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company shall be acquainted with its provisions, particularly as no act beyond its scope is binding upon the company, even should every member acquiesce. This is the ultra vires doctrine we referred to earlier.

In Ashbury Carriage Co. Ltd v. Riche (1875) a company was formed with the objects of making, selling and mending railway carriages and, as mechanical engineers, to purchase, lease and work mines, minerals, land and buildings. It purported to enter a contract to purchase a concession to build a railway in Belgium. The members of the company, in general meeting, ratified the contract, but it was nevertheless held to be ultra vires and void, for it was beyond the objects clause in the Memorandum.

However the 1985 Act consolidated significant amendments to the ultra vires doctrine as a result of the harmonisation of British company law with EC (now EU) law. Section 35 modified the doctrine by providing that a person dealing in good faith with a company need no longer inquire into the limitations on the capacity of the company or powers of the directors. This has the effect of preventing the company from avoiding its responsibility under an ultra vires contract, but left the bona fide third party the option of either enforcing such a contract against the company or of backing out on the grounds that the contract was ultra vires.

In 1989 further legislation reached the statute book on this particular issue. Section 108, Companies Act 1989 substituted new Sections 35, 35A and 35B into the 1985 Act. These new provisions, to all intents and purposes, abolished the ultra vires rule altogether, in so far as it affects companies formed or registered under the 1985 Act. The provisions are as follows:

(a)By Section 35, "the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's Memorandum".

A shareholder may, however, still obtain an injunction to restrain an intended ultra vires act, providing he/she does so before any binding legal obligation has been entered into by the company. Furthermore, directors will remain liable for any acts which are ultra vires the Memorandum, unless those acts are ratified by a special resolution and a further special resolution is passed to relieve them of liability.

(b)Section 35A brings within the section the power of directors to bind the company to acts within the power of the company.

Neither Section 35 nor Section 35A applies to charities.

(c)Section 35B relieves a party to a transaction with a company from the need to inquire into the terms of a company's Memorandum or any limitation in the directors' powers.

Similar provisions are enacted for companies not formed under the Act, but which are registered under it – and for unregistered companies.

Section 110 of the 1989 Act also substitutes a new Section 3A and Section 4 into the 1985 Act. These provisions enable a company to state that its object is to "carry on business as a general commercial company", which is explained as enabling the company to "carry on any trade or business whatsoever ... (and to do) ... all such things as are conducive to carrying on any trade or business by it". The sections also enable the company to alter its objects for any purpose whatsoever. Formerly the opportunities for such alterations were restricted to a few specific situations.

For companies which choose to adopt such a broadly worded objects clause and to avail themselves of the modified procedures, the ultra vires doctrine would appear to be dead.

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Articles of Association

The Articles of Association are the rules for the internal management of the company. The First Schedule of the Companies Act is known as "Table A" and it constitutes a model set of Articles which are applicable to every company, unless the company's own Articles expressly exclude or modify the provisions of Table A. The Articles of Association are freely alterable by special resolution of the company.

Name of a Company

Registration

The Memorandum must state the name of the company. The general rule is that any name may be selected. However, a company cannot be registered by a name which, in the opinion of the Department of Trade, is undesirable. Further, the last word of the name of a limited company must be the word "Limited" or "plc", as appropriate, unless permission is given to dispense with the word "Limited". In selecting a name, it is not necessary to use the word "company", and the modern tendency is to omit it.

The Department of Trade's policy regarding undesirable names is explained in an official Guidance Note but the list of rules contained in it is not exhaustive and does not restrict the Department's discretion. In general, a name will not be allowed if it is misleading, e.g. if the name of a company with small resources suggests that it is trading on a great scale. A name will be refused if it is too like the name of an existing company. Only in very exceptional cases and for valid reasons will names be allowed which include "British", "Royal", "Imperial", "National", "International"" "Commonwealth", "Co-operative", "Bank", "Trust", "Crown", etc.

