Vicarious liability

The firm is only liable where the partner was acting (i) in the ordinary course of the business of the firm, or (ii) with the authority of his copartners and where (iii) loss or injury is caused to any person not being a partner. In Hamlyn v. John Houston & Co. [1903], a partner of the defendant firm bribed a clerk of a rival firm to disclose confidential information causing that rival firm to suffer loss. The Court of Appeal held the defendants liable for the wrongful act of the partner. It was in the ordinary course of business to obtain information about a trade rival, whether the means employed were legitimate or illegitimate.  

3. Questions

1) What is the main distinction between sole trader or partnership, on the one hand, and registered company, on the other hand?

2) Give the definition of a partnership.

3) What persons can be partners and what persons cannot?

4) In what situations are partnerships considered illegal?

5) What are the rights of partners?

6) What are the duties of partners?

7) What are partners liable for?

8) What kind of name cannot be used as a name of a partnership?

 

4. Find the following sentences in the text.

1) Собственник, конечно, может нанимать других людей, но ответственность за успех или неудачу предприятия в руках  индивидуального предпринимателя.

2) Условие относительно прибыли означает, что эта форма не может быть использована для благотворительных или некоммерческих целей.

3) Компания с ограниченной ответственностью может быть партнером, если это разрешено меморандумом ассоциации.

4) Капитал, вложенный несовершеннолетним, может быть использован для оплаты долгов фирмы.

5) Товарищество является нелегальной ассоциацией, если количество партнеров превышает законный максимум, который равен 20 для торговых товариществ.

6) Все партнеры имеют одинаковую долю в капитале и прибылях и должны иметь одинаковую долю в убытках.

7) Таким образом, работающие партнеры получают больше, чем те, кто не посвящает все свое время делу.

5. Recite the main points of the text.

Unit 3. Business Organisations

The Registered Company

1. Words to be remembered.

incorporatedcompany– обладающая правами юридического лица

unlimitedliabilitycompany– компания с неограниченной

ответственностью

annualaudit– ежегодная проверка отчетности

limitedcompany– компания с ограниченной ответственностью

debentures(loanstock) – долговое обязательство

subsidiary– дочерняя компания

dispense– обходиться без . . .

pursuantto– согласно чему-либо

trialcourt– суд первой инстанции

indemnity– гарантия возмещения ущерба, убытков

signatory– подписавшаяся сторона

nominee– назначенное лицо

trustee–  попечитель, доверительный собственник

calamitous– бедственный катастрофически

legalentity– самостоятельная хозяйственная единица, обладающая

юридическими правами

passingoff– ведение дела под чужим именем

injunction – запрет

free of charge – без оплаты

cancel– аннулировать

promoter– учредитель

remuneration– вознаграждение

tobevoid– не иметь юридической силы (недействительный)

unratifiable– нератифицируемый

discretionary– представленный на усмотрение

fiduciary– основанный на доверии

bribe– взятка

breach– нарушение (закона, договора, обязательств)

rescind– расторгать

statutory– предусмотренный законом

 

2. Text for reading

C. The Registered Company

The Companies Act 1985 (CA 1985) provides that ‘any two or more persons, associated for any lawful purpose may, by subscribing their names to a memorandum of association and otherwise complying with the registration requirements of this Act . . . form an incorporated company, with or without limited liability’.

Unlimited liability companies

Persons trading as an unlimited liability company enjoy the advantages of corporate status but  their liability for the debts of the company is unlimited. Because of this, there is no obligation to disclose details of its operation, other than to its members. The company also escapes liability for an annual audit of its accounts. These advantages are now available for small private limited companies and the unlimited company form is rarely encountered. It is, however, suitable for business activities where persons are restricted from trading with limited liability and could be used by solicitors and accountants as an alternative to partnership.

Limited liability companies

The members of such companies have limited liability for the debts and liabilities of the company, although the company is always liable fully for its debts. There are two different forms of limited liability company: the company limited by guarantee and the company limited by shares, of which only the latter is suitable for trading.

Companies limited by guarantee.

The members are required to contribute to the company’s assets on liquidation the amount guaranteed when they became members. The form is used for charitable, educational or other worthwhile purposes: for example, The League Against Cruel Sports, The British Ski Federation, London Guildhall University. They can drop the word ‘limited’ from their name although their exact status must be disclosed on letterheads and other documents.

Private and public companies limited by shares

The liability of the members is limited ‘to the amount, if any, unpaid on the shares respectively held by them’. This is the most usual form of all trading companies and is the only company that can exist as a private or as a public company. The others can only exist as private companies.

Private companies cannot invite the public to subscribe for shares or debentures (loan stock). Thus private companies are restricted to raising their money through institutional sources or from the sale of shares by private treaty or to members of the family of shareholders or employees. Public companies are more closely regulated since there is a greater need to protect the general public.

