Company Law problem question: Running a business

Company Law problem question Running a ancestryCompany Law problem questionQuestion 1(a)Tom, bill and devil are in commercial enterprise together in the stochastic vari equal of a reasoned partnership. The business having developed somewhat, they are now corking to incorporate their business into a limited phoner. This go away undoubtedly piddle benefits for the traders, although there are of course certain ramifications of which they should be aware which exit be dealt with after a discussion of the benefits of incorporating.The correct choice of business medium is a crucial decision for any business. It each(prenominal)ow demand how the business trades, the financial obligation of those running the business (in their guise of partners or directors) and the liabilities of the business itself for taxation, for example, in the carapace of a friendship. Perhaps the most signifi reart match for Tom, mother fucker and Harry, is the risk of capital that is associated w ith any business. The overwhelming benefit in this context of forming a limited club over remaining as a partnership is that a phoner go forth carry tho(prenominal) limited liability. This means that the owners of the party (that is, Tom, Dick and Harry, assuming they remain as directors and become shareholders) will only be liable for the amount of free shares in the familiarity if the society were to become insolvent or even out bankrupt. In other words, they can choose the amount which they are spontaneous to pay into the company (which does non welcome to be paid up front), and this is the total amount for which they would be liable should the company ever be wound up. This can be contrasted with the situation under a partnership where the partners would be both jointly and sever aloney liable for the entire order of their trading losses. This means a partner could lose any billet that he owns.The beneficial effects of this arrangement would be limited, however, i n a upshot of situations. If Tom Dick and Harry were to risk everything in the business, that is, if they place only there as compulsives in the business, then they would still lose it all if the company were to become insolvent. Secondly, it is often the case that when a company comes to soak up money for business development, and circumstancely where the company is relatively sore and abstruse to the banks, that the lenders will demand personal guarantees for the mensurate of the loan on spinning top of the normal resolveual and security relations with the company. These would, obviously, override the limited liability associated with the company. As business is good for Tom, Dick and Harry at the moment, however, this would not appear to be an immediate problem.A elevate issue to be considered when deciding whether to incorporate as a company is the write off involved. tour these are not extortionate, they are, at least, significant, and should be duly considered by Tom, Dick and Harry. Unlike a partnership, a company needs to be registered, which incurs fees itself. on that point will be legal fees payable to the solicitor who draws up the new companys memorandum and obliges of association (together, the constitutional documents of the company), which are essential, and outline the aims, methods, and rules of the companys business life.A similar issue of expense and complexity that will be incurred by a company as opposed to a partnership relates to the accounts of the company. While all businesses, including partnerships, obviously craving to keep accounts, the requirements for accounting for companies are to a greater extent particular and complicated. The accounts need to be more detailed, and show certain information in a particular way. Furthermore, because companies are subject to more rigorous regulation, the accounts of a company will need to be audited annually by an independent qualified accountant. This, of course, will incur h igher accountancy costs that would be expected for a partnership. The company will also be required to complete an annual re function and pay a fee on filing it with the registrar.A company is subject to certain rules and regulations relating to its operation and management, which are statutorily set out in the Companies Act 1985 (subject to be overhauled when the current Company clean up Bill makes it through Parliament). An example of this is the requirement that a company must exact at least one director and one secretary. It is accustomed for the first owners (Tom, Dick and Harry) to become the first directors and / or secretary. These officials will reach certain obligations relating to duties owed to the company, and in respect of items that need to be completed and filed with the Registrar of companies at Companies House.An important reflexion to take into account is the flexibility of a company to change its internal structure if and when circumstances require it. mu ch(prenominal) a change would normally involve and require an alteration to the companys articles of association. This would require, under the Companies Act, a so-called special settlement, which equates to 75% of the shareholders. In the case of Tom, Dick and Harry, if they were to remain the only shareholders, any much(prenominal) decision would, of course, have to be unanimous. If any conflict is predicted, this will have to be a consideration for the parties. It is worth noting that this requirement is no more stringent than that required for altering a partnership agreement, which requires the approval of all partners. If a conflict were to arise between the directors of the company, the other shareholders would be able to consider the troublesome director by way of an ordinary event.Finally, the legal status of a company differs significantly from that of a partnership. A company is seen as a separate legal person, which means it can deoxidize and be held liable in its o wn name. This has ramifications for the liability of the directors, and is generally seen as a benefit of a company. Only a