Change of Name

A company may change its name by special resolution, with the approval of the Department of Trade. A small fee is payable to the Registrar for filing the new name and the issue of a new Certificate of Incorporation. The change does not affect any rights or obligations.

Business Names Act 1985

This Act applies to companies, partnerships, or individuals who carry on business under a name other than the corporate name of the company, the forenames and surnames of the partners, or individual.

Businesses controlled by the Act must state on all letters, written orders for goods and services, invoices and receipts, and written demands for payment of debts:

In the case of companies, their corporate name;

In the case of a partnership, the name of each partner;

In the case of individuals, their own names; and

In each case, an address within Great Britain for the service of legal and statutory documents.

They must also display on any premises to which customers or suppliers have access a prominent notice containing such names and addresses.

Capital of a Company

Types of Capital

The term "capital" may be used in various senses. It may mean the nominal or authorised share capital, the issued share capital, the paid-up share capital, or the reserve share capital of the company. The capital is issued in the form of different classes of shares or stock which are subscribed by the members. Stock has been defined as "simply a set of shares put together in a bundle" (Morrice v. Aylmer (1875)). Paid-up shares may be converted into

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stock. For example, a company which has 10,000 paid-up £1 shares may convert them into £10,000 worth of stock. If shares are converted into stock, the value of the holder's stake in the company remains the same, although it is expressed in different terms, e.g. a person who formerly held 100 shares of a nominal amount of £1 each will now hold a nominal amount of £100 worth of stock.

We shall now consider briefly the different types of share capital:

(a)Nominal or Authorised Capital

The Memorandum of Association sets out the maximum amount of capital which the company is authorised to issue, although a company need not issue capital to the full amount authorised unless, or until, it wishes to do so. The company's nominal or authorised capital depends on its business requirements.

(b)Issued Capital

This is that part of the company's nominal capital which has been issued to the shareholders.

(c)Paid-up Capital

This is the proportion of the issued capital which has been paid up by the shareholders. The company may, for example, have a nominal capital of £500,000 divided into 500,000 shares of a nominal amount of £1 each, of which £400,000 is issued (i.e. 400,000 of the shares have been issued) and only £100,000 is paid up because the company has, so far, required only 25p to be paid up on each share.

(d)Uncalled Capital

Uncalled capital is the balance of the issued capital and it can be called up at any time by the company from the shareholders.

(e)Reserve Capital

This is that part of the uncalled capital which a company has, by special resolution, determined shall not be called up, except in the event and for the purposes of the company being wound up.

Shares

A share may be of any chosen denomination, e.g. £5, £1, 50p. This is known as the nominal value, and should not be confused with the actual price paid. A share originally issued for £1 may increase in value, so that the market price becomes £3 or more, or it may decrease in value, so that the market price is only a few pence. The nominal value always remains the same and has little significance, whereas the market price depends on whether investors consider that the future prospects of the company are good or bad.

When shares are issued, they need not necessarily be paid for in full. Sometimes the company does not require to use the whole amount represented by the share capital at the time of issuing the shares and, consequently, £1 shares may be paid as to 50p only, the balance remaining payable on "call" from the company when it requires the funds.

The liability of the shareholder is limited to paying the market or issue price (or any unpaid amount of "call") of her shares. She cannot be required to contribute further to the company's debts, even though it is hopelessly insolvent.

This is the meaning of the term "limited liability", which is a basic principle of company law.

In other words, once the shareholder has purchased fully paid shares, he is under no liability whatsoever for the debts of the company. If he has purchased partly paid shares, his liability is limited to the unpaid portion of the nominal value; if the shares are nominally £1 each and 75p was paid on issue, he is liable to pay no more than 25p per share when requested to do

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so by the company. Note that we are talking about the nominal value of partly paid shares; the market price varies according to demand and supply, and the shareholder may have paid 60p, or even £1.25, each to purchase the shares, but this does not affect his liability for 25p each.

