Business Law B
Definition of incorporated vs unincorporated firm
An incorporated business, or a corporation, is a separate entity from the business owner and has natural rights. Conversely, a business owner and an unincorporated business are the same, and the owner personally bears all results of the business. Unincorporated businesses are usually sole proprietor or partnership companies. The main difference between an incorporated and unincorporated business is the way owners shoulder business activities.
Off the shelf companies
An off-the-shelf company is a properly incorporated company but is inactive. They act as an alternative to promoters forming new companies. Some businesses specialise in forming multiple new companies, and when a customer buys it they transfer the share in the company and the original director resigns, with the customer becoming the new director.
Limited liability partnership (LLP).
Another final type of business is a limited liability partnership (LLP). This involves a lot of red-tape, and is a new business vehicle which is a hybrid between a company and a partnership. Typically used by accountancy firms, who are not allowed by professional bodies to incorporate. • Have reporting requirements. Are incorporated when formed. • Advantage: they may get taxed personally, but have limited liability of the firm - will not loose more than they have invested.
A company
A company is a separate legal personality, governed by the Companies Act (2006). Formation of a company consists of sending a document (of memorandum) to companies' house for incorporation. Companies have a separate legal personality and sue in their own name. Occurs through the process of incorporation - once it is registered, it is borne. It is from this moment onwards its own legal person. Members enjoy limited liability; this is the primary reason and advantage (however this is not always limited). Can do things in its own name; own property, be sued etc. However, there is lots of red-tape and reporting requirements involved. Company may be legally liable; is taxed on its profits of the company rather than the individual. Owned by shareholders, but is run by directors (which may be the same thing as shareholders).
Dividend distributions: Bairstow v Queens Moat Houses plc (2000)
A company may not make a distribution to members except out of distributable profits (s.830); NOT the same as accounting profits. Case: Nearly £27 million of dividend was authorised by directors when there were insufficient distributable profits. Manipulated profits to make them to look more valuable then the were. HELD: directors were liable to repay the company. ➢ BUT no rule that profits have to be distributed; ➢ Dividends are only payable when the company has 'declared' a dividend.
Voting on resolutions
A show of hands - shareholders vote by raising their hand to vote for or against proposed resolution, with each member having 1 vote regardless of shares held. On a poll - shareholders vote in proportion to their shareholders, votes which aren't cast are disregarded. There is also a written resolution which can only be used by private companies. It is passed by a simple majority if it is passed by members representing a simple majority of the total voting rights of eligible members - except the removal of a director or auditor before expiration of his period in office.
Sole trader
A sole-trader is where 1 person runs the business on their own, but may have employees. There is no red-tape involved and businesses of this kind can be started easily, with no reporting requirements. The sole-trader keeps 100% of the profits. However, the sole-trader faces unlimited personal liability. Also, it can be hard to manage the whole business on your own.
Who is a partner?
Deemed to be a partner if: Partner by holding out/estoppel - s.14(1) PA If a person represents himself/herself or knowingly allows himself/herself to be represented as a partner for purposes of gaining credit, he/she will be estopped (i.e. stopped) from denying liability as a partner: Tower Cabinet Co. v Ingram (1949) : A partnership that made furniture. One of the partners, Ingram, told everybody he had retired. A piece of furniture was sold, but was faulty, so person attempted to sued. Also sued Ingram. Held: Ingram would not have to pay (not liable) - despite his name was still on the partnership - as he conduced himself in a way that he was retired.
Newborne v. Sensolid (Great Britain) Ltd (1954)
Example of If the promoter makes the contract using the 'company's' name A company known as L. N. (London) purported to sell certain goods to the defendants under a contract signed "Yours faithfully, L.N. (London)." At that time, the company had not yet been registered. Could his company enforce the contract? HELD: as the company was not in existence when the contract was signed, there never was a contract.
Law v Law (1905)
Example of S.28 = "partners have a duty to render accounts" Two brothers (W and J) carried on family partnership manufacturing woollen clothes. J agreed to buy W out of partnership but W later discovered there were partnership assets unknown to him. Should J had told about the assets? HELD: J was under a duty to disclose fully the financial situation of the firm.
Bentley v Craven (1853)
Example of S.29 (1) = every partner must account to the firm for any benefit he has had without the consent of the other partners from any transaction concerning the partnership. Craven and three others were in partnership as sugar refiners. As buyer, Craven bought sugar cheaply and sold it to the firm at market rate. HELD: Should have been the firm's profit. He had to give the profit to the firm. Was defrauding the other partners
Don King Productions v Warren (1999)
Example of S.30 = if a partner carries on a business which competes with the firm, he must account for and pay over any profits DK and W both were boxing promoters. HELD: competing with the firm
Young Legal Associates v Zahid (2006)
Example of a partnership existing Bashir wanted to set up firm of solicitors but needed Lees, a more experienced solicitor, to join the practice under Rule 13 of Solicitor Practice Rules. Lees was paid a fixed salary and spent little time at the office. Did a partnership exist between Bashir and Lees? HELD: Yes, partnership existed even though Lees was paid fixed sum rather than share of profit
Bushell v. Faith (1970) - IMPORTANT
Example of class rights; articles may specify classes of shares with different rights; this will be stated in the article. Company had three shareholders, G, C and K, each holding 100 shares. G and C were also directors. C and K wanted to pass an ordinary resolution to remove G, but the articles of the company stated that the votes of that director (G) would carry 3 votes for each share. Could the sisters (C and K) vote to remove him? HELD: his special voting rights protected him from removal. G held that he had 300 votes, but C and K had 200 between them. The article of the company was held to be binding.
