Types of Companies

Unlimited liability company

1. S/h has unlimited liability, i.e. all the risk
2. Private company only, not a plc
3. Co does not need to file audited accounts with Companies House, advantage
=> privacy
4. Must have share capital in the Co

Co limited by guarantee
1. S/h limit their liability up to a set amount
2. Private Co only and no share capital
3. Used by Charities, i.e. non profit making organisations

Public & Private Co - s/h limited liability

Private Co Public
Co Name ltd plc
Minimum s/hs 1 1
Minimum directors 1 2
Minimum issued share £1 £50,000 nominal value
capital
Offer securities to public N/A Yes
AGM Optional Compulsory
Co Secretary Optional Must be qualified
s/hs pass written Yes No
resolution
Certificate before trading 1 (certificate of 2 (certificate of
incorporation) incorporation, trading
certificate)
Time limit for filing 9 months 6 months
accounts
Payment for share Cash, Goods or Cash or Goods
Services

Documentation required for Co formation

1. Memorandum: Historic record of original s/hs (subscriber - who were original
s/hs)
2. Registration application: Co names, address (domicile: E W & S), company
types, shareholders liability
3. Section 9 document: share capital and initial shareholdings : type, number,
rights and nominal value. Fully or partly paid.
4. Statement of compliance: confirmation that the law has been complied. 4A.
Fee 4B. We do not need to submit Articles if using model articles. 4C.
Details of your first director and secretary.

Companies House will then issue the following.

5. Co registration number
6. Certificate of incorporation: Date on this certificate is when the company
comes live.
- Ltd Co: can start trading immediately
- Plc: Cannot start trading and must apply for a trading certificate within 12
months.

Plc Application for trading certificate

Must provide Companies House with the following information
1. Minimum issued share capital £50,000 (at NV)
2. Minimum paid up share capital (25%x Nominal Value + 100% Share Premium)
3. Premium made to promoters (help from the Co)

What happens if the director enters in a pre-trading certificates?

4. Contract is valid.
5. Director and Co are fined.
6. Director personally liable for breach of duty and any loss
* Plc has 12 months to obtain the certificate or it could be shut down.

Promoters
1. Definition
- Used to help to form the Co (recruit staff, find premises)
- first agents of the Co
- Professional person(lawyer or an account) is not a promoter, the client is

2. Duties(agents, Co sec, promoters, not directors)

- Exercise reasonable skill and care
- Make full disclosure
- Avoid conflict of interest
- Not to make secret profits
- Keep proper accounts
- Act in good faith
- Follow instructions

3. Remedies for breach of duty

- Co can terminate the contract
- Co can sue the promoter for the loss suffered
- Contracts is voidable at Co’s option (Co can decide whether or not to void)

Pre-incorporation contract
1. Definition: Contract entered into before Co has been legally formed, i.e. before
the date of the certificate of incorporation
2. Liability: Person entering into such a contract is personally liable, usually the
promoter
3. Contract does not bind the Co

What happens to the contract after Co has been formed?

4 Promoter cannot assign, i.e. cannot transfer the contract to Co
5. S/hs cannot ratify, i.e approve the contact at a later date
6. Co enters into a new contract that replaces the original pre-incorporation
contract, i.e. novation
7. Leave the contract in draft until the Co has been formed
8. Use an off the shelf Co (ready made) - If a separate Q, expand
8A, 1 Definition, 2 No need to file Co formation documents 3 Avoid risk of pre-
incorporation contracts, can trade immediately. 4. Reduces professional
fees 5. Cheaper and quicker 6. Problems - may need to change
company name, Articles, objects, Co Directors & S/hs(minimum
requirement to change, others are optional)

Registered Office - Make own notes

Object Clause (will be in the Articles!)

1. Definition: Sets out the Co’s legal contractual capacity
2. Automatic - unrestricted objects- model Articles: Directors have wide powers,
can do anything legal with the powers.
3. Express restrictions: Articles may contain any restriction.
4. Change the Articles by Special Resolution 75%. File new Articles and Special
Resolutions to Companies House.

