5) Company Formation

What is legal personality?

A fundamental legal principal that a company is a legal entity, separate and distinct from its members (shareholders). A person possess legal rights and is subject to legal obligations.

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What are the types of legal person?

The term person is used to denote either a natural person - a human individual or an artificial person - a company

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What are the features of a registered company (C)?

C assets belong to the C, liable without limit for debts, can be sued/can sue in name, continue in existence despite membership changes, has insurable interests, C debts must be satisfied from assets of C, may have liability in contract, tort & crime

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What is a company registered under?

Under Companies Act 2006

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What are the feature of members (shareholders)

Liability may be limited, relevant where a Co is wound up & its assets are insufficient to meet liabilities

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What debts are paid first?

Secure creditors like debenture are settled first and then unsecured creditors such as trade creditors.

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What does it mean to be limited by shares?

When in liquidation the members are liable for the amount of nominal value unpaid and any premium payable by the current owner in respect of shares (premium is a debt that does not pass on with its shares).

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What companies are often limited by shares?

Can be public or private

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What does it mean to be limited by guarantee?

When a company goes into liquidation the members are liable for an agreed amount that the members undertake to contribute to the company's assets in the event of it being wound up.

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Where can the amount a company is limited by be found when it is limited by guarantee?

In the articles of association.

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What companies are often limited by guarantee?

A charity or a trade association ( a non commercial organisation that aims to keep income and expenditure in balance). Common where a lender is very powerful (eg bank) and the barrow has no other source of funds (new Co)

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What type of companies can be limited by guarantee?

Private company only

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What does it mean to be unlimited?

There's no limit on the company's members or the company. The members can be compelled to contribute as much as may be necessary to pay company's debts in full.

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What type of companies can be unlimited?

Private companies only.

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Do unlimited companies need to file accounts?

No, unless it's a subsidiary or a parent of a limited company.

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Are rules as strict on capital maintenance for unlimited companies?

No.

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How do you convert a company from limited to unlimited?

With consent of all members (riskier)

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How do you convert a company from unlimited to limited?

By passing a special resolution (75% of members) to that effect and specifying whether the company is limited by shares or guarantee.

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Can you convert a company from limited by shares to limited by guarantee and vice versa?

A company may not re register as a company limited by shares or vice versa.

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If a company that's part of a group becomes insolvent will other companies in that group have to pay their debt?

No, there is no general principle that group companies will be identified as a single entity, even if as subsidiary becomes insolvent despite asset-wealth of holding company.

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What is the veil of incorporation?

Said to be drawn between the members and the company, separating them for purposes of liability and identification.

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When is the veil of incorporation lifted?

The veil may be lifted by courts to defeat fraud, sharp practices or illegality. It may also be lifted by statute.

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When is the veil of incorporation lifted by courts?

1)Where subsidiary acting as agent for holding company 2)To establish true national identity base on members domicile 3)To allow just and equitable winding up in quassi-pertnership companies where director excluded from management 4)To expose shame

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Why is the veil of incorporation lifted when a subsidiary is acting as an agent for a holding company?

To produce tax liability, to give entitlement to compensation and to prevent evasion of excise duty

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When is the veil of incorporation lifted by statute?

To impose liability on disqualified directors who continue to participate in management, directors who are fraudulent or wrongful trading and directors trading without a trading certificate

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What liability is imposed on directors who participate in management of a company in contravention of an under under the Company Directors Disqualification Act 1986?

They will be jointly and severally liable along with the company for the company's debts.

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What is fraudulent trading?

Continuing to trade an insolvent company with the intent to defraud

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What liability is imposed on directors who trade fraudulently?

Can be held personally liable to contribute to the company's debts

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What is wrongful trading?

Continuing to trade an insolvent company without taking all responsible steps to minimize potential losses to creditors.

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What liability is imposed on directors who trade wrongfully?

Can be held personally liable to contribute to the company's debts

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What is the liability imposed on a director trading without a trading certificate (only PLC)?

