Summary LLB Company Law Lecture notes (includes all lectures) 2021

Lectures Notes on Company law for the LLB at BPP University to help you prepare for your classes. These notes are set out in a way that is easy to understand using structured step-by-step guides and clear examples. Having these notes to hand will radically shorten your revision time, and will greatly help you with your preparation to your tutorials and workshops.

Company – All lectures – Notes | Page 1 of 57

LECTURE 1A

TYPES OF BUSINESS MEDIA

INTRODUCTION:

Assessment:

100% of the marks will be given based on one written assessment at the

end of the year.

Six questions divided into Part A + Part B. Must answer 3 questions. One

from Part A, one from Part B and one from any part. Part A will cover

semester 1 and Part B will cover semester 2 topics.

Sources of company law:

1. Statutes: * Insolvency Act 1986 * FSMA 2000 * Companies Act 2006 – Key legislation, replaced

Companies Act 1985, the longest act in history. The new

act aimed to simplify the law and codify directors’

duties.

2. Common law – eg. Salomon v Salomon

CONSIDERATIONS FOR FORMING A BUSINESS:

Businesses are generally set up to make a profit. A business generates

income by selling products and/or services.

Considerations to bear in mind when setting up a business:

These considerations determine which business structure is the most

appropriate.

1. Cost considerations: • To be able to sell products/services, the business must

incur expenses. If the income exceeds the costs of the

business, the business makes profit. • It is likely that a proportion of that profit is given to the

business owners. The rest is retained by that business

to help it grow. • A business is also likely to employ staff and may use

services.

• The company will need to raise finance to: § pay for set-up costs (when setting up) § develop and expand (once established) – These

are the ongoing costs: marketing activities,

buying stock and renting premises.

2. Mitigating or minimising risk:

Does the owner have personal liabilities for all debt?

3. Structural considerations:

Does the business vehicle provide a clear organisational

structure?

BUSINESS STRUCTURES:

Types of business structures:

1. Sole trader

2. Partnership – Partnership, Limited Liability. Partnership

3. Limited Company – Private Limited Company, Public Limited

Company

Sole traders:

The simplest business medium, as the sole trader conducts business

personally. This is how most businesses start out. Needs to register as

self-employed. – Eg. local market, the market traders are sole traders.

If a shop is Daily News, this is only a name under which you trade as a

sole trader. There is no legal entity, each customer enters into a

contract with the sole trader personally.

Advantages Disadvantages

No Companies House registration is

required so enjoys complete

privacy.

No starting capital required apart

from the funds required apart from

usual setting up costs of business.

Sole proprietorship does not have a

separate legal entity. - When a

contract is entered into, it is done by

the sole trader in his personal

capacity. He has unlimited personal

liability under these contracts.

Sole traders are only subject to the

relevant commercial and tax

legislation and the common law.

Partnerships:

Types of partnerships:

1. An informal association between two or more partners to carry

on a business without any express agreement. (family

businesses)

2. Very large business partnerships with many partners and an

elaborate partnership deed. (LLPs)

s.1 Partnership Act 1890 Partnership = the relationship which subsists

between persons carrying on a business in common with a view to

profit.

Partnership Act 1890 This act governs partnerships, but the parties may

change this by creating their own partnership agreement that overrides

the act.

Whether a partnership exists or not, is a matter of fact. The essence of

partnerships is a continuous relationship, personal and commercial.

Eg. you and your partner open a shop called Daily News. You orally

agree to share the profits. You have a partnership. Daily News is only a

name for the shop and each customer enters into a contract with both

partners.

Equal share in profits and also equal contribution to losses. Decision on

ordinary matters are made by majority.

Partnership agreements are not required for a partnership,

recommended. – eg. If the partners want junior partners to get a

smaller share of the profit than the experienced partners.

Advantages Disadvantages

No obligation to register

financial liability, complete

privacy.

A partnership has no separate legal

identity. Partners own property and

enter into contracts jointly. No

limited liability. If the partnership

goes insolvent, the creditors can

claim personal assets of each of the

partners.

