Corporate Law: Antique Trade in Essex

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Corporate law refers to the law creating a separate legal entity of a business. It is the law governing companies and corporations. This paper shall be looking at Loraine and Brenda, who have been in a partnership (Antique Trade in Essex) but now wish to transform (incorporate) their business to a private company, limited by shares (they will call it “south east antique shop”). Their registered office shall be located in chancery lane in London. I will be giving advice on the various issues appertaining to their business.

How can they minimize the risk to the assets to be transferred to the company should the business fail?

The incorporation of “Antique Trade to “south East Antique Shop” means that the new company ceases to have a direct relationship with the partners and assumes a different legal entity altogether. It can sue or be sued. It can enter into a contract or enforce one. It operates fully as a legal person. A company limited by shares means that the liability of the members to the creditors is only limited to their share capital contributions or any outstanding contributions henceforth. Unlike in a partnership, Loraine’s and Brenda’s personal assets cannot be attached or recovered to clear the debts of their company hence protecting their assets in case of insolvency.

There is no legal window that protects a company’s assets from the risk of being realized should the business fail. All that is protected from liability is the personal assets of the members, incase of a business failure. Loraine’s and Brenda’s personal assets shall not be sold to pay off any debts owed to any credit not unless there are evidence of malpractices or fraud. Their assets are absolutely protected.

The risks to the assets can only be protected through effective business practice. This is where they apply the best business management skills to ensure that the business realizes their goals. If they are unable to, they can employ professionals to run their business. They can also insure against losses either through fire or malpractices like a fraud. This ensures that in case of any loss they are compensated accordingly.

They should also avoid securing debts using the transferred assets, especially the long-term debts. Although consequently this in the end might affect their profitability due to the low cash inflow.

They can also minimize risks to the transferred assets if they agree that only one of them is to become a director while the other one remains an ordinary shareholder. If Loraine becomes the director and Brenda the shareholder it excludes one of them from statutory debts most likely to be incurred by the director of a company. They can only avoid this if they don’t contravene the statutory regulation on companies which are mostly incurred by directors.

What provisions should be included in the articles of association to ensure that Loraine and Brenda can realize their shareholding in the company if either of them should wish to leave the business?

The article of association contains the regulations meant to define relations in the company. It stipulates the rules governing the management and internal administration of the company affairs. They deal with issues ranging from issuance of shares and the different rights of each type of share issued; generally touch on the relationship of the directors in respect to the wishes of the shareholders. There are provisions and guidelines in law that dictate how articles of association are drafted to an extent that different models are given. The founders of a private company, who most often than not become its first directors, are charged with the responsibility of drafting the Articles of Associations. They can either choose to adopt fully table A or modify it.

It is these articles of association that contain guidelines and regulations of how shares may be transferred from one member to another upon one of them seeking to do so. Model A of the articles of associations states that shares are only transferable to other shareholders in a private company subject to the approval of three-quarters of all shareholders. If either Loraine or Brenda would wish to realize their share, there has to be a provision in the articles stating so. For instance, (Joseph A et al 2004) model A of articles of association states that “if a shareholder requests approval to transfer some or all of their shares, the continuing shareholders are entitled to take a transfer of shares at a fair valuation determined by the market value”.

For shares to be transferred there must be a written formal request signed by both the transferor and transferee. Although shares are freely transferable, shares or interests can too only be transferred with the written approval of other shareholders if they are being transferred to a third party. But in this case, if either Loraine or Brenda wishes to realize their shareholding only the approval of one of them in regard to the other to the other can be sought. The article shall also make a provision indicating how fair valuation should be reached at in case the members themselves fail to reach a fair agreement. It is recommended that an independent valuer shall be agreed upon by both or if they still disagree, someone from the chamber of commerce shall do so (Joseph A.M et al, 2004).

