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COMPANY LAW - LECTURE NOTES
I. INTRODUCTION TO INCORPORATION
1. Definition of a "Company" A company is a "corporation" - an artificial person created by law. A human being is a "natural" person. A company is a "legal" person. A company thus has legal rights and obligations in the same way that a natural person does. 2. Companies and Partnerships Compared (a) A company can be created only by certain prescribed methods - most commonly by registration under the Companies Act 1985. A partnership is created by the express or implied agreement of the parties, and requires no formalities, though it is common to have a written agreement. (b) A company incurs greater expenses at formation, throughout its life and on dissolution, though these need not be excessive. (c) A company is an artificial legal person distinct from its members. Although in Scotland a partnership has a separate legal personality by virtue of s.4(2) of the Partnership Act 1890, this is much more limited than the personality conferred on companies. (d) A company can have as little as one member and there is no upper limit on membership. A partnership must have at least two members and has an upper limit of 20 (with some exceptions). (e) Shares in a company are normally transferable (must be so in a public company). A partner cannot transfer his share of the partnership without the consent of all the other partners. (f) Members of a company are not entitled to take part in the management of the company unless they are also directors of it. Every partner is entitled to take
part in the management of the partnership business unless the partnership agreement provides otherwise. (g) A member of a company who is not also a director is not regarded as an agent of the company, and cannot bind the company by his actions. A partner in a firm is an agent of the firm, which will be bound by his acts. (h) The liability of a member of a company for the debts and obligations of the company may be limited. A partner in an ordinary partnership can be made liable without limit for the debts and obligations of the firm. (i) The powers and duties of a company, and those who run it, are closely regulated by the Companies Acts and by its own constitution as contained in the Memorandum and Articles of Association. Partners have more freedom to alter the nature of their business by agreement and without formality, and to make their own arrangements as to the manner in which the firm will be run. (j) A company must comply with formalities regarding the keeping of registers and the auditing of accounts which do not apply to partnerships. (k) The affairs of a company are subject to more publicity than those of a partnership - e.g. companies must file accounts which are available for public inspection. (l) A company can create a security over its assets called a floating charge, which permits it to raise funds without impeding its ability to deal with its assets. A partnership cannot create a floating charge. (m) If a company owes a debt to any of its shareholders they can claim payment from its assets rateably with its other creditors. A partner who is owed money by the partnership cannot claim payment in competition with other creditors. (n) A partnership (unless entered into for a fixed period) can be dissolved by any partner, and is automatically dissolved by the death or bankruptcy of a partner, unless the agreement provides otherwise. A company cannot normally be wound up on the will of a single member, and the death, bankruptcy or insanity of a member will not result in its being wound up.
- History
"Limited Liability" - this refers to the liability of the members, not the liability of the company. The company will always be liable to the full extent of its debts. The liability of the members, whether limited or unlimited, is to the company, not to the individual creditors of the company. (a) Unlimited Companies (i) Members have unlimited liability (If company is being wound up, members can be made to contribute to the company’s assets without limit to enable it to pay its debts.) (ii)Cannot be public companies. (iii)Can be set up with or without a share capital. (iv)Not subject to the same restrictions on alteration of capital as other types of company, and do not normally have to file annual accounts. (b) Companies Limited by Guarantee (i) Members agree to contribute a specified amount to the company’s assets in the event of the company being wound up. (Total amount payable by all members is called the "guarantee fund") (ii) Members do not have to pay anything as long as company is a going concern - so company has no contributed capital. (iii) Companies limited by guarantee are not usually formed for business ventures. (iv) Prior to 1980, a company could be registered as a company limited by guarantee, but also have a share capital - these are called "hybrid companies". (c) Companies Limited by Shares (i) The most common kind of registered company. (ii)Members of the company take shares issued by the company. Each share is assigned a nominal value - the amount that must be paid to the company for the share. Members may also agree to pay an extra amount - called a premium.
(iii)When the company is registered, its memorandum must state the total nominal value of all the shares it is going to issue (called the registered capital, or nominal capital or authorised share capital). The memorandum also states the number of shares to be issued: e.g. 10,000 shares of £1 each = registered capital of £10,000. (iv)Liability of a member (shareholder), when the company is wound up is limited to the amount, if any, of the nominal value of his shares which has not been paid. ( Shareholder is also contractually bound to pay any premium which has not been paid). (v) Shares are normally partly or fully paid for when issued, so company will have a contributed capital. Companies Limited by Shares may be Public or Private (i) Public Companies CA 1985, s.1(3): "a company limited by shares which has a memorandum stating that it is to be a public company and which complies with the requirements of the Act for registration as a public company." Main requirements:
- A company cannot be registered as a public company unless it has a minimum allotted share capital of £50,000, at least one quarter of which has actually been paid.
