The nature of the company and its formation Flashcards
Formation of companies
Companies Act 2006
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. The company must be registered with the Registrar of companies.
Company Law exists as it is concerned with the power, rights, duties, and liabilities of companies. The main reason for this statute is that it regulates the relationships with those who are involved with the company eg the relationship between the company and its managers.
It also tries to protect creditors of the company as certain companies have limited liability which only the owners hold. This means that creditors will require extra protection against LL companies.
Registration process of companies (4 requirements)
- Promoter
- Necessary documents
- Registrar of Companies
- Certificate of incorporation
Company Promoter
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 for example
- Authorise the drafting of legal documents (eg Articles of Association)
- Nominate directors, solicitors, bankers & other agents
The promoter has a fiduciary relationship with the company meaning that they will need to act for the benefit of the company.
Pre-incorporation contracts (effects the promoter)
Consequences
If a contract is made by the promoter before it is incorporated, then it does not valid because the company does not yet have a legal existence.
Consequences
• 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, the 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.
Novation: third party can make an agreement that once the company is incorporated the company will enter into a new contract with the same terms releasing the promoter from personal liability
Necessary Documents (6 documents)
- 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
Memorandum of Association (external document provides information to third parties)
This provides evidence of the intention of the subscribers to form a company and become members of a particular company. It Expresses the intention of the subscribers that they wanted to form and become members of a particular company.
Articles of Association (internal document regulates internal affairs)
This is a document containing things such as the provisions on the company name, purpose, share capital, shareholder meetings ect. A copy of this does not need to be delivered to the registrar of companies house.
If a company doesn’t create their own articles of association then the company will have to adopt so-called model articles of association.
Registrar of Companies
Once all of the necessary documents have been submitted to the registrar and they are satisfied a certificate of incorporation is issued by the registrar. The date of the certificate is when the company becomes a corporate body and has a separate legal personality.