company (and not a partnership) can create floating charges over their assets. This is significant when it comes to training finance by way of granting security. It will probably be easier for a company to raise the requisite finance than for a partnership to do so. It is also significant (or may be) that an unlimited number of people can become members of a company, whereas a partnership is limited to twenty partners. If and when the company grows and develops, it will be in its interests to be unlimited in the number of new members it can obtain. Question 1(b)In this scenario, there are a number of developments which will impact on the running and management of the business. apiece development will be taken in turn.Firstly, the cut-rate sale of the companys property to Dicks sister, croupe in 2006 will be problematic. There are three principal areas of con cern. Firstly, the companys articles of association expressly prohibit the sale of company property without a special resolution of the members. As was mentioned above, a special resolution requires a 75% majority, or in this case, as there are only three members, a unanimous vote. There is a course of legal action that the directors can take, however, after the event, that could ratify the sale of the company property. They will just now need to call an extraordinary general meeting, following the correct cognitive process of course, and pass a special resolution either to ratify the sale of the company property to Fanny, or else to alter the articles of association to allow for such sales in a more general context.The value and coat of the property that is sold to Fanny will be significant in the second area of concern for the company. Under office 320 of the CA, a company shall not enter into an arrangement whereby a director of the company or its holding company, or a pers on machine-accessible with such a director, acquires or is to acquire one or more non-cash assets of the requisite value from the companyunless the arrangement is first approved by a resolution of the company in general meeting. The reason the value of the property that is transferred to Fanny is significant is because of the existence of the concept of requisite value, which is set mastered in discussion section 320(2). This states that the requisite value for a non-cash asset is 100,000 or 10% of the companys asset value. If the property is of this value or greater, then, it will be of the requisite value, and will contravene section 320. The particular that Fanny (the purchaser) is the sister of a director classes her as a connected person. As such, she breaches the section 320 prohibition.Finally, the gross undervaluing of the property in the companys sale of it to Fanny will be a problem, as it is likely that this will breach section 339 CA in the case of the company becomi ng insolvent. Were this to happen, the insolvency practitioner would likely deem the transaction to be voidable, and the asset would be brought back into the pool of the companys assets in order to satisfy the creditors. This would occur if the transaction occurred within 5 age of the presentation of the petition for winding up (because Fanny, again, is an associate of the transferor). Under section 238 defines a transaction at an undervalue as one where a company makes a gift to any person and receives either no consideration for it or consideration worth significantly less than the consideration provided by the company. This transaction clearly qualifies as such. It will be deemed to be set aside if insolvency proceedings commence within two old age of the transaction.Each of the directors decisions will now be addressed. They decide, firstly, to enter a contract with Oui Ltd. This is not, of course, a problem in itself, apart from the fact that Tom is a director of Oui Ltd. Fir stly, if entry into the contract was ratified by an ordinary resolution in the company, Tom would not have been able to vote on it under section 94, because he has an interest in it. If ironic Ltd have adopted Table A articles of association, this would be confirmed by article 94. The company should have kept a register of its directors, which lists the interests and other directorships of all its directors (under section 288 CA), which would have detailed Toms directorship of Oui Ltd. Furthermore, section 317 CA requires Tom to have declared his interest in the proposed contract with Oui Ltd at a board meeting of Dry Ltd. He should have given general notice of his directorship.The company issues a further 10,000 unpaid shares to a third party to fight off a takeover bid. This should not create a problem so long as the companys articles of association give the directors power to issue shares. This in turn is dependent on the company having a sufficient amount of unissued authoriz e share capital. If it does not, a special resolution will need to be passed to increase this authorised share capital, beforehand passing a further resolution allowing the issue. The powers of the directors in this instance are regulated by section 80 CA. Furthermore, the company must, under section 89, give consideration to rights of preemption to existing shareholders. As the directors are the only three shareholders, this should not be a problem, but it would mean they had to wait 21 days before issuing the new shares.The resignation of David and his formation of Whip Ltd, which obtains the contract from issue Ltd might breach his directors service contract with Dry Ltd. It is usual for such contracts to contain a clause prohibiting power directors using their business contacts within a certain time of leaving the former directorship a non-solicitation clause. This would protect Dry Ltds business links.Given Harrys age and his mental deterioration, the company will be able, if it has the heart, to remove him from office following the procedure for removal of directors set down in section 303 CA, which requires an ordinary resolution to be passed. Harry may be able to claim damages for his removal from office under this procedure.