A public company must obtain a certificate from the registrar before it commences trade. failure to do so leads to personal liability for the directors for any loss or damage suffered by a third party to a transaction enter into by a company in contr

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Public V Private - What are the options for member's liability?

Public - Can only be limited by shares. Private - Can be unlimited, limited by shares and limited by guarantee.

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Public V Private - Minimum share capital?

Public - Subject to authorised minimum (50K). Private - No minimum.

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Public V Private - Ability to commence trade?

Public - Must have trading certificate before it can trade. Private - May commence trading once incorporated.

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Public V Private - Can they offer securities to the public?

Public - Yes and may obtain listing from stock exchange. Private - No

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Public V Private - What must be included in their name?

Public - Must end with PLC. Private - Must end with LTD.

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Public V Private - What loans need members approval?

Public - Loans to persons connected with directors and quasi-loans and credit transactions to directors or connect persons need members' approval. Private - Only loans directly to directors need members' approval

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Public V Private - How many directors are needed?

Public - 2. Private - 1.

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Public V Private - How many company secretaries are needed?

Public - 1. Private - 0.

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Public V Private - Can they pass written resolutions instead of calling meetings?

Public - No. Private - Yes

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Public V Private - Do they need to hold an AGM?

Public - Yes. Private - No.

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Public V Private - Must accounts be laid before the AGM?

Public - Yes. Private - No.

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Public V Private - When must accounts be filed?

Public - 6 months. Private - 9 months.

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Public V Private - Can they qualify as a small or medium company?

Public - No. Private - Yes and so can take advantage of audit exemptions and less stringent regime for filing.

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Public V Private - Must auditors be appointed each year?

Public - Yes if necessary. Private - No, existing auditors may be deemed reappointed.

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Public V Private - May pre-exemption rights be excluded?

Public - No. Private - Yes.

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Public V Private - What percentage of share capital must be paid up?

Public - 100% of share premium and 25% share capital must be paid up. Private - 0% needs to be paid up.

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Public V Private - Do they have the power to redeem or purchase shares out of capital?

Public - No. Private - Yes.

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Public V Private - How can a redemption in share capital take place?

Public - Needs special resolution confirmed by courts. Private - By special resolution (75% of members)

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What is a quoted (listed) company?

A public company that has it's shares listed on the public stock exchange. special rules apply them with regard to publication of details on the company website and directors' remuneration reports.

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what documents are needed to register a company?

Memorandum of association, application for register, section 9 (statement of capital & initial shareholdings), statement of guarantee, statement of proposed officers, statement of compliance, articles of association, trading certificate.

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Whats included in the memorandum of association?

States that subscribers wish to form a company, that subscribers agree to become members of the company and that subscribers agree to take at least 1 share each. They must be in the prescribed form and it must be authenticated by each subscriber.

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Whats included in the application for register?

Must state the company's proposed name, whether the company is limited and if so is it limited by shares or guarantee, if the company is private or public, the country of the registered office and intended address of the registered office.

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Whats included in section 9 (statement of capital and initial shareholdings)?

Must state the total number of shares, the aggregate nominal value of the shares, the amount paid and unpaid on each share and details of individual class of shares,

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Whats included in the statement of guarantee?

Must state the maximum amount each member undertakes to contribute to the net assets of the company if the company is wound up while they are a member or within a year after,

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Whats included in the statement of proposed officers?

Must give particulars of and consent of the first director and first company secretary of the company.

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Whats included in the statement of compliance?

This is statement that the requirements of the act have been complied with.

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What are the articles of association?

Articles prescribe regulations governing the management of the company's affairs, the rights of the shareholders and the powers and duties of the directors. Form a contract between the company and members and the members in dealing with each other.

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What are model articles?

They are prescribed by the Secretary of State in respect of different types of companies.

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When are model articles used?

Will apply wherever a company is formed without registering articles or where articles registered are insufficient. they apply in default.

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What companies commonly adopts model articles?

Companies limited by shares, either in their entirety or with small amendments

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what articles must a listed company have?

