Company Formation and Expansion: A Report on UK Corporate Law

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ASSIGNMENT 3
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Table of Contents
Introduction................................................................................................................................3
1. The steps that were taken to form a company.................................................................3
2. The nature and essential content of a company’s articles and memorandum of
association..............................................................................................................................3
3. Shareholder involvement in the expansion and the extent to which a shareholder can
be liable for the debts of a company......................................................................................4
4. The nature of shares and the difference between ordinary and preference shares..........4
5. How company resolutions are passed, and the matters for which resolutions are
required..................................................................................................................................4
6. The powers of the directors of the company...................................................................5
7. The duties, which directors owe to the company............................................................6
Conclusion..................................................................................................................................6
References..................................................................................................................................7
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Introduction
The United Kingdom company and corporate law have its base in the codified statute
Companies Act of 2006. Along with this Act, the Code for Corporate Governance and the
Directives of the European Union along with the judicial precedents are also statutory laws
for the governance of the corporations in the UK. The United Kingdom is the first country
which has drafted a codified modern corporate law for the running of the business and
corporations. The corporate law in the United Kingdom has been drafted in two main fields
which are corporate governance and corporate finance. Corporate governance is the general
management and controlling of the corporations whereas corporate finance includes the
increase in the capital of the company by issuing shares which may be done on equity basis
or on debt. The UK government has given people a lot of freedom to design their internal
rules for their corporations.
1. The steps that were taken to form a company:
London Car Repair Ltd is a car modifying and restoring company which is in a will to expand
its business beyond the region. But there are certain requirements under the company law of
the UK which is to be fulfilled while establishing a new company or business. The London
Car repair is also established after complying with the essentials of the Companies Act 2006.
Section 7 of the Companies Act 2006 provides the methods for forming the company. It
requires the formation of the memorandum of association with the names of the members on
it and also the compliance of the registration process as per the provisions of the Act. Further,
it requires that the company shall not be formed for an unlawful purpose (Collison, et. al.
2014).
2. The nature and essential content of a company’s articles and memorandum
of association:
The company’s memorandum of association contains the content which states that the
company’s subscribers are willing to establish the company. Hence, the London Car Repair
while expanding its business has to state such content in its memorandum in order to comply
with section 8 of the UK’s Companies Act 2006. The memorandum shall be drafted as per
the form prescribed and shall be endorsed by each member and subscriber (Inform direct,
2019).
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The article of association of any company is the set of internal rules and regulations which is
to be followed by every member from manager to employees of the company. These rules are
framed by the director’s authority which can be amended easily in case there is such a need.
These articles form the constitution of the company and thus the London Car Repair before
the expansion of its business is required to draft this article as per their new need and
requirement.
3. Shareholder involvement in the expansion and the extent to which a
shareholder can be liable for the debts of a company:
The expansion of the company requires the increase in capital which can be done by issuing
shares to the existing or the new shareholders. These shares can be issued on the basis of
equity or on debt. But the shareholders must be made aware of their liability for the debts of
the company and also the extent up to which they are held liable. Under the provisions of the
Companies Act 2006, the liability of the shareholders are limited which means that they are
only liable up to the extent of the values of their shares and not more than that. Hence, in case
the companies go in debt, the shareholders shall lose only the money which they put in
(Williams, 2012).
Thus, the expansion of the London car Repair shall also require the involvement of the
shareholders in order to raise capital and productivity.
4. The nature of shares and the difference between ordinary and preference
shares:
The company issue shares for increasing its productivity and these shares can be either
ordinary or preference shares. Preference shares are more secure as compared to ordinary
shares because the preference shareholders are given priority when the company gives
dividends. But the preference shareholders are not given any right to vote in the company's
meeting, unlike the ordinary shareholders who have a voting right in the meeting. The risk is
also high in ordinary shares as in cases of liquidation of the company the preference
shareholders are given priority while issuing dividends (Real business rescue, 2019).
