Simon Goulding,University of East Anglia.
FEATURES OF THE REGISTERED COMPANY
The most substantial differences between a company and a partnership can be
appreciated by an examination of the main features of the modern registered
company.
Incorporation by registration
Incorporation of associations prior to the passing of the Joint Stock Companies
Act 1844 was restricted and it occurred in only two major circumstances: first,
when the Crown granted a royal charter as an act of prerogative power,
conferring corporate status, for example, on trading associations, such as the
South Sea Company or the East India Company; and secondly, via a practice
which occurred more commonly from the late 18th century onwards, when a
statute incorporated a company, usually to construct and run public utilities,
such as gas and water supplies and the canals and railways. The incorporating
statute was a private Act of Parliament and the sections of the Act gave the
company its constitution. For Blackstone, the King’s consent was absolutely
necessary for the creation of a corporate body, hence, the idea that, in
England, incorporation and the creation of a non-natural legal person was a
concession. Blackstone described the above two methods of incorporation as
being with the express consent of the King.
Another less frequently occurring method of incorporation was by
prescription, where the King’s consent was presumed. This was because,
although the members could not show any charter of incorporation, the
corporation had purported to exist as such from a ‘time whereof the memory
of man runneth not to the contrary’ and, therefore, the law was willing to
presume that the charter had been originally granted but subsequently lost.
An example of this type of incorporation was the City of London.
Finally, although not a method of incorporating an association, another
example of where the King’s consent to incorporation had been implicitly
given was where the common law, by custom, recognised that certain
officeholders had a separate legal personality in addition to their own natural
personality. Such offices included bishops, vicars and even the King himself.
On the death of the officeholder, the office and the corporate personality are
transferred to the successor. These are known as ‘corporations sole’ to
distinguish them from incorporated associations, which are known as
‘corporations aggregate’.
Quite apart from these corporations, though, during the 18th century,
there grew up an entirely different form of business association, which,
because of its importance in commercial enterprise, ultimately provided much
of the impetus for reform. This became known as the ‘deed of settlement’
company.
As a result of the difficulties in obtaining corporate status, and because an
unincorporated body of persons could not hold property, except as partners,
and the Bubble Act of 1720 made it illegal to pretend to act as a corporate
body,20 the device of the trust was used, so that money property of a group of
persons associating together for the purposes of business could be put into a
trust and trustees could be appointed to administer it. There was, therefore, a
‘joint stock’ held under trust and, although there was, in fact, no corporation,
all the parties, for all practical purposes, acted as if there were one. Shares in
‘the company’ could be issued to the persons contributing property to the
joint stock and each person would execute a covenant that he would perform
and abide by the terms of the trust. The difference between these
unincorporated companies and partnerships was that the unincorporated
companies enjoyed continuous existence with transmissible and transferable
stock but, unlike partnerships, no individual associate could bind the other
associates or deal with the assets of the association.
The ingenuity of the legal draftsmen in drawing up the trust deeds
brought about a situation where groups of associating persons achieved
corporate status for all practical purposes, so that, as Maitland was able to say:
... in truth and in deed we made corporations without troubling King or
Parliament, though perhaps we said we were doing nothing of the kind ...
and that the trust:
... in effect enabled men to form joint stock companies with limited liability,
until at length the legislature had to give way.21
The legislature did give way in a major and significant way in the Joint Stock
Companies Act 1844, which introduced, for the first time, albeit in a rather
long winded form, the notion of the formation and incorporation of a
company for a commercial purpose by the act of registration by a promoter.
No longer did would-be corporators have to obtain a royal charter or await
the passing of an incorporating statute. Incorporation could be obtained by
the administrative act of registration. The equivalent section in the 1985
Companies Act reads:
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.
And, by s 13(3):
From the date of incorporation mentioned in the certificate, the subscribers of
the memorandum, together with such other persons as may from time to time
become members of the company, shall be a body corporate by the name
contained in the memorandum.
