South East Antique Shop - Case Study Example

Lorraine and Brenda were business partners for many years. Their business was primarily that of dealing in antiques from their shop located in Essex.Recently, they decided to incorporate their business by forming a private limited company. They intend to name this company the South East Antique Shop and continue their operations in Essex, but the registered office is to be located in Chancery Lane, London. The word company connotes an association of individuals formed for some common purpose. Such an association may be incorporated or it may be unincorporated. An incorporated company is a legal entity separate and distinct from the individual members of the company, whereas the unincorporated company has no such separate existence and it is not in law distinguishable from its members. The liability of the partners in a partnership firm or the owner of a proprietary extends to the company's debts and financial obligations. In order to limit one's liability to the extent of one's investment in the company, a limited liability company is to be formed. This protects the owners by limiting their risk in the event of failure of their business to just their investment. In the event of a claim being preferred against the company, such a claim is limited to the extent of the assets held by the company. The personal properties or belongings of the owners are protected from such claims. In the absence of such a structure, the liability is not limited to the investment in the company and the homes, accounts in banks and other assets of the owners are at risk of being appropriated towards the claim amount1. In view of the foregoing, the decision of Lorraine and Brenda to form a limited liability company is the best course of action to be adopted. The word limited in respect of companies is a warning in as much as that if something goes wrong and if a person wants his money back; it will be possible to get only what the company has and not what he has to be reimbursed. One cannot go beyond the assets of the company during this process. In other words the dealings are with an entity having limited liability. Over a period of time, gradually the possibility of making the directors personally liable for some company defaults has increased. The articles of association set out rules for the internal management of the company. Great care must be taken in drafting the Articles of Association. The Articles of a company may be altered by a special resolution. Where Articles of Association are not registered, or if the Articles are registered in so far as they do not exclude or modify the regulation in Table A , those regulations so far as applicable are the regulations of the company in the same manner and to the same extent as if they were contained in duly registered articles. If the company intends to issue shares or stock warrants, special authority for that purpose can and must be given by the articles. The articles may authorize the issue of redeemable preferential shares and may also authorize the company to increase its capital, to consolidate its shares into shares of larger amount, or convert paid up shares into stock and to reconvert stock into paid up shares, to subdivide its shares into shares of smaller amounts, and to cancel shares not taken or agreed to be taken, also to reduce its capital share premium account and capital redemption reserve fund. The articles may also authorize the company to alter its memorandum to impose unlimited liability on its directors or its managers or any managing director. The specimen of the Articles of Association is to be found in the office of The Registrar of Companies. The first clause of this memorandum of association is required to state the name of the proposed company. A company being a legal entity must have a name to establish its identity, the name of the corporation is a symbol of its existence. The second clause of the memorandum of association must specify place where the registered office of the company is to be situated. The third and final clause must state the objects for which the company is to be established. This clause must be further subdivided into - main objects to be pursued by the company, objects incidental or ancillary to the attainment of the main objects of the company and other objects to be specified in the sub clauses, which have not been defined in the main objects of the company. Specifically, in order to retain control over the business, Lorraine and Brenda have to clearly emphasize in the articles of association, who is to exercise the powers and responsibilities as described in section 8, which is appended below. In other words section 8 of the Companies Act 1985, which deals with the powers and responsibilities of the directors is to be incorporated into the articles of association, this section is appended below: "Without prejudice to Article 7, and to the powers and responsibilities set out elsewhere in these Articles, the Board shall have the following powers and responsibilities: (a) To appoint a panel of Ombudsmen in accordance with the provisions of Article 16 and to ensure, maintain and monitor their independence; (b) To conduct the affairs and business of the Service for the year concerned in accordance with the financial budget adopted by the Board pursuant to Article 11; (c) To determine who shall be entitled to sign on the Company's behalf bills, notes, receipts, acceptances, endorsements, cheques, releases, contracts and other documents; and (d) To determine who shall be entitled to institute, conduct, defend, compound or abandon any legal proceedings by or against the Company or its officers or employees or otherwise concerning the affairs of the Company, and also to compound and allow time for payment or satisfaction of any debts due and of any claims or demands by or against the Company.2" With the exception of the competent authority, no information, book or document, without the previous consent in writing of that body, can be published or disclosed. Such disclosure is mandatory if it is required for the instituting of criminal proceedings pursuant to, or arising out of the Companies Acts or criminal proceedings for misconduct in connection with the management of the body's affairs or misapplication or wrongful retainer of its property. For instituting criminal proceedings pursuant to or arising out of the Exchange Control Acts, 1954 to 1986, or the Insurance Acts, 1909 to 1990, or regulations on insurance made under the European Communities Act, 1972. For compliance with any requirement or for the exercise any power, imposed or conferred with respect to reports made by inspectors appointed by the court or the Minister. For winding - up under the principal act of the