FORMATION OF THE
COMPANY
In order to form a company,
prescribed documentation has to
be filed with
the Registrar of Companies,
together with the appropriate
fee. At present,
this is £20, though there is a
same-day service if the
documents are presented at
Companies House before 3 pm.
The same-day service costs
£100. If everything is in order,
the registrar duly issues a
certificate of incorporation.
In the case of a private
company, this enables the
company to begin trading
immediately. In the case of a
public company, a trading
certificate issued
under s 117 of the Companies
Act 1985 is a further necessity.
The documents to be filed with
the Registrar are listed below.
Under the
Companies Act 1985
(Electronic Communications)
Order 2000, the
documents may be filed
electronically, in which case the
requirements for
signature in the presence of a
witness and the attestation of
the signature by
a witness, do not apply.
Memorandum of Association
This is the document which
gives basic information about
the company to
the outside world. The
memorandum must be signed
by each subscriber in
the presence of a witness. Table
B of the 1985 Companies Act
provides a
model memorandum for a
private company limited by
shares; Table F gives
a model memorandum for a
public company limited by
shares. The contents
of the memorandum are
prescribed by s 2 of the
Companies Act 1985. It
must contain the following.
(a) The name of the company
Section 25 provides that if a
company is limited, the last
word of its name
must be ‘limited’ if it is a
private company; and the last
words must be
‘public limited company’ if it is
a public company. This warns
people that
they are dealing with an
enterprise which has limited
liability in respect of
its corporate debts.
There are provisions which
allow the words to be
abbreviated to ‘Ltd’ and
‘plc’ for private and public
companies respectively and
which allow for their
Welsh equivalents to be used in
certain circumstances. Section
30 permits theword ‘limited’ to
be dispensed with by a private
company limited by
guarantee,provided the
company’s objects meet certain
criteria and its memorandum
orarticles contain specified
restrictions as to the way in
which the companymay deal
with its assets. Section 26 of the
Companies Act contains
restrictions on the names which
the registrar will register. The
most important restriction is
that a name will
not be registered if it is the
same as a name appearing on
the index of names
of companies held by the
Registrar. The index can be
searched free of charge
on the Companies House
website. Further restrictions are:
where the use of
the name would be a criminal
offence or would be offensive;
where the words
‘limited’, ‘unlimited’ or ‘public
limited company’ or their
abbreviations, appear
anywhere except at the end of
the name.
To try to prevent the public
from being misled, certain
names will not be
registered without approval.
Others require that a ‘relevant
body’ be given
the opportunity to register its
objection to the name. In
addition, there are
provisions relating to ‘phoenix
companies’.
The Secretary of State must
approve the registration of a
name which
implies national or multi-
national pre-eminence; local or
central government
connection, patronage or
sponsorship; business pre-
eminence or representative
status; objects or status, such as
insurance. Certain names
require that a
‘relevant body’ be given the
opportunity to make objections
to the name.
Thus, for example, in order to
use a name including the word
‘Royal’ or
‘Royalty’, a written request
must be sent to the Home
Secretary asking him if
he has any objections to the
proposed use of the word, and,
if so, to state the
reason for them. The reply must
be forwarded to the Registrar of
Companies,
who has a discretion to decline
to register the name.
The Insolvency Act 1986
introduced measures aimed at
preventing people
from being misled by so called
‘phoenix companies’. A
phoenix company
was an insolvent company
which was purchased from the
liquidator by its
existing management and then
continued to trade as before, but
free of its
creditors. Sections 216 and 217
of the Insolvency Act provide
that where a
company goes into insolvent
liquidation, anyone who was a
director or shadow
director of that company at any
time during the previous 12
months, who
becomes a director of a
company using the name or
trading name of the
insolvent company, within five
years of the insolvency,
commits an offence.
Change of name
A company may change its
name voluntarily, subject to the
above rules, by
passing a special resolution and
sending a copy to the registrar
with the
appropriate fee.
