Company Formation and Constitution

 Formation of a Company: Procedures

Registration Procedure

Companies must be registered by the Registrar of Companies, and a certificate of incorporation is issued upon application. Subscribers, who will take shares in the new company, must submit a company application along with necessary company constitution documents.

Previous requirements of the Companies Act 1985

The Companies Act 2006 replaced the previous requirement for a memorandum of association and articles of association in company registration applications, with less information now provided on the registration form.

Requirements of the Companies Act 2006

A company is formed by one or more persons:

• subscribing their names to a memorandum of association, and
• complying with the other requirements for registration of the new company.

The memorandum of association for a limited by shares company must include a statement that each subscriber will take at least one share and be authenticated.

The following documents must be delivered to the Registrar of Companies.

• the memorandum of association
• an application for registration
• certain documents, and
• a statement of compliance, which is a statement that all the requirements for registration have been complied with.

The application for registration must state:

• the company’s name
•  whether the company’s registered office is to be in England and Wales (or Wales), Scotland or Northern Ireland
•  a statement whether the liability of the members is to be limited, and if so whether liability is to be limited by shares or by guarantee
• whether the company is to be a public or a private company.

The application must also include the following statements or documents:

• A statement of capital and initial shareholdings is a crucial document for a company limited by shares, outlining the total number of shares to be taken by subscribers.
• A company’s proposed officers should include the first directors and company secretary, with a company secretary optional for private companies and mandatory for public ones.
• A statement of the intended address of the company’s registered office.
• The company must provide a copy of its proposed articles of association, which contain detailed constitutional rules, or standard ‘default’ articles will be applied.

Certificate of Incorporation

The registrar registers the documents in the application for incorporation and issues a certificate of incorporation, providing official evidence of the company’s existence. In share capital companies, subscribers become shareholders, and proposed officers become directors and company secretary.

On receipt of a certificate of incorporation, a private company is free to start business as a company and borrow money. 

Additional requirement for public companies: Trading Certificate

A public company requires both a certificate of incorporation and a trading certificate from the Registrar to start trading and borrow money.

A trading certificate is issued for a public company meeting minimum share capital requirements, and a declaration must be submitted to the registrar.

The company must have a minimum share capital of £50,000, with 25% paid up and 100% paid up for any share premium.

When the registrar issues a trading certificate stating that the public company has complied with the requirements relating to minimum capital requirements, it may start in business and start to borrow.

Constitutional documents and statutory records

Constitutional Documents

A company must have a ‘written’ constitution, in the form of printed documents or an electronic file.

Under the provisions of the Companies Act 2006, the constitutional documents of a company are:

• the company’s articles of association, and
• any resolutions and agreements relating to the company’s constitution: these may include special resolutions concerning the constitution of the company which have been agreed by a general meeting of the company’s members (shareholders) and filed with the Registrar of Companies.

The articles of association define what the company is, and how its business and its affairs should be conducted.

When they have been registered (and the company has been formed), the articles are a contract between each shareholder and the company, and between the shareholders themselves.

Memorandum of Association and the Companies Act 2006

Under the provisions of the Companies Act 2006, the memorandum of association became a much less significant document than in the past. Companies formed and registered under the provisions of the Companies Act 1985 included some items in their memorandum that were part of the company’s constitution.

The Companies Act 1985 mandates that a memorandum of association should include details about a company’s external purpose, such as its name.

A memorandum of association for a company under the Companies Act 1985 must include specific details in a separate clause, excluding additional details.

• Name clause, containing the name of the company.
• Registered office clause, stating which country the registered office is situated in. This could be England and Wales, Wales, or Scotland.
• Objects clause. The objects clause stated the purpose for which the company has been formed.
• Limited liability clause, stating that the liability of the members is limited.
• Authorised capital clause, stating the maximum amount of share capital that the company may issue. The concept of authorised share capital was abolished by the Companies Act 2006.
• Public company clause. A public company had to state in its memorandum that it is a public company.
• Association clause. This is the statement by subscribers that they intend to subscribe for shares in the company and for each subscriber, the number of shares that he will be taking.

The Companies Act 2006 made the memorandum of association of existing companies part of their articles of association, making them the main constitutional document. Once a business is incorporated and submitted with its application to the Registrar of Companies, the memorandum becomes a historical record.Subscribing for the number of shares in the company is required, and it has no significance after that.

Articles of Association

The articles of association of a company set out its internal rules and regulations. Every company must have articles of association (s18 CA2006).

Standard Articles of Association

The government produces standard articles of association to simplify the process for companies in preparing their constitutional documents. Companies can adopt these or amend them, making the process quick and inexpensive.

