2.3.1. PUBLIC LIMITED COMPANIES (PLC’s)
CONCEPT OF INCORPORATION
All Limited companies are incorporated, which means they can sue or own assets in their own right. Their owners are not personally liable for the firm’s debts (limited liability) see cases Salomon V Salomon and Macaura V Northern Assurance Co 1925. The ownership of a limited company is divided up into equal parts called shares. Whoever owns one of more of these is known as a shareholder.
A public Ltd company (PLC) can sell its shares on the stock market, while a private limited company (LTD) cannot. Unlike a sole trader or partnership, the owners of a limited company are not involved in the running of the business unless they have been elected to the board of directors.
To set up a company, the founder or founders have to complete various documents and register the business at COMPANIES HOUSE with the REGISTRAR OF COMPANIES. This ensures a company gains separate legal status. The process requires two key documents to be completed:
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The Memorandum of Association, which governs the relationship between the company and the outside world. This includes the company name, the object of the company, limitation of liability and the size of the authorised share capital
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The Articles of Association, which outline the internal management of the business. This includes the rights of shareholders, and frequency of shareholder meetings, the number of directors, how they are elected and what their roles are. This also describes how profits will be divided.
Once the two documents have been completed, the registrar of companies issues a Certificate of Incorporation, which allows a limited company to begin trading. A Public Limited company first has to raise the sufficient capital, through selling its shares to the public. It has to produce a prospectus of how the business is run and what it intends to do in the future. Once all this has been done, the registrar issues a Trading Certificate, which allows the newly formed PLC to start trading.
This process is known as incorporation. Depending on the type of business, a company can be established in three ways:
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Royal Charter – once the only method of registration, now used for special cases.
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Act of Parliament – Used for public corporations.
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Registration under the Companies Act – by far the most common method.
The process of incorporation creates a separate legal identity for the organisation. In the eyes of the law the owners of the business and the company itself are now two different things. The business can take legal action against others and have legal action taken against it. This means that each owner will now have the benefit of LIMITED LIABILITY. Limited liability dictates that a company is responsible for the money it owes but the personal possessions of its owners are safe because there is only a limited amount for which they are liable. This is different from a sole trader who has unlimited liability and stands to lose all personal assets if the business experiences financial problems.
Each owner of an incorporated business sees their investment represented by shares. The money that they have used to purchase these shares is the only finance they will lose if the business is unable to meet its debts. If a firm is declared insolvent, all the assets of the business will be sold off to raise money to repay the creditors. If this amount is insufficient, the creditors lose out. This process sounds unfairly weighted towards the owners but it encourages individuals to put forward capital, as the financial risk is limited to the amount they invest.
There are advantages and disadvantages that result from forming an incorporated business:
ADVANTAGES
- Shareholders experience the benefits of limited liability.
- Companies have a separate legal identity.
- A limited company is able to gain access to a wider range of borrowing opportunities. This makes funding the growth of the business potentially easier.
- Continuation of existence e.g. in the event of holidays, sickness or the death of an individual.
DISADVANTAGES
- There are a number of legal requirements covering the operation of a limited company.
- Limited companies must make financial information available publicly at Companies House in accordance with the Company’s Act 1985 (revised 1989). N.B. The level of disclosure of company accounts for small firms is however limited, so this requirement is not too burdensome.
- Legally required to prepare and have audited a set of accounts, which must be presented to the members at the annual general meeting. This adds to the administrative costs of the business.
- Limited companies must conform to extensive formalities, such as holding the annual general meeting of shareholders and publishing annual returns.
