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Saturday 4 th August 2012. COMPANY LAW (INCORPORATION). The kind of legal entity or corporate body which is brought into being by the registration procedures laid down by the Companies Act 2006

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Saturday 4 th august 2012

Saturday 4th August 2012

COMPANY LAW(INCORPORATION)

Lecturer: RowinGurusami


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

COMPANY LAW

Lecturer: Rowin Gurusami


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)

LEGAL PERSON

Lecturer: Rowin Gurusami


Salomon v salomon co ltd 1897

SALOMON natural persons to act as if they were a single composite individual for certain purposesv. Salomon & Co LTd (1897)

Lecturer: Rowin Gurusami


Facts

Price of business = £ 39,000 natural persons to act as if they were a single composite individual for certain purposes

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

FACTS

Lecturer: Rowin Gurusami


Broderip v salomon 1895

In natural persons to act as if they were a single composite individual for certain purposesBroderip 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 debts

The concept of the “one-person company”

BRODERIP v. SALOMON [1895]

Lecturer: Rowin Gurusami


Salomon v salomon co ltd

Mr Salomon appealed to the House of Lords natural persons to act as if they were a single composite individual for certain purposes

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)

SALOMON v. SALOMON & CO LTD

Lecturer: Rowin Gurusami


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

WHY IS THIS CASE IMPORTANT?

Lecturer: Rowin Gurusami


Other relevant cases

Macaura is irrelevant 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.

OTHER RELEVANT CASES

Lecturer: Rowin Gurusami


Limited liability

Enacted by the Limited Liability Act 1855 is irrelevant

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

LIMITED LIABILITY

Lecturer: Rowin Gurusami


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

LIFTING THE VEIL OF INCORPORATION

Lecturer: Rowin Gurusami


Statutory examples

s213 of Insolvency Act 1986 states that any person involved in fraudulent trading can be made liable for resulting losses

This 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

Lecturer: Rowin Gurusami


Statutory examples1

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

STATUTORY EXAMPLES

Lecturer: Rowin Gurusami


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

Lecturer: Rowin Gurusami


Veil lifting by courts1

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

VEIL LIFTING BY COURTS

Lecturer: Rowin Gurusami


Types of company

Public Company Council [1976] – 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)

TYPES OF COMPANY

Lecturer: Rowin Gurusami


Public v private companies

Capital Council [1976]

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

Lecturer: Rowin Gurusami


Public v private companies1

Accounts Council [1976]

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

PUBLIC v. PRIVATE COMPANIES

Lecturer: Rowin Gurusami


The promoter

Person who takes the necessary steps to form a company Council [1976]

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

Lecturer: Rowin Gurusami


The promoter1

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

THE PROMOTER

Lecturer: Rowin Gurusami


Role of the promoter

Registering the company with Companies House activities relate to promotion of a company

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

ROLE OF THE PROMOTER

Lecturer: Rowin Gurusami


Duties of promoter

Promoter is activities relate to promotion of a companyNOT 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

Lecturer: Rowin Gurusami


Duties of promoter1

Promoter must not make secret profit from his position activities relate to promotion of a company

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

DUTIES OF PROMOTER

Lecturer: Rowin Gurusami


Pre incorporation contracts

Company only comes into existence once incorporated activities relate to promotion of a company

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

Lecturer: Rowin Gurusami


Pre incorporation contracts1

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

PRE-INCORPORATION CONTRACTS

Lecturer: Rowin Gurusami


Registration

Memorandum of Association a putative company will be held personally liable unless clearly and expressed stated to the contrary (

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 compliance

Registration fee (£20 or £50 if same day incorpor.)

REGISTRATION

Lecturer: Rowin Gurusami


Lecturer: Rowin Gurusami a putative company will be held personally liable unless clearly and expressed stated to the contrary (


Trading certificate

For Public Companies only a putative company will be held personally liable unless clearly and expressed stated to the contrary (

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

TRADING CERTIFICATE

Lecturer: Rowin Gurusami


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

NAME OF COMPANY

Lecturer: Rowin Gurusami


Passing off

If 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

PASSING-off

Lecturer: RowinGurusami


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

MEMORANDUM OF ASSOCIATION

Lecturer: Rowin Gurusami


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.

OBJECTS & CAPACITY

Lecturer: Rowin Gurusami


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

ARTICLES OF ASSOCIATION

Lecturer: Rowin Gurusami


Alteration of articles

Through special resolution (75% majority) company; i.e. internal management and running of company

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

ALTERATION OF ARTICLES

Lecturer: Rowin Gurusami


The constitution

AoA company; i.e. internal management and running of company 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

Lecturer: Rowin Gurusami


The constitution1

Constitution is not binding upon an outsider ( company; i.e. internal management and running of companyEley 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))

THE CONSTITUTION

Lecturer: Rowin Gurusami


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

STATUTORY BOOKS & RECORDS

Lecturer: Rowin Gurusami


Registers

Register of Members registers, : 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

Lecturer: Rowin Gurusami


Registers1

Register of Directors registers, : 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

REGISTERS

Lecturer: Rowin Gurusami


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

ACCOUNTING RECORDS

Lecturer: Rowin Gurusami


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 fines

ANNUAL ACCOUNTS

Lecturer: Rowin Gurusami


Annual return

Every company must make an annual return to Registrar lay them and various reports before members and file them with Registrar’s (following directors’ approval)

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

ANNUAL RETURN

Lecturer: Rowin Gurusami


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)

COMPANY SECRETARY

Lecturer: RowinGurusami


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)

POWERS AND AUTHORITY

Lecturer: RowinGurusami


Company auditor

P agents to exercise apparent or ostensible authorityrofessional 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

COMPANY AUDITOR

Lecturer: RowinGurusami


Exemption from audit

Company is exempted from audit if: agents to exercise apparent or ostensible authority

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

EXEMPTION FROM AUDIT

Lecturer: RowinGurusami


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 limitthe 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 reasonablehaving regards to auditor’s responsibilities, contractual obligations and professional standards

AUDITORS’ LIABILITY

Lecturer: RowinGurusami


Removal from office

Resolution can be proposed to: seeks to indemnify auditor for their own negligence, default, or breach of duty of trust is

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

REMOVAL FROM OFFICE

Lecturer: RowinGurusami


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