CORPORATIONS AND LEGAL PERSONALITY
THE DOCTRINE OF INCORPORATION
COMPANY (artificial or abstract legal person)
A company is an artificial (as opposed to a natural) person which is an entity in its
own right with a legal personality separate from that and independent of its
shareholders (members/owners) or directors (managers).
SALOMON v SALOMON & CO (1897)
S sold his sole-trader business to a
company of which he was the main
shareholder. When the company went
into liquidation, S was sued (by
creditors) in his personal capacity as
they claimed S was, in effect, the
company.
HELD.
S was not liable for any moneys owed
to the creditors. These were company
debts and as the company had a
separate legal personality, it alone was
answerable to the creditors.
Module 4.1
V
E
I SHAREHOLDERS (Members)
L
DIRECTORS (Management)
EMPLOYEES (natural legal persons)
Relevant Case Authority O
F
LEE v LEE’s AIR FARMING LTD (1960) MACAURA v NORTHERN LIFE ASSURANCE (1925)
L was a director and owned the bulk of M sold his forest to a company in which he owned all
the shares in a company engaged in the shares. M had previously insured the forest in his I THIS VEIL may be lifted by law (courts or statute)
aerial crop-spraying. L appointed own name but omitted to change the relevant policy in certain circumstances so that the human and
himself as the only pilot of the company to state the name of the company as owner. The N commercial reality behind the corporate
at a salary arranged by himself. forest was later destroyed by fire and M sought to C personality can be revealed.
Subsequently, L was killed while claim under the policy.
crop-spraying and his widow claimed O
workers compensation from the HELD.
company as employer of her husband.
R
L could not file a claim as the forest was owned by P
Question under the relevant Act was
the company. As shareholder, L had no insurable
whether the relationship of employer and
employee could exist between L and the
interest in the forest because the company was a O
separate entity.
company. R
HELD. A
Yes they were separate legal persons,
T
thus even though L owned most of the I
shares, he could still be an employee of
the company. Thus his widow was O
entitled to compensation. N
A company's existence does not depend on the presence
It is the company itself which owns corporate
of human elements or resources (although these are, for
property. It is not owned by the members (or
practical purposes, necessary to run the company’s
directors) so it will not be affected by any change in
business activities).
shareholders.
(1) (5) (Refer MACAURA v NORTHERN LIFE
Thus, the company may have perpetual succession
Perpetual ASSURANCE (1925)).
notwithstanding the retirement, bankruptcy, mental Ownership
disorder or death of the shareholders/members. Succession CORPORATIONS AND LEGAL PERSONALITY of Property
In effect, this means that in small companies, (e.g.
THE CONSEQUENCES OF INCORPORATION with a single shareholder) the member would be
(perpetual = never ends or changes) Module 4.2 open to a charge of theft if he were to treat the
corporate property as his own.
(2)
(4)
Limited
Where a company is limited by shares, the extent of a Ownership
Liability
member’s liability is the amount which remains unpaid and
on the nominal value of the shares held. Management
In the event that the company is limited by guarantee,
the liability is that which the member has (guaranteed) (3)
agreed to pay if the company is wound up. The fact that a company is a legal entity separate and
Legal distinct from its shareholders, necessitates the
Capacity involvement and participation of management in the
form of a board of directors.

a) Proper Claimant c) Tort

b) Contract

If a wrong has been committed against a company, then,
as proper claimant, only the company can sue (acting
through the majority shareholders).
This is known as the rule in FOSS v HARBOTTLE and
in effect means that an individual cannot institute
proceedings in such circumstances (although there are
exceptions where minority protection is an issue) .
A company has the capacity to enter
into contracts in its own name.
(Because it has unlimited liability all
its assets may be utilised to
discharge debts).
A company may have liability in tort vis a
vis third parties who may have suffered
injury, loss or damage by virtue of the acts
or omissions of the company’s
employees or agents.
 Cases in Point
As previously observed, the SALOMON principle of separate legal personality has, benefited the shareholders In GILFORD MOTOR COMPANY LTD v HORNE(1933) an employee agreed not to solicit customers from his employer once he ceased to be employed by
of companies (refer LEE v LEE’s AIR FARMING LTD (1960). him. Despite this, the employee formed a company and solicited these customers after he left his employers.
Although in certain cases the courts have strictly applied the SALOMON
However: principle, they have, on occasions, intervened to achieve justice where HELD
The price of such a benefit is sometimes borne by the creditors, in conformity with the general philosophy of the circumstances warrant this. The courts’ approach is sometimes dictated by
The company was a mere sham (merely a front) and could not be used to avoid the employee’s contractual obligation not to solicit customers.
Companies Acts. (in that they cannot sue individual shareholders or directors) policy considerations and sometimes by the need to prevent the evasion of a
legal obligation or the use of the corporate form for fraudulent purposes. In DAIMLER v CONTINENTAL TYRE & RUBBER CO (1916) a company incorporated in the UK was owed money. When it sued the creditor for the debt,
But! the creditor argued that it would not repay the amount owed as this would be tantamount to “trading with the enemy” which was prohibited by law at the time. The
company argued that it was not an “enemy” company as it was incorporated in the UK.
It is sometimes the case that a strict application of the SALOMON principle may result in a situation where
the separate personality doctrine is likely to be abused or to lead to unjust consequences. In such circumstances, HELD
(4)
the courts and the legislature (Parliament) have intervened to lift the veil of incorporation with the result that a Control (shareholding) of the company was in “enemy” hands because lifting the veil revealed only one British shareholder whilst the majority members were
Veil Lifting at Common Law
company will not be treated as a separate legal entity (it is said that the veil is “lifted”, “pierced” or “set aside” to German. Thus, the debtor was under no obligation to repay the debt. (The veil was lifted to effectively give the company the same nationality as its members).
reveal the identity of shareholders – or directors - with a view to ascribing liability on these individuals if (Judicial Veil Lifting)
(1)
circumstances warrant this). In JONES v LIPMAN (1962) , X had entered into a contract with Y for the sale of X’s land. X then changed his mind and in order to avoid the contract he
Introduction formed a company to which he conveyed his land (arguing that as he was now no longer the owner, he could not comply with the contract).
HELD
CORPORATIONS AND LEGAL PERSONALITY
LIFTING THE VEIL OF INCORPORATION The company was a mere façade or front for X, so Y was entitled to specific performance to give him ownership of the land.
a) Absence of Trading Certificate (S767CA06)
Module 4.3
In the event that a public company commences trading without having previously obtained a trading certificate,
then by virtue of S767 of the Companies Act 2006 , the directors shall be personally liable for any loss of
damage suffered by a third party. (3)
Lifting the Veil We may have a situation where a parent company (holding company) owns all the issued share capital in other companies (which are thus wholly owned
(2) on Group Structures subsidiaries). In effect, the parent company controls all these companies and in real terms constitutes one economic/business entity which is structured in
a) Absence of Trading Veil Lifting Under Statute the form of independent sub-entities each with its own legal personality. In such circumstances, the parent company could effectively take advantage of its
Certificate (S767CA06) separate personality to enjoy the benefits of limited liability. The implications of this are that the parent company could channel higher-risk business
(Legislative Intervention) transactions through one of its wholly-owned subsidiaries. Consequently, the parent company’s assets would be secure in the event of the financial demise
b) Disqualified Director Engaging in Management (CDDA 1986) of the subsidiary in question.
b) Disqualified Director
Under the provisions of the Company Directors Disqualification Act 1986 , a “disqualified” director However:
participating in the management of a company shall be jointly and severally liable (along with the company) for the
Engaging in Management
company’s debts. (CDDA 1986) Notwithstanding the above, there have been instances where the courts have lifted the veil between a holding company and its subsidiaries
This legislature has neutralised or
limited the effects of the SALOMON
principle in a wide range of areas.
c) Fraudulent Trading Cases in Point
c) Fraudulent Trading (S213 IA 1986) (S213 IA 1986)

