Company Lawcards 2012-2013

Routledge

• Publisher: Routledge
• Year: 2012
• Print ISBN: 9780415683302
• eBook ISBN: 9781136594779
• Edition: 8
• Topic: Law
• Subtopic: Corporate Law
• Index: Law

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Titles in the Series: Commercial Law; Company Law; Constitutional Law; Contract Law; Criminal Law; Employment Law; English Legal System; European Union Law; Evidence; Equity and Trusts; Family Law; Human Rights; Intellectual Property Law; Jurisprudence; Land Law; Tort Law

1

Incorporation

Introduction

Organising for business

The company and the partnership

Advantages of incorporation

Public companies and private companies

Partnerships

Partnership Act 1890

Limited Partnership Act 1907

Limited liability partnerships

Formation of an LLP

Members and designated members

Contractual and tortious liability

Members’ relationship with each other

Minority protection

Winding up

Disqualification of members

Corporate personality

Statutory exceptions

Judicial exceptions

Combating fraud

Agency

Groups of companies

Trust

Corporate killing

INTRODUCTION

In this chapter, the aim is to introduce key areas of company law. Much of the content may not be the subject of a specific examination question but this area is vital to an understanding of company law. Key issues, such as corporate personality, are dealt with in some detail. The law relating to companies was amended by the Companies Act (CA) 2006. This Act both consolidates and reforms company legislation.

ORGANISING FOR BUSINESS

When a business person decides to set up in business, there are a variety of formats that can be adopted. These are sole trader, partnership or company. The decision as to which type of entity will be used will be influenced by a variety of factors, such as whether there are other people who will be involved in running the business, the size of the business, whether the business has any assets and how long the venture is likely to last. He or she will need to consider the various advantages and limitations of each form of organisation.

THE COMPANY AND THE PARTNERSHIP

The most usual initial decision is whether to operate as a partnership or as a company registered under the (CA) 2006. Reference here is to partnerships coming within the scope of either the Partnership Act 1890 or the Limited Partnerships Act 1907. Partnerships coming within the former can be referred to as ordinary or general partnerships. It is possible for a limited liability partnership to come into existence, as provided for by the Limited Liability Partnerships Act 2000. These types of partnerships are dealt with later on.

The two types of business are very different. A partnership is defined in s 1 Partnership Act 1890 as ‘the relation which subsists between persons carrying on a business in common with a view of profit’ (Khan v Miah [2000]). The company is a separate person in law (Salomon v Salomon & Co Ltd [1897]). The company can own property, commit crimes and conclude contracts. The partnership, on the other hand, is no more than a convenient term for describing the sum total of the partners who make up the partnership or firm. The partnership is not a separate person in law. The partnership cannot commit crimes or torts. These can only be committed by the partners, as agents of the firm.

A further consequence of the distinction between the company and the partnership is that the company pays corporation tax as a separate entity on its profits whilst the partnership does not pay tax as such, although a tax assessment may be raised against it. The tax is in fact paid under the schedular income tax system by the individual partners in the firm.

◗ SALOMON V SALOMON & CO LTD [1897]

Salomon incorporated his boot and shoe repair business. He took all the shares of the company except six which were held by his wife and children. Payment for the transfer of the business was partly by debentures (a secured loan) issued by the company to Salomon. The debentures were transferred to Broderip in exchange for a loan. Salomon defaulted on the loan and Broderip sought to enforce the security against the company. Unsecured creditors tried to put the company into liquidation. A dispute ensued as to who had priority in relation to payment of the debts. The unsecured creditors argued that Salomon’s security was void as the company was a sham and was in reality the agent of Salomon.

The House of Lords held that this was not the case, the company had been properly incorporated and that therefore the security was valid and could be enforced.

The case is the most important case in company law since it is from this case that many of the principles of English company law flow. However, the spirit of the decision has not been universally followed and there are exceptions to the Salomon principle where the corporate veil is lifted.

ADVANTAGES OF INCORPORATION

The members of a registered company have the benefit of access to limited liability. Not all companies are limited. Indeed, there are many unlimited companies where liability of the members is not limited. The advantage of such companies is that they do not need to file annual accounts. By contrast, although there is such a thing as a limited partnership (see the Limited Partnership Act 1907), partnerships are in practice unable to limit the liability of the partners, unless it is a limited liability partnership created under the Limited Liability Partnerships Act 2000.

