Topic 13. Agency and Liabilty in Partnerships-combined.pdf

Notarial Academic Training Course The Law and Practice of Companies and Partnerships Topic 13. Agency and L...

Notarial Academic Training Course The Law and Practice of Companies and Partnerships Topic 13. Agency and Liability in Partnerships: Rights, Duties, and Legal Implications Law Training Centre (Kent) All rights reserved. These publications are for the personal use of the individual studying for the relevant qualification and may not be offered for sale to or by any third party.  Topic 13. Agency and Liability in LAW TRAINING CENTRE (KENT) LTD Partnerships: Rights, Duties, The Law and Practice of Companies and Legal Implications Version: 2 Introduction Partnerships can be complex entities with different types of partners, each bearing distinct rights and responsibilities. It is essential to differentiate between partners and employees within a partnership, as they have contrasting roles and legal statuses. This reading delves into the various types of partners, their rights and responsibilities, and the critical distinction between partners and employees in a partnership setting. Partners and employees: A crucial distinction Partnerships have the flexibility to employ individuals, but it's essential to recognise the fundamental distinction between partners and employees: Profit entitlement: Partners typically have a stake in the profits of the firm, whereas employees do not share in these profits. However, partners also bear liability for the firm's debts, which employees do not. Statutory rights: Employees are entitled to specific statutory rights, such as protection against unfair dismissal, which do not apply to partners. Determining whether an individual is a partner, or an employee can be intricate, and there is no one-size-fits-all test. Factors like profit-sharing rights may indicate partnership status. Each case must be evaluated based on its unique circumstances. The Relationship between partners Partnership agreements can set forth express duties and obligations for partners. Additionally, the Partnership Act 1890 introduces implied rights and duties to regulate partner relationships. Notably, partnership agreements are contracts of the utmost good faith (uberrimae fidei), imposing fiduciary duties on partners. Three key fiduciary duties under the Partnership Act 1890 include: 1. Duty to render true accounts: Partners must provide accurate information about partnership matters to other partners or their legal representatives (Section 28). 2. Duty to account for benefits derived: Partners must account for any benefits they gain without the consent of other partners from partnership transactions or property (Section 29(1)). 3. Duty to avoid competition: Partners are prohibited from competing with the partnership's business without consent and must account for profits made in competing ventures (Section 30). Page 1 LAW TRAINING CENTRE (KENT) LTD Topic 13. Agency and Liability The Law and Practice of Companies in Partnerships: Rights, Duties, and Legal Implications Version: 2 The Relationship between partners and third parties The Partnership Act 1890 governs how partners can contractually bind the firm and their co-partners to third parties. Section 5 of the Act defines every partner as an agent of the firm and co-partners for the partnership's business. Partners can bind the firm and co-partners to third parties when acting within their authority and in the usual course of business. However, partners cannot bind the firm or co-partners when they lack authority, and the third party either knows of the lack of authority or does not believe the individual to be a partner. Partnership activities must be within the usual course of business, with distinctions between trading and non-trading firms. Trading firms involve buying and selling goods, while the phrase ‘business of the kind carried on by the firm’ aligns with the concept of the ‘ordinary course of business’. Liability for tortious and wrongful acts Section 10 of the Partnership Act 1890 addresses liability for wrongful acts or omissions of partners within the ordinary course of the firm's business or with their co-partners' authority. Partners and the firm can be vicariously liable for these acts. Notable cases, such as Dubai Aluminium Co Ltd v Salaam, emphasize that even if acts are undertaken unlawfully or without authorization, liability under Section 10 still applies if the act is within the firm's ordinary course of business. However, the extent of liability can depend on the closeness of the connection between the wrongful act and the partner's authorised actions. The liability imposed under Section 10 is joint and several, allowing claimants to pursue each partner individually or collectively until the full amount of loss is recovered. This contrasts with Section 9 liability, which is joint, where all partners are collectively liable for the loss. In conclusion, the legal intricacies of partnerships involve defining partner types, delineating their rights and duties, and distinguishing between partners and employees. Understanding fiduciary duties, agency relationships, and liability for wrongful acts is essential for partners and third parties alike in navigating the complexities of partnership law. Page 2  Notarial Academic Training Course The Law and Practice of Companies and Partnerships Topic 12. Dissolution Law Training Centre (Kent) All rights reserved. These publications are for the personal use of the individual studying for the relevant qualification and may not be offered for sale to or by any third party. LAW TRAINING CENTRE (KENT) LTD Topic 12. Dissolution The Law and Practice of Companies Version: 2 Introduction Dissolution is a crucial phase in the lifecycle of a partnership. It marks the end of the partnership's existence, whether due to mutual agreement or a fixed term expiration. In some cases, dissolution can also occur when one partner leaves, leading to the formation of a new partnership if at least two partners remain. This reading explores the methods of dissolution, including general dissolution and technical dissolution, and their effects on the partnership. Methods of dissolution 1. General dissolution General dissolution is a comprehensive termination of the partnership. It involves winding up the partnership's affairs and settling its accounts. There are various causes of general dissolution as outlined in the Partnership Act 1890 (sections 32 - 44): Mutual agreement: Partners can agree to dissolve the partnership, either informally or as stipulated in the partnership agreement. Notice by a partner: A partner can serve notice for dissolution if allowed by the partnership agreement. Specific power in the agreement: The partnership agreement may grant a partner the power to initiate dissolution. Legislation: Partnerships can dissolve due to events outlined in legislation, such as the death or bankruptcy of a partner, unless otherwise agreed. Misconduct: Fraud, misrepresentation, rescission, or engagement in illegal activities can trigger dissolution. Court order: A court can order dissolution in cases of mental incapacity or other ill-health. Operational loss: If the business can only operate at a loss, dissolution may be necessary. Page 1 LAW TRAINING CENTRE (KENT) LTD Topic 12. Dissolution The Law and Practice of Companies Version: 2 Technical dissolution Technical dissolution occurs whenever there is a change in the partnership's composition. For example, the partnership dissolves when one partner leaves and is replaced by another, or when a new partner joins. In such cases, there is typically no interruption in the partnership's operations, and the ‘new’ partnership takes on the assets and liabilities of the ‘old’ one. Effect of dissolution The effect of dissolution on a partnership depends on whether there is a partnership agreement in place or not. Profits and losses: In the absence of a specific provision in the partnership agreement, the Partnership Act 1890 (section 24) dictates that profits and losses should be divided equally among partners. This can be problematic if the partners have different profit-sharing expectations, such as a part-time partner expecting a pro-rata share or a silent partner contributing more capital seeking a higher profit share. Dissolution and retirement: According to section 26 of the Partnership Act 1890, any partner can dissolve the entire partnership by giving notice to the other partners, effective immediately. This dissolution means that the business halts its operations, assets are realised, liabilities are settled, and any surplus is distributed among the partners. To avoid abrupt dissolution, partnerships often include provisions for an orderly retirement of a partner by requiring advance notice to the other partners. Death: The Partnership Act 1890 mandates that the death of any partner results in the dissolution of the entire partnership. This triggers the realization of partnership assets and settlement of its liabilities. However, if partners wish to continue the business in the event of a partner's death, an express provision must be included in the partnership agreement to ensure continuity. Expulsion: In the absence of a provision to the contrary, section 24 of the Partnership Act 1890 prohibits the expulsion of a partner. This can lead to challenges when dealing with a partner's serious breach of duty, criminal convictions, or disqualification from a compulsory body. In such cases, partners may desire the ability to remove an offending partner, necessitating explicit terms in the partnership agreement. Page 2 LAW TRAINING CENTRE (KENT) LTD Topic 12. Dissolution The Law and Practice of Companies Version: 2 In conclusion, understanding the methods and consequences of partnership