Ultra Vires - Directors acting outside the object clause

5. Definition: General Rule: Director acts outside the object clause, the contracts
used to be void! This is the old rule!
Points 6-10 - relates to third parties, external parties
6. This concept is very limited and does not extend to third parties. (third parties
get protected)
7. Third parties do not need to check the Articles for restrictions.
8. A Co cannot use Ultra Vires to escape a contract with a third party.
9. S/hs can do the following.
-Get an injunction preventing the director from entering into the contract.
-S/hs can ratify the director’s conduct by passing Special Resolution or can sue
10. Directors still binds the Co even if he acts outside the objects clause under
apparent authority, provided the third party is acting in good faith.
Point 11 - relates to internal affair, when director does something wrong,
internally
11. An UV transaction between the Co and Director is voidable at the companies’
option unless s/hs choose to ratify using Special Resolution 75%.

Articles and its contractual effect

* Watch out for Q involving a s/h that is a solicitor!

Scope of the Articles

1. Deals with the internal regulations of the Co
2. S/hs rights
3. Directors powers and duties
4. Co conduct

Contractual relationship between:

5. M & C: members and Co
6 C & M: Co and members
7. M & M: members and members
8. Excludes: third parties

Case Law
9. Hickman Case (High Court Case): The s/h was contractually obliged under
the Articles to refer his case to tribunal and Not the High Court.
10. Rayfield v Hands: The director - s/h were contractually obliged under the
articles to buy another member’s shares.
11. Eley v Positive life (solicitor case): Eley could not reply on the Articles since
he was a third party.
12. Articles can incorporate missing terms from a contract Beckwith case. The
director’s own contract did not contain his salary £. The Articles did. (* A
third party can use Articles as reference/ missing terms, not contractually.)

Amending the Articles

1. S/hs pass Special Resolution 75% (at AGM or GM) AND
2. The alteration must be in the best interests if the Co (cinema case) - does not
matter if a minority s/h suffers a loss
3. Cannot declare it unalterable (cannot say the Articles are unchangeable).
4. Must not conflict with the Co Act.
5. Cannot have retrospective effect.
6. Co cannot be prevented from changing the Articles
7. Majority s/hs should not obtain an unfair advantage.
Entrenching a clause in the Articles: New Co Act 2006 (entrenching =
locking in)
1. Possible to entrench a clause in the Articles to make it difficult to amend,
create or remove certain clauses
2. Require greater % then Special Resolution => 100% or court appeal
* S/h can only be removed, i,e, forced to sell their shares back to the Co in the
below circumstances: Watch out for this in a scenario!
1. They are defrauding the Co.
2. They are competing with the Co.
3. A co cannot have a clause in the Articles giving it the general power to buy
back a s/h’s share.

AGM
1. Compulsory for plc
2. Optional for Private Co
2A. Approve accounts/ Declare dividends, elect directors & auditors.
3. Notice: minimum 21 clear days (excludes day of serving the notice and AGM)
3A. Notice can be in writing or electronic (email or website)
4. Notice served to M.A.D. (Members, Auditors, Directors)
5. AGM Held: within 6 months of y/e and max 15 months gap between each AGM
6. Short Notice, i.e. <21 days requires 100% s/h approval
7. Only directors can call AGM, not s/h
8. S/h can add a resolution onto AGM agenda if:
- owns 5% of voting rights or
- 100s/h have invested average of £100 share capital

GM
1. Director can call
2. A s/h can call, must together hold at least 10% voting rights
2. 5% if a GM is not held in the last 12 months.
3. Plc must hold if there is a sharp fall in the Co’s net assets > 50%
4. Auditor can call re - resign or make a statement
4A. Court can call GM where there is deadlock between s/hs
5 Notice minimum: 14 clear days - M.A.D.
6. Holding GM at a short notice (less than 14 days)
- 95% for s/hs in a plc
- 90% for s/hs in a ltd

Class Meeting
1. Purpose
- Meeting held for specific class of s/h, i.e. preference or ordinary
- Usually for varying class rights
2. Procedure
- Same as GM

Voting - Voting requirements will be in the Articles.

