COMPANY LAW STUDY NOTES
I. INTRODUCTION TO INCORPORATION
Definition of a "Company"
A company is a "corporation" - an artificial person created by law.
A human being is a "natural" person.
A company is a "legal" person.
A company thus has legal rights and obligations in the same way that a natural person does.
Companies and Partnerships Compared
(a) A company can be created only by certain prescribed methods - most commonly by registration
under the Companies Act 1985. A partnership is created by the express or implied agreement of the
parties, and requires no formalities, though it is common to have a written agreement.
(b) A company incurs greater expenses at formation, throughout its life and on dissolution, though
these need not be excessive.
(c) A company is an artificial legal person distinct from its members. Although in Scotland a
partnership has a separate legal personality by virtue of s.4(2) of the Partnership Act 1890, this is
much more limited than the personality conferred on companies.
(d) A company can have as little as one member and there is no upper limit on membership. A
partnership must have at least two members and has an upper limit of 20 (with some exceptions).
(e) Shares in a company are normally transferable (must be so in a public company). A partner cannot
transfer his share of the partnership without the consent of all the other partners.
(f) Members of a company are not entitled to take part in the management of the company unless
they are also directors of it. Every partner is entitled to take part in the management of the
partnership business unless the partnership agreement provides otherwise.
(g) A member of a company who is not also a director is not regarded as an agent of the company, and
cannot bind the company by his actions. A partner in a firm is an agent of the firm, which will be
bound by his acts.
(h) The liability of a member of a company for the debts and obligations of the company may be
limited. A partner in an ordinary partnership can be made liable without limit for the debts and
obligations of the firm.
(i) The powers and duties of a company, and those who run it, are closely regulated by the Companies
Acts and by its own constitution as contained in the Memorandum and Articles of Association.
Partners have more freedom to alter the nature of their business by agreement and without formality,
and to make their own arrangements as to the manner in which the firm will be run.
PREPARED BY MR. ANTONY AMBIA Page 1
,(j) A company must comply with formalities regarding the keeping of registers and the auditing of
accounts which do not apply to partnerships.
(k) The affairs of a company are subject to more publicity than those of a partnership - e.g. companies
must file accounts which are available for public inspection.
(l) A company can create a security over its assets called a floating charge, which permits it to raise
funds without impeding its ability to deal with its assets. A partnership cannot create a floating
charge.
(m) If a company owes a debt to any of its shareholders they can claim payment from its assets
rateably with its other creditors. A partner who is owed money by the partnership cannot claim
payment in competition with other creditors.
(n) A partnership (unless entered into for a fixed period) can be dissolved by any partner, and is
automatically dissolved by the death or bankruptcy of a partner, unless the agreement provides
otherwise. A company cannot normally be wound up on the will of a single member, and the death,
bankruptcy or insanity of a member will not result in its being wound up.
3. History
TYPES OF COMPANY
A company can be formed in a number of ways:
(a) By Royal Charter (Chartered Companies)
Formed by grant of a charter by the Crown.
Promoters of the company petition the Privy Council attaching draft of proposed charter to the
petition.
Still used to incorporate learned societies and professional bodies.
No longer used to incorporate trading companies.
(b) By Act of Parliament (Statutory Companies)
Formed by private Act of Parliament.
Formerly used to incorporate public utilities such as gas, electricity and railways. i.e Kenya power,
national oil petroleum, railways
(The privatised public utilities have been incorporated as registered companies).
(c) By Registration (Registered Companies)
Formed by registration under the Companies Act 1985 (as amended) or one of the preceding
Companies Acts.
Registration is the most commonly used means of forming a company and virtually the only method
now used to form a trading company.
CA 1985, s.1(1): "Any two or more persons associated for a lawful purpose may, by subscribing
(put)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."
PREPARED BY MR. ANTONY AMBIA Page 2
, Classification of Registered Companies
Important Note
"Limited Liability" - this refers to the liability of the members, not the liability of the company. The
company will always be liable to the full extent of its debts.