Lee v Lee's Air Farming Ltd (1961) - IMPORTANT
Example of consequences of separate legal personality; ' The company can sue and be sued' Lee had formed the company to carry on his business of crop-spraying. He held 2,999 of the 3,000 shares, was sole director and also employed as chief pilot. He was killed in a plane crash whilst working for the company. Was he a worker for the company? Would he be compensated for his work as an employee? HELD: he was an employee and was treated as such. So yes, he could claim compensation. However, he was entitled, and go to the beneficiaries of his will.
Macaura v Northern Assurance (1925)
Example of consequences of separate legal personality; 'The company can own property'. Macaura owned almost all shares in timber company. He insured the timber in his own name, as a person. Two weeks later, the timber was destroyed by fire and Macaura wanted to claim on his insurance. HELD: he could not claim as the property was owned by the company, as a person. There was a corporate veil between Macaura and the company that could not be lifted.
Erlanger v. New Sombrero Phosphate Co. (1878) - IMPORTANT
Example of contract that was void due to promoter. Failing to give info means that the contract is invalid. Erlanger bought lease for phosphate mining on island of Sombrero for £55,000; Then set up 'New Sombrero Phosphate Company'; 8 days later, sold lease to the company for £110,000; obviously made a bit profit. Disclosed to new board of directors but were they independent? Could company later rescind the contract? There were 5 directors, 2 were abroad, 2 were the puppets of Erlanger, and one was a mayor. HELD: disclosure was not effective, so company was able to rescind the contract.
Khan v Miah (2001) - IMPORTANT
Example of existence of partnership being in existence - and who is a partner? Three individuals decided to set up a restaurant. Before it opened and began to trade, premises were acquired, furniture and equipment purchased and advertisements placed. They then fell out before the restaurant opened. HELD: Yes, not necessary to show that the business has started trading. They were already 'carrying on a business' together. They had done everything they were meant to do for a partnership to arise. A partnership was in existence
A-G v. Lindi St Clair (Personal Services) Ltd (1981)
Example of registrar refusing to register a name which would constitute a criminal offence or be offensive (s.53); Set up a limited company called 'prostitutes ltd' - was not allowed. Was considered offensive HELD: Eventually called it Lindi St Clair (Personal Services) Ltd (1981)
Re Duomatic Ltd (1969)
Example of the 'Duomatic' principle. The liquidator of D sought to recover payments from director because the payments had not been formally authorised by a general meeting. HELD: there was shareholder consent. Shareholders' unanimous consent was as binding as a resolution passed in a general meeting.
Re Wragg Ltd. (1897)
Example of their being differences in deciding how much property is worth: W and M sold to the company upon incorporation their existing omnibus and livery-stable business for £46,300 which was partly paid in cash and debentures and partly by the allotment to them of the whole of the company's £20,000 capital in fully paid-up shares. Liquidator later sought to show that the business had been overvalued by £18,000. HELD: claim failed - the court will accept the board valuation unless reached dishonestly/fraudulently. Can buy property for any price they see fit. Court will not interfere unless something is seemed to be done illegally.
Gilford Motor Co v Horne (1933)
Example of when the veil of incorporation can be lifted - Second reason: "Incorporation as mere façade:" H was a car salesman, and left G. His contract stated that he wasn't allowed to sell to G's customers for a period after leaving. H set up a company which then approached his former customers. H argued that firstly his company was approaching the customers, not him; and secondly, if there was wrongdoing, his company was liable and not him. HELD: The company had been set up purely to get around the contract on leaving G. It was a device that breached his agreement, and therefore is was a sham. Judge issued an injunction.
Unfair prejudice claim for the shareholder personally s.994 CA 2006
Any shareholder may alternatively make a claim of unfair prejudice on the grounds that the company's affairs are being conducted in a manner that is unfairly prejudicial to the interest of members generally or of some part of its members (including at least himself), or that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial Examples of what constitutes unfair prejudice: Directors exercising powers for an improper purpose. Breach of statutory pre-emption rights. Refusal to pay declared dividend The remedy is usually buy-out order: majority shareholders buy shares of minority shareholders at an agreed price (Just and equitable winding-up petitions). Leading case: O'Neill v. Phillips (1999) - IMPORTANT
"Unfair prejudice claim for the shareholder personally"
Any shareholder may alternatively make a claim of unfair prejudice on the grounds that the company's affairs are being conducted in a manner that is unfairly prejudicial to the interest of members. Examples of what constitutes unfair prejudice: Directors exercising powers for an improper purpose. Breach of statutory pre-emption rights. Refusal to pay declared dividend. Remedy is usually buy-out order: majority shareholders buy shares of minority shareholders at an agreed price
Rights and liabilities of shareholders
Liability= to pay the amount of capital agreed with the company, usually fully paid when the share is issued; Rights= can only be enforced by legal action, so known as a 'chosen/ thing in action'; 1. Being able to transfer shares; 2. Attend meetings; and vote 3. Receive dividends; if one is declared 4. Right to see the company's accounts. It is a type of property, and can be enforced by legal action.
Public and private companies - What are the main differences between a public and a private company?
