Money and

Banking

Lecture 01
Company law

Lecture 01
 Aim of the unit
• The aim of this unit is to provide
learners with a knowledge and
understanding of the law on
• companies and the skill to apply
the rules particularly in business
situations.

1-3
 Unit abstract
• In this unit learners develop an understanding of
the different types of company, company
• formation and the required documentation. The
unit then considers capital, the creation of
shares and the rights of shareholders. It also
looks at directors and their powers and duties.
Finally, the unit examines the winding up a
company.

1-4
 What is company
• A company, in common saying,
means a group of persons
associated together for the
• attainment of a common end,
social or economic. It has “no
strictly technical or legal
meaning.”
1-5
 What is company
• A company is a "corporation" - an artificial
person created by law.
• A human being is a "natural" person.
• A company is a "legal" person.
• A company thus has legal rights and
obligations in the same way that a natural
person does.

1-6
 What is company
• A company is meant an association of many
persons who contribute money or money’s worth to
a common stock and employ it in some trade or
business, and who share the profit and loss (as the
case may be) arising there from. The common stock
contributed is denoted in money and is the capital of
the company. The persons who contribute it, or to
whom it belongs, are members. The proportion of
capital to which each member is entitled is his
share. Shares are always transferable although the
right to transfer them is often more or less
restricted”.
1-7
 What is company
• According to sec. 3 (1) (ii) of the Companies Act,
1956 a company means a company formed
• and registered under the Companies Act, 1956
or any of the preceding Acts. Thus, a Company
• comes into existence only by registration under
the Act, which can be termed as incorporation.

1-8
 Types of Company
• A company can be formed in a number of ways:
• (a) By Royal Charter (Chartered Companies)
• Formed by grant of a contract by the Crown.
• Promoters of the company request the Privy
Council attaching draft of proposed contract to
the request.
• Still used to incorporate learned societies and
professional bodies.
• No longer used to incorporate trading
companies.
1-9
 Types of Company
• (b) By Act of Parliament
(Constitutional Companies)
• Formed by private Act of Parliament.
• Formerly used to incorporate public
utilities such as gas, electricity and
railways.
• (The privatized public utilities have
been incorporated as registered
companies). 1-10
 Types of Company
• (c) By Registration (Registered Companies)
• Formed by registration under the Companies Act 1985
(as amended) or one of the preceding Companies Acts.
• Registration is the most commonly used means of
forming a company and virtually
• the only method now used to form a trading company.
• "Any two or more persons associated for a lawful
purpose may, by subscribing their names to a
memorandum of association and otherwise complying
• with the requirements of this Act in respect of
registration, form an incorporated company, with or
without limited liability."
1-11
 Classification of Registered
Companies
• (a) Unlimited Companies
• (i) Members have unlimited liability (If company is being
wound up,
• members can be made to contribute to the company’s
assets without
• limit to enable it to pay its debts.)
• (ii)Cannot be public companies.
• (iii)Can be set up with or without a share capital.
• (iv)Not subject to the same restrictions on change of
capital as other types of company, and do not normally
have to file annual accounts.

1-12
 Classification of Registered
Companies
• (b) Companies Limited by Guarantee
• (i) Members agree to contribute a specified amount to
the company’s assets in the event of the company being
wound up. (Total amount payable by all members is
called the "guarantee fund")
• (ii) Members do not have to pay anything as long as
company is a going concern - so company has no
contributed capital.
• (iii) Companies limited by guarantee are not usually
formed for business ventures.
• (iv) Prior to 1980, a company could be registered as a
company limited by guarantee, but also have a share
capital - these are called "hybrid companies".
1-13
 Classification of Registered
Companies
• (b) Companies Limited by Guarantee
• Companies limited by guarantee are widely used
for charities, community projects, clubs, societies and
other similar bodies. Most guarantee companies are not-
for-profit companies, that is, they do not distribute their
profits to their members but either retain them within the
company or use them for some other purpose. Most
such companies need their articles to be drafted for that
particular organization, and this is the main specialized
work to be undertaken.

1-14
 Classification of Registered
Companies
• (c) Companies Limited by Shares
• (i) The most common kind of registered company.
• (ii)Members of the company take shares issued by the
company.
• Each share is assigned a nominal value - the amount
that must be paid to the company for the share.

1-15
 Classification of Registered
Companies
• (iii)When the company is registered, its memorandum must state
• the total nominal value of all the shares it is going to issue (called
• the registered capital, or nominal capital or authorized share
• capital).
• The memorandum also states the number of shares to be issued:
• e.g. 10,000 shares of £1 each = registered capital of £10,000.
• (iv)Liability of a member (shareholder), when the company is
• wound up is limited to the amount, if any, of the nominal value of
• his shares which has not been paid.

• (v) Shares are normally partly or fully paid for when issued, so
• company will have a contributed capital.
• Companies Limited by Shares may be Public or Private

1-16
 Classification of Registered
Companies
• (i) Public Companies
• CA 1985, s.1(3): "a company limited by shares which has a
memorandum stating that
• it is to be a public company and which complies with the
requirements of the Act for
• registration as a public company."
• Main requirements:
• - A company cannot be registered as a public company unless it has
a minimum
• allotted share capital of £50,000, at least one quarter of which has
actually been
• paid.
• - A public company must have at least two shareholders and at least
two directors.

1-17
 Classification of Registered
Companies
• (ii) Private Companies
• CA 1985 defines a private company as "any company that is not a
public company".
• Private companies have no authorized minimum share capital.
• A private company is only required to have one director and, since
1992, it can be
• formed with only one member.
• Only Public Companies can have their shares listed on the Stock
Exchange - but
• Public Companies are regulated much more strictly than Private
Companies.

