COMPANY LAW (INCORPORATION)

COMPANY LAW(INCORPORATION)

Saturday 4th August 2012

Lecturer: Rowin Gurusami


COMPANY LAW

The kind of legal entity or corporate body which is brought into being by the registration procedures laid down by the Companies Act 2006

Company law is about interactions between a company, the company’s members (shareholders), its directors, and its creditors (secured & unsecured)

A company is a legal person


LEGAL PERSON Legal mechanism through which the law allows a group of natural persons to act as if they were a single composite individual for certain purposes

That single composite individual has a separate legal personality other than that of its members

This legal fiction means the law allows those ‘entities’ to act as persons for certain limited purposes

IMPORTANT – Salomon v. Salomon & Co Ltd (1897)


SALOMON V. SALOMON & CO LTD (1897)


FACTS Price of business = £ 39,000 Payment was £ 20,000 in shares, £ 10,000 debentures and £ 9,000 cash Mr. Salomon held 20,001 shares, his family held the remaining 6 shares Debentures later transferred to Mr. Broderip Business went into insolvent liquidation Assets not enough to pay off debentures Mr. Broderip brought claim alleging that company was but a sham and a mere ‘alias’ of Mr. Salomon


BRODERIP V. SALOMON [1895]

In Broderip v Salomon [1895], the CoA held upheld Broderip’s claim CoA looked at motives of promoters (Salomon) and members (Salomon and family) Held that six members never intended to take part in business Mr. Salomon was held to be liable to indemnify company against its trading debts debts CoA was disturbed that an individual could avoid responsibility for one’s debtsThe concept of the “one-person company”


SALOMON V. SALOMON & CO LTD Mr Salomon appealed to the House of Lords HoL unanimously reversed the CoA’s decision Held that company was valid formed according to Joint Stock Companies Act 1844 (requiring 7 members) Motives of shareholders irrelevant (unless fraud involved) Salomon was the agent of the company (not vice versa) Company acquired legal personality although nothing changed (business, managers, who benefits)


WHY IS THIS CASE IMPORTANT? Fact that shareholders only holding shares as technicality is irrelevant This facilitated investment in large companies by shareholders for pure speculative purposes

ANY company formed in compliance with regulations of Companies Act is a separate person

Use of debentures instead of shares provide further protection to investors

One of the rare principle that HoL cannot overrule


OTHER RELEVANT CASES Macaura v Northern Assurance Co [1925] – Property of company belongs to it and not to its members

Lee v Lee’s Air Farming Ltd [1961] – Privy Council held that a company may make a valid and effective contract with one of its members.Thus possible for one person to be at same time wholly in control of company and an employee of that company

The rule in Foss v Harbottle (1843): Only the company can sue for wrong caused to it.


LIMITED LIABILITY Enacted by the Limited Liability Act 1855

Concept whereby a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability

A shareholder in a limited company is not personally liable for any of the debts of the company, other than for the value of his investment in that company


LIFTING THE VEIL OF INCORPORATION

Situations where the judiciary or legislature has decided that separation of personality of company and the members is not to be maintained

Possibility to look behind the company-framework (separate personality) to make members liable

Doctrine of Salomon v Salomon & Co. Ltd still unshakeable


STATUTORY EXAMPLES s213 of Insolvency Act 1986 states that any person involved in fraudulent trading can be made liable for resulting lossesThis provision requires “actual dishonesty...real moral blame” to be proved and this was difficult

s214 of IA 1986 deals with directors and ‘wrongful’ trading, where it is negligence rather than fraud that matters Mainly in cases where director trades when not reasonable anymore to do so (Re Produce Marketing Consortium Ltd (No 2)(1989))


STATUTORY EXAMPLES Companies Act 2006 s399 – companies to produce group account CA 2006 s409 – parent to provide details of subsidiaries’ names and details

CA 2006 s767 – directors personally liable for loss/damage suffered by 3rd party if public company trades without first obtaining trade certificate


VEIL LIFTING BY COURTS Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd [1916] – To determine whether company to be characterised as ‘enemy’ in time of war

Re Darby, ex p Brougham [1911] – If company used as means to perpetrate fraud

Gilford Motor Co Ltd v Horne [1933] & Jones v Lipman [1962]– To prevent deliberate evasion of contractual obligation


VEIL LIFTING BY COURTS DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] – To allow group of associated companies to be treated as one Lord Denning outlined the concept of the ‘single economic unit’, wherein the court examined the overall business operation as an economic unit

Adams v Cape Industries plc [1990] showed the reluctance of the courts to extend the rule in DHN where there was no motive to commit fraud and where subsidiaries are run independently free from day to day control of parent


TYPES OF COMPANY Public Company – intention to raise large amounts of money from general public Private Company – investment largely provided by founding members (personal savings or loans) Unlimited liability company – only private Liability Limited by shares – members’ liability limited to amount paid for shares Liability Limited by guarantee – members’ liability is amount which each member undertakes to contribute in winding up. Mainly used for non-commercial activities (e.g. charities)


