LECTURE 1A Partnerships:
TYPES OF BUSINESS MEDIA Types of partnerships:
1. An informal association between two or more partners to carry
INTRODUCTION: on a business without any express agreement. (family
businesses)
Assessment: 2. Very large business partnerships with many partners and an
100% of the marks will be given based on one written assessment at the elaborate partnership deed. (LLPs)
end of the year.
s.1 Partnership Act 1890 Partnership = the relationship which subsists
Six questions divided into Part A + Part B. Must answer 3 questions. One between persons carrying on a business in common with a view to
from Part A, one from Part B and one from any part. Part A will cover profit.
semester 1 and Part B will cover semester 2 topics. Partnership Act 1890 This act governs partnerships, but the parties may
change this by creating their own partnership agreement that overrides
Sources of company law: the act.
1. Statutes:
* Insolvency Act 1986 Whether a partnership exists or not, is a matter of fact. The essence of
* FSMA 2000 partnerships is a continuous relationship, personal and commercial.
* Companies Act 2006 – Key legislation, replaced Eg. you and your partner open a shop called Daily News. You orally
Companies Act 1985, the longest act in history. The new agree to share the profits. You have a partnership. Daily News is only a
act aimed to simplify the law and codify directors’ name for the shop and each customer enters into a contract with both
duties. partners.
2. Common law – eg. Salomon v Salomon Equal share in profits and also equal contribution to losses. Decision on
ordinary matters are made by majority.
CONSIDERATIONS FOR FORMING A BUSINESS:
Partnership agreements are not required for a partnership,
Businesses are generally set up to make a profit. A business generates recommended. – eg. If the partners want junior partners to get a
income by selling products and/or services. smaller share of the profit than the experienced partners.
Considerations to bear in mind when setting up a business: Advantages Disadvantages
These considerations determine which business structure is the most
appropriate. No obligation to register A partnership has no separate legal
financial liability, complete identity. Partners own property and
privacy. enter into contracts jointly. No
1. Cost considerations: limited liability. If the partnership
• To be able to sell products/services, the business must goes insolvent, the creditors can
incur expenses. If the income exceeds the costs of the claim personal assets of each of the
business, the business makes profit. partners.
• It is likely that a proportion of that profit is given to the One partner will bind other partners
business owners. The rest is retained by that business when contracting with a third party
to help it grow. (the law of agency).
• A business is also likely to employ staff and may use
services.
Limited Partnerships:
• The company will need to raise finance to:
§ pay for set-up costs (when setting up) Governed by the Limited Partnership Act 1907.
§ develop and expand (once established) – These Limited liability, but not for all partners. At least one partner must be a
are the ongoing costs: marketing activities, general partner with unlimited liability. Limited partners + general
buying stock and renting premises. partners.
Registered at Companies House but not required to file accounts.
2. Mitigating or minimising risk: Used in the venture capital industry, quite rare.
Does the owner have personal liabilities for all debt?
3. Structural considerations: Unlimited Liability Partnerships:
Does the business vehicle provide a clear organisational
structure? Hybrid of a company and a partnership. Has the flexibility of a
partnership with limited liability. Relatively new, formed under Limited
Liability Partnership Act 2000.
BUSINESS STRUCTURES:
Separate legal entity. An LLP can own property, enter into contracts,
Types of business structures: sue and be sued. Liability of members is limited to the amount they
1. Sole trader have agreed to contribute to the debts of the LLP. This liability agreed
2. Partnership – Partnership, Limited Liability. Partnership must satisfy the Companies House requirements.
3. Limited Company – Private Limited Company, Public Limited
Company Must be registered at Companies House and must file account, at least
two members must be made responsible for filing this.
Sole traders:
Companies:
The simplest business medium, as the sole trader conducts business
personally. This is how most businesses start out. Needs to register as Companies have a separate legal personality and therefore a limited
self-employed. – Eg. local market, the market traders are sole traders. liability. A company is owned by its shareholders, so when referring to
limited liability, we are referring to the liability of the shareholders.
If a shop is Daily News, this is only a name under which you trade as a Shareholders are protected, not personally liable.
sole trader. There is no legal entity, each customer enters into a
contract with the sole trader personally. This encourages investment, risk-taking, which contributes to the
economy. Risk of business moves from the shareholders to the
Advantages Disadvantages creditors.
No Companies House registration is Sole proprietorship does not have a Companies are distinct from their shareholders (owners). A company
required so enjoys complete separate legal entity. - When a can own property, enter into contracts, sue and be sued. Profits and
privacy. contract is entered into, it is done by losses belong to the company, not the shareholders.
the sole trader in his personal
No starting capital required apart capacity. He has unlimited personal
from the funds required apart from liability under these contracts. Shareholders/Members = owners of a company.
usual setting up costs of business. Subscribers = the very first shareholders of a company. They formed
Sole traders are only subject to the the company
relevant commercial and tax Stakeholders = broad term, any interested party in a company. – Eg.
legislation and the common law. shareholders, employees, creditors.
