Advantages of incorporation

Question 1

This question requires the explanation of the incorporation, limited liability, separate legal entity, other advantages of incorporation and a brief discussion on the preserve manner from partnership. These issues will be dealt with separately and advised accordingly based on the facts of the case.

While Emma (E) is considering to expand her business with both David (D) and Chris (C ). D suggested that it would be a wise option to form a private company limited by shares. (s4(1))

It is acknowledged in the United Kingdom that there are varieties of business formation in existence, among them are; the sole traders, partnerships and others but there is no doubt that the dominant form of business association here are companies. The listed forms have their own distinctions, therefore E could be said to have other alternative from, basically either a private limited company or a partnership if she wishes to expand her business in addition to which D had suggested.

Incorporation is the forming of a new corporation. As we shall see, a sole trader is the most simple, legal form of business which is owned and controlled by one person. While applying it on E, it may be obviously inappropriate for E's expanding plan since they have 3 parties. Therefore it would be suggested that, it should take partnership and registered company into account for consideration.

Pursuant to Section 1 of the Partnership Act 1890 defines as “the relationship which subsists between persons carrying on a business in common with a view of profit.” This provision can be a danger to the unwary with its broad definition. For instance, partners of a partnership can associate a business without incorporating. Furthermore, if one of the partners dies, the particular partnership will deem to be ended. In other words, each partner seems to be merely an agent of the others, and manifestly it would only be appropriate for a small number of persons who have certain degree of trust on each other.

Also,among the parties it requires the ability to provide sufficient funds for the business from their own resources which means that there is a possibility that such organisation may be inadequate for the development of modern capitalism in partnerships since it does not provide any limited liabilities to business people.

Concerning with limited liability, it is the major difference between partnership and registered company and it is significant. Pursuant from the ambit of “Limited Liability Act 1855(hereafter LLA 1855), the general limited liability was introduced with the purpose to generate economic growth in the wake of the industrial revolution.” “Limited liability provides a means by which entrepreneurs and investors could join forces to raise capital and trade that capital with limited risk to their personal wealth.”

Further in section 3 (1) LLA 1855 which provided that, the liability of a member of a company may be limited by shares or by guarantee. Most of the time, it happens either to small or medium company, whereby there are only a few members in the company's framework with the majority being directors as well.

Hereby, question arises, shall the company become insolvent if repayment problem occurs? With the protection of limited liability, unlike unlimited company, a limited company does not need to bear the debts of the company. In other words, it means the members of the company are only liable for the amount unpaid on their shares and not for the debts of the company. It also minimises the risk for investors and it is said to encourage investment and shareholders will not lose everything in the investment.

Apart from liability limited, separate legal entity is another major advantages of incorporation.

The effect of separate legal entity are illustrated in Salomon v Salomon as a keystone of company law with the symbolic of incorporation. By virtue of Salomon, a company is a separate legal entity and a veil of incorporation is drawn between the persons dealing with a company and its members.

In Salomon, Mr Salomon (S), sold his business and he form a new company as he knew he needed 7 member to form that company. Apparently, S had 5 children,added on his wife and himself, 7 member were found. He elected his two children together with him,to be the company's directors. Besides, being a shareholder and director of the company simultaneously, later S become debenture holder as well with the portion of 10000 pounds debentures on hand.

Later, the company went into liquidation and the liquidator asked S to pay all the debts since he was the owner of the company. Hereby, S did not agree with it, upon it trial judge Vaughan Williams agreed with the liquidator and asked S to pay on behalf of the company. S appealed to Court of Appeal. Court of Appeal held that the others 6 people in company is just merely nominees of S therefore he have the obligation to pay the debts.

Case appealed in House of Lords(HOL), where HOL quashed all the previous judgements

and said that there is neither fraud in the manner which S formed the company, nor S formed the company for fraudulent purpose. Therefore, S did not have to pay to the company's creditors since S and the company are two separate entities. Also,HOL found that, technically, shareholders who were holding shares were irrelevant; the registration procedure could be used by individual to carry on what was in effect a one-man business.

Furthermore, the best illustration of principle of Salomon was happened in Macaura v Northern Assurance Co and Lee v Lee Air Farming. In Macaura, it was held that the timber belonged to the company and not to Macaura. As a result,his claim failed as he did not have an insurable interest in the property even though he was the sole owner. Again, similar case happened in Lee, where the widow claimed she was entitled to compensation under the Act as the widow of a 'worker' . At first, the issue went to New Zealand Court of Appeal,where held that he was not a 'worker' so no compensation was payable. Nonetheless, the case was appealed to the Privy Council in London with the judgement : the company and Mr lee were distinct legal entities and therefore capable of entering into legal relations with one another, he could in his role of Governing Directors give himself orders as chief pilot. It was therefore a master and servant relationship and later, manifestly,he had fitted the definition of 'worker' under the Act, therefore the widow was entitled to compensation in consequently.

Aside from the advantages mentioned above, from the concept of private companies,have no real minimum capital requirement. It could be saying that it designed as investment vehicles, which can always subdivide their capital into small amounts, allowing them to draw in huge numbers of investors who also benefit from the sub-division by being able to sell on small parts of their investment. It can also adopt a more streamlined procedure for meetings by introducing written agreements instead of formal meetings. Also,it can restrict their membership to those the directors approve of or insist that those who wish to leave the company first offer their shares to the members.

