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ACCA Paper F4
Corporate and Business Law
For exams in 2010

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ACCA F4 Corporate and Business Law

ExPedite Notes

Chapter 10

Company Formation and Constitution

The examiner has stated that in the exam, you may be required to: 1. 2. 3. 4. 5. 6. 7. 8. Explain the role and duties of company promoters (application level). Describe the procedure for registering companies, both public and private (knowledge level). Describe the statutory books, records and returns that companies must keep or make (knowledge level). Explain the content and effect of the memorandum of association (application level). Describe the content and effect of Table A articles of association (knowledge level). Analyse the effect of a companys constitutional documents (application level). Explain how articles of association can be changed (application level). Explain the controls over the names that companies may or may not use (application level).

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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ACCA F4 Corporate and Business Law

ExPedite Notes

Note that these requirements were written before the enactment of the Companies Act 2006. Some are now outdated, such as the reference to Table A articles (which are now given by a statutory instrument referred to in s.20 CA 2006).

Company Formation

Under the Companies Act 2006, formation of a company is very simple. The procedure is given below. One or more persons writes a memorandum of association stating that they wish to form a company under the Companies Act 2006. These people are called the subscribers. This is then sent with the registration documents (which are available for free download at www.companieshouse.gov.uk), a statement of compliance with the necessary rules and the registration fee, which is currently 20 or 80 for same day registration. The memorandum of association was formerly an important document in company law, but CA 2006 has greatly reduced its importance to only have relevance for new companies as part of the company registration process.

Application for Registration

The application for registration must state:

1. 2. 3. 4. 1.

The companys proposed name Whether the companys registered office is to be situated in England and Wales (or in Wales), in Scotland or in Northern Ireland Whether the liability of the members of the company is to be limited, and if so whether it is to be limited by shares or by guarantee Whether the company is to be a private or a public company. A statement of capital and initial shareholdings (or a statement of guarantee in the case of a company limited by guarantee).

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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ACCA F4 Corporate and Business Law

ExPedite Notes

2. 3. 4.

A statement of the companys proposed officers (directors and secretary), together with their consent to act as officer. A statement of the intended address of the companys registered office A copy of any proposed articles of association (to the extent that these are not supplied by the default application of model articles in section 20 of the Companies Act 2006).

Statement of Compliance

The statement of compliance required to be delivered to the registrar is a statement that the requirements of this Act as to registration have been complied with.

The process is often done with the assistance of a lawyer, but this is not necessary. Nor is it necessary to be a UK citizen. In reality, all the above requirements are satisfied by filling in the standard forms (Form 10 and Form 12).

Company Names

The Company Registrar will not register a company if it: 1. 2. 3. 4. 5. 6. 7. Uses a name of another company or LLP Is likely to cause offence, eg includes rude words. Implies national or international pre-eminence, eg The British Training Co Implies being a public body Implies being a charity Implies being a charity If the name conflicts with a registered patent or trademark.

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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ACCA F4 Corporate and Business Law

ExPedite Notes

In some cases, it will be possible to obtain registration despite the name being sensitive if good cause can be proven.

Registering a company name does not give any sort of right to exclusive use of those words as a trading name or trade mark.

A company may change its name at any time by passing a special resolution, or whatever mechanism is included in its articles. The registrar must be informed of the name change and a revised incorporation certificate is then issued.

Incorporation Certificate

Upon registration of the company, the company registrar will issue a certificate of incorporation, including the company name, the company number and the date of its registration. From the date of the incorporation, the company exists and is able to enter into contracts in its own name. Any contracts purported to be made before the date of the incorporation certificate are not valid.

Public Limited Companies

The process of registration is the same for a public company as for a private company, with the exception that a plc must have a company secretary, is subject to minimum share capital requirements. It must also obtain a trading certificate under s.761. This is issued upon giving the Company Registrar details of share capital, initial formation expenses, details of payments to promoters and a statement of compliance.

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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ACCA F4 Corporate and Business Law

ExPedite Notes

Off-the-Shelf Companies

Businesses exist which incorporate companies and hold them in inventory until somebody wants to buy a ready-made company. An example is www.ukincorp.co.uk. Buying an offthe-shelf company is now rather cheap and has a number of advantages, including: 1. 2. Reduced workload all the work has already been done. No risk of any personal liability as a promoter existing, as the company already exists.

There are a number of disadvantages however, including: 1. 2. 3. Although relatively cheap, its still not as cheap as registering a company yourself. It will be necessary to change the companys name, members, directors and probably Articles. It is necessary to do a stock transfer form to record the sale of shares from the company selling the off-the-shelf company to you.

