This action might not be possible to undo. Are you sure you want to continue?
Company Law The Nature of Companies
Introduction What is a company? Separate Legal Personality Consequences of Separate Legal Personality Types of Company Comparison of Sole Trader, Partnership and Company
The three main forms of business are
Sole trader Partnership Company
A major disadvantage for sole traders and partners is that they have unlimited liability for the debts of their business
The owners of companies, on the other hand, have limited liability Companies are also fairly flexible - ranging from small, one person companies to large multinationals
by Royal Charter This was the earliest way of creating corporations. 5 .What is a Company? A company is a body corporate or corporation There are 4 types of corporation. Those created 1.
nowadays.What is a Company? (cont. It is used for charitable and educational bodies The BBC (British Broadcasting Corporation) and the Bank of England were both created by Royal Charter 6 . it is not used to create trading bodies.) However.
this is an old way of creating corporations which is no longer used Bank of Scotland was created in 1695 by and Act of the old Scots Parliament The Governor and Company of the Bank of Scotland 7 . by special Act of Parliament Again.What is a Company? (cont.) 2.
by registration under the Limited Liability Partnership Act 2000 3.What is a Company? (cont.) by registration under the Companies Act 1985 The current law relating to companies is mainly contained in this Act It is the most common way of creating a corporation 4. 8 .
they have their own separate identity In law. they are regarded as a person Although a company is not a natural person (like you or me) the law treats it in the same way in many areas 9 .Separate Legal Personality As companies are a kind of corporation.
Separate Legal Personality (cont. he formed Salomon & Co Ltd He held most of the shares with his wife and 5 of his children each holding one share as company law at that time required at least 7 shareholders in a company 10 .) The most famous case in this area is Salomon v Salomon & Co Mr Salomon was in business as a leather merchant In 1892.
Separate Legal Personality (cont. the company did not do well and it went into liquidation A liquidator was appointed to sell the assets of the company and pay its debts 11 .) Unfortunately.
) The liquidator claimed that the company was a fake because Mr Salomon owned 20 001 shares and his family owned only 6 altogether Mr Salomon was really just running the same business Therefore.Separate Legal Personality (cont. the liquidator argued that Mr Salomon was liable for all the debts of the company 12 .
The fact that some shareholders only held 1 share as a technicality was not relevant The registration procedure could be used to create a one-man company 13 .Separate Legal Personality (cont.) However. the House of Lords disagreed The court held that 1.
Separate Legal Personality (cont.) 2. A company which is properly formed under the Companies Act is a separate person As a result the debts of a company were its own and not those of its members 14 .
In Macaura v Northern Assurance Co.Separate Legal Personality (cont. Macaura sold all the timber on his estate to a company in return for all the shares in that company The timber was stored on Macaura‟s estate Macaura insured the timber in his own name 15 .) Two more cases also help to demonstrate the idea of separate legal personality.
) Two weeks later. The company owned it. the timber was destroyed in a fire The insurance company refused to pay out because it said Macaura did not have an insurable interest in the timber because he did not own it.Separate Legal Personality (cont. The House of Lords agreed 16 .
Macaura had not insurable interest in the timber even though he owned all the shared in the company 3. Just as the separate legal identity of a company gives the members limited liability.Separate Legal Personality (cont.) The court held 1. The timber belonged to the company not Macaura 2. it also means that the assets of a company belong to it and not to its shareholders 17 .
Consequences This concept of separate legal personality has several consequences Limited liability Perpetual succession Business property Court actions Liability in tort and crime The rule in Foss v Harbottle 18 .
and a member of a company limited by guarantee is only liable to pay the amount which he guarantees to pay if the company is wound up 19 .Limited Liability The liability of the members of a company for its debts is limited Under the Companies Act 1985 a member of a company limited by shares is only liable to pay the full amount of his shares.
members are free to sell their shares on the stock exchange 20 . the death or bankruptcy of a member does not end the company In public limited companies.Perpetual Succession Changes in the membership of a company have no effect on the continuation of that company Unlike a partnership.
Business Property Business property is owned by the company and not its shareholders That means a creditor cannot take action against company assets in respect of a debt due by a member of that company 21 .
Court Actions A company can sue and be sued in its own name It can also enter contracts in its own name The company‟s liability for contractual debts is unlimited It is only the members‟ liability which is limited 22 .
Liability in Tort and Crime Companies are vicariously liable for the torts of their employees Companies can be guilty of crimes which do not require a mental element (eg intention or recklessness) However. it has been more difficult to prosecute companies where the crime has such an element as it has to be shown that one of the directors of the company had the required mental element This can be very difficult in a large company where the directors are not involved in the day to 23 day operation of the business .