S213 of the Insolvency Act 1986 , was enacted to cover situations where incorporation is used as a ADAMS v CAPE INDUSTRIES (1990)
vehicle for fraud. This “fraudulent” trading provision provides that if in the course of the winding up of a d) Wrongful Trading
company it appears that any company business has been carried out with intent to defraud creditors (or other CAPE was a UK-registered corporation involved in asbestos mining operations in South Africa. The international marketing function was carried out through a
(S214 IA 1986) number of subsidiaries, one of which was CPC which was registered and carried on business in the USA. A court judgement was given against CPC and the
person) or for any fraudulent purpose, the individuals can be called upon to contribute to the debts of the
company. claimant sought to enforce it against Cape by arguing that the veil between CPC and Cape should be lifted accordingly.
HELD There were no special circumstances to indicate that CPC was a mere façade for CAPE. There was no indication of any “agency” situation as CPC
was an independent company under the control of the chief executive. Furthermore, the “economic reality” argument accepted in the case of DHN FOOD
DISTRIBUTORS would not be extended to cover this particular case. Effectively, the holding company (CAPE) could not be liable for its subsidiary’s (CPC)
d) Wrongful Trading (S214IA 1986) debts under the circumstances.
Unlike fraudulent trading, this does not require proof of an intent to defraud. Liability under this provision will arise if a Director , at some time before the commencement of the winding up of a company, knew
(subjective) or ought to have concluded (objective) that there was no reasonable prospect that the company would avoid going into liquidation, but nevertheless continued to trade. In such cases, directors are liable to The case of WOOLFSON v STRATHCLYDE REGIONAL COUNCIL (1978) adopted a more cautious approach than DHN and held that the veil will only
contribute to the debts of the company (Refer RE: PRODUCE MARKETING CONSORTIUM LTD, (No.2) (1989) where a company over a 7-year period gradually moved towards insolvency. The two directors be lifted where special circumstances exist indicating that it is a mere façade concealing the true facts.
continued to do business instead of going into liquidation when it became apparent that the company had reached the point of no return. Both were liable under S214 for wrongful trading and ordered to contribute £75000
towards the debts of the company).
IMPORTANT NOTE: Sections 213 and 214 have a slightly different impact on the SALOMON principle . S213 may embrace company shareholders and thereby affect their limited liability.
S214 refers to directors only although in small companies this can also indirectly affect shareholders who also happen to be Directors (thus limited liability is indirectly affected here).

DHN FOOD DISTRIBUTORS V LONDON BOROUGH OF TOWER HAMLETS (1976)

DHN HOLDING COMPANY Subsidiary X DHN, a parent company, owned a subsidiary company X which was not engaged in any business activities. DHN operated from premises
which were in fact owned by its subsidiary X. At some point a local authority decided to proceed with a compulsory acquisition of these
Operating from Not engaged in premises. In doing so however, the local authority declined to compensate DHN for disturbance (paid only to owner occupiers) on the
premises owned by basis that DHN was not the owner of the premises. DHN argued that, on the contrary, DHN and its subsidiary should be regarded as a
Local Authority business activities single economic entity for this purpose, thereby, in effect, entitling it to compensation as “owner”.
subsidiary
Same directors as HELD
Same directors as holding company DHN’s argument was accepted by the court and, as owner, was therefore entitled to compensation for disturbance.
subsidiary X
 CORPORATIONS AND LEGAL PERSONALITY
LEGAL FORMS OF BUSINESS
ORGANISATION
Module 4.4

This is the simplest legal form of business which is essentially a sole proprietorship or one-man business. Features include the following:
The Sole Trader

The sole trader himself and the sole trading business are one and the same thing – he himself is the business. An offshoot of this is that it is he who owns the assets
and it is he who will be personally responsible for the business debts.

The relative simplicity of this business form means there are no legal formalities, filing requirements or fees, thus dispensing with the need for professional advice.
 
Whilst a sole trader has the benefit of keeping the profits for himself, he is also liable for any losses that may accrue. The fact that he has unlimited liability would mean
that in the event of insolvent liquidation, the sole trader’s creditors would be able to institute claims on his personal assets.

