Scottish Company Law

Brian Pillans, Nicholas Bourne

• Publisher: Routledge-Cavendish
• Year: 2012
• eBook ISBN: 9781135343293
• Edition: 1
• Topic: Law
• Subtopic: Financial Law
• Index: Law

The second edition of this successful book incorporates many important developments, such as the changing judicial approach to directors' duties and disqualification orders, recent developments in auditors' liability and the effect of the House of Lords decision in Sharp v Thompson. New legislation includes the Competition Act 1998 and the Human Rights Act 1998. Recent work of the Law Commissions on Shareholder Remedies and Directors Duties is examined.

The ongoing debate on corporate governance is brought up to date with the incorporation of the Greenbury and Hampel Reports and the Combined Code on Corporate Governance and the work of the DTI on reform of company law is explained.

CHAPTER 1

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INTRODUCTION

1.1 A company or a partnership

When a group of businessmen get together and decide to start a business, one decision that they will need to make early on is whether to operate as a company or as a partnership. There are certain advantages, and, indeed, certain disadvantages, that attach to incorporation. The following are therefore matters which businessmen will need to consider. The essence of the company is that it is a completely separate person in law: see Salomon v A Salomon & Co Ltd (1897) (para 2.1). Although a Scottish partnership, unlike its English counterpart, does have a personality of its own, its personality is limited. Thus, unlike a company, a partnership cannot own heritable property (land and buildings) in its own name and a court decree obtained against a firm can be enforced against the individual partners personally. From this very basic difference between the company and the partnership flow many of the advantages and disadvantages of incorporation.

The most obvious advantage in incorporation is the access to limited liability. Not all companies are limited companies. Unlimited companies do not need to file accounts so sometimes this is an attraction for businessmen. However, the possibility of limiting the liability of the participators to the amount of the issued shares is an attractive one. Sometimes, this advantage is, of course, more apparent than real. If a small private company goes to a bank and asks to borrow a large sum of money, the bank is unlikely to be satisfied with the possibility of recourse against the company's assets. In practice, the bank manager will require some collateral security from the company's directors. In a partnership, however, all the partners will have unlimited liability for the business's debts and liabilities. This is the case except in a limited partnership governed by the Limited Partnerships Act 1907. In a limited partnership, however, only sleeping partners may have limited liability and it is not possible to form a partnership made up entirely of limited partners. There must always be somebody who is ‘picking up the tab’ with no limitation of liability.

A further advantage of the company is the possibility of separating ownership from control. In a partnership, all of the partners are agents for the firm. In a company, and this is particularly the case in public companies, the ownership and the control are separated. Those people owning the share capital will not generally be the people who are running the business (however, in private companies, the owners and the managers may well be the same).

An attraction of incorporation is what is sometimes termed perpetual succession. This means that the company need never die. Companies do go into liquidation but they need not do so. There is no theoretical reason why a company cannot go on forever. The Hudson's Bay Company has been running for well over 300 years, for example. A company will retain its personality, regardless of any changes made to its name, membership or board of directors: see Vic Spence Associates v Balchin (1990). In the case of partnerships, however, wherever there is a change of partners, there has to be a drawing up of partnership accounts and, in principle, a reformation of the partnership.

Incorporation is an attractive business medium where the participators wish to be able to transfer their shares at some later stage. In a company, shares are freely transferable, subject to the terms of the articles of association and the memorandum of association (Chapters 5 and 6). In a partnership, by contrast, a partner's share is not so transferable unless the agreement so provides. The advantage of transferability is seen at its clearest where a company is quoted on the Stock Exchange or the Alternative Investment Market. At this stage, there will be a market mechanism for disposing of and purchasing shares.

It is said to be easier to raise finance where a company as opposed to a partnership is formed. Clearly, if a company is quoted, it has access to the Stock Exchange to raise finance by issuing its shares and debentures (collectively called securities) to the public (Chapter 4). In the case of debentures, these may be secured by a floating charge over all of the company's assets and undertaking (Chapter 18). The device of the floating charge is unique to the company and thus a partnership cannot take advantage of this means of raising finance.

It is probably the case that there is more prestige attached to the company than to the partnership. There is no reason that this should be the case but probably the trading and investing public sees a company in a more favourable light than a partnership.