1. Show of hands : Ignore shareholding
2. By poll: based on shareholding
Rules for demanding a poll
3. Minimum 5 s/h
4. 10% of voting rights and 10% of share capital

Types of shares (class rights)

Ordinary Shares:
1. Wide Voting Rights
2. No guaranteed or fixed dividends, only when directors declare dividends.
3. Last to receive capital and surplus on a winding-up

Preference Shares
4. Restricted voting rights but can still attend GMs, AGMs.
5. Guaranteed or fixed dividends. (cumulative or non-cumulative)
6. Bank in preference to ordinary s/hs on a winding-up

Director’s Authority to issue shares

- watch out for directors and take-over
1. S/hs pass on ordinary resolution >50% at a GM/AGM or
2. Authority is include in Co Articles
3. Duration: 5 years (Excludes Ltd Co with 1 type of shares AND no restriction of
duration in the Articles)
4. Directors must use their share issuing powers for a proper purpose
- Hogg v Cramphorn (take-over case 1) - S/hs ratified directors’ action when they
issued shares to block a Co take-over.
- Hayward Smith (take-over case 2) -S/hs did or ratify the directors, they were
held liable for breach of duty.
5. What happens when a director issues shares without valid authority?
- share issue is valid
- Director is personally liable for breach of duty
-S/hs may have to return the shares back only if they knew Director was
unauthorised.

Pre-emption rights (Rights Issues)

1. Definition: Co must issue new shares to existing s/hs first in proportion to their
shareholding conditions.
2. Must be new shares
3. Ordinary shares
4. Paid for cash only - offer conditions
5. In writing to existing s/hs
6. Open for 21 days

Dis-apply these rights

7. S/hs pass Special Resolution 75% at a GM

Payment for shares

1. Define Nominal value, denomination
2. Not based on market value
3. Cannot be issued at a discount, i.e. below nominal value
4, If issued below NW, s/h must pay in balance plus 5% interest
5. Can be issued below market value provided
MV (£10) > NV (£1), i.e. can be issued up to £9.99
6A. S/h can full pay for shares (no further liability to the Co)
6B. S/h can partly pay for shares (liability outstanding for the unpaid amount).
Liquidator has the right to demand the balance.

Additional rule for a plc

7. Minimum issued share capital £50,000 at NV
8. Minimum paid up share capital - 25% x NV + 100% x share premium

Method of payment
9. Ltd: cash or good or services at a slight over value
10. Plc: cash or goods (subjects to an independent valuation) - 1) 6 months rule-
goods have to be valued within 6 months of share issue, 2) 5 years rule -
5 years in which to transfer the goods
11. Valuation received in excess of NV is transferred to share premium

Share Premium Account

1. Definition: The value received for shares in excess of nominal value.
- Capital Account: Cannot be used to replay s/hs’ uses
2. Finance bonus issues
3. Pay Co formation expenses
4. Fund debentures issued at a discount
5. Fund debentures redeemed at a premium
6. Private company buying book shares
- Cannot be used for
7. Paying dividends to s/hs

Variation of class rights

1. Definition: s/h’s rights are altered. e.g. dividend or voting rights
 Procedure:
2. If the procedure is in the Articles then the Co must apply: or
3. s/hs of that specific class must pass SR 75% at a class meeting

Minority
4. Minority s/hs owing 15% of the share capital
5. Have 21 days in which to make a court application to block the variation

Court’s powers
6. Either approve or cancel the variation
7. They will not amend the variation
8. Cinema case e.g. Co converting 50p shares into 5 x 10p shares held: not
a variation

Debenture
1. Definition: Written acknowledgement of a debt
2. 3 Types of debentures
- Single : One loan
- Series: Loans from different lenders all ranking equally
- Public: Plc can offer debentures to the public
3 Security
- Lender can request a charge: fixed or floating
- On default, the lender could appoint a receiver (receiver re Fixed Charges) or
administrator (administration re Floating Charges)
- Debentures can be issued/ redeemed at a discount. (Financed from share
capital)