PUBLIC V. PRIVATE COMPANIES Capital-Public: Minimum £ 50,000-Private: No minimum- Only public company can raise capital by offering shares/debentures to public

Only public company can be listed on Stock Exchange

Public company must wait for trading certificate from Registrar


PUBLIC V. PRIVATE COMPANIES Accounts-Public: 6 months from end of accounting period to produce statutory audited accounts-Private: 9 months-Listed public company must have full accounts and reports on website-Public co. must present accounts/reports at AGM

Private companies not required to hold AGM. Public companies must hold one within 6 months of end of financial year


THE PROMOTER Person who takes the necessary steps to form a company

Whaley Bridge Calico Printing Co v Green (1879): “the term promoter is a term not of law, but of business, usefully summing up in a single word a number of business operations ... by which a company is generally brought into existence.”

No definition of promoter by CA 2006


THE PROMOTER Courts have framed tests to determine whether a person’s activities relate to promotion of a company

Twycross v Grant (1877): “promoter is one who undertakes to form a company with reference to a given project, and to set it going and who takes the necessary steps to accomplish that purpose”

Definition left as general as possible as anti-avoidance measure


ROLE OF THE PROMOTER Registering the company with Companies House

Entering into pre-incorporation contracts

In the case of public companies, issuing a prospectus

Appointing directors and finding shareholders wishing to invest in the new company


DUTIES OF PROMOTER Promoter is NOT an agent of the company he is promoting (Kelner v Baxter (1866))

Promoter is a fiduciary (i.e. owing certain obligations to the principal)

Fiduciary must act to secure the principal’s best interest and must not allow his own interests to govern his behaviour in any way that could conflict with the principal’s best interests


DUTIES OF PROMOTER Promoter must not make secret profit from his position

Must disclose any interest in property sold to company and make full disclosure of any profit (Re Lady Forrest (Murchison) Gold Mine Ltd (1901))

Promoters required to make full disclosure of any such profit to an independent board of directors once company comes into existence (Erlanger v New Sombrero Phosphate Co). Failure to do so can lead to rescission of the contract


PRE-INCORPORATION CONTRACTS

Company only comes into existence once incorporated

Any contract made by promoter on behalf of unincorporated body will make the promoter liable (Kelner v Baxter (1866))

Even through the contract was ratified in Kelner, the Court rejected the approach that a stranger could, through ratification, relieve an agent of responsibility


PRE-INCORPORATION CONTRACTS

s51 CA 2006 states that promoters contracting on behalf of a putative company will be held personally liable unless clearly and expressed stated to the contrary (Phonogram Ltd v Lane (1981))

Contracts (Rights of Third Parties) Act 1999 DOES NOT protect the promoter from liability

Novation removes the promoter’s liability


REGISTRATION Memorandum of Association Articles of Association Application form (detailing name of company, form of limited liability, public or private, registered office) Statement of capital and initial shareholdings (no. Of shares, aggregate nominal value, how much paid up) Statement of proposed officers (directors, company secretary) Statement of complianceRegistration fee (£20 or £50 if same day incorpor.)


TRADING CERTIFICATE For Public Companies only Conclusive evidence that company is entitled to do business and exercise any borrowing powers

Requires:-Nominal capital at least £ 50,000-At least quarter of nominal value paid up-Amount of preliminary expenses paid for-Any benefits given or to be given to promoters


NAME OF COMPANY

All private companies must end with ‘Ltd’ and all public companies must end with ‘plc’ Cannot be a name already registered Must not use illegal or offensive words Requires Secretary of State’s consent if using words suggesting connection with government Must avoid tort of passing off

PASSING-OFFIf name suggests that company is carrying on the business of complainant or is otherwise connected with it.Company can be prevented by an injunction issued by court in passing-off action from using its registered name, if its goods are confused with those of the claimant.

-Objection has to be made to Company Names Adjudicator under the Companies Act 2006.-Adjudicator will review the case.-Within 90 days make their decision and provide reasons-May require offending company to change its name-May even determine the new name-Appeal against decision may be made in court



MEMORANDUM OF ASSOCIATION Simple document which states that subscribers wish to form a company and become members of it

Not so important since advent of CA 2006 because much of information in MoA is now found in AoA (objects not even required to be mentioned)

Object of a company is now considered as completely unrestricted under CA 2006

OBJECTS & CAPACITY Under Companies Act 2006, company’s objects are completely unrestricted (as long as lawful).

The company can restrict its activities by including restrictions in its articles.

If directors permit an act which is restricted by company’s objects, then the act is ultra vires.

Ultra vires: where a company exceeds its objects and acts outside its capacity.



ARTICLES OF ASSOCIATION Articles of Association sets the internal constitution of company; i.e. internal management and running of company

Deals with issues like directors (appointment, termination, powers, remuneration), documents and records, members’ rights, general meetings, shares (issue and transfer), dividends and so on...

