Business and Company Law

INTRODUCTION

In the United Kingdom any individual or group of individuals may

engage in business. To do this they must understand, control and
manage the three principal business activities:

Production
 The provision of a product or service to satisfy the wants and
needs of potential customers marketing
 The management process that identifies and anticipates
customer requirements. It includes the selling and distribution of
products and services to satisfy these requirements
Finance
 The function which co-ordinates and controls the resources of the
business to attain a predetermined level of profitability.
The forms of business organisation, which may be adopted, include
sole trader, partnership and various types of company. Each of these
types of organisation will afford certain advantages, but each will also
have its own legal constraints and commercial drawbacks. These
business organisation types are now examined in more detail.

2. SOLE TRADERS
A sole trader is a person who enters business on his own account. He
obtains the capital to start the business, he works in the business with
or without the aid of employees and he receives, as his reward, the
proceeds of the venture.
There are a number of advantages of the sole trader type of business
organisation.
 No formal procedures are required to set up in business,
 Independence means that with no one to consult, the sole trader
can quickly put his plans into effect.
 Personal supervision enables close working links with customers
and employees
 He is accountable only to himself and (apart from taxation
authorities) he need not reveal the state of his business to
anyone.
 No formal procedures to sell or close down the business

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Obviously there are disadvantages suffered by sole traders. The
principal ones are:
 Long working hours, few holidays
 Sickness could lead to business difficulties
 Unlimited liability -the sole trader is personally liable to the full
extent of his private wealth for the debts of the business
 Limited capital for expansion.

PARTNERSHIPS

Whenever two or more people join together in a venture with an object

of gain, a partnership exists whether this is realised or not.

DEFINITION

The basic law of partnership is contained in the Partnership Act of

1890, and this defines partnership as "the relation, which subsists
between persons carrying on a business in common with a view to
profit".

FORMING A PARTNERSHIP

A partnership can be formed with no legal formalities, merely by the

agreement of the parties. It is, however, more usual to draw up a deed
of partnership, showing:

 The names of the partners and the name of the firm.

 The name under which the partnership business operates.
 The amount of money each partner contributes
 The ratio in which profits and losses are to be accepted.
 How accounts will be kept.
 The duration of the partnership.

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RIGHTS AND DUTIES

The rights and duties of the partners depend on the exact terms of the
partnership agreement. If there is no alternative agreement made,
then the Partnership Act 1890 lays down certain rights and duties.
These are:
 The firm will accept any liabilities incurred by a partner in
pursuing the firm's business
 All partners may assist in managing the business. They are not
entitled to draw any salary for their work, but may make
drawings in anticipation of expected profits
 Any disputes and disagreements on the day-to-day running of
the partnership business may be settled by a majority vote of the
partners. No fundamental change in the business can be made
without the consent of all the partners.
 No person may be introduced as a partner without the consent of
all existing partners
 Any profits made outside the business by one partner are to be
given to the firm unless a specific agreement to the contrary has
been made
 A partner may not transfer shares in the firm to any other person
without the consent of all the partners.

PARTNERS AS AGENTS

Every partner is deemed to be an agent of his fellow-partners, but if a

partner acts outside of his authority, then he will be personally liable
for his acts unless the other partners accept what he has done. As
deeds of partnership tend o vest quite broad degrees of authority in
each partner, then the point of personal liability has more academic
than practical interest nowadays. Normally a partner acting as an
agent on behalf of the firm will have the following rights:

 A contract made by a partner in connection with the partnership

business will be binding on his fellow partners.
 A partner is allowed to borrow money, and to pledge the firms
property for this purpose.
 He may sell the goods of the partnership and buy such goods as
the partnership normally deals in.
 He may receive payments owing to the firm and release debts.

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 LIABILITY OF PARTNERS

The major liabilities of partners are as follows:

 Every partner of the firm is liable jointly with the other

partners for all debts and obligations incurred by the firm
while he is a partner. This means that:
 Partners have unlimited liability to the full extent of their
personal wealth.
 If any partner is unable to pay their share of a partnership
debt, the remaining partners must take on that liability.
 For wrongs committed by the partnership, a person may bring
an action in tort against the firm or an individual partner.
 A partners liability ceases when he retires, but to ensure this
cessation of liability, the partner must advise all those people
he has dealt with of his retirement. This is often achieved by
inserting a notice in the ‘London Gazette’
 If an infant is a partner, the other partners accept any liability.

