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By: Ankur Mittal
COMPANY LAW - LECTURE NOTES
I
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Definition of a "Company"
A company is a "corporation" - an artificial person created by law
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A company is a "legal" person
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2
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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
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(c) A company is an artificial legal person distinct from its members
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4(2) of
the Partnership Act 1890, this is much more limited than the personality
conferred on companies
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A partnership must have at least two members and has an upper
limit of 20 (with some exceptions)
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A partner cannot transfer his share of the partnership without the
consent of all the other partners
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Every partner is entitled to take
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part in the management of the partnership business unless the partnership
agreement provides otherwise
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A partner in
a firm is an agent of the firm, which will be bound by his acts
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A partner in an ordinary partnership can be made
liable without limit for the debts and obligations of the firm
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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
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(k) The affairs of a company are subject to more publicity than those of a
partnership - e
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companies must file accounts which are available for public
inspection
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A partnership cannot create a floating charge
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A partner who is owed
money by the partnership cannot claim payment in competition with other
creditors
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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
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History
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4
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Promoters of the company petition the Privy Council attaching draft of proposed
charter to the petition
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No longer used to incorporate trading companies
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Formerly used to incorporate public utilities such as gas, electricity and railways
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(c) By Registration (Registered Companies)
Formed by registration under the Companies Act 1985 (as amended) or one of the
preceding Companies Acts
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CA 1985, s
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"
Classification of Registered Companies
Important Note
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"Limited Liability" - this refers to the liability of the members, not the liability of the
company
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The liability of the members, whether limited or unlimited, is to the company, not to
the individual creditors of the company
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)
(ii)Cannot be public companies
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(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
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(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
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(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"
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(ii)Members of the company take shares issued by the company
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Members may also agree to pay
an extra amount - called a premium
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The memorandum also states the number of shares to be issued:
e
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10,000 shares of £1 each = registered capital of £10,000
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( Shareholder is also contractually bound to pay any premium
which has not been paid)
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Companies Limited by Shares may be Public or Private
(i) Public Companies
CA 1985, s
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"
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
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(ii) Private Companies
CA 1985 defines a private company as "any company that is not a public company"
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A private company is only required to have one director and, since 1992, it can be
formed with only one member
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II
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Promoters
Promotion of a company is concerned with taking the steps necessary for
incorporation
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Some attempts at definition have been made by the courts:
Twycross v Grant (Case 1)
Whaley Bridge Printing Co v Green (Case 2)
Whether someone is acting as promoter of a company is a question of fact rather than
a question of law
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The courts then began to impose a fiduciary duty on promoters similar to that imposed
on agents
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(c) Remedies for Breach of Promoters Duty
(i) Where promoter has sold his own property to the company, without disclosing this
- the company can rescind the contract and recover the purchase price:
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Erlanger v New Sombrero Phosphate Co (Case 3)
Right of recission is lost if restitutio in integrum is not possible
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Gluckstein v Barnes (Case 4)
(iii)The company may be able to sue the promoter for damages for breach of
fiduciary duty
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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
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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
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2
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(a) Effect of Pre-Incorporation Contract on the Company
Company cannot be bound to the contract because it had no contractual capacity
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Company cannot sue or be sued on the contract
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(Kelner v Baxter)
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Newborne v Sensolid (GB) Ltd (Case 6)
This was unsatisfactory and was first changed by legislation in 1972
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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
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Exceptions:
(i) Companies Bought "Off the Shelf"
s
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The company can then ratify the contract
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36C does not apply where a company has been in existence but has been struck off
the register
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Cotronic (UK) Ltd v Dezonie (Case 7)
(c) Avoiding Personal Liability
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(i) s
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This requires express agreement - courts will not infer it
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(novation =
substitution of a new obligation for an old one)
Promoter could agree with third party that promoter’s liability will end when the
company, once formed, enters new contract on same terms
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REGISTRATION OF A COMPANY
1
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Duties include registering new
companies, maintaining company files and supervising compliance with the
administrative and disclosure requirements of the Companies Act
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2
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10:
(a) Memorandum of Association
(b) Articles of Association
These are the documents which make up the constitution of the company
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A public company’s memorandum must be in accordance with Table F of the
Regulations
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The Memorandum must be signed (subscribed) unless submitted in electronic form,
and must show the number of shares each subscriber is taking
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Statement must be signed by the subscribers to the memorandum
and include a written consent to act signed by those named as
directors/secretary
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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
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3
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This is the company’s "birth
certificate"
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Certificate is conclusive evidence that registration requirements have been met
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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)
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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
