Company law Review Example

INTRODUCTIONThe Companies Act 2006 meant for the regulation of companies and it has received Royal Assent on 8th November 2006. It is the longest Act in the British Parliamentary history with 1,300 sections covering nearly 700 pages. The Act supersedes the Companies Act 1985. The key provisions of the Act are common law principles, directors duties, implementation of European Union’s takeover, introduction of various new provision for private and public companies etc.

The Companies Act 2006 in the United Kingdom governs the company law.  The UK was one of first nations to establish rules for the operation of companies. The Act is originated by the Companies Act 1985. It is the Act of Parliament of United Kingdom of Great Britain and Northern Ireland and enacted during 1985. Besides other functions, the Act fixed the responsibilities to the companies, directors and Secretaries.

The Companies Act applies only to the companies, which are incorporated. The Companies Act 2006 will be commenced from 1st October 2009. The provisions of the Companies Act applies to the companies registered under this and bodies incorporated in the United Kingdom though they have not registered under the Companies Act. The Companies Act comprises the company law provisions, Part 2 of companies (Audit, Investigations and Community Enterprise) Act 2004 and provisions of the companies Act 1985. The Companies Act, 2006 has 47 Parts with the following matters.

PartTopic1 to 7Formation of the company and its fundamentals8 to 12Members and officers of the company13 and 14Procedure of decision makings by the companies15 and 16Accountability of the officers and members of the company17 to 25Provisions with respect to the share capital, submission of annual returns and charge of assets26 to 28Reconstructions, mergers and takeovers29 to 39Regulations to such companies those who have not formed under the Companies Acts40 to 42Disqualifications of directors and statutory auditors43Obligations44 to 47Miscellaneous and generalCOMPANY INCORPORATION

The formation of the company under the Act may be done by the subscribing their names to a memorandum of association under section 8. Further compliance requirements should be dome under section 9 to 13. The formed company should be formed for unlawful purpose. Prescribed memorandum should also be filed. The memorandum should state that they wish to form a company under this Act and agree to become members of the company and they should take at least one share of each. All such requirements were legally complied in case of Salomon Vs Salomon and company.

The formation of the company called incorporation of the company. It is also called Registration of the company. The registered company considered as separate entity and able to operate the business at its own. The companies can be crate4d by individuals, agents, solicitors or accountants. In the UK most of the companies are being formed electronically. There are two types of process to form the company i.e. paper process and electronic process. It is necessary to file the documents such as Memorandum of Association, Articles of Association, Form 10 and Form 12.  In the electronic process, Form 12 is not necessary. Formation of company through electronic process will be just 5 minutes.

Under Section 735 (1) (a) and (b), the Act covers to all other companies such as Registered under former companies Acts, unregistered companies and overseas companies.

When the company formed, a registration certificate would be issued which will have the following effects

1.      The registration of the company valid from the date of incorporation itself.

2.      The subscribers of the memorandum become members of the company and they become body of corporate with the name of company as mentioned in certificate of incorporation.

3.      From the incorporation, the body of corporate is capable of exercising all the functions of an incorporated company.

4.      If the company having share capital, the subscribers to the memorandum become holders of the shares mentioned in the state of capital.

The company’s constitution is mainly based on the Company Act and with the company’s articles. The Company Act does the external control of company and Articles of Association would monitor internal control. Hence first the company should confirm the articles of association and thereafter with the Companies Act. In case company not in a position in conformity with the Articles, then option available to change of articles through specific resolutions by the majority members of the company. The said Articles must be registered with the Registrar.

Section 3 of the Act describes limited and unlimited companies. In case of limited companies, the liability of the members is limited by its constitution with shares or limited by guarantee. The liability would be with respect to the shares or guarantee to the extent only. In the case of limited by shares, the liability would be to the extent of unpaid amount on the shares only. If the shareholders paid the entire amount on the share taken then there would be no liability though the company wound up. If the members take no liability, then it would be called as unlimited company.

