Professional Documents
Culture Documents
The law relating to companies is mainly governed by the Companies Act 1985 and
1989.
We can classify companies from a number of viewpoints.
1 Public companies, :
2 Private companies
Formation of a Company
This is usually undertaken by promoters of companies. A promoter who makes a pre
incorporation contract on behalf of a company may be held personally liable, under
the Companies Act 1985, for the contract made on behalf of the company that has
not yet been incorporated (See also Kelner v Baxter 1866.)
The company begins its life when it registers its Memorandum of Association and
Articles of Association with the Registrar of Companies. If the new company does not
submit its own set of articles, then the model Table A documents will apply.
We can regard this as the skeleton of the company. It tells us what the company is
authorised to do. we will see this more clearly when we look at the objects clause.
1 Name of Company
2 Registered Office
3 Objects clause
4 Liability of members limited by shares or guarantee
5 Nominal Capital
6 The Association clause
1 Name :
The general rule is that any name can be chosen. There are a few qualifications,
amongst them being the requirement that the name of a public company must end
with PLC whilst the name of a private company must end in Limited.
Other restrictions on names prohibit those that are offensive or that give the
impression that the company is associated with either a central or local authority.
If a company sets up and adopts a name that is close to another in the same type of
business, then the court has jurisdiction to grant an injunction stopping the new
company using the name. (see Ewing v Buttercup Margarine Co Ltd 1917)
1 Paint or affix its name on the outside of every office, where business is carried on,
in a conspicuous position and in a legible form.
2 Have its name on all business letters of the company and other official publications
(For advanced students other cases concerning names are : Penrose v Martyr 1858,
John Wilkes (Footwear) Ltd v Lee International (Footwear) Ltd 1985 )
Companies can change their names by Special Resolution, that takes effect when it is
issued with a new certificate of incorporation from the Registrar of Companies.
Companies are not required to state the actual registered address in the
Memorandum, but must notify the registrar of Companies of the actual address, and
mention on all its business letters :
Place of registration
Registered number
Address of registered office
3 Objects clause
The objects clause was of major importance. The object clause originally had two
purposes :
b) to protect persons dealing with the company, who can discover the true powers of
the company
In order to protect those dealing with a company, the courts evolved the doctrine of
Ultra Vires that stated that anything done by a company outside the objects for
which it was set up is null and void.
The Companies Act 1985 which adopted the EEC approach, has severely restricted
the effect of the objects clause.
The objects clause is best understood if we look at its application through case law.
See : Att-General v Great Eastern Railway Co 1880 for a clear explanation of the
meaning of the doctrine of Ultra vires.
Re German Date Coffee Company 1882
This is a hefty list of cases, but they are well documented leading cases and are really
essential if one is to understand the Ultra Vires concept.
The effect of the objects clause was that people dealing with a company were
presumed to be aware or should make themselves aware of the object for which the
company was set up. If a transaction was outside the objects of the company, then
the transaction is null and void, and further more was incapable of being ratified at a
later date. This is what is referred to in textbooks as the doctrine of Constructive
Notice.
The doctrine of Ultra Vires as applied to the Objects clause was substantially changed
in S35 of the Companies Act 1985. Section 35 said :
"where a person deals with a company in good faith, a transaction decided upon by
the directors shall be deemed to be within the capacity of the company to enter
into"
Section 142 of the Companies Act 1989 abolishes the doctrine of constructive notice
(the 1989 Act uses the term deemed notice)
Section 142 (of 1989 Act) contains a proviso that a person cannot rely on his not
having notice of certain matters if he failed to make such enwuiries which he might
have been expected to have made in the circumstances. This is a somewhat woolly
proviso but may be of interest to consider in relation to the Maxwell affair. In
addition it must be appreciated that section 142 states that the no doctrine does not
afect the provision in S 35 of the Companies Act 1985 which states thta when a
person takes any charge over the property of a company he is presumed to have
notice of any matter which should be registered and disclosed on the register of
charges.
Whilst the objects clause of a trading company is now required to state that it is a
general commercial company, it must be remembered the members of a company
might still restrain its directors from acting ultra vires. See Parke v Daily News. Finally
the 1989 Act now permits members to ratify an act that was ultra vires, by special
resolution in general meeting.
Finally the case of Cotham v Brougham is important as it led to the modern all
embracing do anything objects clause we are familiar with today and which still
remain law until companies rewrite their objects clause in accordance with the
Companies Act 1989 S 142.