The Partnership The partnership is defined by the Partnership Act 1892 as “the relationship” which subsists between persons carrying on a business in common with a view of
profit. Features include the following:

There are no formal legal filing requirements.

 
Partnerships are advantageous from the financing aspect in that it accommodates the pooling of economic resources by two or more persons (the maximum number of
partners since 2002, is unlimited).
 
The operative partnership agreement may be drafted or adapted to ensure a flexible organisational structure.
 
The provisions of the Partnership Act 1890 may have an adverse effect on persons who are in business together but are unaware that, in legal terms, they are in fact a
partnership.
 
Partners are jointly and severally liable for the debts of the partnership.

Limited Liability Partnership See relevant sections for details

(LLP)

Company See relevant sections for details

 CORPORATIONS AND LEGAL PERSONALITY
COMPANIES AND PARTNERSHIPS
A COMPARISON
Companies Module 4.5 Partnerships

Are created by registration and must have a written constitution in the form of There are no formalities involved to form a partnership. A written agreement between the partners is not necessary although,
1) Creation Formalities Articles of Association. for practical purposes, most desirable.

Do not have separate legal personality and this places the individual partners in a position whereby, in their personal
Have separate legal personality which enables it to: capacity, they will:

Own property. Own property themselves.

2) Personality
Contract in its own name. Be liable on partnership contracts

Sue and be sued in its own name. Be liable if sued.

The management function is undertaken by directors who need not be shareholders of the The management function can be undertaken by the partners themselves.
3) Management
company.

4) Agency Partners are regarded as agents of the partnership in relation to transacting the firm’s business in the usual way.
The shareholders of companies are not agents thereof (although directors are).

5) Return of Capital Generally speaking, companies are precluded from returning capital to its shareholders. Partners may withdraw capital

The company, as a separate legal entity (with unlimited liability) is liable for its debts whereas Partners are jointly and severally liable (in their personal capacity) for the partnership debts.
6) Liability
the shareholders will only be responsible for any unpaid portion on the price of their shares (if
company is limited by shares) or the amount they have undertaken to contribute (if limited by
guarantee) , as the case may be.

7) Tax As separate legal entities, are subject to corporation tax. The individual partners themselves will pay income tax in their personal capacities.

Are subject to a number of statutory requirements regarding the availability of financial and other Other than the need for declaration of taxable profits to the Inland Revenue, there are no disclosure requirements or any
8) Publicity
information to the public at large. obligation to publicise the affairs of the partnership business.

9) Dissolution Would require a formal liquidation procedure per relevant insolvency/winding-up legislation. Can simply be dissolved by agreement between the parties or may be automatically terminated upon the death or
bankruptcy of an individual partner (depending on the provisions of the partnership agreement, if any).

10) Borrowing Are able to create both fixed and floating charges as security for borrowing. Can only create fixed changes as security for borrowing.
 CORPORATIONS AND LEGAL PERSONALITY
PUBLIC AND PRIVATE COMPANIES - A COMPARISON
Module 4.6

Public Private

1. Definition Registered as a public company. Any company that is not a public company.

2. Directors Must have a minimum of two directors. Requires only one director.

3. Name Ends with the words “plc” or “public limited company”. Ends with the word “Ltd” or “limited”.

4. Capital Requires a minimum authorised capital of £50,000. There is no minimum authorised capital.

Capital may be raised by offering shares or debentures (securities) to the public for A private company is prohibited by law from offering its shares or debentures (securities) to the public for subscription.
subscription.

5. Secretary Must have a qualified secretary. No secretary is required.

6. Audit There is an ‘audit of accounts’ requirement for public companies. Audit is not a requirement if turnover is below £5,600,000.

7) Commencement of May only commence business following issuance of a trading certificate. May commence operations as soon as the registrar issues a certificate of incorporation.
Operations

8) Annual General An AGM must be held every year. An AGM need not be held at all.
Meeting

9) Identification Memorandum to incorporate a clause describing company as a “public company” There is no need for an identification clause in the memorandum.
 ( 1 ) Private Company
May be free-standing (independent) or ( 2 ) Public Company
subsidiaries of other companies. CORPORATIONS AND LEGAL PERSONALITY
May be free-standing (independent) or
Definition TYPES OF COMPANY subsidiaries of other companies.
Module 4.7
A private company is any company which is
not a public company.
Definition

Limited Company Unlimited Company

A public company is an entity which is
Limited by Shares formed by virtue of the Registrar of
Companies issuing a certificate that the
company has been registered as a public
Only a private company can be company. This will be done subject to the
In a company limited by shares, the
unlimited. This means member’s do not following:
shareholder’s liability is limited to the
enjoy limited liability so that in the event
amount, if any, unpaid on the nominal i) the name ends with the words
of liquidation, they will be obliged to pay
value of his shares. Thus, fully-paid “public limited company” or “plc”
as much as may be required to pay off
shares will not generate any further
the company’s debts. ii) the memorandum of association
liability on the part of the shareholder.
declares that it is to be a public
company
Limited by Guarantee Features
iii) the authorised capital of the
company must not be below £50,000

In a company limited by guarantee, the
liability of the shareholders is limited to
the amount they agree to contribute to
the assets in the event of winding up
(past members in the preceding year
can be liable if current members
default in this regard). This type of
company is appropriate where the
need to raise capital is not crucial and
the company is set up for non-profit
making purposes.
Not obliged to file accounts at the iv) it is a limited company
Registrar of Companies (unless
unlimited company is controlled by
one or more limited companies or
has a limited company as a
subsidiary
At liberty to buy its own shares.
Must have special articles of
association.
FOR A COMPARISON OF PUBLIC AND PRIVATE COMPANIES REFER TO Module 4.5
The application must be completed with the following information. This statement will include the following details:

Registered office particulars The number of shares.

Company name (g)
Statement to the effect that shareholders liability will be limited Statement
(a) The total nominal value of shares.
(by shares or guarantee, as the case may be). of Capital
Application for
Registration The total amount “paid-up” in respect of the shares.
Whether company is public or private.