Directors = officers/managers of a company
Company – All lectures – Notes | Page 1 of 57
,Private company limited by shares: Public company limited by shares: There are also:
- prohibited names – eg. offensive names
Also called a private company. Most common company form. - restricted names – eg. a company name cannot be the same
No minimum share capital Permitted to offer shares to the name as a government body or pretend any relationship with a
requirement, prohibited from public. - Eg Barclays Bank plc. government body.
offering shares to the public.
Can be formed by one person. s.768 CA 2006 Minimum share A company may also be liable for a tort, eg. passing off. This liability
capital requirement is £50,000 arises where a third party can prove that it has goodwill in a name and
the company is misrepresenting itself as that third party and that third
s.761 CA 2006 Trading certificate party has suffered losses as a result.
Private company limited by is required before trading. This s.77 CA 2006 The company can change its name later if the name is not
guarantee certificate is issued only if the satisfactory.
company meets the minimum
Quite rare. No min. share capital share capital requirement. Articles of Association:
requirement, liability of members Shares must be transferable. One of the most important documents that must be filed. This is also
is limited to the amount they called the 'Rulebook of the Company' or the Constitution.
agreed to contribute in the event
of a winding up. Commonly £1 s.18 CA 2006 The company must register articles.
each.
The subscriber has three options:
Private company with unlimited Listed companies * Bespoke articles - articles written specifically for that company.
liability * Model articles (private or public version) - articles drafter in a
Not the company itself but its standard form that cater for the needs of most companies.
Quite rare. Liability of members is shares are listed. Only for public Small private companies will likely adopt these articles.
unlimited. companies, but only 26% of * Model articles as amended - adopting the standard articles but
Generally no obligations to them are listed. Admitted on amended a few sections to suit that particular company. Hybrid
provide regular accounts and RIE (Regular Investment between the bespoke and model articles.
fewer disclosure requirements. Exchange)
Ltd = Limited Private Company. If non registered, model articles apply in default.
COMPANY FORMATION: What are the articles?
* s.17 CA 2006 Constitution and Rulebook of the company. When
Before actually forming the company, it is vital to decide which type of advising a client on a matter of law, a lawyer must check the
company we wish to form. articles first.
* They regulate internal affairs, the issue and transfer of shares,
s.3 CA 2006 Types of companies: how the board and shareholder meetings are to be conducted
× Company limited by shares (private or public) This lecture will and the powers of directors.
focus on private company limited by shares and will touch upon Directors and Secretary:
public company limited by shares. s.9(4)(c) CA 2006 Application must include details of officers of the
× Company limited by guarantee. company. Officers = directors (those with a day-to-day control over the
× Unlimited company. company) + secretary.
Formation: Private company: Must have 1 director minimum, the directors of
private companies may also be shareholders of that company.
Documentation and fee must be filed at Companies House, the
registrar of companies which stores a public record. Companies House Public company: must have 2 directors minimum = secretary (the role
has an electronic filing system, so that all documents can be filed of the secretary is to support the director. Eg. assistance with filing
electronically. accounts, taking notes at a board meeting, checking whether the
company is in compliance with the CA 2006 and dealing with records).
The subscriber, the first shareholder handles the filing of documents.
All electronically submitted documents must be authenticated by the For each director and secretary, the following must be included:
company. Name / DOB / Nationality / Occupation / Service and Residential
Address.
Registration documents:
The director must provide his last known residential address to
The first shareholder to send to Companies House: Companies House. This does not need to form part of the public record.
1. Form IN01 + fee The director will then provide a service address.
2. Memorandum of Association Eg the director may not want to attract animal rights activists to his
residential address if his company is eg. a pharmaceutical company
Form IN01: which does animal testing.
The subscriber must file the IN01.
IN = Incorporation Statement of Capital:
01 = s1 CA 2006 s.10 CA 2006 The statement of capital and initial shareholdings must
state the following:
A copy of the form can be downloaded from the Companies House - The total number of shares taken by each subscriber
website. The blank form is 18 pages long. - Classes of share: ordinary and preference. A private limited
company will only have one class of share in general, but it is
Must include the below info: very much possible to have different classes of shares. The
* Proposed name statement must note the number of shares in each class and the
* Type of company amount paid for each share.
* Registered office - Rights attaching to each class of share. Eg. voting rights, if there
* Articles of Association is a right to dividend, right to capital on insolvency.
* Details of directors (and secretary)
* Statement of capital and shareholders Statement of Compliance:
* Statement of compliance. The subscribers must state that they have complied with all the relevant
regulations in CA 2006 in relation to the formation of the company.