5. How company resolutions are passed, and the matters for which resolutions
are required:
The major decisions and functioning of the company are taken by the directors and members
of such company through passing of resolutions which can be either by simple majority or by
a majority of 75% members present and voting. This is called special majority which is
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required in a few cases and decisions of the company. The company’s internal rules provide
for the process of voting as per section 282 of the Companies Act 2006. Hence, the London
Car Repair shall also have to take decisions by the provided voting procedure for its
expansion purpose. The following are the cases where the company requires a special
majority while passing resolutions:
 When the name of the company is to be changed the resolution requires a special
majority.
 When the article of association is to be amended the company requires a special
resolution as this is a change in the constitution of the company.
 When any resolution is to be passed regarding the shareholder's pre-emption
rights, it requires a special majority.
 It is also required when there is a reduction in the share capital of the company.
 A special resolution is also required when the company desires to change its status
from a limited to unlimited company or from private to public company and vice
versa.
 When the company desires to proceed for voluntary winding up, it requires a
special resolution.
6. The powers of the directors of the company:
Directors are the main players of the company as the company’s formation, function and
overall production depends on the performance of the directors and the decision which they
make for their company. Thus, it is of utmost consideration that the directors take decision
wisely and do not perform arbitrary action in the company. There are enormous powers listed
in the hands of directors like:
 The directors have the power to frame the internal constitution of the company and
further make amendment in it as and when required.
 The directors also pass resolutions in relation to the working and functioning of the
employees.
 The directors also have the power of exercising sub-delegation which means they can
pass their power of making decisions to other members.
 The directors are in complete control over all the matters and events taking place in
the company (Icaew, 2019).
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Hence, the London Car Repair while planning its extension in other regions shall take into
consideration all the powers and responsibilities of the directors and subordinate members
and shall ensure that these rights and powers are exercised and complied with the current
Companies Act of the United Kingdom.
7. The duties, which directors owe to the company:
The directors of the company are not only conferred with powers but are also held with
responsibilities and liabilities which they owe to the company. The directors can be held
liable for their misconduct and negligence in case the company faces losses. The following
are the responsibilities of the company which the directors have to abide with:
 They shall avoid all sort of misconduct and take due care and diligence while
performing the company's functions.
 The directors shall perform their functions within the ambit of their powers.
 The directors shall also not be dependent upon others for judgments and shall
independently take decisions.
 The directors shall also take every step to avoid conflicts of interest within other
members. They have a responsibility of considering the views of every member of the
company.
 They shall also not get indulge in unethical practices like accepting benefits from
third parties in the form of bribe or any other (Icaew, 2019).
Conclusion
Hence, the LCR is required to ensure that all the essentials of the Companies Act 2006 are
complied with when the company is planning its expansion. In order to avoid penalties and
paying compensation, the company is required to comply with the provisions of the corporate
law which is in effect in the country.
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References
 Collison, D., Cross, S., Ferguson, J., Power, D. and Stevenson, L., 2014.
Financialization and company law: A study of the UK Company Law Review.
Critical Perspectives on Accounting Vol. 25(1). Pp. 5-16.
 Icaew, 2019. Companies, directors and company law [Online]. www.icaew.com.
Available at: https://www.icaew.com/membership/regulations-standards-and-
guidance/membership/icaews-guide-to-directors-responsibilities/companies-
directors-and-company-law. (Accessed on 3rd May 2019).
 Inform direct, 2019. Memorandum and articles of the association explained [Online].
www.informdirect.co.uk. Available at: https://www.informdirect.co.uk/company-
records/memorandum-and-articles-of-association-explained/. (Accessed on 3rd Mat
2019).
 Real business rescue, 2019. Preference shares vs ordinary shares – What is the
difference? [Online]. www.realbusinessrescue.co.uk. Available at:
https://www.realbusinessrescue.co.uk/articles/directors-advice/preference-shares-vs-
ordinary-shares-what-is-the-difference. (Accessed on 3rd May 2019).
 Williams, R., 2012. Enlightened Shareholder Value in UK company law. UNSWLJ
Vol. 35. Pp. 360.
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