Main difference: only public companies are allowed to offer their shares for sale to the public. They are the only ones to have their shares on the stock exchange. This means they have more regulation to go through under company law. Public companies are specified in the memorandum (document sent to companies' house when you incorporate). Public companies have limited liability. Public companies have the PLC suffix. Public companies must have at least £50,000 authorised share capital as a statutory minimum. All other companies are private. • Can swap from public to private • It is a matter of the law if a company is private or public.
Who is a promoter?
Promoters are the people responsible for setting up and registering a company. They are often the first directions of a registered company too. The key issue surrounding promoters is: should promoters be liable for pre-incorporation contracts? The role of a promoter is not an agent, but a fiduciary. This means that the promoter owes a duty of good faith and integrity. Furthermore, this role requires the promoter to fully disclose any personal gain / interest, otherwise a contract may be voidable.
"Derivative claim on behalf of the company"
S.260 states that members can now bring a claim on behalf of the company for wrongs done to the company, and the claim must be based on an actual or proposed act involving negligence, breach of duty or breach of trust by a director. Member must obtain court's permission to proceed with the action, and provide evidence. If the act has been authorised, the claim is likely to be rejected.
Liability of partners: fiduciary duties to each other
S.28 says that partners have a duty to render accounts; each partner must give true accounts and full information of all things affecting the firm. S.29(1) says that every partner must account to the firm for any benefit he has had without the consent of the other partners from any transaction concerning the partnership. S.30 says that if a partner carries on a business which competes with the firm, he must account for and pay over any profits.
Terminating a partnership 2: Judicial dissolution
S.35 gives partner rights to apply for dissolution on five grounds: 1. S.35(b) - partner's incapacity either mentally or physically. 2. S.35(c) - conduct prejudicial to business (harmful of business reputation). 3. S.35(d) - wilful or persistent breach of partnership agreement. 4. S.35(e) - partnership can only be carried on at a loss. 5. S.35(f) - on just and equitable grounds, partnership may end.
When do you need permission for a company name?
S.54 & S.55- certain sensitive words will not be registered without permission; Examples of names you cannot have: X National, District Council, Government; X Queen, Princess, Royal; anything with a connection to the royal family. Must have appropriate permission to use such a name. X Bank, Building Society; Unit Trust. E.g. can't be a called 'dentist' if not a dentist. Also cannot be called charity if not a charity.
Variation of class rights (of shares)
S.630: can only be varied: a) In accordance with the articles, or b) If three-quarters in value of the shares of that class either consent in writing OR pass a special resolution at a separate meeting of those shareholders.
Definition of 'debenture'
S.738: 'Debenture' includes debenture stock, bonds and any other securities of a company, whether or not constituting a charge on the assets of the company;
Notice and proceedings of resolutions (special notice)
Special notice of at least 28 days is required of these resolutions: To remove a director or to appoint someone in his place. To remove an auditor. To appoint a new auditor. Special notice is given by the shareholders of the company to the directors. 1. Quorum - minimum number of members which must attend for the meeting to be valid (usually 2). 2. Voting - by show of hands or by poll. 3. Proxies - person who attends a meeting and votes on behalf of a member. 4. Records - S.355 states that a company must keep records of all resolutions passed other than at general meetings, available for 10 years.
Crystallisation?
The process whereby a floating charge is converted into a fixed charge; to make it 'tangible' Events causing crystallisation are: ➢ Liquidation of the company; ➢ The company ceases trading; becomes dormant ➢ Company fails to pay the debenture holder; ➢ Any other event specified in the charge.
What are the 3 types of partnership?
There are 3 types of partnership: general (ordinary), limited and limited liability. The main one is the general partnership, which is an unincorporated business where all partners have unlimited liability for the debts of the business. A limited partnership is covered by the Limited Partnerships Act 1907 and is mainly used by equity investors. A limited liability partnership is covered by the Limited Liability Partnerships Act 2000 and is mainly used by professionals such as accountants and solicitors. An LLP is incorporated, so it has a separate legal personality and is more like a limited company than a partnership!
What are the 2 ways in which a partnership can be terminated?
There are two ways in which a partnership can be terminated: non-judicial dissolution (where partnerships end for various reasons), and judicial dissolution (where the judge ends the partnership, relating to specific law).
Articles of Association: Effect --> Hickman v. Romney Marsh Sheep Breeders Association (1915)
• Articles represent contractual terms between the company and its members; • Explicit in CA 2006 s.33: "The provisions of the company's constitution bind the company and its members to the same extent as if there were covenants (a contract) on the part of the company and of each member to observe those provisions." Hickman was expelled from the association and sued for breach of contract. Articles of association stated all disputes between member and association must be referred to arbitration first. Hickman had gone straight to court. Only when he had been through the arbitration process who he take it to court. HELD: Hickman couldn't sue until arbitration process was complete
What are ordinary equity shares?
• Commonest type of share; • Typically carry most of the voting rights; • BUT rank behind preference shares for payment of dividend payments; this means that you could, potentially, not end up getting dividends at all. On insolvent liquidation, ordinary shareholders are paid last. • Dividends are discretionary, and the amount of dividends varies; • Thus, carry more risk.
What is the aim of company law?
• Enabling: to help people set up companies • Regulatory: to stop people to abuse their power as a company • 2006 company act is trying to redress the two
Priority of charges; fixed or floating first?
• Fixed charge ranks before floating charge; if we have more than one of each kind, then... • As between the same type of charge, priority is governed by the order of creation; whatever is created first • I.e. between several floating charges, the charge created first in time prevails.
What are the rules regarding issue of shares?
