The nature of the company and its formation

Question 1

What is a legal personality?

Answer 1

A legal person possesses legal rights and is subject to legal obligations.

Question 2

There are two categories of legal person

Answer 2

Natural Person

Artificial Person

Question 3

What is a natural legal person?

Answer 3

This is an actual human being

For example a sole trader

There is no distinction from the business itself and the owner of the business.

The business is not legally distinct from the owner.

There is no legal entity for the business (they have no legal rights & obligations)

Question 4

What is a legal Artificial person?

Answer 4

This person is created and destroyed by the law.

The procedure for incorporation and termination is laid down in statue and must be followed.

For example corporations are artificial persons and corporate personality is a common law principal.

The corporation has a legal identity which is separate from its members and owners.

This is a common law principal

Question 5

Separate corporate personality “corporate veil”

What this means when we are talking about a company

The company will be….

Answer 5

• An independent legal person. This will be the corporation (the business we are talking about)
• Legally separate from its members & officers
• Recognised by the law. This means they can raise legal actions on their own rights and subject to legal actions against it.
• Has legal capacity and becomes a party to the contracts. This means the company could deal with 3rd parties (not the members/ shareholders)
• Can exercise ownership over its property
• Perpetual succession. The business will continue to exist despite changes in membership. (applies to corporations and companies. Not partnerships)
• Members could enjoy limited liability for the debts of the company. However this is subject to the type of corporation or company.

Question 6

The separate legal personality of a company is also know as the … ?

Answer 6

Corporate Veil

Question 7

The corporate veil creates a barrier between the directors and Shareholders/members of the company which protects them from the companies creditors (debts and legal obligations) for example employees and customers.

Answer 7

It is very rare for the corporate veil to be lifted.

Question 8

Lifting the veil of incorporation.

In what cases can the veil of incorporation removed/lifted?

Answer 8

This can be removed when the incorporation is

1) Trying to avoid obligation. When the company tries to use the separate legal personality to avoid obligation.
2) Try to achieve unfair advantage.

This is abuse of the corporate form. Therefore in such circumstances the veil can be removed.

Question 9

Once the corporate veil has been lifted the Directors / Shareholders and members will become personally liable to the debts and obligations of the company due to their actions.

Answer 9

There are provisions in the companies act 2006 and insolvency acts 1986 which will provide opportunities and list cases where the veil could be lifted.

Question 10

Situations where the Veil of corporation can be removed.

Lifting the veil by statue (Laws) to enforce the law. Eg Companies Act 2006, and the Insolvency Act 1986.

Answer 10

• Trading without a trading certificate. (A public company must obtain this before they are aloud to trade)
• Fraudulent and wrongful trading (eg defrauding creditors)
• Disqualified directors. ( participating in management of the company against the order under the companies directors disqualification act. They will be liable for debts and obligations too)
• Abuse of company names.

Question 11

Situations where the Veil of corporation can be removed.

Evasion of obligations

Answer 11

• Evasion of legal obligations
• Public interest (eg in time of war a company is not permitted to trade with enemies)
• Evasion of liabilities (Eg where directors ignore the separate legal personalities of two companies. Eg by transferring assets from one company to another to avoid existing liabilities)
• Evasion of taxation (corporate form is used to conceal the nature of the company for taxation purposes)

Question 12

What happens when the veil of incorporation is lifted?

Answer 12

This separates corporations from its members and members/shareholders/directors are revealed and made responsible for the actions of the corporation.

This will only apply to the members or directors of the company who actually created the situation

Question 13

Corporate bodies (Talking about an artificial person)

What can corporate bodies be based on?

Answer 13

• Companies Act 2006
• Earlier legislations
  
  • Companies Act 1948, 1985
  • Industrial and Provident Societies Act 1956, 2002
• Royal Charter
• Papal Bull

Question 14

The Companies Act 2006 must be followed when trying to create a company. Certain legal requirements must be met before the company can be formed.

Answer 14

The company needs to be registered with the Registrar of companies.

Question 15

The Company Act 2006 is a UK law which means this concerns England, Scotland, Wales, and Northern Ireland.

Answer 15

This is heavily controlled by statute and subordinate (secondary) legislation which means that most case law has been quantified into the Companies Act 2006.

Question 16

Why do we have Company Law?

Answer 16

It is concerned with the power, rights, duties, and liabilities of companies.

Also concerns those who are closely connected with the company for example the owners of the company.

The main thing is it regulates the relationships with those who are involved with the company. For example the relationship between the company and its managers.

Also tries to protect the creditors of the company as certain types of companies can have limited liability which the owners will have not the actual company itself. This means that the creditors will need extra protection due to limited lability companies.

Question 17

Classification of Corporations

We are going to focus on

Registered Companies which include Public and Private companies.

Answer 17

These are concerned with the Companies Act 2006 and earlier versions.

Question 18

The Liability of a company

Answer 18

A company will always be 100% liable for its debts and obligations

Question 19

The liability of its members

Answer 19

The liability of members may be limited.

