COMPANY LAW & LIQUIDATION COURSEWORK
B.1 (i) (ii)
An Incorporated Company is an association of members wherein the members have no individual liability to its creditors for debts owed by the company, and their personal liability is satisfied when they pay the calls properly made on then by the company or its liquidator. These calls may be limited or unlimited depending on whether the company is limited by shares or unlimited or bound by guarantee. The company has its own distinct legal personality once incorporated. A company can be public (PLC) (where the minimum requirements as to nominal share capital are set out) or private (Ltd) (the shares are not quoted on The Stock Exchange and the Board of Directors have more control over who becomes a shareholder).
The commonest type of company is one limited by shares which are paid for in one or several payments or calls. Some companies are limited by guarantee. No money is paid over until asked and the amount paid is specified in the Memorandum of Association. An unlimited company has no shareholders but does have members.)
The Members are often called shareholders or stockholders. They are the persons who together own the company and can be individuals or another company. Accordingly company A can own some or all of the shares in company B. Although the members of a company are directly tied in financially to the company's capital, they are not personally entitled to benefits which the company receives nor are they liable for the company's debts or burdens. They are said to have limited liability. The creditors of an incorporated company therefore know that they cannot look to the assets of the members but are restricted to the company's property in the pursuit of payment. In an incorporated registered company, the members have no individual liability to its creditors for debts owed by the company and a member's obligation is implemented when s/he pays all calls to the company or its liquidator.
The members rights are confined to receiving from the company a share of the profits (usually by way of dividends each financial year) or, after winding up, a share of any surplus after the assets have been ingathered and the company debts paid. Their liability extends to payments of the amounts due on each share to the company or its liquidator.
In the case of FGHI (Classic Cars) Limited, they are a private company, that may not advertise I order to sell shares and are a limited by shares company. As s.3 (2) Companies Act 2006 states that: if the liability of shareholders 'is limited to the amount, if any unpaid, on the shares held by them', the company is 'limited by shares'.
A limited company is an individual legal entity which is separate from that of its officers. A limited company has its own assets, liabilities, profits and losses where the liabilities are limited to the Company unlike a sole trader or partnership where the assets and liabilities of the business are that of the individuals. Limited companies must also submit annual accounts to Companies House these are made available to the general public.
The term 'limited' derives from the fact that the company's finances are distinct from the personal finances of their owners (unlike the sole trader arrangement).Shareholders in limited liability companies are not responsible for company debts, although if required, directors may be required to guarantee loans or credit granted to the company.
The higher level requirements for limited liability companies are as follows:
- Company must be registered at Companies House
- Annual accounts must be filed at Companies House
- Annual Return must be completed each year to update Companies House with basic details relating to the company. Also requires a small annual fee.
- Inland Revenue must be informed if the Company has any profits or taxable income in a Company year.
- Company must complete an annual Inland Revenue corporation tax return and pay the due taxes within nine months of the Company year end each year.
- Anyone employed by the Company must pay income tax and national insurance on their income.
Section 9 Companies Act 2006 sets out the basic requirements which must be included in the application for registration. These include:
- The name of the company;
- Whether the registered office is to be in England and Wales, in Wales, in Scotland or Northern Ireland;
- Whether it is to be limited and if so by shares or guarantee;
- Whether it is to be a private or public company.
The setting up of a business involves the creation of a corporation. A corporation is an artificial legal person created by law and thus has rights and obligations which must be adhered to by law. There are two distinct types of corporation. In the case of Fred, Ginny, Henry and Irene, their corporation would be a 'corporation aggregate'. A corporation aggregate consists of a number of persons who, in law, form a single person, the single person would be FGHI (Classic Cars) Limited. Corporations aggregate can be further broken down into three different types of companies; chartered companies, statutory companies and registered companies.
FGHI would come under the category of registered companies and are formed under the relevant company legislation, currently the Companies Act 2006.
The four friends want their company to be a limited company and therefore their company would be a private company.
The promotion of a company is concerned with taking the steps necessary for incorporation. The promotion of small private company will normally, although not exclusively, be carried out by the owner or owners of the pre-incorporated business.
An application for registering a corporation involves filing certain documentation with the Registrar of Companies. The documents required for registration are listed in section 9 of the Companies Act 2006. The Memorandum of Association and Articles of Association are documents which make up the constitution of the company. A statement giving the address of the company's registered office and the details of the company's first directors and secretary must also be lodged along with a statutory declaration of compliance which lets the registrar know all the requirements of the 2006 Act have been met. A fee of £20 is also required as the registration fee.
If the Registrar is satisfied that the requirements of the Act have been met, he registers the documents and issues a certificate of incorporation.
A company's name must be stated in its memorandum. The name chosen must not be one which already exists in the index of registered company names. The friends want their company to be known as FGHI (Classic Cars) Limited. The placing of Limited or Ltd after a company name is a requirement of a private company.