CORPORATIONS AND
LEGAL PERSONALITY (f)
(b)
REGISTRATION Statement of If this is applicable (company is limited by guarantee), it must
Memorandum of Guarantee indicate the maximum amount that each member has undertaken to
The memorandum must be signed by all subscribers to the effect Association DOCUMENTS AND
contribute.
that they desire to form a company (by way of agreeing to INCORPORATION
subscribe for a minimum of one share). This document must be Module 4.8
signed by at least two persons in respect of a public company, (e)
and at least one person if a private company is being formed. (c) Statement of
Articles of Officers
Association
To include names of the first directors and, if applicable, the
The Articles are signed by the subscribers or if no articles are
(d)
company secretary (who duly consents to act in such capacity).
supplied, a statement in lieu of special articles will indicate that Declaration of
the model default articles will apply. The articles are, in effect, the Compliance
internal regulations of the company.

This is a declaration by director/secretary/solicitor confirming that

The Registrar of Companies will inspect all documents and if he is satisfied that the requirements of the Companies Act 2006 have been complied
the requirements of the Companies Act have been fulfilled, will proceed to issue with.
a certificate of incorporation which is conclusive evidence of such compliance
and reflects the existence of the company as of the date indicated therein.
(Refer JUBILEE COTTON MILLS v LEWIS (1924).

HOWEVER :

Whilst a business entity will be considered “incorporated” as from the date of If a company does business or borrows prior to obtaining a trading
issuance of the certificate of incorporation, a public company may not certificate, the 3rd party will be protected as the transaction is
commence business until such time as the Registrar issues a certificate of Consequences
of not Obtaining regarded as being valid.
entitlement to do business (“trading certificate”). This will only be forthcoming
after the company has submitted a statutory declaration to the Registrar, a Trading But!
incorporating the following particulars: Certificate The company, along with its officers commit a crime punishable by a
fine (and in respect of any transaction with a 3rd party, the directors
The nominal value of the company’s allotted share capital is at least (≥) £50,000. will be jointly and severally liable with the company).
That a minimum of 25% of the normal capital (+ all of any premium) has been
paid up (i.e. a minimum of £12, 500 paid-up capital).
Details of preliminary expenses and payments benefits to promoters.

REGISTER TYPE
i) Register of Members
(S113 Companies Act
2006)
ii) Register of Directors
(and Company Secretary,
if applicable)
iii) Register of Charges
(Given by the company, as
security for a loan, in its
capacity as “changor”)
iv) Register of Directors’ interests
in shares and debentures
(includes any interests of a
director’s spouse and any minor
children under the age of 18)
v) Register of Directors’
Residential Addresses
vi) Register of Debenture-Holders.
Note: Maintaining such a register
is not mandatory (i.e. it is not a
statutory requirement.)
vii) Minutes of General Meetings
of the Company
viii) Minutes of Directors’ and
Managers’ Meetings.
ix) Register of Written Resolutions
Note: Applicable to private
companies only.
CORPORATIONS AND LEGAL PERSONALITY
STATUTORY REGISTERS
Module 4.9
INFORMATION TO BE INCLUDED IN REGISTER PLACE AT WHICH REGISTER IS TO BE KEPT
Name of each member (including date of membership and date of cessation of membership).
Address of each member. Either at the registered office of the company or at
another specified location in the same country.
Shareholder class (where company has more than on class of issued shares).
Number of shares and amount paid up on each share (where company has share capital).
Name.
Service address (as opposed to residential address) – This may be the company’s registered office (must be submitted to the Registrar).
Nationality.
Registered office
Business occupation.
Date of birth.
Other Directorships (whether present or previous directorships held (within the preceding 5 years).
Corporate name and registered office (if director is a corporate body).
Type of charge(s) (fixed or floating). Registered office
Description of specific property charged.
Date of creation of charge.
The amount of the charge.
Name of the “chargee” entitled to the charge (the lender).
Particulars of the shares or debentures (as the case may be) and the applicable price paid.
Maintained with the Register of Members or
(Note: The directors are obliged to notify the company of any such interest within 5 days of becoming aware of this interest.
at the company’s registered office.
Thereafter, the company must enter same on a Register of Directors Interests within three days).
Not for public domain but accessible by the Registrar of Companies,
Directors’ Residential Addresses
some public bodies and credit reference agencies.
In the event that such a register is maintained, it should
be open to inspection as for the Register of Members
Relevant Particulars of Debentures
(generally kept as registered office).
Minutes (Note: Must be maintained for 10 years) Registered office
Minutes (Note: Must be maintained for 10 years) Registered office
Resolutions (pertaining to ad hoc matters) which are moved and passed by unanimous written agreement (signed by each member) and which
Registered office
effectively dispenses with the need for a full general meeting.
Note: Must be validated by a director or company secretary prior to being recorded in the register.
 CORPORATIONS AND LEGAL PERSONALITY
ANNUAL ACCOUNTS, RECORDS AND RETURNS
Module 4.10

(A) ANNUAL RETURN (B) ACCOUNTING RECORDS (C) ANNUAL ACCOUNTS/FINANCIAL STATEMENTS

It is a statutory requirement per the Companies Act that an annual return
(duly signed by a director or secretary) is made to the Registrar of
Companies within 28 days of the anniversary of incorporation (known as
the “return date”). The return must indicate the following particulars if the
company is limited by shares:
The registered office address.
If the address at which the register of members or register of
debenture holders is kept, differs from the registered office address,
then this must be stated.
A company has a statutory obligation to keep accounting records in accordance
with the provisions of the Companies Act 2006. Such records must be sufficient
to reflect and explain the company’s transactions and indicating with reasonable
accuracy the company’s financial position. The records should be such as to
enable the directors to provide a true and fair view of the company’s financial state
of affairs.
What should records contain?
i) daily entries of moneys paid/received
ii) company assets and liabilities
It is a statutory requirement for companies to prepare annual financial
statements (for each accounting reference period) comprising:
- a balance sheet and profit and loss account reflecting a true and fair
view of the company’s state of affairs
- directors’ report with respect to the company’s affairs, including:
directors’ names
recommended dividend (if any)