The liability of the mem
bers, whether limited or unlimited, is to the company, not to the individual creditors of the company.
(a) Unlimited Companies
(i) Members have unlimited liability (If company is being wound up, members can be made
to contribute to the company’s assets without limit to enable it to pay its debts.)
(ii) Cannot be public companies.
(iii) Can be set up with or without a share capital.
(iv) Not subject to the same restrictions on alteration of capital as other types of company, and
do not normally have to file annual accounts.
(b) Companies Limited by Guarantee
(i) Members agree to contribute a specified amount to the company’s assets in the event of the
company being wound up. (Total amount payable by all members is called the "guarantee
fund")
(ii) Members do not have to pay anything as long as company is a going concern - so company
has no contributed capital.
(iii) Companies limited by guarantee are not usually formed for business ventures.
(iv) Prior to 1980, a company could be registered as a company limited by guarantee, but also
have a share capital - these are called "hybrid companies".
(c) Companies Limited by Shares
(i) The most common kind of registered company.
(ii)Members of the company take shares issued by the company. Each share is assigned a
nominal value - the amount that must be paid to the company for the share. Members may
also agree to pay an extra amount - called a premium.
(iii)When the company is registered, its memorandum must state the total nominal value of
all the shares it is going to issue (called the registered capital, or nominal capital or authorised
share capital).
The memorandum also states the number of shares to be issued: e.g. 10,000 shares of £1 each
= registered capital of £10,000.
(iv)Liability of a member (shareholder), when the company is wound up is limited to the
amount, if any, of the nominal value of his shares which has not been paid.
( Shareholder is also contractually bound to pay any premium which has not been paid).
(v) Shares are normally partly or fully paid for when issued, so company will have a
contributed capital.
Companies Limited by Shares may be Public or Private
(i) Public Companies
CA 1985, s.1(3): "a company limited by shares which has a memorandum stating that it is to be a
public company and which complies with the requirements of the Act for registration as a public
company."
Main requirements:
PREPARED BY MR. ANTONY AMBIA Page 3
I. INTRODUCTION TO INCORPORATION
Definition of a "Company"
A company is a "corporation" - an artificial person created by law.
A human being is a "natural" person.
A company is a "legal" person.
A company thus has legal rights and obligations in the same way that a natural person does.
Companies and Partnerships Compared
(a) A company can be created only by certain prescribed methods - most commonly by registration
under the Companies Act 1985. A partnership is created by the express or implied agreement of the
parties, and requires no formalities, though it is common to have a written agreement.
(b) A company incurs greater expenses at formation, throughout its life and on dissolution, though
these need not be excessive.
(c) A company is an artificial legal person distinct from its members. Although in Scotland a
partnership has a separate legal personality by virtue of s.4(2) of the Partnership Act 1890, this is
much more limited than the personality conferred on companies.
(d) A company can have as little as one member and there is no upper limit on membership. A
partnership must have at least two members and has an upper limit of 20 (with some exceptions).
(e) Shares in a company are normally transferable (must be so in a public company). A partner cannot
transfer his share of the partnership without the consent of all the other partners.
(f) Members of a company are not entitled to take part in the management of the company unless
they are also directors of it. Every partner is entitled to take part in the management of the
partnership business unless the partnership agreement provides otherwise.
(g) A member of a company who is not also a director is not regarded as an agent of the company, and
cannot bind the company by his actions. A partner in a firm is an agent of the firm, which will be
bound by his acts.
(h) The liability of a member of a company for the debts and obligations of the company may be
limited. A partner in an ordinary partnership can be made liable without limit for the debts and
obligations of the firm.
(i) The powers and duties of a company, and those who run it, are closely regulated by the Companies
Acts and by its own constitution as contained in the Memorandum and Articles of Association.
Partners have more freedom to alter the nature of their business by agreement and without formality,
and to make their own arrangements as to the manner in which the firm will be run.
PREPARED BY MR. ANTONY AMBIA Page 1
,(j) A company must comply with formalities regarding the keeping of registers and the auditing of
accounts which do not apply to partnerships.