Under Section 15, after completion of process and review of the application for incorporation, the Registrar will issue a certificate of incorporation which contains name and registered number of company, date of incorporation, limited/unlimited conditions, private/public, situation of registered office etc. the certificate will be conclusive evidence that the requirements of the Act with registration have been complied with and the company duly registered under the Act.

Under Section 33, the company’s constitution bind the company and its members and they have to observe all provisions of the Companies Act. The moneys payable by a member to the company will be treated as debt due from the members to the company. It is treated as ordinary contract debt in England and Wales and Northern Ireland.

When the Company’s constitution is altered with the order of a court or other competent authority a notice should be given under section 35 to the registrar not later than 15 days. Such notice must be accompanied with the copy of order and where the order amended the articles, such articles, resolution, copy of the company’s articles etc.

The General duties of directors specified in Sec171 to 177.  These duties based on common law and the equitable principles.  Under section 171, it is the duty of directors to act within the powers in accordance with the company’s constitution. The director of the company should exercise powers with respect to the articles of association and should not go beyond the articles of association.

The directors are obliged to promote the success of the company under section 172. Director of the company must act with good faith to more the success of the company for the benefit of its members as a whole. The director should take such decisions with respect to the following matters:

Long-term decisionsIn the interest of company’s employeesIncrease of business relationships with suppliers, customers and othersImpact of the company’s operations on community and environmentMaintaining reputation of the companyNeed to act fair relation between members of the company.Under section 173, it is the duty of the director to exercise independent judgment. And this duty must not be infringed by any agreement which in existence or company’s constitution. While exercising the duties, reasonable care, skill and diligence should be applied by the director.

Under section 177, it is the duty of director to declare interest in proposed transaction or arrangement. The declaration may be made at meeting of the directors and giving notice. In the case of Salomon, the Salomon in the directors meeting might have given notice for the said transaction and got debentures, since there would be no objection from the directors.  When the conflict of interest is not exist, then no declaration is required. The Law Commission and the Scottish Law Commission recommended that there should be a statutory statement of a director’s main fiduciary duties.

CORPORTE VEIL

When the shareholder or director of a company held liable for the debts or liabilities on behalf of company, then the piercing the corporate veil in order to know the real picture behind the curtain. It is based on the limited liability. Normally in partnership or other firms, the total liability of debts or any other lies on partners or proprietor. But in the case of company or corporation, the liability is limited and that too to the extent of unpaid share amount. The shareholders are not at all responsible for the debts and liabilities at any stage.

SALOMON V. SALOMON & COMPANYThe decided date for the case is 1897 by the judges of Lord Halsbury, Lord Herschell and Lord Macnaghten. The Companies Act 1862 was under question with the elements of Corporation, separate legal entity and agency. In this case courts viewed that Salomon separate person and company has separate legal entity hence the creditors sue the Salomon.

FACTS OF CASESalomon has the business of boot making. After some time, he formed a limited company and sold total business to the formed limited company for £ 39,000 with the overvaluation of £ 8,000. The company formed with subscribers of his own members of the family. The subscribers have taken one share of each and Salmon took 20,001 shares of £ 1 each and the remaining amount of the capital has been secured by Debentures for £10,000. After one year company reached for winding up. As usual, the liabilities exceeded the assets worth of £7,700.

However all these under the group of unsecured creditors. The creditors argued that Salomon and members of the company are same hence the debentures amount should not be paid which has been with the Salomon. But the courts refused and concluded that Salomon is different from Salomon & Company Ltd, hence Salomon is not liable for the unsecured debts. Because the company has separate legal personality and distinct from others.

In this case, Salomon runs the business for many years as a sole proprietor. Thereafter his sons interested in the business during 1892, thereby Salomon decided to form a company and sold his business to the limited company, which is Salomon & Co.Ltd.

The principle requirement of the company is that there should be seven subscribers required to form the company. Here the seven members were Salomon, his wife, daughter and four sons. Out of them 2 sons directors and Salomon himself was managing director. Salomon has majority shares and remaining members just only shareholders having minimum of one share. After formation of the company Salomon sold his business to the company for £39,000 for which 2£0,000 given as share capital and £10,000 as debentures i.e. Company due to the Salomon.