The act of registration creates the corporation.22 The drafting of these sections
inherited from previous Companies Acts seems to imply that the body
corporate is simply the aggregate of the subscribers and members and this is
why, in the 19th century, a company is referred to in judgments as ‘they’ or
‘them’. This view is wholly superseded by the view that a company is
separate from, and additional to, the members and is now always referred to
as ‘it’. The former view seems especially strange now that there is the
possibility of companies being formed with a single member.
Among the disadvantages of the old deed of settlement companies was
the difficulty in suing and enforcing judgments against them, since they
essentially remained large partnerships. But, from this very first statute
introducing the notion of incorporation by registration, the option of
continuing to carry on trade in the form of a large partnership was severely
circumscribed to deal with this problem. The 1844 Act required partnerships
of more than 25 persons to register, thus compelling the use of the new form
of business association.23 Thus, there is one readily identifiable legal persona,
which can sue to enforce the rights of the business and which can be sued to
be held accountable for the obligations of the business. The present day
successor to this provision is s 716 of the Companies Act 1985, and the number
of partners has been reduced to 20. There are, however, express exceptions
contained in the section, allowing, for instance, solicitors and accountants to
practise in partnerships of unlimited size.24
Transferable shares
A crucial element in the success of the registered company as a form of
business association is the idea of the transferable share. Shares in a company
are transferable in the manner provided for in the company’s articles.25
Those persons who are originally involved in setting up and running the
business may wish to leave the business or to leave their ‘share’ of it to their
beneficiaries on their death but, usually, all parties, particularly those
remaining involved in the business, will want to affect the company as little as
possible. A serious disadvantage with the partnership is that, unless express
provisions are made in a formal partnership deed as to what should happen
in the event of there being a change in the composition of the partnership,
when any partner dies or wishes to leave or when a new partner is admitted,
the partnership has to be dissolved and re-formed. In respect of the registered
company, in theory, changes of the shareholders can be accomplished
conveniently and with a minimum of disruption to the company’s business.
When a shareholder sells his shares to another person, that person becomes
the new shareholder, and the only involvement of the company is to change
the appropriate entry in the register of members. Thenceforth, the new person
becomes a new member.
Furthermore, because the company is a corporate body and a recognised
legal entity, it survives the death of one, or even all, of the members.26 The
shares of any deceased member are simply transferred to their personal
representatives. The company therefore has a potentially perpetual existence.
In practice, in respect of private companies, the position with regard to the
transmissibility of shares is likely to be complicated by the presence in the
company’s constitution of a clause which states that any member wishing to
sell his or her shares must first offer them to existing members, who have an
option to purchase them or, possibly, are obliged to purchase them. This is an
important restriction for the small family company to include in its
regulations, since the members will obviously wish to retain control over who
comes into the company. Again, this does not directly affect the company but
it can lead to disputes, especially as to the mechanism for the valuation of the
shares. Formerly, there was a requirement in the Companies Acts that, in
order for a company to qualify as a private company, there had to be such a
restriction on the transfer of shares27 but this was removed in the Companies
Act 1980.
These clauses are not usually found in the constitution of public
companies, which do not, in the normal case, have any restrictions on
transfer.28 This reflects the reality that the shares in the public company are an
investment only and that the shareholder has little or no interest in the
business of the company or the identity of the other shareholders.
Limited liability
Corporations, as already described, existed long before the Companies Acts of
the mid-19th century. As early as 1612, in Sutton’s Hospital,29 Coke had stated
that corporations were distinct from their members and, later in the century,
in the case of Edmunds and Tillard v Brown,30 it was recognised, as a result of
this distinction, that the members of a chartered company were not directly
personally liable for the debts and obligations incurred by the company in its
own name and, likewise, nor was the company liable for the members’ debts
and obligations. Hence, the recognition of the important advantage of trading
through the medium of a corporation rather than in a partnership, where each
partner remains both jointly and severally liable for the debts of the business,
or even as a member of the old deed of settlement company, where, since
there never was, in law, a distinct body brought into existence, the members
remained liable for debts incurred.