• Generally, must be offered to existing shareholders first (pre-emption rights) (s.561); they are the first to get new issues shares. It not, the issue of new shares will dilute the rights. I.e. if I own 25 shares and another 100 shares are issued, my percentage of the total number of shares will decrease. BUT subject to exceptions: o Private company can exclude pre-emption rights by adding a provision to the articles by special resolution; o Public company can also dis-apply pre-emption rights by special resolution. Listing Rules may apply though
What are Preference shares (assumption: all standard and the same)?
• Gives holders the right to a fixed rate of dividend, specified when shares issued; • Represented as percentage of the share value, e.g. 10% of the nominal value; e.g. if you pay 10 and are allowed 1. • BUT no right to such dividend unless the company has sufficient distributable profits; no say in the running of the company. • Look a bit like debt? Legally, still shares. • May be cumulative or non-cumulative. I.e. cumulative: the entitlement rolls forward if profits cannot be paid. If non-cumulative: if the firm makes no profits then there will be no dividends
Registration of charges and Consequences of non-registration
• Part 25 CA 2006- Amended recently by CA 2006 (Amendment of Part 25) Regulations 2013; • All charges created by the company are now registrable; • Period for registration is 21 days starting with day after charge created; • BUT no longer mandatory to register a charge... • If charge is not registered within 21 days, then it is void; • BUT the debt remains valid, indeed the money advanced against the charge becomes immediately repayable; • No longer criminal sanctions for non-registration.
What is a written resolution?
• S.282(2)= A written resolution is passed by a simple majority if it is passed by members representing a simple majority of the total voting rights of eligible members; • Written resolutions can only be used by private companies (s.288); • EXCEPT: removal of a director or auditor before the expiration of his period of office (s.288(2)).
Issue of shares at a discount
• S.552: company is forbidden from issuing shares at a discount; • E.g. a share with a nominal value of £1 must not be allotted for less than £1.
What is the distinction between the allotment of shares and the issue of shares?
• S.558: shares are allotted when the company agrees to issue the shares to that investor; • S.113: shares are not issued until the investor's name is registered in the company's register of shares.
Who runs the company?
• There are two 'organs' of the company- the directors and shareholders. Though a company is its own legal entity, it does rely on human beings to actually run it. But who does the running? The directors do a part of it, but the shareholders do the other - and there is balance of power between the two. • This balance of power has changed a lot in the past 200 years - shareholders were the company in the past, doing a significant amount of the work. • Today, shareholders are more like investors - who sit back and get the dividends. Care more about a safe investment.
What does it mean to have separate legal personality?
• A human being has legal personality made up of legal rights and duties; i.e. a natural • A company is made up of shares - issued as shared capital • A company, despite not being a natural person, can also be a legal person, with its own legal personality, separate from the members who own the company; they issue shares, which are sold differently depending on the company. To be a company member, you must own shares. There are also different kinds of shares - but this is the key issue; you must own shares to be a company. Each share has a nominal value. • Thus, there is a veil of incorporation between the members and the company; a veil is imaginary. It can be 'lifted' • Veil sometimes lifted to avoid inequitable results. This is called piercing the viel.
Issue of shares for non-cash consideration
• Very common for shares to be issued in exchange for property; e.g. Salomon v Salomon • Problems arise if property worth less than the shares or worth more than the shares; • Who decides how much the property is worth? Different approach for private and public companies. There are more restrictions apply to public companies issuing shares for non-cash consideration; o Private companies: Court accept the board's valuation unless the valuation was reached dishonestly or fraudulently. o Public companies: S.593 states that any non cash consideration must be valued by an independent expert. Heavy sanctions if don't!
Advantages and disadvantages of being a Parnership
+ Can share the risks and profits, as well as he expertise; easy to set up + Share the workload of running the business & decision-making + Easier to raise finances because you can expand the partenrship + Flexibility + Do not need a legal agreement to set up the partnership. No need to register - No legal agreement is not always a good thing - Unlimited personal liability for debts
Off-the-shelf companies; advantages and disadvantages
+ Can start to trade immediately + Can avoid liability for pre-incorporation contracts - used to be the case of avoiding the red tape, but there is less nowadays - Can be more expensive - Limited choice of names and articles - BUT can later change - Potentially take on existing liabilities? If a dormant company is bought that traded in the past, you are using one that looks like it has been going for a longer period of time. Liabilites may come back from the past
Advantages and disadvantages of being a Sole Trader
+ Easy to set up; can keep all profits and make all decisions; record-keeping is simple. + No red tape; no need to register the company + No corporation tax - just tax on income + Keep all of the profits - no sharing + Absolut control over business - All responsibility lies on you - Unlimited personal liability - No help
Advantages and disadvantages of being a Company
+ Limited liability - More complex to set up - More red tape: reporting requirement, audits etc. - If there are shareholder, directors and more there may be issues in management.
Pre-incorporation contracts?
- Pre-incorporation contracts are contracts made before the company is formed. As part of the process of creating a company, promoters may contract for utilities, premises, etc. However, the company does not exist yet, so who is liable for these contracts? - S.51(1) states that: "A contract which purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as an agent for it, and he is personally liable on the contract accordingly." - This means that if a promoter makes a contract on behalf of a company, or in the company's name pre-incorporation, they're personally liable.