The shares which make up the capital of the company are usually of two main types; either preference shares, which entitle the holder to be paid a dividend at a fixed rate per cent before any other dividend is payable, or ordinary shares, which are entitled to distribution of a dividend out of the remaining profit, the rate of dividend being decided each year according to what the company can afford. In the event of a winding-up, the company's preference shareholders usually carry the right to the return of capital before the ordinary shareholders, who are dependent upon the assets available.

Alteration of Capital

A limited company with a share capital, if so authorised by its Articles, may alter the conditions of its Memorandum by:

Increasing its share capital by new shares; or

Consolidating and dividing all or any of its share capital into shares of larger amount than its existing shares; or

Converting all or any of its paid-up shares into stock, or reconverting stock into paid-up shares of any denomination; or

Subdividing all or any of its shares into shares of smaller amount than is fixed by the Memorandum; or

Cancelling shares which have not been taken or agreed to be taken by any person.

All these powers require for their exercise a resolution of the company in general meeting.

Meetings

Classification

General (i.e. shareholders') meetings of companies are of three kinds. A statutory meeting must be held by every public limited company with a share capital, between one month and three months after it becomes entitled to commence business. Annual general meetings must be held each calendar year. All other meetings are extraordinary general meetings, and may be called by the directors whenever they think fit, but the Act makes special provisions, obliging the directors to call such a meeting where a certain proportion of the shareholders make a requisition.

Statutory Provisions

There are detailed statutory provisions concerning a number of matters in connection with the calling and conduct of meetings, including the following:

A specified minimum notice of meetings must be given to all the members.

The notice must state whether it is proposed to transact any "special business" at the meeting and, if so, it must state the nature of such special business. (This is to protect members from the danger of allowing important changes in the company's structure or policy to be made in their absence.)

No business can be transacted unless a quorum is present.

Provisions are made with regard to the duties and powers of the chairman of the meeting (usually the chairman of the Board of Directors).

There are rules governing voting. Voting may be by show of hands or (on the demand of any person present and entitled to vote) by poll. In the latter case, members may

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vote by proxy. (A proxy is a written instrument entitling another to vote in a member's place, and the Act makes detailed provisions concerning voting by proxy.)

Special provisions are made with regard to the three kinds of resolutions that may be passed at meetings – ordinary, extraordinary and special. These are outside the scope of your course.

By the rule in Foss v. Harbottle (1843), the court will not interfere at the suit of a member or a minority of members where there is a wrong done to a company itself or an irregularity in its internal management, if such action is capable of confirmation by a majority of the members. However, there are certain exceptions to this rule, e.g. a minority may sue to prevent the company from acting illegally or ultra vires, or from perpetrating a fraud on the minority of members.

Directors

Nature of Directorship

All registered companies must have directors, and normally there must be at least two, although one suffices for a private company or one registered before 1929.

The position of directors is similar to that of trustees, e.g. in their fiduciary relationship to the company, in issuing shares, and approving transfers of shares. They are, however, trustees for the company, and not for the individual shareholders, nor for third parties who have made contracts with the company. Directors are also sole agents for the company when they make contracts for the company and, as such, are in a fiduciary position to the company and cannot make secret profits at the company's expense.

A company may act only through its agents – and such agents, if they direct and control the company's affairs, are deemed to be directors. Under the Act, "director" includes any person occupying the position of director, by whatever name called.

Powers of Directors

The powers of directors are usually set out in the Articles, authorising them to carry on the business of the company, and there is generally an additional clause giving them powers of management and all the powers of the company which are not otherwise specifically mentioned in the Articles.

If the Articles are silent on this point, the law implies that all the ordinary powers connected with a business of the same kind as that carried on by the company are being conferred upon the directors.

The powers of directors may be enlarged, or in certain circumstances restricted by the shareholders, and if the directors act beyond their powers the shareholders may ratify their act, provided it is not ultra vires the company.