dissolution is critical for partners to navigate this phase effectively. A well-drafted partnership agreement can provide clarity, avoid disputes, and ensure a smooth transition in the event of dissolution, whether general or technical. Page 3  Notarial Academic Training Course The Law and Practice of Companies and Partnerships Topic 11. Formation of a Limited Liability Partnership Law Training Centre (Kent) All rights reserved. These publications are for the personal use of the individual studying for the relevant qualification and may not be offered for sale to or by any third party. LAW TRAINING CENTRE (KENT) LTD Topic 11. Formation of The Law and Practice of Companies a Limited Liability Version: 2 Partnership Introduction A Limited Liability Partnership (LLP) is a distinctive form of business entity that combines elements of both partnerships and limited companies. Unlike a traditional partnership, an LLP offers its members limited liability, shielding their personal assets from business debts and liabilities. This reading will delve into the intricacies of forming an LLP, covering essential aspects such as the approved name, documentation requirements, the method of incorporation, and ongoing filing obligations. Approved name The naming of an LLP is a crucial step in its formation. The chosen name must adhere to specific regulations. Firstly, it cannot be identical to the name of an existing LLP. Additionally, it must conclude with either ‘Limited Liability Partnership’ or its abbreviation ‘LLP’. In Wales, an alternative ending is allowed, which includes ‘partneriaeth atebolrwydd cyfyngedig’, ‘pac’, or ‘PAC’. The regulatory framework governing LLP names is rooted in the Companies Act 2006 (CA 2006). Companies House, the registrar responsible for LLP registration, will reject a name under certain conditions. These include if the name implies an offense or is offensive, if it suggests a connection with government or public authorities, or if it contains sensitive words or expressions. The Secretary of State can also establish regulations regarding these matters. Furthermore, the name should not include characters, signs, symbols, or punctuation that are not permitted. Finally, it must not misuse terms like 'limited,' 'ltd,' 'unlimited,' 'public limited company,' or 'plc' in a way that misleads or causes confusion. Documentation The formation of an LLP hinges on the submission of specific documents to the Registrar of Companies, accompanied by the requisite fee, all under an approved name. Section 2(1) of the LLP Act 2000 outlines the key requirements: a) Two or more individuals associated for the purpose of conducting a lawful business with a profit motive must have their names on an incorporation document. b) The incorporation document, or a copy of it, must be submitted to the registrar. c) A statement, made by a solicitor engaged in formation or any subscriber to the incorporation document, affirming compliance with requirement (a). Page 1 LAW TRAINING CENTRE (KENT) LTD Topic 11. Formation of The Law and Practice of Companies a Limited Liability Version: 2 Partnership b) Importantly, making a false statement knowingly or without belief in its truthfulness can result in a criminal offense, punishable by imprisonment, a fine, or both. The incorporation document, as specified in section 2(2) of the LLP Act 2000, must provide essential details. These include the LLP's name, the registered office's location, the office's address, particulars of the initial members, designation of designated members, and a statement of initial significant control. While an express agreement can govern the LLP, it is not mandatory, and the default position, in the absence of an agreement, is set by the Limited Liability Partnership Regulations 2001. Method of incorporation An LLP can be incorporated either electronically or through paper filing. Electronic applications, especially if straightforward, are typically processed within 24 hours, with an option for same-day service at an additional fee. Conversely, paper applications take longer, usually around 5 days for straightforward cases. The application form to be used is the ‘Form LL IN01 Application for the incorporation of a Limited Liability Partnership (LLP)’. This form is divided into several parts, each collecting specific information. Upon successful registration, Companies House issues a certificate of incorporation, containing vital information such as the LLP's name, registered number, date of incorporation, registered office location, and the registrar's signature or seal. Ongoing filing requirements In addition to the initial registration, an LLP has ongoing filing obligations with Companies House, ensuring transparency and compliance with legal standards. These requirements include: 1. Changes to LLP details: LLPs must notify Companies House of any changes in membership using various forms, such as LL NM01 (Change of LLP name), LL AP01 (Appointment of an individual member), and LL AP02 (Appointment of a corporate member). 2. People with Significant Control (PSC): Initial PSC details must be provided on registration, and any subsequent changes must be reported within 14 days using forms LLPSC01-09. Page 2 LAW TRAINING CENTRE (KENT) LTD Topic 11. Formation of The Law and Practice of Companies a Limited Liability Version: 2 Partnership 3. Charges: When creating a charge, an LLP must submit a statement of particulars, a copy of the charge (if applicable), and the necessary fee to Companies House within 21 days, utilising the LLMR01 form. 4. Confirmation statement: An annual confirmation statement, submitted through form LL CS01, is required to affirm the accuracy and currency of information held by Companies House. 5. Annual accounts: LLPs are obligated to file annual accounts with Companies House every year, ensuring financial transparency and accountability. In conclusion, the formation of a Limited Liability Partnership involves several steps and legal requirements, from choosing an approved name to ongoing compliance and reporting. Understanding and adhering to these processes are vital for the successful establishment and operation of an LLP, offering members the benefits of limited liability while engaging in a lawful business with a view to profit. Page 3  Notarial Academic Training Course The Law and Practice of Companies and Partnerships Topic 10. Formation of a Partnership Law Training Centre (Kent) All rights reserved. These publications are for the personal use of the individual studying for the relevant qualification and may not be offered for sale to or by any third party. LAW TRAINING CENTRE (KENT) LTD Topic 10. Formation of The Law and Practice of Companies a Partnership Version: 2 Introduction The formation of a partnership is a flexible and straightforward process, governed by the Partnership Act 1890 in the UK. Partnerships can be established through oral agreements or implied through the actions of individuals carrying on a business together with the intent to make a profit. However, it is advisable to formalise the terms and conditions of the partnership in a written partnership agreement to avoid potential disputes and clarify the rights and responsibilities of each partner. Key provisions of partnership formation 1. Implied Terms in the Absence of a Partnership Agreement In the absence of a written partnership agreement, the Partnership Act 1890 provides default terms that apply to the partnership. These terms include: Equal profit and loss sharing: All partners are entitled to share profits and losses equally, regardless of their capital contribution. Indemnification: The partnership must indemnify each partner for payments made and personal liabilities incurred in the ordinary course of business or for preserving partnership assets. Interest on capital: A partner who contributes more capital than agreed upon is entitled to interest at a rate of five percent per annum. Capital interest: Partners are not entitled to interest on their capital until profits are ascertained. Management participation: Each partner may participate in the management of the partnership. Remuneration prohibition: Partners cannot receive remuneration for their role in the partnership. New partner consent: Introducing a new partner requires the unanimous consent of all existing partners. Page 1 LAW TRAINING CENTRE (KENT) LTD Topic 10. Formation of The Law and Practice of Companies a Partnership Version: 2 Nature of business change: Altering the nature of the partnership's business requires the consent of all existing partners. Access to partnership books: Every partner has the right to access, inspect, and copy partnership books. Contents of a partnership agreement A comprehensive partnership agreement should address the following key aspects: Name of the partnership: If the partnership's name includes the surnames of all partners, no restrictions apply. Other names must comply with the Companies Act 2006 (CA 2006) disclosure requirements. Partnership commencement date: Partnerships can begin through common business activities. The agreement establishes the date when partners agree to the terms. Place of business: Specify the business address and geographic coverage. Nature of business: Describe the primary business activities and any provisions for future expansion or change in direction. Names and roles of each partner: Define each partner's role, such as general partner, fixed equity partner, silent partner, or salaried partner, along with their respective responsibilities and profit-sharing arrangements. Page 2 LAW TRAINING CENTRE (KENT) LTD Topic 10. Formation of The Law and Practice of Companies a Partnership Version: 2 Financial provisions in the partnership agreement Capital contribution: Detail the amount of capital each partner will contribute