Chapter 10

Formation of company

Question Asked recently • In relation to company law:• (a) state, and explain the purpose of, the various

registers that have to be kept by a company. (4 marks)

• (b) describe what accounting records will have to be produced and maintained by a company. (6 marks) (10 marks) Dec 2010

• Explain the documents necessary, and the procedure to be followed, in registering a public limited company.(10 marks) June 2010

Question Asked recently • In relation to the formation of a company explain:• (a) the role and duties of promoters, and how they

are regulated; (5 marks)• (b) a pre-incorporation contract, and its legal

consequences. (5 marks) June 2011

Promoters (Definition )• There is No Statutory Definition of a Promoter• According to case law , Parson who 'undertakes to

form a company, and who takes the necessary steps to accomplish that purpose.

• The definition excludes peoples just acting in their Professional Capacity, such as accountant or Solicitor

Duties of promoter • A Promoter is under a fiduciary duty to :1) Disclose any interest in transaction (Personal

Interest) Not to make Secret Profit2) Disclose any Benefits Acquired to independent

board or shareholder

If the promoter makes any Secret Profit, the company may :

1) Rescind (To make void) the contract(but not always possible if third party rights accrued)

2) Obtain Damages (Prove loss by company)3) Recover the Profits (Prove failure to disclose

profit from transaction.

Pre-Incorporation Contract• Is a contract where a person enters into a contract

before a company has been formed.• Position at Common Law :• A Company, prior to its incorporation, does not have

contractual capacity, and• After its formation it cannot ratify or formally adopt

a pre-incorporation contract• The promoter is therefore personally liable under

any such contract.

Kelner v Baxter• Fact :• A,B and C entered into a contract with the claimant

to purchase goods on Behalf of the proposed Royal Hotel Co. The goods were supplied and used in the business. Shortly after incorporation the company collapsed

• Held :• Royal Hotel Co. was not bound by the contract

Neither could it ratify the contract after incorporation

How promoter can negate(Protect) liability

• Clear and express words are needed in order to negate(To make ineffective or invalid, deny) liability

• The Promoter can only protect his position by :• 1) Agreeing with the company that there is no personal

liability for the promoter• 2) Postponing Finalizing contracts until the company is

formed.• 3) Entering into an agreement by novation (Discharging

the original contract by replacing with the New one)• 4) Buying an 'off-the shelf' company , so it is ready to

contract

Off-the-shelf Company• An ‘off the shelf’ company is one that has already

been formed. Buying off• the shelf has a number of advantages as follows:• Advantages :• Cheap and Simple• Can Trade Immediately• No problem in Pre-incorporation Contracts.• Disadvantages :• Article are to be amended• Name of the company may be changed.

Registration Procedure • The following must be submitted to the Registrar in

order to form a company:• Application for Registration• Application form must include :1) The proposed name of the company2) Whether the members will have limited liability (by

shares or guarantee)3) Whether the company is to be private or public4) Details of the registered office

Registration Procedure• Memorandum of Association• Used to be a more important document under

previous company legislation.• Signed by all subscribers and stating that they wish

to form a company and agree to become members of the company.

• In relation to a company limited by shares, the memorandum provides evidence of the members' agreement to take at least one share each in the company.

• Is not possible to amend or update the memorandum of a company formed under CA06.

Registration Procedure

• Article of association• Specific clause E.g. No Director can be a

Shareholder• To Change an Article at least 2/3 resolution

should be passed.

Registration Procedure

Statement of capital and initial shareholdings• 'Snapshot' of a company's share capital at the point of registration• This must state :1) Number of Shares2) Aggregate nominal value3) How mush has been paid upStatement of Guarantee State the Max. amount each member Guarantees to contributes in a

winding up.Statement of Proposed Officers Details of the first directors (Company Secretary, if any)Statement of ComplianceProvides confirmation that CA06 has been complied withRegistration FeeCurrently Pound 40 Approximately.

Registrar's Duties• On receipt of the above documents the registrar

must :• Inspect the documents• Make sure whether all the requirement of CA06 are

met.• Issue certificate of incorporation• Company exists from the date on the certificate of

incorporation• Issue trading certificate to public companies

Trading Certificate - Public Companies only• A plc cannot commence trading until the registrar

has issued a trading certificate• In order to obtain a trading certificate, an

application must be made to the registrar which states :

1) Allotted (Issued) share capital > Pound 50,0002) At least a quarter of the nominal value and All of

any premium have been paid up3) Amount of preliminary expenses4) Benefits given or to be given to promoters

If it Trades before the certificate is Issued.

1) Company and any officer in default are liable to a fine.

2) Criminal offence to carry on business, but any contracts are still binding on the company

3) Directors are personally liable if the company defaults within 21 days of due date.

4) Valid grounds for winding up if certificate not obtained within one year

Statutory books , Returns and Records

• Register of Member• Register of Directors • Register of Charges • Register of debenture holder

Register of members

• Names, addresses, date became/ceased, number of shares, class of share, amount paid up.