There are three circumstances in
which a company can be
compelled to
change its name. There is also a
circumstance at common law
where a company
can be prevented, by injunction,
from continuing to use its
registered name.
In such a case, in order to carry
on trading, the company will be
compelled to
change its name.
The three circumstances in
which, under the Act, a
company may be
compelled to change its name
are:
(a) where a company is
registered under a name which
is the same as, or too
like, a name which appears, or
should have appeared, in the
index of
names of companies at the time
the company was registered. In
such
circumstances the Secretary of
State may, within 12 months of
the name
being registered, give a written
direction to change the name: s
28(2) of
the Companies Act 1985;
(b) where it appears to the
Secretary of State that a
company has provided
misleading information for the
purpose of securing the
registration of a
particular name, or has given
undertakings or assurances
which have
not been fulfilled. In such a
case, the Secretary of State
may, within five
years of the name being
registered, give the company a
written direction
to change the name: s 28(3) of
the Companies Act 1985;
(c) where the registered name
gives so misleading an
indication of the nature
of its activities as to be likely to
cause harm to the public. In
such a case,
the Department of Trade and
Industry may direct a company
to change
its name. There is no time limit
within which such a direction
must be
made. The direction must be
complied with within six weeks,
unless the
company applies to a court
within three weeks to have the
direction set
aside. The court may set the
direction aside or confirm it.
Before the Business Names Act
1985, it was possible for a
company to
circumvent the above rules by
adopting a trade name which
was not the
company name. For example, a
small tyre company trading only
in
Northampton might register
itself as Smith’s Tyres Ltd, but
trade under the
name of International Tyre
Services. However, under the
Business Names
Act, similar rules apply to the
trading names of a company as
they do to its
registered name.
Despite these rules, it may be
that a company secures the
registration of a
name which is so similar to that
of an existing company or
trading name that
the existing enterprise has
justifiable fears that the new
company may be
mistaken for the existing
enterprise. In such a case, the
existing enterprise
may apply to the court for an
injunction preventing the new
company from
using its registered name. In
doing so, it alleges that the new
company is
committing the tort of ‘passing
off’, that is, it is passing off its
business as
that of the existing business.
The leading case is Ewing v
Buttercup Margarine
Co Ltd (1917). In this case the
plaintiff carried on business
under the name
Buttercup Dairy Co. He
obtained an injunction to
prevent the defendant
trading under the registered
name of the company on the
grounds that the
public might think the two
businesses were connected.
(b) The domicile of the company
The place where the registered
office of the company is
situated determines
its domicile. The registered
office is the address to which
communications to
the company may be sent and
writs may be served. There is
also a list of
important documents which,
under various sections of the
Companies Act,
must be kept at the registered
office.
(c) The objects of the company
The objects clause of the
memorandum, originally of
substantial significance,
has become much reduced in
importance over recent years. A
final step was
the introduction of a new s 3A,
which provides that a company
may be
registered with the object to
carry on business as a general
commercial
company.
Ultra vires
Originally the doctrine of ultra
vires (meaning ‘beyond one’s
powers’) meant
that if the company embarked
on any business or undertaking
which was not
included in its objects clause,
any contracts relating to such a
business were
not enforceable either on behalf
of, or against, the company.
This meant that
a person dealing with the
company had to take the trouble
to seek out and
examine the objects clause of
the memorandum. If he did not,
the doctrine of
constructive notice deemed that
he had done so and he was
therefore regarded
as having had notice of the
limitation on the company’s
powers. This problem
was partly overcome by
including a large number of
powers within the objects
clause so that the ultimate effect
was that the company could
undertake
virtually whatever business the
directors decided upon.
In 1972, the European
Communities Act made changes
which are now in
s 35 of the Companies Act
1985. It provided that, in
relation to a person
dealing with the company in
good faith, any transaction
decided on by the
directors was deemed to be
within the company’s powers.
