Chapter 10

Formation of company

Question Asked recently

In relation to company law:
(a) state, and explain the purpose of, the
various registers that have to be kept by
a company. (4 marks)
(b) describe what accounting records will
have to be produced and maintained by a
company. (6 marks) (10 marks) Dec 2010
Explain the documents necessary, and
the procedure to be followed, in
registering a public limited company.(10
marks) June 2010

Question Asked recently

In relation to the formation of a
company explain:
(a) the role and duties of promoters,
and how they are regulated; (5
marks)
(b) a pre-incorporation contract, and
its legal consequences. (5 marks)
June 2011

Promoters (Definition )
There is No Statutory Definition of a
Promoter
According to case law , Parson who
'undertakes to form a company, and who
takes the necessary steps to accomplish
that purpose.
The definition excludes peoples just
acting in their Professional Capacity, such
as accountant or Solicitor

Duties of promoter
A Promoter is under a fiduciary duty to :
1) Disclose any interest in transaction
(Personal Interest) Not to make Secret
Profit
2) Disclose any Benefits Acquired to
independent board or shareholder

If the promoter makes any Secret

Profit, the company may :
1) Rescind (To make void) the
contract(but not always possible if
third party rights accrued)
2) Obtain Damages (Prove loss by
company)
3) Recover the Profits (Prove failure to
disclose profit from transaction.

Pre-Incorporation Contract
Is a contract where a person enters into a
contract before a company has been
formed.
Position at Common Law :
A Company, prior to its incorporation, does
not have contractual capacity, and
After its formation it cannot ratify or
formally adopt a pre-incorporation contract
The promoter is therefore personally liable
under any such contract.

Kelner v Baxter
Fact :
A,B and C entered into a contract with the
claimant to purchase goods on Behalf of
the proposed Royal Hotel Co. The goods
were supplied and used in the business.
Shortly after incorporation the company
collapsed
Held :
Royal Hotel Co. was not bound by the
contract Neither could it ratify the
contract after incorporation

How promoter can negate(Protect) liability

Clear and express words are needed in order to
negate(To make ineffective or invalid, deny)
liability
The Promoter can only protect his position by :
1) Agreeing with the company that there is no
personal liability for the promoter
2) Postponing Finalizing contracts until the
company is formed.
3) Entering into an agreement by novation
(Discharging the original contract by replacing
with the New one)
4) Buying an 'off-the shelf' company , so it is
ready to contract

Off-the-shelf Company
An off the shelf company is one that has
already been formed. Buying off
the shelf has a number of advantages as
follows:
Advantages :
Cheap and Simple
Can Trade Immediately
No problem in Pre-incorporation Contracts.
Disadvantages :
Article are to be amended
Name of the company may be changed.

Registration Procedure
The following must be submitted to the
Registrar in order to form a company:
Application for Registration
Application form must include :
1) The proposed name of the company
2) Whether the members will have limited
liability (by shares or guarantee)
3) Whether the company is to be private or
public
4) Details of the registered office

Registration Procedure
Memorandum of Association
Used to be a more important document under
previous company legislation.
Signed by all subscribers and stating that they
wish to form a company and agree to become
members of the company.
In relation to a company limited by shares, the
memorandum provides evidence of the
members' agreement to take at least one
share each in the company.
Is not possible to amend or update the
memorandum of a company formed under
CA06.

Registration Procedure
Article of association
Specific clause E.g. No Director can
be a Shareholder
To Change an Article at least 2/3
resolution should be passed.

Registration Procedure

Statement of capital and initial shareholdings

'Snapshot' of a company's share capital at the point of
registration
This must state :
1) Number of Shares
2) Aggregate nominal value
3) How mush has been paid up
Statement of Guarantee
State the Max. amount each member Guarantees to contributes
in a winding up.
Statement of Proposed Officers
Details of the first directors (Company Secretary, if any)
Statement of Compliance
Provides confirmation that CA06 has been complied with
Registration Fee
Currently Pound 40 Approximately.

Registrar's Duties
On receipt of the above documents the
registrar must :
Inspect the documents
Make sure whether all the requirement of
CA06 are met.
Issue certificate of incorporation
Company exists from the date on the
certificate of incorporation
Issue trading certificate to public
companies

Trading Certificate - Public Companies only

A plc cannot commence trading until the
registrar has issued a trading certificate
In order to obtain a trading certificate, an
application must be made to the registrar
which states :
1) Allotted (Issued) share capital > Pound
50,000
2) At least a quarter of the nominal value and
All of any premium have been paid up
3) Amount of preliminary expenses
4) Benefits given or to be given to promoters

If it Trades before the certificate is Issued.

1) Company and any officer in default are

liable to a fine.
2) Criminal offence to carry on business,
but any contracts are still binding on the
company
3) Directors are personally liable if the
company defaults within 21 days of due
date.
4) Valid grounds for winding up if certificate
not obtained within one year

Statutory books , Returns and

Records

Register of Member
Register of Directors
Register of Charges
Register of debenture holder

Register of members
Names, addresses, date became/ceased,
number of shares, class of share, amount
paid up.
Any member of the company can inspect
the register without charge. A member of
the public has the right of inspection but
must pay.

