About the Lawcards Series

Commercial Lawcards Glossary

Click on the glossary term to see the definition

Chapter One

Company

A company is a trading structure. It is created by promoters through a process called incorporation. A company can own its own property, is liable for its own debts, can sue and be sued as well as having perpetual succession. There are several different type of company.

Company limited by shares

A company limited by shares is one in which the liability of the members is limited to the amount, if any, outstanding for payment of shares. Once a member has paid for their shares in full, they will have no further liability for the company’s debts.

Company limited by guarantee

In this type of company the members agree to pay a specified amount if the company is wound up. The most common example of a company limited by guarantee is a charity.

Unlimited Company

In this type of company there is no limit on the liability of the members so if the company goes into liquidation then the members must pay the company’s debts as far as they can.

Public Company

Public companies are those companies which can issue shares or debentures to the public. They must have a share capital of at least £50,000 of which a quarter must be paid up.

Private Company

Every company starts out as a private company. Private companies are prohibited from selling their shares to the public. They are small companies, who have greater freedom to operate under the CA 2006

Separate legal personality

Once a company has come into being, it is a body corporate and has a separate legal personality from that of its members and directors.

Veil of Incorporation

There are occasions when the courts will wish to ignore the companyÕs separate legal personality. If this happens the courts are said to lift the veil of incorporation which separates the company from its members and directors.

Partnership

A partnership comes into being when two or more people go into business together. There is no need for any formalities. There is a definition in s 1(1) of the Partnership Act 1890 Ð ÔPartnership is the relation which subsists between persons carrying on a business in common with a view of profit.Õ

Limited Liability Partnership

These were introduced by the Limited Liability Partnership Act 2000. The Act provides for a form of business organisation that offers more protection for those involved than the traditional form of partnership as regards liability, but it also allows more flexibility than a company.

Chapter two

Memorandum of Association

The Memorandum is now a historical document which is incapable of amendment. It contains a statement of intent by the subscribers that they intend to form a company and a statement by the subscribers that they agree to be members and take at least one share each.

Articles of Association

The Articles are a companyÕs rule book or constitution (CA 2006 s 17). Every company must have a set of articles, which can be tailor-made or taken from the one of the model sets. A company can only change its articles by special resolution and any change must be bona fide for the benefit of the company as a whole (Allen v Gold Reefs of West Africa (1900)).

Model Articles

Every company must have a form of articles of association Ðrules by which the company is run. The ready made forms were previously known as Tables. Under the CA 2006 the new model articles are more limited in the types of company to which they apply and are less prescriptive in structure than the old Tables. This is in line with the aim of streamlining regulation of companies.

Name

Every company needs a name by which it can be identified. There are limitations placed on a companyÕs choice of name. It cannot be the same as a name already registered. There are names which are prohibited from use (s.66 CA 2006) and names which require the approval of the Secretary of State because they may suggest a connection with the Government or are sensitive. (Ss.54 and 55 CA 2006). A companyÕs name may have to be changed if it is misleading or too similar to the name of another company (s. 75 CA 2006).

Index

The Index is a list of all registered companies names and is maintained by Companies House.

Objects Clause

Prior to the CA 2006, the Objects clause was vital to a company because it prescribed the limits of what a company could or could not do. If a company carried out an act which was not covered by its objects clause, it could be declared void. Since the CA 2006 and the downgrading of the importance of the memorandum of association, all objects clause will be treated as unrestricted. If a company wishes to restrict its objects it can do so (s.31 CA 2006).

Ultra Vires

Ultra vires in this context means outside the capacity. For a company to be acting within its capacity, it has to observe any limitations placed on its activities by the objects clause. If not, the act can be declared ultra vires and can be declared void. With the change to the importance of the objects clause, the common law doctrine of ultra vires will become less important but because of s.31 of the CA 2006 (the ability to restrict a companyÕs objects) remains relevant.

Class Rights

Every class of share that is created has its own rights. These rights can be, for example, the right to attend and vote at company meetings or the right to share in any surplus on the winding up of the company. Class rights are created in the articles at the time of the companyÕs creation or at the time of the issue of shares. Class rights should be exercised so as not to affect or deprive other classes of their rights.

Variation of Class Rights

Class rights can only be changed in accordance with the provisions contained in the articles or, if there is no provision in the articles, s. 260 CA 2006. A variation of class rights has to be approved by a special resolution of the members of that class or by the written consent of 75% of the members.

Membership Contract

When a person becomes a member of a company, this contract operates on two levels: first to bind each member to the company; and second to bind each member to each other. Under s.33 of the Ca 2006 it is now the constitution of the company that is binding upon the company and its members. (This was formerly known as the s.14 contract.)

Chapter Three

Promoter

Promoters are those people who form the company. In Whaley Bridge Calico Printing Co. v Green (1880), Bowen J said "The term promoter is 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."

Pre-incorporation contract

Promoters may wish to be able to start trading as soon as company is incorporated and as such enter into contracts on behalf of the company. Legally this cannot happen as the company has no legal personality until it is created. Under s 51 of CA 2006 the rule is that the contract will be effective but the promoter will be personally liable on the contract.

Share

The issue of shares is one method by which a company can raise finance. A share is a unit which represents the investment a member has made in the company. The issued share capital is the total nominal value of the shares that the company has issued.

Dividend

If a company makes profits, then those profits may be distributed to the members as a dividend.

Debenture

The issuing of debentures is another method of raising finance. A debenture is the security for a long term loan. Usually there is a set amount of annual return that a debenture holder is entitled to.