The foursome wish to be the corporation's sole members and only managers, this involves a number of duties and roles. A company must have the required amount of directors as well as a secretary. It is essential to determine the status of individuals involved in the setting up of a company due to distinct duties owed by promoters and the personal liability which may arise. The term promoter is not defined in the however; some attempt at definition has been made in the courts in the cases of Twycross v Grant and Whaley Bridge Printing Co v Green. Their duty is to 'exercise reasonable care and skill in the performance of his duties' (Griffin, Company Law, "The Formation of a Company", pg 33)
The relationship between the promoter and the company is a fiduciary one. Each of the promoters is required to disclose any profit made through transactions undertaken on the company's behalf. In the event a promoter sells his own property to the company without disclosing it the company can rescind. The company may be able to sue a promoter for damages for breach of fiduciary as was seen in Leeds and Hanley Theatres of Varieties Ltd (1902).
The company secretary owes duties similar to that of the director.
B.2 (i)
When using the word capital when referring to organisations it takes several meanings. A share is the unit of measure for determining a member's interest in the company. The memorandum states the nominal value for each share and members must contribute at least this amount. There are two types of membership to a company, preference shareholders and ordinary shareholders.
An ordinary shares dividend depends on company profits and there is no automatic right to a dividend. A good aspect of ordinary shares is that their dividends are not fixed and therefore the dividend could rise considerably with the profit made by the company. Ordinary shares 'rank behind preference shares for repayment of capital'. (Keenan et al, Company Law, "The Capital of a Company", pg 134) Ordinary shares are said to 'hold the equity share capital of the company. (Keenan et al, Company Law, "The Capital of a Company", pg 134) At general meetings the directorate can really represent or be made to represent ordinary shareholders in order to control any resolutions that are passed.
Preference shareholders have the right to receive a fixed net rate of dividend before any dividend is paid to an ordinary shareholder. A cumulative preference shareholder is where the company does not have sufficient funds to pay the shareholder their dividend in one financial year but can have it paid to them by the end of the following year along with that year's dividend as well. This was demonstrated in the case of Webb v Earle.
A Debenture is not regarded as a share but as a loan and is the usual form a company takes to borrow money. The debenture holder is a creditor and not a member of the company. There are many types of debentures.
A secured debenture is a debenture which is secured by placing a charge on the company's assets. This is done either by the creation of a provision in the debenture or by terms held in the trust deed which deals with the issue.
Debentures may be secured by 'means of a fixed or floating charge, or by a combination of both'. (Keenan et al, Company Law, "Debentures and Charges", pg 422)
A fixed charge takes the form of a legal mortgage. It usually applies to specified assets such as the company land and building and fixed plant. The charge is created by a deed held under the Law of Property Act 1925 section 85 (1). By securing the debenture against the company the friends can ensure the company's overdraft.
In the event the friends have no land or buildings the bank can take a fixed charge over their books. While under a fixed charge the company can not do away with the assets to which the charge is applied.
A floating charge is not attached to any particular assets which the company may hold at the time of the charge. The charge is placed against the company's assets at the time. With a floating charge the company can freely dispose of its assets and any new assets which are acquired are made available to the debenture holder.
B.2 (ii)
The rights attached to Shares in a class of shares may be varied or cancelled only by special resolution of the Company and:
- by special resolution passed at a meeting of the class of Members holding Shares in the class; or
- with the written consent of Members with at least 75% of the votes in the class.
- If the Shares in a class of Shares are divided into further classes, and after division the rights attached to all of those Shares are not the same:
- the division is taken to vary the rights attached to every Share, that was in the class existing before the division; and
- Members who hold Shares to which the same rights are attached after the division form a separate class.
- If the rights attached to some of the Shares in a class of Shares are varied:
- the variation is taken to vary the rights attached to every other Share that was in the class existing before the variation; and
- Members who hold Shares to which the same rights are attached after the variation form a separate class.
B.3 (a)
The administration of a company is dealt with by the company secretary. In the case of the friends Irene without knowing it has been appointed. Table A section 99 deals with the appointment of a secretary through the directors. The company secretary may also be a director.
It is recognised that today a secretary is an 'important official' (Keenan et al, Company Law, "Directors and Management" pg 310). The law recognises that a secretary has the power to contract on behalf of the company on administrative duties. The secretary is an employee of the company, regarded as such for the purpose of preferential payments in liquidation (Insolvency Act 1986, s.175 and Sch 6).
Irene's main duties would be to deal with the procedure associated with general meetings and board meetings, keeping statutory registers, sending returns of information to Companies House and keeping custody of the company seal.
The company secretary may also be given other duties by the directors.