They must have their own full-length articles containing a number of special provisions as required by Stock Exchange rules.

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Articles do not bind the company to third parties. Does this principal apply to members in their capacity as outsiders?

This principle applies only to rights and obligations which affect members in their capacity as members. Members cannot seek to rely on the articles in support of a claim made as an outsider

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What happens if a contract contains no specific term on a particular point but the articles do?

Then the contract may be deemed to incorporate the articles to that extent

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What happens if the Act prohibits something permitted by the article?

The Act prevails.

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Can a company alter its articles?

if a contract incorporates terms of the articles, it is subject to the company's right to alter its articles. If rights have already accrued under a contract, say for services rendered before the alteration, those rights will be unaffected

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How does a company alter its articles?

By passing a special resolution but where the articles contain 'provision for entrenchment' such provisions can only be altered with the agreement of all company members or by court order

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Can a company provide that a provision for entrenchment can never be replaced

No

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A copy of any amended article must be sent to the Registrar within how many days?

15

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When will a member not be bound by any alteration made after they became a member ?

not if the alteration requires them to take more shares or increase their liability in any way to pay money to or contribute to the company.

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What is the trading certificate?

A public company must obtain it before it commences trading. The company must submit that nominal value of the company's allotted share capital is more than the authorised minimum (50K) & 100% of share premiums & 25% of nominal value has been paid up

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What are the results of failure to obtain a trading certificate with a year of incorporation?

May result in the company winding up.

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What happens if there's a transaction in contravention to the provision of the trading certificate?

It will render the company officer in default liable to a fine but the transaction will remain valid.

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What is a certificate of incorporation?

A certificate that names and describes the company and gives the date of incorporation and the registration number. This certificate is conclusive evidence that the company is registered in accordance with the Act and is a body corporate.

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When is a certificate of incorporation issued?

If the Registrar is satisfied that the registration requirements of the Act have been complied with, they will register the documents and issue a certificate of incorporation

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What happens if irregularities in formation procedure or an error in the certificate are discovered?

It is nonetheless valid and conclusive.

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What is an off the shelf company?

its possible to buy a company that has already been incorporated. the person associated with the company formation is registered as the company's subscriber, director and company secretary.

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What happens when an off the shelf company is purchased?

When the company is purchased the shares will be transferred and the registers will be notified of director's & company secretary's resignations.

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What are the advantages of and off the shelf company?

Avoid potential liability of pre-incorporation contract as the company already exists. Also quicker and easier.

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What are the disadvantages of and off the shelf company?

The name of company must be changed, the shares must be transferred, old director & Co Sec must resign and new ones be appointed and the articles may need to be altered.

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What is a promoter?

Someone who makes business preparations for a company.

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Who is not a promoter?

a person who acts merely in a professional capacity in company formation, such as a solicitor or an accountant

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What are the duties of a promoter?

A general duty to exercise reasonable care and skill and fiduciary duty to disclose any personal interest in a transaction and to account for monies received.

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What happens when a promoter fails to disclose a profit?

Profits must be surrendered to the company.

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What happens when a promoter discloses a profit?

If they disclose them and the company gives consent, they may retain any legitimate profits.

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What would be considered a legitimate profit?

A legitimate profit is made by a promoter who acquires interest in property before promoting a company and then makes a profit when they sell the property to the promoted company, provided they disclose i

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What is a pre-incorporation contract?

When a promoter enters into contract before incorporation of the company has taken place. The company has no capacity to enter into contracts before it's incorporated so the promoter and the third party are personally liable on it

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Can a company ratify a pre-incorporation contract?

The company cannot ratify the contract since it did not exist when the contract was made

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Is a company bound by a pre-incorporation contract?

The company is not bound by it even after incorporation and even if it has derived some benefit from it

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Can a company cannot enforce a pre-incorporation contract?

The company cannot enforce the contract against the third party unless the promoter and third party have given rights of action to the company under the Contracts (Rights of Third Parties) Act 1999.