Proposed name:
s.9(2)(a) CA 2006 Must be the full name of the company. 1. Requirements for public companies:
Generally the same requirements as for private companies,
s.66 CA 2006 Can't be the same as an existing company name. To avoid except that public companies must also have a Trading
this, the subscriber should check the register at Comp H. in advance. Certificate.
Exception: it is allowed for existing company structures of the same • This will only be issued if there is at least £50k in share
group to have the same name in part. Eg. Sainsbury's Ltd, Sainsbury's capital, which is the authorised minimum requirement
Bank plc., because they are all part of the same group. • Also, one quarter of nominal and whole of premium
must be paid up on the shares.
s.58 CA 2006 Public limited companies must identify themselves as a
public p.l.c. in the company name. 2. Certificate of Incorporation:
• If all the documentation is in order, the Registrar of
s.59 CA 2006 Private limited companies must use ltd. Companies will issue the certificate of incorporation.
Company – All lectures – Notes | Page 2 of 57
, This is conclusive evidence that the requirements for
the formation of the company have been satisfied.
• The cert. will include a unique official number. The
name of the company may change, but the official
number remains the same.
• The cert. will include the date of incorporation
• On incorporation, the subscribers will become
shareholders and the officers (directors and any
secretary) are deemed appointed.
3. Pre-incorporation contracts:
A company cannot contract until incorporated, because until
then it doesn't exist. Also, a pre-incorporation contract cannot
be ratified.
A company needs to have equipment and the subscribers
want the company to own the equipment, as it would be used
by the company after its incorporation.
Kelner v Baxter At common law, if someone wants to enter into
a contract on behalf of his company not yet formed, the person
signing the contract will have personal liability. 'for an on
behalf of ABC Limited.' If, however, the person is purporting to
be the director of the company, 'ABC Limited by the director' -
no contract.
s.51 CA 2006 The common law led to a huge risk to third parties
so it gives the parties an enforceable contractual obligation
against the individual who signs the contract. Many of these
issues have now been dissipated as Companies H. can now
incorporate companies on a same day basis.
Memorandum of Association:
Acronyms: MEM or MoA. In addition to the form IN01, the subscriber
must also register the MEM at Companies House. There is a prescribed
form for this online:
× The MEM lists every subscriber
× Each subscriber must state that they wish to form a company
and that they agree to become shareholders.
× How many shares they open
× How many shares they will get. (Must take at least one each).
× Signed by each subscriber.
Historically the MEM used to form part of the constitution along with
the articles, however, since CA 2006, the MEM is not part of the
constitution.
Company – All lectures – Notes | Page 3 of 57
, LECTURE 1B The case was the first time that the courts looked at the concept of
limited liability and corporate personality.
CORPORATE PERSONALITY
Broderip v Salomon [1893] In the High Court Vaughan Williams J held
INTRODUCTION: that Broderip's claim was valid and Mr Salomon created the company
solely to transfer his business to it. The court applied the law on
agency, whereby Salomon was a principle and the company was an
It is only possible to grasp the fundamental principles of company law agent and therefore Salomon was liable for all the debts of the
if you can appreciate the underlying fundamental concepts of limited company and he was required to indemnify the creditors.
liability and separate legal personality.
Salomon v Salomon & Co Ltd [1895] Lindlay, Lopes and Kay LJ in the
History of companies: Court of Appeal rejected his appeal and concluded that the formation
• Medieval guilds are the earliest example of a group based activity. of the company and the issue of the debentures was actually just a
Group of skilled craftsmen in the same trade might form a guild scheme to enable Salomon to carry on the business with a limited
to trade as a group. This led to the subsequent development of liability. They thought it was contrary to the true intent of the
the Royal Charters. At one time the Royal Charter was the sole Companies Act 1862. Parliament had never contemplated an extension
means by which an incorporated body could be formed. Among of limited liability to sole trader or to a fewer number than 7. CA
the past and present groups formed by the Royal Charter are the concluded that his wife and 5 children were only involved to enable Mr
British East India Co., Hudson Bay Co., the P&O, the British South Salomon to carry on his business with a limited liability and although
Africa Co., the Bank of England, BBC and some of the former the company was a valid company, it was illegitimate.
British Colonies on the North American Mainland.
• Industrialisation in the 19th century resulted in a burst of The court disagreed with the application of agency on two points, that
economic activity and this led to the search for an economically the business was Salomon's and that he used it as an agent. In order for
efficient vehicle for business. the agency to work, the agent (the company) must exist. If the company
• Joint Stock Companies Act 1844 We can trace the development did exist, then the business could not belong to Salomon, because a
of companies to this act. The act was enacted thanks to a select company has its separate legal entity.
committee chaired by William Gladstone. The JSCA 1844 allowed
companies to be registered without state approval. Salomon v Salomon & Co Ltd [1897] Lords Halsbury, Watson, Hershell,
• Limited Liability Act 1855 The next notable development was the Macnaghten, Morris & Davey in the House of Lords unanimously
introduction of the limited liability. The liability of the company overturned the decisions, rejecting the arguments of both the High
members (shareholders) was limited. Court and the Court of Appeal.