• Unlimited liability (rare) only concerns private companies
• Members of a company agree to limited their liability to an agreed amount of money (limited liability)

In the form of either shares or guarantee

Question 20

The types of companies which can be created under the Companies Act 2006

Answer 20

• Limited liability and Unlimited (private) Companies

Question 21

What are limited liability companies limited from the members (owners)?

Answer 21

• Limited by share (Private& Public)

- Limited by guarantee (Private)

Question 22

Reasons why you would choose to be part of an Unlimited Liability company

Answer 22

Although members of unlimited liability companies are responsible for the debts and obligations for the company and there is little protection against them.

People choose this as members dont need to reveal too much about their affairs. For example don’t want to publish or make available things such as financial performance or accounts.

Question 23

Types of companies & members liability

Private limited Company

Members limited by shares (benefit from separate legal personality)

Answer 23

Share issue - only to members

Members liability in event of insolvency - Members are limited to any outstanding amount they still owe for the shares

Example- Volkswagen Group UK limited

Question 24

Types of companies & members liability

Private limited Company

Members limited by guarantee (mostly non-profit organisations)

Answer 24

Share issue- No share capital

Members liability in event of insolvency- Limited to the amount they guaranteed to pay in the event of a winding up

Example- Oxfam, Network Rail

Question 25

Types of companies & members liability

Private Unlimited limited Company

Answer 25

Share Issue- Only available to members (who wish to purchase shares)

Members liability in event of insolvency- Unlimited. Members are liable for everything.

Example- Equitable Life Assurance Society

Question 26

Types of companies & members liability

Public Company

Limited by shares

Answer 26

Share issue - Offered to members and public

Members liability in event of insolvency- Limited to any outstanding amount the individual member still owes for the shares.

Example- Tesco, BP

Question 27

A public company is a company registered as such under the Companies Act with the Registrar . Any company not registered as public is a private company.

Question 28

Classification of small and medium- sized private companies

Answer 28

Private companies are divided into small and medium sized companies.

This is further divided into two small categories and two medium categories.

Question 29

A small & medium sized company must be within the limits of these two or thresholds. However new companies do not need to meet these thresholds until after 2 financial years.

Answer 29

• Turnover
• Balance Sheet (Total Assets of the business)
• Employees

Question 30

A small company thresholds

Answer 30

Turnover- £10.2 m

Balance sheet- £5.1 m

Employees- 50

Question 31

A small groups thresholds

Answer 31

Turnover- Plus 20% of a small company (£10.2m)

Balance Sheet- Plus 20% of a small company (£5.1m)

Employees- 50

Question 32

A Medium Company thresholds

Answer 32

Turnover- £36 m

Balance Sheet- £18 m

Employees- 250

Question 33

A Medium group thresholds

Answer 33

Turnover- Plus 20% of a medium company (£36m)

Balance Sheet- Plus 20% of a medium company (£18m)

Employees- 250

Question 34

Why do we need to know the different between different small and medium sized private companies?

Answer 34

Because of administrative reasons small and medium sized companies can enjoy administrative benefits.

For example they are aloud to file simpler accounts eg abbreviated accounts, don’t need to into much detail with accounts (don’t require an auditor).

Will save the company time and money.

Question 35

Comparison between Public and Private limited Companies.

Public Companies

Part 1

Answer 35

Names - ‘Plc/ Public limited company’

No of members- Minimum 2

Share Capital- Minimum £50,000 (one quarter must be paid up of this when registering the company)

Share Dealings- Unrestricted right to offer/sell shares to public
(listed/ quoted company. Shares can be listed on The Stock Exchange)

Share Transfer- At members discretion

Company Officers- At least 2 directors (age 16 or over)
& a company secretary (qualified) (eg solicitor, professional accountant)

Question 36

Comparison between Public and Private limited Companies

Public Company

Part 2

Answer 36

Accounts - Must be created & audited within 6 months after their financial year end.

Must also be filled with the Registrar or Companies and publish full accounts and reports on its website. (full transparency of their activities)

Commencement (starting up the business & borrowing)-
Must have a trading certificate from Registrar before commencing trading.

Loans to directors (& persons connected with directors) - Prohibited (some exemptions, requires members approval)

General Meeting- Must hold one within 6 months after their financial year end

Question 37

Comparison between Public and Private limited Companies

Public Company

Part 3

Answer 37

Written Resolutions (this allows board and shareholders decisions to be made without holding a meeting) - N/A

Payment for shares- Additional rules may apply, including that shares must be at least 1/4 paid up

Reduction of capital (important topic) - Needs special resolution confirmed by the court (stricter rules compared to private companies)

Power to redeem or purchase shares out of the capital- N/A (in reference to those associated with the company eg directors)

Question 38

Comparison between Public and Private limited Companies.