Throughout the decided case law and the advantages of incorporation into private limited company, it shown clearly that a registered company may enjoys certain number of benefits while compare to the concept of partnership. Consequently, it would be advisable that E may take these all point into account while deciding the expand form of her business.

Even though, by forming a company and complying with company law is expensive and time- consuming. Although it would seems to be a long term investment by paying the expenses of forming company but anyhow, it is depends on E and her friend's decision.

Question 2

This problem requires to advice this two parties, Chris (C) and David (D) in the scenario that they wish to remove Emma (E) from the board of directors and stop the services of Ben (B) as solicitor.

In this case, Hatford Hair Salon Ltd was incorporated, as a private limited company by shares. Generally, in respect of being private limited company, it must includes a set of articles of association and any resolutions and agreements would effecting to its constitution. Pursuant to S.18(1) of Companies Act 2006, it provided that every company must have a set of articles. It provide the rules for a company's internal management and provide about how the company is work.

Here, B,solicitor, helped draft Hatford Hair Salon's article with these provision.

  • E, C and D are directors of Hatford Hair Salon with holding 40,35,and 25 shares.
  • B shall be the company's solicitor for life.

  • E, be director until age of 60 and her shares will carry four votes per share if any resolution to remove her from director.

Regarding to C and D wish to remove E as director, they may either i) alter the article with the provision of S21 of Companies Act 2006, a special resolution passed by general meeting; ii)enforce the removal of director by the virtue of S168 of Companies Act 2006, an ordinary resolution ; or iii)refer back to Table A, art 81 if there was no alteration of Table A

In facts, C and D would like to alter the article from the fact that article are protecting E until she retires at the age of 60. Unfortunately in prima facie, C and D would be unable to raise up special resolution in general meeting since both of them only have 60% of the total shares on hand. As a special resolution requires 75% in order to amend the company's article. However, it may be alter by unanimous consent without a meeting or resolution, which laid down in Cane v Jones or accordance the virtue of s. 228, the written resolutions of private companies.

Regarding the provision which protected E as a director until she at the age 60, it seems to be unfair to C and D. Are current article exercising with bona fide? With the ratio in Shuttleworth v Cox Bros & Co Ltd it was suggested that the court will generally accept the majority's subjective bona fide view of alteration of article is for the benefit of the company as a whole and not 'oppressive' or 'extravagant' that no reasonable person could address it as a benefit of the company. The application of the test can be seen from Greenhalgh v Arderne Cinemas, where held that a member cannot challenge a bona fide alteration even though it has affected the member's personal rights. It might be a room for C and D to argue, that the original article is running without bona fide, and request for alteration, but anyhow, it is question of fact to decided by judges on what is the definition of bona fide in this case and what is the consequent to alter the article.

Apart from the issue with E, as a director until her retirement's age at 60, it was mentioned that if there are any resolution to remove her as directors, her shares will carry four votes per share. By virtue of s.168 Companies Act 2006, where provided that for removal of directors, it needs an ordinary resolution proposed at the general meeting to every shareholder in order to get the 51% (50 % + 1 %) vote.

In Bushell v Faith, similar scenario happened,in was stated down in article 9 that under a resolution to remove a director, that Mr faith's shares would carry three votes each, which means Mr faith recorded 300 votes when his two sisters tried to remove him as director. Ungoed-Thomas J said this article infringed s.168 of Companies Act 2006

Bibliography

Books

Andrew Hicks & S.H.Goo, Cases & Materials on Company Law, Oxford publishing, 2008

Alan Dignam & John Lowry, Company Law Subject Guide, University of London publishing, 2009

L.S. Sealy & Sarah Worthington, Cases and Materials in Company Law, Oxford publishing, 2007

Jerry Lai FCIS, Company Secretary's Handbook 2006-2007, Lexis Nexis Butterworths publishing, 2006

W.R. Perciva Parker, Company Law : A Concise Manual, Biblio Bazaar publishing, 2008

Geoffrey Morse, Charlesworth's Company Law, Sweet & Maxwell publishing, 2005

Keith Abbott, Norman Pehdlebury & Kevin Wardman, Business Law, Continuum publishing, 2002

John Birds, Boyle & Birds, Company Law, Jordans publishing , 2007

Articles

Stephen Griffin, Limited Liability : A Necessary Revolution Company Lawyer - (2004), volume 25, issue 4 , page 99-101

Gary Scanlan, The Salomon Principle,Company Lawyer (2004), volume 25, issue 7, page 196

Legislation,

Companies Act 2006

Limited Liability Act 1855

Partnership Act 1890

Cases

Bushell v Faith [1970] AC 1099

Cane v Jones[1980] 1 WLR 1451

Gilford Motor Co v Horne [1933] Ch. 935

Greenhalgh v Arderne Cinemas[1951] Ch 286

Jones v Lipman[1962] 1 WLR 832

Lee v Lee Air Farming[1961] AC 12

Macaura v Northern Assurance Co[1925] AC 619

Major v Brodie [1998] STC 491

Salomon v Salomon [1897] AC 22

Shuttleworth v Cox Bros & Co Ltd[1927] 2KB 9

Other Sources

http://www.companylawclub.co.uk/topics/faq195.htm

http://www.opsi.gov.uk/ACTS/acts2006/pdf/ukpga_20060046_en.pdf

http://www.companieshouse.gov.uk/

http://www.gillhams.com/dictionary/51.cfm

http://www.compactlaw.co.uk/legal_glossary/o/ordinary_resolution.html

http://www.nuigalway.ie/law/GSLR/1998/art5.html



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