THE LEGAL FORMATION OF COMPANIES
THE PROMOTER A company can only be formed when the necessary steps have been taken to register the company within the provisions of the Companies Acts. The legal formation of a company needs a promoter to take on this task, a company cannot form itself. The promoter can be the owner of the company, but if this is to be to his advantage, he must disclose any advantage he might gain to the board of directors or to existing or prospective members. If proper disclosure has been made then the promoter may retain his profit, unless he is accountable to the company under some other principle.The company cannot claim any benefit of any contract before the company has been incorporated. Therefore the promoter is personally liable under S9 (2) of the European Communities Act 1972, (see Phonogram Ltd. V. Lane 1982 and Cotronic (UK) Ltd. V. Dozen 1991). The promoter can overcome these disadvantages by:
Preparing a contract in draft form between the third party and the company, on the agreement that it will be executed after the company has been incorporated.
- The memorandum and article of association are formed so that the company has the power to make the contract and directors have the authority to sign and complete the agreement
If this was to happen then the agent or promoter would not acquire any liability.THE REGISTRATION PROCEDURESThere is a legal process before the incorporation of a company can go ahead. It requires certain documents to be registered. These documents must be delivered to the Registrar of Companies. Which will then issue a certificate of registration.The two documents needed are:
A Memorandum of Association - Section 12 of the 1948 Act
Articles of Association
These documents must be filed with the registrar on the formation of the company, and form the basic constitution. These two documents define what the company is and how its business and the affairs are to be carried out.
The Memorandum of Association The original memorandum must be presented to the registrar to obtain registration of the new company. The memorandum must be signed by at least two persons who agree to become the first members. If there is a single member for private companies, it is now possible for only one member to subscribe to the memorandum of association. The contents of the memorandum for (Private company's) are compulsory clauses S 2 and must sate the following;
The name of the company
Whether the registered office is to be in England Wales or Scotland
The objects of the company
The liability of members limited by shares or guarantee
The authorised share capital and how it is divided into shares
The contents of the memorandum include one more clause for Public companies that the company is a public company S 1(3) The company name is to distinguish it from any other company and must end with the word(s) LTD or PLC see case Penrose v. Martyr 1858. There must be no other company with the same name. No company may have criminal or offensive names S 26 (1). No company should imply any connection with local authority or government or words such as International or British unless officially approved. Or suggest professional expertise unless appropriate expertise has been consulted.A company may change its name if it has a 75% majority vote. The registrar may also compel the change if it is too like another company name, or if any misleading information or assurances were given at the time of registration, like in the case of Ewing v Buttercup Margarine Co Ltd 1917, how had traded for many years as the Buttercup Dairy Company, it was granted an injunction to restrain the defendants from trading under its registered name. To be successful in such an action the plaintiff would have to show that the two businesses are similar in operation.The Law requires that every company must:
Paint or affix its name on the outside of every office, or place in which its business is carried on, and easily legible and in a conspicuous Position.
It must have its name on all business letters and on all official publications, notices, on all bills of exchange, notes, cheques or any other similar documents of the company.
Engrave its name on its seal.
At all times have Ltd or Plc at the end.
The law states that if limited is missing from the name of the company, and a person signs or authorises to be signed on behalf of the company any bill of exchange, cheque or order for money/goods, that, that person will be liable to a fine, and be personally liable to the holders of these documents to the value stated unless this is paid by the company. Refer to Penrose v Martyr (1985). Changing of a company name S24 of the 1981 Act, states that a company name may be changed after registration by a special resolution, this takes effect when it is issued with a new certificate of incorporation from the Registrar of companies.These 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 must mention on its entire business letters:
Place of registration
Registered number
Address of registered office
The Registered office this memorandum states the address of the registered office. Whether the address is in England, Wales or Scotland and that it must fix its address in one of these. This is called the domicile of the company. The first address of the registered office is given in the documents presented to secure incorporation. The Domicile of the company whether it be England, Wales or Scotland cannot be altered. The registered office of the directors may alter at any time but only within the (domicile), the country specified. If the registered office is changed, notice of the new address must be given to the registrar under s 287 3. This is in order that any legal documents are sent out by post or recorded delivery they are delivered to the company and they cannot deny this delivery.An example of these registers are:
A register of members and the index of members, if the company has one, S110 &111.