A feature of partnership is that partners are involved in the business either via the investment which they have made in the enterprise or by managing it. For a company however, we need to separate ownership from control. The people who subscribe for the shares of a company do not necessarily have any hand in the running of the business. This will be particularly true of a large public company. In the case of the partnership, all of the partners of the firm are agents and are able to act to bind the firm and are bound by the actions of the other partners.

Since the company is a separate entity, in theory, it could go on forever. Perpetual succession is seen as a benefit of incorporation as the company can continue even when those who run it or finance it may change. Partnerships, unless they have made arrangements in their partnership deed, have to be re-formed and reconstituted upon the death or bankruptcy of individual partners.

Where a person wishes to invest money and needs the investment to be readily realisable, the company is the appropriate vehicle. This is particularly true if the company is quoted on the Stock Exchange since there is a market mechanism for disposing of the shares of the business. In a partnership, it is likely that a partnership share will be much less easily realisable than shares in a company.

A further advantage for the company is in the context of raising finance. A company, as a separate entity, is able to mortgage all its assets by way of a floating charge to secure a borrowing from, for example, a bank. This means of securing a loan and raising finance is not available to the partnership.

The costs of incorporation are minimal. However, there are some formalities connected with setting up and running a company. The CA 2006 has stream-lined the paperwork required to set up a company. It is now possible to file the documentation online. Compliance with ss 7–16 of CA 2006 requires the filing of a modified form of the memorandum of association as well as an application for registration, articles of association and statements of initial shareholding, share capital, guarantee, proposed officers and statement of compliance. There are additional requirements regarding company management, the issuing of shares, the creation of charges and the filing of the annual return. Furthermore, the company is obliged to keep a series of company books at the company’s registered office or some other appropriate place. These registers would include the register of members, register of directors and register of charges. However, a partnership does not even require a written agreement (Partnership at will). In this case it will be governed by the Partnership Act 1890 by default.

An important consideration for entrepreneurs who are setting up in business is what the tax consequences of setting up as a company or as a partnership will be. It is not possible to say that the balance of advantage always lies with one form of business rather than another, but it will certainly be a powerful consideration when entrepreneurs are weighing the relative advantages and disadvantages of each form of business medium. Partners will pay income tax on profits taken from the business; companies will pay corporation tax on profits made by the company; directors will pay income tax on salaries; and shareholders will pay tax on dividends received.

The information set out above in relation to different types of business is extremely important background information in tackling company law questions and understanding why people set up companies rather than operating a business through the medium of a partnership. The restriction on the number of partners forming a trading partnership was lifted in December 2002. Prior to that date the maximum number of partners that could be involved in a firm was set at 20.

PUBLIC COMPANIES AND PRIVATE COMPANIES

Another key area which permeates the whole of company law is the distinction between public companies and private companies. The vast majority of companies are private companies. Those that hit the news headlines tend, however, to be public companies and this may give a distorted view of the numerical significance of public companies.

The surprising feature of English company law is that the general principles apply to public companies as to private companies. However, the advent of CA 2006 has resulted in the removal ‘of unnecessary [regulatory] burdens on small firms’, with greater variation in the legal requirements placed on different types of companies.

A public company must have a minimum subscribed share capital of at least £50,000 or the Euro equivalent (s 763 of the CA 2006). This should be paid up to at least 25 per cent before it can be incorporated and commence its business (s 586 of the CA 2006). This was a requirement of the Second EC Directive which set the minimum subscribed share capital for public companies within the European Union. In addition to the payment of the minimum subscribed share capital to at least 25 per cent on initial allotment of shares, the whole of any premium must be paid up (for example, if a company issues 50,000 £1 par shares at £1.50, the minimum subscribed share capital would be £37,500, that is, one quarter of £50,000 plus premium of £25,000).

A further distinction between the public an...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Table of Cases
• Table of Statutes
• Table of Statutory Instruments
• Table of European Legislation
• How to use this book
• 1. Incorporation
• 2. The company’s constitution
• 3. Capital
• 4. The management of the company
• 5. Company meetings
• 6. Shareholder protection
• 7. The company in trouble, reconstructions and takeovers
• 8. Putting it into practice…