Company Law : An introduction.

The law relating to companies is mainly governed by the Companies Act 1985 and 1989.
We can classify companies from a number of viewpoints.

Classification according to Type of Company

1 Public companies, :

* PLC or Public Limited Company after the name
* at least two members
* minimum share issue of 50,000
* registered under the provisions of the Companies Acts and
* have in its memorandum of association a statement that it is a PLC


2 Private companies

* at least two members
* cannot offer shares to public

Classification according to Liability of Members

Liability limited by shares

Liability limited by Guarantee ie charitable, professional etc

Liability unlimited ie non trading companies of an educational or artistic
nature

Formation of a Company

This is usually undertaken by promoters of companies. A promoter who makes a pre incorporation contract on behalf of a company may be held personally liable, under the Companies Act 1985, for the contract made on behalf of the company that has not yet been incorporated (See also Kelner v Baxter 1866.)

The company begins its life when it registers its Memorandum of Association and Articles of Association with the Registrar of Companies. If the new company does not submit its own set of articles, then the model Table A documents will apply.

The Memorandum of Association

We can regard this as the skeleton of the company. It tells us what the company is authorised to do. we will see this more clearly when we look at the objects clause.

The Memorandum must contain the following clauses :

1 Name of Company
2 Registered Office
3 Objects clause
4 Liability of members limited by shares or guarantee
5 Nominal Capital
6 The Association clause

Lets look at these clauses in detail:

1 Name :

The general rule is that any name can be chosen. There are a few qualifications, amongst them being the requirement that the name of a public company must end with PLC whilst the name of a private company must end in Limited.
Other restrictions on names prohibit those that are offensive or that give the impression that the company is associated with either a central or local authority.

If a company sets up and adopts a name that is close to another in the same type of business, then the court has jurisdiction to grant an injunction stopping the new company using the name. (see Ewing v Buttercup Margarine Co Ltd 1917)

The law requires that every company must :

1 Paint or affix its name on the outside of every office, where business is carried on, in a conspicuous position and in a legible form.

2 Have its name on all business letters of the company and other official publications

3 Engrave its name on its seal

(For advanced students other cases concerning names are : Penrose v Martyr 1858, John Wilkes (Footwear) Ltd v Lee International (Footwear) Ltd 1985 )

Companies can change their names by Special Resolution, that takes effect when it is issued with a new certificate of incorporation from the Registrar of Companies.

Companies are not required to state the actual registered address in the Memorandum, but must notify the registrar of Companies of the actual address, and mention on all its business letters :

Place of registration
Registered number
Address of registered office

Documents to be kept at Registered Office

Register of members, and if there is one
index of members (S352-354)
minute book of general meetings (S383)
Register of interest of notifiable minority ie over 5% of shares.
Register of Directors interests (S211, 213)
Register of Directors and Company Secretaries
Register of Directors interests in shares,
Debentures of company and associates (S324)
Copy of Directors contract of service (S318)
Register of debenture holders (S190)
Copy of all instruments of charge that need to be registered
Details of off market deals (S164, 165,167)
Any contract for the purchase of its own shares. (S169)
Statutory declaration of solvency and auditors report (S175)

3 Objects clause

The objects clause was of major importance. The object clause originally had two purposes :

a) to protect subscribers to a company who know exactly where their money is to be used, and

b) to protect persons dealing with the company, who can discover the true powers of the company

(See Cotman v Brougham 1918 )

In order to protect those dealing with a company, the courts evolved the doctrine of Ultra Vires that stated that anything done by a company outside the objects for which it was set up is null and void.

The Companies Act 1985 which adopted the EEC approach, has severely restricted the effect of the objects clause.

The objects clause is best understood if we look at its application through case law.

See : Att-General v Great Eastern Railway Co 1880 for a clear explanation of the meaning of the doctrine of Ultra vires.