The position, however, was not so straightforward as this because, as a
case such as Salmon v The Hamborough Company31 shows, the courts were
willing to make orders to the effect that, should a company not be able to pay
a judgment debt, then the company could make ‘calls’ on the members of the
company so that sufficient money was collected. In this way, members could
be made indirectly liable for a proportion of the company’s unpaid debt.
Many charters of incorporation, however, contained an express clause
exempting members from any such liability.
When the legislature first established the registered company in 1844, it
was initially envisaged that members would not escape liability for the debts
of the company but there was a clear and significant difference from the
position that existed with chartered corporations. By s 66 of the 1844 Act, a
creditor had to proceed, first, against the company for the satisfaction of his
debts and, if that did not recover the required amount, the creditor could then
proceed directly against the members of the company personally. Further, a
member would remain under such personal liability for three years. But this
state of affairs did not last long and the hurriedly passed Limited Liability Act
1855 provided that, as long as a number of conditions were satisfied, a
member was absolved from liability for the debts of the company.
So the position now is that members are said to enjoy limited liability,
although the meaning of this phrase and the way it works in practice depends
on what sort of registered company is being considered. Overwhelmingly, the
most popular and important form of company for trading purposes is the
company limited by shares. Here, each share is given a nominal value and a
member of this form of company is liable only up to that full nominal value of
each share he holds or has agreed to purchase. Most shares today are issued to
shareholders on a fully paid up basis, so that, in the event of the company
being wound up insolvent, there is no further liability on the part of the
member, no matter how much the company owes to its creditors. If, however,
the member is holding partly paid shares (which was the case with some
recent Government ‘privatisations’) and the company goes into insolvent
liquidation, then the member will be called upon to pay the outstanding
amount on each share.
The other form of registered company where the members can enjoy
limited liability which can be formed under the Act is the company limited by
guarantee. Here, the company does not issue shares but, instead, the
members each agree to pay a fixed amount should the company be wound up
insolvent. The amount is usually only nominal but, in any event, this form of
company is only really appropriate for charitable or educational purposes,
rather than for commercial ventures.
Limited liability and the registered company are not inevitably and
inextricably linked in English company law. Section 1(2)(c) of the 1985 Act
states that a company can be formed without a limit on the liability of its
32 Companies Act 1985, s 1(2)(b).
Introduction
members. So, in the event of such a company going into insolvent liquidation,
the members could be called upon to make a contribution to the company’s
assets. The advantage of such a company is that there is an exemption from
the disclosure requirements in the Act. However, not surprisingly, this form
of company is not particularly popular and, at present, there are fewer than
4,000 registered at Companies’ House.
Disclosure and formality
A major feature of the law relating to registered companies, which is
immediately apparent to anyone forming and running a company, is the
amount of information about the company which has to be compiled and
disclosed. Thus, the formalities and the publicity associated with the
registered company can be considered disadvantageous and, to some extent,
form a disincentive for a businessman to incorporate his business. The
information required of a sole trader, or of the partners in a normal
partnership, is much less and may be only the information which is required
for the purposes of taxation; moreover, this is not available for public
inspection. But, as regards the registered company, from its inception, the idea
of incorporation by registration was seen as a privilege or concession to
businessmen and, in return for this, there had to be a certain amount of
documentation which had to be open for public inspection and scrutiny. So,
the 1844 Act established the Registrar of Companies, who is still with us today
and whose offices are located in Cardiff. The reasoning behind this
requirement was perhaps best encapsulated by the American judge, Justice
Brandeis, who once said that ‘[s]unlight is the best of disinfectants; electric
light the best policeman’. Furthermore, and specifically in the context of
English company law, the 1973 White Paper on company law reform stated it
was the government’s view that ‘disclosure of information is the best
guarantee of fair dealing and the best antidote to mistrust’.