body or for the purpose of entry and search. Contravention of this section makes a person guilty of an offence3. As per the provisions of this Act registers of individual share allotments or transfers need not be maintained by a company. In order to answer future queries, these are frequently included in bound or loose-leaf statutory books. In the same way, the Act does not require the maintenance of a register of debenture holders. In case such a register is maintained, the Act lays down the conditions for its maintenance and inspection (Sections 190 and 191). This describes the information that may be kept undisclosed from the public. To comply with the provisions of The Companies Act 1985, every company has to keep the following registers, books and records: Register of members, Register of charges, minutes of company and directors' meetings (Section 382), resolutions in writing of members (Section 382A) and resolutions of a sole member (Section 382B). Accounting records (Sections 221-2 inserted by CA1989, Section 2). Register of directors and secretaries (Sections 28-90 as amended by CA1989, Sch. 19, paras. 2 and 3, and CA 1989, Schedule 24). Register of directors' interests in shares and debentures of the company (Sections 325 and 326 and Schedule 13, Part IV, as amended by CA 1989, Schedule 24). For a public company, a register of interests in voting shares has to be maintained (Section 211). The register of directors, secretaries and of charges must be kept at the registered office. The register of members must be kept either at the company's registered office or at Essex. If the register of members is not kept at the company's registered office, the Registrar of Companies has to be informed of its location within 14 days on Form 353 (Section 353(2)-(4)). The register of directors' interests in shares and debentures of the company should be kept at the company's registered office or at the place where the register of members is kept. If this register is not kept at all times at the registered office, the Registrar of Companies has to be informed of its location within 14 days on Form 325 (Schedule 13, Part IV). The register of interests in voting shares must be kept at the same place as the register of directors' interests (Section 211 (8)). The register of debenture holders is to be kept like the register of members is kept and if not kept at the registered office of the company; the Registrar of Companies has to be informed of its location in Form 190 (Section 190). It is permissible to keep the statutory registers and other records on a computer or in other illegible form, only if data integrity can be ensured and they can be reproduced in legible form for inspection (Sections 722 and 723). These details are contained in the Companies (Registers and Other Records) Regulations 1985, SI 1985/724. Registers which include only the required information and which contain statutory information are to be made available for public inspection. If a company keeps both non - statutory information and other matters pertaining to share registration with its statutory records then it has give notice under the Data Protection Act. Some companies, particularly private companies, include non-statutory information in the register of members. However, this is not advisable, because non - statutory information will have to be deleted from the copy given for such inspection4. Various registers and documents have to be at the registered office, in order to enable them to be inspected by members, creditors or the general public. Sometimes a provision is made to keep these documents elsewhere. Since the company is a private limited company, the liability of Lorraine and Brenda is restricted to the extent of their share holding and in the event of a failure of the company their liability will be only as much as they had invested in the company5. A company is a distinct entity from the legal point of view. It exists independently of its members and it allows people to enter financial and other trade related transactions with it. However, it does not accept personal responsibility for their actions6. Lorraine had entered into a contract with Alfie, as a promoter, but before incorporation of the company, for purchasing office accommodation for the South East Antique Shop. However, Alfie did not honour the contract. Contracts made by promoters on behalf of a company yet to be formed are valid as per the provisions of section 36 C of the Companies Act 1985. Therefore the company can sue Alfie for enforcement of the contract7. A promoter is not a trustee or agent of the company but holds a fiduciary position with respect to the company, which he promotes from time to time when he first becomes a promoter until he ceases to be a promoter thereof. A promoter cannot therefore, retain any profit made out of a transaction to which the company is a party without full disclosure. A company on incorporation is a legal entity or person distinct from its members and its property is not the property of the members. The national and domicile of the company is determined by its place of registration. A company incorporated in the U.K will normally have British Nationality as well as English or Scottish Domicile. In general, residence depends upon the place where central control and management of the company is located. A company registered under the Companies Act 1948, is not entitled to carry on business in such a way or under such a name, as to represent that its business is the business of any other company or firm or person and the absence of fraud is immaterial A corporation or a limited company which is incorporated has a corporate existence apart from the members constituting the same. A corporation has been defined as a collection of individuals united into one body under a special denomination having perpetual succession under an artificial form and vested by the policy of law with the capacity of acting in several respects as an individual. In particular, a corporation should have the capability of taking and granting properties, of contracting obligations and of suing and being sued in the course of transacting its business. The ideas inherent in the definition of a corporation are: 1. It should have continuous identity. 2. It is intangible. 