Register of directors
This must include the name, occupation, nationality and date of
birth if the director is an individual. If the director is a corporate
body, the corporate name and registered office must be stated.

The register should now contain service addresses rather than

details of the directors residential addresses. The service
address can be simply the companys registered office.

The company must also keep a separate register of the directors
residential addresses. Both the service and the residential
addresses will need to be supplied to the Registrar of Companies.

The residential addresses will be withheld from the public

register. However, they will generally remain available to the
Registrar and certain specified public bodies and credit
reference agencies.

Register of charges
This register contains details of fixed or
floating charges created over the company's
property).
The register will have details of the name of
chargee, type of charge, brief description of
property charged, amount and date created.
The company must also keep copies of every
instrument creating a charge at its registered
office or some other place of which the
Registrar has been notified.
Any member or creditor may inspect the
register free of charge, any other member of
the public can inspect for a fee.

Register of debenture holder

Name of debenture holder
Amount given
Date of return
Interest rate
Security

Annual Return
The annual return must be filed with the registrar
annually within 28 days of the return date (which
is the anniversary of incorporation). The return
must be signed by a director or a secretary.
the address of the company's registered office
the type of company
the company's principal business activities
details of directors and company secretary where
applicable
a statement of capital which states the total
number of shares of the company, the aggregate
nominal value of the shares and the amount paid
up and unpaid on each share

Annual returns
for each class of shares, the right of
those shares, the total number of shares
in that class and their total nominal value
details of the members of the company
as at the return date
details of members who have ceased to
become members since the last return
was made
details of the number of shares of each
class held by members at the return date

Accounting Records
The company must keep accounting records
containing sufficient information to show and
explain the companys transactions and its
financial position.
At any time it should be possible:
to disclose with reasonable accuracy the
company's financial position at intervals of not
more than six months
for the directors to ensure that any accounts
that need to be prepared comply with
Companies Act 2006 and International
Accounting Standards.

Accounting Records
In particular the records must show:
1) daily entries of all money received and
spent
2) a record of assets and liabilities
3) statement of stocks at end of the
financial year to back up the above
4) statements of stocktaking t
5) statements of all goods sold and
purchased, showing the goods and the
buyers and sellers (except in the retail
trade).

Accounting Records
Accounting records must be kept for three years in
the case of a private company and six years in that
of a public one. They should be kept at the
company's registered office or at some other place
thought fit by the directors.
Failure to keep sufficient accounting records is an
offence by the officers in default.
Annual financial statements
Companies are required to produce annual financial
statements including:
balance sheet/statement of financial position and
profit and loss account/statement of comprehensive
income showing true and fair view
directors report stating the amount of any dividend
and likely future developments.

Question 1
(a) List and explain the purpose of the
various registers that will have to be kept
by the company. (5 marks)
(b) Describe what accounting records will
have to be maintained by the company.
(5 marks)
(Total: 10 marks)

Question 2
Albert and Edward were the promoters and subscribers
to the memorandum of a company that was registered
on 1 June 20X5 under the name Superspeed Ltd. The
certificate of incorporation issued by the registrar, in
error stated the registration date as 10 June 20X5.
Albert had contracted with Typo Ltd on 28 May 20X5
for the supply of stationery by Typo Ltd. On 2 June the
company had transferred shares to Jennifer.
Required:
(a) to advise Albert and Edward as to whether
Superspeed Ltd is bound by the contract with
Typo Ltd as Edward has found a cheaper source,
and (5 marks)
(b) to advise Jennifer on the validity of the
transfer of shares. (5 marks)

Answer
Albert has contracted with Typo Ltd before Superspeed Ltd received its certificate of
incorporation. This therefore is a pre-incorporation contract. s51 CA06 provides that
a contract which purports to be made on behalf of a company not yet formed has
effect as one made with the person purporting to act on behalf of the company and
he is personally liable on it subject to any agreement to the contrary. In short, the
person acting on behalf of the future company must contract out of personal
liability. Albert has not done so, therefore he is personally liable on the contract.
Superspeed Ltd is not liable and can contract with a cheaper source because it was
not bound by the contract anyway.

(b) The transfer of shares to Jennifer is dependent on whether there was a company
in existence whose shares could be transferred to Jennifer. Although Albert and
Edward had been led to believe the incorporation date was 1 June, the certificate
states 10 June. There are two matters to be considered. First there is the legal status
of the certificate of incorporation. S15 CA06 states the issue of a certificate is
conclusive evidence that the requirements of the Act in respect of matters
precedent and incidental to the registration have been complied with. Secondly, if
there are errors in the formation procedure or an error on the certificate itself, Jubilee
Cotton Mills Ltd v Lewis (1924) held the view that the date on the certificate was the
significant date. Applying those principles to the transfer of shares to Jennifer
it becomes clear that the company had not yet been incorporated and therefore the
transfer, in law, could not occur. Any payment Jennifer gave was made under mistake
and is recoverable. Should the company and Jennifer still wish her to be a member,
the transfer should be authorized at a directors meeting according to Superspeeds
articles.