DISSOLUTION OF A PARTNERSHIP

A partnership may be dissolved by any of the following:

 By expiry of time.
 By mutual consent of all partners.
 By the death or bankruptcy of a partner (this automatically
brings the partnership to an end, but the remaining partners
may immediately agree to enter a new partnership
agreement)
 When it is unlawful to continue.
 By a court judgement – a court may dissolve a partnership on
application by one of the partners on grounds such as one of
the partners is of permanently unsound mind, or where the
business of the partnership can only be carried on at loss.

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LIMITED PARTNERSHIPS

Limited partnerships were created by the Limited Partnerships Act

1907, with a view to setting up halfway house between ordinary
partnerships and limited companies. In the event, they have never
proved popular and today very few exist.

In operation, a general partnership may have one or more limited

partners who contribute capital and share in profits. Their liability is
limited and they take no part in the conduct and running of the
business. Such partnerships should be by partnership deed.

SLEEPING PARTNERS

A dormant or sleeping partner contributes towards the capital of the

business and receives a share of the profits. Such a partner is liable,
with the other partners, for any business debts even though he takes
no active part in running of the business.

COMPANIES – BASIC TYPES OF LIMITED COMPANY

A Company is termed a limited liability company if the capital to start a

business is provided by shareholders (usually called “members”)
whose liability for the debts of the business is limited to the amounts
paid (and/ or payable) on their shares. Once a company is created it is
then said to have its own legal “personality” which is separate from
that of the individuals – the members – who bought it into existence.
Once created, a company has the power to employ people, to own
property and to enter into contracts. A Company as a legal entity can
also be sued for breaches of civil law, such as breaches of contract, but
cannot normally be held liable for criminal acts.

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The formation of a company has certain advantages to its creators,
principally:

 The main advantage is that of limited liability. Shareholders can

only put at risk the amounts paid for the shares. Personal
property is not at risk as it is, for example, with partnerships and
sole traders.
 It allows the business to expand by securing money from outside
sources in exchange for shares. These are dealt with more fully
in the following paragraphs.
 A company can also present a more substantial identity to the
outside world, and suppliers and customers may view a company
as a business with an enhanced credibility.
 The current tax regimes can make it beneficial to pay
corporation tax on company profits rather than personal taxation
on the earnings as a sole trader or partner.

There are also certain drawbacks with creating a company. The main
disadvantage is that a company’s accounts must be submitted to the
Register of Companies each year. This means that, unlike partnerships
and sole traders, details of the business are available to anyone who
wishes to view them – customers, competitors etc.

PUBLIC LIMITED COMPANY

A public limited company is limited liability company (i.e. limited by

shares or guarantee) which:

 Have at least two members.

 Have at least two directors.
 Have a company secretary.
 Has a registered name ending with Public Limited Company
(PLC).
 Declares itself by its memorandum to be a Public Limited
Company.
 Has authorised share capital of at least £50,000.
 Includes an issued share capital of at least the authorised
minimum (i.e. £50,000).

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PRIVATE LIMITED COMPANY

A private limited company is a limited company, which is not a public

limited company. It must:

 Have at least one director and a company secretary who must be

separate people, although the secretary may be a director.
 Have a registered name ending with ‘Limited’.
 Not invite the public to buy its shares or debentures and is
required to certify that it has not issued any such invitation when
making the Annual Return to the Registrar of Companies. It can,
however, raise money by selling shares to friends, family
members etc.
The only limit to the number of members of a private company is
provided by the amount of authorised share capital.

COMPANIES – FORMATIOM AND REGISTRATION

MEMORANDUM OF ASSOCIATION

The first members of a limited company will draw up a memorandum

of association indicating the following:

 The name of the company, with the word ‘limited added.

 Whether the registered office is situated in England, Wales or
Scotland.
 The objects of the company.
 The limitation of the member’s liability.
 The amount of authorised share capital.

As the company may not exceed the powers outlined in the objects
clause, it is usual to draft the clause as widely as possible.

The promoters of the company must sign the memorandum and send
it to the Registrar of Companies in Cardiff for England and Wales, or
Edinburgh for Scotland.

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ARTICLES OF ASSOCIATION

These are contained in a document showing the appointment, powers

and remuneration of the directors. It will also show the rights of
various classes of shareholders and rules governing meetings. The
Articles of Association for the procedural ‘rule book’ of the company.

COMPANIES – COMMENCEMENT IN BUSINESS

CERTIFICATE OF INCORPORATION

Before any company, private or public, can be officially registered, the

following documents must be lodged with the Registrar of Companies:

 The memorandum of association.

 The articles of association.
 Details of the company’s registered office.
 Particulars of the director (s) and secretary.
 A statutory declaration that the relevant requirements of the
Companies Act have been met.
 The necessary fee.
Once the Registrar has received all of the necessary documents and
the fee, the company will be officially registered. The Registrar does
this by issuing a Certificate of Incorporation and by giving the company
a registration number.