The company secretary 'also owes the company fiduciary duties which are similar to those owed by a director'. (Keenan et al, Company Law, "Directors and Management" pg 310) Therefore Irene may not make secret profits or take secret benefits from the office. If this should happen she may be 'required to account for them to the company as a constructive trustee'. (Keenan et al, Company Law, "Directors and Management" pg 310) This was seen in the case of Morvah Consols Tin Mining Co, McKay's Case.
B.3 (b)
With some exceptions to private companies, all companies must hold a general meeting every year under s 366 of the Companies Act.
The FGHI Company has called their meeting within 16 months of incorporation and is therefore not required to hold a meeting for the next year.
The way in which notice of meetings can be called is a matter for the articles of association. Irene telephoned the other three telling them of her intent to hold a meeting, in the form of a barbecue in her garden to discuss the successful months of trading and also to discuss the profits and the untouched paperwork for the Registrar. She specified the time and place of the meeting, which she is required to do under Table A. However, she deliberately did not invite the auditor which she is also required to do under Table A.
Under Table A notice must be given to all members and to the auditors of the company. If notice is not given then the proceedings and any resolutions which are passed will be deemed invalid. Cases in which members have been excluded are Young v Ladies Imperial Club and West Canadian Collieries Ltd.
The required notice for an annual meeting is normally 21 days unless all members entitled to attend and vote agree on shorter notice. However the auditor is entitled to attend but was not given notice and therefore the meeting is not valid.
Table A contains no provisions as to what can be dealt with at meetings. Items of business are supposed to be placed in the notice of the meeting.
Once the meeting has been convened the matters of 'quorum, voting, proxies, the position of the chairman and the recording of minutes' (Keenan et al, Company Law, "Meetings and Resolutions", pg 388) must be dealt with. This can not be done without the presence of everyone who is required to be there.
Any decisions or proposals made at this meeting are invalid without the presence of the auditor.
B. 4 (i) (ii)
Being one of the companies members, Henry has a fiduciary relationship with the other three.
The duties and obligations a director owes are to the company only. The director must act bona fide for the benefit of the company as a whole as was the case in Lee Behrens and W & M Roith Ltd. Henry is not benefiting the company as he is not showing up for meetings.
In the case of Howard Smith v Ampol Petroleum (Bisacre, Company Law with Scottish Case, "The Directors" pg 161), a director must also only use his powers only for the purpose for which they were conferred.
A director must also avoid conflict between his own interests and those of the company; a good example of this was Aberdeen Railway Co v Blaikie Bros (Bisacre, Company Law with Scottish Cases, "The Directors", pg 165). Henry's private life is conflicting with his company as he is on the verge of personal bankruptcy.
Henry has used confidential information to gain a personal profit from the company, this is not allowed and as in Gluckstein v Barnes, Henry has not disclosed this fact and so must surrender his profit to the company. The other three can take action to ensure that they are paid for his personal profit which he did not disclose.
Henry is not meeting his duties as a member and therefore the company may be able to sue for damages for breach of fiduciary duty as was seen in Leeds & Hanley Theatre of Varieties (1902).
B.5
A company's life can be brought to an end by a process known as winding up. A company may be wound-up by either the court or by voluntary means. In the case of a court winding up the business it is usually because the company is unable to pay debts. A petition for the winding-up may be placed. In the event of this happening a liquidator is appointed who realises the assets and pays the creditors. After the company's affairs are wound up the court passes an order dissolving the company.
FGHI (Classic Cars) Limited would be a case of the members winding-up the business. Section 84 of the Insolvency Act 1986 provides that voluntary liquidation may commence if a fixed period has been settled for the duration of the company and the fixed period has passed, if the company resolves to be wound up voluntarily by special resolution or if the company resolves by special resolution to be wound up on the basis that it cannot by reason of liabilities continue its business.
Once the required resolution is obtained a notice of their solution must be published within 14 days in the Edinburgh Gazette. The winding up then commences on the day that the resolution is passed.
Under the Insolvency Act, there are two procedures that can be followed in voluntarily liquidation. When members' voluntarily wind-up the company a statutory declaration of solvency is delivered to the registrar. If the directors are unable to make a declaration, the winding-up proceeds as a creditor's voluntary winding up.
After the liquidator has realised the company's assets, he must pay off the company's debts. Once distribution is completed the liquidator must call a meeting of the relevant parties in order to present the accounts. These final accounts along with a return of the meeting are then lodged with the Registrar. Once the Registrar receives this information he lodges the accounts and within three months of receipt the company will be dissolved.
References
J R Bisacre, Casebook on Company Law, London: Pitman, 1992
Stephen Griffin, Company Law: Fundamental Principles, 3rd Edition, Harlow: Logman, 2000
Denis Keenan & Josephine Bisacre, Company Law, 12th Edition, Harlow: Longman, 2002
Janet Dine & Marios Koutsias : Company Law 6th edition Palgrave
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