One partner will bind other partners

when contracting with a third party

(the law of agency).

Limited Partnerships:

Governed by the Limited Partnership Act 1907.

Limited liability, but not for all partners. At least one partner must be a

general partner with unlimited liability. Limited partners + general

partners.

Registered at Companies House but not required to file accounts.

Used in the venture capital industry, quite rare.

Unlimited Liability Partnerships:

Hybrid of a company and a partnership. Has the flexibility of a

partnership with limited liability. Relatively new, formed under Limited

Liability Partnership Act 2000.

Separate legal entity. An LLP can own property, enter into contracts,

sue and be sued. Liability of members is limited to the amount they

have agreed to contribute to the debts of the LLP. This liability agreed

must satisfy the Companies House requirements.

Must be registered at Companies House and must file account, at least

two members must be made responsible for filing this.

Companies:

Companies have a separate legal personality and therefore a limited

liability. A company is owned by its shareholders, so when referring to

limited liability, we are referring to the liability of the shareholders.

Shareholders are protected, not personally liable.

This encourages investment, risk-taking, which contributes to the

economy. Risk of business moves from the shareholders to the

creditors.

Companies are distinct from their shareholders (owners). A company

can own property, enter into contracts, sue and be sued. Profits and

losses belong to the company, not the shareholders.

Shareholders/Members = owners of a company.

Subscribers = the very first shareholders of a company. They formed

the company

Stakeholders = broad term, any interested party in a company. – Eg.

shareholders, employees, creditors.

Directors = officers/managers of a company

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Company – All lectures – Notes | Page 2 of 57

Private company limited by shares:

Also called a private company.

No minimum share capital

requirement, prohibited from

offering shares to the public.

Can be formed by one person.

Public company limited by shares:

Most common company form.

Permitted to offer shares to the

public. - Eg Barclays Bank plc.

s.768 CA 2006 Minimum share

capital requirement is £50,000

s.761 CA 2006 Trading certificate

is required before trading. This

certificate is issued only if the

company meets the minimum

share capital requirement.

Shares must be transferable.

Private company limited by

guarantee

Quite rare. No min. share capital

requirement, liability of members

is limited to the amount they

agreed to contribute in the event

of a winding up. Commonly £1

each.

Private company with unlimited

liability

Quite rare. Liability of members is

unlimited.

Generally no obligations to

provide regular accounts and

fewer disclosure requirements.

Listed companies

Not the company itself but its

shares are listed. Only for public

companies, but only 26% of

them are listed. Admitted on

RIE (Regular Investment

Exchange)

Ltd = Limited Private Company.

COMPANY FORMATION:

Before actually forming the company, it is vital to decide which type of

company we wish to form.

s.3 CA 2006 Types of companies: × Company limited by shares (private or public) This lecture will

focus on private company limited by shares and will touch upon

public company limited by shares. × Company limited by guarantee. × Unlimited company.

Formation:

Documentation and fee must be filed at Companies House, the

registrar of companies which stores a public record. Companies House

has an electronic filing system, so that all documents can be filed

electronically.

The subscriber, the first shareholder handles the filing of documents.

All electronically submitted documents must be authenticated by the

company.

Registration documents:

The first shareholder to send to Companies House:

1. Form IN01 + fee

2. Memorandum of Association

Form IN01:

The subscriber must file the IN01.

IN = Incorporation

01 = s1 CA 2006

A copy of the form can be downloaded from the Companies House

website. The blank form is 18 pages long.

Must include the below info: * Proposed name * Type of company * Registered office * Articles of Association * Details of directors (and secretary) * Statement of capital and shareholders * Statement of compliance.

Proposed name:

s.9(2)(a) CA 2006 Must be the full name of the company.

s.66 CA 2006 Can't be the same as an existing company name. To avoid

this, the subscriber should check the register at Comp H. in advance.