Private company’s articles however do not allow such an easy transferability of shares because sudden transferring of shares may impact negatively on the survival of such small businesses. That is why they insist that the approval of the other members should be sought first, if the member wishing to transfer fails to secure any willing member in the company he or she can look for another transferee outside the membership but strictly at the approval of the other shareholders. In this case if either Loraine wishes to transfer the shares to another transferee after Brenda has failed to accept the shares, he can look for another transferee but with the strict approval of Brenda at a fair valuation.

To what extent can the company’s financial affairs be kept secret from the public?

A private company has a number of advantages over the public limited companies. These include ease of appointment of directors and rising of the minimum subscription. But the greatest advantage it has over the public company however is that it is under no statutory obligation to publish their books of account. Publishing of a company’s financial report is not always to its advantage, it might be experiencing financial hurdles reflecting badly in its profits, if such a report is made public it might shun away potential investors and customers.

The private company will also be under no obligation to file an audited report of its annual financial statement. External auditing is not mandatory but rather is at the discretion of management. This shows that private companies have a larger leeway in the way they conduct and disclose of the financial statements. However, there are some circumstances that can lead to a company disclosing its financial statements.

A company should avail its financial statements when filling tax returns. IRS tax requirements have it that any business must provide information regarding its profit and loss accounts, its balance sheets as well as their cash flow statements. This acts as a proof to the tax to be paid. The private company is not to be an exception to this disclosure.

The financial statements are also important when the company is sourcing for finance from outside source.

For instance, when a private company is entering into an arrangement with banks, for a loan or an over draft, it has to disclose it s financial statements to pin point its financial position at the moment so that the bank can gauge its credit worthiness. All creditors too have a right to assess the company’s books of account in trying to reach a decision on whether to grant any credit to the business entity. By scrutinizing the books they will be able to know the credit rating of the business and whether if they provide it a credit facility, it will be in a position to pay back.

Potential investors with a wish of investing in the company also have a right to access the books of account. For him or her to know how viable the company is he will have to inspect the book of account then make a decision of whether to invest or not to invest based on the information in the books.

In addition too, any investigation being carried out when the company is carrying out fraudulent dealings may also lead to the books of account be inspected at the authority of the court. The tax collector also has authority to raid the company’s book of account to verify any information or question arising out of tax returns filed. This is where a firm is suspected of avoiding tax by filing incorrect or incomplete details.

What statutory books and register must be kept at the company’s chancery lane premises and what may be kept at the trading premises in ESSEX?

The corporate law has it that the registered office of a company to be situated in the same country that it is registered in. This is where important documents are kept. Documents that are kept in the registered office are:

The register of directors and secretaries of the company. It maybe kept at the registered office but may also be kept where the registrar of member is but not again outside the registered country.
The register of debenture holders is also kept where the register of members is kept.
Accounting records of the company although it may be kept any place where the directors may deem fit.
Register of director’s interest on shares and debentures may also be kept where the register of the members is kept.
Registers of charges and mortgages and copies of the instrument creating or evidencing them.
The minute book of the Annual General Meeting or any meting thereof having been held by the board of directos.It is mandatory that in any meeting held must be recorded in the company’s minutes.
Copies of directors service contracts or written memorandum setting out the terms of the contract.

Documents that may be kept at the trading premises in ESSEX.

Register of members or shareholders
Register of debenture holders
Accounting records and all books of the company
Register of directors interest of share and debenture

Ordinarily, a private company is under no obligation to make public its documents, unlike the public companies. However, the public, members and creditors still have residual powers in them to inspect the documents in the registered office although this is bound to change from state to state (www.lectlaw.com ).

Shareholders have an express authority to inspect the documents concerning the company’s affairs. It is within their shareholding rights, however this right maybe refused by the directors if they believe that there are chances that the company’s secrets may be jeopardized. In extreme cases, the court, where further redress has been sought, might grant the authority to inspect the book or deny depending on the degree of the secrecy of the information (www.internationlawoffice.com ).

