United Kingdom Company Law – Incorporation [Part 1]

1 Promoters and pre-incorporation contracts

As we know about the promoters before, the one who forms company known as promoter. They must act with reasonable skill and care and in the good faith of company.

1.1 Types of promoters

1. Professional promoters: they are the experts of their promotion work and take all necessary steps to promote the company.
2. Occasional promoters: they do not work on regular basis but they take interest in floating company and once it is over they may go to their original profession. i.e. lawyers and engineers etc.
3. Entrepreneur promoters: they are both promoters and entrepreneurs. For example when a person wants to do a business and do all the groundwork from scratch to end and later on takes part in management.
4. Financier promoters: they are the financial institutions like investment banks.

If promoter is the owner also then there will be no conflict of interest but if promoters sell all or some of the shares then they becomes the agents of the company and then they have to follow all the customary duties of the agent and following fiduciary duties.

1. General duty of care and reasonable skill.
2. Duty of accountability
   1. A promoter must have to disclose all the transactions and the income from these transactions
   2. They must have to disclose profit or any other benefit obtained through acting as a promoter.
   3. Duty of fiduciary relationship: They must act in the good faith of company and do not put themselves in a position where conflict of interest arise between company and themselves.

Promoters have right to obtain personal benefits or profits but they can only make legitimate profits while they may be liable for the wrongful profits. The promoters have to give full disclosure about their personal profits.

If the promoters actions resulted in secret profits then there may be following remedies

• Damages
• Recovery of undisclosed profits or benefits
• Rescission
• Retention of promoter’s property

2 Pre incorporation of expenses and contracts

Pre incorporation contracts are the contacts made by the promoters on the behalf of company that does not exist (before its formation).

Promoters are liable for the pre incorporation contracts and company is totally free from all the liabilities of pre incorporation contracts because these contracts are not legally binding upon the company so cannot be enforced.

The company could not ratify the contract however it may form a new contract with may or may not same terms and conditions after its incorporation.

• Contract remains as a draft until company is formed
• If promoters are the directors then after the formation of company, directors take the office and company enters into the contract.
• Novation: if the original contract contains a clause that liability of promoters ceased after the formation of company and it enters into the contract with same terms and conditions.
• If a person contracts on the behalf of new company before it is bought then the company is able to ratify the contract. 

All the expenses incurred at the time of company’s formation before its incorporation are considered as pre incorporation expenses.

Pre incorporation expenses recovered by the promoters after its incorporation

Examples

• Drafting expenses for documents
• Legal expenses
• Professional fee

3 Statutory books and records

Statutory books are official records of companies related with all legal and statutory matters. Every company is required to keep the statutory books and records for a fixed time period.

These books and records give true picture of company history with all matters and issues necessary to keep in safe. These records kept in safe at companies’ house (registrar office). These records are generally kept in hard form prepared by company secretary or directors but now a day’s all the records are easily available in computerized form and some of the books and records are available for inspection by the general public.

1. Register of members ( shareholders)
2. Register of directors
3. Register of company secretaries
4. Register of director’s interest
5. Register of director’s service contract
6. Register of debenture holders
7. Register of charges
8. Register of minutes and resolutions

When company needs any information about any shareholder then it may be provided by the registrar at the Companies House. The register of members contain following information.

• The names and addresses of all the members
• The date at which each member entitled to become a shareholder of the company
• The date at which any member ceased to be a shareholder
• The number of shares held by each member
• The class of shares (ordinary or preference shares) held by each member

All others members have access to view these records free of cost ,general public have also access but they have to pay before inspection.

The register of directors contain following information;

• The names and official addresses of all the directors
• The present and the former surnames and forenames
• Some personal detail with date of birth, their home address and nationality as the directors have legal obligations. And government agencies and interested third parties may be aware of the names and address in order to serve a statement of claim on corporation.
• The date of joining and resigning of all directors
• Business occupation

All the members have access to view these records free of cost, general public have also access but they have to pay before inspection.

This register gives following detail;

• The number of shares held by each director
• The class of shares (ordinary shares, preference shares or debentures) held by them
• The number of shares held by their spouse and their children under the age of 18

Only the members and directors are entitled to view these record and general public have no access on these records.

This register is basically about the contracts between company and one of its directors including the copies of the service contracts between company and the director under which the directors’ employment is not less than one year.

This register also contains the copies of any other contract made between company and the directors related with any provision, third party guarantee, and other matters or responsibilities of companies.

Only the members can view the records of directors’ service contracts with no fee but for copy of these contracts they have to pay for the set fee.

