Companies Act 2006 Flashcards
(24 cards)
Companies Act 2006
This has put into law for the first time a statutory statement of directors’ duties and responsibilities. This includes ‘having regard’ for employees, suppliers, and the environment.
Whats a Promoter
They are individuals (director of company) that initiate the formation of the company, they can be sued or sue regarding the contract
They have general duties that include exercising reasonable skill and care, holding a position of trust and confidence and ensuring disclosure of any profit made
What’s the Role of the Promoter when Setting up a Company
When setting up a company, several steps and considerations are involved:
Pre-incorporation contracts
Registration of a New Company
Constitutional Documents
Pre-INcorporation Contract
These are contracts or agreements that promoters make with third parties before a company is officially registered and legally recognised
It’s non-binding since the company doesn’t legally exist yet
Promoters are held liable and can be sued or can sue regarding the contract
Once company is formed, contract can’t be ratified
Phonogram v Lane Ltd
Lane was personally liable as the promoter for repayments as the company wasn’t formed yet when the contract was made
Strategies to Adress Pre-Incorporation Contract Issues
Careful Drafting - make agreements with specific attention to detail, clearly outline responsibilities and liabilities
Off the Shelf Company - Use already registered companies at Companies House, avoiding the need for contracts to be made before the company legally exists
Registration of a New Company
Specific documents required to register include:
Name
Registered Office
Memorandum of Association
Application for Registration
Statement of Compliance
Fee
Statement of Capital and Initial Shareholding
Statement of Proposed Officers
What’s Memorandum of Association
This document requires those that wish to form a company and agreed to become members must each agree to take at least one share each
What’s Application of Registration
This application includes vital info like the company name, address, number of shares, face value, copy of articles
What’s a Statement of Compiance
A declaration confirming that the requirement of the Companies Act 2006 have been met
What’s a Statement of Capital and Initial Shareholding
Providing a snapshot of the company’s share capital
What;s the Tort of Passing Off
This protects a business’s goodwill and reputation from misrepresentation
It’s relevant when choosing company names and conducting activities online
What’s the meaning of Passing off
This occurs when one party misrepresents their goods and services, leading to consumers to believe they are those of another business
This harms the original business’s goodwill and reputation
Ewing v Buttercup Margarine Co Ltd (1917)
This case highlights that even minor difference like ‘Tesco and Tesko’ can be problematic if they can cause confusion amongst consumers
If a companies name is too similar to that of an existing company, it can lead to a passing off action if it damages the original
What’s Online Relevance
While domain name registration is unrestricted, using a name too similar to existing companies can lead to legal action as well if original company rep or goodwill is damaged
What’s Gripe Sites
These are websites that voice grievances
They can also face scrutiny, only acceptable if they express legitimate concerns
Burden of proof rests on the party alleging the passing off
Constitutional Documents of a Company
These are rules that govern how a company operates
They include the Article of Association and resolutions and agreements passed by company members
Articles of Association
They contain rules for conducting the company’s business
They cover aspects like the powers of directors and members’ voting rights
The articles create a binding relationship between:
Members to the company
Company and the members
Among the members themselves (inter se)
Cases on Articles of Associtates
Hickman Case (1915) - Taking dispute to arbitration as stated in the Articles
Pender (1877) - Voting rights contractually given in the Articles
Eley (1876) Rights as a shareholder v rights as employee
Section 40 Companies Act
Under Section 40, a company has the full capacity of a natural person and can enter into any legal contract.
⚖️ Ultra Vires Rule:
Contracts made outside the company’s stated powers (ultra vires) are still valid when made with third parties acting in good faith.
This protects third parties from being affected by internal company limitations.
🧑⚖️ Insider Transactions:
If the contract is made with an insider (e.g. Director or a connected person), the company may apply to court to set aside the contract.
This limits abuse of power within the company.
✅ Why It Matters:
Helps ensure commercial certainty and protect external third parties.
Encourages transparancey and accountability
What is Altering the Articles of Association
The Articles of Association set out a company’s rules. They can be altered by a special resolution (≥75% of votes in favour).
⚠️ Key Limitation:
Any alteration must be for the benefit of the company as a whole.
Courts can intervene if this condition is not met.
⚖️ Case Law – Sidebottom v Kershaw Leese (1920):
Articles were amended to force competing shareholders to sell their shares.
Held valid, as it was for the company’s benefit.
🧠 Principle:
Shareholder rights can be changed if the goal is to protect or promote the company’s overall interests.
Financing a Company
How a company obtains capital it needs to conduct business and operate
This is done by two ways:
By shares
By way of debt
By Shares
Shareholders buy shares in return for capital investment.
Shares can be ordinary (voting rights, variable dividends) or preference (fixed dividend, no voting rights, priority in liquidation).
Shares can be issued at nominal value or at a premium.
Shareholders may receive dividends, depending on profits and distributable reserves.
🧑🤝🧑 Shareholder Rights:
Pre-emption rights: Existing shareholders get the first offer on new share issues (unless excluded by articles).
Bonus Issues/Rights Issues: Company may give additional shares or offer discounts.
🏢 Special Requirement for PLCs:
A Public Limited Company (PLC) must have £50,000 share capital, with at least 25% paid up before trading.
By Debt
Company borrows money from creditors or issues debentures.
🔐 Debentures:
A debenture is a formal document acknowledging debt.
Can be a single debenture, debenture series, or debenture stock.
Debenture holders receive interest, not dividends.
🏦 Security for Loans:
Debentures may be secured by:
Fixed charge (specific asset).
Floating charge (general assets, shifting in nature).
🧑⚖️ Priority in Liquidation:
Debenture holders rank above shareholders when company assets are distributed.
But they do not have voting rights or ownership interests.