A creditor too has a right to inspect a company’s document provided he has solid reason, claims and the necessary authority. He can inspect the document to check for any malpractice or if a document contains a falsified statement. Creditors play an important role in helping companies to accomplish the missions as they provide them with the necessary resources and if not allowed to inspect the important documents might risk losing a lot of their finances to dubious companies. They have to inspect these documents to know that their registration is as the law requires it to be as well as examining the articles and memorandum of association to ensure that the company’s activities and dealings are intravires.

The documents are also inspected by the authorities such as government officials to ensure that the company has followed all the stipulations in law during its registration. Important documents such of the creditors and debentures will assist in taxation. There are no known provisions however, authorizing the general public to inspect the company’s document unless, those who may wish to invest in the company as they would wish to know whether the company has followed the registration procedures as well as its articles and memorandum of association.

What extent if any could Lorraine or Brenda or both incur personal liability for the company’s debts if the business fails?

A company with a liability limited by shares is considered to be a separate legal entity forms both the directors and the shareholders. The members enjoy limited liability, up to the amount contributed or pending towards the share capital of the company. This however, is detrimental to the creditors who might loose millions of shillings in case a company becomes insolvent, supplies and customers might lose their deposits if the company’s assets cannot cater for them all (Manfred Davidman, 1996). However there some instances and circumstances that may lead to a member incurring personal liabilities of the company’s debts incase a business fails.

In perpetraiton of fraud or where it is suspected that the company is engaging in criminal dealings, members or the shareholder have sometimes faced the blunt where the courts have intervened causing the members to incur liability over any debts or criminal changes facing the company (www.jonesbahamas.com ). The court is rather watchful of the abuse of the veil of incorporation and member forced to take a personal responsibility. This is mostly common in private entities (Thomas. H. L et al 2003).

The statutory minimum number of members in a private company is not supposed to go below 2. In case the minimum number is exceeded for more than six months, the surviving member, if he still carries on with the business shall be made personally liable for any debt or liability incurred in those days that business has been in operation. In this case, if Brenda carries on the business alone for a period of 6 months, she will be liable for all debts and liabilities being limited to the shares, because it is rather obvious that she knows she was contravening the statutory minimum legislation.

Personal liability on the members may be incurred in case where they fail to follow a corporate legislation concerning the exhibition of the company’s name in the stipulated manner, they could also be liable of a fine of an amount the court may deem fit. Failure, for example, to indicate that a company is a limited entity may result to the shareholders being personally liable of the liability that may occur as a result of the ill displayed name.

Also any director who participates in the management of the company in contravention of an order under the act corporate law will be jointly or severally liable along with the company for any company debts. If for example both Brenda and Loraine or one of them is the director of south East Antique shop and they have gone against the corporate law in any way they shall be both liable for any debts arising during the time that they had contravened the order.

In addition too, if Loraine and Brenda have not obtained a trading certificate from the registrar of companies they shall be personally liable for any unpaid up debt. If they commence business without a trading certificate it may lead to them being forced to cover for any loss or damages suffered by a third party in any of the transactions entered into during the time that they have been in contravention of the corporate law.

On fraudulent trading, in the course of winding up the business, if it emerges that any activity or business has been carried out with an intention of defrauding the creditors, upon application of the liquidator or any creditor, both Loraine and Brenda shall be personally liable for the debt, if this is done in their full knowledge, they shall be fully liable for the damages regardless of whether they enjoy a limited liability. Their personal assets shall be used to pay for the damages or any debts arising out of the fraudulent dealings.

The exceptions to limited liability are there with an intention of guarding or protecting any person or a third party who enters into a contract or dealing with the company unaware of the flaws existing in the company. It should protect the rights of a third party from incurring any unnecessary losses and liabilities resulting form incompetence of the company.

Assuming that Loraine and Brenda are the only directors and shareholders in the company, what provisions should be included in the articles of association to ensure that Lorraine and Brenda remain as company directors despite any disagreements between them or the introduction of new shareholders or directors to the company?