This meant that a
person dealing in good faith
could enforce an ultra
vires transaction. The
company or a person of whom it
could be proved that he was not
dealing in
good faith could not, however,
enforce such a transaction. The
position was
changed by the Companies Act
1989, which amended the 1985
Act. Under s
35A, transactions are
enforceable against the
company even by persons who
have actual knowledge that the
transaction is not within the
company’s power.
Thus the requirement of good
faith on behalf of the
company’s creditor in
relation to an ultra
vires transaction has
disappeared.
Section 35 provides that any
member may seek an injunction
from the
court to restrain the directors
from entering into an ultra
vires transaction. If
the directors have already
entered into the transaction, no
injunction is
available. Similarly, no
injunction can be granted if
members have ratified
the ultra vires transaction by a
special, or (in the case of a
single member
company), a written resolution.
Directors are liable to pay
damages to the
company in respect of any loss
caused to it by an ultra
vires transaction.
However, the company may
relieve the directors of this
liability by passing a
special (or written) resolution to
that effect.
Ultra vires transactions
undertaken by a director, with
the company or
with the company’s holding
company, are voidable, that is,
they can be set
aside at the instance of the
company. Ultra vires contracts
made with persons
connected with the director are
voidable, as are contracts made
with associated
companies, that is, a company
in which the director has 20%
or more of the
issued share capital or controls
20% or more of the votes.
Connected persons
comprise the director’s spouse
or child or step-child (under the
age of 18).
Also connected are trustees
of trusts whose beneficiaries
include the director,
the director’s spouse, child or
step-child, or any associated
company. In
addition, a partner (that is,
business partner) of the director
or of any of the
director’s connected persons is
connected.
The problems with objects
clauses can now be almost
entirely avoided as
between the company and its
creditors. A new s 3A provides
that a company
may be registered with objects
(or alter its objects) to carry on
business as a
general commercial company.
This allows the company to
carry on any trade
or business whatsoever. It also
allows the company to do any
act incidental
or conducive to such trade or
business.
(d) That the liability of members
is limited, though, of course,
this will
normally be apparent from the
name of the company
(e) The amount of its authorised
share capital and its division
into shares of
a particular value
For example, 100 shares of £1
each.
In addition, the memorandum of
a public company must contain
a clause
stating that it is a public
company. Section 14 of the
Companies Act provides
that the memorandum of a
company binds the company
and the members as
though it had been signed and
sealed by each member and as
though it
contained covenants by each
member to observe its
provisions.
Articles of association
Articles of association regulate
the internal government of the
company. They
deal with such matters as the
issue and transfer of shares, the
calling of
meetings together with the
procedure to be adopted and the
taking of votes
at them, the appointment of
directors and their powers, etc.
It is not
compulsory for a company
limited by shares to register
articles of association,
though an unlimited company
or a company limited by
guarantee must do
so. Table A to the Companies
Act sets out a model form of
articles for both
public and private companies.
Section 8 provides that
Table A will
automatically apply to
companies limited by shares
unless it is excluded or
modified. The normal practice
is for a company to expressly
adopt Table A
as its articles but to include
modifications where
appropriate. For example,
Art 73 of Table A requires
directors to retire in rotation.
Though they can, of
course, be reappointed
following their compulsory
retirement, most private
companies find it convenient to
exclude this Article.
Section 7 provides that articles
must be printed, in numbered
paragraphs
and signed by the subscribers to
the memorandum in the
presence of at
least one witness. Where the
memorandum and articles
conflict, the
memorandum will prevail of s 9
of the Companies Act, subject
to the
restrictins contained in the
section. Section 14 of the
Companies Act provides
that the articles of a company
(like its memorandum) bind the
company
and the members as though they
had been signed and sealed by
each member
and as though they contained
covenants by each member to
observe their
provisions. The broad effect of
this is that the company is
contractualy
bound to its members, and
members are contractually
bound to each other
in respect of the provisions of
the articles.