As we have already said, a director is in a fiduciary position to the company in her capacity as agent, and she cannot, therefore, place herself in a position where her own interests conflict with her duties. Directors must on no account make any secret profits. Any such benefit is regarded as a bribe, and the directors are accountable to the company for such. Where a director accepted a gift of 200 fully paid shares from the promoter of the company, he was compelled to make good to the company the advantage gained (Eden v. Ridsdale Lamp Co. (1889)).

A director is bound to exercise faithfully the trust he has accepted, and is bound to exercise fair and reasonable diligence in discharging his duties, and to act honestly; but he is not bound to do more (Re Forest of Dean Company (1878)).

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Liabilities of Directors

The directors are liable for negligence or breach of trust in relation to the company's affairs. The Act makes ample provision for the liability of directors guilty of fraud or gross negligence in respect of the company or third persons. During the course of a winding-up, the Act provides that a director who has misapplied or retained or become liable or accountable for any money or property of the company, or has been guilty of any misfeasance or breach of trust in relation to the company, may be compelled to repay or restore the money or property or to pay such sum to the company as the court thinks fit.

Directors are personally responsible for fraud; although, where the company has taken advantage of fraudulent misrepresentations, the company may be held bound as well as the directors.

A director owes a duty to the company to devote to her duties such care, prudence, and diligence as could reasonably be expected of a reasonably responsible person in those kind of circumstances. She must exercise such skill as may reasonably be expected of a person of her knowledge and experience. For care and diligence, the director's conduct is measured objectively against the standards of the reasonably prudent and responsible person. For skill, or "professionalism", the executive director with a service contract will be required to display higher standards. Like any other responsible employee, she will be required to show both care and skill of a kind to be expected of an employee receiving that kind of salary and charged with those kind of responsibilities.

Borrowing by a Company

Borrowing Powers

Trading companies have implied power to borrow for trading purposes and to give security for loans, unless expressly prohibited from doing so by the Memorandum of Association. Other companies need express power to raise loans. If a loan (or any portion of a loan) is ultra vires the company, it is void, even if it is ratified by the members in general meeting.

In such circumstances, however, the lender may have the following remedies:

If the money has not been spent, he can obtain an injunction restraining the company from parting with it, and he can recover it.

He can bring an action against the directors for breach of warranty of authority.

If money has been used to pay creditors, the lender may stand in the place of such creditors; this is known as subrogation. But he will not get any priority which may have attached to such creditors' interest.

Debentures

A company may borrow money by the issue of debentures which are, in reality, promises to repay the sum borrowed, and are executed under the seal of the company.

A debenture can be a document issued to such lender, and it is then a self-contained security, entitling the holder to take action in his/her own name. An alternative method of raising funds is to execute one debenture in the form of a trust deed, appointing trustees. Lenders do not receive an actual debenture, but only a debenture stock certificate. Debenture stock is the whole amalgamated borrowing of the company, and holders of stock certificates are not, generally, entitled to take proceedings individually but have to do so through the trustees, who are the beneficiaries of the promises in this case.

A debenture is merely a promise to repay the money borrowed and it does not, of itself, constitute an actual charge on the assets of the company. It is usual to give security to the debenture holders by effecting a mortgage or charge on the assets of the company, so that, in the event of the company's being wound up, the debenture holders have a first claim to

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receive payment. This security may be given in the form of a fixed charge, a mortgage on some specific part of the company's assets, e.g. the factory premises at X town, or by means of a floating charge, which may be described generally as relating to the whole of the assets of the company. The advantage of a floating charge, from the company's point of view, is that it remains entitled to deal freely with the assets so charged.