All the related information about the company secretaries must be kept in record with following detail;

• Listing all the names of company secretaries since its formation as the company secretary may be changed after some period.
• Listing the full name, address, nationality and profession of each secretary
• Must contain all the contracts made between the company secretary and the company.

The required information related with register is available free of cost to members and at charge of nominal fee to general public.

This register is not compulsory required by the statute. This register contains information about all the debenture holders that to whom and how many debentures are issued.

This register is compulsory required by the statute even if the companies have no charges. This register contains following other detail.

• Description of charge either floating or foxed undertaking the company’s property
• Nature of the asset (current or non-current asset) with brief description undertaking the charge
• The amount of the charge
• Copies of the instruments creating charge
• The name of person entitled to the charge

The required information related with this register is available free of cost to members and creditors and at charge of fee to general public.

This register contains all the board resolutions and minutes of all meetings by the directors and shareholders. Generally following types of board resolutions and minutes are included and kept in record at Companies House.

• Minutes of general meeting
• Minutes of AGM
• Minutes of EGM
• Documents related with directors first board meeting
• Board resolution passed for applying and accepting bank facilities (leasing, loan, pledge)
• Board resolution passed for purchasing non-current assets (building, vehicles)

From this book only the minutes of general meeting are available to shareholders

4 Accounting records

For any business in an organization or company, there is a system of accounting which must be recorded in hard copy or in computerized form.

All the sources of information and evidences related with the business transaction, financial position and performance in a prescribed form simply known as accounting record. Each type of accounting record gives different detail or information about the business and each is used for different purpose.

Some of the accounting records are given below, these maintained with day to day transactions of the business.

Simple accounting records

• General ledgers
• Trial balance
• Receipts and invoices
• Statement of assets and liabilities
• Statement of stock held by the company
• Statement of business contracts and agreement
• Bank statement
• Litigations and statements of claims
• Loan statements and agreements
• Statements of provisions and liabilities
• Annual accounts

Accounting records must be carefully maintained at the registered office and only the company officers(senior director , manager and secretary) are permitted to inspect them while other employees and members shareholders) have no right to view or inspect these records.

Public companies are required to keep these records for six years and for private companies the limit of time period is reduced to three years only.

5 Annual accounts

Annual accounts are the detail accounts covering 12 months period having detail of all the business transaction during the financial year.

In other words we can say a formal record of financial activities of business during the financial year.

These annual accounts are prepared from the source documents of simple accounting records and prepared by the directors and accountants in the company.

 These accounts are prepared according to the companies Act format or International reporting standards of accounting

Following are most important and compulsory required annual accounts by the public company.

1. Balance sheet an alternative name of statement of financial position and it gives the position of business through assets, liabilities and equity.
2. Income statement alternative names of statement of comprehensive income or trading and profit & loss account and it gives the detail of revenue and expenses and ultimately gives the final figure of profit and loss.
3. Statement of cash flows it gives the detail of total cash inflows and cash outflows through operating, investing and financing activities.

After the preparation of annual accounts, these accounts approved by the board of directors and company secretary and finally from the CEO before publication. After the annual general meeting these accounts are published and also send to the all members for their satisfaction. All the members have right to inspect these accounts.

Now a day’s these accounts are available in electronic form also so a link can be send the member so the accounts via internet but if member ask for a hard copy then a company have responsibility to send the accounts in hard copy free of cost.

Features of annual accounting records or financial statements

• These accounts must be prepared with due diligence and care which give true picture of the financial position and performance of the business.
• Accounts must be audited before publication and available to members.
• Must be prepared with summarized form and easily understandable by the general public and members
• Covering a period of not less than twelve months

6 Annual return

This is the statutory document required by all the registered companies.

Annual return is prepared each year and gives essential information of business core activities, business position and investment composition. Some of the important points are given below;

• Address of company’s registered office.
• Name and address of all the members (shareholders and debenture holders), directors and secretaries
• Type of company with its objective (mission statement) and core business activities
• Total nominal value of issued share capital with paid and unpaid nominal value of total shares
• Rights of shareholders at each class and the total number of shares for each class
• Listing the members who ceased to be a member and the number of shares transferred to other members.
• Detail of dividend ,interest and capital gains/losses
• Copy of latest financial statements (annual accounts)

7 Constitution of a company

Constitution is a formal document which is drafted by the person wants to register the company.