In addition to the Memorandum
and Articles, those involved in
the
formation of the company must
file a statement signed by the
subscribers to
the memorandum which:
(a) gives particulars of the first
directors and company
secretary; and
(b) specifies the intended
situation of the company’s
registered office;
This is done on standard form
10.
(c) a statement of the
company’s capital;
(d) a statutory declaration that
those engaged in the formation
of the company
have taken all the required steps
in relation to the formation.
This is done on standard form
12, though the purpose is not
apparent. If all
the required steps have not been
taken, the Registrar will simply
refuse to
register the company
irrespective of the fact that form
12 has been submitted.
Lifting the veil
We saw earlier that a company
is a legal person quite distinct
from its members
and that this is so even where,
as in the Salomon case and
the Lee case, one
person effectively ‘owns’ the
company. This is called ‘the
veil of incorporation’.
There are circumstances,
however, where the law will
‘lift the veil’ of
incorporation and look at the
reality behind the veil. Some of
these are as a
result of statutory provisions,
some as a result of judicial
decisions.
There are two situations in
which statute may lift the veil.
The first is
where a public company carries
on business for more than six
months with
less than the statutory minimum
of two members. In this case,
any person
who was a member of the
company during any of that
time and who knew
that business was being carried
on with less than two members
is jointly and
severally (that is, separately)
liable for all of the company’s
debts contracted
during that time.
The second is where an officer
of the company, or any person
acting on
the company’s behalf, signs and
authorises the signing of a bill
of exchange,
promissory note, cheque,
endorsement or orders for
money or goods which
purports to be signed on behalf
of the company but in which the
company’s
name is not mentioned. The
officer (or other person) is
personally liable to
the holder of the bill of
exchange, etc, unless the
company honours the
obligation (see s 349).
The veil may be lifted by a
decision of the court. However,
the judicial
decisions as to when it is
appropriate to lift the veil do not
seem to follow any
defined principle. The main
principle originally was that the
veil would be
lifted if the company was a
‘sham’, formed or operated to
avoid the
enforcement of rights which had
accrued against an individual or
another
company.
In Gilford Motor Co v
Home (1933), EB Home had
covenanted with his
employer that on leaving the
employer’s employment, he
would not solicit
his employer’s customers. He
left his employer and set up a
competing business.
In order to avoid the restraint on
soliciting his former employer’s
customers,
he carried on the business
through a company set up by his
wife, JM Home
Ltd. Held: the plaintiff would
be granted an injunction against
Home and
against JM Home Ltd, since the
company was nothing but a
sham set up in
order to avoid Horne’s
obligations under his agreement
with the plaintiff.
In a contrasting case, Hilton v
Plustile (1989), H owned a flat
which Miss
Rose wished to rent. However,
if H rented the flat to an
individual, that
individual would be entitled to
protection (for example,
protection against
eviction) under the Rent Act
1977. H would therefore only
let the flat to a
company. Miss R acquired a
company called Plustile Ltd to
which H rented
the flat. Miss R contended that
the reality of the situation was
that H had
rented the flat to her. Held by
the Court of Appeal: there was
no reason to
override the transaction since it
was the intention of both parties
to structure
their transaction in such a way
that the Rent Acts would be
avoided.
Thus, in the Hilton case, the
court was drawing a distinction
between the
situation where the device of a
company is used to try to avoid
existing rights
to the detriment of an unwilling
party and the situation where,
initially at
any rate, both parties are agreed
upon using a company to
prevent rights
arising.
In certain cases, particularly
where a group of companies is
involved, it
has been suggested that the
corporate veil may be pierced
‘in the interests of
justice’. However, in Adams
v Cape Industries (1990), the
Court of Appeal
stated that the court was not
‘free to disregard the principle
of Salomon v
Salomon & Co Ltd merely
because it considers that justice
so requires’.
