Sole Traders: The sole trader is the business and there is no distinction between the business and the trader.

Transcription

1 LGS 1& 2 INTRODUCTION TO BUSINESS MEDIA & FINANCE Page 1 of 43 Sole Traders: The sole trader is the business and there is no distinction between the business and the trader. Partnerships: Whilst partnerships are defined in statute, they have no separate legal personality. The partnership is therefore technically unable to own property or enter into contracts. Instead, where a partnership seeks to do any of the above, it is actually the individual partners who will conduct the legal action in their own name, own the property jointly and enter into contracts jointly. This means that if the partnership becomes insolvent, then the creditors are entitled to satisfy those debts by enforcement against the personal assets of each of the partners themselves. The Limited Liability Partnerships Act 2000 was brought into force with effect from 6th April Companies: A company is an artificial person with separate legal identity Salomon v Salomon. The company may therefore own property, enter into contracts, sue and be sued. This also means that a company may incur liabilities such as debts owed to creditors. If the company is unable to pay that debt, then the company will ultimately be wound up; creditors of the company will not be able to access the personal assets of the shareholders in order to satisfy the debts of the company. However, this principle of separate legal identity is without prejudice to the fact that, economically speaking, groups of companies are treated, to a certain extent, as a single entity; Ord v Belhaven Pubs. Whilst the company has separate legal identity, it is not a natural person, and therefore needs someone to take decisions on its behalf. Those people are the officers of the company and are called directors. Directors are also agents of the company, and as such their conduct is governed not only by the Companies Act 1985 but also by the common law principles of agency. A director owes a series of fiduciary duties to the company. Constitutional Documentation: Memorandum of Association Relationship with outside world Name / Location Objects clause General commercial company o NB Ultra Vires rules (acting beyond the scope of the objects clause breaches a director s fiduciary duty, but a 3 rd party may still enforce a contract if he in turn acts in good faith) Statement of limited liability Authorised share capital Number of shares it can issue Articles of Association Internal workings of company usually Table A S. 221 Companies Act 1985: Each company must keep accounting records which are sufficient to show and explain the company's transactions. S. 226 Companies Act 1985: The directors of every company must prepare for each financial year of the company a balance sheet and a profit and loss account which give a true and fair view.

2 LGS 3 COMPANY LAW ON INCORPORATION Page 2 of 43 FORMATION: To incorporate a new Company the following must be delivered to the Registrar of Companies; Memorandum of association and articles of association; a form 10 (details of registered office, directors names and company secretary s name) a form 12 (Statutory Declaration that everything is in place) and a fee 20. The company becomes a legal entity from the date of incorporation set out in the certificate of incorporation (s. 13(3) CA). If a client chooses to purchase a shelf company it is likely that they will want to make some changes. This might include a desire to change the name; the directors/company secretary; Registered office; Provisions in the Articles of association and the Shareholders. MAKING DECISIONS: A company may make certain decisions by board resolutions. At a board meeting, the majority of directors present need to agree with the resolution. A quorum, specified as 2 directors in Table A (Reg. 89) is needed to make meetings valid. Certain decisions must be made by Shareholder Resolution; i.e. made by the members. Shareholder meetings are known as General Meetings and they are either the Annual General Meeting AGM or an Extraordinary General Meeting EGM. The Quorum for a general meeting is laid out in the articles and is usually 2 (Table A Reg. 46 (b)). Ordinary Resolutions (Bushell v Faith) require a simple majority of those attending. Where there is equality in the case of an ordinary resolution, regulation 50 TA gives the chairman a casting vote. Special resolutions (Section 378(2) CA) require approval by 75% of those attending; present and voting. This can be a simple show of hands, or if insisted upon the poll can take into consideration the number of shares owned by each member. Elective resolutions (Section 379A(2) CA) require unanimous consent of all the members of the company, as opposed to the unanimous consent of all the members present and voting at the meeting. Written resolutions (S. 381A CA) must be signed by all the members. Regulation 53 of Table A re-asserts this. They are subject to the exceptions in Schedule 15A CA. Copies of written resolutions must be sent to the company s auditors (S. 381B CA). If the number of members of a company drops to one, a statement must be sent to the Registrar that the company has only one member (s. 352A CA). Quorum will therefore be one (s. 370A CA) and decisions must be recorded in writing (s. 382B CA). A Company may alter its objects clause by special resolution (s4 CA) but 15% of the members may apply to the court within 121 days to have the change set aside. Section 35 Companies Act capacity to contract: This section effectively prevents either the company, or a third party to a transaction with the company, from escaping liability on the ground that the company is acting outside of its objects clause, but s. 35(2) CA provides that a shareholder may still apply to the court for an injunction to prevent the company from entering into an ultra vires transaction, provided such