A further consideration, although it might not be an advantage for companies, is taxation. Companies will pay corporation tax on their profits. These profits may then be distributed as dividends to members who may be liable to pay tax on the dividend less any advance corporation tax (ACT) that has already been paid by the company. In the case of partnerships, the profits of the partnership business are attributable to the partners of the firm who will pay schedular income tax on those profits. It is not possible to say in isolation from factors concerning the circumstances of the participators and their other sources of income whether this is an advantage or not. It will depend on the circumstances.

The disadvantages that attach to incorporation are not numerous. There are clearly formalities to be complied with. A partnership agreement need not even be written. Clearly, it is desirable to have a written agreement for evidential purposes but there is no legal reason why the agreement should be in writing. Companies are subject to a comprehensive code of rules contained in the Companies Act 1985 and, elsewhere, the partnership is not subject to a detailed statutory regime, although the Partnership Act 1890 does set out some rules.

In the case of a company, there are various formalities to be complied with. A constitution has to be drafted, made up of a memorandum of association and articles of association (Chapters 4 and 5). These documents have to be delivered to the registrar of companies at Companies House in Edinburgh (Cardiff in the case of English and Welsh companies) together with a statement of capital and a declaration of compliance. A certificate of incorporation will then be issued to the company. There are various ongoing formalities for a company including the filing of an annual return, the filing of annual accounts (unless the company is unlimited) and the filing of various forms connected with changes of directors, issue of shares, issue of debentures, change of company secretary, etc. Companies also have to comply with formalities regarding the holding of meetings which is not the case in a partnership. Private companies may dispense with the need to hold an annual general meeting by unanimous resolution (see para 15.5.9).

Together with these formalities, there is the disadvantage of publicity in the case of the company. This is generally seen as a disadvantage as a company has no option but to make certain of its affairs public. These would include the company's directors, company secretary, the accounts of the company (unless unlimited), the annual return of the company, the company's constitution and various registers that have to be kept at the company's registered office.

Together with formalities and publicity, one may add expense as a disadvantage. However, the expense of setting up a company is not great. There is a charge for the issue of a certificate of incorporation and an annual fee for filing the company's annual return but few other charges are made by the company's registry. The cost of the annual audit may well be a deterrent, however, in the case of a limited company, although small private companies may be exempt from this requirement (see para 16.1).

Two other disadvantages of incorporation may be mentioned here. These are the rules on the maintenance of capital that apply to companies and which are much stricter than in relation to partnerships and the remaining rules on ultra vires that limit a company's freedom to manoeuvre. Partnerships by contrast are free to do what is legal within the law of the land.

1.2 Types of companies

There are various classifications of companies that may be made.

1.2.1 Chartered company

A company may be chartered, that is, set up by a charter from the Crown, and may then derive its powers from the charter. The very first companies were of this variety, for example, the East India Company, the Massachusetts Bay Company, the Hudson's Bay Company. Today, chartered companies are not of economic significance but they still exist. Generally, they are not trading concerns. They may be professional organisations – the Institute of Chartered Accountants in Scotland is an example. Perhaps the most famous chartered company of them all is the British Broadcasting Corporation.

1.2.2 Statutory company

A further type of company is the statutory company. In Victorian England, there was a great plethora of incorporations. Each company had to be set up by a separate Act of Parliament. During this period of industrial revolution, the great mass of companies involved public utilities such as gas and water, or transportation such as canal companies and railway companies. Today, there are few statutory companies. The process is too cumbersome for periods of massive economic activity, as each company is incorporated by a separate Act of Parliament. However, the remaining nationalised industries are statutory companies, for example, British Coal.

1.2.3 Registered company

The third type of company in this classification is the most common of all. This is the registered company. Registered companies originated with the Joint Stock Companies Act of 1844, when Gladstone was President of the Board of Trade. The current Companies Act under which registration may be sought by companies is the Companies Act of 1985. Provided a company complies with the formalities set out in the Act, it will be registered – that is, its name will be added to the list of registered companies and a file will be opened in its name at Companies House in Edinburgh. In fact today, clearly, a manual register is not opened, the company's registered details are kept on microfiche which is available for inspection at Edinburgh (or in Cardiff and London for English companies).