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What ways can the promoter avoid liability?

Not making contracts until the company has been incorporated, using an off-the-shelf company, agree in draft only, expressly on basis that the company will enter into contract once incorporated and novation of contract.

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What does it mean to novate the contract?

To enter into a new contract on identical terms. The promoter is then released from personal liability.

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A promoter usually incurs expenses in preparations, such as drafting legal documents, made before the company is formed. Can they legally claim any remuneration or indemnity for their services or expenses?

No bit in practice, will generally arrange that the first directors, of whom they may be one, agree that the company shall make such payment to them.

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What are prohibited company names?

If the name is considered to be offensive, or if its use could constitute a criminal offence. If it indicates that the company is of another type or legal form or if its name is the same as or virtually the same as the name of an existing company.

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When is approval of the Secretary of State is required for naming a company?

If it suggest some connection with central or local government, or any public authority. Words such as 'British' or 'International', for example, are only likely to be sanctioned if the size of the company matches its pretensions.

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How does a company change its name?

By passing a special resolution to that effect or otherwise as provided for in its articles. The company must notify the Registrar accordingly and obtain a new certificate of incorporation (new name, everything else stays the same).

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When may the Secretary of State order a company to change its name?

If it's considered to be the same as or virtually the same as an existing company name or that it might otherwise mislead the public.

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How must a company disclose its name?

The name must be displayed in certain locations and on certain documents in accordance with regulations made by the Secretary of State. The name must also be engraved legibly on the company seal if the company has chosen to have one. Punishment-fine

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What is a business name?

Business names are subject to similar rules as to words or names that are misleading or otherwise prohibited or that require the approval of the Secretary of State in the case of company names

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What records are a company required to keep?

A register of members, directors, co secs and PSC. A register of director's residential addresses (protected from public), copies of directors service contracts and indemnity provisions restricting directors' liabilities, records of resolutions

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What records are a company required to keep?

minutes of meetings, directors statement and auditors report, a register charges and copies of charges

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The Act sets our rules relating to the rights of inspection for members and other. What happens if there is a contravention to any of these provisions?

Renders the company and every company officer in default guilty of an offence and liable to a fine.

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What is a company not required to keep?

A register of debenture holders.

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The registrar of companies maintains a register of each company at Companies House. What does the register contain?

A certificate of incorporation, the trading certificate and certificate of registration of charges. Must contain documents in accordance wit statutory provision (accounts, confirmation statement, special and ordinary resolutions).

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What is the registrar required to keep in electronic form?

the articles, annual accounts and reports, confirmation statements, statements of capital and statements of directors.

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Who has the right to inspect the register?

Any person and they can pay a small fee to get a copy. The consent of charges and residential addresses of directors are protected from inspection.

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What is a confirmation statement?

They are used to confirm that either no changes have been made to the info held by the registrar or to record the changes that have occurred.

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How often must a confirmation statement be filed?

No more than 12 months may elapses between statement submissions.

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What information requires confirmation in a confirmation statement?

registered office address, the address where register of members or debentures is kept, type of company & principal activity, particulars of members (& ceased members since last return), directors & co sec, changes to register of PSC

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What information about shares requires confirmation in a confirmation statement?

number of shares issued,their aggregate nominal value,amounts unpaid.For each class of share the rights of those shares,the total number of shares in that class & their total nominal value.Number of shares of each class held at return date & transfe

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Who has to file a confirmation statement?

All companies

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Who can be a company secretary of a public company?

Must have the necessary knowledge and the experience as deemed by the directors.

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The company secretary of a public company must also have one of the following..?

employment as plc's secretary for 3 out 5 years proceeding appointment, member of ACCA CIMA ICAEW ICAS ICAI CIPFA, qualified solicitor , barrister or advocate within the UK,employment in a position or membership of a professional body that qualify

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Can a sole director of a private company also be the company secretary?

Yes

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What is a company secretary?

An employee and an officer of that company so face potential civil and criminal liability where the act provides so in the event of contravention by the company of its legislation requirements.