Type of company. iii) statement of stock significant events

iv) stocktaking statement to verify (iii) above

Company’s principal business activities.
Total number of issued shares along with their aggregate nominal
value.
Classes of shares, total shares per class and total nominal value.
Members’ names and addresses.
Names and addresses of officers (directors and secretary)
research and development activities
v) statement of goods bought and sold (barring retail sales) including details of
buyers and sellers likely future developments
(iii , iv and v above) only for companies engaged in dealing with goods. employees health and safety issues
Note: Accounting records must be maintained at the company’s registered office
(or such other location as determined by the directors) and be available for
inspection by the company’s officers. (Shareholders do not have statutory access
but may be permitted to inspect same by virtue of the Articles of Association.)

Date of birth, nationality, business occupation and (if applicable)

directors’ other directorships

Statement that the company has chosen to dispense with the filing of
accounts and/or holding Annual General Meetings (AGM’s) – if
applicable.
 The name of a public company must Apart from certain exempted
end with the words “public limited a) Public charitable companies, it is
company” or its abbreviation “plc”. Companies essential that companies
expressly indicate the fact that they
Continued in Module 4.15.2
are operating as entities with
b) Private “limited liability”.
Companies
The name of a private limited
company must end with the word
Per S77 CA 2006, a company is at liberty to change its name by passing a
“limited” or its abbreviation “ltd”.
(1) special resolution (subject to complying with the normal requirements regarding
company names). However, the resolution does not of itself change the company’s
Name to Reflect
name. The company then applies to the registrar and, if he has no objection, he
Limited Liability
issues a certificate of incorporation in the new name.

(5) Note:
Change of The change of name shall be considered effective as from the date of issue of this
Per S66 CA 2006, there is a prohibition against the use of a (2) CORPORATIONS AND LEGAL PERSONALITY Name certificate. Despite its change of name, a company will be regarded as being the
name which is the same as that of any existing company Same Name COMPANY NAMES same legal entity as it was prior to its name change.
appearing in the register/index of business names at the registry.
Module 4.11.1

What is regarded as the “same”?

(4)
Secretary of State’s
Names will be regarded as the same for this purpose even though there Power to Alter Name
may be minor differences such as “&” and “and”, or the addition of the (3)
word “the” in front of the name etc.
Names which
are unacceptable
Per S62 CA 2006, the Secretary of State has the authority to oblige a company to change
its name:

(i) Where it is the same as or too like a name already appearing in the index of company
The undermentioned categories of names are considered unacceptable : names at the Registry (change can only be made 12 months from incorporation or change of
name).
(i) Per S53 CA 2006, names which in the opinion of the Secretary of State
constitute a criminal offence or are offensive. (ii) Where the name tends to mislead as to the nature of its activities so that it might be
detrimental to the public (there is no time limit for any change in these circumstances).
(ii) Per S54 CA 2006, names which might suggest a connection with the
government or a local authority. (iii) Inaccurate information or assurances were given at the time of applying for a name (the
time limit for change is 5 years).
(iii) Per S26 of the Company & Business Names Regulations, the
approval of Secretary of State is required for the use of certain words such as
“England”, “Royal”, “Chartered”, “Insurance”, “University”, etc.
Under S69 CA 2006, it is possible for any person (not (6)
necessarily another company) to lodge an objection with a Having regard to the fact that there may be time-limits for the Secretary of
company names adjudicator (appointed by Secretary of State) if New Procedure (7) State to effect a change of name, (e.g. 12 months where name is “too like”
a company’s name is similar to a name in which an applicant Under Sections Passing-Off an existing name), a company that wishes to “challenge” another company’s
has goodwill. 69-74 of CA 2006 Action name has only one other remedy available in the form of a “passing-off”
action at common law, in the law of tort (a civil wrong).
Note:

Per S72 CA 2006, the adjudicator’s decision and reasons CORPORATIONS AND LEGAL PERSONALITY
must be published within 90 days. He then instructs the COMPANY NAMES What is “Passing-Off”?
offending company to change its name and if it fails to do so by a
Module 4.11.2
prescribed deadline, the adjudicator himself is empowered to
decide on a new name (offending company may appeal however A company which carries on business under a name calculated to
to a court). deceive the public by confusion with the name of an existing company will
commit the tort of passing-off.

Note:
It is essential to show that:
a) Where Confusion likely to Arise and Claim Successful
i)    The business carried on by the offending company is the same as
EWING v BUTTERCUP MARGARINE CO LTD (1917) Cases in Point: that of the claimant.

The claimants had a change of retail shops selling margarine and tea ii)    It must be likely that customers will be drawn towards the offending
under the name “The Buttercup Dairy Co”. The defendants had the same company because the public will effectively be deceived and
name and sold margarine as part of a wholesale operation. The thereby associate it with the claimant.
defendants argued that there would be no confusion as

i)            they were wholesales and the claimants were retailers b) Claim Unsuccessful c) Claim fails if Confusion Unlikely
In contrast to the BUTTERCUP case, a court has held that an action for
ii)           they operated only in London whereas the claimants were
passing-off cannot be used where a name is essentially a word in general In situations where the public is unlikely to be confused
active in Scotland and the North of England.
use: (notably where companies are engaged in entirely different
HELD - An injunction (a prohibitive court order) would be granted to the businesses) an action for “passing-off” is not likely to
AERATORS LTD v TOLLITT (1902) succeed:
claimant to prevent the defendant from trading in the name in question.
The court stated:
The claimant in this case sought an injunction to prevent the defendants (Refer DUNLOP PNEUMATIC TYRE CO LTD v
from registering a company name which included the word “Aerator” (on DUNLOP MOTOR CO LTD (1907)
i)    The defendants had authority under their Memorandum of
the basis that it would deceive the public as the word was associated with
Association, to run retail outlets (so there was a possibility that
the claimant company).
they would do so at some time in the future).
HELD - The claimant’s action failed as this was effectively seen as an
ii)   The claimant proposed to open branches in the South of England
attempt to monopolise a word (“Aerator”) in ordinary use.
at some time in the future, and this could generate confusion.
 CORPORATIONS AND LEGAL PERSONALITY Whilst both a public and private company require a certificate of incorporation, there is a
(2) further requirement in respect of public companies which, in addition to a certificate of
CERTIFICATE OF INCORPORATION
Trading Certificate incorporation, will also need a trading certificate from the registrar prior to being permitted to
& TRADING CERTIFICATE
(certificate of entitlement commence trading or to exercise borrowing powers.
Module 4.12
to do business)

(1) How is this obtained?