Re German Date Coffee Company 1882

Ashbury Railway Carriage Co Ltd v Riche 1875

Cotman v Brougham 1918

Re Jon Beauforte (London) Ltd 1953

Rolled Steel Products Ltd V British SteelCorporation 1985

This is a hefty list of cases, but they are well documented leading cases and are really essential if one is to understand the Ultra Vires concept.

The effect of the objects clause was that people dealing with a company were presumed to be aware or should make themselves aware of the object for which the company was set up. If a transaction was outside the objects of the company, then the transaction is null and void, and further more was incapable of being ratified at a later date. This is what is referred to in textbooks as the doctrine of Constructive Notice.

The doctrine of Ultra Vires as applied to the Objects clause was substantially changed in S35 of the Companies Act 1985. Section 35 said :

"where a person deals with a company in good faith, a transaction decided upon by the directors shall be deemed to be within the capacity of the company to enter into"

Section 142 of the Companies Act 1989 abolishes the doctrine of constructive notice (the 1989 Act uses the term deemed notice)

Section 142 (of 1989 Act) contains a proviso that a person cannot rely on his not having notice of certain matters if he failed to make such enwuiries which he might have been expected to have made in the circumstances. This is a somewhat woolly proviso but may be of interest to consider in relation to the Maxwell affair. In addition it must be appreciated that section 142 states that the no doctrine does not afect the provision in S 35 of the Companies Act 1985 which states thta when a person takes any charge over the property of a company he is presumed to have notice of any matter which should be registered and disclosed on the register of charges.

Whilst the objects clause of a trading company is now required to state that it is a general commercial company, it must be remembered the members of a company might still restrain its directors from acting ultra vires. See Parke v Daily News. Finally the 1989 Act now permits members to ratify an act that was ultra vires, by special resolution in general meeting.

The objects of a company can be altered by special resolution, to enable the company to carry on business in a more economical or efficient way, or for a new or improved purpose.

Finally the case of Cotham v Brougham is important as it led to the modern all embracing do anything objects clause we are familiar with today and which still remain law until companies rewrite their objects clause in accordance with the Companies Act 1989 S 142.

What is of vital importance is to understand theat the constructive notice clause has been virtualy abolished subject to a few remaining provisions such as those detailed in Companies Act 1989 S 142.

The Companies Act 1989 at S 35 A abolishes the rule in Royal British Bank v Turquand 1856. This rule attempted to make sense of the possile conflict that could affect the outsider (of a company) when there was a difference between what the directors could do (objects clause) and what they actually did (as permitted by mambers under proviso of the articles) This distinction was of practical importance because non members have access to the objects clause but not to the minute book of a company.

The remaining clauses in the Memorandum and straight forward. The most important of the memorandum clauses, from an examination context areas are the Name and Objects clauses.

The Veil of Incorporation

This is a frequent examination topic.

When a company is incorporated it acquires a separate legal entity to the members (shareholders). The case of Salomon v Salomon 1897 is an example of this. In this case Salomon and his family ran a leather and boot business. They decided to set up a company of which they were the only shareholders. To all intent and purposes the business carried on as before with the same people running it. The only difference was that it had acquired the title company and the benefit of limited liability.

Some time later the company went into liquidation. The liquidator went to court claiming that as the company was really Mr Salomon; then Salomon should be responsible for the debts of the business, in his personal capacity.

The House of Lords held that the company was a separate legal entity to the owners even though the people involved were one and the same. There was no reason for the court to look behind the veil of incorporation.

Two further cases are of value in illustrating the veil of incorporation.

In Macaura v Northern Assurance 1925 the owner of some timber tried to persuade the court that he and the company were one and the same. This was in order that the insurance company pay on his personal fire insurance policy for the loss. The House of Lords again revised to lift the veil of incorporation, and confirmed that the company was a separate legal entity from the owner(s).

The veil of incorporation has been lifted in a number of instances. See the cases of

Dailmer Co Ltd v Continental Tyre & Rubber (GB) Ltd 1916
Gilford Motor Co Ltd v Horne 1935
Jones v Lipman 1962

Cases such as Gilford Motor Co Ltd v Horne illustrate that there are instances when the protection of the veil of incorporation will be lifted in cases where a company has been used to avoid a legal obligation.