- A public company must have at least two shareholders and at least two directors. (ii) Private Companies CA 1985 defines a private company as "any company that is not a public company". Private companies have no authorised minimum share capital. A private company is only required to have one director and, since 1992, it can be formed with only one member.
Erlanger v New Sombrero Phosphate Co (Case 3) Right of recission is lost if restitutio in integrum is not possible. (ii)The promoter may have to account to the company for any profit he has made. Gluckstein v Barnes (Case 4) (iii)The company may be able to sue the promoter for damages for breach of fiduciary duty. Re Leeds & Hanley Theatre of Varieties (Case 5) (d) Payment of Promoters A company cannot enter into a contract before incorporation - so a promoter has no legal claim against the company for fees and expenses. In Scotland, memorandum or articles of the company can be drawn up with a provision that the company will pay fees and expenses incurred in promoting the company. (e) Suspension of Promoters Company Directors Disqualification Act 1986, s.2(1) The court can make a disqualification order against a person who has been convicted of an indictable offence in connection with the promotion, formation or management of a company. The order can be for a maximum of 15 years - a person who is disqualified is prohibited from directly or indirectly taking part in the promotion or formation of a company.
- Pre-Incorporation Contracts A company has no contractual capacity prior to incorporation - so contracts cannot be made on its behalf. (a) Effect of Pre-Incorporation Contract on the Company Company cannot be bound to the contract because it had no contractual capacity.
Company cannot ratify the contract because it was not in existence at the time the contract was made. Company cannot sue or be sued on the contract. (b) Effect of Pre-Incorporation Contract on Person Purporting to Contract on Behalf of the Company At Common Law:
- if third party knew company was not yet in existence, he could make the purported agent liable on the contract. (Kelner v Baxter).
- if it appeared that the contract was with a company already in existence, the court might hold there was no contract at all, and neither the company nor the purported agent could enforce it. Newborne v Sensolid (GB) Ltd (Case 6) This was unsatisfactory and was first changed by legislation in 1972. Provisions are now in s.36C of the Companies Act 1985: "A contract which purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly." This means the "agent" will always be personally liable on the contract unless there is agreement to the contrary. Exceptions: (i) Companies Bought "Off the Shelf" s.36C does not apply where promoter makes contract on behalf of existing company he later buys. The company can then ratify the contract. (ii) Companies Struck Off the Register s.36C does not apply where a company has been in existence but has been struck off the register. The section only applies where the company has never been in existence. Cotronic (UK) Ltd v Dezonie (Case 7) (c) Avoiding Personal Liability
Public and Private companies limited by shares can adopt the articles in Table A of the Regulations - Table A will also apply automatically so far as not modified or excluded by the company’s own articles. The Memorandum must be signed (subscribed) unless submitted in electronic form, and must show the number of shares each subscriber is taking. (c) A statement giving the address of the company’s registered office and the details (name, address, nationality, occupation and date of birth) of the company’s first directors and secretary. Statement must be signed by the subscribers to the memorandum and include a written consent to act signed by those named as directors/secretary. (d) Statutory Declaration of Compliance - a statement that all the requirements of the 1985 Act with regard to registration have been complied with. The statutory declaration must be signed by a solicitor involved in the formation of the company or by one of the persons named as director or secretary. (e) Registration Fee - this is presently £20.