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What does a company secretary do?

convene the meetings of the board of directors, issue the agenda and draft the minutes. They will also be responsible for the various statutory registers and for filing documents with the Registrar

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What are some of the extra roles of a company secretary in a small company?

also likely to act as general administrator and compliance manager and might even be responsible for the accounts and taxation aspects of the company's business.

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What powers does a company secretary have?

They may bind the company by their actions on the basis of implied actual authority as well as express or ostensible authority.

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What does the company secretary have authority to do?

has the power to contract on behalf of the company in respect of its administrative operations, including employment of office staff and management of the office generally.

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What does the company secretary not have authority to do?

They do not have authority to buy land or borrow money or any other acts usually undertaken by directors.

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Who must keep accounting records and file accounts?

Generally speaking, every company must.

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How must accounts be prepared?

In accordance with UK or international accounting standards. they must be in the prescribed form.

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All companies should prepare..?

Accounting records, annual accounts, a directors report and an audit report

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Quoted (listed) companies should also prepare..?

A directors remuneration report.

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Large and medium sized companies should also prepare..?

A strategic report. The purpose of the strategic report is to inform members of the company and help them assess how directors have performed their duty to promote the success of the company.

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What are the adequate accounting records that a company is required to maintain?

Daily entries of income and expenditure, records of assets and liabilities and statements of stock and stock takings.

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How long must accounting records be kept?

3 years for a private company and 6 years for a public company

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Whats included in annual accounts?

Balance sheet and profit and loss. The accounts must give true and fair view of the company's financial position. Must include notes to the accounts which includes employee numbers and directors benefits.Must be approved & signed by board of direcor

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Whats included in the directors report?

Must contain names of directors, principal activity of the company and a statement that the auditor is not aware of any relevant audit information. A recommended dividend and business review is usually included (not in small Cos). approved & signed

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Whats included in the audit report?

Accounts that have been audited and the reporting framework are identified, the scope is described, auditors opinion on if the accounts are true and fair and if the auditors report is consistent with accounts.

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Whats included in the strategic report?

balanced and comprehensive analysis of the development and performance of the company's business during the financial year, and the position of the company's business at the end of that year, consistent with the size and complexity of the business

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Non-compliance with these provisions is punishable by?

render the company and any relevant officer liable to a fine and, in some cases, imprisonment

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Who can file abbreviated accounts?

Small and medium-sized companies and small companies have a simpler directors' report)

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What exemptions does a micro entity have?

Can have a simple P&L and balance sheet, no notes to the accounts and the same simpler directors report as a small company.

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What is required for a company to be a micro entity?

Less than 632K turnover, 316K balance sheet & 10 employees. (satisfy 2 out of 3)

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What is required for a company to be a small company?

Less than 10.2M turnover, 5.1M balance sheet & 50 employees.(satisfy 2 out of 3)

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What is required for a company to be a medium company?

Less than 36M turnover, 18M balance sheet & 250 employees. (satisfy 2 out of 3)

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When are companies audit exempt?

Micro and small companies (not insurance or banking), dormant companies, not for profit making companies subject to public sector audit and Subsidiary companies whose parent company guarantees their liabilities outstanding at the balance sheet date

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Even where an exemption applies when can an audit can be required?

By 10% or more of the members or by members representing at least 10% of the nominal value of the company's issued share capita

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How is an auditor appointed?

by the directors or by the members passing an ordinary resolution or, in the event of default, by the Secretary of State

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Should the auditor's remuneration be fixed by those appointing them?

Yes

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When do auditors have a right of access to the company's books and accounts?

At all times

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What is an auditors duty?

They have a duty to carry out a proper investigation in preparing their report

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How can an auditor be removed?

by ordinary resolution, subject to special notice being given and the auditor having the right to make representations.

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What happens to any person who knowingly or recklessly causes an auditor's report to include any matter that is misleading, false or deceptive

They commit an offence punishable by fine

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5) Company Formation

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