• Companies Act 1862 The act confirmed the existence of limited • They found that Salomon followed the procedures to
liability. This was the legislation that was applied in Salomon v incorporate the company since the act merely required 7
Salomon. shareholders holding at least 1 share each.
• It was irrelevant that the bulk of shares were issued to one
This historical walkthrough is only to set the context and there is no shareholder because the statute did not specify this. The court
need to read about this in any greater detail for the purposes of this refused to imply what Parliament may have intended.
course. • The act had said nothing about the shareholders being
independent.
SALOMON V SALOMON: • The act also did not state that the shareholders should have a
substantial interest in the company or that they should have a
Salomon v Salomon is the foundation of modern company law. Its mind on their own or that there should be an equal balance of
judgment must be printed out and read for the tutorial. power.
There are three courts that were involved in the decision-making and Again the question whether the company was a legal entity was
slightly different decisions were reached at the different stages. The considered. One of the Lords noted that when the Memorandum is
tutorial will consider the contents of these judgments in more detail. signed and registered, the body corporate is formed. The Lords
concluded that the company was a separate legal entity and Mr
Broderip v Salomon [1893] Vaughan Williams J in High Court Salomon was not personally liable.
Salomon v Salomon & Co Ltd [1895] Lindlay, Lopes and Kay LJ in Court
of Appeal
Salomon v Salomon & Co Ltd [1897] Lords Halsbury, Watson, Hershell,
THE SEPARATE PERSONALITY OF A COMPANY:
Macnaghten, Morris & Davey in House of Lords. As you have learnt, a company is an entity that is distinct from its
owners - the shareholders - as well as from its directors, creditors and
Facts: For many years, Mr Salomon had carried on a prosperous employees. It has a separate legal personality. A company continues to
business as a sole trader, as a leather merchant. In 1892 he decided to exist even if its shareholders and/or directors change. This is a
incorporate his business as a company called Salomon & Co Ltd. The fundamental concept of company law, since there is always an extra
shareholders were Mr Salomon, his wife and 5 of his children. Mr entity to take into account: the company.
Salomon was also the managing director. At this time, companies were
governed by the provisions of the Companies Act 1862 which required Directors, in general, owe their duties to the company, not to the
that at least 7 people subscribe as shareholders of the company. The shareholders. Shareholders usually have rights against the company,
wife and 5 children held one share each and the rest of the shares were rather than against the directors, and third parties with whom the
held by Mr Salomon. The family did not have any formal or active role company does business contract with the company, even though they
in running the business. negotiate with the directors.
Once Mr Salomon set up this company, he sold his soletrader business s.16 CA 2006 Body corporate capable of exercising the functions of an
to the company for £39,000 (£3.2m today). This figure was based on his incorporated company from the date of incorporation.
personal view of what the business was worth, not a formal valuation.
The price for the business was satisfied by a £10,000 debt underwritten On the date when all the necessary documentation is submitted to
by a debenture, 20,000 fully paid shares at £1 each and the remainder Companies House (the Registrar) issues the Certificate of Incorporation.
£9,000 in cash. The debentures meant that Mr. Salomon was a creditor
of the company and it meant that he had a claim over the assets but Also note: the company can now be formed with only one shareholder
he was also a shareholder. He had 20,001 shares and the remaining 6 under the current act.
shares were shared between his wife and 5 children. So there was a
huge imbalance in shareholding. Directors:
Debenture: a promise to pay some money in favour a creditor and it is
then secured against the assets of a company. If a company therefore The law does recognise that although the company has a separate legal
were to become insolvent, he would then have a claim over the assets personality, the company must be operated and run by human beings.
of the company. So this notion of the separate personality of the company is something
fictitious that has been developed by the courts.
Following incorporation there was a decline in boots sales in part as a
result of strikes which caused the government (one of his major Lennard's Carrying Co v Asiatic Petroleum Co Held: Viscount Haldane
customers) to cancel his contracts. The company then ran into financial LC: "... a corporation is an abstraction. It has no mind of its own any
difficulties and Mr Salomon sold the debentures to Mr Broderip. Mr more than it has a body of its own..."
Broderip sued to enforce the floating charge.
When solicitors check the company's constitution (Articles of
When the company went into liquidation, the liquidator argued that the Association), it can be seen that directors have a day-to-day control
debentures were invalid on the grounds of fraud and Mr Salomon was over the company. So the acts and omissions of the director will
liable for all the debts in the company. Was Mr Salomon personally ultimately be the acts and omissions of the company and the company
liable for all the debts of the company?
Company – All lectures – Notes | Page 4 of 57
