Company Law.

Company Law

Company Law focuses on the formation, governance, and regulation of companies, covering key issues like corporate structure, duties of directors, shareholder rights, and insolvency. Here's an in-depth overview of its essential principles and practices:

Nature of a Company

Definition

  • A company is a separate legal entity from its owners, created by registration under the Companies Act 2006 (CA 2006).

Characteristics

  1. Separate Legal Personality:

    • A company has its own legal identity (Salomon v A Salomon & Co Ltd).

  2. Limited Liability:

    • Shareholders are liable only to the extent of their unpaid shares.

  3. Perpetual Succession:

    • The company continues to exist regardless of changes in ownership or management.

  4. Ownership and Management Separation:

    • Shareholders own the company; directors manage it.

Types of Companies

  1. Private Companies (Ltd):

    • Cannot offer shares to the public.

  2. Public Companies (PLC):

    • Can offer shares to the public and must meet higher regulatory standards.

  3. Limited by Shares or Guarantee:

    • By Shares: Members' liability is limited to the value of their shares.

    • By Guarantee: Members guarantee a specified sum in case of winding up.

  4. Unlimited Companies:

    • No limit on members' liability.

Company Formation

Incorporation Process

  • Governed by CA 2006, Part 2:

    • Submit a Memorandum of Association.

    • Prepare Articles of Association (or use Model Articles).

    • Register with Companies House.

    • Obtain a certificate of incorporation.

Legal Effects of Incorporation

  • Separate legal personality (Salomon principle).

  • Contracts and liabilities bind the company, not its members or directors.

Corporate Constitution

Memorandum of Association

  • A formal document stating the company’s intent to incorporate.

Articles of Association

  • Set out rules governing the company’s operation (e.g., director powers, shareholder meetings).

  • Can be altered by a special resolution (CA 2006, s.21).

Doctrine of Ultra Vires

  • Historically limited company actions to those within its objects.

  • Modern companies generally have unrestricted capacity unless specified (CA 2006, s.31).

Corporate Governance

Directors

  • Responsible for managing the company.

  • Appointment and Removal:

    • Appointed per the Articles or by shareholders.

    • Removed via an ordinary resolution (CA 2006, s.168).

Duties of Directors (CA 2006, ss.171–177):

  1. Act within Powers (s.171):

    • Follow the company’s constitution and powers.

  2. Promote the Success of the Company (s.172):

    • Act in good faith for the benefit of the company.

  3. Exercise Independent Judgment (s.173).

  4. Exercise Reasonable Care, Skill, and Diligence (s.174):

    • Objective and subjective standards apply.

  5. Avoid Conflicts of Interest (s.175):

    • Declare interests in proposed transactions.

  6. Not Accept Benefits from Third Parties (s.176).

  7. Declare Interest in Proposed Transactions (s.177).

Shareholders

  • Own the company but are not involved in day-to-day management.

  • Rights include:

    • Voting on resolutions.

    • Receiving dividends.

    • Access to company records (CA 2006, s.116).

Share Capital

Types of Shares

  • Ordinary Shares: Entitle holders to dividends and voting rights.

  • Preference Shares: Have priority in dividend payments but limited voting rights.

Issuance and Maintenance

  • Companies must maintain records of issued shares and comply with share allotment rules (CA 2006, ss.549–551).

Reduction of Share Capital

  • Must follow statutory procedures (CA 2006, ss.641–644).

Minority Shareholder Protection

Unfair Prejudice (CA 2006, s.994):

  • Shareholders may petition the court if company affairs are conducted unfairly prejudicial to their interests.

Derivative Claims (CA 2006, ss.260–264):

  • A shareholder may bring an action on behalf of the company for a director’s breach of duty.

Just and Equitable Winding Up (Insolvency Act 1986, s.122(1)(g)):

  • Used in cases of deadlock or loss of trust (Ebrahimi v Westbourne Galleries).

Insolvency

Corporate Insolvency Procedures

  1. Administration:

    • Rescue mechanism aiming to keep the company as a going concern.

  2. Liquidation:

    • Winding up the company to pay creditors.

  3. Company Voluntary Arrangements (CVA):

    • Agreements with creditors to avoid insolvency.

Directors’ Duties in Insolvency

  • Avoid wrongful trading (Insolvency Act 1986, s.214).

  • Prioritize creditors' interests once insolvency is imminent (BTI 2014 LLC v Sequana SA).

Key Cases in Company Law

  1. Salomon v A Salomon & Co Ltd (1897):

    • Established the principle of separate legal personality.

  2. Royal British Bank v Turquand (1856):

    • Indoor management rule: outsiders can assume internal company rules are followed.

  3. Foss v Harbottle (1843):

    • Established the rule that only the company can sue for wrongs against it.

  4. Ebrahimi v Westbourne Galleries (1973):

    • Set out principles for winding up based on equitable grounds.

  5. Re D’Jan of London Ltd (1994):

    • Clarified the standard of care for directors.

Practical Applications for SQE2

  1. Advising Startups:

    • On choosing the right company structure and drafting constitutional documents.

  2. Corporate Governance:

    • Advising directors and shareholders on their rights and duties.

  3. Litigation:

    • Representing clients in unfair prejudice or derivative claims.

  4. Insolvency Support:

    • Assisting businesses facing financial distress.

Tutoring Focus Areas

  • Corporate Governance: Duties of directors and shareholder rights.

  • Case Law: Key judgments like Salomon and Turquand.

  • Problem-Solving: Applying the law to practical scenarios, such as minority shareholder disputes or director liability.

  • Exam Preparation: Structuring answers to essay and problem questions.

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