We have seen some of the cases where the veil of incorporation would be lifted. Statute law also provides circumstances where the veil can be lifted.

Examples under the Companies Act 1985 include instances where a company continues for more than 6 months with less that 2 directors the veil of incorporation will be lifted and the individual director, not the company will be liable for debts incurred during the time he was the sole director.

The Companies Act 1985 also allows in instances where group accounts are prepared for the whole group to be treated as one economic entity rather than separate companies. In addition the 1985 Act makes an officer of the company personally liable for any cheques etc signed where the company's name is not mentioned (See also Penrose v Martyr)

The Insolvency Act also provides means for the removing of the veil of incorporation where there is an intent to fraud.

The matter of the veil of incorporation needs close study of the cases to gain a good understanding. Fortunately, the cases are well documented and relatively easy to understand.

Articles of Association

When we introduced the Memorandum it was described as the skeleton. The Articles of Association is like the body and clothing of the company. The Articles tell us how the company is to be run, and how it will regulate its internal affairs.

If a company does not register articles then Table A of the appropriate Companies Act become the automatic articles.

Registered Articles must :
* be printed
* divided into numbered paragraphs
* signed by each subscriber to the memorandum
* dated

The Memorandum and Articles of Association form a contract between each shareholder and the company. See the case of Hickman v Kent and Romney Marsh Sheep-Breeders Association 1915 where a provision in the articles to settle disputes between the company and shareholders by arbitration was held to be binding on the aggrieved shareholder.

The case of Wood v Odessa Waterworks Co 1899 is an example of the right of a shareholder to force the company to abide by its articles.

The articles may be altered by special resolution. Any change must not conflict with the provisions of the company's memorandum or the Companies Act.

Amongst the information contained in the Articles we would expect information about :

* Share capital and the share premium account.

In issuing shares a company is required to receive at least the nominal value of the shares. Any excess has to be placed in the share premium account.

Type of shares

A share is a transferable form of property that gives the holder the following rights :

1) to receive a dividend, if the company has distributable profits and decides to distribute the profit as dividends.

2) to receive capital repaid on a reduction of capital, with the approval of the court or in liquidation. Note that creditors claims take priority.

3) to vote at general meetings

* deferred shares carry rights that rank after ordinary shares
* redeemable shares where the company has the option or right to buy back the shares
* non voting shares

* Preference Shares
Carries a priority right to dividends. Usually a fixed interest payment. Dividend can be passed if company has no distributable profit, or simply passes the dividend. Entitlement is carried forward where dividends are passed.

* Debentures
A debenture is a document that states the terms under which a company has borrowed money. It may be a secured or an unsecured loan.
If X Bank lends Y company 5million to purchase a machine then the bank will insist on a debenture to protect its money.

Charges

When a charge is established over assets in a company, it has the effect of establishing a prior claim over other creditors.

Types of Charges

Fixed or Specific - over a specific asset

Floating - does not attach to assets until the charge chrystalises (See below)

A floating charge applies to current assets such as book debts or stock in trade. The most common type is a floating charge over the undertaking and its assets.

We saw in the box above the term chrystalisation. It means the conversion of a floating charge (not specific) into a fixed (specific) charge. This takes place in the following circumstances :

1 when the company ceases to carry on business
2 when the company is wound up
3 the security is enforced ie when a receiver is appointed
4 when there is a default in the debenture ie not repaying interest

When a company creates either a fixed or floating charge the charge needs to be registered within 21 days of its creation. If the charge is not registered within 21 days it becomes void against another creditor and the loan secured becomes immediately repayable.

The articles will tell us the borrowing powers of a company. The objects clause in the memorandum always contains a clause allowing the company to borrow.

Protection for Minority Interests

Consider a company with three directors. Two can side against the remaining director. What protection, if any is available to the minority.