- The minute book of general meetings (S146).
- A register of directors and secretaries (S200).
- A register of directors' interests in shares of the company or its associated companies (1967 Act, S27).
- A register of shareholders' interests in five per cent or more of the nominal value of any class of share capital which is quoted and has unrestricted voting rights (1976 Act S26).
- Copies of each director's contract of service or a memorandum of the agreement (1967 Act, S26).
- Copies of every instrument creating any charge required to be registered (S103).
- A register of charges affecting the company's property (S104).
- A register of debentures (if company keeps one) (S86).
These registers etc. must be available for inspection during normal business
hours.
Objects this sets out the aims and purposes of the company. This may be very broadly drafted so that the company's actions cannot be challenged as outside its objects. It may include objects and powers and in the clause a list of permissible transactions. These powers include leasing, construction of buildings, employing staff and subcontract work etc. The most important powers are the powers of borrowing funds. All these powers can be very long and detailed.
These objects may be altered by a special resolution (S 4(1)). These powers are to protect subscribers to a company who know exactly where their money is, so when they purchase shares they have knowledge of the company's activities and how their investment will be applied.
To protect persons dealing with the company, who can discover the true powers
of the company? The object also has another purpose by informing other parties who trade with the company, such as creditors, the scope and extent of activities and powers, which the company has. The intent for these objects are to make the people dealing with a company aware of the objectives behind the company.
So 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 s the doctrine of constructive Notice. S142 of the Companies Act 1989 abolishes the doctrine of constructive notice (the 1989 Act uses the term deemed notice). The objects clause may fill several pages of the memorandum.
Implied powers
- Every trading company has the power to borrow money, but it must be ancillary to some purpose of the company.
- Power to purchase similar businesses.
- Power to buy and sell assets of the company.
- Power to buy or take shares in another company.
- Power to pay pensions and make ex gratia payments to employees, their wives
and dependants. This power has been extended to similar payments when the
company is ceasing to trade or is selling the whole or part of its undertaking, regardless of whether of not it is for the benefit of the company (S74 of the 1980 Act).
The Substratum, or main objectives rule states that the company's activities are limited to and controlled by the main object.
But as with the case (Cotman V Brougham 1918) it was possible to overcome this strict interpretation by including in the objects a clause (usually the last), which states that each object in the memorandum is to be considered as a main object.
In order to protect those dealing with the company, the courts evolved the doctrine of Ultra Vires this stated that anything done by a company outside the objects for which it was set up is null and void.
The doctrine of the ultra vires rule
This clause was changed in S35 of the Companies Act 1985 S35.
"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"
If a company carries on an activity, which is not within, the objects and powers stated or implied in the memorandum it is ultra vires and void, even though the activity may be legal in itself. An activity, which is ultra vires and void, cannot be ratified by the company, even if all shareholders wish it to be.
In Ashbury Railway Carriage and Iron Co. Ltd V. Riche 1975, the company's
objects were to make and sell, lend or hire as general contractors and mechanical engineers, and to purchase, lease, work or sell mines, mineral, land timber, coal and other materials. The company purchased a concession to finance and build a railway in Belgium, but later the directors repudiated the contract.
The company was sued for breach of contract, but the House of Lords held that the contract was ultra vires and void and incapable of being ratified. The House considered the contract entirely beyond the objects of the memorandum. It is important to remember that a company can enter into contract which are not specified in the memorandum, provided they are reasonable ancillaries and necessary to achieve the main objects.
Liability clause s 2(2) of the 1948 Act states that the memorandum of a company limited by shares must state that the liability of its member is limited. It must also state that each member contributes to the assets of the company if the company were to be wound up, whilst being a member.
Under S43 44 of the 1967 Act, a limited company may be reregistered as an unlimited company and an unlimited company reregistered as a limited company.