Minimum share capital requirements for public/private companies
- Public companies must have a nominal value of allotted share capital of at least £50,000 (s.761); - At least a quarter of this must be paid up before it begins trading (and gets a trading certificate) (s.586); - Private companies have no minimum capital requirements
What is Debenture, single debenture and debenture stock
1) Written evidence of a secured loan to the company 2) Single debenture: loan to the company from any person or organisation, usually a bank. 3) Debenture stock= offered to the public through the Stock Exchange; To protect debenture holders, company creates trust with control over company's assets.
Terminating a partnership 1: Non-judicial dissolution
1. Ending of a specified period (s.32(a)); come to the end of its natural line - it was set up for a specific time and the time has ended, e.g. 1 year. 2. Achievement of a specified purpose (s.32(b)); project has ended - e.g. a bridge has been built. 3. By the giving of notice (s.32(c)); one partner or all say that they are ending it. 4. Death of a partner (s.33(1)); this automatically ends partnership. 5. Bankruptcy (s.33(1)); if bills cannot be paid by the partner. 6. Illegality (s.34). If illegal actions are being undertaken.
When might the veil of incorporation be lifted?
1. If the court is interpreting a statute or document and needs to treat a group as a single entity for the sake of clarity (single economic unit) = principle from case says the veil is unlikely to be lifted on the grounds that the body is part of a single economic unit unless it is the true interpretation of a document or statute. 2. If incorporation is a mere façade = if the company is deemed to be a 'sham', injunction may be granted against the company and the owner. This is when the company isn't set up for true commercial purposes - only as a sham. 3. To reveal true commercial reality = e.g. English company actually made up of German owners, and the real commercial reality was to transfer money to an enemy country in wartime. Veil may be lifted, key question depending on control. Recent developments suggest differences in the corporate veil. Lord Neuberger said: "Doctrine of piercing the corporate veil should only be invoked when 'a person is under existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control'". Thus, current approach is restrictive and treats veil more like 'iron curtain'.
Consequences of a separate legal personality (veil of incorporation)
1. The company can own property. 2. The company can sue and be sued. 3. The company can be a party to a contract. 4. The company can commit a tort. 5. The company can be a victim of tortious behaviour - have torts committed against them. 6. The company has human rights. 7. The company can commit a crime. 8. The company can be the victim of a crime. 9. The company has perpetual existence until dissolved - continuation of an organisation despite the death, bankruptcy, or insanity of any member. 10. The company has "owners". If there is a director or employee is does not mean that they are a owner. If you have shares, then you are an owner. If you own a more than 50% then you may have a degree of control.
Notice and proceedings of resolutions (general resolution)
14 days' notice is required for general meetings. 21 days' notice is required for AGMs of a public company. For shorter notice, must be agreed by a majority of members (90% for Ltd, 95% for plc, and 100% for AGM of plc).
Board of directors versus a general meeting
A meeting of directors = 'Board of directors'. Meeting of shareholders = 'General meeting'. General meeting can be called by: Directors of their own volition (S.302). Directors when required to do so by shareholders (representing 5% of the company's voting capital) (S.303). - S.336: Public companies must hold an annual general meeting (AGM) once a year. Also S.338 states that at least 21 days' notice should be given unless all the members agree otherwise. There is no requirement for private companies to hold an AGM.
Partership
A partnership is a business formed by two or more persons. This includes a traditional partnership (most common), but also limited partnerships and limited liability partnerships. A partnership is defined by the Partnership Act (1890) as "a relationship between persons in common with a view to profit." A partnership means a shared workload. No legal agreement is needed for a partnership - however, this raises the issue of is a partnership exists at all. However, a partnership means that all profits must be shared. Also, partners face unlimited personal liability. •Taxed as income tax - •Includes 3 different kinds of partnerships: o Traditional partnership; ordinary. All have unlimited liability. o Limited partnership; some have limited liability - must always have one person who has limited liability partnerships o Limited liability partnership (LLP) - mainly used by large accounting firms.
What are the different Classes of shares?
Articles may specify classes of shares with different rights: 1. Ordinary (equity) shares: Most common type. Carry most of voting rights. But, rank behind preference shares for payment of dividends, and dividends are discretionary with the amount varying, so these shares carry more risk. 2. Preference shares: Gives holders the right to a fixed rate of dividend, specified when the share is issued. Get a & of share value. But, no right to dividend unless company has sufficient distributable profits. May be cumulative (if no distributable profits, payment rolls over to next year + previous year), or non-cumulative (doesn't roll over). 3. Redeemable shares: Issued to shareholder, in the future the company pays back and gains control of those shares. 4. Deferred / founder's shares: Deferred means payment is deferred, and founder's shares are owned by founders of company and may carry special rights.
Traditional partnership
As defined by the S1. Partnership Act (1890): "the relationship which subsists between persons carrying on business in common with a view to profit"; must have the aim of making a profit. No need to have a formal written agreement - so it can be difficult to know when a partnership exists. Must be decided on a case by case basis o Will all have liability for the debt, either all or part. o Joint or spent liability. If one person doesn't do well, can loose all of the debts. This is a big disadvantage. • Question of fact as to whether partnership exists; • Agreement can be implied, but express agreement recommended! • Each partner is personally liable for the debts of the partnership.
Liability of partners: torts
As well as each partner acting as an agent & liability through holding out, S.10 says that partners may be liable for torts, but only where the tort is committed in the ordinary course of business. For example, if an accountant negligently prepares accounts, in a partnership the other partners will be liable in the tort of negligence. MUST BE IN ORDINARY COURSE OF BUSINESS.