Distinction between Debentures and Shares

Debentures must be carefully distinguished from shares in a company. In modern times they are often regarded by investors as being merely different species of the same thing; each enables members of the public to invest in a company and to participate in its profits. In law, however, they are quite distinct. A shareholder is a member of the company, with certain rights and liabilities. A debenture holder is not a member of the company – but a person outside the company who happens to be its creditor; legally, his/her position vis-à-vis the company is similar to that of ordinary trading creditors. Secondly, a shareholder's dividends are his/her share of the company's profits; debenture holders merely receive interest on the loan. In modern times, the distinction has tended to become blurred by reason of the increase in popularity of issues of shares which do not carry voting rights, and preference shares which are entitled to a fixed dividend – the position of such shareholders is very similar in practice to that of debenture holders – but the legal position, largely for historical reasons, is that they are completely different and distinct.

Common Seal

The common seal of a company is, as it were, the signature of the company, and the sealing of a document is witnessed by the officers of the company specified in the Articles of Association. The seal must be kept at the registered office of the company under some form of control which will adequately prevent its unauthorised use.

As mentioned above, however, the company may act in a number of ways through its agents, and it is no longer necessary for documents in normal business use to be impressed with the seal of the company. The Companies Act 1989 provides for documents to be signed as a deed and for companies to dispense with the use of a seal in commercial transactions.

Winding-up

Definition

Winding-up (or liquidation) is the legal term for the termination or dissolution of a company. It is comparable, in some ways, with the death of an individual or with the bankruptcy of an insolvent person. (Note carefully that a limited company cannot be made bankrupt – a bankruptcy applies only to individuals and persons trading as partners.)

Methods

The various methods of winding-up or liquidation are as follows:

(a)Compulsory

Compulsory winding-up, or liquidation, is by direction of the court, the principal grounds being as follows:

The company's failure to hold the statutory meeting or to file the statutory report.

The presentation of a petition by a creditor, and the court, declaring that the company is unable to pay its debts.

The passing by the company of a special resolution to the effect that it is unable to pay its debts and, as a consequence, cannot continue business.

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The company's failing to commence business within one year of incorporation.

That it is just and equitable to wind up the company.

The company has less than the minimum number of members.

(b)Voluntary

This is generally carried out by a liquidator, the grounds being as follows:

A resolution of the company that it be wound up voluntarily. (The Articles usually provide that it shall be an extraordinary resolution.)

An extraordinary resolution of the company that, by reason of its liabilities, it is unable to continue business and it is desirable to wind up.

Voluntary liquidation falls into two classes. If the directors of the company pass the necessary resolution and file a statutory declaration that they are of the opinion that the company will pay all its debts in full within 12 months, then the winding-up is a members' voluntary winding-up. Without this declaration, it is a creditors' voluntary winding-up.

Appointment of an Administrator

The Insolvency Act 1986 provides that, on the petition of the company or the directors or of a creditor, the court may appoint an administrator to manage a company where it is satisfied that the company faces serious financial difficulties but that there are reasonable prospects of a return to profitability for the whole or part of the business or of a more advantageous realisation of the assets than would be achieved by winding it up. The administrator will be appointed by the court for a specific purpose or purposes. She will have power to do all that is necessary for the management of the company's affairs, business and, subject to certain safeguards for the rights of third parties, its property. The administrator may dispose of or otherwise exercise her powers in relation to any property of the company subject to a floating charge.

The administrator is given the power to dismiss and appoint directors. She also has the power to call meetings of shareholders or creditors. She must circulate her proposals to creditors and hold a meeting of creditors within three months.

Directors' Liability for "Wrongful Trading"

Under the Insolvency Act 1986, directors became liable for "wrongful trading". On the application of the liquidator, the courts can deem a director personally liable to the company's creditors for their losses incurred through the company's wrongful trading. In order to invoke these provisions the following conditions must be met:

The company involved must be in insolvent liquidation.

The person concerned must be, or have been, a director.

The director involved ought to have concluded that there was no real prospect of the company being able to avoid insolvency.

The directors failed to take all the steps they should have in order to minimise potential losses to the creditors.