3 Page 3 of 43 action is taken before the transaction is entered into. Furthermore, any contract may be ratified by Special Resolution. A director who causes his company to enter into a transaction that falls outside the scope of the company s objects will still be in breach of the fiduciary duties that he owes to the company. He will therefore be liable to indemnify the company against any loss it suffers as a result of the company entering into the ultra vires transaction, unless the shareholders agree to pass a further special resolution to relieve the director from liability. Section 35A Power and authority of the board to bind the company: This provision prevents the company from escaping liability to a third party under a contract, on the ground that the board, in entering into the transaction, has acted in breach of any limitation in the company s constitution (provided that the third party to the transaction has acted in good faith). It applies to any situation where the directors have acted within the objects of the company but have otherwise exceeded their powers under the company s constitution. There is no definition of good faith provided in the CA but a person will not necessarily be dealing in bad faith if they knew that the company was acting in breach of its constitution. Section 35A(4) provides that a shareholder may still apply to the court for an injunction to prevent the company from entering into a transaction and a director who causes his company to enter into a transaction that breaches a limitation in the company s constitution will still be in breach of the fiduciary duties and will therefore be liable to indemnify the company against any loss it suffers. Section 35B A third party is not under any duty to enquire as to whether a transaction is permitted by a company s memorandum or as to any limitation on the powers of the board to bind the company or authorise others to do so. Section 322A Where the board enters into a contract in breach of its constitution but the third party to the transaction is a director of the company (or its holding company) or a person connected to such a director, the contract is voidable at the instance of the company. Any director who authorised the contract is liable to account for any gain he has made and to indemnify the company for any loss it has suffered as a result of the transaction. Articles of association: Section 9 - A company may alter its articles by special resolution. Section 14 - The memorandum and articles, when registered, bind the company and its members. LGS 4 OWNERSHIP & MANAGEMENT OF COMPANIES Power to make decisions is given to the directors and shareholders by both the Companies Act and the company s own articles of association. Unless powers are given to the shareholders by the CA, the memorandum, the articles or special resolutions, all of the company s powers are exercised by the directors - Reg 70 TA states that the business of the company shall be managed by the directors meeting of directors at which a quorum is present may exercise all powers exercisable by the directors.