1-18
 Advantages of a company
• Advantages of a company include that:
• liability for shareholders is limited
• it's easy to transfer ownership by selling shares
to another party
• shareholders (often family members) can be
employed by the company
• the company can trade anywhere in the country
• taxation rates can be more favorable
• you'll have access to a wider capital and skills
base.
1-19
 Advantages of a company
• Disadvantages of a company include that:
• the company can be expensive to establish,
maintain and wind up
• the reporting requirements can be complex
• your financial affairs are public
• if directors fail to meet their legal obligations,
they may be held personally liable for the
company's debts
• profits distributed to shareholders are taxable.

1-20
 Separate legal personality
• A company has a legal separate entity and is independent
• of its members. The creditors of the company can recover their money only from the
• company and the property of the company. They cannot sue individual members.
• Similarly, the company is not in any way liable for the individual debts of its members.
• The property of the company is to be used for the benefit of the company and nor for
the personal benefit of the shareholders. On the same grounds, a member cannot
claim
• any ownership rights in the assets of the company either individually or jointly during
• the existence of the company or in its winding up. At the same time the members of
• the company can enter into contracts with the company in the same manner as any
• other individual can. Separate legal entity of the company is also recognized by the
• Income Tax Act. Where a company is required to pay Income-tax on its profits and
• when these profits are distributed to shareholders in the form of dividend, the
• shareholders have to pay income-tax on their dividend of income. This proves that a
• company and its shareholders are two separate entities.

1-21
 Lifting the veil
• Piercing the corporate veil or lifting the
corporate veil is a legal decision to treat the
rights or duties of a corporation as the rights or
liabilities of its shareholders.

1-22
 Lifting the veil
• A legal concept that separates the personality of
a corporation from the personalities of its shareholders,
and protects them from being personally liable for
the company's debts and other obligations.
This protection is not impassable. Where
a court determines that a company's business was not
conducted in accordance with the provisions of corporate
legislation (or that it was just a frontage for
illegal activities) it may hold the shareholders personally
liable for the company's obligations under the legal
concept of lifting the corporate veil.

1-23
 Lifting the Corporate Veil
• The corporate veil may be lifted by: -Lifting by the
courts
• Determination of the character of the company
• A company may be declared an enemy character when
its directors are residents of an enemy
• country. Therefore courts may lift the veil to establish the
nationality of persons controlling the company.

1-24
 Lifting the Corporate Veil
• Prevention of fraud or improper conduct
• The veil may also be lifted if a company is formed for a
fraudulent purpose or to avoid legal obligations.

• This refers to a situation where a company is formed and

1-25
 Lifting the Corporate Veil
• Where the company is acting as the agent of the
shareholders
• When a company is acting as an agent of its
shareholders or of another company, it will be liable
• for its acts. There may be express agreement to the
effect or an agreement (of agency) may be
• implied from the circumstances of each particular case.

1-26
 Lifting the Corporate Veil
• Protection of Revenue
• This is especially the case when a company is formed to
assist shareholders avoid taxes. In
• such case the shareholders may be held liable e to pay
income tax.

1-27
 Lifting the Corporate Veil
• Protection of Revenue
• This is especially the case when a company is formed to
assist shareholders avoid taxes. In
• such case the shareholders may be held liable e to pay
income tax.

1-28
 Lifting the Corporate Veil
• Protecting public policy
• Courts lift the corporate veil to protect the public policy
and prevent transactions conflicting to
• public policy. Where there is a conflict between the
separate entity principled and public policy
• the courts ignore form and take into account the matter

1-29
 Lifting the Corporate Veil
• Lifting by decree:
• When members fall below constitutional minimum
• As per section 33 of the Act, a business is not allowed to
carry on business for more than six
• Months if membership falls below seven incase of a
public company and below two in
• case of a private company. Anyone aware of the fall of
membership and continues to carry on business will be
held liable for all debts of the company contracted after
six months.

1-30
 Lifting the Corporate Veil
• Mis- description of the company
• The Act states that the name of the company must be
fully and properly mentioned on all
• documents issued by it. Where an officer of a company
signs, on behalf of the company, a bill of
• exchange, promissory note, Cheque,order for money or
goods in which the company’s name is
• not mentioned, the officer is personally liable to the
holder of the bill of exchange.

1-31
 Lifting the Corporate Veil
• Investigation of company membership
• The Act empowers the registrar to appoint one or more
competent inspectors to investigate and
• report on the membership of any company for the
purpose of determining the true persons who
• are or have been financially interested in the success or
failure of the company or able to control
• or to influence the policy of the company. To investigate
the corporate veil is lifted to as certain the real persons
controlling it.

1-32
 Lifting the Corporate Veil
• Takeover Bids
• The Act provides that where scheme or contract inviting
the transfer of shares or class of shares
• in the company to another company has been approved
by the holders of not less than nine tenths
• in the value of shares whose transfer is involved the
transferee company may at any time within
• two months after the making of the offer by the transferor
company, give notice in the prescribed
• manner to any dissenting shareholder that it deserves to
acquire his shares.

1-33
 Lifting the Corporate Veil
• Fraudulent conduct of Business
• The Act in the course of winding up to a company it
appears that any business of the company
• has been carried on with intention to cheat creditors, the
court may declare that any person who
• were meaningfully, parties to the carrying on such
business are to be personally liable for the
• debts and other liabilities of the company.

1-34
 Lifting the Corporate Veil
• Action of criminal officers and members of company
• In the course of winding up of a company it appears that
any past or present officer or any
• member of the company has been guilty of any offence
in relation to the company then the court
• may declare such a person liable for his crime

1-35