Exception: it is allowed for existing company structures of the same

group to have the same name in part. Eg. Sainsbury's Ltd, Sainsbury's

Bank plc., because they are all part of the same group.

s.58 CA 2006 Public limited companies must identify themselves as a

public p.l.c. in the company name.

s.59 CA 2006 Private limited companies must use ltd.

There are also: - prohibited names – eg. offensive names - restricted names – eg. a company name cannot be the same

name as a government body or pretend any relationship with a

government body.

A company may also be liable for a tort, eg. passing off. This liability

arises where a third party can prove that it has goodwill in a name and

the company is misrepresenting itself as that third party and that third

party has suffered losses as a result.

s.77 CA 2006 The company can change its name later if the name is not

satisfactory.

Articles of Association:

One of the most important documents that must be filed. This is also

called the 'Rulebook of the Company' or the Constitution.

s.18 CA 2006 The company must register articles.

The subscriber has three options: * Bespoke articles- articles written specifically for that company. * Model articles (private or public version) - articles drafter in a

standard form that cater for the needs of most companies.

Small private companies will likely adopt these articles. * Model articles as amended - adopting the standard articles but

amended a few sections to suit that particular company. Hybrid

between the bespoke and model articles.

If non registered, model articles apply in default.

What are the articles? * s.17 CA 2006 Constitution and Rulebook of the company. When

advising a client on a matter of law, a lawyer must check the

articles first. * They regulate internal affairs, the issue and transfer of shares,

how the board and shareholder meetings are to be conducted

and the powers of directors.

Directors and Secretary:

s.9(4)(c) CA 2006 Application must include details of officers of the

company. Officers = directors (those with a day-to-day control over the

company) + secretary.

Private company: Must have 1 director minimum, the directors of

private companies may also be shareholders of that company.

Public company: must have 2 directors minimum = secretary (the role

of the secretary is to support the director. Eg. assistance with filing

accounts, taking notes at a board meeting, checking whether the

company is in compliance with the CA 2006 and dealing with records).

For each director and secretary, the following must be included:

Name / DOB / Nationality / Occupation / Service and Residential

Address.

The director must provide his last known residential address to

Companies House. This does not need to form part of the public record.

The director will then provide a service address.

Eg the director may not want to attract animal rights activists to his

residential address if his company is eg. a pharmaceutical company

which does animal testing.

Statement of Capital:

s.10 CA 2006 The statement of capital and initial shareholdings must

state the following: - The total number of shares taken by each subscriber - Classes of share: ordinary and preference. A private limited

company will only have one class of share in general, but it is

very much possible to have different classes of shares. The

statement must note the number of shares in each class and the

amount paid for each share. - Rights attaching to each class of share. Eg. voting rights, if there

is a right to dividend, right to capital on insolvency.

Statement of Compliance:

The subscribers must state that they have complied with all the relevant

regulations in CA 2006 in relation to the formation of the company.

1. Requirements for public companies:

Generally the same requirements as for private companies,

except that public companies must also have a Trading

Certificate. • This will only be issued if there is at least £50k in share

capital, which is the authorised minimum requirement • Also, one quarter of nominal and whole of premium

must be paid up on the shares.

2. Certificate of Incorporation: • If all the documentation is in order, the Registrar of

Companies will issue the certificate of incorporation.

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Company – All lectures – Notes | Page 3 of 57

This is conclusive evidence that the requirements for

the formation of the company have been satisfied. • The cert. will include a unique official number. The

name of the company may change, but the official

number remains the same. • The cert. will include the date of incorporation • On incorporation, the subscribers will become

shareholders and the officers (directors and any

secretary) are deemed appointed.

3. Pre-incorporation contracts:

A company cannot contract until incorporated, because until

then it doesn't exist. Also, a pre-incorporation contract cannot

be ratified.

A company needs to have equipment and the subscribers

want the company to own the equipment, as it would be used

by the company after its incorporation.