4 How business is transacted: Page 4 of 43 Board resolutions: Directors attending board meetings make decisions unless the power has been delegated. Decisions are taken by majority vote on a show of hands. Regulation 88 TA gives the chairman a casting vote. The chairman is chosen by the directors from amongst themselves (Regulation 91 TA). Shareholder resolutions: Shareholders make decisions by attending general meetings - either an Annual General Meeting ( AGM ) or an Extraordinary General Meeting ( EGM ) - and passing the appropriate type of resolution. An AGM must normally be held once every calendar year and occur within 15 months of the last AGM. Calling meetings: Board Meetings Regulation 88 TA provides that any director may call a meeting or require the company secretary to do so at any time. The process is fairly informal. They are held on reasonable notice - Browne v La Trinidad. Regulation 89 TA requires a minimum of two directors to be present for the meeting to be quorate. Board resolutions are passed by majority vote on a show of hands. The chairman may have a casting vote to prevent deadlock. General Meetings The board usually calls general meetings. Regulation 37 TA gives the directors power to decide when to call the AGM and power to call EGMs at any time. Shareholders may also call an EGM, provided they hold 10% of the paid up share capital. (S. 368 CA). The request must be in writing, signed and deposited at the company s registered office. It is then for the directors to convene the EGM. If the directors fail to call a meeting within 21 days of the date of the request being deposited, the members can convene the meeting at the company s expense. Notice depends on both the type of resolution being voted on and whether the meeting at which the resolution is proposed is an AGM or an EGM (s. 369(1) CA and regulation 38 TA). Unless the articles provide otherwise, or where the company has only one member, there must be at least two shareholders to form the quorum (regulation 40 TA). Resolutions will normally be passed by shareholders on a show of hands, where each member personally present has one vote (regardless of the number of shares owned), unless a poll vote is demanded. On a show of hands, a proxy (a person attending in place of the member) cannot vote, unless the articles provide otherwise. On a poll vote, the votes are counted according to the voting rights of the members - see s. 373 CA which sets out which shareholders can demand a poll vote and how. In both cases, the chairman may have a casting vote if there is a deadlock. Notice: Resolution Clear days notice required EGM AGM Ordinary Special Extraordinary Elective 21 21

5 Page 5 of 43 Where the proposed resolution is an ordinary resolution to appoint a director, 21 clear days notice is required. The definition of clear days is contained in regulation 1 TA which states that a period of clear days notice excludes the day when the notice is given, or deemed to be given (i.e. the date of service), and the date on which the meeting is to take place. Short notice: Where small companies have few shareholders, meetings can be held at very short notice, which means that business is not delayed by the otherwise lengthy notice periods. s. 369(3) CA and regulation 38 TA provide that shorter notice may be validly given: In the case of an AGM, if all the members entitled to attend and vote agree to shorter notice, whatever the shorter period may be; and Where the meeting is an EGM, if a majority in number of members owning 95% of the voting shares and entitled to attend and vote agree. N.B. Under s. 378(3) CA, consent to short notice must also be obtained in relation to any special resolution to be passed at a meeting. Regulation 115 TA states that, where the notice is posted (or sent by ), it is deemed to be served 48 hours after posting (or 48 hours after the time sent by ). The egg sandwich of meetings: 1. A board meeting must always be held before the EGM is convened to decide the issues to be considered at the EGM and to approve the form of notice for the EGM (think of this as the first piece of bread in the sandwich ). 2. The EGM will then take place and the shareholders will either approve the particular matter being discussed (e.g. contracts under s. 319 or s. 320) or exercise their power to actually make a particular decision (e.g. removing a director under s. 303 or increasing share capital under s. 121) (the egg filling in the sandwich ). 3. A further board meeting will follow the EGM, because the board will have to decide what further action is required to implement the decision(s) taken by the shareholders (the second layer of bread in the sandwich ). For example, if the members approve a change of the company s name, the directors must instruct the company s secretary to send the appropriate form and effect the change at Companies House. 4. There will then be various post-meeting matters (the plate on which the sandwich sits). Using the name change example, the company secretary will be responsible for making an application to change the name and sending the fee to the Registrar of Companies, together with a reprinted memorandum, containing the change of name, and a copy of the special resolution approving the name change. Copies of certain resolutions must be sent to the Registrar of Companies within 15 days of being passed (s. 380 CA). Included in this requirement are; all special, extraordinary and elective resolutions; and those ordinary resolutions set out in s. 380(4) CA. Certain other ordinary resolutions must also be filed if required by the relevant provision of the CA, e.g. an ordinary resolution under s Copies of any amended memorandum and/or articles must also be filed, together with various company forms. The relevant form is given a number which relates to the