Their may be occasions where a member of a limited company has unlimited liability and is then personally liable for the debts of the company.
The share or capital clause S2 1948 provides that a company with a share capital must state in the memorandum the amount of share capital with the company to be registered and the division into shares of a fixed amount. For example the clause might state the share capital of the company is £1,000,000 divided into shares of £1 each.
The Articles of Association
These article of association govern the internal affairs of the company and regulate the rights of the members as between themselves, and between the members and the company. The articles deal with things such as:
- The issue and transfer of shares.
- Alteration of capital structure.
- Calling general meeting, members' voting rights.
- Directors duties their powers and proceedings.
- The auditors, accounts and dividends.
S 6 of the 1948 provides that if a company limited by shares may register with its memorandum, articles of association. But if a company limited by guarantee or unlimited must register articles of association. The articles may adopt all or any of the regulations contained in Table A.
If a company is limited by shares and does not register articles then all Table A applies, and this will be the regulations for the company, as if it had been registered.
Articles which are registered but do not cover all the regulations in Table A those regulations in Table A will apply, unless there is a clause which excludes the Table A S8.
The Memorandum and Articles as Contracts.
The legal effect and consequences of registering the memorandum and article.
Once these documents have been registered, they bind the company and the
members S14, as if they had been signed and sealed by every member. These are the regulations of the documents:
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They are a contract, which binds each member to the company, see case Hickman v. Kent or Romney Marsh Sheep-Breeding Association 1915.
- The members are bound to each and every other member.
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The company is bound to each member, see case Eley v. Positive Government Security Life Assurance Co. 1976.
- A contract between the company and outsiders may be implied.
- When the memorandum and article conflict the memorandum prevails.
SHARE CAPITAL
A company’s capital is the funds it has available for use in the business and represents its assets. Some, if not all, of a company’s capital is provided by its members subscribing for shares.
Types of capital:
- Authorised share capital - This is the total amount of share capital which a company is authorised to issue by the capital clause of its memorandum. This total must be divided into shares of a fixed amount (nominal or par value of the shares). It can be increased as prescribed in the articles.
- Issued share capital (or allotted share capital) - This is the nominal value of the shares which have been allotted and issued to members. A company need not issue all its share capital at once.
- Called up share capital - This is the aggregate amount of calls for money or other consideration which members are required to pay (or have paid in applying for shares).
Allotment of Shares
The allotments of shares, is a form of contract. The intending shareholder applies to the company for shares. The company accepts this offer by allotting shares to him/her.
Procedure for allotment of shares
The allotment for shares in a private company is a simple and immediate matter. Public companies listed on the Stock Exchange follow a two-stage procedure.
- They issue a renounceable allotment letter, which the original allottee for a period of six weeks transfer to another person by signing a form of renunciations and delivering it to the transferee. The allotment letter is then sent with a completed application for registration of the shares in the applicant’s name.
- On receipt of the application for registration the company enters the name of the applicant in the register of members and delivers a return of allotments to the registrar which is made up to show who is then on the register. Once the applicant becomes a member by entry on the register they then receive a share certificate from the company.
Director’s powers to allot shares.
It is long established practice to delegate to the board of directors the decision on the terms of the contract allotment and the power to allot shares. The directors only have the power of allotment if they are properly authorised to do so, whether by the articles or by ordinary resolution passed in a general meeting.
Consideration for shares
Every share has a nominal value and may be allotted at a discount. To issue shares ‘at par’ is to obtain equal value, £1 for a £1 share. If shares are allotted at a discount on their nominal value the allotte must pay the full nominal value with interest at the appropriate rates (5%).
The no-discount rule only requires that, in allotting its shares, a company shall not fix a price, which is less than the nominal value of the shares. It may leave part of that price to be paid some time later by whoever then holds the shares.
Payment for shares
Shares may be paid for in money or ‘money’s worth’. The company may agree to accept a ‘non cash’ consideration of sufficient value. For example, a company may issue shares in payment of a price agreed in the purchase of a property.
