United Kingdom Company Law – Incorporation [Part 2]

1 Company constitution with contracts

According to company constitution there may be three types of contracts

  • Company and members
  • Members and the company
  • Members and members

According to company’s constitution, above three types of contract are binding while the constitution does not allow the contract between company and the third party.

2 Company names

2.1 Rules for selecting the name of companies

The name of companies or any businesses show their identity.

With all other regulations practiced in the companies for any activity or decision, the rules are also available for choosing the name of companies. Choosing the name of company is a sensitive area so there are following statutory rules which must be followed by the companies at the time of incorporation.

The name of each company must end with a specific word according to the type of company i.e for public companies the name must show (plc) public limited company and if company is private then show limited at the end.

A company cannot choose a name which is already available in the statutory index at the Companies House. As we know that a separate register is maintained at the Companies House which contains all names of companies, private or public. So when a new company takes registration and provide name that name must be easily distinguished from others. So it is not possible for Companies House to issue two registration numbers for two companies with identical names. Lots of difficulties and issues may arise in this case.

The name would not be acceptable by the registrar which is offensive or leads to show criminal activity. So the proposed name must be in the legal framework.

The Act also prohibits the name which shows a connection to the government sector or local authority. And sometimes a official approval needed for relevant profession. For example the companies wishing to use the word of ‘’Bank, Banking or Deposit ‘’ must submit the approval from Financial Service Authority.

2.2 Publication of the company names

  1. After registering the name of company at Companies House the companies must publish its name at following places and documents.
  2. Outside the registered Head Office and all other places related to the company.
  3. A full name must be available at the website of company.
  4. On all letter heads (business letters) , forms and notices and official publications.
  5. On all invoices and receipts raised by the companies.
  6. On all bills of exchange, letter of credit, promissory notes, cheques and orders for money.

2.3 Disputes about company names

As we have discussed before that some difficulties may arise if statutory rules are not followed by the companies in choosing their names. One of it discussed here that is passing off action

2.3.1 Passing-off action

Passing off action is treated under the civil crime in which one person try to infringe the rights of others by misleading or misrepresentation. This issue is relevant at choosing company names for example; a business try to trade under the similar name of other business or company (may be a well-known and customers trusted fully) that confuses customers and other related parties. In this way, customers and other related parties believes that both companies are same.

Case law

Awing v Butter Cup Margarine Co Ltd

In this case the issue arises between Buttercup Margarine Co established in 1916 and Buttercup Dairy Co since 1904. Buttercup Dairy Co claimed to restrain the business of Buttercup Margarine Co when they decided to expand business in South of England where defendant Co established newly. So it was decided to restrain the business of defendant Co (Buttercup Margarine Co) because there could be confusion between two businesses.

if two businesses have similar names but there is no possibility of confusion or misleading then both can continue with their original names as in the case law Dunlop pneumatic Tyre Co Ltd v Dunlop Motor Co Ltd. Effects of passing-off action

Passing of action is treated under common law remedies and if it occurs it has following effects.

  • Loss of customers
  • Loss of good will because quality may reduce by the passing off business and customers believe it by the trusted business
  • Loss of revenue and income Remedies

  • Take legal action against it and court may order for injunction
  • The victim party can claim for compensation of cost equal to loss of income and good will

2.4 Changing company’s names

Companies may change their names by a prescribed method

  • Pass a special resolution in which all directors and company secretary meet together and decided the proposed name.
  • Send a copy of resolution to registrar within 15 days of being held.
  • Change should be according to the article
  • A certificate of incorporation is issued at the proposed name

But after the change of name, company is still a same legal entity as before.

3 Financing Companies

In this section we will discuss in more detail about the matters of companies. Here we will discuss that how companies cope operations through personal money or how raise funds from public. How capital is maintained and through which procedures it is improved and later on we will talk about the dividend law also in the last of this section.

This section is categorized in three parts;

  1. Share capital
  2. Borrowing and loan capital
  3. Capital maintenance and dividend law

3.1 Share capital

Authorized capital:

The amount of capital with which a company is registered with the registrar of companies (body responsible for registration of companies). It is the maximum amount of capital which a company can raise through shares i.e. shared capital can be maximum up to the authorized capital and not beyond. Due to this reason companies are registered with such authorized capital which is well above their current needs of financing so that if more is needed in future then it is easily possible. Authorized capital is also called Registered capital or Nominal capital.