- Certificate of Incorporation If Registrar is satisfied that requirements of the Act have been met, he registers the documents and issues a certificate of incorporation. This is the company’s "birth certificate". The Registrar publishes the issue of the certificate in the London or Edinburgh Gazette. Certificate is conclusive evidence that registration requirements have been met. It is also conclusive evidence as to the date of incorporation. Registrar is entitled to refuse to register a company where it has been formed for an unlawful purpose: R v Registrar of Joint Stock Companies, ex p Moore (Case 9)
The court may also be petitioned to cancel a registration if it appears that the company has been registered for purposes which are unlawful or contrary to public policy: R v Registrar of Companies, ex p Attorney-General (Case 10) Trading Certificates Private companies can begin to trade as soon as the certificate of incorporation has been issued. Public companies require a further certificate - called a s.117 certificate or trading certificate. Registrar will only issue s.117 certificate if satisfied that minimum capital requirements for a public company have been met. A public company which begins to trade without a trading certificate commits a criminal offence - the company and any director responsible for the default can be convicted. (This does not affect the validity of any contracts entered into by the company). IV. CONSEQUENCES OF INCORPORATION
- Separate Legal Personality A company is a separate person in law from its members. This has several important consequences: (a) Company is liable for its own debts The shareholders are not liable for the debts and liabilities of the company and cannot be sued by the company’s creditors. A shareholder can be a debtor or creditor of the company and can sue or be sued by the company. Salomon v A Salomon & Co Ltd (Case 11) Lee v Lee’s Air Farming Ltd (Case 12) (b) Limited Liability The fact that the company is a separate person from its shareholders makes limited liability possible.
In order to convict companies of common law crimes, courts may regard the mens rea of those individuals who control the company to be the mens rea of the company. However, the courts have been very restrictive in their use of this approach: Tesco Supermarkets v Nattrass (Case 15) R v P&O European Ferries (Dover) Ltd (Case 16) R v Kite and OLL Ltd (Case 17) Transco plc v HM Advocate (No 1) (Case 18) Crimes Against the Company A company can be the victim of crime. It is theft to steal from a company, even if those accused of the theft are also the company’s only shareholders: R v Philippou (Case 19) (f) Perpetual Succession Separate personality means that the existence of a company does not depend on the existence of its members. Membership may change or members may die - the company continues in existence until wound up. (g) Borrowing A company can borrow money and grant a security for a debt. Only a company can create a floating charge. Floating charge = a kind of security for a loan. The charge "floats" because is does not attach to any particular asset, but floats over the company’s assets as they exist from time to time. Certain events cause the charge to "crystallise" and attach to whatever assets the company has at the time.
- Veil of Incorporation Separate legal personality of company operates as a shield - the courts will not normally look beyond the façade of the company to the shareholders who comprise it. The screen separating the company from its individual shareholders and directors is commonly referred to as "the veil of incorporation".
- Piercing the Corporate Veil Sometimes the law is prepared to examine the reality which lies behind the company façade - this is described as "lifting" or "piercing" the corporate veil. (a) Statute Some statutory provisions have the effect of piercing the corporate veil to make directors personally liable. Presumption is in favour of separate personality and courts will not normally infer that legislation is intended to pierce the corporate veil. Dimbleby & Sons Ltd v NUJ (Case 20) Situations where "veil is lifted" by Statute (i) Companies Act 1985 s.24 - where membership of a company falls below two for more than six months. Member who knows he is the sole member but continues to trade will be jointly and severally liable with the company for company debts contracted after the six month period has elapsed. (s.24 no longer applies to private limited companies) (ii) Companies Act 1985, s.117(8) - where public company trades without obtaining a trading certificate. If the company fails to comply with any obligations under a transaction within 21 days of being called on to do so, the directors of the company are jointly and severally liable to indemnify the third party against any loss. (iii) Companies Act 1985, s.349 - if person acting on behalf of a company signs or authorises the signing of a bill of exchange, cheque, order for goods or similar document in which the company’s name is not correctly stated, the person signing will be personally liable if the company fails to pay. This provision is rigidly enforced: Durham Fancy Goods v Michael Jackson (Fancy Goods) Ltd (Case 21) (iv) Insolvency Act 1986, ss.213 & 214 s.213 applies where company is being wound up and it appears that business has been carried on with intent to defraud creditors. s.214 applies where company is in insolvent liquidation and the director(s) should have known this, but did not take sufficient steps to minimise losses to creditors.
But see: Adams v Cape Industries Ltd (Case 27) (iii) Single Economic Unit In the past, courts have been willing to lift the veil on the basis that a group of companies was not a group of separate persons, but a single economic unit: DHN Food Distributors v Tower Hamlets (Case 28) Later cases have doubted this principle: Woolfson v Strathclyde Regional Council (Case 29) Adams v Cape Industries Ltd (Case 27) (iv) State of Hostility In times of war, courts may regard a British company as an enemy alien if the company is controlled by nationals of an enemy country: Daimler Co Ltd v Continental Tyre and Rubber Co (GB) Ltd (Case 30) (v) Justice and Equity Courts have sometimes been prepared to pierce the corporate veil where they feel this is in the interests of justice: Re a Company (Case 31) Creasey v Breachwood Motors Ltd (Case 32) But see: Adams v Cape Industries Ltd (Case 27) Ord v Belhaven Pubs Ltd (Case 33) Yukong Lines Ltd v Rendsburg Investment Corp (Case 34) V. THE CORPORATE CONSTITUTION The constitution of a company consists of its memorandum of association and its articles of association.