Allotment of shares at a premium
A company may be able to obtain consideration for new shares in excess of their nominal value. This excess is called ‘share premium’, and must be credited to a share premium account (S130) to which certain restrictions apply. For example a share has a nominal value of £1 may be issued for £1.50, therefore the premium on each share is 50p.
Return of allotments
Within one month of allotting shares, a company must deliver to the registrar a return of allotments in the prescribed form showing what shares have been allotted, to whom and for what consideration, S88.
Rights and bonus issues
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A rights issue - is an allotment of additional shares made to existing members. If members do not wish to subscribe for additional shares they are able to sell their rights to other persons and so obtain the value of the option.
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A bonus issue - is more correctly but less often called a capitalisation issue. The articles of a company usually give it power to apply its reserves to pay to unissue shares and then allot these shares as a bonus issue to members.
The nature of shares and types of share
A share is a form of property, carrying rights and obligations. It is by its nature transferable. A member who holds one or more shares is by that fact a shareholder. If no differences between shares are expressed it is assumed that all shares have the same rights.
A company may attach special rights to different shares, for example as regards dividends, return of capital, voting or, less often, the right to appoint a director. Any share that has different rights is grouped with other shares carrying identical rights.
The most common classes of share capital with different rights are preference shares and ordinary shares.
The essential characteristic of any preference share is that it carries a prior to right to receive an annual dividend of fixed amount, say a 6% dividend. There are no other implied differences between preference and ordinary shares.
The transfer of shares
To obtain transfer of the legal ownership of shares two conditions must be satisfied:
- A ‘proper instrument of transfer’ must be delivered to the company which may not enter the transfer in its register until this is done, S183 (1).
- If, as is general practice with private companies, the articles give to the directors power to refuse to register a transfer and the directors exercise their power in proper way, the contractual restriction imposed by the articles operates to prevent a transfer of legal ownership.
It is standard practice in unlisted companies to use the stock transfer form authorised for general use by the Stock Transfer Act 1963, S1. This can be used to transfer fully paid shares irrespective of any provision in the articles requiring some other form and must be signed but not sealed, S2 Stock Transfer Act 1963. Transactions on The Stock Exchange are effected using sold transfer and bought transfer forms.
Transfer procedures in unlisted companies
The unlisted company transfer procedure is that the registered holder – the seller completes and signs the stock transfer form and delivers it along with his share certificate to the transferee – the buyer, who completes the transfer and pays stamp duty before delivering it together with the seller’s share certificate to the company for registration. The buyer becomes the holder and legal owner of the shares when his name is entered in the register of members, S22. The company then issues a new share certificate within two months, S185, and cancels the old one.
Transfer procedure for Stock Exchange transactions
Since 1996, listed companies have been able to make their shares eligible for CREST, the Stock Exchange’s electronic shareholding and transfer system.
The main feature of CREST is that anyone dealing on the stock market will be able to hold shares in electronic form, rather than on paper. Electronic holdings can be quickly, cheaply and safely exchanged for money in CREST when shares are bought and sold.
The CREST operator will instruct the company secretary to amend the share register when a transaction is carried out. The company secretary must follow the instructions and must confirm the CREST system operator that this has happened.
Share certificates
Within two months of allotting shares or receiving a transfer a company must deliver a certificate of shares allotted or transferred. This is a formal declaration that the person named is entered in the register as the holder of the shares specified, S185. A company listed on The Stock Exchange has a time limit of 14 days.
A share certificate is a prima facie evidence of ownership, S186. The company therefore requires the holder to surrender his certificate for cancellation when he transfers all or any of his shares.