In the lower court, when the company went to liquidation, the liquidators argued that the debentures were invalid on the ground of fraud. The court also agreed headed by the judge Vaughan Williams J and given ruling that Mr. Salomon had created the company for the transfer of his business and he was only real agent and principal hence liable for such unsecured creditors.

The case gone for appeal at Court of Appeal and there also ruling given against Mr. Salomon and abused the privileges of incorporation and limited liability. But House of Lords overruled the decision. They viewed that formed company is limited company under the Companies Act 1862 it has certain statute limitations such as limited liability, separate legal entity and distinct from the shareholders.

LIABILITY AS SHAREHOLDER

The shareholders have limited liability and with respect to the unpaid amount only. In this case there is no unpaid amount and hence no liability to the company. Since it involved winding up procedure, priority creditors should be given with respect to their unpaid amount. As the Salomon has the security debenture he should be over of unsecured creditors. Hence Salomon should be given first priority and his claim is legal.

LIABILITY AS DIRECTOR

Company having a separate identity from its directors and shareholders and it is established in the case of Salomon Vs Salomon & Co. Company has corporate personality and also prevents directors being held liable in respect of company obligations. It is a foundational decision of the House of Lords in the area of company law. It was unanimous ruling given the House of Lords with the concept of independent legal entity to the company from its shareholders.

Lord Halsbury stated that the statute “enacts nothing as to the extent or degree of interest which may be held by each of the seven shareholders or as to the proportion of interest or influence possessed by one or the majority over the others.”

COURT OF APPEAL

From the Salomon’s case, the legal identity of the company more observed.  The registration of the requires seven members/subscribers required to form the company.  Hence Salomon and family formed the company according to the companies Act. Salomon was Managing Director.

The newly incorporated company purchased the business of Salomon with the overvaluation, which is not wrong as promoters can sell their property by full disclosure. So total business worth was 39,000 and accordingly company issued debentures of worth 10,000 to the Salomon, thereby Salomon becomes secured creditor. After sometime company goes to liquidation. The liquidator alleged Salomon’s character and hence Salomon should personally be liable for the debts of the company. The court of appeal agreed

HOUSE OF LORDS

But House of Lords disagreed and found the following:

Having some shares by some persons technically was irrelevant. The registration process is correct. The formed company was in compliance with the regulation of the Companies Act and has separate legal entity and it is not agent or trustee of any others. With such registration, company owns the debts and the debts not belonging to the members. The members liability is limited according to share capital amount.

CONCLUSION

From the date of incorporation itself, the limited company becomes a legal person with the right and duties and distinct from its members and shareholders. There is a corporate veil between them from the courts has to observe as and when necessary. By the incorporation of the company, the company will have corporate personality and will have independent status from such incorporation.

By such registration, the company would be in a position to sue or to be sued in its own and can hold own property, debts liabilities etc. though the entire shares held by even one member cannot combine its ownership with the company. The shareholders only responsible to such extent for unpaid share amount by them if any. Hence any debts, liabilities, assets properties belong to the company but not shareholders.

The doctrine of separate or corporate derived from ancient history and from Roman law. It is also evidently noticed in the case of Salomon Vs The Hamborough Co. during 1671. Thereafter separate personality widely described in Salomon Vs Salomon and Co. 1897. In order to satisfy the sons, Salomon incorporated the company and sold entire business to the company. The company paid in the form of cash, shares and debentures. Ultimately Salomon becomes preferential creditor to the company. Here the company is different from Salomon.

and Company should pay the amount first to the preferential creditor overriding all other creditors. But all other creditors argued that that Salomon and his company both are same, hence the payment should be avoided to Salomon. The House of Lords clearly examined and gave decision in favor of Salomon, as he was separate from the company. They gave the decision based in the absence of fraud with respect to the debentures and hence debentures were valid. It should be understood that the Salomon’s case did not establish doctrine of personality, but the case given exhaust meaning with respect to the separate independent personality from the company.

REFERENCE:

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