Secretary of State prescribes Model Articles which can be adopted in full or in part Model Articles deemed accepted if none filed


ALTERATION OF ARTICLES Through special resolution (75% majority) Copies must be sent to Registrar within 15 days

Any change must only be bona fide in interests of the company as a whole (Allen v Gold Reefs of Africa (1900))-Members decide if change bona fide-Court will only interfere if no reasonable person believe change to be bona fide-If change bona fide, irrelevant whether it is harsh- Void if fraud takes places

THE CONSTITUTION AoA constitute a contract between:-Company and members-Members and company-Members and members

Company’s constitution does not bind company to third parties

s33 gives to constitution the effect of a contract made between the company and its members individually and impose contract on members dealing with each other(Rayfield v Hands (1958))


THE CONSTITUTION Constitution is not binding upon an outsider (Eley v Positive Government Security Life Assurance Co (1876))

The constitution does not bind members in any other capacity (Beattie v EF Beattie (1938))

Constitution can be used to establish terms of contract existing elsewhere (Re New British Iron Co, ex parte Beckwith (1898))


STATUTORY BOOKS & RECORDS Greater public accountability via Companies Registry, registers, London Gazette and company letterheads

Registrar keeps a file at Companies House holding all documents delivered by the company for filing. Any member of public can inspect them

Registers held at registered office of company


REGISTERS Register of Members: name, address, shareholder class, no. of shares, date membership started Inspection free for other members, payable for public

Register of Charges: details of fixed or floating charges, brief descriptions of property charged, amount of charge, name of creditor Any person can inspect (members and creditors for free


REGISTERS Register of Directors: present and former forenames and surnames, service address, residency and nationality, business occupation & date of birth Must keep separate register of residential address

Register of Debentureholders: No statutory obligation

Record of Directors’ service contracts: Copies available to members for viewing


ACCOUNTING RECORDS Sufficient accounting records to explain company’s transactions and its financial position (i.e. Profit and loss account and balance sheet)-Daily entries of sums paid & received-Record of assets & liabilities-Statements of stock at end of financial year-Statements of stocktaking-Statements of goods bought and sold

Records to be kept for 3 years (private) & 6 years (public)Shareholder do not have statutory right to inspect records, but it may be granted by articles


ANNUAL ACCOUNTS Must prepare annual accounts showing true and fair view, lay them and various reports before members and file them with Registrar’s (following directors’ approval)

Must show true and fair view of assets, liabilities, financial position, profit and loss

Accounts must be audited; the reports, together with directors’ report, supplied to members

Failure to comply result in finesLecturer: Rowin Gurusami

ANNUAL RETURN Every company must make an annual return to Registrar-address of registered office-Address of where register of members held-Type of company and principal business activities-Total no. of issued shares, nominal value-Rights of shares-Particulars of members-Particulars of those who ceased to be members-Particulars of directors and company secretary


COMPANY SECRETARY Senior position in a private or public company, normally in the form of a managerial position or above

Ensures that an organisation complies with relevant legislation and regulation, and keeps board members informed of their legal responsibilities

Every public company MUST have a company secretary (usually one of officers or directors)

Private companies not required to (the role of the company secretary may be done by one of the officers)


POWERS AND AUTHORITY

Common law increasingly recognises that they may act as agents to exercise apparent or ostensible authority

They can enter into contracts connected with administrative side of company (Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd 1971)

Secretary cannot extend contracts to commercial purposes (Re Maidstone Building Provisions 1971) and cannot borrow money on behalf of company (Re Cleadon Trust Ltd 1938)


COMPANY AUDITOR Professional who performs an audit on the financial statements of a company, and who is independent of the entity being audited

An audit is a check on the stewardship of directors

Membership of a Recognised Supervisory Body is main prerequisite for eligibility as auditor (ICAEW, ICAS or ACCA)

Audit firm may be either a body corporate, partnership or sole practitioner


EXEMPTION FROM AUDIT Company is exempted from audit if:

- Turnover for that year is not more than £6,500,000 and balance sheet total is not more than £3.26 million(this does not apply to public companies, banking/insurance companies or those subject to statute-based regulatory regime)- Company is non-commercial, non-profit making public sector body subject to audit by public sector auditor- Dormant company

Members holding 10% or more of capital of any company can veto the exception


AUDITORS’ LIABILITY Under s532, any agreement between auditor and company that seeks to indemnify auditor for their own negligence, default, or breach of duty of trust is void

s534 allows agreements that seek to limit the auditor’s liability to the company. Those agreements can only stand for one financial year and must be replaced annually. Must be approved by members and publicly disclosed in accounts or directors’ report

Liability can only be limited to what is fair and reasonable having regards to auditor’s responsibilities, contractual obligations and professional standards


REMOVAL FROM OFFICE Resolution can be proposed to:-Remove auditors before term of office expires-Change auditors when term of office is complete

Auditors have the right to make representations of reasonable lengths to the company

The company must:-Notify members in the notice of meeting of representations-Send a copy of representation in the notice-If not sent out, auditors can require it is read at meeting

Auditors removed before expiry of office can attend meeting at which office expires or meeting at which appointment of successors is discussed


COMPANY LAW (INCORPORATION)

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