company law.ppt

Legal Environment

Company Law

The Nature of Companies

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Learning Objectives

Introduction

What is a company?

Separate Legal Personality

Consequences of Separate Legal Personality

Types of Company

Comparison of Sole Trader, Partnership and Company

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Introduction

The three main forms of business are Sole trader Partnership Company

A major disadvantage for sole traders and partners is that they have unlimited liability for the debts of their business

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Introduction

The owners of companies, on the other hand, have limited liability

Companies are also fairly flexible - ranging from small, one person companies to large multinationals

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What is a Company?

A company is a body corporate or corporation

There are 4 types of corporation. Those created

1. by Royal Charter

This was the earliest way of creating corporations.

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What is a Company? (cont.)

However, nowadays, it is not used to create trading bodies. It is used for charitable and educational bodies

The BBC (British Broadcasting Corporation) and the Bank of England were both created by Royal Charter

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2. by special Act of Parliament

Again, this is an old way of creating corporations which is no longer used

Bank of Scotland was created in 1695 by and Act of the old Scots Parliament

The Governor and Company of the Bank of Scotland

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3. by registration under the Companies Act 1985

The current law relating to companies is mainly contained in this Act

It is the most common way of creating a corporation

4. by registration under the Limited Liability Partnership Act 2000

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As companies are a kind of corporation, they have their own separate identity

In law, they are regarded as a person

Although a company is not a natural person (like you or me) the law treats it in the same way in many areas

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Separate Legal Personality (cont.)

The most famous case in this area is Salomon v Salomon & CoMr Salomon was in business as a leather merchantIn 1892, he formed Salomon & Co LtdHe held most of the shares with his wife and 5 of his children each holding one share as company law at that time required at least 7 shareholders in a company

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Unfortunately, the company did not do well and it went into liquidation

A liquidator was appointed to sell the assets of the company and pay its debts

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The liquidator claimed that the company was a fake because Mr Salomon owned 20 001 shares and his family owned only 6 altogetherMr Salomon was really just running the same businessTherefore, the liquidator argued that Mr Salomon was liable for all the debts of the company

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However, the House of Lords disagreed

The court held that

1. The fact that some shareholders only held 1 share as a technicality was not relevant

The registration procedure could be used to create a one-man company

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2. A company which is properly formed under the Companies Act is a separate person

As a result the debts of a company were its own and not those of its members

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Two more cases also help to demonstrate the idea of separate legal personality.In Macaura v Northern Assurance Co, Macaura sold all the timber on his estate to a company in return for all the shares in that companyThe timber was stored on Macaura’s estateMacaura insured the timber in his own name

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Two weeks later, the timber was destroyed in a fire

The insurance company refused to pay out because it said Macaura did not have an insurable interest in the timber because he did not own it. The company owned it.

The House of Lords agreed

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The court held1. The timber belonged to the company not

Macaura2. Macaura had not insurable interest in the

timber even though he owned all the shared in the company

3. Just as the separate legal identity of a company gives the members limited liability, it also means that the assets of a company belong to it and not to its shareholders

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Consequences

This concept of separate legal personality has several consequencesLimited liabilityPerpetual successionBusiness propertyCourt actionsLiability in tort and crimeThe rule in Foss v Harbottle

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Limited Liability

The liability of the members of a company for its debts is limited

Under the Companies Act 1985 a member of a company limited by shares is

only liable to pay the full amount of his shares, and

a member of a company limited by guarantee is only liable to pay the amount which he guarantees to pay if the company is wound up

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Perpetual Succession

Changes in the membership of a company have no effect on the continuation of that companyUnlike a partnership, the death or bankruptcy of a member does not end the companyIn public limited companies, members are free to sell their shares on the stock exchange

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Business Property

Business property is owned by the company and not its shareholders

That means a creditor cannot take action against company assets in respect of a debt due by a member of that company

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Court Actions

A company can sue and be sued in its own name

It can also enter contracts in its own name

The company’s liability for contractual debts is unlimited It is only the members’ liability which is

limited

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Liability in Tort and Crime

Companies are vicariously liable for the torts of their employeesCompanies can be guilty of crimes which do not require a mental element (eg intention or recklessness)However, it has been more difficult to prosecute companies where the crime has such an element as it has to be shown that one of the directors of the company had the required mental elementThis can be very difficult in a large company where the directors are not involved in the day to day operation of the business

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Foss v Harbottle

This case gives us the idea of ‘majority rule’ in a company

If a company suffers injury then the majority of members must agree to raise a court action

A single member cannot take action against the wrongdoer

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Lifting the Veil of Incorporation

Although the general rule is that a company has a separate legal identity from its members, there are exceptions to this rule when a court will not treat a company as a separate entityThis is often referred to as “lifting the veil of incorporation”Often, this is to prevent abuse of the principle of separate identity

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Lifting the Veil of Incorporation (cont.)

