Companies registered under the Companies Acts can be classified in various ways.
Classification by limitation of liability
Unlimited companies can be created by registration under the Acts. The company is a separate legal entity and, if it has assets, it will have the benefits arising from separate legal person-ality when membership changes. But if the company’s assets are insufficient to meet its liabilities, all members are liable to contribute without limit towards paying its debts and the cost of liquidation. If the personal resources of present members are insufficient, then ex-members who had left within the last 12 months can be called upon for debts incurred while they were members.
Such companies do have the advantage that they need not have their accounts audited, and need not deliver annual copies to the Registrar of Companies. This exemption does not apply, however, if the unlimited company is a subsidiary or a holding company of a limited one – otherwise the unlimited company could be used to make nonsense of the disclosure requirements of the Companies Acts.
A company may be registered as unlimited from the outset, with or without share capital.
A limited company may be re-registered as unlimited: the Registrar must be sent a prescribed form of assent, signed by or on behalf of all members; a statutory declaration by the direc-tors that the signatories constitute all members; and a copy of the new Memorandum and Articles. Because of the risks, unlimited companies are rare.
In companies limited by guarantee a member must, when he joins, guarantee the company’s debts, but only up to a limited amount. There is no statutory minimum, and the guarantee may be for only £1. If the company engages in trading, however, a potential creditor might want a higher guarantee, or possibly a separate guarantee of his own credit to the company.
If a guarantee company becomes insolvent, the members must pay the amount of their
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guarantee towards the company’s debts. If this is insufficient, ex-members who had left within the last twelve months could be called upon for their guarantees towards debts incurred while they were members.
A guarantee company does have some of the advantages associated with separate legal personality, and it can sometimes escape having to end its name with the word ‘limited’
(see later). But it does have the expense of making annual returns to the Registrar, and of having its accounts audited.
It is no longer possible to create a company limited both by shares and by guarantee, although some such companies created before the 1985 Act still exist. Guarantee compa-nies are not very common, and are used substantially for non-trading associations and clubs.
Companies limited by shares comprise the vast majority of companies. The company’s capi-tal is divided into ‘shares’. Each member holds one or more. Initially, the shares are issued by the company in return for a payment by the member. Each share will have a ‘nominal’
value of, say, 50p, but a company will often issue its shares at a premium, that is, for more than the nominal value. If 50p shares are issued for £2.50 each, they are issued at a premium of £2. Sometimes a company allows payment by instalments, for example, £1 immediately and the remaining £1.50 in one year’s time. During this time, the shares are said to be ‘partly paid’. The shareholder can be called upon to pay the remaining £1.50 immediately if the company becomes insolvent. But once the remaining £1.50 has been paid, the share is ‘fully paid’, and the shareholder has no further liability for the company’s debts. A share can be sold partly paid, and the above rules apply to the new holder in the same way as they would have done to the old holder had he kept the share.
There are some exceptions to the basic rule that the holder of a fully paid share has no further liability for the company’s debts: see the notes in Section 6.2.4. But these are very much exceptions, and the basic rule normally applies.
Public and private companies
Learning Outcome: To explain the differences between public and private companies.
A public company is almost invariably one limited by shares. (A guarantee company with a share capital can be public, but no new companies of this type can now be created.) It must comply with the following requirements of the Companies Act 1985:
1. The Memorandum of Association must specifically state that the company is to be public.
2. The name must end with the words ‘public limited company’ or the initials plc. Welsh equivalents may be used if the registered office is in Wales.
3. The nominal capital must be at least ‘the authorised minimum’, currently £50,000.
A private company is one which does not satisfy all of these requirements. The vast majority of companies are formed as private ones and remain so. A private company can later be turned into a public one by satisfying the above requirements and re-registering as public.
Some companies are public from the outset. The main differences between public and private companies are:
1. A public limited company’s name must end with these words, or the initials, or Welsh equivalents in Wales.
2. There are no minimum nominal share capital requirements for private companies.
3. A private company can commence business immediately, as soon as it receives its cer-tificate of incorporation (see later). A public company cannot do business until it has received a further certificate from the Registrar under s.117. The Registrar must be
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satisfied that shares with a nominal value of at least £50,000 have been allotted, with at least one quarter of the nominal value and the whole of any premium paid up. He must also be given information about preliminary expenses and payments to promoters.
4. A public company must have at least two directors. A private company only needs one.
5. A public company must have at least two shareholders but a private company needs only one.
6. Only a private company can be unlimited, and a public company cannot be created lim-ited by guarantee.
7. There are special provisions discussed later to lessen the administrative burden on small companies. The provisions for ‘small’ companies can only apply to private companies.
8. A private company cannot advertise its shares for sale to the public.
Single-member companies
The Companies (Single Member Private Limited Company) Regulations 1992 allow such companies to be formed in the same way as other private limited companies. Only one sub-scriber to the Memorandum is required and there need only be one share. There must how-ever be two officers, a director and a secretary. Neither of these need hold shares. Existing companies can reduce their membership to one without reregistration, but the register must now state that the remaining shareholder is the only one. Such companies are likely to be very small businesses, or wholly owned subsidiaries of a single corporate shareholder.
For meetings, one member present is a quorum. He must provide the company with a written record of resolutions which can be taken in a general meeting, but no notices of meeting or minutes are required. The sole member can pass a 100 per cent written resolu-tion to dispense with the annual general meeting (see later). Single-member companies which fall within the ‘small companies’ exemptions can escape the filing of reports, and even sometimes the need for an annual audit.
Holding and subsidiary companies
It will already be apparent that one company can hold shares in another. Most large busi-nesses consist of many companies. Although in law each of these companies is a separate person, in reality the members of the ‘group’ are closely related and (usually) are run as a coherent whole. In this context, a ‘holding’ company is one which controls another (the
‘subsidiary’) either by:
(a) being a member of the subsidiary and controlling the composition of the subsidiary’s board of directors; or
(b) holding more than half the equity share capital in the subsidiary.
Where the subsidiary itself has similar powers over another company, that other com-pany too is a subsidiary of the holding or ‘parent’ comcom-pany.
The relations can be complex but, in general, a subsidiary must not be a member of (i.e.
shareholder in) its holding company (Companies Act s.23). However, a company can take over another which already holds shares in the parent, and the subsidiary can continue to hold those shares.
Quoted companies
These are public companies whose ‘securities’ (shares and/or debentures) are ‘listed’ for buy-ing or sellbuy-ing on a recognised stock exchange. The company must apply to the exchange, and
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must satisfy the requirements of the exchange as to matters such as disclosure and total value of shares. ‘Listing’ of their securities is sought, in the main, by the largest public companies.