The case of Foss v Harbottle 1843 stated that the minority is not generally protected by the courts,but ought to use the general meeting as a means to air their grievances.

The exceptions to the Foss v Harbottle rule are :

1 where the act of the minority is ultra vires
2 where there is fraud on the minority
3 where the proper purposes rule applies

The Companies Act 1985 S459 now provides statutory protection for the minority shareholder.

The Articles of Association will also give us details of rules relating to appointment of directors, their removal, meetings, voting rights, notice of meetings etc.

We will now examine in greater detail internal management of a company, especially meetings and directors.

Meetings

Types of Shareholder meetings.

1 Annual General Meeting
2 Extraordinary General Meeting
3 Class Meeting (particular class of shareholder)


The Annual General Meeting :

The Companies Act 1985 S366 provides that every company must hold its first AGM within 18 months of its incorporation.

Every company has to hold an AGM in every calender year, and not more that 15 months must elapse between the date of one AGM and the date of the next AGM.

If the company does not conduct its business in accordance with S366 it is liable to a fine.

Business Of AGM

1 consideration of accounts
2 auditors report
3 directors' report
4 declaration of dividend
5 appointment of auditors
6 election of directors


The Extraordinary General Meeting :

Any general meeting other than the AGM is an extraordinary general meeting.

Whilst directors may call an EGM when they feel it is essential, by Companies Act 1985 S386 it must also be called if :

* the directors are requested to call an EGM by =
1) holders of at least 10% of the issued and paid up voting shares

2) if the company has no share capital by members having at least 10% of the voting rights
must call the EGM within 21 days of receipt of the request.

S391 of the 1985 Act provides that a retiring auditor can request that an EGM be called to allow him to explain the facts around his resignation.

A company that finds that its net assets are below 50% of its called up share capital, must under S142 0f the 1985 Act call an AGM within 28 days.

Notice for the calling of meetings

The minimum notice required to call a meeting under Companies Act 1985 S369 is :

AGM == 21 days notice in writing

EGM == 14 days notice in writing, except where a special resolution is proposed, when 21 days notice is required.

The document giving notice of meetings must contain the time and place of the meeting, as well as the general nature of the business to be transacted.

However, if a special or an extraordinary meeting is called, then the wordings of the resolutions must be given.

The notice must also state that a person entitled to vote can appoint a proxy.

If a member wishes to propose a resolution he is required to give the company notice of his intent. These instances are usually concerned with directors appointment or auditors appointments. The law also allows members to have under certain circumstances, personal statements sent to all members.


Requirements for a valid meeting

1 Must be proper notice

2 Must be a quorum

3 Must be a chairman


Duties of Chairman

1 to preserve order

2 to ensure meeting is held in a proper manner

3 to take care that the mood of the meeting is properly ascertained


Voting at Meetings

Voting may be by show of hands or by poll. The exact regulations concerning voting will usually be contained in the Articles of Association. The Companies Act 1985 S372 contains a requirement that any member entitled to attend a meeting and vote at the meeting, be entitled to appoint another person as his proxy.


Type of Resolutions

Ordinary - requires a simple majority. Notice is 21 days for an AGM, 14 or 21 for EGM

Extraordinary - requires a 75% majority of votes cast. Again, notice requirement depends on type of meeting

Special - requires a 75% majority of votes cast, and 21 days notice


Directors

A director is any person occupying the position of director, by whatever name called. Companies Act 1985 S741.

A company can be a director of another company. Companies Act 1985 S280

A director is an officer of the company. If a director has a contract of service, then he is also an employee of the company.

A private company is required to have at least one director

A public company is required to have at least two directors. Companies Act 1985 S282.

The maximum number of directors is usually stated in the articles.

The company secretary must be a person suitably qualified : barrister, solicitor, chartered or certified accountant, chartered secretary etc.


Appointment of Directors

When a company is set up it usual to name the original directors in the articles.