In reality, the workload associated with buying an off-the-shelf company is similar to the work required to register one in the first place. The principal advantage is probably avoidance of potential liability as a promoter (see below).

Promoters and Pre-incorporation Contracts

Promoters

There is no general statutory definition of a promoter in company law. The courts have not given a comprehensive judicial definition. In Twycross v Grant (1877) the judge defined a promoter as . . . one who undertakes to form a company with reference to a given project and to see it going, and who takes the necessary steps to accomplish that purpose. In Whaley Bridge Calico Printing Co v Green (1880) the judge described the term promoter as

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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ACCA F4 Corporate and Business Law

ExPedite Notes

a term not of law but of business, usefully summing up in a single word a number of business operations, familiar to the commercial world, by which a company is generally brought into existence.

The consequence of the above two statements is that the answer to the question of whether a person is a promoter or not is a question of fact and the determining factor is whether the individual in question will be a person who exercises some control over the affairs of the company both before and after it is formed up until the process of formation is completed. The following are typical acts which promoters perform taking the procedural steps necessary to form a company, inviting other persons to become directors and issuing a prospectus. A person is not to be treated as a promoter of a company simply on the basis that they act in a professional capacity with respect to the establishment of a company. Thus solicitors and accountants employed purely in their professional capacity in order to establish a company will not be considered to be promoters.

Duties of Promoters

As with directors, so promoters are said to be in fiduciary relationship with the company they are establishing. This is a position akin to that of a trustee and promoters duties are very similar to the duties of an agent, even though a promoter is the agent for a principal that does not yet exist! The most important consequence that flows from it is that the promoter is not entitled to make a profit from establishing the company, without full disclosure of that profit to either an independent board of directors, or to the existing and prospective shareholders in the company. Such a situation usually arises in situations where the promoters sell assets to the company they are in the process of forming. Failure to make such a disclosure will enable the company to: rescind the contract; claim damages or hold the promoter liable to account for any profit made (Erlanger v New Sombrero Phosphate Co (1878), Gluckstein v Barnes (1900), Re Leeds & Hanley Theatres of Varieties (1902)). Although problems in relation to the promotion of companies have been greatly diminished by the introduction of rigorous rules relating to the provision of information in company prospectuses, nevertheless the Company Directors Disqualification Act 1986 also provides for the disqualification of anyone who has been convicted of an indictable offence in relation to the promotion or formation of a company.

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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ACCA F4 Corporate and Business Law

ExPedite Notes

Pre-Incorporation Contracts

A pre-incorporation contract is a contact which promoters enter into, naming the company as a party, prior to the date of the certificate of incorporation and hence prior to its existence as a separate legal person. The legal difficulty, of course, is that the company cannot enter into a binding contract until it has become incorporated, and it is not bound by any contract made on its behalf prior to incorporation. The legal consequences of the above propositions are that the company, when formed, is not bound by the contract even if it has taken some benefit under the contract.

In Kelner v Baxter (1866) a contract was entered into supposedly on behalf of a company, but before it was actually registered. Although goods were supplied to the company under the contract, it was held that it could not be held liable under the contract, as it had not been in existence at the time the contract had been entered into. The parties who had purported to act as its agents were liable on the contract but the company itself could not be held responsible.

Promoters Liability

Similarly the company cannot ratify the agreement even after it has become incorporated. One of the main consequences of the principles outlined above is that someone who contracts on behalf of a company in respect of a pre-incorporation contract is treated as if he had contracted on his own behalf. Such was the consequence of ordinary agency law as stated in Kelner v Baxter above, but that position has been bolstered by statutory authority. Thus s.51(1) of Companies Act 2006 provides that a contract which purports to be made by or on behalf of a company, has effect, at a time when the company has not been formed, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable for the contract accordingly. It can be seen from the wording of s.51(1) that liability of the agent is contractual, but it should be noted that this liability arises whether the promoter contracts as agent or not.

Thus in Phonogram Ltd v Lane (1982) it was proposed to form a company, FM Ltd to run a pop group. L made a contract with Phonogram Ltd for and on behalf of FM Ltd. However, FM Ltd was never actually incorporated. Consequently the court held that Lane was personally liable for the money advanced to FM Ltd by Phonogram Ltd. The Court of Appeal

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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ACCA F4 Corporate and Business Law

ExPedite Notes

held that the fact that Lane had signed for and on behalf of FM made no difference to his personal liability. To give effect to the words subject to any agreement to the contrary the words used would need to amount to an express exclusion of liability. Promoters can avoid liability for pre-incorporation contracts in a number of ways. For example it is possible to avoid entering into the contract until the company has actually been incorporated. Alternatively, the promoter may enter into an agreement subject to contract with the effect that there is no binding agreement until the company itself enters into one. As the promoters are usually the first directors of the company, they can assure that the company does in fact enter into the pre-arranged contract. Finally the promoters can expressly provide that they will bear no responsibility for any pre-incorporation contracts as permitted under s.51(1) of the Companies Act 2006.