What is of vital importance is to understand theat the constructive notice clause has
been virtualy abolished subject to a few remaining provisions such as those detailed
in Companies Act 1989 S 142.
The Companies Act 1989 at S 35 A abolishes the rule in Royal British Bank v Turquand
1856. This rule attempted to make sense of the possile conflict that could affect the
outsider (of a company) when there was a difference between what the directors
could do (objects clause) and what they actually did (as permitted by mambers under
proviso of the articles) This distinction was of practical importance because non
members have access to the objects clause but not to the minute book of a
company.
The remaining clauses in the Memorandum and straight forward. The most
important of the memorandum clauses, from an examination context areas are the
Name and Objects clauses.
Some time later the company went into liquidation. The liquidator went to court
claiming that as the company was really Mr Salomon; then Salomon should be
responsible for the debts of the business, in his personal capacity.
The House of Lords held that the company was a separate legal entity to the owners
even though the people involved were one and the same. There was no reason for
the court to look behind the veil of incorporation.
In Macaura v Northern Assurance 1925 the owner of some timber tried to persuade
the court that he and the company were one and the same. This was in order that
the insurance company pay on his personal fire insurance policy for the loss. The
House of Lords again revised to lift the veil of incorporation, and confirmed that the
company was a separate legal entity from the owner(s).
The veil of incorporation has been lifted in a number of instances. See the cases of
Cases such as Gilford Motor Co Ltd v Horne illustrate that there are instances when
the protection of the veil of incorporation will be lifted in cases where a company
has been used to avoid a legal obligation.
We have seen some of the cases where the veil of incorporation would be lifted.
Statute law also provides circumstances where the veil can be lifted.
Examples under the Companies Act 1985 include instances where a company
continues for more than 6 months with less that 2 directors the veil of incorporation
will be lifted and the individual director, not the company will be liable for debts
incurred during the time he was the sole director.
The Companies Act 1985 also allows in instances where group accounts are prepared
for the whole group to be treated as one economic entity rather than separate
companies. In addition the 1985 Act makes an officer of the company personally
liable for any cheques etc signed where the company's name is not mentioned (See
also Penrose v Martyr)
The Insolvency Act also provides means for the removing of the veil of incorporation
where there is an intent to fraud.
The matter of the veil of incorporation needs close study of the cases to gain a good
understanding. Fortunately, the cases are well documented and relatively easy to
understand.
Articles of Association
When we introduced the Memorandum it was described as the skeleton. The Articles
of Association is like the body and clothing of the company. The Articles tell us how
the company is to be run, and how it will regulate its internal affairs.
If a company does not register articles then Table A of the appropriate Companies
Act become the automatic articles.
The articles may be altered by special resolution. Any change must not conflict with
the provisions of the company's memorandum or the Companies Act.
In issuing shares a company is required to receive at least the nominal value of the
shares. Any excess has to be placed in the share premium account.
Type of shares
A share is a transferable form of property that gives the holder the following rights :
* Preference Shares
Carries a priority right to dividends. Usually a fixed interest payment. Dividend can be
passed if company has no distributable profit, or simply passes the dividend.
Entitlement is carried forward where dividends are passed.
* Debentures
A debenture is a document that states the terms under which a company has
borrowed money. It may be a secured or an unsecured loan.
If X Bank lends Y company £5million to purchase a machine then the bank will insist
on a debenture to protect its money.
Charges
Types of Charges
Floating - does not attach to assets until the charge chrystalises (See below)
A floating charge applies to current assets such as book debts or stock in trade. The
most common type is a floating charge over the undertaking and its assets.
We saw in the box above the term chrystalisation. It means the conversion of a
floating charge (not specific) into a fixed (specific) charge. This takes place in the
following circumstances :
When a company creates either a fixed or floating charge the charge needs to be
registered within 21 days of its creation. If the charge is not registered within 21 days
it becomes void against another creditor and the loan secured becomes immediately
repayable.
The articles will tell us the borrowing powers of a company. The objects clause in the
memorandum always contains a clause allowing the company to borrow.
Consider a company with three directors. Two can side against the remaining
director. What protection, if any is available to the minority.
The case of Foss v Harbottle 1843 stated that the minority is not generally protected
by the courts,but ought to use the general meeting as a means to air their
grievances.
The Articles of Association will also give us details of rules relating to appointment of
directors, their removal, meetings, voting rights, notice of meetings etc.
Meetings
The Companies Act 1985 S366 provides that every company must hold its first AGM
within 18 months of its incorporation.
