Welcome to the World of Company Building!
Today, we explore how a company is legally formed and the constitutional rules that govern its operations. In your ACCA LW-GLO studies, company formation and corporate constitution represent foundational principles tested across both Section A and Section B. Let us break down each concept step by step.
1. Promoters: The Architects of the Company
Before a company is formally incorporated, an individual or group must take the initiative to form it, raise capital, and complete registration requirements. Such an individual is known as a promoter.
Who is a Promoter?
A promoter is anyone who undertakes to form a company and takes the necessary legal and commercial steps to accomplish that purpose. Note: Professional advisers, such as solicitors or accountants acting purely in their professional capacity, are not promoters.
Duties of a Promoter
A promoter stands in a fiduciary relationship to the unformed company. This means they owe duties of utmost good faith, loyalty, and avoidance of conflict of interest:
• Duty not to make a secret profit: A promoter who sells their own property to the company or receives an undisclosed commission from a third party must disclose all material facts to an independent board of directors or the members.
• Duty of care and skill: A promoter must act with reasonable competence and care when handling preliminary affairs.
Breach of Duties and Company Remedies
If a promoter breaches their fiduciary duties (such as making an undisclosed secret profit), the company may pursue the following remedies:
• Rescission of the contract: The company can cancel the transaction and be restored to its original financial position, provided rescission is still practically possible.
• Recovery of profit (accounting for profits): The company can order the promoter to hand over any undisclosed secret profit.
• Damages for breach of duty: The company can sue the promoter for financial losses suffered due to misrepresentation or breach of fiduciary duty.
2. Pre-Incorporation Contracts
A company does not legally exist until its formal registration takes effect. This creates specific legal consequences when someone enters into a contract on behalf of an unformed entity.
The Status of Pre-Incorporation Contracts
Because an unformed company has no legal personality, it lacks contractual capacity. A company cannot be bound by a pre-incorporation contract made in its name prior to registration, nor can it enforce such a contract.
Liability under a Pre-Incorporation Contract
Subject to any contrary agreement, an individual who purports to contract on behalf of an unformed company is personally liable on the contract and is entitled to enforce it.
Can the Company Ratify the Contract Later?
A company cannot retrospectively ratify a pre-incorporation contract after it is formed, because ratification requires the principal to have existed and possessed capacity at the time the contract was made. To adopt the agreement, the parties must enter into a brand new contract after incorporation, typically by novation (substituting the new company for the promoter with the consent of the other contracting party).
3. Company Registration and Streamlined Registration
A company is formally created by registering required constitutional documents and statements with the Registrar of Companies.
The Registration Process
To register both private and public companies, an application for registration must be submitted to the Registrar containing:
• Proposed company name: Subject to legal naming rules.
• Type of company: Specifying whether the company is private or public, and whether liability is limited by shares or guarantee.
• Registered office: The official legal address of the company.
• Articles of association: The company's internal regulations, unless default model articles are adopted.
• Statement of capital and initial shareholdings: For companies limited by shares, stating total share capital, number and nominal value of shares, and rights attached to each class.
• Statement of proposed officers: Details of the initial directors (and secretary where required).
• Statement of compliance: Confirmation that all statutory registration formalities have been fulfilled.
Streamlined Company Registration
Modern regulatory regimes provide a system of streamlined company registration, allowing simultaneous online filing of incorporation details, tax registrations, and statutory disclosures, thereby significantly reducing formation administrative burdens and processing times.
The Certificate of Incorporation
Upon satisfactory receipt of all documents and fees, the Registrar issues a certificate of incorporation. This certificate is conclusive evidence that all registration requirements have been complied with and that the company is a distinct body corporate from the date of incorporation stated on the certificate.
4. Control over Company Names
A company does not have unrestricted freedom in choosing its name. Company law imposes strict controls:
• Prohibited and offensive names: A company cannot register a name whose use would constitute a criminal offence or which is offensive in character.
• Misleading or identical names: A proposed name must not be identical or virtually identical to an existing registered company name without required consent or connection.
• Sensitive words and expressions: Names that suggest a connection with government bodies, regulatory authorities, or royal patronage, or words implying specific professional standing (e.g. "Bank", "Trust", "Insurance"), require formal official approval.
• Statutory suffixes: A private limited company must end its name with "Limited" (or "Ltd"), and a public limited company must end its name with "Public Limited Company" (or "PLC").
• Directing a name change: The Registrar or regulatory authority can order a company to change its name if it is misleading, confusingly similar to a pre-existing name, or gives a misleading indication of the nature of its activities.
5. Statutory Books, Records, and Returns
Once incorporated, companies must maintain official statutory registers and submit periodic returns to ensure corporate transparency:
• Register of members: A record of all current shareholders, their addresses, shareholdings, and the date each was registered.
• Register of directors and secretaries: Official personal and service details of appointed corporate officers.
• Register of people with significant control (PSC): A mandatory record identifying individuals or legal entities that hold significant ownership or influence (generally more than 25% of shares or voting rights, or significant control over company governance).
• Register of charges: A record detailing company charges over corporate assets.
• Confirmation statement: An annual statutory return submitted to the Registrar confirming that all company information held on public record (officers, capital, registered office, PSC data) is up to date and accurate.
6. The Constitution and Articles of Association
The constitutional documents of a company form the legal framework for its internal governance.
Model Articles of Association
The articles of association regulate the internal administration and management of the company. Standard default provisions known as model articles of association are provided by statute. A company may adopt the model articles in full, adopt them with amendments, or draft entirely bespoke articles. If custom articles are not registered, model articles apply automatically.
Typical Contents of Model Articles
Model articles typically set out:
• Powers and responsibilities of directors, including delegation and board decision-making procedures.
• Appointment and termination of directors.
• Issue, transfer, and alteration of shares.
• Declaration and payment of dividends.
• Calling, conduct, and voting procedures at general meetings.
Legal Effect of Constitutional Documents
A company's constitution has the legal effect of a statutory contract. This contract binds:
1. The company to its members.
2. The members to the company.
3. The members to one another.
Crucial Rule: The articles do not create a contractual relationship between the company and third parties (outsiders), nor do they bind the company to a member acting in a non-member capacity (such as an employee, solicitor, or director).
Altering the Articles of Association
A company has the statutory power to alter its articles by passing a special resolution (requiring a 75% majority of votes cast by eligible members at a general meeting).
• Any alteration must be made bona fide for the benefit of the company as a whole.
• An alteration cannot compel an existing member to take more shares or increase their financial liability without their written consent.
7. Chapter Summary
• Promoters: Owe fiduciary duties not to make secret profits; breaches trigger remedies of rescission, accounting for profits, or damages.
• Pre-incorporation contracts: The unformed company is not bound and cannot ratify; the promoter is personally liable unless novation occurs.
• Registration: Achieved by submitting constitutional documents and statements to the Registrar, facilitated by streamlined systems, resulting in a conclusive certificate of incorporation.
• Company names: Strictly controlled regarding offensive terms, similarity to existing names, sensitive expressions, and statutory suffixes.
• Statutory books & returns: Includes registers of members, directors, charges, and people with significant control (PSC), accompanied by an annual confirmation statement.
• Articles of association: The internal rulebook forming a statutory contract between the company and members; alterable by special resolution (75% majority) in good faith for the company's benefit.