Company Law problem question: Owning a business

Company Law problem question

Question 1(a)

Tom, Dick and Harry are in business together in the form of a legal partnership. The business enterprise having developed somewhat, they are actually keen to include their business into a restricted company. This will certainly have benefits for the professionals, although there are of course certain ramifications of which they must be aware which will be dealt with after a talk of the advantages of incorporating.

The correct choice of business medium is an essential decision for just about any business. It will affect the way the business deals, the liability of these running the business (in their guise of lovers or directors) and the liabilities of the business enterprise itself for taxation, for example, in the case of a company. Possibly the most significant matter for Tom, Dick and Harry, is the chance of capital that is associated with any business. The overpowering benefit in this context of forming a limited company over staying as a collaboration is a company will take only limited responsibility. This means that the owners of the business (that is, Tom, Dick and Harry, supposing they remain as directors and become shareholders) will only be responsible for the quantity of unpaid stocks in the business if the company were to be insolvent or even bankrupt. Quite simply, they can pick the amount which they are willing to pay into the company (which doesn't have to be paid up front), and this is the quantity for which they would be liable if the company ever before be wound up. This is contrasted with the situation under a relationship where the associates would be both jointly and severally responsible for the complete value of their trading losses. This implies a partner could lose any property that he is the owner of.

The beneficial effects of this layout would be limited, however, in several situations. If Tom Dick and Harry were to risk everything available, that is, if they spend all there belongings available, then they would still lose everything if the company were to become insolvent. Secondly, it is the case that when a company involves borrow money for business development, and especially where the company is relatively new and anonymous to the banking institutions, that the lenders will demand personal guarantees for the worthiness of the loan together with the normal contractual and security relationships with the company. These would, clearly, override the limited responsibility from the company. As business is good for Tom, Dick and Harry at this time, however, this might not look like an immediate problem.

A further concern to be looked at when deciding whether to include as a firm is the trouble involved. While these are not extortionate, they are, at least, significant, and really should be duly considered by Tom, Dick and Harry. Unlike a relationship, a company needs to be recorded, which incurs fees itself. There will be legal fees payable to the solicitor who draws in the new company's memorandum and articles of association (mutually, the constitutional documents of the business), which are crucial, and outline the aims, methods, and guidelines of the business's business life.

A similar issue of expenditure and complexity that will be incurred with a company instead of a partnership pertains to the accounts of the business. While all businesses, including partnerships, naturally desire to keep accounts, the requirements for accounting for companies are more particular and complicated. The accounts need to be more detailed, and show certain information in a specific way. Furthermore, because companies are subject to more rigorous legislation, the accounts of an company will need to be audited annually by an independent skilled accountant. This, of course, will incur higher accountancy costs that would be expected for a relationship. The company may also be necessary to complete an twelve-monthly come back and pay a charge on filing it with the Registrar.

A company is subject to certain rules and regulations relating to its operation and management, which are statutorily set out in the Companies Function 1985 (at the mercy of be overhauled when the current Company Reform Monthly bill helps it be through Parliament). An example of this is the requirement a company will need to have at least one director and one secretary. It really is typical for the first owners (Tom, Dick and Harry) to be the first directors and / or secretary. These representatives will have certain commitments relating to tasks owed to the business, and in respect of items which have to be completed and submitted with the Registrar of companies at Companies House.

An important consideration to take into account is the versatility of the company to improve its internal framework if so when circumstances want it. Such a change would normally entail and require a modification to the business's articles of connection. This might require, under the Companies Action, a so-called 'special image resolution', which compatible 75% of the shareholders. Regarding Tom, Dick and Harry, if indeed they were to remain really the only shareholders, such decision would, of course, need to be unanimous. If any conflict is expected, this will have to be a thought for the people. It is well worth noting that requirement is no more strict than that required for altering a partnership arrangement, which requires the agreement of all partners. If a discord were to happen between the directors of the company, the other shareholders can remove the difficult director by using an ordinary quality.

Finally, the legal status of an company varies significantly from that of any partnership. An organization sometimes appears as a separate legal person, which means it can contract and be held liable in its name. This has ramifications for the responsibility of the directors, and is generally regarded as a benefit of a company. Only an organization (rather than a relationship) can create floating charges over their resources. That is significant as it pertains to raising financing through granting security. It will oftimes be easier for a company to raise the requisite fund than for a collaboration to take action. Additionally it is significant (or may be) that an unlimited number of folks can become members of your company, whereas a collaboration is bound to twenty lovers. If and when the company increases and develops, it'll be in its passions to be infinite in the amount of new people it can buy.