Once the Certificate of Incorporation has been issued a private limited

company may commence business. Public limited companies,
however, must wait until the Registrar issues a further document, the
Trading Certificate, which confirms that the issued share capital is not
less than the authorised minimum of £50,000.

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LISTED COMPANIES

Almost all companies begin life as private limited companies. They will
convert to public limited companies usually only when expansion
requires more capital than the private owners can provide. Before a
private limited company can become a public limited company it must
pass a resolution to alter its memorandum and articles of association
and apply to the Registrar of Companies to re-register.

To enable the shares of a public limited company to be traded the plc

will usually apply for a “listing” on the London Stock Exchange.
Although it is now possible to make offers of unlisted securities on the
Alternative Investments Market. Before the Stock Exchange will permit
a listing they will require the company to provide detailed information,
which will then be published as the “listing particulars”.

REGISTERS

Under the Companies Act, every company must keep a register

showing certain information concerning all directors and members.
This information includes:

 Date on which each person became a shareholder.

 Shareholder’s name, address and occupation.
 Number and identification of shares held.
 Details of transfers of shares.
 Register of mortgages and charges.

Companies must also keep

 Register of directors.
 Minute book.
 Books of account.

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ACCOUNTS

It is a requirement for limited companies to file copies of their accounts

each year with Companies House. In addition, the Companies Act
requires companies to maintain copies of their accounting records,
usually at head office, for the following minimum periods:

 Private limited companies – 3 years.

 Public limited companies – 6 years.

Separate legislation also requires that VAT records are maintained for
a minimum of 6 years.

OTHER PROVISIONS

Limited liability gives companies great protection. The law is anxious

that companies make public the fact that they are in fact limited
companies and enjoy the benefits of limited liability. The Companies
Act requires companies to show the following information on all their
business letters:

 The place of registration of the company i.e. whether it is

registered in England and Wales or Scotland.
 The registration number of the company.
 The address of the registered office.

It is not a legal requirement to show the names of directors on

company headed stationery. However, if the name of any director is
printed on the stationery, then the law requires the names of all the
directors be included.

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COMPANIES – SHAREHOLDERS AND DIRECTORS

Share capital

The issuing of shares is one way of raising money (capital) for a

business. A share is exactly what its name implies, it represents a tiny
piece of the company, and the shareholder will buy the shares in
anticipation of the company making profits and sharing those profits
with the shareholder in the form of dividends.

There are obviously other ways of raising capital, such as obtaining

loans from banks or other institutions, issuing debentures or retaining
profits to plough back into the business. The alternative sources of
capital are examined more fully in ‘Financial Management Techniques’.

If the company chooses to issue shares there are two basic types of
share it can issue:

 Preference Shares
Preference shares give the holder the right to a preferred “fixed”
dividend. “Fixed” means that the rate of dividend is fixed in
advance and is not directly dependant upon the company’s level
of profit. “Preferred” means that the holders of preference
shares must be paid their dividends before any remaining profits
are distributed between the ordinary shareholders. However,
preference shares are still shares and not loans. Preference
shareholders are still paid dividends and not interest. Even
preference shareholders will not receive their dividend if the
company makes no profit at all. Preference shares represent a
relatively safe investment. The Articles of Association of the
company will specify the various rights of the preference
shareholders. Normally holders of preference shares do not have
any voting rights.

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  Ordinary Shares

Ordinary shares are often known as the equity share capital of a

company. Ordinary shareholders will not receive any dividend
until preference shareholders have been paid.

Ordinary shares carry voting rights. They represent a riskier

investment than preference shares, but the presence of the
voting rights mans that disgruntled ordinary shareholders can
always vote to remove directors who have failed to produce
acceptable profits for the company.

In both private and public companies the Memorandum of

Association will specify a maximum amount of money that the
company is authorised to raise by issuing shares. Once this
amount has been reached then it is possible to increase the
share capital further, but this will require the passing of a
resolution to that effect by the existing shareholders.

It is important to note that debentures are not part of a

company’s share capital. They are in fact, part of the company’s
loan capital. Debenture holders are therefore not shareholders.
They are paid interest not dividends.

DIRECTORS

A director can be directly appointed by the founders of the

Memorandum or named in the Articles, or voted into office at a general
shareholders meeting.

Directors are answerable to the shareholders for the conduct and

efficiency of the company. They are also required to have regard to
the interests of the company’s employees.

The company must keep an updated register containing the names,

addresses and nationalities of directors.

Generally, all companies are forbidden to make loans to directors.

Insider dealing i.e. buying or selling the company’s shares on the

market, using information obtained in confidence, to the buyer /
seller’s advantage, whether by a director or any other person, is a
criminal offence.