Remember, the safest way to avoid promoters liability under a pre-incorporation contract is to establish the company first (or buy an off-the-shelf company) before conducting any discussions with any third parties.

Content and Effect of Company Constitution

Objects

Prior to the Companies Act 2006, the objects (ie purpose) of the company had great legal importance. Under section 31 CA 2006, the importance of the objects clause has been further diluted.

Unless the companys constitution specifically says that the objects are restricted, the companys objects are unrestricted.

This means that third parties have no reason to assume that the directors have any restrictions on the contracts that they can bind the company to (s.39 CA 2006). Third parties are not required to inspect the companys constitution in order to ascertain whether a proposed contract is within the companys powers. However, if it can be proven that they

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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ACCA F4 Corporate and Business Law

ExPedite Notes

knew of the restriction but went ahead anyway, they are contracting in bad faith and the contract will not be enforceable by the third party (s.40 CA 2006).

If a director binds the company to a contract that is outside the object of the company in its articles (ie ultra vires the company), that contract is still valid, but the shareholders can sue the director for breach of duty and any losses suffered.

If the third party somehow knew the contract was outside the power of the company in its Articles, he/ she has acted in bad faith and the company is therefore not bound by this contract, since all commercial law presumes that all parties must act in good faith in order to be bound in contract.

Purpose of the Articles

The articles are a series of mutual covenants between the company and each member, as well as members to each other. The Articles will generally cover matters like:

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Procedures for appointment and dismissal of directors Method for determining directors remuneration and expense repayment Powers of directors Conduct at board meetings Taking votes at general meetings Deciding dividends Procedures for issue of shares Communication with members, eg is the Internet an allowable means of giving notice of meetings Transfer of shares between members Quorum at general meetings and board meetings.

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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ACCA F4 Corporate and Business Law

ExPedite Notes

Section 20 Companies Act 2006 assumes that the current model Articles apply to companies unless the company chooses to amend or substitute them.

The current model Articles were passed by statutory instrument the Companies (Model Articles) Regulations 2008. A copy is available for free download on the Internet.

Changing a Companys Constitution

A company can change its articles at any time by passing a special resolution. The modified articles must then be sent to the company registrar, s.26 CA 2006.

A companys articles may contain terms that are designed to be difficult or impossible to change (eg a provision to prohibit expelling any shareholder from the company). Entrenched articles can only be introduced into the first articles of the company on registration, or by unanimous consent of every member.

An article that is intended to be entrenched can still be changed at any time if there is a unanimous resolution of all shareholders.

Statutory Books and Records

Section 113 CA 2006 requires that a company keep the following registers, most of which must be maintained at the companys registered office, though some (eg register of members) may be maintained by third parties on behalf of the company:

Section 114 Section 162 Section 228 Section 237

Register of members Register of directors Directors service contracts Directors indemnities

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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ACCA F4 Corporate and Business Law

ExPedite Notes

Section 275 Section 358 Section 702 Section 720 Section 743 Section 805 Section 809 Section 877

Register of secretaries Records of resolutions etc Contracts relating to purchase of own shares Documents relating to redemption or purchase of own shares out of capital by private company Register of debenture holders Report to members of outcome of investigation by public company into interests in its shares Register of interests in shares disclosed to public company Instruments creating charges and register of charges: England and Wales)

Want to Know More?

You can download a free full copy of the Companies Act 2006 at www.opsi.gov.uk/acts/acts2006/pdf/ukpga_20060046_en.pdf

A full copy of the current model Articles of Association is available for free download at www.berr.gov.uk/files/file45533.doc

An example of how to purchase an off-the-shelf company can be seen at this companys website: www.ukincorp.co.uk

The UK Company Registrar has all the forms needed to incorporate a company in England and Wales, together with a good amount of guidance in plain English: www.companieshouse.gov.uk

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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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ACCA F4 Corporate and Business Law

ExPedite Notes

Past exam questions

Done Revised

Incorporation/ promoters:

Q4 December 2004 Q10 June 2005

Registration1:

Q10b December 2003

Constitutions:

Q7 June 2004 Q3 June 2005 Q4 December 2007 Q9 December 2008

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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

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