Maintenance of Capital
The capital which a limited company obtains from its members as consideration for their shares (and its right to call for payment of the balance, if any still owing on its shares), is sometimes called ‘ the creditors’ ‘ buffer’. No one can prevent an unsuccessful company for loosing all or part of its capital by trading at a loss. But insofar as subscribed capital remains in the hands of the company it must be held for the payment of the company’s debts and may not be returned to members. That is the price which members of a limited company are required to pay for the protection of limited liability. They cannot be compelled to pay more than the amount due on their shares but cannot recover what they or their predecessors have subscribed for the shares unless the company’s debts have been paid.
Share premium account
A company which obtains for its shares a consideration in excess of their normal value must transfer the excess to a share premium account, S130.
The permitted uses of share premium are:
- To make an issue of fully paid bonus shares.
- To make an authorised reduction of capital.
- To pay capital expenses.
- To pay a discount on the issues of debentures.
- To pay a premium on the redemption of shares or debentures, S130(2).
Private companies, only may also use a share premium account in purchasing or redeeming their own shares out of capital.
Redemption or purchase by a company of its own shares
There is a general prohibition against any voluntary acquisition by a company of its own shares, however there is no objection to accepting a gift, S143.
Purchases of own shares
Companies are allowed to purchase shares provided certain safeguards are followed. A limited company may purchase its own shares:
- Out of profits or the proceeds of an issue of new shares.
- If it is private company, out of capital.
For redemption or purchase of shares out of the capital there is a long and involved procedure which must be followed. If a company goes into liquidation within a year of making a payment out of capital the persons who received the payment and the directors who authorised it may have to make it good to the company.
Financial assistance for purchase of own shares
Obtaining financial assistance to a third party to enable them to buy company shares can take many forms. Subject to exceptions it is not lawful for a company to give any financial assistance for the purpose of the acquisition of shares either of the company or of its holding company or to discharge liabilities incurred in making the acquisition. ‘Financial assistance’ is defined to mean a loan, guarantee, indemnity or security, purchase of such rights from a third party and any other financial assistance given by a company which reduces to a material extent, its net assets, S152
Loss of capital in a public company
If the net assets of a public company are half or less of the amount of its called up share capital there must be a EGM, S142. This is because the company has large accumulated losses:
- The duty to call the meeting arises as soon as any of the directors comes to know of the problem.
- They must issue a notice to convene a meeting within 28 days, this meeting must then be convened for a date within 56 days of their coming to know the relevant facts. This is to enable shareholders time to consider ‘whether any, and if so what, measures should be taken to deal with the situation.
DIRECTORS
A director is any person occupying the position of director, by whatever named 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 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’s the company in the form of their members in general meeting dealing with the matter.
The duty of care is one expected from a person of his/her knowledge and experience. The degree of care and skill will depend on the individual director and his/her 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 then it is in these days of the professional manager.
The duties of directors in Re City Equitable Fire Insurance Co 1926:
- To be honest
- Need not give continuous attention to company
- May delegate
- 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:
- Not to exercise their powers in an improper manner
- To act in am manner that is in the interests of the company
- 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 to takeover bids for their company. It makes for some interesting conclusions. A director must declare any conflict of interest and is not entitled to be benefit personally from information or opportunities obtained whilst acting in his/her capacity as a director. Company law Hastings 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.
Directors contracts of service
Again these powers are contained in the articles. As we saw earlier every company is required to have its directors contracts of service available for the inspection of its members. The Company 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:
- the director is to employed for a period of more than five years
- 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 giving of notice 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.
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 may 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.
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 of the company. However if the board remove a managing director from his/her position he will still remain a director as he/she can only be removed as a director by the members of the company (shareholders).
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 directors contract of employment, see Bushell v Faith 1970.
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 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 i.e. if convicted of an indictable offence involving a company, or is a persistence 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.
LOAN CAPITAL AND CHARGES
Debentures
There is another way to provide capital by lenders who provide it by taking
debentures or debenture stock. Loan capital is less regulated than share capital the interests and position of a provider of loan capital is very different from shareholders.