So, the reasoning behind the disclosure requirements is that fraud and
malpractice are less likely to occur if those in control of corporate assets have
to be specifically identifiable and know they have to disclose what they have
been doing. This means that public disclosure is intended to protect investors
and creditors who either put money into the company or who deal with it.
For public companies which are listed on the Stock Exchange, there is the
additional, extra-legal requirement to disclose information to the Stock
Exchange.
The issue of disclosure in company law has another aspect to it and that is
the disclosure of information by the directors to the members both in and out
of general meeting. The aim here goes beyond that in relation to public
disclosure to the registrar, which is largely concerned with the protection of
investors and creditors, and generally has more to do with ensuring that the
members of the company are satisfied with the efficiency of their management
and are able to scrutinise the conduct of the directors. So, the directors have a
duty to lay the annual accounts and the directors’ and auditors’ reports before
the company in general meeting every year.36 Furthermore, every member of
the company is entitled to receive a copy of these documents not less than 21
days before the date of the meeting at which they are to be laid before the
company.37 Also, a company must keep a register of its members at its
registered office, which is open to inspection not only to any member (free of
charge) but also to any other person (on payment of the prescribed fee).38
Officers of a company who fail to comply with the provisions in respect of
disclosure are likely to have committed a criminal offence and, more
particularly, directors who are in ‘persistent default’ in complying with
disclosure requirements can be disqualified from holding office as a director
for up to five years.39
There has been some trenchant criticism of the disclosure system, in
particular, that the present level of disclosure cannot be justified.40 There has,
indeed, been a steady growth in the volume of documents required from each
company, without, perhaps, a thorough examination of whether the further
disclosure meets the overall aims of the system. In addition, further disclosure
is constantly being required by EC directives. Originally, under the 1844 Act, a
company only had to send a copy of its constitution, a list of members and a
copy of any prospectus to the registrar. In addition, there was a requirement
to present balance sheets to the registrar but, somewhat surprisingly, this
requirement was dropped in the 1856 Act and not re-introduced until 1907.
But the list of members, on the other hand, very important during the time
when members were liable for the company’s debts, has remained. Now, in
addition to the keeping and filing of annual accounts,41 it is necessary to
prepare a directors’ and an auditors’ report, lay them before the general
meeting and deliver them to the registrar,42 along with annual returns,43
containing particulars of the directors, company secretary and the address of
the registered office,44 copies of any special or extraordinary resolutions,45
and valuations of company property.46
Some reform has begun to be made, especially to remove the bureaucratic
burden from private companies. The Companies Act 1989 introduced the
‘elective resolution’, which allows a company, if it passes such a resolution, to
dispense with certain specified formalities required by the 1985 Act. Most
important in this context is the ability of a private company to pass an elective
resolution to dispense with the laying of accounts and reports before the
general meeting. Elective resolutions will be dealt with in greater detail
later. Further auditing relaxations have been introduced for very small
companies. This is part of the move towards the deregulation of small
businesses, which looks set to continue.
A further relaxation which was introduced by the 1989 Act is that public
companies listed on the Stock Exchange may send shareholders a summary
financial statement instead of the full audited accounts.
The advantages of forming a company
Most of the reasons why those running a business would wish to form a
company through which they can run their businesses flow from the above
features, either directly or indirectly. A company is able to enjoy a perpetual
existence, the death or retirement of the members having no necessary effect
on its continued existence, a fact which obviously is not the case with the
partnership. Similarly, a change of members by a transfer of shares can be
accomplished without affecting the company.
The management of the company can be assigned to specific persons, the
directors, so that other members do not have the authority to represent or
legally bind the business with third parties. Obviously, in addition, limited
liability against the trading debts can be enjoyed by those investing in the
business. In a recent empirical study of small businesses, it was discovered
that, overwhelmingly, the most important reason given by the respondents for
the formation of a company was the advantage of limited liability. It must
