Company Law

Janet Dine, Marios Koutsias

• Publisher: Red Globe Press
• Year: 2020
• Print ISBN: 9781352010008
• eBook ISBN: 9781352010015
• Edition: 9
• Topic: Law
• Subtopic: Corporate Law
• Index: Law

Company Law is a complete and accessible guide to the legal framework in which companies operate. Logically structured and with a readable style, the text includes helpful summaries for each chapter, along with case notes.

Chapter 1

Starting a company

Key terms

Alter ego – a device that attributes the acts of important managers to the company itself, so that the company may be sued for compensation or convicted of crimes.

Community interest company (CIC) – this type of company was created by the Companies (Audit, Investigations and Community Enterprise) Act 2004. It is a form of company designed for community enterprises that are not charities.

Corporate personality – the legal fiction that the company is an entity separate from the people actually involved in it.

Lifting the veil – looking at the facts and disregarding the effect of the legal fiction that all companies are completely separate from their shareholders.

Private company (Ltd) – this type of company may not advertise to the public in order to sell shares.

Public company (PLC) – this type of company may offer shares to the public by advertisement.

1.1 Starting a company

The first decision that must be made by those considering incorporation of a business is the type of company that will be suitable.

1.1.1 Unlimited and limited companies

1.1.1(a) Unlimited companies

An unlimited company has the advantage of being a legal entity separate from its members but lacks the advantage that most people seek from incorporation, that is, the limited liability of the members. Thus, the members of an unlimited liability company will be held responsible for all of the debts of the company without limit. Unlimited companies therefore form only a small proportion of the total number of registered companies.

1.1.1(b) Limited liability companies

‘The limited liability corporation is the greatest single discovery of modern times. Even steam and electricity are less important than the limited liability company,’ said Professor NM Butler, President of Columbia University (quoted by AL Diamond in Orhnial (ed.), Limited Liability and the Corporation (Law Society of Canada, 1982) at 42; see also Sealy, Company Law and Commercial Reality (Sweet & Maxwell, 1984) at 1).

Why is the limited liability company so important? A huge proportion of the world’s wealth is generated by companies, and a company is most often used by people as a tool for running a commercial enterprise. Many of these businesses start in a small way, often by cooperation between a small number of people. If such a commercial undertaking prospers, the persons involved will wish to expand the undertaking, which will generally require an injection of money. This may be achieved by inviting more people to contribute to the capital sum that the business uses to fund its activities. The alternative is to raise a loan. The latter course has the disadvantage of being expensive, because the lender will charge interest. On the other hand, the option of inviting a large number of persons to be involved in a business may have considerable disadvantages. One is that they may disagree with each other as to how the business should best be run. They may even disagree with each other as to who should make the decisions about how the business is to be run. This is partially solved in a company by the necessity of having a formal constitution (the memorandum and articles of association – see Section 1.2.2), which sets out the voting and other rights of all the members (shareholders) of a company.

Another disadvantage of expansion of a business is that as the amounts dealt with increase, so too do the risks. The great advantage of the most widely used type of company is that its members enjoy ‘limited liability’. This means that if the company becomes unable to pay its debts, the members of that company will not have to contribute towards paying all the company’s debts out of their own private funds: they are liable to pay only the amount they have paid, or have promised to pay, for their shares. This means that contributors to the funds of businesses that are run on this limited liability basis may be easier to find. Limited liability is also said to encourage greater boldness and risk-taking within the business community, so that new avenues to increasing commerce are explored.

The advantage of limited liability may lead quite small businesses to use a company, although this may not be advantageous from a tax point of view and leads to a number of obligations to file accounts and so on, which create a considerable burden for a small concern. Furthermore, if a very small business wishes to raise a loan from a bank, the bank will normally require a personal guarantee from the people running the business. This means that the advantage of limited liability will, practically speaking, be lost.