Certificate of
Incorporation

An application must be lodged (with the registrar), incorporating the following particulars:

i)     The nominal value of allotted share capital is not less than £50,000.
Upon receipt of the relevant registration documents, the registrar will inspect the
ii)    That each allotted share is paid up to at least ¼ of the nominal value and the whole of any
documents to verify whether the requirements of the Companies Act 2006
premium.
requirements have been duly complied with.
iii)   The preliminary expenses of the company and who has paid or is to pay them.
Note:
iv)    Any benefits given, or intended to be given, to promoters.
Per S15 CA 2006, once the certificate of incorporation has been issued, this will
serve as conclusive evidence that the relevant stipulations of the
Companies Act 2006, have been fulfilled.
Consequences of Trading (or borrowing) Without a Certificate?

Thus:
If a public company trades (or borrows) in the absence of a trade certificate:

For all intents and purposes, the company shall be regarded as being in existence
as from the date indicated in the certificate of incorporation
.
a)  The company as well as any defaulting officer commits a crime and is subject to a fine.
b)  It will be a ground for winding up the company under S122 of the Insolvency Act 1986 (if
the trading certificate is not obtained within one year of incorporation).

c)  The directors will be jointly and severally liable with the company if the company enters into a
transaction with a third party (contracts are still binding on the company).

In the absence of any statutory definition, we turn to case law which regards a promoter as a person
who “undertakes to form a company and who takes the necessary steps to accomplish that
purpose”.
(Refer TWYCROSS v GRANT 1878).
Thus!
A promoter would be anyone who takes procedural steps to form the company and/or anyone who
undertakes preparatory business activities for the company which is to be incorporated (e.g.
registration of company, negotiating pre-incorporation contracts, finding initial directors and
shareholders, issuing prospectus (if public company).
But Note:
A person who acts in a purely professional capacity (e.g. solicitor or accountant) would not be
regarded as a promoter
(Refer RE GREAT WHEAL POLGOOTH CO 1883).
These are contracts entered into by promoters in the company’s name or on its behalf) prior to
registration of the company. The problem here is that the company itself only comes into
existence when the relevant certificate of incorporation is issued by the Registrar. Thus until it is
incorporated, it cannot be contractually bound by any agreement that the promoters may have
concluded in its name or on its behalf.
Note:
Such contracts may, for example, relate to the leasing of premises or connection to electricity,
telephone and other utilities so that the company would be more or less ready to operate
effectively, immediately after the incorporation process is completed.
The position is appropriately summarised by ROVER INTERNATIONAL LTD v CANNON
FILM (1987) which held that “if a person does not exist they cannot contract”.
Furthermore!
Once a company is formed, it will, in effect, be a stranger to any prior contract and the
principles of privity will prevent the company from having any rights or liabilities thereunder.
In addition, under principles of agency , the company cannot ratify a contract because a
person cannot be an agent of a principal that does not exist. ( Refer KELNER v BAXTER
1866 ) where the promoters of a hotel contracted to buy wine from a supplier. After incorporation,
the hotel ratified this transaction. The wine was consumed but the hotel went into liquidation
before the supplier was paid. When the promoters were sued, they claimed the hotel was liable
due to the ratification.
HELD – Contract was not capable of being ratified as company was not in existence
when the wine contract was concluded.
Background :
(3)
CORPORATIONS AND LEGAL PERSONALITY In the event that a promoter is to be the sole owner of the company to be formed, he may obtain
(1) Promoters as
PROMOTERS an advantage from his position as promoter simply because there is no likelihood of any conflict
Definition Fiduciaries
Module 4.13 of interest. (SALOMON v SALOMON ) illustrated a situation where the promoter sold his
existing business to a newly-formed company at an inflated value, in return for the total share
capital. There was no prospect of anyone else being prejudiced by this however).
But!
(2)
Where a promoter is involved in a situation where other shareholders will “come into the
Pre-Incorporation
picture”, the promoter is in a fiduciary position as he effectively “undertakes to act for and
Contracts Duties of Promoters on behalf of another person in some particular matter or matters”. (Finn 1977)
SEE Module 4.9
Note:
A promoter is not considered to be an agent of the company he is promoting simply
because a company which has not yet been, (or is in the process of being,) formed is, in effect,
a) Background a non-existent principal. Furthermore, a promoter is not a trustee in this context.
(Refer RE LEEDS & HANLEY THEATRES OF VARIETIES LTD 1902).
What is a Fiduciary?
c) Promoters Protection
This can perhaps be understood in the context of the nature of the specific obligations that
b) The legal position is a fiduciary owes to his principal. In 2004, Penner described fiduciary duties as those
reflected by both common owed to a 3 rd party to act with “loyalty and good faith in dealings which affect that person”.
law principles and statutory Penner broadly explained this as a duty on the part of a fiduciary to act “solely with the
intervention (which interests of his principal in mind” and that neither the fiduciary’s own self-interests or the
reinforces the common law). interests of others should be allowed to conflict with the principal’s best interests.
(i) Common Law (ii) Statute
What can a promoter do to protect his position in respect of pre-incorporation contract?
to refrain from concluding an agreement until the company is formed (at which time it can enter into a
S51 of the Companies Act 2006 , reinforces the common law position by providing that contract for itself)
subject to any agreement to the contrary, the person making the contract is personally
liable.
after incorporation the company and the other contracting party substitute the initial pre-incorporation
A case in point. contract with a new contract on similar terms (this is known as “novation”)
In PHONOGRAM LTD v LANE (1981) the court held that when the promoter signed assignment (transfer) of the contract
a pre-incorporation agreement “for and on behalf of F Ltd”, this was not sufficient for
regarding it as “agreement to the contrary”. Thus the promoter was personally agreement with the company to the effect that the promoter will not be personally liable
liable. (The court emphasised that to exclude personal liability under S51 CA06 (S51CA06)
clear and express words were needed).
buying a “ready-made” off-the-shelf company which can trade immediately (although this is a relatively
(Note: A person who is personally liable under S51 CA06 will also be able to enforce
cheaper step to take, it will involve alteration of articles, name etc.)
the contract per BRAYMIST LTD v WEST FINANCE 2002 ).
promoter securing an option (by payment of a fee) from the other party, which can be exercised when
the company is formed.