It is basically a set of rules which forms the bases that how an entity operates in a legal world. The two documents jointly form company’s constitution:

1. Memorandum of association
2. Article of association

The above composition was much used before oct-2009 but after 0ct-2009 according to companies’ act 2006 a new composition of company’s constitution is as follows:

1. Article of association
2. Resolutions and agreements

As we know about the memorandum of association before, old document in which members state their willingness to form a company and also agree to become a member of a company. Members also agree to take one share each from the company’s share capital.

We can simply define as resolution is prescribed decision to do or not to do something. Resolution is more formal decision made by the company directors and senior officers. Before taking any big decision a resolution must be passed

Let’s take an example;. Company want to take loan facility from a bank , so all the directors meet together in the presence of company secretary and chairman and decide the amount of loan ,its purpose ,benefits and total expense versus outcome and then finally all mutually agree to take the loan facility. After it company secretary prepare a document o which it is stated that a meeting is held and following directors and chairman mutually agree to take loan facility from the bank with following terms a conditions and then all directors and chairman sign the document and finally approved by the company secretary. Now this is called resolution.

Now these resolutions and agreements may or may not affect the company’s constitution as the agreements and resolutions propose new terms and rules and sometime change the provisions in the articles. That’s why these are the part of company’s constitution.

To make these resolutions and agreements more effective the copies of resolutions and agreements must send to the registrar within 15 days of being passed and agreed. 

If company fails to send the copy of resolution and agreement to registrar within 15 days then every person signed on the resolution will be punishable.

As we have discussed before about the article of association, a set of documents with rules and regulations about company administration, management and its core operations.

There are following important areas on which article contains rules and regulations.

• Appointment and dismissal of directors
• Powers, responsibilities and liabilities of directors
• Directors meeting
• Company secretary
• General meetings and class meetings
• Shareholders rights and dividends
• Issue and transfer of shares
• Provisions and claims
• Winding up conditions
• Confidentiality of matters

To consider above areas, companies made their own rules and follow them but it is not right for all companies because model articles are also available that companies can adopt.

Model articles are the standard articles with all necessary specifications needed in the company. Different model articles available for different companies, so companies are free to use any model articles and also amend some terms of the articles according to the specific needs of the companies.

If companies failed to adopt any article at the time of incorporation then by default model articles must be followed but members have right to amend the article according to their own wish later on

Before the alteration of article following points must remember

• To pass special resolution
• 75 % majority
• Alteration must be in favor of company

But alteration will be void if it conflicts with the companies Act

To make this effective a copy of special resolution sends to the registrar within 15 days of its being passed.

Sometimes article may be restricted to amend for the following reasons;

• To protect the interest of minorities
• To be in good faith of company
• To protect the rights attached with shares if other class of shares varies these rights
• If amendment is not under the legal framework and not according to companies Act
• If subscriber is not willing to accept more liability on shares

8 Company objects and capacity

For every work to perform there may be a reason behind it, this reason become its purpose and aim which is achieved after the completion of work. Same is the case with companies, companies are formed for some purposes and different people work together and put their efforts to achieve that purpose. They perform all those activities which they assume to be helpful to achieve their purpose. So these overall purposes and aims or goals are the company objects and extent of these objects known as capacity.

Before the companies act 2006, company objects are included in the memorandum of association by including a paragraph named objects clause which sets out everything a company can do or perform. This object clause fixed and if companies try to enter in any agreement or work which is not included in the object clause then this activity is considered as ultra vires.

 All the activities must be in accordance to the object clause and all the directors and company officers are also binding to do so.

Let’s take an example of a person who has a company to manufacture shoes and it is also included in its company object clause that they can manufacture shoes but after some time they decided to start manufacturing ladies hand bag, now it is considered as ultra vires. So company has now no capacity to enter into new activity.

Case law

To understand it more clearly, in history a well-known case Ashbury Railway carriage and iron Co ltd v Riche about it. According to this case law company had the object clause ‘’ to make or sell, to lend or hire, railway carriages’’. But after it directors of the company decided to gave out loan for construction of Railway in Belgium. Later on House of Lords held and simply the act was ultra vires.

This policy was introduced to protect the investment of shareholders and creditors.

By introducing this policy lot of benefits and secured investment plans built but with all its positive signs some are its drawbacks also. The prominent one is, this policy restricts the variety of work and flexibility of business to expand and grow.

So to overcome this drawback a new constitution introduced according to the companies act 2006 in which memorandum of association was omitted and objects are included in article of association with no fixed object clauses.

According to it companies can do everything which is lawful.  So now companies no needed to draft longer object clauses but to restrain from difficult situations the Act 2006 clarified the legal position of companies. And also gave the rights to shareholders that they can sue on directors for any loss or disagreements by the directors.