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117 certificate or trading
certificate
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117 certificate if satisfied that minimum capital
requirements for a public company have been met
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(This does not affect the validity of any contracts entered into by the company)
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CONSEQUENCES OF INCORPORATION
1
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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
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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
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(c) Company Property
A company owns its own property - the shareholders have no direct right to this or
any share of it
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A shareholder has no legal interest in the company’s property and cannot insure it
against theft, damage, etc
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)
(d) Contractual Capacity
A company has full contractual capacity - and only the company can enforce its
contracts
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(e) Crimes
A company can be convicted of a crime, regardless of whether its directors are also
convicted
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There are particular problems with crimes which require mens rea ("a guilty mind") most common law crimes require mens rea, while many statutory offences involve
strict criminal liability
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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
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Membership may change or members may die - the
company continues in existence until wound up
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Only a company can
create a floating charge
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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
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2
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The screen separating the company from its individual shareholders and directors is
commonly referred to as "the veil of incorporation"
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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
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Presumption is in favour of separate personality and courts will not normally infer that
legislation is intended to pierce the corporate veil
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24 - where membership of a company falls below two for
more than six months
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(s
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117(8) - where public company trades without obtaining a
trading certificate
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(iii) Companies Act 1985, s
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This provision is rigidly enforced:
Durham Fancy Goods v Michael Jackson (Fancy Goods) Ltd (Case 21)
(iv) Insolvency Act 1986, ss
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213 applies where company is being wound up and it appears
that business has been carried on with intent to defraud creditors
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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
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(v) Insolvency Act 1986, s
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If he does
he can be made personally liable for all the debts of the new company
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15
A person will be jointly and severally liable with the company for all the company’s
debts if he takes part in the management of the company while he is under a
disqualification order
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(b) Common Law
The courts are willing to pierce the veil of incorporation in some circumstances:
(i) Fraud, Façade or Sham
Courts will examine the reality behind the company where the company was set up
purely to evade a legal obligation, or to allow someone to do something he would not
be allowed to do as an individual:
Gilford Motor Co v Horne (Case 22)
Jones v Lipman (Case 23)
Re Bugle Press Ltd (Case 24)
(ii) Agency
Court may lift the veil on the basis that one company is merely carrying on business
as the agent of another - so that transactions entered into by the subsidiary can be
regarded as transactions of the holding company:
Smith, Stone & Knight v Birmingham Corporation (Case 25)
Firestone Tyre & Rubber Co v Lewellin (Case 26)
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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
Address of registered office can be changed by ordinary resolution (simple majority
vote of shareholders), provided this does not also change the domicile
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(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)
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This was called the ultra vires rule
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s
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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
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Potential problems can be avoided: CA 1985 s
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It can then carry on any trade or business whatsoever
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4 a company can change its objects clause by special resolution
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(s
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The
alteration will not then come into effect unless it is confirmed by the court
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(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
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(f) Association Clause
This is a clause stating that the subscribers are desirous of being formed into a
company in pursuance of the memorandum
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(g) Other Clauses
Public company must have clause stating it is to be a public company
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(h) Alteration of Memorandum
CA 1985, s
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Memorandum can be altered to change company from public to private and vice versa
- requires special resolution of shareholders
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Reduction of share capital requires special resolution
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17 - any provision in the memorandum which could have been contained
in the articles can be altered by special resolution
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16 - no member of a company can be bound to an alteration which makes
him liable to take more shares or which increases his liability in any other way unless
he consents in writing
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2
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The articles are secondary to the memorandum - if there is conflict between the
articles and the memorandum, the memorandum prevails
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A company has three options:
(i) It may adopt Table A in full
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(iii) It can exclude Table A entirely and write its own articles
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Articles must be: (i) Printed
(ii)Set out in numbered paragraphs
(iii)Signed by the subscribers to the
memorandum
(b)Alteration of Articles
CA 1985, s
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Any provision in the articles which would have the effect of making them unalterable
is void
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16 - cannot alter articles to increase a member’s liability without
his consent
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369(1) sets out notice periods for calling meetings and states this
cannot be shortened by a provision in the articles
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St Johnstone Football Club Ltd v SFA (Case 41)
The same would apply to any provision which was inconsistent with the companies
legislation
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(iv) Memorandum
An alteration to the articles which conflicts with the memorandum would be
effectively void
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A member cannot challenge an alteration carried out in good faith for the benefit of
the company, even if the alteration adversely affects his own rights
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Legal Effect of Memorandum and Articles
The legal effect is described in s
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The memorandum and articles operate
as a contract between the company and its members, which both parties are bound to
honour
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Hickman v Kent or Romney Marsh Sheep Breeders Association
(Case 46)
(b)The company is bound to each member in his capacity as a
member
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Eley v Positive Government Life Assurance Co Ltd (Case 48)
Beattie v E & F Beattie Ltd (Case 49)
(d) Provisions of the memorandum or articles can sometimes form
part of an extrinsic contract between the company and an outsider
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(ii) Where there is no express contract but a
provision in the memorandum/articles is
incorporated by implication from the conduct of the
parties