to the partnership. This forms the basis for calculating interest on capital and ownership percentages. Profit sharing: Specify the ratio or percentage of profits each partner is entitled to. This can vary among partners and should reflect their contributions and roles. Salary: If applicable, outline the salaries paid to partners. Salaries are deducted from profits before profit sharing calculations. Interest on capital: Define the interest rate (usually expressed as a percentage) paid on capital contributions exceeding the agreed-upon amount. Drawings: Set limits on the amount partners can withdraw from the business account, preventing excessive or unauthorized withdrawals. Asset ownership: Allocate ownership percentages for partnership assets, such as property or vehicles. Compliance with the Companies Act 2006 (CA 2006) When selecting a partnership name other than the surnames of partners, CA 2006 regulations apply. These include: Disclosure requirements: Partnership names must be included on business letters, invoices, orders for goods or services, receipts, and written demands for payment of debt. Prominent notice: Display partner names and UK service addresses in a prominent location at the business premises. Restrictions on business names: Business names should not suggest a government or local authority connection, use sensitive words without permission, or include terms like 'limited,' 'Ltd,' 'limited liability partnership,' 'LLP,' 'public limited company,' or 'plc.' Page 3 LAW TRAINING CENTRE (KENT) LTD Topic 10. Formation of The Law and Practice of Companies a Partnership Version: 2 Conclusion The formation of a partnership in the UK is relatively simple, often beginning through informal agreements or common business activities. However, to ensure clarity and avoid future disputes, it is advisable to draft a comprehensive partnership agreement. This agreement should address key elements such as partner roles, capital contributions, profit sharing, salaries, and the use of partnership assets. Additionally, compliance with the Companies Act 2006 regarding business names and disclosure is crucial to avoid legal issues and maintain transparency. A well-structured partnership agreement is a vital tool for partners to outline their rights and responsibilities and create a solid foundation for a successful business venture. Provisions relating to a partner leaving the partnership: Rights, responsibilities and liability Introduction In a partnership, the departure of a partner can significantly impact the dynamics and operations of the business. Whether a partner leaves voluntarily through retirement or is expelled from the partnership, there are specific provisions and considerations outlined in the partnership agreement to address these situations. Additionally, issues such as payment for the departing partner, restraint of trade clauses, arbitration, and the duration of the partnership play pivotal roles in managing partner exits. Moreover, the Partnership Act 1890 defines the legal framework for these scenarios, ensuring clarity in partnership law. Retirement of a partner Retirement is a common way for a partner to exit a partnership. As long as there are at least two remaining partners, the business can continue as a partnership even when one partner retires. Unless the partnership agreement specifies a different procedure, the retirement process involves the departing partner giving notice of their intention to dissolve the partnership. The remaining partners can then reform the partnership. The partnership agreement should clearly outline the procedure for partner retirement, including any financial requirements and restraint of trade provisions. These provisions help manage the exit process and protect the interests of both the retiring partner and the business. Page 4 LAW TRAINING CENTRE (KENT) LTD Topic 10. Formation of The Law and Practice of Companies a Partnership Version: 2 Expulsion of a partner In contrast to retirement, expulsion involves removing a partner from the partnership against their will. The grounds and procedure for expelling a partner should be clearly defined in the partnership agreement. It is crucial to specify the financial obligations and restraint of trade clauses applicable to an expelled partner. The use of an arbitration procedure can also be outlined in the partnership agreement to resolve disputes related to partner expulsion, reducing the need for court litigation. Payment for departing partner Determining the amount payable or the method of calculating payment to a partner retiring from the partnership is a critical aspect of managing partner exits. The partnership agreement should specify the basis for calculating the departing partner's share of the partnership's assets and profits. This provision helps ensure a fair and transparent process for settling financial matters when a partner leaves. Restraint of trade Restraint of trade clauses in the partnership agreement can prevent an exiting partner from engaging in specific activities that might compete with the partnership or harm its interests. These clauses may include: Prohibitions on soliciting or canvassing the partnership's clients. Restrictions on engaging in business with existing clients of the partnership. Geographical area restrictions. Prohibitions on soliciting partnership staff or employing them after leaving the partnership. These provisions protect the business from unfair competition and the departing partner from potential legal issues. Page 5 LAW TRAINING CENTRE (KENT) LTD Topic 10. Formation of The Law and Practice of Companies a Partnership Version: 2 Arbitration Partnership agreements can include provisions specifying the circumstances in which disputes must be resolved through arbitration rather than civil court actions. Arbitration offers a more confidential and efficient way to address conflicts within the partnership. The partnership agreement may also designate an arbitrator, emphasising the importance of arbitration as the preferred method for dispute resolution. Initiating a civil action outside of arbitration can be considered a breach of the agreement. Duration of the partnership By default, a partnership can continue indefinitely unless a specific duration is specified. In cases where the partnership agreement does not set a fixed duration, Section 26(1) of the Partnership Act 1890 allows any partner to dissolve the partnership by giving notice to all other partners. Alternatively, the partnership agreement can include provisions that dictate the conditions under which the partnership continues, such as requiring a minimum number of partners. Agency and types of partners Partnerships can consist of various types of partners, each with different rights and responsibilities. Importantly, partners are distinct from employees. This distinction is crucial because partners have a share in profits and liability for debts, while employees have statutory rights and protections that partners do not possess. The Partnership Act 1890 imposes fiduciary duties on partners, regardless of whether they are explicitly stated in the partnership agreement. These duties include rendering true accounts and full information, accounting for benefits derived from transactions concerning the partnership, and avoiding competing businesses. Liability for wrongful acts The Partnership Act 1890 also outlines liability for wrongful acts of partners. Partners may be liable for tortious or unlawful actions of a partner committed within the ordinary course of business or with the authority of other partners. The Act specifies that both the partnership and individual partners are vicariously liable for these actions. The liability can be in contract, tort, or other fault-based common law or statutory wrongs. Page 6 LAW TRAINING CENTRE (KENT) LTD Topic 10. Formation of The Law and Practice of Companies a Partnership Version: 2 Conclusion Partnership agreements play a pivotal role in managing partner exits, protecting the interests of both departing and remaining partners. Clear provisions related to retirement, expulsion, payment, restraint of trade, arbitration, and the duration of the partnership are essential for a smooth transition. Furthermore, understanding the fiduciary duties imposed by the Partnership Act 1890, as well as the distinctions between partners and employees, is crucial for operating a partnership effectively and ensuring legal compliance. Properly drafted partnership agreements provide clarity, reduce conflicts, and facilitate the orderly continuation of the business when partners leave the partnership. Liability in partnership: Holding out, new partners, and retirements Introduction Partnerships are dynamic entities that often see changes in composition over time. New partners may join, while others retire or leave. These changes raise important questions about the liabilities of partners and how third parties perceive these partnerships. In this reading, we explore the legal aspects of ‘holding out’ in partnerships and discuss the liabilities of new partners and partners who retire or leave the firm. Holding out Section 14(1) of the Partnership Act 1890 (PA 1890) addresses the concept of ‘holding out’ in partnerships. It stipulates that anyone who, by words or conduct, represents themselves or allows themselves to be represented as a partner in a partnership is liable as if they were a partner to any third party who has relied on this representation when extending credit to the partnership. In essence, this section establishes an estoppel principle that prevents the person who held themselves out as a partner (referred to as ‘X’) from denying their partnership status if such representation led a third party to grant credit to the partnership. Page 7 LAW TRAINING CENTRE (KENT) LTD Topic 10. Formation of The Law and Practice of Companies a Partnership Version: 2 To rely on Section 14(1), a third party must establish three key elements: A representation indicating that X was a partner Direct communication of this representation to the third party or through an intermediary The third party's reliance on this representation when extending credit to the partnership. Notably, the third party does not need to prove that they would not have extended credit if they knew the truth. The mere belief in the representation and acting upon it suffices. Liability of new partners Determining the liability of new partners in an existing partnership is not always straightforward. Section 17(1) of the PA 1890 appears to provide clarity, stating that a person admitted as a partner into an existing firm is not liable for anything done before they became a partner. However, complexities arise when examining the timing and nature of the acts in question. For instance, in cases involving single continuous acts, such as the signing of a contract before the new partner's admission but with breaches occurring afterward, the new partner is generally not liable. However, when the contract involves repeated acts or obligations continuing after the new partner's entry, they may be held liable for acts or breaches that occur during their partnership. Liabilities of Partners Upon Retirement When a partner retires from a partnership, their liability for partnership debts and obligations incurred before their retirement persists under Section 17(2) of the PA 1890. However, this is a general rule subject to exceptions. If the partnership's contractual obligations involve single continuous acts that span a period extending beyond the partner's retirement, that partner remains liable for those acts. Conversely, for contracts that require repeated acts, the retiring partner is liable only for acts occurring before their retirement. It's worth noting that a retiring partner may escape liability for debts incurred after their retirement if: The partnership agreement expressly relieves them of such liability. They enter into an agreement with the remaining partners and the third party releasing them from future obligations. Page 8 LAW TRAINING CENTRE (KENT) LTD Topic 10. Formation of The Law and Practice of Companies a Partnership Version: 2 Liabilities following retirement: Third party perspective From the perspective of third parties, Section 36(1) of the PA 1890 holds relevance. It states that if a person deals with a firm after a change in its composition, they can consider all apparent members of the old firm as still being members until they receive notice of the change. In practice, this means that if a retired partner appears to be an active partner, and a third party is unaware of the partner's retirement, the retired partner remains liable to that third party. To avoid such liability, the retiring partner should ensure that the third party is informed of their retirement. This is particularly crucial to protect against debts incurred after the partner's departure. Conclusion Partnerships are subject to changes in composition, and understanding the legal implications of these changes is essential. ‘Holding out’ provisions in the PA 1890 protect third parties who rely on representations of partnership status. The liabilities of new partners depend on the nature of the acts involved, while retiring partners retain liability for pre-retirement obligations, subject to specific conditions. From a third-party perspective, notice of changes in partnership composition is crucial to determining liability. This legal framework ensures that the evolving nature of partnerships is balanced with the protection of the interests of all parties involved. Page 9  Notarial Academic Training Course Law and Practice of Companies Topic 9. Introduction to Partnerships Law Training Centre (Kent) All rights reserved. These publications are for the personal use of the individual studying for the relevant qualification and may not be offered for sale to or by any third party. LAW TRAINING CENTRE (KENT) LTD Topic 9: Law and Practice of Companies Introduction to Partnerships Version: 1 Introduction To start a business as a partnership requires limited procedural formalities. A partnership is created when at least two people start a business together with a view of making a profit. There is no formal process or system of registration, however the individual partners must register with the HMRC as being self- employed. A partnership will invariably choose to have a partnership agreement in place which does not require any set formality. The same cannot be said for Limited Liability Partnerships (LLPs) which each have extensive requirements. In this topics 10, 11 and 12 you will consider: Formation of a partnership Formation of an LLP Relationship between partners, including partners as agents Dissolution of a partnership. Last edited 22-Sept-22 Page 1  Notarial Academic Training Course The Law and Practice of Companies and Partnerships Topic 8. The Termination of Companies Law Training Centre (Kent) All rights reserved. These publications are for the personal use of the individual studying for the relevant qualification and may not be offered for sale to or by any third party. LAW TRAINING CENTRE (KENT) LTD Topic 8. The Termination The Law and Practice of Companies of Companies Version: 2 Introduction When a company faces financial turmoil, there are various processes that can either lead to its termination or aim to address its financial difficulties without necessarily ending its existence. In this comprehensive guide, we will explore several termination and restructuring options for companies in financial distress, including Company Voluntary Arrangements (CVA), administration, fixed asset receivership, liquidation, clawback of assets for creditors, and the order of priority for distributing assets to creditors. Company Voluntary Arrangement (CVA) A Company Voluntary Arrangement (CVA) is a mechanism designed to help a struggling company manage its financial problems. It involves a compromise between the company and its creditors, supervised by an insolvency practitioner. A CVA is approved if the majority of creditors and shareholders vote in favour, binding unsecured creditors. Secured and preferential creditors maintain their rights unless they consent. Administration Administration aims to rescue a company by placing it under the control of an administrator, who seeks to save it as a going concern. Creditors cannot initiate winding-up proceedings during administration without court permission. The administrator's role includes reorganising the company, negotiating with creditors, selling the business or assets, and repaying secured or preferential creditors. Administration provides statutory protection against creditor actions. Fixed asset receivership A receiver, appointed by a creditor holding a charge over a debtor's assets, takes custody of these assets, manages them, and collects income. Receivers often have the authority to sell these assets to satisfy secured debt. This mechanism protects the interests of secured creditors, and the receiver's primary duties are to the appointing creditor. Liquidation Liquidation, governed by the Insolvency Act 1986, aims to dissolve a company as a separate legal entity. It occurs through voluntary winding-up by members or creditors or in the public interest. Liquidation settles the company's affairs, pays off debts, and distributes remaining assets to shareholders. Solvent liquidations occur when assets exceed debts, while insolvent liquidations result from the opposite situation. Page 1 LAW TRAINING CENTRE (KENT) LTD Topic 8. The Termination The Law and Practice of Companies of Companies Version: 2 Solvent liquidation: Assets exceed debts. Insolvent liquidation: Debts exceed assets. Clawback of assets for creditors Clawback mechanisms recover improperly distributed assets before liquidation or administration. This ensures that all available funds are allocated to creditors based on the correct order of priority. Transactions subject to clawback include preference payments, transactions at an undervalue, and those resulting from fraudulent or wrongful trading. Preferences: Payments outside the order of priority can be reclaimed and redistributed. Transactions at an undervalue: Transactions where assets are sold at an undervalued price can be reversed. Fraudulent trading: Deliberate actions with intent to defraud creditors result in criminal charges. Wrongful trading: Directors' actions that lead to increased creditor losses result in civil actions. The order of priority for distribution to creditors In insolvency procedures, priority ensures that creditors are paid as much as possible from limited available funds. The order of priority is critical, as not all creditors will receive full payment. The priority order is as follows: 1. Fixed charge creditors: Secured creditors with charges against specific assets. 2. Expenses of the insolvency process: Legal fees and insolvency practitioner fees. 3. Preferential creditors: Employees' unpaid wages and HMRC tax debts (excluding VAT and PAYE). 4. Floating charge creditors: Receive a portion of assets through the ‘Prescribed Part’. 5. Unsecured creditors: All other creditors. 