3. It is an entity distinct from its constituent members. To illustrate limited liability, we will consider the case of Saloman v Saloman & Co(1897). Saloman was a leather merchant who formed a company in which his wife and five children held a share each. This was in order to comply with the Companies Act of that time, which required 7 shareholders as a minimum. The rest of the shares were held by him. After this formation of the company, his liability reduced from unlimited to limited. The company, after some time, went into liquidation and the Court of Appeal held that the shareholding was not bonafide but contrived to favour Saloman. However, the House of Lords reversed this decision and held that Saloman was liable only to a limited extent and Lord MacNaghten emphasized that the company and the promoter are different8. Mode of forming an incorporated company:- If the object of a company is illegal, such a company cannot be registered. Subscriber to memorandum The subscription to a memorandum of association means not merely signing every one of its pages but also the signing of names in token of having entered into an agreement, both as signatories forming themselves into a company and also in their undertaking to take the number of shares indicated against their names. Requirement with respect to memorandum:- Purpose of objects clause The objects clause informs members of the use to which the company's money can be put, and to third parties who deal with it, the extent of company's powers and activities Method of stating objects There should be clarity in the statement of objects. The statement must not be too vague, too general or too wide, for in that case it will defeat its very purpose and its objective. Interpretation/construction of object clause The memorandum of association must be read fairly and reasonably. General words of memorandum are not to be construed widely, but should be taken in conjunction with the dominant or main object. Intent of the framers of the memorandum must be gathered from the language in which they have chosen to express it. Objects incidental or ancillary to attainment of main objects The acts incidental or naturally conductive to the main object are those, which have a reasonably proximate connection with the object. The memorandum does not constitute a contract between company and a third party. It is very important to note that a Corporation is not to be registered with an undesirable name. Name, which is identical or too nearly resembles with name of already registered company. If the name of a company gives such misleading indication of its activities as to cause harm to the public, it should not be registered. Every company whether limited by shares or by guarantee, or unlimited must in the memorandum of association, state the name of the company. If the company is limited by shares or guarantee it must have the word 'limited' as the last word of its name unless authorized by licence of the department of trade and industry to dispense with the inclusion of that word in its name. The term veil of incorporation connotes that since the company is a separate legal entity, it shields its shareholders from its directors. The courts of law generally do not probe beyond this shield to get to the shareholders. This screen or shield is referred to as the veil of incorporation. When the situation warrants, then the courts of law, enforce statutory provisions for lifting this veil in order to make directors personally liable. This is termed as lifting the corporate veil9. A company usually borrows money from the public for expansion, mergers, acquisitions, etc. The two main methods adopted are either taking a bank loan or by issuing debt securities like bonds, bills, etc. The advantages of this to the company are that it gets funds for expansion, to meet its liabilities and so on, without having to borrow from the promoters. The share holders benefit by getting a large stake in the company. The disadvantages are that the company may be borrowing to offset its losses, to dilute promoter share and consequently, promoters' interest in the venture10 To register a company the following documents have to be filed along with an application to the Registrar of Companies: I. Memorandum of Association. This document sets out: The company's name, where the registered office of the company is situated (in England, Wales or Scotland); and what it will do (its objects). The object of a company may simply be to carry on business as a general commercial company. The company's memorandum delivered to the Registrar must be signed by each subscriber in front of a witness who must attest the signature. II. Articles of Association. This document sets out the rules for the running of the company's internal affairs. III. Form 10 gives details of the first director(s), secretary and the intended address of the registered office. As well as their names and addresses, the company's directors must give their date of birth, occupation and details of other directorships they have held within the last five years. Each officer appointed and each subscriber (or his or her agent) must sign and date the form. IV. Form 12 is a statutory declaration of compliance with all the legal requirements relating to the incorporation of a company. It must be signed by a solicitor who is forming the company, or by one of the people named as a director or company secretary on Form 10. It must be signed in the presence of a commissioner for oaths, a notary public, a justice of the peace or a solicitor. 4. a. Three examples of matters that articles of association may contain are: I. The number of members with which the company proposes to be registered must be specified. II. The articles of association must contain the power to alter the memorandum in order to impose unlimited liability upon its directors, managers or any managing director. III. The articles of association may authorize the issue of redeemable of preference shares and authorize the company to increase its capital. It is possible to ensure that the articles, which specify the maximum and minimum number of directors, cannot be changed later, either by some provision in the articles themselves or by some arrangement outside these articles of association. Bibliography Halsbury's Laws of England Company Law - Palmer Company Law and Corporate Finance - Eilis Ma Ferran, Oxford University Press, 1999 Company Law: Theory, Structure, and Operation - Brian R. Cheffins, Clarendon Press, 1997 An introduction to Company Law in the Commonwealth Caribbean - Rambarran Mangal, University of the West Indian Press, 1995 Examining the Law Syllabus: The Core, P.B.H. Birks, Oxford University, 1992 Yearbook of European Law - Vol.4, Clarendon Press, 1982 Law Making, Law Finding, and Law Shaping: The Diverse Influences, B.S. Markesinis, Oxford University, 1997 The Multinational Challenge to Corporation Law: The Search for a New Corporate Personality, Phillip I. Blumberg, Oxford University Press, 1993 The Rule of Law and Economic Reform in Russia, Jeffery D. Sachs, Katharina Pistor, Westview Press, 1997 Industrializing English Law: Entrepreneurship and Business Organization, 1720- 1844, Ron Harris, Cambridge University Press, 2000 Read More