The rule from Foss v. Harbottle
Claimants (2 minority shareholders) alleged the defendants (directors and majority shareholders) had defrauded the company by selling land belonging to them to the company for inflated price; HELD: action dismissed. The 'proper claimant principle'= Only the company can commence proceedings for wrongs committed against it. Under the rule, only a company can take and action as a legal person. Cannot use it to remove directors • S.260 CA 2006 effectively abolished rule from Foss v Harbottle; • Member can now bring claim on behalf of the company for wrongs done to the company; • Claim must be based on an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of that company
Forming a partnership
Can be formed by written or oral agreement or even inferred from conduct = Formalities not required; does not need to be a written contract. BUT signed partnership deed is recommended (see sample on Moodle);this is useful as, if there is a disagreement, the partners can refer back to what was written in the deed, Agreement can be amended if all the partners agree (s.19 PA); e.g. when a new person comes in to the agreement. Even amended by conduct - it is enough to be done through conduct.
If a company needs more money, how can it be raised?
Capital may be raised in two main ways: ➢ By issuing shares (share capital); buyers become company members with an interest in how the company fares; ➢ By obtaining loans (loan capital); debenture holders do not become members of the company, but may secure the loan with a charge. o Also such a thing as preference shares - a middle ground between the two o There is a synergy between the shareholders and the lenders (debenture holders).
To form a registered company with Companies House, what information is required?
Company name. Address for the company. At least one director, and at least one shareholder. Memorandum and articles of association. Details of the company's shares. A SIC code - this identifies what the company does Also need to need to create the company and the written rules; details of the shares
Authority of partners
Each partner is the agent both of the firm and of the other partners - the authority differs at times: 1. Actual authority - if a partner (A) enters into a transaction with the express or implied agreement of the other partners (B and C), the partnership is bound by the contract; 2. Apparent authority - if the other partners (B and C) make a representation to a third party (T) that partner A has authority to make the contract, if T acts on this representation to make a contract, the partnership is bound to the contract. More difficult to determine, but all will be bound in this circumstance. 3. Usual authority - If the contract was: o Made on behalf of the firm; AND o The type of contract the firm would usually make; AND o Made in the usual way - Then the partnership is bound by the contract. Unless the third party knew partner A had no actual authority; OR the third party did not know or believe A to be a partner
Kelner v Baxter (1866) - IMPORTANT
Example of If promoter makes the contract, on behalf of the 'company'. It is not possible to ratify the contract after company has been incorporated.
Adams v Cape Industries plc (1990) - Important
Example of when the veil of incorporation can be lifted - first reason: "If the court is interpreting a statute or document and needs to treat a group as a single entity for the sake of clarity;" Cape, an English company, mined and marketed asbestos and had several subsidiaries, including Capasco, its worldwide marketing subsidiary and NAAC, a US-based marketing subsidiary. In 1978-9, several judgments made against Cape, Capasco and NAAC in Texas for asbestos-related injuries, but by 1978, NAAC had ceased trading. Claimants sought to enforce Texan judgment against Cape plc in English court. Key question was: did the Texan court have jurisdiction over them? HELD: cape, the English company, did not have presence in the US. It could therefore not be taken to the US. Nothing said that they were responsible for the US subsidiaries. They cannot enforce a US judgement in a UK court. Principle = veil unlikely to be lifted on the grounds that the body is part of a single economic unit unless it is the true interpretation of a document or statute.
Daimler Co Ltd v Continental Tyre & Rubber (1916 - WW1)
Example of when the veil of incorporation can be lifted - third reason: "To expose commercial reality" C sued D for debts owing. C was a UK company; however all shareholders (but one) and directors were German. D argued that they should not pay the debt to German individuals to prevent money going towards Germany's war effort. They traded in good faith. HELD: D did not have to pay - agreed by HoL. Looking at the commercial reality, they decided they did not have to pay.
Pilling v Pilling (1887)
Example of where behaviour inferred that partnership had changed. Father and two of his sons were in a partnership. The partnership deed stated that certain assets were to remain father's property, with the father only to receive interest on these assets, but after ten years the court held that the assets had become partnership property. Why? HELD: No. Only went through to a new form of accounting - that was so different and complicated that they were both considered to be partners, and from their behaviour inferred that the partnership had changed.
National Westminster Bank plc v. Spectrum Plus Ltd (2005) - IMPORTANT
Example of: Distinguishing between fixed and floating charges. Spectrum granted a charge over all present and future book debts and other debts to the bank to secure an overdraft of £250,000; Debenture stated Spectrum must pay proceeds of collection into specified account, but did not restrict how the account could be used; When Spectrum went into liquidation, crucial question was whether the charge was fixed or floating? HELD: the charge was a floating as spectrum still had the ability to continue to deal with the charged assets.
Stainer v. Lee (2010) - IMPORTANT
Example where permission way given for a statutory derivative claim: S. was minority shareholder in Kerrington Ltd (K). Majority shareholder was L and his company EH Ltd, who together owned 87% of shares. EH Ltd received loans of £8.1 million from K over 9 years with no interest payable. HELD: permission to continue the derivative claim was granted. S had satisfied the court that a prima facie claim existed
How can the problem of personal liability of promoters be solved?
Incorporate the company first before agreeing any contracts. By acting as an agent for existing off-the-shelf company. By novation - making a new contract after incorporation on the same terms. Make a binding contract between party and promoter, which states that the company will agree to another identical contract upon formation.