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Directors owe to their companies a duty of care and skill in undertaking
their activities, and also a duty of loyalty and good faith. Directors will
be liable for any act, which is negligent, outside their authority or in
breach of the duty of loyalty and good faith. Under the Insolvency Acts
it is possible for directors to be sued by creditors, shareholders, the
official Receiver, in fact anyone suffering a loss, if this situation has
been brought about by the director breaching one of the specified
duties. Such action for wrongful trading can, if successful, lead to the
director being required to make substantial contributions from his
personal wealth to cover losses incurred.

COMPANY SECRETARY

The company secretary has a key role in the administration of any

private or public limited company. The company secretary will either
be a director in his / her own right or will have been appointed by the
directors. For public limited companies the Company Secretary must
meet certain criteria, either having prior experience as a secretary or,
more commonly, having a professional qualification such as an
accountant, chartered secretary, solicitor or barrister.
The company secretary’s duties include:

 Ensuring that the company meets all of the requirements of the

Companies Act and other legislation.
 Organising company meetings.
 Maintaining the company registers, particularly the register of
shareholders.

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AUDITORS

Auditors are usually appointed at the general meeting of the company.

They must present a balance sheet and a profit and loss account t its
shareholders. Two directors and the company secretary must sign
these. However, where a private company has only one director, then
only one director’s signature is required in addition to the company
secretary.

Shareholders will also be given the directors and the auditor’s reports.
These will explain the previous year’s trading and expectations for the
following year.

PROXIES

If the Articles of Association allow, a shareholder may pass his voting

rights to someone acting on his behalf. He will fill in the requisite form
showing his own and the proxy’s name and address and the particulars
of the meeting. He must also sign the form and have his signature
witnessed.

COMPANIES – WINDING UP

A company can be dissolved and removed from the register of

companies. Dissolution of a company is more frequently referred to as
winding up or liquidation. There are basically two major forms of
winding up, voluntary winding up and compulsory winding up.

VOLUNTARY WINDING UP

Member’s voluntary winding up

Shareholders can at any time agree to wind up the company, they

must first pass a resolution to this effect. If the company is solvent,
the directors can file a statutory declaration with the Registrar of
Companies stating that the company is able to pay all of its debts.
Once this is accepted then the shareholders can appoint their
liquidator who will arrange the winding up.

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Creditors Voluntary Winding Up.

This will take place when the company cannot meet all of its debts in
full and is unable to make the necessary statutory declaration of
solvency. A meeting of the creditors will be called by the company
and, at the meeting, the directors of the company will give the
creditors a full statement of the company’s financial position. The
creditors, not the shareholders, are able to appoint a liquidator to
control the winding up.

COMPULSORY WINDING UP

The Insolvency Act give the courts, principally the High Court, the
power to make orders for the compulsory winding up of companies.
Situations which would allow a compulsory order to be made include
circumstances where:
 The company does not commence in business within a year
from its incorporation, or it suspends its business for a year
or more.

 The number of shareholders falls below two.

 For public limited companies the Registrar of Companies

withholds a trading certificate. A trading certificate is
normally issued to plcs after the Certificate of Incorporation
and it is the document that permits trading to begin. The
Registrar may withhold the certificate if he has been unable
to obtain certain details relating to its finances.

 The company is unable to pay its debts. This is by far the

most common reason for compulsory winding up. The
winding up process will commence and a bankruptcy order
will be issued if the company fails, within 3 weeks, to pay a
creditor who has delivered a statutory demand for payment
to the company’s office.

For compulsory winding up the process is controlled by the court which

will appoint a liquidator (usually the Official Receiver) to dispose of the
company assets and pay what is available to the creditors.

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LIQIIDATOR’S DUTIES.

The Insolvency Act 1986 sets out the powers and duties of the
liquidator. His chief duties will include selling or realising the property
and other assets of the company, paying debts (including his own
costs) and distributing any balance to shareholders.

The liquidator must follow a strict order of priorities when distributing

the money raised by the disposal of the assets. Priority for payment is
in the following order:

 The liquidator’s fees and expenses, plus any other expenses

associated with the winding up.

 Preferential debts, including any PAYE owed, VAT and the wages
of the employees.

 Unsecured debts, mainly the sums owed to the trade creditors.

 Shareholders. The Articles of Association will specify the

priorities within the total group of shareholders but, as a general
rule, preference shareholders will receive their payments before
any ordinary shareholders.

For a compulsory winding up, when the liquidator has realised and
distributed the assets he can apply to the court for an order to dissolve
the company and to release him from his duties. For voluntary
liquidations the court has no involvement.

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