(k) The affairs of a company are subject to more publicity than those of a partnership - e.g. companies
must file accounts which are available for public inspection.
(l) A company can create a security over its assets called a floating charge, which permits it to raise
funds without impeding its ability to deal with its assets. A partnership cannot create a floating
charge.
(m) If a company owes a debt to any of its shareholders they can claim payment from its assets
rateably with its other creditors. A partner who is owed money by the partnership cannot claim
payment in competition with other creditors.
(n) A partnership (unless entered into for a fixed period) can be dissolved by any partner, and is
automatically dissolved by the death or bankruptcy of a partner, unless the agreement provides
otherwise. A company cannot normally be wound up on the will of a single member, and the death,
bankruptcy or insanity of a member will not result in its being wound up.
3. History
TYPES OF COMPANY
A company can be formed in a number of ways:
(a) By Royal Charter (Chartered Companies)
Formed by grant of a charter by the Crown.
Promoters of the company petition the Privy Council attaching draft of proposed charter to the
petition.
Still used to incorporate learned societies and professional bodies.
No longer used to incorporate trading companies.
(b) By Act of Parliament (Statutory Companies)
Formed by private Act of Parliament.
Formerly used to incorporate public utilities such as gas, electricity and railways. i.e Kenya power,
national oil petroleum, railways
(The privatised public utilities have been incorporated as registered companies).
(c) By Registration (Registered Companies)
Formed by registration under the Companies Act 1985 (as amended) or one of the preceding
Companies Acts.
Registration is the most commonly used means of forming a company and virtually the only method
now used to form a trading company.
CA 1985, s.1(1): "Any two or more persons associated for a lawful purpose may, by subscribing
(put)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."
PREPARED BY MR. ANTONY AMBIA Page 2
, Classification of Registered Companies
Important Note
"Limited Liability" - this refers to the liability of the members, not the liability of the company. The
company will always be liable to the full extent of its debts.
The liability of the mem
bers, whether limited or unlimited, is to the company, not to the individual creditors of the company.
(a) Unlimited Companies
(i) Members have unlimited liability (If company is being wound up, members can be made
to contribute to the company’s assets without limit to enable it to pay its debts.)
(ii) Cannot be public companies.
(iii) Can be set up with or without a share capital.
(iv) Not subject to the same restrictions on alteration of capital as other types of company, and
do not normally have to file annual accounts.
(b) Companies Limited by Guarantee
(i) Members agree to contribute a specified amount to the company’s assets in the event of the
company being wound up. (Total amount payable by all members is called the "guarantee
fund")
(ii) Members do not have to pay anything as long as company is a going concern - so company
has no contributed capital.
(iii) Companies limited by guarantee are not usually formed for business ventures.
(iv) Prior to 1980, a company could be registered as a company limited by guarantee, but also
have a share capital - these are called "hybrid companies".
(c) Companies Limited by Shares
(i) The most common kind of registered company.
(ii)Members of the company take shares issued by the company. Each share is assigned a
nominal value - the amount that must be paid to the company for the share. Members may
also agree to pay an extra amount - called a premium.
(iii)When the company is registered, its memorandum must state the total nominal value of
all the shares it is going to issue (called the registered capital, or nominal capital or authorised
share capital).
The memorandum also states the number of shares to be issued: e.g. 10,000 shares of £1 each
= registered capital of £10,000.
(iv)Liability of a member (shareholder), when the company is wound up is limited to the
amount, if any, of the nominal value of his shares which has not been paid.
( Shareholder is also contractually bound to pay any premium which has not been paid).
(v) Shares are normally partly or fully paid for when issued, so company will have a
contributed capital.
Companies Limited by Shares may be Public or Private
(i) Public Companies
CA 1985, s.1(3): "a company limited by shares which has a memorandum stating that it is to be a
public company and which complies with the requirements of the Act for registration as a public
company."
Main requirements:
PREPARED BY MR. ANTONY AMBIA Page 3