6. Shareholders: Receive any remaining assets after paying off creditors. Understanding these termination and restructuring mechanisms, as well as the order of priority for creditor distribution, is essential for companies facing financial difficulties and for those involved in insolvency proceedings. These processes play a crucial role in managing financial crises, safeguarding creditor interests, and ensuring the fair distribution of assets. Page 2  Notarial Academic Training Course The Law and Practice of Companies and Partnerships Topic 7. Shares and Debentures Law Training Centre (Kent) All rights reserved. These publications are for the personal use of the individual studying for the relevant qualification and may not be offered for sale to or by any third party. LAW TRAINING CENTRE (KENT) LTD Topic 7. Shares and The Law and Practice of Companies Debentures Version: 2 Introduction Financial considerations are paramount for businesses, encompassing both raising funds when needed and managing profits effectively. Companies must be equipped to secure funding in times of financial stress or to facilitate expansion. Additionally, managing profits and distributing them among shareholders is essential for sustaining a healthy financial structure. Funding options Companies have various avenues to secure funds, which can be broadly categorised into debt finance and equity finance. Debt finance involves borrowing money, while equity finance entails selling a portion of the company's ownership in exchange for capital. Debt finance advantages: Ownership is retained, and control remains with the company Once the loan is repaid, there are no ongoing obligations Interest payments are tax-deductible Predictable cash flow due to known loan repayment schedules. Debt finance disadvantages: Repayment obligations, including interest charges Failure to repay can lead to insolvency. Equity finance advantages: No obligation to repay received funds No additional financial liabilities, resulting in a favourable debt-to-equity ratio No interest charges. Equity finance disadvantages: Dilution of ownership and decision-making power Reacquiring shares from investors (if willing to sell) may be costly. Page 1 LAW TRAINING CENTRE (KENT) LTD Topic 7. Shares and The Law and Practice of Companies Debentures Version: 2 Debentures Debentures represent a company's debt and serve as the loan agreement. According to Section 738 of the Companies Act 2006 (CA 2006), debentures encompass stock, bonds, and any other company securities, whether they constitute a charge on assets or not. Debentures must be registered with Companies House within 21 days. If not registered and the company goes into liquidation, the lender becomes an unsecured creditor. Debentures outline how business assets secure the loan and specify the interest rate. Default on the loan allows the lender to claim these assets. Fixed charge debenture: Secured against specific assets. Floating charge debenture: Secured against assets that may vary but are deemed sufficient. No lender permission is needed for trading, selling, or purchasing these assets. Shares Section 540 of the CA 2006 defines a ‘share’ as a share in the company's share capital. There's a limit on the number of shares a company can issue, defined in the memorandum of association. Ordinary shares: Carry one vote per share and equal rights to dividends. Holders participate in distributions during the company's winding up. Preference shares: Hold priority over ordinary shares in capital or profit distribution or both. Deferred shares: Entitle holders to dividends only under specific conditions, such as meeting profitability targets. Non-voting shares: Common in public companies, these shares have no voting rights and help maintain current shareholders' control. Redeemable shares: Can be redeemed by the company or shareholder, provided it's not prohibited by the articles. Distribution of profits and gains Shareholders benefit from their investments when companies distribute profits and gains. Distributions, as defined in Section 829 of the CA 2006, are subject to certain exceptions. A company can distribute from accumulated profits minus accumulated losses, ensuring that net assets stay above share capital. Page 2 LAW TRAINING CENTRE (KENT) LTD Topic 7. Shares and The Law and Practice of Companies Debentures Version: 2 Accumulated realised profits: Recognised once cash or assets are received. Accumulated realised losses: Recognised losses not yet written off in capital reductions. Distributable profits: Calculated by subtracting accumulated losses from accumulated profits. Dividends are the most common form of profit distribution, regulated by Part 23 of the CA 2006. They can only be paid from distributable profits to maintain a company's net assets above its share capital. Paying dividends in violation of this rule is unlawful and ultra vires. Directors who knowingly permit such breaches can be held liable to repay the dividends. Filing requirements Section 113 of the CA 2006 mandates companies to maintain a register of members, including names, addresses, and relevant registration dates. This register must be accessible at the company's registered office or a designated location. Any change in location must be reported to the registrar within 14 days. Failure to notify the registrar constitutes an offense for the company and its officers. Conclusion Financing and profit distribution are vital aspects of corporate management. Companies can choose between debt and equity finance based on their needs, considering factors like ownership, obligations, and tax implications. Debentures and shares are instrumental in securing capital and defining ownership rights. Effective profit distribution ensures that shareholders benefit from their investments while adhering to legal regulations, maintaining a company's financial health. Compliance with filing requirements, such as maintaining the register of members, is essential to meet regulatory obligations. Understanding these financial mechanisms is crucial for companies to navigate their financial landscape effectively. Page 3  Notarial Academic Training Course The Law and Practice of Companies and Partnerships Topic 6. Companies and the Rights of Minority Shareholders Law Training Centre (Kent) All rights reserved. These publications are for the personal use of the individual studying for the relevant qualification and may not be offered for sale to or by any third party. LAW TRAINING CENTRE (KENT) LTD Topic 6. Companies and The Law and Practice of Companies the Rights of Minority Version: 2 Shareholders Introduction Shareholders play a crucial role in the governance of a company. While they are not directly involved in the day-to-day management of the company, they hold significant decision-making power. This reading delves into the role and rights of shareholders in a company, focusing on how they participate in decision-making, their rights, powers, and the protection afforded to minority shareholders. The role of a shareholder Shareholders, as owners of the company, bear the responsibility of making significant decisions. These decisions can be made through resolutions passed at general meetings or through written resolutions. Shareholders typically become part of a company through one of three methods: allotment, transfer, or transmission. Allotment: New shares are issued by the company and purchased by individuals. Transfer: A shareholder transfers their ownership of shares to another person, facilitated by a stock transfer form. Transmission: Occurs when shares are transferred due to legal processes, such as inheritance. Shareholder rights The rights of shareholders in a company are primarily defined by the Companies Act 2006 (CA 2006). The company's articles of association may modify these rights to some extent. A shareholder enters into a contract with the company and other shareholders through Section 33 of the CA 2006, which outlines their rights. Shareholders may also enter into private shareholder agreements, which do not involve the company but regulate interactions among shareholders. New shareholders: Shareholders have the right to receive a share certificate within two months of allotment or transfer and to be entered on the register of members. They also have the right to access important documents related to the company's incorporation and management. Accounting: Section 423 of the CA 2006 mandates that the company must annually provide shareholders with copies of its annual accounts and accompanying reports without the need for a request. Page 1 LAW TRAINING CENTRE (KENT) LTD Topic 6. Companies and The Law and Practice of Companies the Rights of Minority Shareholders Version: 2 Voting: Shareholders are required to participate in general meetings and respond to written resolutions. Proper notice, including details of proposed resolutions, must be provided. Shareholders can request a poll vote to ensure fair representation based on the number of shares held, especially if there's a significant difference in shareholdings among members. Shareholder powers In addition to voting at general meetings, shareholders have specific powers that significantly impact the company's management. Removal of Directors and Auditors: Shareholders have the authority to remove directors and auditors through ordinary resolutions under Sections 168(1) and 510(1) of the CA 2006, respectively. Winding up: Shareholders can apply to have the company wound up under Section 122(1)(g) of the Insolvency Act 1986 if it's deemed ‘just and equitable’. Alternatively, Section 994(1) of the CA 2006 allows shareholders to apply to the court for remedies if the company's management is unfairly prejudicial. This can result in the sale of the petitioner's shares at a fair value rather than winding up the entire company. Decision making General meetings are the forum for shareholders to authorise significant decisions. Part 13 of the CA 2006 provides the statutory framework for calling and conducting general meetings, emphasizing proper notice and compliance with the company's articles. Annual General Meetings (AGMs): Private companies are not required to hold AGMs unless specified in their articles. AGMs typically involve receiving annual