Difference between fixed and floating charges
Fixed charges - charge attached to a particular asset to the value of the loan. These are like a mortgage, attached to specific asset such as land, restricts the company's power to deal with that asset. Floating charge - charge attached to the company's assets in general to provide security. Over a class of assets present and future, company can continue business and dispose of assets in course of that business. The assets within the class subject to the charge will change as the company trades. The value of the pool of assess will be constant
What is a 'share'?
From a legal perspective: 'A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second. A share is an interest measured by a sum of money and made up of various rights.'- Borland's Trustees v. Steel Brothers & Co. Ltd. (1901). - Thus, a shareholder has both liability and rights - A share is quantifying the level of liability. - It is also a form of property - intangible property.
Statutory derivative claims - for serious mismanagement
Member must obtain court's permission to proceed with action. S.263 identifies situations where permission must be refused: • If a person acting in accordance with s.172 (duty to promote the success of the company) would not seek to continue the claim. I.e. is the action in the interest of the company? • Where the cause of action arises from an act or omission that is yet to occur, that the act or omission has been authorised by the company. • Where the cause of action arises from an act or omission that has already occurred, that the act or omission (i) was authorised by the company before it occurred, or (ii) has been ratified by the company since it occurred.
How to form a registered company
Registered company is formed by promoters; Pay £40 fee (£12 online) and send documents to the Registrar of Companies: • Memorandum of association; • Application for registration; • Statement of compliance (s.13); Registrar will then issue certificate of incorporation (ss14-16). The date on the certificate is the date that the company is born as a separate legal person.
What are resolutions?
Resolutions are the formal way in which a decision of the shareholders is proposed and passed. They're usually passed at a general meeting by 'a majority of' the votes cast - but private companies can also pass written resolutions. 1. Ordinary resolution - a resolution is passed by a simple majority (50% + 1 vote). When a resolution isn't specified, an ordinary resolution is required. 2. Special resolution - must be passed by no less than 75%, may be required by statute or articles, e.g. change of name or reducing share capital. To vote on resolutions, it can be done by:
Liability of partners: incoming and outgoing partners
S.17 states that incoming partners are not liable for pre-existing debts of the firm. However, retiring partners remain liable for debts incurred before retirement, UNLESS they are discharged from liabilities through novation (make a new partnership deed specifying debts). S.36(1) states that partners are responsible for debts incurred after retirement until notice is given of the change, and a notice in the London Gazette is sufficient notice.
S.24 implies 9 terms into the partnership agreement automatically. What are they?
S.24(1) - profits & losses are shared equally in the absence of a contrary agreement. S.24(2) - partners have the right to be reimbursed for expenses properly incurred in the course of business. S.24(3) and (4) - no interest is payable on capital, but 5% per annum payable on advances beyond original capital (meaning unless you put money into the business, you're not entitled to any capital). S.24(5) - every partner may take part in the management of the business. S.24(6) - no remuneration payable for acting in the partnership business. S.24(7) - new partners need consent of all existing partners. S.24(8) - regarding decision-making, ordinary matters are decided by majority of partners, and a change in the nature of the partnership business must be unanimous. S.24(9) - records and accounts are to be held at main place of business and open to inspection by all partners. S.25 - the majority of partners can only expel a partner where partnership agreement gives them this power.
Summarise the facts of the case Salomon v Salomon. What are the legal rules arising from this case?
Salomon ran a successful boot-making business as a sole trader, then sold it to a limited company incorporated for the purpose and received shares in return, as well as a debenture for the remaining £10,000 secured by a floating charge. When the company failed, Salomon took the remaining assets as a secured creditor, leaving the unsecured creditors with nothing. The key question was whether Mr Salomon could be held personally liable for the debts of the company. The court held that as the company had been correctly incorporated, it had a separate legal identity from Mr. Salomon. Thus, the company was a legal person it its own right and the liability of its members was limited. Mr. Salomon was not liable for the debts of the company even though the ownership and management of the business had remained largely unchanged after incorporation. This case is significant because it shows that a company is treated as a separate legal person from its owners. It also shows how the veil of incorporation prevents creditors from claiming against the members personally in the event that the business fails. Also an example of lifting the veil of incorporation.
Issue of shares at a premium
Shares can be offered at a premium, however, S.610 states that any amount received by company as share premium must be kept in a share premium account.
Dubai Aluminium Co Ltd v Salaam (2003)
Solicitor set up sham contracts which defrauded the claimant of $50m. Was planning, drafting and signing sham contracts in the ordinary course of business? C/A (court of appeal) HELD: no. H/L HELD (HoL): partners were vicariously liable as drafting contracts was part of the solicitors ordinary course of business
What is the Memorandum of association?
The memorandum of association is a statement of intent by promoters to set up a company. Since the CA 2006, this is less important and companies don't need to register an objects clause (purpose of company and range of activities).
What is the 'Duomatic' principle
The 'Duomatic' principle = States that shareholders' unanimous consent was as binding as a resolution passed in a general meeting (unanimous being 100%). If there is a small company, this is an informal way of making decisions. Based on the case of Re Duomatic Ltd (1969)
What are the articles of association?
The articles of association (S.17) is a document laying out the rules of the company. Model articles are prescribed by regulation but companies can choose to adopt model articles or draft their own. If no articles are supplied, the default articles will apply. The content of these articles includes the objects of the company, which contain rules governing the internal conduct of the company's business (how power is allocated), such as number of directors, the power of directors, and voting rights). - S.21(1) states that articles may generally be amended by special resolution (75%+ majority vote). But any alteration must comply with company legislation and be made in good faith for the benefit of the company. - S.22(2) states that for entrenched articles (harder to amend), there must be a 90%+ majority vote. The articles represent contractual terms between the company and its members (binds company and members).
