Chp 7. Company law

• Legal standing of a company to its shareholders and directors

  Separate legal entity =

  • artificial person (can enter contract, sue and be sued)
  • members have limited liability BUT company has unlimited liability
  • has ability to hold property
  • perpetual succession
  • can have liabilities in tort and crime (person may go to prison on company's behalf)
• Amount owed by member of company limited by shares at winding up for fully paid shares, partly paid shares and share premium

  1. fully paid = members have no further liability
  2. partly paid = any outstanding amount of nominal value must be paid by original or subsequent shareholder
  3. share premium = premium will be owed also unless shareholder is not original shareholder.
• Amount owed by member of company limited by guarantee at winding up

  amount guaranteed to pay in the event of winding up
• Why does law 'lift the veil' between company and members sometimes?

  to expose the commercial reality of the situation while retaining general legal principal - usually to expose sharp practice whilst retaining benefit of separate entity for those engaged in business fairly
• Situations when the veil is lifted between company and members - group companies 


  subsidiary regarded as agent of the holding company is courts see fit

  1. to produce tax liability e.g., UK agent of foreign parent still liable to UK tax
  2. to prevent tax evasion e..g, subsidiary assets can be held over tax evasion of parent
  3. to give entitlement to compensation e.g., wholly owned subsidiaries can receive on parent behalf
• Situations when the veil is NOT lifted between company and members - group companies

  • creditors of insolvent subsidiary are not paid in full even though parent company solvent
  • claimant proceeds against subsidiary that is not as asset rich as parent company
• Situations when the veil is lifted between company and members - other

  1. to reveal true national identity and expose illegality e.g., UK company with all members in foreign county
  2. quasi-partnership e.g., company wound up in a partnership so better to end company and form properly
  3. when a company is a sham e.g., to gain customers of ex-employee when under contract not to personally
• Situations when the veil is lifted between company and members - legislation requirement

  1. when director is disqualified = jointly or severally liable with company for its debts
  2. fraudulent/wrongful trading
  3. trading with knowledge of insolvency in future
  4. trading without a trading certificate
• How often can companies change legal status. What is required for the change

  only once.

  • limited to unlimited = consent of all shareholders
  • unlimited to limited = special resolution (75% agreement)
  • not possible to change from limited by guarantee to limited by shares
• public vs private - liability

  public = limited

  private = limited or unlimited
• public vs private - share capital

  public = minimum 50,000

  private = no minimum
• public vs private - ability to commence trading

  public = must have trading certificate before trading

  private = certificate of incorporating then can commence
• public vs private - public offers

  public = can offer securities to public and may obtain listing from stock exchange/other investment exchange

  private = prohibited from offer securities to public
• public vs private - name

  public = must end with 'public limited company' or plc

  private = must end with 'limited' or ltd BUT certain entities exempt e.g. charity, education
• public vs private - loans

  public = loans connected with directors/quasi-loans/loans to directors or connected persons need member approval

  private = these rules do not apply
• public vs private - directors

  public = need atleast TWO directors

  private = need atleast ONE
• public vs private - company secretary

  public = must have one

  private = dont need one
• public vs private - written resolutions

  public = not applicable (have shareholder meetings instead)

  private = may pass written resolutions rather than calling meetings
• public vs private - AGMS

  public = must have one

  private = dont need one
• public vs private - accounts and reports

  public = must be laid out in general meeting and filed within 6 months

  private = dont need to lay out in meeting. must be filed within 9 months
• public vs private - small/medium company exemptions

  public = not applicable

  private = audit exemptions
• public vs private - appointment of auditors

  public =must appoint each year if necessary

  private = existing auditors deemed to be reappointed
• public vs private - pre-emption rights (1st refusal)

  public = may NOT be excluded

  private = may be excluded
• public vs private - payment for shares

  public = shares must be atleast 1/4 paid up

  private = not applicable
• public vs private - reduction of capital

  public = needs special resolution confirmed by court

  private = needs special resolution and directors solvency statement
• public vs private - power to redeem/purchase shares out of capital

  public = not applicable

  private = can do, subject to conditions
• Advantages of buying a company that is already incorporated

  • quicker as 'ready to go'
  • avoids potential liability from pre-incorporation contracts
• Disadvantages of buying a company that is already incorporated

  • change of name (maybe)
  • MUST transfer subscribers shares
  • MUST change directors and company secretary (if there is one)
  • alteration of articles (maybe)
• How is a company formed?

  company must supply following documents to registrar of companies:

  • memorandum of association
  • application
  • statement of capital and initial shareholdings (company with share capital) OR statement of guarantee (company limited by guarantee)
  • statement of compliance

  following this, registrar will issue certificate of incorporation = conclusive evidence company is registered EVEN if irregularities/error is found later on

  company also needs a trading certificate to commence trading
• What must company submit to obtain a trading certificate?

  • application stating that the nominal value of company's share capital is not less than authorised minimum (50,000)
  • statement of compliance
• What happens if company doesnt get a trading certificate?

  • failure to obtain within one year may lead to compulsory winding up
  • company officer default liable to a fine for any contravention and potentially personally liable for debt BUT transaction remains valid
• What is memorandum of association?

  prescribed form stating that subscribers:

  • wish to form company
  • agree to become members
  • if company with share capital = agree to take at least one share each

  must be authenticated by each subscriber
• What is included in company formation application doc?

  must state:

  • proposed company name
  • if limited or unlimited liability for members and whether by shares or guarantee
  • private or public
  • registered office country and intended address of registered office
• What is included in statement of capital and initial shareholding

  must state:

  • total number of shares
  • aggregate nominal value
  • classes of shares
  • amount to be paid and unpaid on each share
• What is included in statement of guarantee

  must state max amount each member will contribute to company net assets if wound up while he is member or within one year (even if step down)
• What is included in statement of proposed officers

  particulars and consent of:

  • first director(s) of company
  • first company secretary (optional for private comp)
• What is a promoter?

  promoter includes anyone who make business preparations for the company
• Duties of a promoter to the company

  seen as an agent

  • reasonable care and skill
  • fiduciary duty to disclose personal interest and monies received (or company can claim) through listing the particulars or prospectus (invitation to treat)
  • in private company should disclose to existing and prospective members or to board of directors
• What are pre-incorporation contracts ?

  contract promoter enters in the name of the company before it comes into existence
• potential consequences of pre-incorporation contracts

  • company has no capacity to enter contracts and therefore cannot be bound
  • company cannot ratify since didn't exist when made
  • company cannot enforce unless promoter and third party have given rights of action to company. but promoter can enforce
  • promoter is personally liable