Company Law
Week 1
Types and functions of companies
The term company implies an association of a number of people for some common object. The
purposes of association are multifarious. However, in common parlance the word company is
normally reserved for those associated for economic purposes i.e. to carry on a business for gain. It
should be noted that companies are not the only legal vehicles which people may use for gainful
business and there are companies incorporated under the Companies Act that are non profit
motivated.
Business vehicles: companies and partnerships (limited and unlimited)
Partnership law is codified in the Partnership Act 1890 is largely based on the law of agency, each
partner becoming an agent of the other.
Companies are different: it constitutes a distinct legal person, subject to legal duties and entitled to
legal right separate from those of its members and is formed upon registration in accordance with
the Companies Act 2006.
The above distinction might imply that partnerships are created for small operations and companies
for big operations. This is certainly true for the early times, where it can be seen that s716 of the
Companies Act 1985 provided that in principle as association of 20 or more persons formed for the
purposes of carrying out a profit making business must be formed as a company.
S7(1) of the Companies Act 2006 extends the decision of Salomon to public companies, in that you
can have a one man public company.
For partnerships, the limit of 20 partners has been removed for a number of professions, including
solicitors.
Normally a company is built on a distinction between the owners i.e. shareholders and management
i.e. directors, this is not normally the case for partnerships, however, there it can be arranged in the
partnership deed.
There is an introduction by way of the Limited Liability Partnerships Act 2000 a hybrid vehicle of
business, which is comprised of elements of a company and a partnership. Like companies, LLPs have
separate legal personality and the partners like shareholders in companies, have limited liability.
However, they are taxed in accordance to partnership taxation rules i.e. the partners are subject to
income tax and not corporation tax. The management is run as if it were a partnership.
LLPS are to be distinguished from the Limited Partnerships Act 1907, in which there are some
partners who have limited liability, but are prohibited from taking part in management and do not
have the power to bind the partnership as against outsiders.
Non- business vehicles: charities, community interest and limited by guarantee companies
,A company may be not- for- profit, in that the MemArts prohibit the distribution of profits by way of
dividend or in a winding up case to its members. They may pursue activities that are charitable or in
public interest but are not confined to these. The government has created a special vehicle for
charities known as Community Interest Company.
The Companies Act does not permit the creation of a company in which all members are free from
any sort of liability, but as an alternative to limiting their contribution to the amount payable on
their shares, it enables them to agree that in the event of liquidation they will, if required, subscribe
an agreed amount- companies limited by guarantee. The members are only liable to the extent of
their guarantee, and this is not when the company is an ongoing concern, but when it is going to be
wound up.
It can be noted though that companies can be registered with nominal share capital and as such the
liability a member exposes himself to is minimal, and as such many non-profits are set up as general
companies instead of companies limited by guarantee. Membership admission and resignation are
easier than that in a company. In a company one member resigning means that his shares must be
reallocated whereas, in a company limited by guarantee it would be as simple as an agreement
between the company and the member and the termination of said agreement.
Advantages of the new corporate form
Company law, by insisting upon the central role of directors in the running of the company, permits
a large and fluctuating body of shareholders to delegate oversight of the company’s business to
directors. This delegation of authority is well supervised and regulated on by the Companies Act
2006.
Company form will create separate legal personality, limited liability, transferable shares, and
company law makes it possible to isolate business risks within the business vehicle (insulating
shareholders) and facilities of raising risk capital from the public for financing corporate ventures or
by raising funds by shares.
Advantages and Disadvantages of incorporation
Legal entity distinct from its members
A company is a legal entity distinct from its members, hence it is capable of enjoying rights and being
subjected to duties that are not the same as those enjoyed by its members. It has LEGAL
PERSONALITY.
Salomon v Salomon- the HL held that the company has been validly formed since the Act only
required seven members holding at least one share each. It did not go to tell us what interest a
shareholder must hold, it said nothing about the members being independent of one another, or
that they should have a mind and will of their own of that there should a balance of power in the
company constitution. Hence the business belonged to the company and Salomon was simply an
agent of the company. “(at 51) the company is at law a different person altogether from the
subscribers… and though it may be that after incorporation the business is precisely the same as it
was before, and the same persons are managers, and the same hands receive profits, the company is
, not in law the agent of the shareholders or trustee for them. Nor are the subscribers liable in any
shape or for except to the manner provided by the Act.”
The Salomon case established that (a) provided the formalities of the Act are complied with, a
company will be validly constituted or incorporated even if it is only a one person company and (b)
the courts will be reluctant to treat a shareholder as personally liable for the debts of a company by
piercing the corporate veil. Since this case, complete separation between a company and its
members has not been doubted. It not only illustrates the upside of separate legal personality, but it
also shows that it is possible for a sole trader to limit liability to the money he put in the venture and
to avoid any serious risk to the major part of that by subscribing to secured debentures rather than
shares only.
The company as a result of its own separate legal personality will be capable of being sued and
capable of suing others.
Limited Liability
Members of a company are totally free from any personal liability, with some exceptions. This also
applies to the principle of obligations, the company is liable for its own obligations and will be
responsible for any repercussions and not the member.
Members who become involved in the management of the business, will realise that they will not
enjoy all of the benefits of limited liability as they are acting as agents of the company and will be
required to adhere to the statutorial obligations. They may also do something whilst in the course of
business that may make them personally liable to someone else e.g. a tort committed by them.
In the case of an unlimited company, s74 of the Insolvency Act imposes on members an obligation to
contribute to the assets of the company from their personal patrimony, in the event the company is
wound up.
In a case of a company limited by shares, the member is liable to contribute when called upon to do
so, the full nominal value of the shares held in so far as this has already not been paid by the
shareholder or any prior shareholder. Thus if the member hold partly paid shares, he will be liable to
pay the balance when called upon to do so by the company.
In partnerships since each partner is in effect an agent of the other, then an act done by one partner
in carrying out the name of the business binds all partners and as such all would be equally liable or
liable as per their share. Only if the creditor knows of the limitations placed on the partner’s
authority will the other members escape liability as the partner will be acting as a frolic of his own.
You cannot restrict the partnership liability to the partnership funds by way of a clause in the
partnership deed, even if known to the creditors (Sea Fire and Life Insurance Co Re).
Thus when it comes to raising finance externally, companies are normally required to give a
guarantee i.e. members are required to give guarantees, or the finance is secured over one of the
company’s assets or by way of floating charge.
Property
