Company Law — Formation and Constitution

Companies incorporated under the Companies Act 2006 (CA 2006) are classified by two characteristics: liability and public/private status.

Classification by liability:

Classification by public/private status:

A company is formed (incorporated) by registration with the Registrar of Companies at Companies House (s.7 CA 2006). One or more persons may form a company.

Documents required for registration:

1. Memorandum of association (s.8): A brief document signed by each subscriber (initial shareholder) stating their intention to form a company and to become members. Under CA 2006, the memorandum is a much simpler document than under previous legislation — it merely evidences the subscribers' intention. It cannot be amended after incorporation.
2. Application for registration (Form IN01): Contains the proposed company name, whether the company is limited or unlimited and whether by shares or guarantee, whether it is private or public, the registered office address (in England and Wales, Wales, Scotland, or Northern Ireland), a statement of capital and initial shareholdings (for companies limited by shares), a statement of the company's proposed officers (directors and company secretary if applicable), a statement of compliance (confirming legal requirements have been met), and the articles of association (or a statement that model articles will apply).
3. Fee: Registration fee payable to Companies House (currently £50 for standard online registration, or £30 for same-day incorporation for an additional fee).

Certificate of incorporation: If the Registrar is satisfied that all requirements have been met, a certificate of incorporation is issued (s.15). This is conclusive evidence that the company exists as a legal entity from the date stated on the certificate. The company receives a unique company registration number.

Effect of incorporation: From the date of the certificate, the company has separate legal personality (see below). For a private company, it can begin trading immediately. A public company must first obtain a trading certificate (s.761) by demonstrating that its allotted share capital meets the minimum (£50,000, 25% paid up).

Pre-incorporation contracts: A contract made in the company's name before it is incorporated is not binding on the company (because the company does not yet exist as a legal person). The person who made the contract is personally liable on it (s.51 CA 2006). The company can adopt the contract after incorporation by novation (a new contract replacing the old one with the company as a party).

The articles of association are the company's internal rulebook — they govern the relationship between the company and its members, and between the members themselves. They regulate the company's internal management and administration.

Key provisions typically found in the articles:

• Rights attached to shares (voting rights, dividend rights, rights on winding up)
• Transfer and transmission of shares (restrictions on transfer, pre-emption rights)
• General meetings (calling meetings, quorum, voting, proxies, written resolutions)
• Appointment, removal, and powers of directors
• Directors' meetings (procedure, quorum, conflicts of interest)
• Dividends and distributions
• Accounts, reports, and audit

Model articles: CA 2006 provides model articles (prescribed by the Companies (Model Articles) Regulations 2008) for private companies limited by shares, private companies limited by guarantee, and public companies. If a company does not register its own bespoke articles, the model articles apply automatically. Most companies adopt the model articles, sometimes with modifications.

Legal effect of the articles (s.33 CA 2006):

• The articles constitute a statutory contract between the company and each member, and between the members themselves
• This contract is enforceable only in their capacity as members — it does not create rights for outsiders (Eley v Positive Government Security Life Assurance Co [1876] — a solicitor named in the articles as the company's solicitor could not enforce this because the right was not in his capacity as a member)
• The articles can be enforced by: the company against a member, a member against the company, and a member against another member (in their capacity as members)

Amendment of the articles (s.21):

• The articles can be amended by special resolution (75% majority)
• An amendment must be bona fide for the benefit of the company as a whole (Allen v Gold Reefs of West Africa [1900]) — an amendment that unfairly discriminates against a minority may be challenged
• An amendment cannot override the statutory rights of members (e.g., the right to petition for unfair prejudice under s.994)
• An entrenched provision in the articles may specify that a particular article can only be amended by unanimous consent or stricter conditions than a special resolution (s.22)

The most fundamental principle of company law is separate legal personality: a company incorporated under CA 2006 is a legal person separate from its members (shareholders) and its directors.

Salomon v A Salomon & Co Ltd [1897]:

Mr Salomon transferred his boot-making business to a newly incorporated company (Salomon & Co Ltd). He was the major shareholder, holding 20,001 of 20,007 shares (the other 6 shares were held by family members to meet the then-minimum requirement of 7 shareholders). He also lent money to the company, secured by a debenture (floating charge). When the company became insolvent, the liquidator argued that the company was just Mr Salomon in another guise and that his debenture should rank behind the unsecured creditors.

The House of Lords held: The company was a separate legal entity from Mr Salomon. It was not his agent or trustee. The company had been properly incorporated, and therefore its separate personality must be respected. Mr Salomon's debenture was valid, and he ranked ahead of unsecured creditors as a secured creditor.

Consequences of separate legal personality:

• Limited liability: Members' liability is limited to the amount unpaid on their shares (or their guarantee). The company's debts are the company's, not the members'.
• Perpetual succession: The company continues to exist regardless of changes in membership. Death, bankruptcy, or departure of a shareholder does not affect the company's existence.
• Own property: The company owns its assets in its own right. A shareholder has no direct ownership of company assets — they own shares in the company.
• Contractual capacity: The company can enter into contracts, sue, and be sued in its own name.
• Criminal liability: A company can be prosecuted for criminal offences (e.g., health and safety breaches, fraud, corporate manslaughter).
• Separate taxation: The company is taxed on its profits (corporation tax) separately from the personal tax of its shareholders.