accounts, electing directors and auditors, if applicable, and discussing important company matters. General Meetings (EGMs): EGMs are called to address specific urgent matters that require shareholder decisions. Directors and members with 5% of voting rights can call these meetings. Page 2 LAW TRAINING CENTRE (KENT) LTD Topic 6. Companies and The Law and Practice of Companies the Rights of Minority Version: 2 Shareholders Minority shareholder protection Minority shareholders, owning less than 50% of shares, face challenges in influencing company decisions. However, they can call general meetings or circulate written resolutions with only 5% of voting shares. Shareholder agreements can also protect minority shareholders, allowing them to set terms such as unanimous agreement for certain resolutions. Breach of such agreements can result in legal remedies. Conclusion Shareholders are essential stakeholders in a company's governance. Their rights, powers, and protections are defined by the CA 2006 and, in some cases, shareholder agreements. Understanding these aspects is crucial for shareholders to effectively participate in decision-making and protect their interests, especially minority shareholders who might face challenges in influencing company direction. Shareholders collectively shape the destiny of the company, making their role pivotal in its success and governance. Page 3  Notarial Academic Training Course The Law and Practice of Companies and Partnerships Topic 5. Roles and Responsibilities of Company Directors Law Training Centre (Kent) All rights reserved. These publications are for the personal use of the individual studying for the relevant qualification and may not be offered for sale to or by any third party. LAW TRAINING CENTRE (KENT) LTD Topic 5: Roles and The Law and Practice of Companies Responsibilities of Version: 2 Company Directors Introduction In the realm of corporate governance, company directors and shareholders play distinct yet interrelated roles within a company's structure. This reading delves into the multifaceted responsibilities of directors, distinguishing them from shareholders while exploring the types of directors, their rights, duties, and powers within the context of the Companies Act 2006 (CA 2006). The role of a Director Directors, often referred to as the guiding force behind a company, are individuals officially recognized as such by Companies House, primarily associated with limited companies. While the CA 2006 does not explicitly define the term ‘director’, Section 250 broadly encompasses anyone ‘occupying the position of director, by whatever name called’. This includes formally appointed directors and individuals who effectively control the company, irrespective of formal appointments. Companies must adhere to certain minimum directorial requirements outlined in Section 154: public companies must have a minimum of two directors, while private companies require at least one director. Directors bear the responsibility of overseeing the day-to-day operations of the company. They have varying levels of authority, from individual decision-making powers to requiring board approval for significant corporate decisions, which can be obtained through board resolutions at meetings or written resolutions. Types of directors 1. Executive directors: These directors work full-time for the company, typically under employment contracts. They are commonly found in large and listed companies, often distinguished from non-executive directors. 2. De jure directors: Validly appointed directors through standard procedures such as election by company members or appointment by the board in accordance with the company's constitution. 3. De facto directors: Individuals who function as directors without formal appointment procedures. They participate in board decisions on par with de jure directors and are equally bound by directorial duties. 4. Shadow directors: Regulated by the CA 2006, shadow directors are individuals or entities whose directions or instructions the board follows. They can be held accountable under directorial duties. Page 1 LAW TRAINING CENTRE (KENT) LTD Topic 5: Roles and The Law and Practice of Companies Responsibilities of Company Directors Version: 2 5. Managing directors: Companies' articles of association often grant directors the authority to appoint a managing director, defining their powers based on the articles and employment contracts. 6. Alternate directors: Some articles permit directors to appoint alternate directors to represent them when they are unavailable. The CA 2006 does not address alternates, making their appointment subject to the articles. Director's rights All limited companies are required to establish articles of association, which serve as a set of rules governing the company's management. Directors are entitled to remuneration for their services, along with reasonable expenses incurred in connection with their duties. Director's duties The CA 2006 codified directorial duties that were previously based on case law, providing a clearer framework for directorial behaviour. Key duties include: 1. Duty to act within powers (Section 171): Directors must adhere to the company's constitution, including its articles of association. 2. Duty to promote the success of the company (Section 172): Directors must act in a manner that promotes the company's success, considering various factors, including shareholders' interests, employee welfare, and broader societal impacts. 3. Duty to exercise independent judgment (Section 173): Directors must make decisions independently, free from external influence. 4. Duty to exercise reasonable care, skill, and judgment (Section 174): Directors must exhibit a reasonable level of care, skill, and judgment based on their role and individual abilities. 5. Duty to void conflict of interests (Section 175): Directors must disclose any conflicts of interest, particularly in situations involving personal interests or multiple business positions. 6. Duty not to accept benefits from third parties (Section 176): Directors are prohibited from accepting benefits that may lead to conflicts of interest. Page 2 LAW TRAINING CENTRE (KENT) LTD Topic 5: Roles and The Law and Practice of Companies Responsibilities of Version: 2 Company Directors 7. Duty to declare interest in proposed transactions (Section 177): Directors must declare any interest in proposed company transactions, with mechanisms in place to manage conflicts appropriately. Breaching these duties may lead to liability for damages, including profits gained from the breach, and potential corrective remedies, with Section 174 being the exception. Director's powers By default, directors possess a general power to exercise all the company's powers unless the articles of association limit them. Shareholders have a reserve power to restrict directorial authority through special resolutions, but this does not invalidate prior actions. Directors can delegate their powers and are entitled to call and participate in board meetings and general meetings. Decision making Directors and shareholders have distinct roles in company decision-making. Board meetings are used for collective directorial decisions, leading to board resolutions or written resolutions. The articles of association or the CA 2006 determine which decisions require board or shareholder approval. In conclusion, company directors are pivotal in managing day-to-day operations, guided by specific roles, duties, and powers. Their responsibilities are meticulously outlined in the CA 2006, ensuring transparency and accountability in corporate governance. Directors' actions significantly impact a company's success, requiring them to balance various interests and exercise due care, skill, and independent judgment in fulfilling their roles. The role and responsibilities of directors and company secretaries in a company Introduction In any company, directors and shareholders play distinct roles, each contributing to the overall functioning of the organization. Shareholders own the company through their ownership of shares, while directors, who may or may not be shareholders themselves, bear the responsibility of managing the company's day- to-day operations. Page 3 LAW TRAINING CENTRE (KENT) LTD Topic 5: Roles and The Law and Practice of Companies Responsibilities of Company Directors Version: 2 This reading delves into the roles, types, rights, and duties of directors, while also exploring the appointment and removal of directors, the concept of a quorum in board meetings, and the role of a company secretary in ensuring the smooth administration of a company. The role of a Director Directors, registered at the Companies House, are responsible for the management of limited companies. The Companies Act 2006 (CA 2006) defines directors broadly as, ‘any person occupying the position of director, by whatever name called’. Public companies must have at least two directors, while private companies need a minimum of one director. Directors manage day-to-day operations, make individual decisions within their purview, and participate in collective board decisions. These decisions can be reached through board meetings or written resolutions. Types of Directors 1. Executive Directors: They work full-time for the company and often hold formal employment contracts. 2. De Jure Directors: Appointed following standard procedures, either elected by company members at a general meeting or appointed by the board with constitutional authority. 3. De Facto Directors: Not formally appointed but act as directors in practice, participating in decision-making as regular directors. 4. Shadow Directors: Individuals or corporate entities whose instructions guide the actions of the board. 