1.  A private company has  the word Limited (Ltd) as the last word of its name whereas the public company has the words Public Limited Company (plc).

2.  The private company can commence trading immediately on incorporation whereas the public company must obtain a certificate to the effect that it has raised the minimum capital (£50 000) which is required of a public company.

3.  The private company may only have one director whereas a public company must have at least two.

4.  Directors of private companies are not subject to age limits unless the company is a subsidiary of a public company.

5.  The company secretary of a private company does not need formal qualifications whereas the company secretary of a public company does.

6.  There are less strict rules governing many aspects of a private company including:

– restrictions on loans to directors,

– regulation of raising and maintenance of capital.

7.  Disclosure requirements in the annual return are less onerous where the private company is classified as either ‘small’ or ‘medium’. There is also exemption for small and medium-sized groups in respect of group accounts.

8.  Private companies can enjoy deregulation which enables them to dispense with formal meetings of their shareholders.

9.  A private company may be exempt from the statutory audit of their accounts.

Most companies are initially incorporated as private companies and will then ‘go public’ when they have increased sufficiently in size and need greater freedom to raise capital for expansion. Many public companies seek access to the financial markets. There are two markets for company securities access to which is regulated by the Stock Exchange. Companies seeking to join the London Stock Exchange’s Official List must comply with strict requirements of the London Stock Exchange regarding capital size, length of trading record and the percentage of shares in public hands, which must be at least 25 per cent. There is also Alternative Investment Market (AIM) for which there are no restrictions on capitalisation, length of trading record or minimum percentage of shares in public hands. Companies whose securities have  been traded on AIM can apply to join the Official List after two years. The vast majority of limited liability companies are private.

 Groups of Companies: Holding and Subsidiary Companies

A group is the term used to describe a number of related companies. A holding company is at the head of a group of companies, all of which are subsidiaries of the holding company. The relationship between holding and subsidiaries may be very complex. The classic example is the Maxwell group of companies.

The legal definition of a subsidiary company states that a company is a subsidiary of another company if that other company:

(a)              holds a majority of the voting rights in it, or

(b)             is a member of it and has the right to appoint or remove a majority of its board of directors, or

(c)              is a member of it and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in it, or if it is a subsidiary of a company which is itself a subsidiary of that other company.

 

A company is a ‘wholly-owned subsidiary’ of another company if it has no members except that other and that other’s wholly-owned subsidiaries.

A holding company must generally prepare group accounts in which the financial  situation of holding and subsidiary company is consolidated as if they were one person. A subsidiary company may not ordinarily be a member of its holding company; and cannot give financial assistance to persons wishing to buy shares in the holding company.

Separate legal person

A company is separate from the shareholders. This was established in the celebrated case of Salomon v. Salomon & Co. Ltd [1897]. The  plaintiff, a manufacturer of boots and shoes, incorporated the defendant company with a registered capital of £40 000 to take over the business. At that time the law required at least seven people for the formation of a company and this was achieved by Mr. Salomon together with his wife and five children acting as subscribers and taking one share each in the venture. Subsequently Mr Salomon sold the business, which he valued at over £39 000, to the company, receiving in return £20 000 in fully paid shares, £10 000 in cash of which £9000 went in discharging debts and liabilities of the business and £10 000 in debentures secured on the assets of the company. At the time of the collapse of the company, these debentures were held by a bank from whom Mr. Salomon had raised money to keep the company going. In the trial court the judge suggested that the company had a right of indemnity against Mr. Salomon. The other signatories of the memorandum were mere nominees of Mr. Salomon and the company was Mr. Salomon in another form. He used the company as his agent. The view of the company as agent of and trustee for him was also recognised by Court of Appeal. However, the House of Lords decided that ‘The company is at law a different person altogether from the subscribers to the memorandum: and the company is not in law the agent of the subscribers or trustee for them’. Thus Mr. Salomon was not liable to indemnify the company’s creditors. This has been called a ‘calamitous decision’ by O. Kahn-Freund (1944), recognising the validity of ‘one man companies’.

A person can also be controller, managing director and an employee of the company under a separate contract: Lee v. Lee’s Air Farming Ltd [1961]. This principle of the ‘veil of incorporation’ separates the incorporators of a company from the company itself. The veil of incorporation also operates between the companies in a group so that each company is regarded as a separate legal entity. Thus in Lonrho Ltd v. Shell Petroleum Co. Ltd [1980] the plaintiff failed to obtain disclosure of documents which were held by a subsidiary.

Whereas partnership property is jointly owned by all the partners, a company owns its own property and no member of the company has any interest in it. In Tunstall  v. Steigman [1962], Mrs S ran a business in one of a pair of shops of which she was the landlord. The other shop was leased to Mrs T. Mrs S sought to terminate Mrs T’s lease to expand her own business into the second shop. She needed to establish that she needed the premises to carry on a business run by herself. She had earlier transferred her business to a limited company of which she was the controller and the court rejected her application on the grounds that the business was owned and operated by the company and not by her.