In exceptional circumstances, the courts will "lift" or "pierce" the corporate veil — looking behind the company's separate personality to hold the members or controllers personally liable for the company's actions or debts. The courts are very reluctant to do this and will only lift the veil in narrow circumstances.

Statutory provisions that lift the veil:

• Fraudulent trading (s.213 Insolvency Act 1986): If the company's business has been carried on with intent to defraud creditors, the court may declare any persons knowingly party to the fraud personally liable for the company's debts. This is also a criminal offence.
• Wrongful trading (s.214 Insolvency Act 1986): If a director knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation and did not take every step to minimise potential loss to creditors, the court may order the director to contribute to the company's assets.
• Disqualified directors: Under the Company Directors Disqualification Act 1986 (CDDA), a disqualified person who acts as a director (or is involved in management) is personally liable for the company's debts incurred during the period of disqualification.
• Failure to use the correct company name: An officer who signs a cheque, bill, or order that does not bear the company's correct name may be personally liable on the instrument (s.83 CA 2006).

Common law / judicial lifting of the veil:

• Sham or façade: The court may lift the veil where the company is a sham or façade — i.e., it was set up to evade an existing obligation or deceive (Gilford Motor Co v Horne [1933] — a former employee set up a company to circumvent a restraint of trade clause; the veil was lifted). The leading modern authority is Prest v Petrodel Resources Ltd [2013] — the Supreme Court confirmed the veil can be pierced only where the company was used to evade an existing legal obligation (the "evasion principle"), not merely to conceal the identity of the true controller (the "concealment principle" — which does not require piercing).
• Agency: If the company is acting as agent for the member(s), the principal behind the company may be liable. But the court will not easily infer an agency relationship simply from the existence of a parent-subsidiary structure.
• Groups of companies: Each company in a group has its own separate legal personality. A parent company is not normally liable for the debts of its subsidiary simply because it is a member. However, the veil may be lifted if the subsidiary is a mere façade or if the parent assumed a direct duty of care to persons affected by the subsidiary's actions (Chandler v Cape plc [2012]).

Key exam point: The courts are very reluctant to lift the veil. The Salomon principle is deeply entrenched. The veil will only be lifted in exceptional cases — typically involving fraud, evasion of obligations, or where statute requires it.

Restrictions on company names (ss.53-85 CA 2006):

• The last word of the name must be "Limited" (Ltd) for private companies or "Public Limited Company" (plc) for public companies (or Welsh equivalents)
• The name must not be the same as an existing company name on the register ("same as" test — Companies House will reject identical or near-identical names)
• The name must not be offensive
• Certain words and expressions require prior approval from the Secretary of State or a relevant body — e.g., "Royal", "Queen", "King", "Bank", "Insurance", "Chartered", "University", "Association", "Authority", "Council". These words imply status or government connection.
• The name must not give a misleading impression of the company's activities
• A company limited by guarantee that is a charity may be exempt from using "Limited" in its name if it meets certain conditions

Display of the company name: The company must display its name at its registered office and any place of business, on all business letters, order forms, notices, official publications, bills of exchange, promissory notes, cheques, endorsements, invoices, and the company's website.

Change of name (s.77): A company can change its name by special resolution (75% majority). The Registrar issues a new certificate of incorporation with the new name. A change of name does not affect the company's rights or obligations.

Every company must have a registered office to which all official communications and notices can be addressed (s.86 CA 2006). The registered office must be in the part of the UK in which the company was registered (England and Wales, Wales, Scotland, or Northern Ireland).

Significance:

• Determines the jurisdiction and which court has authority over the company
• Determines which Registrar the company files with (Companies House in Cardiff or Edinburgh)
• Is the address for service of legal documents (writs, court proceedings, statutory notices)
• Certain statutory registers and records must be kept available for inspection at the registered office (or a single alternative inspection location — SAIL)

The registered office address can be changed by giving notice to Companies House (ordinary resolution for private companies), but the company cannot change the jurisdiction (e.g., from England and Wales to Scotland).

Historically, companies had an objects clause in their memorandum specifying the activities the company was authorised to carry on. Acts beyond the objects clause were ultra vires (beyond the company's powers) and void.

Under CA 2006:

• Unless the articles specifically restrict the company's objects, the company has unrestricted objects (s.31). This means the company can carry on any lawful activity.
• If the articles do contain an objects restriction, any act beyond those objects is technically ultra vires. However, s.39 CA 2006 provides that the validity of an act done by a company shall not be questioned on the ground of lack of capacity by reason of anything in its constitution (articles). This protects third parties dealing in good faith — a contract with a third party cannot be set aside merely because it was beyond the company's objects.
• The ultra vires doctrine is therefore effectively abolished as far as third parties are concerned. However, shareholders can still seek an injunction to restrain an ultra vires act before it occurs (s.40). And directors who authorise ultra vires acts may be in breach of their duty to act within their powers (s.171).

Directors' authority: Even if the company has capacity, a director may lack the authority to bind the company. However, s.40 CA 2006 protects third parties dealing with the company in good faith — the power of the directors to bind the company is deemed to be free of any limitation under the company's constitution. The third party is not required to investigate whether the directors have authority.