Subscribed capital:

The amount of capital (out of authorized capital) for which company has received applications from the general public who are interested in buying shares. If this term is too technical to be understood then subscription is simply an application in which investors expresses his interest to buy shares in the company. Usually only that much shares are subscribed which company intends to issue later. But sometimes, if company is in good shape then more and more people will be interested in buying shares and in this case over-subscription will be the result. But if company’s financial position is not sound or due to other factors it may be possible that subscriptions are received for lesser then intended shares in which case there will be under-subscription.

Issued capital:

The amount of capitals (out of subscribed capital) that is issued by the company to the subscribers (that are now shareholders). 

Called-up capital:

In some jurisdictions, company is permitted to ask for only part of the total issued capital i.e. company will require shareholders to pay only part of the amount of the shares they hold and not to pay fully. The partial amount (out of issued capital) so asked by the company from the shareholders out of the total value of shares is called-up capital.

Paid-up capital: The amount of capital (out of called-up capital) against which the company has received the payments from the shareholders so far.


ABC Ltd was registered with registrar with a registered capital of Rs. 20,000,000 where each share is of Rs. 10.

In response to the advertisements made by the company to buy shares in the company applications have been received for 1,000,000 shares but company actually issued 700,000 shares where company has called for Rs. 8 per share.

All the calls have been met in full except three shareholders who still owe for their 6000 shares in total.


Authorized capital = Rs. 20,000,000

Subscribed capital = 1,000,000 x Rs. 10 = Rs. 10,000,000

Issued capital = 700,000 x Rs.10 = Rs. 7,000,000

Called-up capital = 700,000 x Rs. 8 = Rs. 5,600,000

Paid-up capital = 5,600,000 – (6000 x Rs. 8 ) = Rs. 5,552,000

All of these types are basically types of share capital so, they are usually stated as following also:

  • authorized share capital
  • subscribed share capital
  • issued share capital
  • called-up share capital
  • paid-up share capital

4 Types of Shares

Before going on the types of shares we have to define share.


The unit of share capital is share. Share is a written document purchased for a nominal value in return carrying right of ownership in company, dividend and some obligations and the owner of share is called shareholder.

In other way we can say that share is the form of property owned by someone else (shareholder) but it could be transferred from one person to another.

We can define it in another way also that share is the interest of shareholder in a definite portion of the capital, so it shows a proprietary relationship between the company and the shareholder.

When shares are allotted it must be paid for, the selling party (company) receives cash or sometimes services and the other party receive the right of ownership in the company. Shares are paid fully, or sometimes in two or more installments. The share holders receive long term benefit in the form of dividend. So shareholders are the proportionate owner of the company.

Value of share

The value of share can be can in the following ways;

Nominal value—–the nominal value can also be termed as face value or the par value. It is that price which is defied the share certificate and also specified in the memorandum of association. For example 50,000 shares with each carry £1, so the nominal value of each share is £1.

Exchange value——–when shares are allotted to shareholders, they may be allotted at different prices at different time. The share having nominal value £1 can be issued at £ 2.5 or £3.5. This shows its exchange value

Transfer price/value———sometimes shares of private companies transferred from one person (actual owner) to another person at the price which they mutually agree. This price is known as transfer price.

Market value——as we know the shares of public companies are listed on stock exchange. The price of share changes every moment relevant to the market. This price is known as market value of the share.

4.1 Types of shares

Shares may be of three types

  • Ordinary shares
  • Preference shares
  • Redeemable shares
  • Cumulative preference shares
  • Deferred shares
  • Bonus shares

From the above types of shares, two of them are most important and discussed below in detail;

Ordinary shares

Ordinary shares are also called as equity shares. These are the most common types of shares and come of the companies categorized ordinary shares into two classes, one is class ‘’A ‘’ordinary shares and class ‘’B ‘’ordinary shares.

Features of ordinary shares

There are following rights attached with the ordinary shares.

  • Right of dividend—-ordinary shareholders are entitled to receive dividend which is, a definite share from the profits of company. But they can only receive when it is announced by the directors that dividend is proposed at the following date to ordinary shareholders.
  • Dividend is paid to ordinary shareholders after the preference shareholders.
  • The dividend of ordinary shareholders is not fixed but it depends on the company’s performance. As the performance is good the dividend is increased.
  • Right of vote——ordinary shareholders are entitled to vote at the AGM ( annual general meeting ) and other meetings and one share attached one voting right.
  • Right of payment after preference shareholders—–at the time of winding up company, ordinary shares will be paid for their capital at the last when all preference shareholders and creditors paid fully.
  • Right to appoint or remove Directors and Auditors——–Ordinary shareholders have right to appoint or remove directors and auditors.
  • Ordinary shareholders have right to call meeting and may propose resolutions.
  • They are entitled to approve company’s final accounts and proposed dividend.