Question 1(b)

In this circumstance, there are a number of developments that may effect on the running and management of the business enterprise. Each development will be taken subsequently.

Firstly, the sale of the business's property to Dick's sister, Fanny in 2006 will be difficult. A couple of three principal regions of concern. Firstly, the company's articles of relationship expressly prohibit the deal of company property with out a special image resolution of the customers. As was mentioned above, a special quality requires a 75% majority, or in this case, as there are just three associates, a unanimous vote. There's a course of action that the directors can take, however, after the event, that may ratify the sales of the company property. They'll should just call a fantastic general meeting, following the correct treatment of course, and cross a special quality either to ratify the sale of the business property to Fanny, if not to improve the articles of relationship to allow for such sales in a more general framework.

The value and size of the house that is sold to Fanny will be significant in the second area of concern for the company. Under section 320 of the CA, 'a company shall not enter an arrangement whereby a director of the business or its having company, or a person connected with such a director, acquires or is to acquire a number of non-cash assets of the requisite value from the company. . . unless the agreement is first approved by a resolution of the company in general assembly. ' The reason why the worthiness of the property that is used in Fanny is significant is as a result of existence of the concept of 'essential value', which is defined down in section 320(2). This state governments that the requisite value for a non-cash advantage is 100, 000 or 10% of the business's advantage value. If the house is of this value or greater, then, it'll be of the requisite value, and will contravene section 320. The fact that Fanny (the buyer) is the sister of a director classes her as a 'connected person'. Consequently, she breaches the section 320 prohibition.

Finally, the gross undervaluing of the property in the business's deal of it to Fanny is a problem, as chances are that this will breach section 339 CA in the case of the business becoming insolvent. Were this to occur, the insolvency practitioner would likely deem the deal to be voidable, and the advantage would be cut back into the pool of the business's assets in order to meet the creditors. This might happen if the exchange occurred within 5 many years of the demonstration of the petition for winding up (because Fanny, again, is an 'affiliate' of the transferor). Under section 238 defines a exchange at an undervalue as one in which a company makes a gift to any person and obtains either no concern for this or consideration price less than the account provided by the business. This transaction evidently qualifies therefore. It will be deemed to be reserve if insolvency proceedings commence within 2 yrs of the exchange.

Each of the directors' decisions will now be tackled. They decide, first of all, to enter a agreement with Oui Ltd. This is not, of course, issues in itself, in addition to the undeniable fact that Tom is a director of Oui Ltd. First of all, if entry in to the contract was ratified by an ordinary resolution in the business, Tom would not have been able to vote onto it under section 94, because he comes with an curiosity about it. If Dry up Ltd have implemented Desk A articles of connection, this might be confirmed by article 94. The company should have held a register of its directors, which lists the passions and other directorships of all its directors (under section 288 CA), which could have complete Tom's directorship of Oui Ltd. Furthermore, section 317 CA requires Tom to own declared his interest in the proposed contract with Oui Ltd at a table meeting of Dry out Ltd. He must have given standard notice of his directorship.

The company issues an additional 10, 000 unpaid shares to an authorized to struggle off a takeover bid. This should not build a problem as long as the company's articles of connection give the directors capacity to issue shares. Therefore is dependent on the business having a sufficient amount of unissued authorised share capital. If it does not, a special quality should be transferred to increase this authorised show capital, before transferring a further quality allowing the problem. The power of the directors in this instance are governed by section 80 CA. Furthermore, the business must, under section 89, consider privileges of pre-emption to existing shareholders. As the directors are the only three shareholders, this will not be considered a problem, but it would mean they had to wait 21 days before issuing the new shares.

The resignation of David and his creation of Whip Ltd, which obtains the contract from Pop Ltd might breach his director's service deal with Free of moisture Ltd. It is regular for such deals to include a clause prohibiting ex - directors using their business contacts in just a certain time of leaving the previous directorship; a non-solicitation clause. This would protect Free of moisture Ltd's business links.

Given Harry's years and his mental deterioration, the company will be able, if it gets the heart, to eliminate him from office following a procedure for removal of directors established down in section 303 CA, which requires an ordinary quality to be exceeded. Harry might be able to claim damage for his removal from office under this procedure.

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