5. Managing Directors: Appointed based on articles of association, they may have specific powers as outlined in their employment contracts. 6. Alternate Directors: Appointed by individual directors to represent them when they are unable to fulfil their duties. Page 4 LAW TRAINING CENTRE (KENT) LTD Topic 5: Roles and The Law and Practice of Companies Responsibilities of Version: 2 Company Directors Director’s rights Directors are entitled to remuneration for their services and reasonable expenses incurred during their roles. These rights are governed by the articles of association and the CA 2006. Director’s duties The CA 2006 codified directors' duties, making them explicit and legally binding. These duties include: 1. Duty to act within powers (Section 171 CA 2006) 2. Duty to promote the success of the company (Section 172 CA 2006) 3. Duty to exercise independent judgment (Section 173 CA 2006) 4. Duty to exercise reasonable care, skill, and judgment (Section 174 CA 2006) 5. Duty to avoid conflicts of interest (Section 175 CA 2006) 6. Duty not to accept benefits from third parties (Section 176 CA 2006) 7. Duty to declare interest in proposed transactions (Section 177 CA 2006) Breach of these duties can lead to damages, the restoration of property, or equitable remedies, depending on the specific breach. Director’s powers Directors have the general power to exercise all of the company's powers unless the articles of association restrict them. The board can also delegate powers and call meetings as needed. Decision making Directors and shareholders have distinct roles in decision-making. The type of decision determines the necessary approval process, which can involve board meetings, general meetings, or written resolutions. The articles of association or CA 2006 outlines which decisions require board approval. Page 5 LAW TRAINING CENTRE (KENT) LTD Topic 5: Roles and The Law and Practice of Companies Responsibilities of Company Directors Version: 2 Convening a board meeting The articles of association determine who can convene a board meeting. Any director can call a meeting, and reasonable notice, as defined by the articles, must be given. In the absence of specific notice requirements, a reasonable notice period should be observed. The meeting should allow all directors a fair opportunity to attend. Quorum A quorum is the minimum number of directors required to hold a valid board meeting. The articles of association specify the quorum, and the company secretary may attend but does not count toward it. In cases of disputes over quorum, the chairperson (if appointed) may decide. General meeting process General meetings follow an agenda, chaired by an appointed individual. Voting can be done by show of hands or verbally, with each director having one vote (or two if acting as an alternate). Majority rule applies, with the chairperson potentially casting a second vote to break ties in smaller companies. Written resolutions In addition to board meetings and general meetings, directors can make decisions through written resolutions. These resolutions must be allowed by the articles of association. The process involves proposing a resolution to eligible directors, who can agree or disagree. If a majority agrees, the resolution is passed, provided a quorum is met. Appointment and removal of Directors Directors can be appointed through various methods outlined in the CA 2006, the company's articles, or common law. To remove a director, an ordinary resolution is required, following a specific procedure involving board meetings and general meetings. Filing requirements include updating the Companies House register and retaining minutes. Company Secretary Public companies must have a company secretary, while limited companies may choose to appoint one. The role of the company secretary includes ensuring compliance with regulations, managing shareholder communication, and providing strategic advice. Page 6 LAW TRAINING CENTRE (KENT) LTD Topic 5: Roles and The Law and Practice of Companies Responsibilities of Version: 2 Company Directors In the absence of a company secretary, a director or an authorized person is responsible for these duties. Duties of a Company Secretary A company secretary's responsibilities typically include maintaining statutory books, filing necessary documents with regulatory bodies, arranging board meetings, securing company documents, and acting as a point of contact for shareholders. They may be criminally liable for defaults committed by the company. Conclusion In conclusion, directors and company secretaries are essential components of a company's governance structure. Directors bear the responsibility of managing the company and are subject to various duties and responsibilities outlined in the CA 2006. Company secretaries, while not always mandatory, play a crucial role in ensuring administrative compliance and efficient communication within the company. Understanding the roles, responsibilities, and processes involved in these positions is vital for the effective functioning of any organization. Page 7  Notarial Academic Training Course The Law and Practice of Companies and Partnerships Topic 4. Company formation: Methods and requirements Law Training Centre (Kent) All rights reserved. These publications are for the personal use of the individual studying for the relevant qualification and may not be offered for sale to or by any third party. LAW TRAINING CENTRE (KENT) LTD Topic 4. Company The Law and Practice of Companies formation: Methods and Version: 2 requirements Introduction The formation of a company is a pivotal process in business, giving rise to a 'body corporate' recognised as a legal entity. This process, referred to as incorporation, can occur through various methods, including incorporation by royal charter, incorporation by Act of Parliament, incorporation by delegated authority, and incorporation by registration. While the Companies Act 2006 primarily applies to registered companies, regulations have been enacted to ensure that unregistered companies are subject to certain legal provisions, preventing them from having an unfair advantage over registered counterparts. This reading explores these methods of company formation, focusing on incorporation by registration and the associated requirements. Incorporation methods Incorporation by Royal Charter Through the royal prerogative, the Crown can create a company via a royal charter, resulting in chartered companies. Historically, these were prevalent in activities favoured by the monarchy, such as exploration and overseas trade. Incorporation by Act of Parliament Parliament can establish companies through Acts of Parliament. Public Acts serve national interests or needs, like the Post Office. Private Acts, known as statutory companies, are created for specific commercial purposes, such as running privatized industries. Incorporation by Delegated Authority Legislation may authorize specific individuals or bodies to establish companies. For example, the Financial Conduct Authority (FCA) can create open-ended investment companies under the Open-Ended Investment Company Regulations 2001. Incorporation by Registration Incorporation by registration is the most common method, with nearly all new UK companies using this approach. It involves subscribing to a memorandum of association and complying with the Companies Act 2006's registration requirements. This method will be discussed in detail. Page 1 LAW TRAINING CENTRE (KENT) LTD Topic 4. Company The Law and Practice of Companies formation: Methods and requirements Version: 2 Incorporation by registration Incorporation by registration offers a simple and efficient means of creating a company, resulting in a vast number of newly established companies in the UK. It involves several essential documents: 1. Memorandum of association Historically significant, the memorandum's importance has diminished under the Companies Act 2006. All companies, however, must possess a memorandum. Subscribers to the memorandum express their intention to form a company under the CA 2006 and agree to become its initial members. 2. Application for registration and accompanying documentation The application for registration is typically submitted using Form IN01, which gathers basic company information. Key details include whether the company is public or private, the liability of its members (limited or unlimited), and share capital particulars. 3. Proposed company name The application must specify the company's intended name. Regulations govern the use of certain words and phrases in company names to ensure clarity and prevent misleading representations. 4. Registered office Each company must maintain a registered office to which communications and notices can be directed. The location of the registered office determines jurisdiction, applicable law, and domicile. 5. Statement of capital and initial shareholdings (if applicable) For companies with share capital, a statement of capital and initial shareholdings is required. It outlines the number and value of shares taken by subscribers, details about share classes, and subscriber information. 6. Statement of guarantee (if applicable) Companies limited by guarantee must provide a statement of guarantee. This statement includes the names and addresses of subscribers and their commitment to contribute to the company's assets if it is wound up. Page 2 LAW TRAINING CENTRE (KENT) LTD Topic 4. Company The Law and Practice of Companies formation: Methods and Version: 2 requirements 7. Statement of the Company’s Proposed Officers Information about the first directors and, if applicable, the first company secretary is needed. Subscribers must confirm the consent of these individuals to act in their respective roles. 