Debentures are any document, which states the terms on which a company has
borrowed money, a written acknowledgement of a debt S744. It is usually a
document made under the company's seal, which acknowledges the debt, but also
provides the date of repayment, the rate of interest until repaid and the security for the repayment. The security is referred to as a charge on the
assets.
Debentures Trust deeds
When debentures are issued it is usual for a trust deed to be created between
the company and trustees for the debenture holders, which secures the
property charged. The company normally appointed by the trustees and they
tend to be specialist institutions such as insurance companies. It is the
normal practice to include the remuneration of the trustees as having the
first charge on the assets.
- The particular asset or assets to be mortgaged is identified whether it is
a fixed and or floating charge. Details of events, which would enable the trustees to act and realise the asset.
- The conditions of issue, details of the rate and payment of interest, dates
and methods of redemption and the like.
- Details of transfer and transmission.
- Agreement with the company regarding further issues of debentures.
- The trustee's remuneration.
- Procedure for meetings of debenture holders.
A copy of the trust deed must be provided to any holder on payment of a small
fee.
Charges
Charges for debentures are either fixed or floating charges:
- Fixed charges - a specific asset of the company is charged in favour of the
trustees of the debenture holders by a legal mortgage. This charge is similar to a mortgage where the trustees of debenture holders have the right, under certain conditions, to stop the company dealing with the property, and to sell the property to repay the loan to the debenture holders.
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Floating charges - these do not have to be attached to any specific property or asset but may be a charge on property which is changing and can be dealt with by the company in the ordinary course of business. See Case Yorkshire Woolcombers Association Ltd 1903.
Examples:Types of charges
- A fixed charge is crated over specific property, such as a factory or
premises. A floating charge is over the assets of the company generally
although is may be over a specific asses, such as book debts.
- Whereas the company may not deal with property subject to affixed charge,
the company is entitled to deal with assets of a floating charge in the
ordinary course of business until something happens which crystallizes the
charge and it becomes fixed.
Crystallisation of a floating charge means that it is converted into a fixed
charge on the assets owned by the company at the time of crystallisation.
Events causing crystallisation are:
- The liquidation of the company.
- Cessation of the company's business.
- Active intervention by the chargee, by way of either appointing a receiver
over the assets of the company subject to the security or exercising a power of sale.
- If the charge contract so provides, when notice is given by the chargee
that the charge is converted into a fixed charge.
- Automatically on the occurrence of some specified event, without notice
from the chargee, if the charge contract so provides.
- The crystallisation of another floating charge if it causes the company to
cease business
Registration of charges
If the company creates a fixed or floating charge over its assets the charge
should usually be registered within 21 days of its creation s 398 (1). It is the duty of the company to register the charge. The registrar files the particulars in the companies charges register, which he maintains s(397) and notes the date of delivery. Two copies with the date are then sent out to the company and the chargee S398(5).
Non registration non-delivery
The charge will be void non-delivery within 21 days resulting in the charge being void i.e. of no legal effect, against an administrator, liquidator or person acquiring an interest in the charged property. The charge will be void even if insolvency proceedings or the acquisition of an interest in the property occur within the 21 days prescribed for delivery, if the particulars are not in fact delivered during this period s 399 (1). Creditors who subsequently take security over property and duly register their charge within 21 days will take precedence over a previous unregistered charge, this will be the case even if the later chargee had actual notice of the previous unregistered charge (unless the later charge was expressed as being subject to the earlier charge).
Non-delivery of a charge means that the sum secured by it is payable
forthwith on demand, even if the sum so secured is also the subject of other security S407 (1).
DISSOLUTION OF BUSINESS UNITS
Dissolution is when a company's name is removed from the register. The
business then ceases to exist there are several ways in which this may be
done. A company can only cease to exist if these steps are taken to dissolve
the company. Winding up is governed in the main by the Companies Act 1948, and S211 states that the winding-up as a company may be either:
- By the registrar, under s 652 CA, if it appears to him that the company is
defunct.