All the shares having common features grouped together in one class.

4.2 Preference share

Preference shares are superior than ordinary shares because they carry more befit and fewer risks as compared to ordinary shares. Preference shares are also divided into two classes, cumulative preference shares and hybrid shares.

Features of preference shares

Following are the features attached with preference shares.

  • Prior right of dividend——-preference shareholders are entitled to receive divided very first.
  • A fixed dividend is paid to preference shareholders for example if company issue 500,000 shares with 10% preference right then 50,000 will be paid each year.
  • Ordinary shareholders never pay a high dividend if company’s progress well as their dividend is fixed and irrelevant with company’s performance.
  • They will be paid first for dividend and capital return before ordinary shareholders.
  • They have no voting right in any meeting.
  • They will not be paid any dividend if company’s profits are nil or suffers loss except in the case of cumulative preference share.

5 Allotment of shares and issue of shares

As we have discussed before that companies may be financed through different ways but the most popular way is by issuing shares. Public companies can easily raise finance through this way.

There may be a slightly difference between ‘’allotment of shares’’ and ‘’issue of shares’’

Allotment of shares is the first step before the shares issue in which a potential shareholder gets an unconditional right to be a member in the company’s register of members in respect of shares according to companies Act 2006.

When shares are allotted to a specific person it becomes the allotee of shares and that person has now contractual right to receive that shares.

The next step is to issue shares to allotee having contractual right to have it and when shares are issued a legal title of ownership is transferred to allotee through a certificate and then name of the allotee is entered in the companies’ register of shareholder.

So it is concluded that allotment of shares is simply ‘’the creation of shares’’ and issue of shares is then ‘’transferring shares to subscriber’’

5.1 Purpose

Why shares are allotted and issued?

Generally we all know that shares are issued to finance the companies but here are some benefits and purposes in more detail than to just say ‘’financing of companies’’. Money is collected from shares issue which could be used for the following purposes;

To enable companies to trade through borrowed money from public

To meet all other expenses and repayment of short term borrowings from creditors

New funds through issue of shares also enable the business to grow and expand its operation.

It may be used to purchase another company (subsidiary)

To enhance the financial position of business

An option share is made to director or any other employee of the company

More shares also issued in return of dividend to existing shareholders

How shares are allotted and issued

Shares are allotted and issued through a specific procedure that is separate for public and private companies

In private companies

As we know that private companies cannot trade shares publically as it is restricted under the article of association.

In private companies shares are simply transferred by a private agreement and shares are only transferred to close family members, friends and relatives and not to general public.

Before allotment an application must be send to the director of a company and then shares allotted and issued to the potential shareholder.

In public companies

In public companies, shares can be traded publically so there are easier ways for public companies to sell shares in general public.

They can sell shares through prospectus in public offer in which all information related to buying is given and the person who wants to purchase shares can easily apply to purchase them

Placing is another method in which some people or institutions purchase shares in a small number of large blocks through a predefined agreement and price.

Director’s power and authority in relation to share issue

Directors are the stewards of company and they are responsible in all regulation all major functions and activities so a share allotment is a big function maintained by the companies. In private companies this function is more straightforward because there is a one class of shares (but not always) so directors have authority to allot the shares in one class.

But when shares are divided in more than one class of shares like in public companies then directors have no power to allot shares without authority from members due to pre-emption rights 

Pre-emption rights

As we know about the pre-emption rights in which, an existing shareholder holder have statutory right to acquire new shares of same class before offering to another person.

Pre-emption right is also called as subscription right.

According to the companies Act 2006 through pre-emption rights a company must have to follow following terms before general offer of shares;

  • Offer has been made to existing shareholders of the same class
  • The time limit has been expired to accept the offer given to existing shareholders
  • The time limit must not less than 14 days of the offer

Right issue

The right of existing shareholder to subscribe for more shares in the same class.

In right issue, companies offer their existing shareholders to buy more shares as it is in pre-emption rights and this agreement may be underwritten.

In right issue, shares are offered to members and then offer remains open for 21 days for acceptance but if it is not accepted within 21 days then this offer can be made to the public.

But sometime this rule of pre-emption right can be cancelled, known as disapplication of pre-emption rights.

Bonus issue

In bonus free shares are issued to existing shareholders mean without consideration from shareholders but equal to the shares issue, company reserved changed into share capital.

For example a company issued 1 bonus share for 2 existing shares. It means one free share is issued to a person having two shares already. If a shareholder has 6000 shares already then in bonus issue, 3000 (1*6000/2) shares will be offered to him/her.