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By far the most usual and most important type of business that we deal with is the corporate body, or as it is usually referred to, the limited company.
The present day company is formed under the Companies Acts. One of the main features of the 1967 Act was the abolition of the private exempt company, leaving in its place two main types of companies, these being the private and public company. The difference between these is that the Directors of a private company, by virtue of its Articles of Association have the power to restrict the transfer of its shares. Any veto so made must be within 2 months and conveyed in writing to the Transferee, it is also prohibited from inviting the public to subscribe to its shares. Apart from these differences, they both have to fulfil identical requirements as laid down by the Companies Act.
Creation of a Corporate Body
A corporate body may be formed by an existing limited company or by individuals and providing it satisfies the Companies Act, it is given a certificate of registration and henceforth takes on a corporate personality which may be described so.
The company in law is a different person altogether from the members, so Jones & Co. Limited is an entirely different person from Mr. Jones even though he started it and owns all the shares. The property is also the property of Jones & Co. Limited and not Mr. Jones.
It should always be borne in mind that limited liability companies are usually formed with the objective of limiting personal liability and to achieve this objective the law recognises a corporate personality. A company is therefore regarded as an entity, that is separate from its members.
One of the main benefits of the 1967 Companies Act as far as creditors are concerned, is that all limited companies are required to file with the Registrar of Companies a copy of their annual accounts. Before balance sheets were available credit assessment was based among other facts on the amount of capital the company had issued. Generally speaking the more capital issued the greater the degree of confidence engendered (Capital requirement is related to a company's undertaking and it is an unfortunate fact that many companies are under-capitalised even though it may look substantial on paper). However, where capital appeared substantial in relation to the credit required, and providing there was nothing else untoward, one felt confident that the credit sought was justified. Unfortunately judgements based on this principle were not always correct, and many anomalies were created, for example, small paid up capital small amount of credit, large capital large credit. As we know only too well, both large and small companies do go into liquidation and one of the contributing factors is the taking on of too much work with insufficient capital. In other words over-trading
Registration
Before a company obtains corporate identity it must satisfy the Registrar that it has met the requirements of the 1967/85 Companies Act. Once a company satisfies the Registrar that the requirements of the Act have been met, it is granted a certificate of incorporation. These requirements would include:
From receipt of the Certificate of Incorporation a company may commence trading.
Certificate of Incorporation
As stated, a company on becoming registered is a legal entity that is quite separate from its members and Directors. This means that the company is responsible to itself for its acts and dealings.
Memorandum of Association
The memorandum of association defines the company's powers. Its purpose enables shareholders, creditors and others who deal with the company to know what it is permitted to do. The memorandum also states:
Name of the Company
Although the name of a company is unique, it may be changed at any time providing that it has passed a Special Resolution and that the name is acceptable to the Registrar of Companies who, having satisfied himself that the name is in order, grants a certificate showing the change in the company's name.
(A company is unable to trade in another name until a certificate has been granted.)
Situation of Registered Office
Although both Scottish and English companies are subject to the Companies Acts, there are slight variations that are applicable to those companies registered in Scotland. Where a company has its registered office in Scotland, that company is deemed to be registered in Scotland and is subject to Scottish law. Applications to inspect the company's file must be made through the Registrar of Companies, Edinburgh.
Objectives
These are a statement of the purpose of the company and are extremely important as a company can do nothing outside the objects given in the memorandum, anything done so is void. The significance of this is in the ultra vires doctrine which means that a company formed with the principal object of selling ice-cream which subsequently contracts to erect a building that is not for its own purpose, the contracts can never be binding on the company and is void.
Share Capital
The initial share capital of a company and its sub-division is shown in the Memorandum of Association.
Every trading company has an implied power to borrow money, and as such a company's assets may be charged as security for monies so borrowed.
Subscribers
Every company before incorporation must have subscribers who must subscribe to at least one share of the company's capital.
The duties of a subscriber are:
Subscribers are generally found to be the solicitors or accountants engaged in the formation of the company, and usually act as caretakers until such time as Directors are appointed.
Articles of AssociationAs the memorandum of association tells us what the company may deal in, its share capital and so on, the Articles of Association tell us the rights of the members of the company and also the powers and numbers of Directors, and whether or not Directors may on their own behalf charge the company's assets.
Registered Office
A company must, from the day it commences business have a registered office. The purpose of the registered office is to enable a company to receive documents, these can be served on the company by either leaving or sending them by post. When serving legal documents it is not necessary to use registered post, and it is advisable to use normal first class letter post.
Directors
Public companies must have at least two Directors but a private company need only have one, providing that Director does not also act as Secretary.
Although Directors have a duty to manage a company's affairs, they are only the agents of a company and as such have no personal liability (except for shares held) for the debts of the company. This from a creditor's viewpoint is a weakness in the Companies Act as it allows the Directors of a failed company to form another company now well known as the Phoenix Syndrome
Secretaries
A good deal of confusion exists about the role of company secretaries. A secretary is a servant of the company and his position is that he has to do what he is told, therefore, we should not assume that they have any authority to either represent or bind a company by contract. There are exceptions of course, but these will be on an individual company basis.
Nominal Capital
Nominal capital (sometimes referred to as authorised capital) is that capital which the company is allowed to issue. This capital may be increased by a Resolution of the Board and the Registrar of Companies must be notified in the Annual Return.
It should be borne in mind that a company is not liable for that part of its nominal capital which has not been issued, unless there is a charge on the company's assets which specifically includes uncalled capital.
Annual Return
Due to the nature of a corporate body, a measure of protection is afforded the creditor by the Companies Act which states that beside the initial requirements of registration, every company must notify the Registrar when there are changes in the nominal or issued capital, details of the shareholders, Directors' appointments together with details of other Directorship held and changes in the registered office.
Companies limited by guarantee and unlimited companies
A company limited by guarantee is a registered company in which the liability of the members is limited to such amounts as they respectively undertake to contribute to the assets of the company in the event of it being wound up. A company limited by guarantee may be formed either with or without a share capital. The majority of such companies are formed to incorporate professional trade and research associations, or clubs supported by annual subscription.