- By order of the court under s 427(3)(d) CA following a scheme of
arrangement under s 425, no winding up is necessary as the company is
transferring its business.
- By Act of Parliament.
- On application by the official receiver for early dissolution s 202.
- On completion of a compulsory liquidation.
- On completion of a voluntary liquidation
Liquidation's
Most dissolution follows liquidation or 'winding up'. The assets are
realised, debts are paid out of the proceeds, and any surplus amounts are
returned to members.
Compulsory Liquidation
-
A company has by special resolution resolved that it should be wound up by
the court see case (Re Yenidje Tobacco Co. Ltd (1916).
- The company does not commence business within a year of incorporation or
suspends business for a whole year.
- The number of members is reduced below two.
-
The company is unable to pay its debts (e.g. insolvent) see case Re London &
Paris Banking Corporation (1874).
Voluntary liquidation
Liquidation begins with a formal decision to liquidate. If the members in general meeting resolve to wind up the company this is a voluntary liquidation, this depends on whether the directors believe that the company can pay the debts off in full. There are two types of voluntary liquidation:
- Members' voluntary liquidation.
- Creditors voluntary liquidation.
Members' voluntary winding up when the directors of a company make a
statutory declaration of solvency it is referred to as a members voluntary
winding up S 283 (as amended by s 105 of the 1981Act provides that:
- Where it is proposed to wind-up accompany voluntarily the directors of the
company may at a meeting of the directors make a statutory declaration to the effect that they have formed the opinion that the company will be able to pay its debts in full within such period not exceeding twelve months from the commencement of the winding-up as may be specified in the declaration.
- A declaration shall have no effect for the purpose of this Act unless, it is made within the five weeks immediately preceding the date of the passing of the resolution for winding-up the company or on that date but before the passing of the resolution, or unless it embodies a statement of the company's assets and liabilities as at the latest practicable date before the making of the declaration.
- A declaration made by any directors of a company shall be delivered to the
registrar of companies within fifteen days immediately following the date on
which the resolution fro winding-up the company is passed.
- Any director making such a declaration without having reasonable grounds for the opinion that the company will be able to pay its debts in full within the specified period shall be liable to imprisonment and or a fine.
- If the company is wound-up in pursuance of a resolution passed within five
weeks after making the declaration, but its debts are not paid in full within
the period stated in the declaration, it shall be presumed, until the contrary is shown, that the director did not have reasonable grounds for his opinion.
Creditors winding up
A voluntary winding-up where a declaration of solvency is not made is referred to as a Creditors winding-up. Provided the company is solvent, no reference need be made to creditors. The Company appoints the liquidator and creditors have no influence on the winding-up because their interests are not in danger. To commence a creditors voluntary liquidation the directors convene a general meeting of members to pass an extraordinary resolution. They must convene a meeting of creditors S98 giving at least seven day's notice of this meeting. The notice must be advertised in the London Gazette and two local newspapers.
Unlike a compulsory winding up, there is no automatic stay of legal
proceedings against the company and the employees are not automatically
dismissed.
CONCLUSIONS AND RECOMMENDATIONS
The ‘conclusion and recommendations’ that we, the Legal Eagles professional law consultants have come to from all the information, research, findings and explanations within the group presentation and report, is to advise our client, Cheryl Hayward, that the best choice of company is a ‘Private Limited Company’.
The reasons for this are that the formation will be cheap, Table A can also be relied upon, and there is no minimum share capital (e.g. as opposed to public companies) and also the liability of the members is limited which is important for our client, who wishes to avoid any personal liability in respect of any contracts she may enter into on behalf of the proposed company.
BIBLIOGRAPHY
Heinmann AVCE Advanced business
Dave Needham & Rob Dransfield
HNC Business Course Book
Core Unit 6: Legal and Regulatory Framework
Mastering Business Law
Terry Price
Gradus executive lawyer
Course literature