Foss v Harbottle This case gives us the idea of „majority rule‟ in a company If a company suffers injury then the majority of members must agree to raise a court action A single member cannot take action against the wrongdoer 24 .
there are exceptions to this rule when a court will not treat a company as a separate entity This is often referred to as “lifting the veil of incorporation” Often. this is to prevent abuse of the principle of separate identity 25 .Lifting the Veil of Incorporation Although the general rule is that a company has a separate legal identity from its members.
Lifting the Veil of Incorporation (cont.) For example. officers of the company will become personally liable if they issue bills of exchange or enter into contracts on behalf of the company but do not use the company‟s full name 26 . if a company trades with fewer than two members then the sole member has unlimited liability for company debts Also under the Companies Act. under the Companies Act 1985.
the general principle is that the courts will not allow a company to be used for a fraudulent purpose or to avoid a legal duty For example.) At common law. a term in an employee‟s contract prevented him from approaching former customers after he left Gilford Motor Co 27 . in Gilford Motor Co v Horne.Lifting the Veil of Incorporation (cont.
when he left he formed his own company. and the company approached his former customers The court held the company was a sham being used to avoid the term in his contract 28 .Lifting the Veil of Incorporation (cont.) Therefore.
Types of Company Companies can be classified in several ways Limited and Unlimited Limited by Shares or by Guarantee Public and Private 29 .
it is possible to create a company without limited liability Such companies do not have disclose their accounts as limited companies do 30 .Limited and Unlimited Companies Companies are usually formed because of the limited liability for their members However.
Limited by Shares or Guarantee The most common kind of limited company is one limited by shares Once the shareholder has paid the full value on his shares then he has no further liability This is true even if the company does not have enough money to pay its debts 31 .
Limited by Shares or Guarantee (cont) A company limited by guarantee is usually created for charitable. educational or professional purposes ie it is not a trading company The liability of members is to pay an agreed amount if the company is wound up Usually. so the risk is low 32 . the amounts are small.
Public and Private Companies The main difference between public and private companies is that the shares in a public company may be bought and sold on a stock exchange Public companies must have at least two directors.000 33 . whereas a private company can have one Public companies must have a minimum issued share capital of £50.
whereas a public company cannot 34 . whereas public companies cannot Private companies may elect not to appoint auditors or hold an AGM (Annual General Meeting).Public and Private Companies (cont.) Private companies may purchase their own shares out of capital.
Comparison of Ownership It is useful to compare the advantages and disadvantages of the three forms of business Sole trader Partnership Company 35 .
Simplicity – one person does not need a complex organisational structure.Advantages No legal filing requirements or fees and no professional advice is needed to set it up. 36 .Sole Trader . You just literally go into business on your own.
. As a result he has personal liability for all the 37 debts of the business. Unlimited liability – the most important point to note in terms of comparing this form to the company in that there is no difference between the sole trading business and the sole trader himself.Sole Trader .Disadvantages The disadvantages are that it is not a particularly useful business form for raising capital (money). For most sole traders the capital will be provided by personal savings or a bank loan. The profits of the business belong to the sole trader but so do the losses.
Easier to obtain capital as there can be up to 20 members of the partnership.Partnership .Advantages No formal legal filing requirement involved in becoming a partnership beyond the minimum requirement that there be two members of the partnership. 38 . all of whom could pool their investment within the partnership.
) If you are aware of the problems the Partnership Act can cause (see disadvantages) then you can draft a partnership agreement to vary these terms of the Act The partnership agreement can therefore be used to provide a very flexible organisational structure although this usually involves having to pay for legal advice. 39 .Partnership – Advantages (cont.
Disadvantages A partnership will end on the death of a partner. If you are unaware of this when the partnership is formed.Partnership . the Act may not reflect the intention of the partners. This means that each partner can be sued for the total debts of the partnership 40 . The partners are jointly and severally liable for the debts of the partnership.
41 .Advantages Companies are designed as to make it easy to raise capital. Companies have the ability to subdivide their capital into small amounts. allowing them to draw in huge numbers of investors who also benefit from the sub-division by being able to sell on small parts of their investment.Company . Limited liability also minimises the risk for investors and is said to encourage investment.
Company – Advantages (cont. 42 .) It is also said to allow managers to take greater risk in the knowledge that the shareholders will not lose everything. The constitution of the company provides a clear organisational structure which is essential in a business venture where you have large numbers of participants.
Company . It also appears to be an very complex organisational form for small businesses. where the Board of Directors and the shareholders are often the same people 43 .Disadvantages Forming a company and complying with company law is expensive and time consuming.
Summary What is a company? Types of corporation Separate Legal Personality Consequences of Separate Legal Personality Types of Company Comparison of Sole Trader. Partnership and Company 44 .
Reading Chapter 13 Pages 341-350 45 .