• Any member of the company can inspect the register without charge. A member of the public has the right of inspection but must pay.

Register of directors • This must include the name, occupation, nationality and date of

birth if the director is an individual. If the director is a corporate body, the corporate name and registered office must be stated.

• The register should now contain service addresses rather than

details of the directors’ residential addresses. The service address can be simply ‘the company’s registered office’.

• • The company must also keep a separate register of the directors’

residential addresses. Both the service and the residential addresses will need to be supplied to the Registrar of Companies.

• The residential addresses will be withheld from the public register.

However, they will generally remain available to the Registrar and certain specified public bodies and credit reference agencies.

Register of charges• This register contains details of fixed or floating

charges created over the company's property).• The register will have details of the name of

chargee, type of charge, brief description of property charged, amount and date created.

• The company must also keep copies of every instrument creating a charge at its registered office or some other place of which the Registrar has been notified.

• Any member or creditor may inspect the register free of charge, any other member of the public can inspect for a fee.

Register of debenture holder Name of debenture holder

Amount given

Date of return

Interest rate

Security

Annual Return • The annual return must be filed with the registrar

annually within 28 days of the return date (which is the anniversary of incorporation). The return must be signed by a director or a secretary.

• the address of the company's registered office• the type of company• the company's principal business activities• details of directors and company secretary where

applicable• a statement of capital which states the total number of

shares of the company, the aggregate nominal value of the shares and the amount paid up and unpaid on each share

Annual returns • for each class of shares, the right of those shares,

the total number of shares in that class and their total nominal value

• details of the members of the company as at the return date

• details of members who have ceased to become members since the last return was made

• details of the number of shares of each class held by members at the return date

Accounting Records • The company must keep accounting records

containing sufficient information to show and explain the company’s transactions and its financial position.

• At any time it should be possible:

• to disclose with reasonable accuracy the company's financial position at intervals of not more than six months

• for the directors to ensure that any accounts that need to be prepared comply with Companies Act 2006 and International Accounting Standards.

Accounting Records • In particular the records must show:1) daily entries of all money received and spent2) a record of assets and liabilities3) statement of stocks at end of the financial year to

back up the above4) statements of stocktaking t5) statements of all goods sold and purchased,

showing the goods and the buyers and sellers (except in the retail trade).

Accounting Records • Accounting records must be kept for three years in the case

of a private company and six years in that of a public one. They should be kept at the company's registered office or at some other place thought fit by the directors.

• Failure to keep sufficient accounting records is an offence by the officers in default.Annual financial statements

• Companies are required to produce annual financial statements including:

• balance sheet/statement of financial position and profit and loss account/statement of comprehensive income showing true and fair view

• directors’ report stating the amount of any dividend and likely future developments.

Question 1• (a) List and explain the purpose of the various

registers that will have to be kept by the company. (5 marks)

• (b) Describe what accounting records will have to be maintained by the company. (5 marks)

• (Total: 10 marks)

Question 2• Albert and Edward were the promoters and subscribers to

the memorandum of a company that was registered on 1 June 20X5 under the name Superspeed Ltd. The certificate of incorporation issued by the registrar, in error stated the registration date as 10 June 20X5.

• Albert had contracted with Typo Ltd on 28 May 20X5 for the supply of stationery by Typo Ltd. On 2 June the company had transferred shares to Jennifer.

• Required:• (a) to advise Albert and Edward as to whether Superspeed

Ltd is bound by the contract with Typo Ltd as Edward has found a cheaper source, and (5 marks)

• (b) to advise Jennifer on the validity of the transfer of shares. (5 marks)

Answer• Albert has contracted with Typo Ltd before Superspeed Ltd received its certificate of

incorporation. This therefore is a pre-incorporation contract. s51 CA06 provides that a contract which purports to be made on behalf of a company not yet formed has effect as one made with the person purporting to act on behalf of the company and he is personally liable on it ‘subject to any agreement to the contrary’. In short, the person acting on behalf of the future company must contract out of personal liability. Albert has not done so, therefore he is personally liable on the contract. Superspeed Ltd is not liable and can contract with a cheaper source because it was not bound by the contract anyway.

• (b) The transfer of shares to Jennifer is dependent on whether there was a company in

existence whose shares could be transferred to Jennifer. Although Albert and Edward had been led to believe the incorporation date was 1 June, the certificate states 10 June. There are two matters to be considered. First there is the legal status of the certificate of incorporation. S15 CA06 states the issue of a certificate is conclusive evidence that the requirements of the Act in respect of matters precedent and incidental to the registration have been complied with. Secondly, if there are errors in the formation procedure or an error on the certificate itself, Jubilee Cotton Mills Ltd v Lewis (1924) held the view that the date on the certificate was the significant date. Applying those principles to the transfer of shares to Jennifer it becomes clear that the company had not yet been incorporated and therefore the transfer, in law, could not occur. Any payment Jennifer gave was made under mistake and is recoverable. Should the company and Jennifer still wish her to be a member, the transfer should be authorized at a directors’ meeting according to Superspeed’s articles.