Where a promoter is in breach of his fiduciary duty, this renders the
contract voidable at the company’s option.
Voidable?
The company has the option to either rescind (cancel) the
contract or to affirm it.
However?
There are the following limitations on the right to rescind:
a)  the right to rescind will be lost if the company affirms
the contract (either by its actions or expressly)
Rescission
(Re: CAPE BRETON CO (1885)).
b)  The right to rescind will be lost if the company delays in
exercising its right to rescind.
(LEAF v INTERNATIONAL GALLERIES 1950).
c)  The right to rescind calls for restoring the parties to their
original position.
But Note:
This will not however prevent the company from suing the promoter
to account for the secret profit.
Damages
The company must prove that it has suffered loss in
order to succeed in a claim for damages (this “loss”
turns on whether the company paid an excessive
price).
CORPORATIONS AND LEGAL PERSONALITY A promoter must not make a secret profit from his position. Essentially, this duty seeks
PROMOTERS to avoid a situation where a promoter might sell property (either owned by him or in
Module 4.14 which he has an interest) to the company, from which he will make a profit. Under such
circumstances, it is imperative that the company is aware of this.
HOW?
Promoters are required to make full disclosure of any such profit to an independent
The Fiduciary Duties Board of Directors once the company is incorporated.
Not to Make a Secret Profit (Re LADY FORREST GOLD MINE LTD 1901).
(Duty of Disclosure)
(a) What are the consequences of non-disclosure?
Failure of the promoter to disclose all material facts of a transaction to an independent board
would result in a voidable contract whereby the company could choose to accept the transaction
or cancel it:
The Fiduciary Duties A case in point
Remedies for Breach of In ERLANGER v NEW SOMBRERO PHOSPHATE CO (1878) a syndicate bought a mine
Duty of Disclosure for £55000 then formed a company to which they sold the mine (through a nominee) for
£100,000. The syndicate did not disclose their interest in the contract. When the company’s
(b) operations encountered problems, the shareholders dismissed the original directors and the
new board instituted a claim and rescinded the sale contract.
(c)
[Note: In SALOMON v SALOMON 1897 , the court held that if for the purposes of disclosure,
Recovery
the board was not independent, it would suffice if disclosure of all material facts were made to
of Profit
the original shareholders. This was later qualified in
GLUCKSTEIN v BARNES where it was held that in such a case the original shareholders
would have to be truly independent and not a ploy to defraud the investing public].
If the company elects not to rescind, but wishes
to keep the property, then the “recovery of
profit” remedy may be appropriate. Similarly, it
is a useful remedy if it cannot establish loss
(paying excessive price) for the purposes of
instituting a claim for damages.
The Articles are essentially internal rules which govern the running of a
company. Anyone who forms a company is at liberty to draft their own rules. If they do CORPORATIONS AND S21 of the Companies Act 2006 allows for the alteration of the articles, which is normally done by passing
(1) a special resolution (75% majority) at a general meeting. The amended articles must be filed with the
not do so, then the so-called “Model Articles” will apply. (S19 CA2006) LEGAL PERSONALITY
Introduction Registrar of Companies within 15 days (together with a signed copy of the relevant special resolution).
ARTICLES OF ASSOCIATION
In effect, the model articles will apply: Module 4.15 [Note: As will be explained later, this leads to a rather odd situation whereby the S33 statutory contract
i)      when no articles are submitted for registration can be changed without the unanimous consent of the parties.

(2)
ii)     when the special articles submitted for registration do not exclude or modify the Alteration
model/default articles. of Articles A conflict may arise where the majority of shareholders seek to alter the articles with a view to securing an
Restrictions
unfair advantage for themselves (as opposed to making the changes for the ultimate benefit of the company
on Alterations
In essence, the Articles provide for the operation of two organs or committees to run the – even if this is somewhat detrimental to a minority).
company, namely:
THUS!
i)      the general meeting (which is the shareholders’ committee or organ) In view of this possibility, there is a restriction on member’s ability to alter the Articles.

ii) the board of directors (which is the management committee or organ ) NAMELY!
effectively allocate powers to one or other of these organs committees (this is i)     Per S22 of the Companies Act 2006 , a specific procedure may be needed to alter the articles in
the most important function of The Articles). (Both case law and statutory law certain circumstances. (Thus, for example, unanimity in voting may be called for, thereby effectively
cast further light on the operation and application of the articles). “entrenching” the articles). Generally, a so-called provision for entrenchment ensures that specific
provisions may be amended or repealed only if certain stipulated conditions or procedures are
complied with, that are more restrictive than the normal special resolution process.
SIDEBOTTOM v KERSHAW, LEESE & CO (1920)
The court confirmed the validity of an alteration which was effected to dismiss a member who ii)    Per S25 of the Companies Act 2006 , an existing member is not bound by any alteration to the
engaged in business activities which competed with those of the company. articles which increases his liability to contribute capital unless otherwise agreed prior to or
subsequent to the alteration.