The articles of association generally define the relationship between shareholders and the directors, defining the rights and powers possessed by each category. It defines the different categories of directors, their remuneration and also how they are appointed. It also bestows them with different responsibilities and duties cautioning them to safeguard the interest of the shareholders with a dutiful care. Basically, company directors are elected by the shareholders in the Annual General Meeting election. They may also be appointed in special cases by the existing directors either form among the shareholders or from outside the company maybe in recognition of their leadership or professional qualities.

Loraine and Brenda are the only directors to the company and they are the only ones present during the board meetings. There are no restrictions in UK on who can become a director as long as one has a legal capacity (www.companies-house.gov.uk ) and as long he has not been disqualified by the court. Table A of the articles of association’s breaks down the rules and regulation touching even on the appointments of directors. A company can adopt the articles in the table A or modify them to suit their situations but following all provisions in the memorandum of association.

If Loraine and Brenda want to remain the company’s director even after the admission of new shareholders the articles should indicate so. The law recognizes the special role played by the likes of Brenda and Loraine and they are referred to as the founders or promoters of a company. These are people involved in the incorporation of a company and also in the first running of the company. They have the responsibility of conceiving the idea, forming the company in the reference to a given object. They also take the necessary steps to provide it with the share and loan capital. After all this is done they are then expected to hand it over to the new directors who in most cases are themselves. It’s the founders or the first directors who have the responsibility of preparing the articles of association.

Their articles of association should contain a provision stating that the first directors, even after nomination of new ones, shall not be required to retire on a rotation basis. This ensures that Loraine and Brenda shall not be expected to retire at any one moment. It should also contain a clause stating that the appointment of any new directors shall be at eh sole discretion of the existing directors. This ensures that they appoint to the board people who they believe are friendly to their cause. If they want to limit the number of directors to two, the articles should limit the number consequently to two. For this to be changed it means that there has to be a special resolution of shareholders. For them two to ensure that they remain in the board of directors, the articles of association should contain a provision stating the founder members or the first directors, due to the special role they played in the incorporation of the company they shall not be expected to retire from the board till death even if it is in the event of a disagreement among the directors. This is however if they have met the necessary qualification of a director, like for instance there might be a provision requiring a director to have taken the qualification shares.

Provisions in the articles should also include the condition to be satisfied or events that have to happen for Loraine and Brenda to quit directorship. Although provisions in the articles may exclusively state that Loraine and Brenda are to be directors for life, this still can be altered with time through the alteration procedures stipulated in the same articles. Another provision however may be included that will totally override the prior provisions authorizing the directorship for life. But the corporate legislation still remain the best option to remove them especially in the event of senility or sickness where their legal capacity to enter into a contract or enforce one will be strongly compromised or when one of them is acting in a manner that will be perceived as not to be in the company’s best interest.

References

Larry D. Solderquist 1999 Law and Practice. Practicing Law Institute.

William A. Klein and J. Mark Ramseyer, 2001. Agency, Partnerships and limited Entities. New York: Foundation Press.

Lawrence Mitchell 1995. Experiencing limited liability: on insulanty and inbreeding on corporate law. In progressive corporate law. Co. west view press.

Demmott, Deborah A. 1977. Foreward: Reweaving the corporate veil. Law and contemporary problems.

Hillhams solicitors: legal dictionary 2007. Web.

Joseph A. Mccahery, Eric M. Vemenler, M J G.C Raaij Makers, 2004, the Governance of close corporations and partnerships: US and European perspectives, Oxford University Press.

Companies House 2003, Web.

From the lectric law library stacks. Share holder’s rights. Web.

International law office, Supreme Court case law 2007, Web.

Manfred David man, 1996. Community Economics: Ownership and limited liability. Web.

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Thomas Lee Hazen and Jerry. Markham, 2003. Corporations and other business enterprises.

Preston Lee E. 1995 Corporate Boards and Corporate Governance, Society.

Romano, Roberta, 1993, Foundations of Corporate Law. New York, Oxford University Press.

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Corporate Law: Antique Trade in Essex

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