The Constitution of a Registered Company

This is in the Memorandum and the Articles of Association. The Memorandum covers the external aspects of the company whilst the Articles, which are subordinate to the Memorandum, cover internal regulation.

The contents of the Memorandum

The Memorandum of a private company limited by shares must state:

(i)          the name of the company;

(ii)        whether the registered office of the company is situated in England, Scotland or Wales;

(iii)     the objects of the company;

(iv)     the liability of the members if limited;

(v)        the share capital with which the company is to be registered and its division into shares of a fixed amount.

It must be signed by the subscribers who must agree to take the number of shares indicated opposite their respective names. The Memorandum for a public limited liability company contains an extra clause (ii) stating that it is a public limited company.

The name clause

The last word(s) of the registered name must be either ‘limited’ or ‘public limited company’ depending upon its status.

Directors or shadow directors during the 12 months prior to a company going into insolvent liquidation are prohibited from using a name if it is a name by which the liquidating company was known at any time in that 12 month period. The restriction operates for five years from the commencement of the liquidation. The legislation is to stamp out the ‘phoenix company’ where the controllers place a company in liquidation and immediately form another company with the same or a similar name and recommence business, often with the same assets. 

Change of name

A company may change its name voluntarily by special resolution.

The change is operative from date of the issue of a new Certificate of Incorporation.

Common law restrictions on choice of name: ‘passing off’

If a company name is so similar to the name of an existing company or business, the court may issue an injunction to restrain the carrying on business under that name: Ewing v. Buttercup Margarine Co. Ltd [1917]. But a company having a word in ordinary use as part of its name cannot prevent another company from using the same word: Aerators Ltd v. Tollitt [1902].

The registered office clause

 

This establishes the domicile/nationality of the company. The clause only states that the registered office is situated in England, Scotland or Wales and does not give the address which is separately supplied at the time of registration, the place where the registered office is situated cannot be altered.

The registered office is the official address at which legal documents, notices and other communications can be formally presented. Statutory books must be kept there and be available for inspection by members free of charge during business hours for at least two hours a day.

The capital clause

 

The clause states the registered or authorised capital of the company and its division into shares of a fixed nominal value but does not indicate the actual capital raised. It establishes the ceiling beyond which the company must pass a resolution to increase its authorised capital; companies can increase, consolidate, sub-divide or cancel shares or convert them to stock by ordinary resolution.

 

Company Promoters

 

A promoter is ‘one who undertakes to form a company with reference to a given project, and to set it going, and who takes the necessary steps to accomplish that purpose’: Twycross v. Grant (1877). The definition excludes persons acting in a professional capacity in connection with the formation of a company, such as solicitors, accountants and so on.

Promoters are not entitled to remuneration from the company and are personally liable for the expenses of the promotion. Any pre-incorporation contract for remuneration is void and unratifiable after the company is incorporated. The articles usually give directors a discretionary power to pay the promoter’s expenses and the promoter will usually be one of the first directors.

 

Fiduciary duties of promoters

 

Promoters are in a fiduciary relationship with the company and must not accept bribes or make secret profits. They must keep proper accounts and make full disclosure of interests either to an independent board of directors or to members through a prospectus or other means. Provided full disclosure is made, any profit made by promoters selling property to the company can be retained. Where promoters breach their fiduciary duties, the company may claim damages in respect of any loss suffered resulting from the breach. Promoters’ failure to disclose a profit made on the sale of property to the company allows the company to set aside the transaction. In Erlanger v. New Sombrero Phosphate Co. (1878), a syndicate headed by E bought a lease of an island and then formed a company to take up the lease. They made a substantial profit on the sale of the lease to the company, but did not make a full disclosure of this. The company was able to rescind the contract. If the company elects not to rescind or has lost the right to do so, the company may recover the profit from the promoter: Gluckstein v. Barnes [1900].

 Pre-incorporation contracts

Where contracts are made on behalf of the company before a certificate of incorporation is issued, the company cannot be liable on the contract and cannot ratify the contract after incorporation. However, a contract which ‘purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly. The section has been broadly interpreted in Phonogram Ltd v. Lane [1982] to cover any situation where a person acts on behalf of a non-existing company, even where no steps have been taken towards its incorporation. 

Provisional Contracts by Public Companies

A public company originally registered as such is not able to commence business until the Registrar issues a certificate that the company has raised the statutory minimum capital (£50 000). Contracts made earlier are provisional, and the company and any officer in default is liable to a fine. The contract is not void but, if the company fails to comply with its obligations, the directors are liable to compensate the other party for any resulting loss or damage suffered.