Every company has to hold an AGM in every calender year, and not more that 15
months must elapse between the date of one AGM and the date of the next AGM.
If the company does not conduct its business in accordance with S366 it is liable to a
fine.
Business Of AGM
1 consideration of accounts
2 auditors report
3 directors' report
4 declaration of dividend
5 appointment of auditors
6 election of directors
Any general meeting other than the AGM is an extraordinary general meeting.
Whilst directors may call an EGM when they feel it is essential, by Companies Act
1985 S386 it must also be called if :
2) if the company has no share capital by members having at least 10% of the voting
rights
must call the EGM within 21 days of receipt of the request.
S391 of the 1985 Act provides that a retiring auditor can request that an EGM be
called to allow him to explain the facts around his resignation.
A company that finds that its net assets are below 50% of its called up share capital,
must under S142 0f the 1985 Act call an AGM within 28 days.
The minimum notice required to call a meeting under Companies Act 1985 S369 is :
The notice must also state that a person entitled to vote can appoint a proxy.
2 Must be a quorum
3 Must be a chairman
Duties of Chairman
1 to preserve order
Voting at Meetings
Voting may be by show of hands or by poll. The exact regulations concerning voting
will usually be contained in the Articles of Association. The Companies Act 1985 S372
contains a requirement that any member entitled to attend a meeting and vote at
the meeting, be entitled to appoint another person as his proxy.
Type of Resolutions
Ordinary - requires a simple majority. Notice is 21 days for an AGM, 14 or 21 for EGM
Directors
A director is any person occupying the position of director, by whatever name called.
Companies Act 1985 S741.
A public company is required to have at least two directors. Companies Act 1985
S282.
Appointment of Directors
When a company is set up it usual to name the original directors in the articles.
Any directors appointed after the original directors must be appointed in accordance
with the company's articles. At AGM's one third of the board of directors retire. They
can, up to the age of 70 offer themselves for re-election.
It is possible for a director of a public company to be reappointed over the age of 70
by ordinary resolution of which special (28 days) notice is given.
A director appointed between AGM's has to stand for re-election at the next AGM.
A managing director any be appointed, if the articles allow. The appointment is made
by the board and the managing director is not normally subject to retirement by
rotation.
Again these powers are contained in the articles. As we saw earlier every company is
required to have its director's contracts of service available for the inspection of its
members.
The Companies Act 1985 S319 provides that, unless a term is first approved by
ordinary resolution, a company cannot incorporate a term into a directors contract
of service that :
Removal of Directors
The Companies Act 1985 S303 provides that the shareholders may by ordinary
resolution, remove a director at any time irrespective of any provision in the articles,
or any term in the individual director's contract of employment.
However if the board remove a managing director from his position he will still
remain a director as he can only be removed as a director by the members of the
company (shareholders)
A director removed from office in breach of his agreement is entitled to sue for loss
of office. The companies Act 1985 S312 allows for directors to be compensated for
loss of office only if the compensation has been approved by the members in general
meeting. (This is what we often read in takeover bids as "golden parachutes)
Where a director is dismissed from his contract of service he is entitled to sue for
breach of contract.
Disqualification of Directors
The Company Directors Disqualification Act 1986 provides that a director can be
disqualified from being appointed or acting as a director in the following
circumstances :
Duties of Directors
A director is the agent of the company. This means that their duty is owed to the
company and not to the members. In the event of a director or directors breaching
their duty, it is the company in the form of the members in general meeting dealing
with the matter.
The duty of care is one expected from a person of his knowledge and experience.
The degree of care and skill will depend on the individual director and his
circumstances. In the early part of the century, when directors were often local
gentry and paid little interest in the business, the duty of care was much lighter than
it is in these days of the professional manger.
In addition to the duty of care and skill the director owes the company a Fiduciary
duty. This type of duty means that even after the director ceases to be a director he
still owes a fiduciary duty not to reveal confidential information received when he
was a director.
The difficulties faced by directors in deciding their fiduciary duty to the company
should be considered from the viewpoint of takeover bids for their company. It
makes for some interesting conclusions!.
A director must declare any conflict of interest and is not entitled to benefit
personally from information or opportunities obtained whilst acting in his capacity as
a director. (See Law of Agency on cases and the Company law case of Regal
(Hastings) Ltd v Gulliver 1942 )
A director's liability for breach of duty cannot be excluded by the company articles.
However the law does provide relief in the form of ratification of the act, or by the
court granting relief if it thinks that the director acted in an honest manner. Stephen
John