Any directors appointed after the original directors must be appointed in accordance with the company's articles. At AGM's one third of the board of directors retire. They can, up to the age of 70 offer themselves for re-election.
It is possible for a director of a public company to be reappointed over the age of 70 by ordinary resolution of which special (28 days) notice is given.

A director appointed between AGM's has to stand for re-election at the next AGM.

A managing director any be appointed, if the articles allow. The appointment is made by the board and the managing director is not normally subject to retirement by rotation.

Directors' contracts of service

Again these powers are contained in the articles. As we saw earlier every company is required to have its director's contracts of service available for the inspection of its members.

The Companies Act 1985 S319 provides that, unless a term is first approved by ordinary resolution, a company cannot incorporate a term into a directors contract of service that :

a) the director is to employed for a period of more than five years
b) that during that period the employment cannot be terminated by the company by the giving of notice or that it can only be terminated by the giving of notice in specified circumstances.

In the event of a director not having a contract of employment the courts may imply a contract of service that is based on the company's articles, or the relevant
Table A Regulations.

Removal of Directors

The Companies Act 1985 S303 provides that the shareholders may by ordinary resolution, remove a director at any time irrespective of any provision in the articles, or any term in the individual director's contract of employment.

See : Bushell v Faith 1970

Office of Managing Director

A managing director may be removed by ordinary resolution. If this occurs he ceases to be both the managing director and a director of the company.

However if the board remove a managing director from his position he will still remain a director as he can only be removed as a director by the members of the company (shareholders)


Compensation for Directors

A director removed from office in breach of his agreement is entitled to sue for loss of office. The companies Act 1985 S312 allows for directors to be compensated for loss of office only if the compensation has been approved by the members in general meeting. (This is what we often read in takeover bids as "golden parachutes)

Where a director is dismissed from his contract of service he is entitled to sue for breach of contract.

Disqualification of Directors

The Company Directors Disqualification Act 1986 provides that a director can be disqualified from being appointed or acting as a director in the following circumstances :


* when an undischarged bankrupt
* when subject to a court disqualification order ie if convicted of an indictable offence involving a company, or is a persistent defaulter in relation to the
Companies Act,
or has been found guilty of fraudulent trading,
or has failed to file documents with the Registrar
of Companies on three occasions in 5 years,
or is regarded as an unfit person to be a director

The acts of a director whose appointment is found to be defective are regarded as being valid.

Duties of Directors

A director is the agent of the company. This means that their duty is owed to the company and not to the members. In the event of a director or directors breaching their duty, it is the company in the form of the members in general meeting dealing with the matter.

Directors have a duty to exercise care and skill.

The duty of care is one expected from a person of his knowledge and experience. The degree of care and skill will depend on the individual director and his circumstances. In the early part of the century, when directors were often local gentry and paid little interest in the business, the duty of care was much lighter than it is in these days of the professional manger.

The duties of directors in Re City Equitable Fire Insurance Co 1926.

1 to be honest
2 need not give continuous attention to company
3 may delegate
4 need not exercise a greater degree of skill than may be reasonably expected

In addition to the duty of care and skill the director owes the company a Fiduciary duty. This type of duty means that even after the director ceases to be a director he still owes a fiduciary duty not to reveal confidential information received when he was a director.

The detailed fiduciary duty of the director is :

1 not to exercise their powers in an improper manner
2 to act in a manner that is in the interests of the company
3 not to place themselves in a position where their personal interests conflict with their duty to the company.

The difficulties faced by directors in deciding their fiduciary duty to the company should be considered from the viewpoint of takeover bids for their company. It makes for some interesting conclusions!.

A director must declare any conflict of interest and is not entitled to benefit personally from information or opportunities obtained whilst acting in his capacity as a director. (See Law of Agency on cases and the Company law case of Regal (Hastings) Ltd v Gulliver 1942 )

A director's liability for breach of duty cannot be excluded by the company articles. However the law does provide relief in the form of ratification of the act, or by the court granting relief if it thinks that the director acted in an honest manner. Stephen John

December 1994

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