For example, under the Companies Act 1985, if a company trades with fewer than two members then the sole member has unlimited liability for company debtsAlso under the Companies Act, officers of the company will become personally liable if they issue bills of exchange or enter into contracts on behalf of the company but do not use the company’s full name

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At common law, the general principle is that the courts will not allow a company to be used for a fraudulent purpose or to avoid a legal duty

For example, in Gilford Motor Co v Horne, a term in an employee’s contract prevented him from approaching former customers after he left Gilford Motor Co

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Therefore, when he left he formed his own company, and the company approached his former customers

The court held the company was a sham being used to avoid the term in his contract

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Types of Company

Companies can be classified in several ways

Limited and Unlimited

Limited by Shares or by Guarantee

Public and Private

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Limited and Unlimited Companies

Companies are usually formed because of the limited liability for their members

However, it is possible to create a company without limited liability

Such companies do not have disclose their accounts as limited companies do

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Limited by Shares or Guarantee

The most common kind of limited company is one limited by shares

Once the shareholder has paid the full value on his shares then he has no further liability

This is true even if the company does not have enough money to pay its debts

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Limited by Shares or Guarantee (cont)

A company limited by guarantee is usually created for charitable, educational or professional purposes ie it is not a trading company

The liability of members is to pay an agreed amount if the company is wound up

Usually, the amounts are small, so the risk is low

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Public and Private Companies

The main difference between public and private companies is that the shares in a public company may be bought and sold on a stock exchangePublic companies must have at least two directors, whereas a private company can have onePublic companies must have a minimum issued share capital of £50,000

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Public and Private Companies (cont.)

Private companies may purchase their own shares out of capital, whereas public companies cannot

Private companies may elect not to appoint auditors or hold an AGM (Annual General Meeting), whereas a public company cannot

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Comparison of Ownership

It is useful to compare the advantages and disadvantages of the three forms of business Sole trader Partnership Company

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Sole Trader - Advantages

No legal filing requirements or fees and no professional advice is needed to set it up.

You just literally go into business on your own.

Simplicity – one person does not need a complex organisational structure.

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Sole Trader - Disadvantages

The disadvantages are that it is not a particularly useful business form for raising capital (money). For most sole traders the capital will be provided by personal savings or a bank loan.Unlimited liability – the most important point to note in terms of comparing this form to the company in that there is no difference between the sole trading business and the sole trader himself. The profits of the business belong to the sole trader but so do the losses. As a result he has personal liability for all the debts of the business.

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Partnership - Advantages

No formal legal filing requirement involved in becoming a partnership beyond the minimum requirement that there be two members of the partnership.

Easier to obtain capital as there can be up to 20 members of the partnership, all of whom could pool their investment within the partnership.

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Partnership – Advantages (cont.)

If you are aware of the problems the Partnership Act can cause (see disadvantages) then you can draft a partnership agreement to vary these terms of the Act

The partnership agreement can therefore be used to provide a very flexible organisational structure although this usually involves having to pay for legal advice.

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Partnership - Disadvantages

A partnership will end on the death of a partner. If you are unaware of this when the partnership is formed, the Act may not reflect the intention of the partners.The partners are jointly and severally liable for the debts of the partnership. This means that each partner can be sued for the total debts of the partnership

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Company - Advantages

Companies are designed as to make it easy to raise capital.

Companies have the ability to subdivide their capital into small amounts, allowing them to draw in huge numbers of investors who also benefit from the sub-division by being able to sell on small parts of their investment.

Limited liability also minimises the risk for investors and is said to encourage investment.

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Company – Advantages (cont.)

It is also said to allow managers to take greater risk in the knowledge that the shareholders will not lose everything.

The constitution of the company provides a clear organisational structure which is essential in a business venture where you have large numbers of participants.

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Company - Disadvantages

Forming a company and complying with company law is expensive and time consuming.It also appears to be an very complex organisational form for small businesses, where the Board of Directors and the shareholders are often the same people

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Summary

What is a company? Types of corporation


Consequences of Separate Legal Personality

Types of Company

Comparison of Sole Trader, Partnership and Company

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Reading

Chapter 13 Pages 341-350

company law.ppt

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