Phoenix companies
A ‘phoenix’ company is a
company which is controlled by
the persons who
were previously in control of a
company of the same or very
similar name,
which has gone into insolvent
liquidation. They have usually
sold the assets
of the old company to the new
company, often at an under-
valuation.
To try to combat this, s 216 of
the Insolvency Act 1986 makes
it an offence
for a person who has been a
director of a company within 12
months before
it goes into insolvent liquidation
to be a director of, or to be
concerned directly
or indirectly in the promotion,
formation, or management of
another company
without leave of the court,
within five years after the
original company went
into liquidation, if the other
company is known by a name
which is the same
as one by which the original
company was known at any
time within 12
months before it went into
liquidation, or by a name which
is so similar to
such a name by which the
original company was known
that it suggests an
association between the original
and the new companies.
It is also an offence for a
director of the original
company, within the same
five year period, to be
concerned in the management
of a business, other than
a company, which is known by
the prohibited name (s 216). In
other words,
the prohibition cannot be got
round by using a sole tradership
or partnership
instead of a company.
A person who is a director of, or
concerned in the management
of, a
successor company in
contravention of these
provisions, or if a person acts
or is willing to act on
instructions given without the
leave of the court, by
another person whom he knows
to be acting in contravention of
any of these
prohibitions, that person is
personally liable for the debts or
other liabilities
of the successor company which
are incurred while he is a
director of it, or is
involved in its management, or
while he acts or is willing to act
under
instructions. This personal
liability is enforceable by the
other party to the
contract which the director
negotiates on behalf of the
successor company,
even though the other party is
aware that the contract is
entered into in
breach of the prohibition.
Insider dealing
Sometimes a person obtains
price-sensitive information
about a company
which has not yet been made
public. If the company is quoted
on the stockexchange,
that person may make a profit
by making use of his
information.
However, a person who wishes
to do this commits a criminal
offence and will
probably need to act fairly
quickly since the Listing Rules
of the LSE require
price-sensitive information (that
is, information which might
affect the price
of the relevant securities) to be
disclosed promptly to the
Company
Announcements Office of the
LSE. Certain other information,
such as any
information received regarding
substantial shareholdings
(which might
indicate that a takeover bid is
being prepared) must be
disclosed, whether or
not it is regarded by the
company as being price-
sensitive.
Example
Suppose that the shares of
Everpool United Football Club
are quoted on the
LSE. The chairman of the club
has been negotiating secretly
regarding the
formation of a new European
Super League, of which
Everpool United are to
be founder members. The
negotiations are concluded
favourably. Before the
agreed time for the press
release, the chairman’s personal
assistant buys himself
a substantial number of shares
in the club. When, later that
day, the news of
the proposed League is made
public, the value of the shares
rise and the
personal assistant ends up with
a substantial profit.
This is called ‘insider dealing’.
Typical examples might be
where the
chairman of a company who
becomes aware that his
company is a target for
a takeover bid (which tends to
push the share price up) buys a
large number
of shares in his company in
order to make a profit; or the
finance director of
a company which is about to
announce a large loss sells his
shares in the
company before the
announcement is made; or a
telecommunications company
is about to be awarded a large
government contract and a
director of the
company, being aware of this,
buys a significant number of
shares in the
company, shortly before the
public announcement is made.
Some people think that insider
dealing is perfectly legitimate.
After all, no
one is harmed by the personal
assistant’s activities: the profit
he makes could
be regarded as additional
remuneration. If it is treated as a
crime, it is argued
that it is a crime without a
victim.
Nevertheless, UK law and
European law does treat insider
dealing as a
crime. It is thought by many
that a stock-market loses
credibility unless it
includes the concept that
dealing shall be fair to all.
Insider dealing is now
regulated by the Criminal
Justice Act 1993. There are two
basic concepts:
one is ‘inside information’; the
other is ‘having information as
an insider’.