Private Companies

Part 1

Answer 38

Name- Ltd/Limited

No of members- Minimum 1

Share Capital- No minimum

Share Dealings- No public sale (prohibited)

Share Transfer- Pre-emption rights (will be stated in the articles of association) (when a member wishes to sell or transfer ownership of shares they must offer these shares to the existing members first)

Company Officers- 1 Director (16 years or over)
No requirement to have a company secretary (if one is appointed they don’t need to be qualified)

Question 39

Comparison between Public and Private limited Companies

Private Company

Part 2

Answer 39

Accounts -Must be created and audited within 9 months after their financial year end (however may have partial exemption depending on the size eg small group, small company)

Commencement (starting up the business)- Can trade immediately (as soon as it is incorporated and receives the Certificate of Incorporation)

Loans to Directors- Not so restricted compared to public companies

General Meeting- Not required (unless Articles of Association requires)

Question 40

Comparison between Public and Private limited Companies

Private Company

Part 3

Answer 40

Written resolutions- May pass written resolutions instead of calling meetings.

Small and medium sized companies- May qualify as being a small or medium company which means they can take advantage of audit exemptions (small companies) and less stringent regime on filing

Reduction of capital- Needs only special resolution and directors solvency statement (directors believe there is no reason for the company to become insolvent in upcoming years (1 year) )

Power to redeem or purchase shares out of capital- May do so, subject to conditions (could redeem shares or purchase shares out of capital)

Question 41

Company Formation

Answer 41

When forming a company must follow the provisions from the Company Act 2006.

Question 42

A company promoter

Answer 42

The Companies Act 2006 involves a strict procedure which companies must comply with before they can operate legally. The person/s who undertake such procedures are the promoters.

A promoter is a person who promotes a business project through the medium of a company. They will take the necessary steps to incorporate a company by registration under the Companies Act 2006.

This involves eg

• Authorise the drafting of legal documents ( eg Articles of Association)
• Nominate directors, solicitors, bankers & other agents

Question 43

What type of relationship does the company promoter have with the company?

Answer 43

A fiduciary relationship. This means the promoter will have to act for the benefit of the company and their relationship is based on trust.

Question 44

A Company promoter

Pre-incorporation contracts

Answer 44

This is when the promoter makes a contract for the company before its incorporation (the company does not yet have a legal existence therefore has no capacity to make contracts)

Remember we are talking about an artificial legal person. This does not yet exist until the company becomes incorporated.

Question 45

A Company promoter

Pre-incorporation contracts

Consequences

Answer 45

• When the company is formed they are not bound by the contract.
• The company is unable to sue the third party (not a legal person, company doesn’t yet exist)
• Cannot ratify the agreement
• Any agreements made will still take effect as this was made between the promoter and the 3rd party. (however since this contract was created before the company existed this means the promoter will be personally liable)
• However there is a way the promoter can be protected and this can be through the process of novation.

Question 46

A company promoter

Pre-incorporation Contracts

Process of Novation

Answer 46

In this situation the promoter and the third party can make an agreement that once the company is actually incorporated the company will enter in a new contract with the third party on the same terms. Will release the promoter from personal liability

Question 47

Company Formation

Necessary documents to register the company

Answer 47

• Memorandum of association
• Application for registration
• A statement of capital and initial shareholding OR a statement of guarantee (will only be require for companies who provide shares)
• A statement of the company’s proposed officers
• A statement of compliance (will declare the appropriate statutory requirements have been complied with)
• A copy of any proposed articles of association

Question 48

Company Formation

What is a Memorandum of association?

Answer 48

Memorandum of association provides evidence of the intention of the subscribers to form a company and become members of a particular company.

Expresses the intention of the subscribers that they wanted to form and become members of a particular company

In the case of companies limited by shares it also provides an evidence that the members agreed to take at least one share from the new company

Question 49

Company Formation

What is included in the Application for registration?

Answer 49

• A statement of the company’s proposed name
• Conformation where the company’s registered office is to be situated
• Confirmation as to whether the liability of the members is to be limited (either by shares or guarantee)
• Confirmation as to whether the company is public or private
• A statement of the name and address of the agent of the company in the incorporation
• Registration Fees ( 3 Company Registrar offices in the UK)

Question 50

Company Formation

What are Articles of Association?

Answer 50

This is a document containing things such as the provisions on the company name, company purpose, share capital, shareholder meetings ect…

A copy of any proposed articles of association
does not have to be delivered to the registrar of companies house.

The company will have to adopt a so called model articles of association and if the company is happy with these articles and its content then they will not need to submit anything to the registrar.

Question 50

Company Formation

What are Articles of Association?

Answer 50

This is a document containing things such as the provisions on the company name, company purpose, share capital, shareholder meetings ect…

A copy of any proposed articles of association
does not have to be delivered to the registrar of companies house.

The company will have to adopt a so called model articles of association and if the company is happy with these articles and its content then they will not need to submit anything to the registrar.

Question 51

Company Formation

What happens once the Registrar of companies is satisfied with the new company?

Answer 51

A certificate of incorporation is issued by the Registrar of Companies.

The date on the certificate is when the company became a corporate body with a separate legal personality (Remember this is an artificial person).

The Registrar will also need to publish a notice of issue of the companies incorporation which will be found in The Gazette. (can see the companies and dates they were incorporated).

Question 52

Not every new company needs to be registered as there is a possibility to purchase a pre registered company “off the shelf”

Answer 52

You can purchase a pre registered company and alter relevant parts.

Has advantages as it will be a much faster process

From the promoters point of view pre-registered companies will be good as they can avoid and potential liability which may arise from pre incorporation contracts.