Model Articles

There are model articles (‘default’ articles) for public companies and different model articles for private companies. On applying for registration of a new company, these default articles will be assumed to apply to the company unless the company provides different articles of association, or indicates how its own articles of association should differ from the default model articles.

The Example of Articles of Association

• Members of the company
• Duties of the director
• Dividend payments
• AGM rules and regulations

Promotion of a company

The promotion of a company involves taking the actions that are necessary to:

• incorporate the company, by having it registered
• ensure that it has share capital (and possibly loan capital)
• acquire assets for the company that the company is being formed to own and control.

 Promoter of a New Company

A person who promotes a company is a promoter.

• One of the most important people in the company’s formation is a promoter, who often acts as one of the original directors. Who is deemed to be a promoter in circumstances involving legal challenges is determined by the court.
• Advocates of a company are not people offering expert counsel on company formation; rather, the company’s clientele, including attorneys and accountants, are probably the firm’s promoters.

Duties of a Promoter

The duties of a promoter may vary between countries. In the UK, a promoter has a ‘fiduciary duty’ to the company he is forming. This means that he cannot make a profit out of his promotion activities unless:

• he discloses his interest in any transaction from which a profit has arisen, and
• he is permitted to take the personal profit if approved.

 Promoters are required to report profits to an impartial board of directors or shareholders; if they do not, the company may take ownership of the gains.

Pre-incorporation Contracts

A pre-incorporation contract is a contract:

• made by a promoter of a new company
• naming the company as a party to the contract
• before the date of the certificate of incorporation, and so before the company actually exists as a separate legal person.

Pre-incorporation contracts pose a legal issue as a company cannot be a party to the contract before it’s established, preventing it from being bound by its terms.

Avoiding Liability for Pre-incorporation contracts

Since promoters and other agents are personally liable for pre-incorporation contracts, a question that arises is: What can promoters do to avoid personal liability?

There are three ways of avoiding personal liability, but these must be acceptable to the other party to the pre-incorporation agreement.

• Pre-incorporation agreements can be avoided by waiting until the company is formed, allowing the company to make the agreement as an existing legal entity.
• A promoter may reach a ‘subject to contract’ agreement with another party, indicating future intent for a contract to be agreed upon after the company is formed. If the promoter becomes a first director, they can convince the company to enter the contract, demonstrating their honesty.
• The pre-incorporation contract may include wording that expressly excludes any personal liability for the promoter.

Off-the-Shelf companies

Acquiring an off-the-shelf company can significantly reduce the time and effort required for registration and incorporation, especially for law stationers and solicitors who have a supply of incorporated companies.

• The memorandum typically contains two named subscribers, either employees of a law stationery firm or a solicitors’ firm.
• The directors and secretary of each company will also be employees of the firm.
• The company will be a private company.
• The company will typically have allotted just two shares of £1, one share to each of the two subscribers.
• The company’s articles of association will be conventional.
• It will have a name, usually a meaningless one, and the Registrar will have issued a certificate of incorporation.
• The company will not have done any trading since its formation.

Statutory Registers

The Companies Act 2006 introduced a definition of company records. Company records are any registers, indexes, records, agreements, memorandum, minutes or documents that a company is required to keep by the Companies Acts. They include the company’s ‘statutory registers.’

Statutory Registers

Companies are required by law to keep certain registers. These are the ‘statutory registers’. These are usually kept at the registered office of the company, and should be open to public inspection.

The statutory registers that a company must keep under the provisions of the Companies Act 2006 are as follows.

• Register of members. The name, address, quantity (and class) of shares held, and money paid up in full for each share are all listed on this list of the company’s shareholders. The entry for each member must also show the date of becoming a member (and the date of any changes in shareholding) and the date of ceasing to be a member.
• Register of directors. This is a record of the directors of the company and the company secretary. The details that must be recorded include name, nationality, service address (possibly the address of the company’s registered office), usual country of residence, business occupation (if any) and date of birth.
• Register of directors’ residential addresses. For security reasons, the residential addresses of directors are not required in the register of directors, where a service address is sufficient. The register of directors is available for inspection by members and possibly members of the public. Residential addresses should be recorded in a separate register that is not available for inspection.
• Register of company secretaries. There should be a register of company secretaries, providing details of the current company secretary. This is not required for a private company if it chooses not to have a company secretary.
• Register of charges. Charges may be given by a limited company as security for some of its debts, such as a bank loan. Fixed and floating charges are described in a later chapter. Details of any such charges must be recorded in a register of charges.

• Register of Debenture Holders. A company is required to register an allotment of debentures as soon as practicable and in any event, within two months after the date of the allotment (CA 2006, s 741), so the company may choose to maintain a register of debentures in order to comply with this requirement, rather than including such details in the register of charges.