4. Nature and Formation of Companies

Question 1

What is a benefit of an unlimited company?

Answer 1

It is not obliged to publish its accounts so enjoys more confidentiality

Question 2

How is the method of payment for shares different between public and private companies?

Answer 2

Public - payment in cash only, or where consideration has been independently value.
* 25% of nominal value of shares must be paid upfront plus the whole of any premium.

Private - no restrictions, and can be issued without immediate payment.

Question 3

What are the two types of limited company?

Answer 3

1. Company limited by shares
2. Company limited by guarantee

Question 4

In addition to the general requirements for a private limited company, what two additional things are required to register as a public limited company?

Answer 4

1. Nominal share capital of at least £50,000
2. Trading certificate must be obtained prior to commencing bussiness (cf. incorporation in an Ltd)

Question 5

What is the minimum number of directors in a private company and a public company?

Answer 5

Private: Two
Public: One

Question 6

Within what time period from the end of the accounting period must annual accounts be filed for a private company and a public company, and need they be audited?

Answer 6

Private: Nine months. Need not be audited.
Public: Six months. Must be audited.

Question 7

Who is a promotor?

Answer 7

A person who takes the necessary steps to form a company

Question 8

What is a Memorandum of Association?

Answer 8

A statement signed by people wishing to become members, indicating this intent and agreement

Question 9

What duties are owed between promotors?

Answer 9

Fiduciary duty and duty of good faith

Question 10

Who is liable on pre-incorporation contracts entered into in the company name, and what is a way to avoid this?

Answer 10

The promotor. Can be avoided by novating the contract after incorporation.

Question 11

What eleven things must be included in the application for a company to the Registrar?

Answer 11

1. Name
2. Address
3. Business activity code
4. Whether public or private
5. Whether limited by shares or guarantee
6. Details of subscribers
7. Statement of capital and initial shareholdings
8. Proposed officers/directors, and their residential address
9. Details of people with significant control
10. Statement of compliance with Companies Act 2006
11. Payment of the relevant fee

Question 12

What are the five limitations on a company name?

Answer 12

1. Cannot be the same or essentially the same as an existing company
2. Must end in Limited or Ltd or Public Limited Company or Plc
3. Cannot be offensive
4. Approval required if name suggests connection to government
5. Approval required if name suggests a protected profession

Question 13

What type of company does not have to use the word Limited?

Answer 13

A company limited by guarantee

Question 14

What is required for a company to change its name?

Answer 14

A special resolution of the members

Question 15

What documents make up a company’s constitution?

Answer 15

• Articles of Association
• Any resolutions/agreements adopted to amend the articles

Question 16

What articles apply automatically unless the company opts for its own?

Answer 16

The Model Articles

Question 17

What document is not required to be filed with the Registrar?

Answer 17

The Articles of Association

Question 18

What five things are dealt with in the articles?

Answer 18

1. Directors’ meetings and decision making
2. Appointment/removal of directors
3. Share capital
4. Rights attached to shares
5. Shareholder meetings

Question 19

Whilst a company need not restrict its objects, what must the directors do if it does restrict them, and what is the consequence of failing to do so?

Answer 19

Directors must adhere to the restriction, and they breach their duty if they do not, and may be subject to an injunction if the act is not yet carried out, otherwise equitable action for damage caused

Question 20

Even though a director would be in breach, what is the status of an act done beyond the scope of the objects?

Answer 20

It is still valid

Question 21

What is the legal effect of the articles?

Answer 21

They are a contract between the company and each of the shareholders, as well as the shareholders with each other

Question 22

What is the extent of a shareholder’s right to enforce provisions of the articles, and when is a shareholder not able to enforce?

Answer 22

Only insofar as it relates to membership rights, and a shareholder cannot enforce the articles in any other capacity, e.g. a personal right, or if they are also a director

Question 23

What is a shareholders agreement?

Answer 23

A separate voluntary agreement entered into by some or all shareholders and only binding on those who sign it

Question 24

Can the articles contain a provision requiring unanimous consent to amend them?

Answer 24

No, this is prohibited by the Companies Act

Question 25

Can the shareholders agree among themselves in a shareholders agreement to not amend the articles unless they all agree, and why is this different?

Answer 25

Yes, because they are merely agreeing among themselves to a course of action they will take. It is not enshrined in the company’s constitution itself, which is what the prohibition in the Companies Act is concerned with

Question 26

Under the Companies Act, what is the unchangeable requirement to amend the articles?

Answer 26

A special resolution

Question 27

What is one thing an amendment to the articles cannot require?

Answer 27

A shareholder to increase their liability to the company, i.e. subscribe for more shares

Question 28

What does an entrenched provision of the articles require?

Answer 28

A more onerous approval process than even a special resolution, e.g. 100% of members

Question 29

In what two ways can provision for entrenchment be made?

Answer 29

In the articles on formation, or by special resolution.
* note - entrenchment cannot entirely prevent alteration of articles, but may require higher majority than even an SR.

Question 30

To whom must notice be given if the articles are to contain an entrenched provision?

Answer 30

The Registrar

Question 31

What is the fate of a provision in the articles which attempts to prevent amendment of the articles, and what will always be the rule?

Answer 31

Such a provision will be ineffective, and the articles can always be changed by special resolution

Question 32

What must be true of an amendment to the articles before a shareholder who did not vote for it can apply for the court to set it aside?

Answer 32

No reasonable person would consider it to be for the benefit of the company

Question 33

What alone is not grounds for challenging an amendment to the articles?

Answer 33

That it adversely affects minority shareholders, as long the amendment is made in good faith

Question 34

What is the question the court will ask in determining whether an amendment which affects the minority should be set aside?

Answer 34

Is the benefit derived at the expense of the minority, or is it something that any and all members could enjoy?

Question 35

What are the only times that the corporate veil has deemed to have been lifted?

Answer 35

Directors or shareholders in breach of other legal provisions, e.g. company was formed to carry out a fraud or avoid existing obligation

Question 36

What is wrongful trading and fraudulent trading?

Answer 36

If a director causes the company to trade knowing the company is insolvent, the director commits the:

1. Civil offence of wrongful trading, and
2. Criminal offence of fraudulent trading

Question 37

Who is personally liable if a Plc trades without a trading certificate?

Answer 37

The directors

Question 38

Is a subsidiary company liable for the debts of the parent or other subsidiaries, and is a parent company liable for the debts of the subsidiaries?

Answer 38

No