Essentials of partnership
The key legislation which covers partnerships is the Partnership Act 1890 (PA 1890). S.1 - Defines a partnership as "The relation which subsists between persons carrying on a business in common with a view of profit." "The relation which subsists" - relationship, not legal entity. "between persons" - companies, as legal persons, can be partners. "carrying on a business" - anything, as long as it is commercially orientated. "in common" - carrying out business together. "with a view of profit." - aim is commercial, even if profit-sharing not occurred yet. Furthermore, there are 3 types of partner; a salaried partner (receives salary not share of profits), an equity partner (share of profits) and a sleeping partner (invests, but does not actively manage). Courts see their liabilities as the same
Rights of minority shareholders
The law uses a number of legal mechanisms to protect companies from poor management and self-interested action by those in control. Main claims: • Derivative claim on behalf of the company; where you take action on behalf of the company • Unfair prejudice claim for the shareholder personally; a claim you make as a shareholder personally • Just and equitable winding-up of the company. You have the company wound up - more extreme.
Limited v Unlimited Companies
Unlimited companies rare, sometimes used for subsidiaries of a global parent company; Irish subsidiary of apple is unlimited. - On a day-to-day basis there is not much difference between a limited and unlimited company, but on liquidation and company has unlimited liability for the debts. The advantage of this is that you're allowed to keep your financial affairs secret, and must not file information. Your accounts do not have to be publically available. This is useful e.g. if you are a subsidiary of the big MNE. - Most companies limited by shares, also possible to limit by guarantee; so if you have a company limited by guarantee, each member gives a guarantee. So if the company goes under - i.e. becomes solvent - will only have to pay in the worth of the guarantee. This tends to be done by non-profit companies, such as charities, student unions...i.e. when the aim is not to make profit. - Members' liability is then limited to the sum which they have agreed to invest; - If company gets into trouble, the company has to pay the debts, BUT the shareholders are not personally liable.
Prest v Petrodel Resources
Will only lift or pierce the veil of incorporation if court think the law is being deliberately evaded or frustrated
Limited partnership
o At least One person must have unlimited liability - they are the ones to run the business. o Very rare = mostly used for private equity purposes o Only used by venture capital funds - works in this context
The doctrine of capital maintenance
o Clearly, as the company's capital contributed by shares is intended to offer some protection to creditors, there are restrictions on handing the capital back to members; firm cannot buy its own shares - if they do they must be cancelled. Public companies can buy back shares from their shareholders, known as treasury shares, but only if they are to be sold on to other people. Restrictions on handing the capital back to members. S.658 states that the company is not permitted to acquire its own shares. S.830 states that a company may not make a distribution to members except out of distributable profits. However, there is no rule stating that profits must be distributed, dividends are only payable when the company has declared a dividend.
Distinguish between incorporated and unincorporated business organisations
o Unincorporated company is personally liable for any debts - if you cannot pay your debts and if you are a sole trader, then the debt collectors have a right to take things from you personally. o Most importantly there is a veil of incorporation between the members and the company. However, the veil can be sometimes lifted to avoid inequitable results. o As an owner of shares you cannot be liable for more than you have invested. You're personal assets will be protected. It is a protection mechanism. However, this is also a downside, making it harder to borrow money o You also have different tax consequences. Corporations pay a lower tax rate than individuals. Additionally, incorporated businesses can defer taxes to a later date, and if the business qualifies as a small business, it may qualify for a small business tax deduction. Incorporated businesses must file separate business tax returns while the unincorporated business owner can file one individual tax return. An unincorporated business also has some flexibility when dealing with taxes, as it can claim personal tax credits that an incorporated business cannot. Also, owners of unincorporated businesses can use business losses to decrease their personal income.
Company names - what are the rules?
➢ Public company: must end with 'public limited company' or 'plc' (s.58); ➢ Private limited company: must end with 'limited' or 'Ltd' (s.59); needs to end with a suffix. What is the purpose of this? - It is to let other people know what kind of company you are. It tells you about the type of company. In wales, can use welsh equivalent. ➢ Under s.60 - there are exceptions where you do not need a suffix at the end of you aim. This is when e.g. you are using it for promotion or non-for profit, like a charity/non-commercial company. ➢ There are various rules about what names you can and cannot use; ➢ Company name may be changed (ss.78-79); can be voluntary, or forced to be done by company's house. This can happen within 12 months of the companies creation. Can keep track of it through it's registered company number - people will still be able to see past performance through this. ➢ Company name must be disclosed (ss.82 and 84). I.e. it needs to be put on all official correspondence, emails, websites, outside office etc. This is needed so that people traded know exactly who they are dealing with.
Regarding same / similar company names
➢ S.53 says that the registrar may refuse to register a name which would constitute a criminal offensive or be offensive. ➢ S.54 and 55 say that certain sensitive words will not be registered without permission, e.g. Dentist, Royal, National etc. • S.66- name will not be accepted if it is the same as existing company; • However, similar names will be registered; e.g. adding a name. • S.69 & S.73- company may be ordered to change its name within first 12 months of registration if deemed to be too like an existing company; • If 12 months have passed, can still bring an action for tort of passing off.