Kelner v Baxter At common law, if someone wants to enter into

a contract on behalf of his company not yet formed, the person

signing the contract will have personal liability. 'for an on

behalf of ABC Limited.' If, however, the person is purporting to

be the director of the company, 'ABC Limited by the director' - no contract.

s.51 CA 2006 The common law led to a huge risk to third parties

so it gives the parties an enforceable contractual obligation

against the individual who signs the contract. Many of these

issues have now been dissipated as Companies H. can now

incorporate companies on a same day basis.

Memorandum of Association:

Acronyms: MEM or MoA. In addition to the form IN01, the subscriber

must also register the MEM at Companies House. There is a prescribed

form for this online: × The MEM lists every subscriber × Each subscriber must state that they wish to form a company

and that they agree to become shareholders. × How many shares they open × How many shares they will get. (Must take at least one each). × Signed by each subscriber.

Historically the MEM used to form part of the constitution along with

the articles, however, since CA 2006, the MEM is not part of the

constitution.

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Company – All lectures – Notes | Page 4 of 57

LECTURE 1B

CORPORATE PERSONALITY

INTRODUCTION:

It is only possible to grasp the fundamental principles of company law

if you can appreciate the underlying fundamental concepts of limited

liability and separate legal personality.

History of companies:

• Medieval guilds are the earliest example of a group based activity.

Group of skilled craftsmen in the same trade might form a guild

to trade as a group. This led to the subsequent development of

the Royal Charters. At one time the Royal Charter was the sole

means by which an incorporated body could be formed. Among

the past and present groups formed by the Royal Charter are the

British East India Co., Hudson Bay Co., the P&O, the British South

Africa Co., the Bank of England, BBC and some of the former

British Colonies on the North American Mainland. • Industrialisation in the 19th century resulted in a burst of

economic activity and this led to the search for an economically

efficient vehicle for business. • Joint Stock Companies Act 1844 We can trace the development

of companies to this act. The act was enacted thanks to a select

committee chaired by William Gladstone. The JSCA 1844 allowed

companies to be registered without state approval. • Limited Liability Act 1855 The next notable development was the

introduction of the limited liability. The liability of the company

members (shareholders) was limited. • Companies Act 1862 The act confirmed the existence of limited

liability. This was the legislation that was applied in Salomon v

Salomon.

This historical walkthrough is only to set the context and there is no

need to read about this in any greater detail for the purposes of this

course.

SALOMON V SALOMON:

Salomon v Salomon is the foundation of modern company law. Its

judgment must be printed out and read for the tutorial.

There are three courts that were involved in the decision-making and

slightly different decisions were reached at the different stages. The

tutorial will consider the contents of these judgments in more detail.

Broderip v Salomon [1893] Vaughan Williams J in High Court

Salomon v Salomon & Co Ltd [1895] Lindlay, Lopes and Kay LJ in Court

of Appeal

Salomon v Salomon & Co Ltd [1897] Lords Halsbury, Watson, Hershell,

Macnaghten, Morris & Davey in House of Lords.

Facts: For many years, Mr Salomon had carried on a prosperous

business as a sole trader, as a leather merchant. In 1892 he decided to

incorporate his business as a company called Salomon & Co Ltd. The

shareholders were Mr Salomon, his wife and 5 of his children. Mr

Salomon was also the managing director. At this time, companies were

governed by the provisions of the Companies Act 1862 which required

that at least 7 people subscribe as shareholders of the company. The

wife and 5 children held one share each and the rest of the shares were

held by Mr Salomon. The family did not have any formal or active role

in running the business.

Once Mr Salomon set up this company, he sold his soletrader business

to the company for £39,000 (£3.2m today). This figure was based on his

personal view of what the business was worth, not a formal valuation.

The price for the business was satisfied by a £10,000 debt underwritten

by a debenture, 20,000 fully paid shares at £1 each and the remainder

£9,000 in cash. The debentures meant that Mr. Salomon was a creditor of the company and it meant that he had a claim over the assets but

he was also a shareholder. He had 20,001 shares and the remaining 6

shares were shared between his wife and 5 children. So there was a

huge imbalance in shareholding.

Debenture: a promise to pay some money in favour a creditor and it is

then secured against the assets of a company. If a company therefore

were to become insolvent, he would then have a claim over the assets

of the company.

