1) Business Organisations
What are the key features of a sole proprietorship/trader?
A sole proprietorship/trader’s advantages include operation with few employees, making it
flexible and adaptable. It requires little formalities other than paying registration fees to
HMRC for tax and national insurance. It preserves confidentiality with no disclosure of its
internal affairs.
Its disadvantages include no separate legal personality which makes the sole trader wholly
liable (unlimited) towards the company’s obligations with third parties. It has low turnover.
Its transferability can be complicated.
What are the key features of a partnership?
A partnership requires at least two persons with the common intent in achieving profit. They
can raise capital by debt funds. Like sole traders, they preserve confidentiality, but
transferability can be complicated. Decisions require at least 50% vote or partnership
agreement, which can be very cumbersome for large partnerships.
On the one hand, general partnerships involve only partners. This means the partners are
jointly and severally liable for the partnership’s obligations. Thus, they should sell their
property to avoid losing their investments. On the other hand, limited partnerships involve
both general and limited partners. General partners are liable for the LP’s debt, whereas
limited partners are liable for the LP’s investments.
What are the key features of a private limited company?
A private limited company enjoys separate legal personality, unlike partnerships and sole
traders. It involves shareholders and directors. Shareholders own the company, through
private companies (investors’ subscriptions/banks’ loans) or the state government. It is run by
the Articles of Association and Companies Act. They cannot sell shares or borrow loans from
the public under FMSA 2000, unlike public companies. Thus they are easier to administer
than public companies. Shareholders appoint, remove and increase the number of directors.
Directors oversee the management of the company and can appoint managerial staff.
Secretaries may be required. It can be run for profit or not for profit. Its transferability of
shares is more straightforward than partnerships and sole traders, but it requires extensive and
ongoing disclosure. It also requires various formalities unlike the former. For instance, it
requires detailed accounting, stringent accounts filings and paying a fee with the Registrar
when filing the annual confirmation statement. But it does not require minimum capital
requirements unlike public companies. Also, it can enjoy confidentiality regarding its
investment decisions by entering a shareholders’ agreement.
What are the key features of a public company?
A public unlisted company has more control over its operations. It may be listed meaning it
can sell shares or acquire loans to the public, in which it is more regulated than private
companies. It may be delisted meaning it can purchase shares or borrow loans ‘over the
counter’ privately with less disclosure requirements. But it must release to the public its
‘certificate of incorporation’ guaranteeing that it is limited by shares, in which it must have a
,minimum share capital of £50,000 and each share must be 25% paid up (£12,500). This
prevents companies starting up business without sufficient capital and quickly leaving
creditors unpaid on winding-up. Secretaries are required, unlike private companies.
What are the key features of a community interest company?
A community interest company must be made for the benefit of the community, whether it be
charitable, social business or not for profit. It can adopt statutory clauses in its constitution to
lock its assets specifically for the community. It must file an annual CIC report with accounts
for the public record. It enjoys less formalities than other companies, thus it is flexible, easy
and inexpensive to set up.
What are the three types of registered companies?
A company limited by shares requires that the members’ liability is limited to the full
nominal value of their shares, even if the company is wound up. The members may either
agree to become members or enter their names on the members’ register.
A company limited by guarantee requires that the members’ liability is limited to the amount
that they undertake to pay under their statement of guarantee filed on incorporation. Here, the
members do not own the shares, but only subscribe to them. Income is derived from the
subscription. The company may be run for charitable, social or non-trading purpose.
An unlimited company involves at least one shareholder and at least one director. The
shareholders will have unlimited liability towards the company’s obligations. The injured
party can make a claim to a liquidator requesting the shareholders to make the necessary
distributions on winding-up. But unlike limited companies, unlimited companies do not
require disclosure of accounts with Registrar, thus they enjoy confidentiality.
, 2) Legal Personality & Limited Liability
What is separate legal personality?
Shareholders will not be liable to the company’s obligations as they are protected by the veil
of incorporation.
When may the veil of protection be pierced?
The veil may be pierced by fraudulent trading. The company was alleged to have engaged in
fraudulent trading, either with intent or not. But a high burden of proof is required.
Alternatively, during winding up, it appeared to the company that the liquidator engaged in
fraudulent trading. In this case, the company may apply to the court ordering its shareholders
to contribute to its assets as it sees fit.
The veil may be pierced by wrongful trading. The company went into insolvent liquidation,
the directors knew or should have known that there was no reasonable prospect of avoiding
insolvent liquidation, they did not mitigate their losses to creditors by taking necessary steps
in doing so, some time before commencing winding up. In this case, the company may apply
to the court ordering its shareholders to contribute to its assets as it sees fit. Unlike fraudulent
trading, a low burden of proof is required and no intent to enter wrongful trading is required.
The veil may be pierced by transactions at undervalue. The company went into winding up. It
entered a transaction and paid more than it agreed to. The transaction either placed the
claimant’s assets beyond his reach or prejudiced his interests. The company may apply to the
court either requiring the company to restore its position before the transaction was entered or
protect the victims’ interests. The members or directors may contribute to the company’s
assets, or a subsidiary company may transfer its liability to the parent company.
Under case law, VTB Capital v Nutritek ruled that the Supreme Court can pierce the veil,
which reaffirms UK law. Prest v Petrodel Resources ruled that where persons owed
obligations and they attempted to avoid/frustrate through control of the company, the veil
may be pierced. Williams v Natural Life Health Foods ruled that where the managing director
is also the majority shareholder, the pierce could be veiled to impose tort liability. Chandler v
Cape ruled that the parent company may owe a duty of care to the subsidiary, in which the
veil may be pierced. Okpabi v Royal Dutch Shell ruled that where the parent company was
substantially involved in the subsidiary, the veil may be pierced.
