shares was £100,000.
4. In 2021, the investor has sold his shares at par.
5. Until 2021, the company could not offer its shares to the public.

Answer 10

Option C is correct. Shares are allotted at a ‘nominal value’ (or ‘par value’) which is the original value of the shares. If shares are allotted for £1, their nominal value will be £1, even though the market value of the shares increases. Therefore in 2020, the nominal value of the shares purchased by the investor was £100,000 (and the market value of the shares was £200,000).

Option A is wrong as the share capital of the company was £1. A company may be set up with a share capital of £1 or less.

Option B is wrong. The nominal value in 2019 was £100,000. The market value was £150,000.

Option D is wrong. If the investor had sold them at par, he would have sold them for their nominal value (£1) not the amount which he paid for them. The market value of the shares has not gone up so he has simply not made a profit on the shares.

Option E is wrong. Public companies, as the name suggests, can offer their shares to the public. However, a public company will not be able to gain the exposure to potential investors which it needs unless it becomes a publicly traded company (i.e. has been admitted to a recognised stock exchange, e.g. the London Stock Exchange, or AIM (Alternative Investment Market)).