SOUTHERN FOUNDRIES LTD v SHIRLAW (1940)
The articles were altered to empower the holding company to remove the
managing director (M.D.) of the subsidiary. This effectively meant that the
company was now in breach of its contract of employment with the M.D.
iii)   At common law, it has been established that any alteration to the articles must be effected in
Cases in Point GOOD FAITH ("BONE FIDE"), FOR THE BENEFIT OF THE COMPANY AS A WHOLE.
Before reviewing case authority on this so-called “bona fide” test, it would be worth noting that,
in essence, the courts have tried to strike a balance between the following key considerations:

HELD a)  The fact that a majority has the right to alter the articles even though a minority may regard such
alteration as being contrary to its interests.
Even so, the alteration was valid, but the company was liable in damages b)  The fact that a minority should have the right to be afforded protection against any alteration
for breach of the operative service contract with the M.D. designed to benefit the majority (as opposed to the company) and which unfairly discriminates against
the minority.

ALLEN v GOLD REEFS OF WEST AFRICA LTD (1900)

BROWN v BRITISH ABRASIVE WHEEL CO (1919)
The court laid down the principle that the power to alter the articles
must be exercised “bona fide for the benefit of the company as a
A public company urgently required capital. Shareholders GREENHALGH v ARDERNE CINEMAS LTD (1950)
who held 98% of the shares agreed to assist provided they The articles provided for the existing members’ right of first refusal of shares that another member wanted to transfer (each
whole” because the majority effectively had the power to impose its
could buy out the 2% minority. However, the minority member had right of premption). The majority sought to change this provision in the articles so that they could facilitate the
will upon the minority.
declined to sell and this prompted the majority to propose a admission of an outsider to become a shareholder (in the belief that this was in the interests of the company).
special resolution for alteration of the articles to provide i.e. The majority who voted for the alteration wanted to avoid having to offer their shares to the claimant before selling them to a
Whilst this general test for determining the validity of an alteration
that any shareholder would be obliged to transfer his non-member.
was essentially a single principle, it comprised the two elements of
shares upon receipt of a written request from members
“good faith” and “benefit”.
holding 90% of the shares. HELD:

HELD: The alteration was permitted as this would enable the claimant himself to sell to an outsider without the need to offer the shares to
(Per the facts of the ALLEN case, the court held that the company
Whilst the majority were considered to have acted in good other existing shareholders. The court pointed out:
had the power to change its articles to extend a lien (for the debts
faith, such an alteration was only for the benefit of the
and liabilities of members) covering partly paid shares to also cover
majority and not for the company as a whole . 1. The "bona fide" test was subjective in terms of what did the majority believe?
fully paid-up shares.)

2. "The company as a whole" in this context means the general body of shareholders. Test is whether every individual
hypothetical member would in the honest opinion of the majority benefit from the alteration.
 This is an unusual contract because:
Per S33 of the Companies Act 2006 , the constitution
CORPORATIONS AND LEGAL PERSONALITY
of the company contractually binds the members of the
ARTICLES OF ASSOCIATION a) it can be periodically varied by way of altering the
company and the company itself.
Module 4.16 articles by special resolution (75% members’ vote)
How? b) it binds parties that are not privy to it (e.g. future
  (b) Unique Features shareholders).
The Constitution (internal rules called Articles + any (a) Contractual
of Contract
objects clause limiting power of the company) effectively Effect
LEGAL EFFECT OF THE
creates a STATUTORY CONTRACT between: COMPANY CONSTITUTION
(CONTRACT OF MEMBERSHIP)
In BROWNE v LA TRINIDAD (1887) , the court held that the
right to be a director of a company was an outsider right.
(i) (ii)
Contract Between Contract Between
The Members Themselves Each Member and the Company
But: Articles may have evidential role.
In NEW BRITISH IRON CO., ex parte BECKWITH (1892)
No enforceable contract in the articles were regarded only as evidence of a contract
RAYFIELD v HANDS (1960) There is n o enforceable contract in respect of respect of non-member rights that directors were to be paid £1000 on taking office.
corporate right (as opposed to personal right). (“outsider rights”).
The Articles provided that directors had to be
members (so they would be required to buy The question of whether a member can sue to BUT NOTE
shares from any member wishing to sell). A enforce the contract will depend on whether the BEATTIE v E&F BEATTIE LTD (1938)
member sought to enforce this. breach is a wrong to the company or a wrong to The articles provided for member disputes to be referred
the individual. to arbitration. A director (also a member) was sued by the
HELD – There was a contract between the company to recover moneys which were allegedly
members themselves (“inter se”) which was THUS irregularly paid to him. The director tried to enforce the
directly enforceable by one member against A member can enforce a contract against the Case Showing Member Can article and refer the claim to arbitration.
another. company directly only if the article constitutes a Enforce Against Company
personal right (.e.g voting right, share HELD – He could not do so because he was acting in his
transfer right, pre-emption right , dividend right capacity as director and not a member.
etc.). PENDER v LUSHINGTON (1877)
Per the Articles for every ten shares, a member
Case Showing a Company Can Enforce Against Member was entitled to one vote, subject to each member
being limited to 100 votes. Once member owned
more than 1000 shares and in order not to ELEY v POSITIVE GOVERNMENT SECURITY LIFE
HICKMAN v KENT OR ROMNEY MARSH SHEEPBREEDERS ASSOCIATION (1920) circumvent the 100 maximum vote limitation, ASSURANCE CO (1876)
The company’s articles provided that all disputes between the company and its members were to be transferred shares to a nominee, duly instructing The articles provided that a member was appointed as the
referred to arbitration. One member instituted court proceedings (instead of arbitration) when a him how to vote. However, the nominees were company’s lawyer. However, the member was not so appointed
dispute arose. The company sought to enforce the arbitration clause in the Articles. rejected by the chairman. and sued for breach of contract.

HELD: The articles were contractually binding between the members and the company. The court HELD – The nominee could enforce his right to HELD – Member could not sue as there was no contract between
proceedings were stayed (stopped) accordingly. vote and succeeded in his claim against the the member as lawyer and the company (this was an “outsider
company. right”).