1.2.4 Limited and unlimited company

Another form of classification of companies is the distinction between a company limited by shares, a company limited by guarantee, a company limited by guarantee with share capital and an unlimited company.

Most companies are limited by shares. Trading companies will need to raise share capital with which to purchase assets which they need for running their businesses. Companies limited by guarantee are the media, usually utilised by charities, including educational institutions such as the London School of Economics. Such companies do not need capital with which to trade, but may wish to have some of the other advantages of incorporation such as the ability to hold property in their own name. Since the Companies Act 1980, it has not been possible to create new companies limited by guarantee with a share capital but there are some companies falling into this category which existed in 1980 and remain registered companies. If the company is an unlimited one, as has already been mentioned, there will be no obligation to file annual accounts. However, this advantage must be balanced against the disadvantage that the members of the unlimited company will have unlimited liability and may be called upon to contribute to the company's assets if the company goes into liquidation.

1.2.5 Public and private company

A fundamental distinction which pervades the whole of company law is the distinction between public and private companies. Most companies are private but the more important larger companies are public companies. The basic distinction is that a public company may offer its shares and debentures to the public whilst it is a criminal offence, under s 81 of the Companies Act 1985, for a private company to do so. A further distinction is the capital requirement first introduced by the Companies Act 1980, which requires that a public company must have a minimum subscribed share capital of £50,000 (s 11 of the Companies Act 1985). This must be paid up to at least 25%, so at least £12,500 must already have been raised by the issue of shares. A public company must, furthermore, have a trading certificate before it begins trading in addition to its certificate of incorporation (s 117 of the Companies Act 1985). This trading certificate will only be issued once the registrar of companies is satisfied that the company has satisfied the formalities of the Act and raised the required minimum capital.

The name of the company will indicate whether the company is public or private. The description ‘public limited company’ or, as abbreviated, ‘plc’ (or Welsh equivalent ‘cwmni cyhoeddus cyfyngedig’ and ‘ccc’) will indicate that the company is a public one. By contrast, if the company is expressed to be ‘limited’ or, as abbreviated, ‘ltd’ (or ‘cyfyngedig’ or, as abbreviated, ‘cyf’)’, the company is a private company. If a company is registered as a public company, this fact must be stated in its memorandum (s 25(1) of the Companies Act 1985). A private company need not state what kind of company it is in its memorandum. There are various other distinctions between public and private companies. It suffices to mention a few at this stage. The company secretary of a public company needs to have a relevant qualification as set out in s 286 of the Companies Act 1985 (see para 17.4). There is no such requirement for the company secretary of a private company. A public company needs to have at least two members and two directors. By contrast, a private company now only needs one member an...

Table of contents

• Cover
• Half Title
• Full Title
• Copyright
• Contents
• Preface
• Table of Cases
• Table of Statutes
• Table of Abbreviations
• 1 INTRODUCTION
• 2 THE SALOMON PRINCIPLE AND THE CORPORATE VEIL
• 3 PROMOTERS
• 4 ISSUE OF SHARES TO THE PUBLIC
• 5 THE MEMORANDUM OF ASSOCIATION
• 6 THE ARTICLES OF ASSOCIATION
• 7 SHARES AND PAYMENT OF CAPITAL
• 8 THE PAYMENT OF DIVIDENDS
• 9 THE MAINTENANCE OF CAPITAL
• 10 DIRECTORS
• 11 DIRECTORS' DUTIES
• 12 POWERS OF DIRECTORS
• 13 INSIDER DEALING
• 14 MINORITY PROTECTION
• 15 COMPANY MEETINGS
• 16 ACCOUNTS, ANNUAL RETURN, AUDITORS
• 17 COMPANY SECRETARY
• 18 DEBENTURES AND SECURITIES
• 19 RECEIVERSHIP
• 20 VOLUNTARY ARRANGEMENTS AND ADMINISTRATION
• 21 INVESTIGATIONS
• 22 TAKEOVERS, RECONSTRUCTIONS AND AMALGAMATIONS
• 23 LIQUIDATION
• 24 COMPANY LAW – THE FUTURE
• Index