1.1.1(c) Corporate personality

A further disadvantage of attempting to run a business with a large number of people involved is that considerable difficulties may be experienced when some of those people die, wish to retire or simply leave the business. There may be great difficulties for a person dealing with the business in deciding precisely who is liable to pay him. In a shifting body of debtors, an outsider may experience extreme difficulty in determining which people were actually involved in the business at the time that is relevant to his claim against it. This difficulty is solved by the legal fiction of corporate personality. The idea is that the company is an entity separate from the people actually involved in running it. This fictional ‘legal person’ owns the property of the business, owes the money that is due to business creditors and is unchanging even though the people involved in the business come and go. Corporate personality is discussed in further detail in Section 1.5.

The UK company law rules were the subject of a Department of Trade and Industry review during 2001–02. Although it was publicised as a ‘fundamental review’ of company law, the changes that resulted were quite modest in substance. However, the Companies Act 2006 almost completely replaces the previous Companies Act 1985, so that many sections have been slightly changed in substance and bear a different number in the new Act. This is important, because some of the case law will refer to the previous Companies Act 1985 and readers will have to find the relevant section in the Companies Act 2006.

As we examine company law of the UK, it is useful to consider the purpose behind the various rules and whether they are sufficiently effective in achieving their purpose and also whether they justify the expense that is incurred by companies to ensure that their operations stay within the complicated framework that has grown up.

1.1.2 Public and private companies

The fundamental difference between public and private companies is that only public companies may invite the public to subscribe for shares. Section 755 of the Companies Act 2006 prohibits a private company from offering, allotting or agreeing to allot securities to the public or acting with a view to their being offered to the public. Section 756 defines ‘offer to the public’ as including an offer to any section of the public, however selected. However, it is not an offer to the public if it can properly be regarded, in all the circumstances, as:

1. not being calculated to result, directly or indirectly, in securities of the company becoming available to persons other than those receiving the offer; or

2. otherwise being a private concern of the person receiving it and the person making it.

In other words, the offeror and offeree must either be known to each other or be part of a close network of friends, family or acquaintances for the offer not to constitute an ‘offer to the public’.

Public companies are therefore more suitable for inviting investment by large numbers of people. A private company is particularly suitable for running a business in which a small number of people are involved. Professor Len Sealy describes the situation as follows:

During the nineteenth century (and indeed for a considerable period before that) the formation of almost all companies was followed immediately by an appeal to the public to participate in the new venture by joining as members and subscribing for ‘shares’ in the ‘joint stock’ … The main reason for ‘going public’ in this way was to raise funds in the large amounts necessary for the enterprises of the period – often massive operations which built a large proportion of the world’s railways, laid submarine cables, opened up trade to distant parts and provided the banking, insurance and other services to support such activities. The promoters would publish a ‘prospectus’, giving information about the undertaking and inviting subscriptions. This process is often referred to as a ‘flotation’ of the company or, more accurately, of its securities.

(Sealy, Cases and Materials in Company Law, 6th edn, Butterworths, 1996)

As one might expect, the regulations governing public companies are more extensive than those governing private companies. In many areas, however, no distinction is made between the two types of company.

1.1.3 Off-the-shelf companies

Ready-made companies may be acquired from enterprises that register a number of companies and hold them dormant until they are purchased by a customer. This may save time when a company is needed quickly for a particular enterprise. There used to be a potential problem in that the objects clause of such a company might not precisely cover the enterprise in question, with the result that such a company would be precluded from carrying on the desired business. Contracts made in pursuance of such an enterprise would be of no effect (see Chapter 4). However, m...

Table of contents

• Cover
• Half-Titlepage
• Series-page
• Titlepage
• Copyright
• Short Contents
• Preface
• Acknowledgments
• Table of Cases
• Table of Legislation
• 1 Starting a company
• 2 Corporate governance
• 3 The articles of association
• 4 The power to represent the company
• 5 Shares
• 6 Buying and trading shares and the regulation of investment business
• 7 Maintenance of capital
• 8 The management of the company
• 9 Directors’ duties
• 10 Shareholders’ remedies
• 11 Lending money and securing loans
• 12 Takeovers, reconstructions and amalgamations
• 13 Insolvency
• 14 Multinational companies
• Index