Following incorporation there was a decline in boots sales in part as a

result of strikes which caused the government (one of his major

customers) to cancel his contracts. The company then ran into financial

difficulties and Mr Salomon sold the debentures to Mr Broderip. Mr

Broderip sued to enforce the floating charge.

When the company went into liquidation, the liquidator argued that the

debentures were invalid on the grounds of fraud and Mr Salomon was

liable for all the debts in the company. Was Mr Salomon personally

liable for all the debts of the company?

The case was the first time that the courts looked at the concept of

limited liability and corporate personality.

Broderip v Salomon [1893] In the High Court Vaughan Williams J held

that Broderip's claim was valid and Mr Salomon created the company

solely to transfer his business to it. The court applied the law on

agency, whereby Salomon was a principle and the company was an

agent and therefore Salomon was liable for all the debts of the

company and he was required to indemnify the creditors.

Salomon v Salomon & Co Ltd [1895] Lindlay, Lopes and Kay LJ in the

Court of Appeal rejected his appeal and concluded that the formation

of the company and the issue of the debentures was actually just a

scheme to enable Salomon to carry on the business with a limited

liability. They thought it was contrary to the true intent of the

Companies Act 1862. Parliament had never contemplated an extension

of limited liability to sole trader or to a fewer number than 7. CA

concluded that his wife and 5 children were only involved to enable Mr

Salomon to carry on his business with a limited liability and although

the company was a valid company, it was illegitimate.

The court disagreed with the application of agency on two points, that

the business was Salomon's and that he used it as an agent. In order for

the agency to work, the agent (the company) must exist. If the company

did exist, then the business could not belong to Salomon, because a

company has its separate legal entity.

Salomon v Salomon & Co Ltd [1897] Lords Halsbury, Watson, Hershell,

Macnaghten, Morris & Davey in the House of Lords unanimously

overturned the decisions, rejecting the arguments of both the High

Court and the Court of Appeal. • They found that Salomon followed the procedures to

incorporate the company since the act merely required 7

shareholders holding at least 1 share each. • It was irrelevant that the bulk of shares were issued to one

shareholder because the statute did not specify this. The court

refused to imply what Parliament may have intended. • The act had said nothing about the shareholders being

independent. • The act also did not state that the shareholders should have a

substantial interest in the company or that they should have a

mind on their own or that there should be an equal balance of

power.

Again the question whether the company was a legal entity was

considered. One of the Lords noted that when the Memorandum is

signed and registered, the body corporate is formed. The Lords

concluded that the company was a separate legal entity and Mr

Salomon was not personally liable.

THE SEPARATE PERSONALITY OF A COMPANY:

As you have learnt, a company is an entity that is distinct from its

owners - the shareholders - as well as from its directors, creditors and

employees. It has a separate legal personality. A company continues to

exist even if its shareholders and/or directors change. This is a

fundamental concept of company law, since there is always an extra

entity to take into account: the company.

Directors, in general, owe their duties to the company, not to the

shareholders. Shareholders usually have rights against the company,

rather than against the directors, and third parties with whom the

company does business contract with the company, even though they

negotiate with the directors.

s.16 CA 2006 Body corporate capable of exercising the functions of an

incorporated company from the date of incorporation.

On the date when all the necessary documentation is submitted to

Companies House (the Registrar) issues the Certificate of Incorporation.

Also note: the company can now be formed with only one shareholder

under the current act.

Directors:

The law does recognise that although the company has a separate legal

personality, the company must be operated and run by human beings.

So this notion of the separate personality of the company is something

fictitious that has been developed by the courts.

Lennard's Carrying Co v Asiatic Petroleum Co Held: Viscount Haldane

LC: "... a corporation is an abstraction. It has no mind of its own any

more than it has a body of its own..."

When solicitors check the company's constitution (Articles of

Association), it can be seen that directors have a day-to-day control

over the company. So the acts and omissions of the director will

ultimately be the acts and omissions of the company and the company

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