Chapter Four

Director

Directors are the officers that run the company. Under s.154 CA 2006 a private company must have at least one director and a public company must have at least two directors. A director will usually be appointed to the office of director and will also enter into a service contract with the company. Directors are subject to various statutory duties under CA 2006. These are: to act within the companyÕs constitution and to exercise their powers for a proper purpose (s.171); to promote the success of the company (s.172); to exercise independent judgement (s.173); to exercise reasonable care, skill and diligence (s.174); to avoid conflicts of interest (s.175); to not accept benefits from third parties (s.176); and to declare an interest in any proposed or existing transactions or arrangements (s.177).

Fiduciary Duty

Despite the new statutory duties, directors still owe fiduciary duties to the company. They are not permitted to make any secret profits from their position and they are under a duty to exercise their powers bona fide for the benefit of the company.

Company Secretary

A company secretary is an officer of the company, but not necessarily a director, who has the responsibility of maintaining various records for the company, such as the minutes of meeting, and ensuring that the company complies with filing requirements. Under s.270 CA 2006 a private company is no longer required to have a company secretary.

Member

Also referred to as a shareholder. The members are the owners of the company. Membership starts from the point where the memberÕs name is entered in the register of members. Members are given certain powers over the company, for example, the power to remove directors. Members have rights under the companyÕs constitution. Examples of rights are the right to dividend once it was lawfully declared and the right to vote at meetings. The first members of the company are known as the subscribers to the memorandum.

Chapter Five

Meeting

There are various meetings that a company may hold. A public company is required to hold an Annual General Meeting (AGM), at which the annual reports and accounts are presented to the shareholders for their approval. Any other meetings are referred to as Extraordinary General Meetings (EGM). Under s.303 of the CA 2006 members may call an EGM. Meetings are subject to strict requirements regarding the amount of notice that must be given of the meeting, usually 14 clear days. If a special resolution is to be voted on at the meeting then 28 days notice is required.

Quorum

This is the minimum number of people that need to be present at a meeting to enable business to be transacted. The rules for establishing that a meeting is quorate are found in s.318 of the CA 2006. Only those entitled to vote may be counted as part of the quorum. For a one member limited company, the quorum is one qualifying person. For other companies the minimum is two.

Resolution

Under the CA 2006 certain matters require that the members of the company vote on them. This type of decision making is done by resolution, where a proposition is put forward and either accepted or rejected dependent on the type of resolution and whether certain thresholds have been reached. An ordinary resolution requires a simple majority of those voting in favour of it. A special resolution requires a majority of 75% voting in favour of it. Private companies may also use written resolutions to conduct business.

Chapter Six

Minority Protection

Because of the way that companies are governed it is usually the will of the majority that prevails. For example, a special resolution requires 75% of the members to vote in support of it to be passed. This means that a small but significant group of shareholders may find that their wishes are ignored. In common law this was tackled in the case of Foss v Harbottle, which established that if any wrong were done by the actions of the majority, the wrong was to the company. However, it was established that minority shareholders could bring complain about unfair conduct in a series of limited exceptions to the rule in Foss by way of what is called a derivative action. This has now been put on a statutory basis by the introduction of s.260 CA 2006. Members can still complain of any ill treatment by use of the unfair prejudice sections in ss.994 Ð 996 CA 2006 or resort to asking the court to winding the company up under the Ôjust and equitable groundÕ found in s.122(1)(g) of the Insolvency Act 1986.

Chapter Seven

Fixed Charge

This is a charge that is given over a specific asset to give a lender a security in case the charge is not repaid. Once a fixed charge has been granted, the company cannot deal with the asset without the permission of the charge holder.

Floating Charge

This is a charge that is given over a class of assets. The type of assets are those such as plant, machinery or stock, which will not remain constant.

Crystallisation

This is term that is given to the process of a floating charge attaching itself to a class of assets. This means that the floating charge has become a fixed charge. Crystallisation may occur if the business ceases, the company goes into liquidation or an event specified in the companyÕs constitution occurs.

Insolvency

This is found in s.122 Insolvency Act 1986. A company is insolvent when it is unable to pay its debs when they fall due.

Receivership

A receiver is the person appointed by a lender to take control of the company and to pay off the creditor.

Administration

Administration is a process whereby a person is appointed in order to rescue a company as going concern.

Liquidation

There are two types of liquidation. Compulsory liquidation occurs when there is a court order granted to wind up the company. Voluntary liquidation if the members or creditors have requested that the company be wound up.

Priority of Payment

This is the order in which creditors must be paid off during a liquidation. This is set down in the Insolvency Act 1986.

Wrongful Trading

This is where directors of a company who either know or should have known that there was no reasonable prospect of a company avoiding an insolvent liquidation but continued to trade. Those directors can be made liable for the losses incurred (S.214 IA 1986).

Fraudulent Trading

This is where the business of a company has been carried with an intent to defraud creditors. It is not limited to actions of the companyÕs officers. The court can make an order against the person responsible for continuing to trade (s.213 IA 1986).

Takeover

Where a business is brought by another company. This is usually done by way of share purchase in order to gain control of the target company. Takeovers can be friendly, (done by agreement between the companies) or hostile (where the target company will advise the members not to accept any offers to buy their shares).

Scheme of Arrangement

This is an agreement between a company and either its members or it creditors, which is usually entered into in order to achieve a compromise between the parties to pay off debts.