Fixed Charges
1. All business mediums can give a fixed charge to a lender
2. Definition: Charge given on a specific asset, e.g. land and building
3. Certainty: The lender knows what it will receive if borrower were to default
4. Contract & consent: The borrower will need the lender’s consent before he
can sell the asset.
5. Default: Lenders will appoint a receiver (seize and sell the asset to
distribute the monies owing)
6. Liquidation: Fixed charges always rank first

Floating Charges
1. Only a company can give a floating charge to a lender
2. Definition: Charge given over asset that are constantly changing, e.g.
stock and debtors
3. No certainly: The lender does not know what it will receive if the borrower
 were to default.
4. No control or no consent: The Co does not need the lender’s consent
before it can sell the asset.
5. Default: Lender will appoint an administrator. (Charges created after Sep
2003)
6. Liquidation: Floating charges rank 3rd, after 1. Fixed charges and 2
Preferential creditors, e.g. employees max £800
7. Negative Pledge Clause: Subsequent fixed charges will have to rank
behind a floating charge with a NPC.
8. Floating charges will crystallise, i.e. lender will seize/freeze the assets in
the following situations:
- Default
- Receivership
- Liqudation
- Ceasing to trade

All charges have to be registered with CH within 21 days. (If need to

expand, see below)
(a) Loan is valid but a lender is unsecured.
(b) Cannot register after liquidation
(c) If register late (>21 days), charge only valid form date of registration, not
date of creation.
Co has to maintain a Register of charges which must be kept at the registered
office.

Appoint a director
1. Company formation: First directors will be named
2. By s/hs: In GM or AGM by passing ordinary resolution > 50%
3. Casual vacancy
- directors are given the power to appoint during the year
- s/h ratify the appointment at next AGM by passing on ordinary resolution >
50%
4. Minimum directors: Plc (2) and Ltd (1)
5. Minimum age 16, no qualification required

Removing a director
1. Retiring: Notice in wiring
2. Re-election: Not standing for re-election
3. Articles: (a) if absent from board meeting for at least 3 months, (b)
bankruptcy, (c) death, (d) insanity, (e) illegal, (f) if disqualified under
Statue, (g) Director serves notice in writing
4. By s/hs in GM or AGM
- serves special notice (28 days) on the Co – then Co holds GM
- s/hs pass ordinary resolution > 50%
 - Director’s 4 rights: speak, circulate statement, use his weighed voting
rights & sue for breach of contract
5. Company directors – disqualified Act 1986 (*came up in Jun 09 exam)

Director’s statutory duties

1A. Duty to act within its powers
1B. Company with Articles
- Hogg v Cramphorn and Howard Smith case: Director cannot issue shares to
influence a take over
2. To promote the success of the Co
- Act in a way that will promote Co success, i.e. good faith,
- Act in the best interest of the Co
3. To avoid conflicts of interest
Do not let personal interest come in the way
- Cooley case: dishonest director was ordered to repay the profit made.
4. Must exercise their power independently
- Must not delegate decision or be swayed by others
5. Exercise reasonable skill, care and diligence:
- Compared with another director with same skill and experience
6. Not to obtain benefits from third parties unless the Co consents:
- Regal Hasting: Innocent directors had to repay the profit made due to lack of
formal consent
7. Disclose an interest in a transaction. To the board, not just s/hs

Factors to take into account when directors exercise their duties

1. Long term consequences
2. Employee’s interests
3. Business relationship with customers and suppliers
4. Impact on the community and the environment
5. Maintain reputation for high standards
6. Act fairly between members and company

Authority of a director
1. A directors is an agent of company, binds the Co into contracts.
2. Authority and power given to the Board as a whole, not individually
3. Express authority: Given in Articles, clearly stating level of authority
4. Implied authority: Goes with the position. MD has wider implied authority.
(MD – not legally required, already a board member, Articles must permit)
5. Apparent authority: Reasonable third party believes he has the authority,
even when the director does not. D binds the Co. Co sue D for breach of
duty or ratify by SR 75%.
6. Freeman v BPP: Individual who held himself out to be the MD, bound the
Co into contracts under apparent authority.
7. D will not bind the Co if he has no authority And the third party is fully
aware of this.