The courts will not make a declaration of personal liability, however, provided they are satisfied that the directors have made every effort to minimise the potential losses of the creditors.

Under the Act, the courts, on application by the Secretary of State or the Official Receiver, must disqualify a director if the company became insolvent while he was a director and his conduct as a director of that company makes him unfit to be involved in the management of another company.

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In order to ensure that directors do not have the constant threat of possible disqualification, the order itself must be applied for within two years of the liquidation, although this time limit may be extended at the court's discretion.

Substantial case law has developed in recent years as a result of the provisions for both fraudulent and wrongful trading contained in statutes.

E. UNINCORPORATED ASSOCIATIONS

We must now consider the rather unusual position of groups of persons who are associated in some common interest but have not become incorporated and, therefore, have no corporate entity or legal personality. Within this general category are numerous examples of such associations ranging from small social and bridge clubs, cultural societies, sports clubs and religious bodies (other than the Church of England) to large, powerful trade unions. Also included in this category are partnerships.

Legal Position

Since the law does not treat such associations as separate entities with a legal personality of their own, it is necessary to clarify their position in certain respects, among which the following deserve particular notice:

If property is held by a large number of persons who form an unincorporated association, it is usual to vest the property in trustees and to set out the rules and regulations of the association in a trust deed.

An unincorporated association cannot enter into a contract. A contract made on its behalf is regarded by the law as the contract of the individual members who actually made, or gave, authority for the particular contract – such as the managing committee.

Any torts committed in connection with any of the activities of the association are treated as the torts of the individual members responsible. For example, the committee of a football club which commissioned the repair of a stand was held responsible when a member of the public was injured, on the collapse of the stand, owing to bad workmanship.

The members as a whole are liable for the debts of the association if the contract was made by an authorised agent.

The members may delegate certain powers to a committee, sometimes including the powers of expulsion. If a court considers that the exercise of such power is contrary to public policy, it may overrule the committee's decision.

We must now consider the particular case of partnerships. These are associations of persons which, because of certain characteristics, are given some of the attributes of a legal personality, although they are not incorporated.

F. PARTNERSHIPS

Definition

Partnership has been defined by the Partnership Act 1890 as:

"The relation which subsists between persons carrying on a business in common with a view to profit".

A partnership is, thus, based on a contract between its members and, since it can be created informally and dissolved informally, it differs completely from a corporation.

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You will remember that a corporation must be created either by charter or by statute and, once formed, it has a continuous legal personality. Partnership, on the other hand, can be formed by means of a deed, i.e. an agreement under seal signed by the persons who agree to become partners, or by means of a simple agreement in writing, or even by an agreement made orally or simply implied from the actions of the persons concerned.

Differences between Partnership and Corporation

We can now note the following important differences between a partnership and a corporation:

A partnership has no legal personality; a corporation has a legal personality of its own.

All partners share in the management, unless it is agreed otherwise. The management of a corporation is left to a selected body (directors, council, committee etc.).

Each partner, except a "limited partner", is liable for all the debts of the partnership personally, to the full extent of his/her private estate. (Limited partnerships may be entered into under the Limited Partnerships Act 1907, but they are uncommon. In any case, at least one partner must accept unlimited liability.) The liability of a member of a company is limited to the amount of his/her holdings.

No more than 20 persons (or ten in a banking business) may usually associate in a partnership. Certain partnerships of solicitors, accountants and stockbrokers are exempt from this prohibition by Section 716, Companies Act 1985. There are usually no limits to the number of members of a corporation.

Each partner has implied authority to contract on behalf of the others in the ordinary scope of the partnership business, and he/she thereby binds all the other partners, even if they are unaware of what he/she has done. A corporation acts through appointed agents, and an ordinary member has no power to bind the corporation.

Differences between Partnership and Company

The characteristic of legal entity is one of the main distinctions between a limited company and a partnership, which is not a distinct person in law but simply the partners acting together.

Note these further distinctions:

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