1. The Memorandum of Association For a company limited by shares, the memorandum must contain the following:
(a) Name Clause CA 1985, s.25 - the name of a public limited company must end with the words "public limited company", the name of a private limited company must end with the word "Limited". Abbreviations may be used instead: "plc" or "Ltd". It is an offence to carry on business under a name which uses these words or abbreviations when not entitled to do so - the penalty is a fine. Under CA s.26, it is not possible to register a company name which includes the words "public limited company", "limited", "unlimited" or their abbreviations anywhere except at the end of the name. There are also other restrictions on the use of names: (i) Under s.26, a company cannot be registered under a name which is identical to a name already registered. (ii) A company cannot be registered under a name which is regarded as offensive or where the use of the name would constitute a criminal offence. (iii) A company cannot be registered under a name which suggests that the company is connected with the government or a local authority - or under any name including a word listed in the Company and Business Names Regulations 1981 - unless the Secretary of State gives permission for the name to be used. (iv)s.26 does not prevent the registration of a name very similar to that of another company - but if the similarity is deceptive and likely to lead to confusion, the established business may bring an action to restrain the new company from using the name. This is called a "passing-off" action. Court will take into account:
- scope of pursuer’s reputation
- similarity of kind of business Ewing v Buttercup Margarine Co Ltd (Case 35) Dunlop Pneumatic Tyre v Dunlop Motor Co (Case 36) Aerators Ltd v Tollitt (Case 37) Exxon Corpn v Exxon Insurance (Case 38)
Company’s memorandum must contain an objects clause - a clause which states the purpose or purposes for which the company was incorporated. (i) The Ultra Vires Rule If the company does something beyond the scope of its objects clause, this is said to be ultra vires (beyond the powers of the company). Previously this was of great importance - transaction entered into beyond the company’s powers was void and could not be enforced by or against the company, and it could not be ratified. This was called the ultra vires rule. Ashbury Carriage and Iron Co v Riche (Case 39) (ii) Abolition of the Rule The Rule has been abolished by statute as far as third parties are concerned. s.35(1) CA 1985 - the validity of an act done by a company shall not be called into question on the grounds of lack of capacity by anything in the company’s memorandum. The rule still operates internally of the company - a shareholder can bring an action to restrain the company from carrying out an ultra vires act. (The court will not restrain the company from doing anything it is already under a legal obligation to do) A director may be liable to the company for any costs incurred by the company on an ultra vires transaction. Potential problems can be avoided: CA 1985 s.3A allows a company to state in its memorandum that its object is to carry on business as a general commercial company. It can then carry on any trade or business whatsoever. (iii) Change of Objects Clause Under CA 1985, s.4 a company can change its objects clause by special resolution. Members (holding at least 15% of the nominal issued share capital) who did not consent to the change can apply to the court to have the alteration set aside. (s.5) Application must be made within 21 days of the resolution being passed. The alteration will not then come into effect unless it is confirmed by the court.
(d) Limitation of Liability Clause If members’ liability is to be limited, memorandum must have a clause to this effect. (e) Capital Clause Limited company with share capital must have a clause stating the total amount of share capital with which it proposes to be registered and the division of that capital into shares of a fixed amount. No minimum capital for private companies; £50,000 minimum for public companies. (f) Association Clause This is a clause stating that the subscribers are desirous of being formed into a company in pursuance of the memorandum. This is followed by signatures of subscribers (attested by one witness) and the number of shares each has agreed to take. (g) Other Clauses Public company must have clause stating it is to be a public company. No other clauses are necessary but it is possible to have others. (h) Alteration of Memorandum CA 1985, s.2(7) - a company cannot change its memorandum except in the circumstances and manner expressly provided for in the Act. Memorandum can be altered to change company from public to private and vice versa
- requires special resolution of shareholders. Company can be changed from unlimited company to limited by special resolution - change from limited to unlimited requires written consent of all the members. Reduction of share capital requires special resolution. CA 1985, s.17 - any provision in the memorandum which could have been contained in the articles can be altered by special resolution.