8. Statement of Initial Significant Control Companies must identify persons with significant control (PSCs) upon incorporation. This information helps in recognizing individuals or entities exerting substantial influence over the company. Compliance and Legal Obligations Compliance with these requirements is vital to avoid the rejection of the incorporation application. Notably, Companies House reported a significant number of rejections due to non-compliance. Post-incorporation, companies must display their registered name at specific locations and disclose it in various forms of business correspondence, fulfilling legal obligations. Conclusion Company formation methods vary in complexity and purpose, with incorporation by registration being the most prevalent and efficient. The regulatory framework ensures transparency and consistency in the naming and establishment of companies. Understanding the process and complying with the Companies Act 2006's requirements are essential for individuals and entities embarking on the journey of creating a new company in the United Kingdom. The significance of articles of association in company governance Introduction The Articles of Association represent a fundamental component of a company's legal framework, delineating the internal rules and procedures governing its operations. In the United Kingdom, every registered company is required to possess a set of Articles of Association, which function as the company's constitution. This reading explores the Articles of Association in detail, emphasizing their role, significance, legal framework, and the factors that influence their formation and amendment. Page 3 LAW TRAINING CENTRE (KENT) LTD Topic 4. Company The Law and Practice of Companies formation: Methods and requirements Version: 2 The foundation of company governance Essential nature of Articles of Association The Articles of Association are, in essence, the foundational building blocks of a company's governance structure. They are mandated by law, as stipulated in Section 18(1) of the Companies Act 2006 (CA 2006). These articles serve as the rulebook for the company's members and management, governing everything from membership conditions to decision-making processes. Contrasting national constitutions and company constitutions While the United Kingdom does not possess a written national constitution, the company's constitution is governed by specific statutory provisions. A written constitution is particularly crucial in a corporate context where effective decision- making equates to control over financial assets. Thus, the Articles of Association are indispensable from the outset. Model articles and customisation To simplify the process for company founders, the law offers model Articles of Association as templates for incorporation. However, companies are not bound to use them; they can draft their own. Should they choose not to adopt the model articles, they must provide their proposed Articles of Association during the registration process. Failing this, the company will be governed by the model articles by default. Legal framework of Articles of Association Key legislation and components The legal framework for Articles of Association is primarily outlined in Sections 17–38 of CA 2006. It includes the model articles prescribed by the Secretary of State, which vary for different types of companies. Constitution and constitutional documents Section 17 of CA 2006 defines a company's constitution to encompass not only its Articles of Association but also any resolutions and agreements affecting the constitution. Additionally, Section 32 specifies documents that must be provided upon request, including a copy of the certificate of incorporation, a statement of capital, and court orders or enactments altering the constitution. Page 4 LAW TRAINING CENTRE (KENT) LTD Topic 4. Company The Law and Practice of Companies formation: Methods and Version: 2 requirements Content of articles Articles of Association prescribe the regulations and procedures that companies must follow. While companies are free to customize their articles, they typically adopt established rules and practices. The model articles, introduced by the Secretary of State, serve as templates for these articles. If a company chooses not to use the model articles, they can register their customized articles, which must be contained in a single document and numerically paragraphed. Model articles and adoption Section 19(3) permits companies to adopt all or parts of the model articles, making it clear where their articles differ from the model. These adopted model articles are determined at the time of registration and remain in force even if subsequent model articles are prescribed. Alternative articles Articles can include any provisions deemed appropriate to the company, subject to certain limitations. Provisions inconsistent with the general law or legislation governing companies are void. Articles not related to membership may not be contractually binding on members. Construction and effect of Articles of Association Interpretation of articles Interpretation of Articles of Association follows the general principles of legal construction, ensuring that the contract's intended meaning is aligned with the background knowledge reasonably available to its audience. Articles are considered public documents, and only publicly available information can be used to interpret them. Construction as a commercial document Articles are viewed as commercial or business documents, subject to the principle of business efficacy. Courts avoid introducing terms that would make the contract unfair but ensure reasonable business efficacy. Page 5 LAW TRAINING CENTRE (KENT) LTD Topic 4. Company The Law and Practice of Companies formation: Methods and requirements Version: 2 Incorporation of non-membership provisions Provisions within Articles of Association that are not related to membership are often regarded as specifying the terms for separate contracts the company may enter into. This is especially true when these provisions apply to officers, auditors, or trading between the company and its members. Effect and scope of Articles of Association Binding nature of articles According to Section 33(1) of CA 2006, the Articles of Association constitute a binding contract between the company and its members, similar to covenants in a deed. All provisions of a company's constitution, except those exempted by the law, are binding on the company and its members. Limitations on articles While Articles of Association have contractual force, they cannot curtail members' statutory rights granted by law. Provisions in the articles are primarily contractual regarding membership matters, not individual rights. Any provision inconsistent with the general law or statutory regulations is considered void. Enforceability and third parties The Articles of Association are contractual among the company and its members. However, non-membership provisions generally do not create contractual obligations between the company and non-members. The Contracts (Rights of Third Parties) Act 1999 does not apply to Articles of Association. Conclusion In conclusion, the Articles of Association serve as the cornerstone of a company's internal governance structure. Mandated by law, they prescribe the rules, regulations, and procedures that guide a company's functioning. While companies have the flexibility to draft their own articles, many opt to adopt model articles as templates. These articles are treated as contractual between the company and its members, focusing on membership-related matters. They form the core of a company's constitution and play a pivotal role in defining the roles, responsibilities, and decision-making processes within the company. Understanding and adhering to the Articles of Association is essential for effective corporate governance and ensuring that a company operates within the bounds of the law. Page 6 LAW TRAINING CENTRE (KENT) LTD Topic 4. Company The Law and Practice of Companies formation: Methods and Version: 2 requirements Non-Membership Provisions in Company Articles: Legal Implications and Case Studies Introduction The incorporation of a company involves various legal complexities, and the company's articles of association play a pivotal role in defining the rights and obligations of its members and officers. This reading explores the legal implications of non-membership provisions in a company's articles, particularly focusing on the enforcement and interpretation of such provisions. To illustrate these concepts, we will delve into relevant case law and discuss scenarios involving pre-incorporation contracts, director appointments, trading agreements, and directors' remuneration. Non-membership provisions in articles Non-membership provisions in a company's articles refer to terms and agreements established before the company's incorporation, often involving specific individuals and parties forming the company. These provisions typically reflect the expectations that these pre-incorporation agreements will be adopted by the company upon its incorporation. When interpreting and enforcing such provisions, courts require clear evidence that the company, post-incorporation, has formed a new contract (novation) to make itself liable. Mere membership of an alleged contractor does not necessarily prove the existence of a new contract. Case study: Browne v La Trinidad (1887) 37 ChD 1 In Browne v La Trinidad, Mr. Browne had a pre-incorporation agreement with the promoters of La Trinidad Ltd, wherein he agreed to sell a mine in Mexico to the company in exchange for fully paid shares and a directorship for at least four years. While Mr. Browne became a member and director, the company later dismissed him prematurely. The Court of Appeal refused Mr. Browne's injunction request, emphasizing that