Company Law for Accountants - Essay Example

Introduction Formation of company is a matter of legal formality and contracts are legal obligations by which companies that are legal, ascertain their legal status. Contracts forms the basis of formalities involved in company formation. A company will not be able to enter into a contract without being incorporated and a certificate of association given. Any company that enters into contracts prior to its existence should be prepared to suffer the consequences should the other party involved fails to honor it. Pre-incorporation contract that exist before the formation of a company are entered into by promoters of a company before the company is incorporated. Promoters are involved in the formation of a company and deal with formalities of a companys registration, finding share holders and negotiations for new company business contracts. However, companies which are not yet been incorporated cannot enforce contract because they have not attain a legal status to attain contractual rights or sustain contractual liabilities existing from a pre-incorporation agreement and therefore the pre-incorporation agreements cannot oblige a company or the other parties involved. Question 1 No action could be taken against candy because of the following reasons. First, the company directors knew that candy was bankrupt pursuant to the court order dated 23rd June 2011 and therefore, he was legally prohibited from managing, forming or promoting a limited company unless he gets an explicit permission from the court. But Becky, one of the directors, knew candy’s plan (of promoting the company) but did nothing to stop or inform candy about the court order regarding his bankruptcy and the implications thereafter. It was therefore unlawful for Becky that even having known that candy was bankrupt, he went ahead and allowed him to negotiate with yuenshiu on an exclusive agreement on behave of the company (gallery company) that once formed, it would take yuenshiu’s output and sell it in return for 50% commission on the first year and with opportunity to extend for further five year and at 40%. It was illegal that candy had to use the inside knowledge of the company to profit at the expense of other investors’. Candy seems to both a share holder and a promoter of the company. Has a promoter, candy must not make secret profits out of promotion of the new company. For example she ought to have disclosed to the company that he had received a gift as a result of the transaction between her on behaves of the company and yuenshiu the investor. Candy was also supposed to disclose all relevant facts regarding any profit made by her during the transaction. Because candy as a promoter failed to disclose the profit she made in course of promotion she is supposed to be liable for any loss suffered the company and other investors involved. She is also supposed to be liable for untrustworthy in the prospectus. But even then, the articles of association of this company ought to have included rules relating to bankruptcy, rights and duties of the members and directors, internal management and company contracts between its members. Therefore, candy should not have been allowed in the first place to transact any business on behave of the company. Even if he may have received the gift rex2010, the blame falls squarely on the directors of the company for having accorded him privileges for example negotiation with potential investors in total contravention of the law. . The law require that, once the decision has been reached about the type of company, its formation has to occurs through clear steps with the registrar of Companies .It is therefore paramount before registration that, any person promoting the company to attract investment is obliged to disclose all substantial facts about the venture and how it intends to get its finances. If the person negotiating on behave of the company claims he/or she is a company secretary or agent ,the investor has to verify the information given from the top management in the company to be sure that the information he received from either the secretary or company agent was indeed right. We don’t see yuenshiu doing these. He does not consult with the company directors to disclose everything he has transacted with candy. It’s only when things go overboard that we see yuenshiu disclosing what went on during the agreement. In addition, the gift given to candy was an appreciation gift and there is no evidence relating the gift to improper soliciting of investors Limited company act through its employees, from board of directors down and therefore, rules to attribute rights and duties to a company from its potential investors have to be clearly emphasized so that an aggrieved (investor) third party will sue the company for having breached its obligation. Its seems yuenshiu was careless and he even gave a gift quite earlier before incorporation and issuance of Certificate of Incorporation to the company as conclusive evidence that the requirements of the Companies registration processes have been complied with and that the company is duly registered under this Act . Candy is further exonerated from this issue because the agreement he made with yuenshiu is passed, adopted and resolutions made. She is even thanked for her hard work giving a clear indication that she acted on behave of the company and since the agreement has already been adopted, any discrepancies caused will be bared by the company and not candy. Question 2 A company will only be in existence once it has been incorporate and a certificate of incorporation given. It is when this certificate is given that a company can proof that it exist and cannot cease to exist unless dissolved by Court order. The company (Worldwide gallery online ltd) ought to have been constituted on 19th September 2011 and not twenty third September 2011. Yuenshiu therefore signed the contract and was ready to abide by it provided that the company was incorporated on 19th.But because Becky’s brother forgot to send the letter by 14th September and that, the letter was only discovered on 21st, the option contained in the agreement cannot be enforced on yuenshiu since the company was inexistence as at 19th September. Although yuenshiu says that they should sell rex2010, an artistic work he gave to candy as a gift, in terms of law, he is not supposed to pay any cent as compensation and in fact he is the one who is supposed to be paid because those who were supposed to incorporate the new company on 19th did not do so .Accordingly, yuenshiu signed an agreement on a non-existent company as per the agreement and he is to be paid because the other party did not honor the contractual terms. In fact, Becky as one of the directors, and whose brother failed to send the letter that later resulted in late incorporation of the company should be blamed for irresponsiveness. She should have ensured that the company is incorporated on time to make sure that yuenshiu honors’ the terms of the contract. Since they were the first to breach the terms of the contract, they should not blame yuenshiu for having failed to honor the terms .yuenishiu has the right to look for other companies which cannot breach the terms of the contract. Even if these options were to be imposed, they will fail in the law court because the contract signed with yuenshiu clearly states that the company was supposed to be opened on 19th for the agreement to be binding on all parties involved failure to which one party has the right to go against the terms of the contract. In fact it will be ironical and illogical to demand that yuenshiu has to remain bound by the agreement failure to which he has to pay for breaching the terms of the contract when in the Actual sense it’s the company which did not honour the agreement by failing to incorporate it on the stipulated date. In contracts, when one party fails to honour the terms of the contract, there is no way the other party can be forced to remain bound by the agreement. Question3 Indeed it was illegal to allow candy deal with yuenshiu the way she did but there is no way we can blame her. We have to blame the company director because they knew that candy was bankrupt pursuant to the court order dated 23rd June 2011 and therefore, he was legally prohibited from managing, forming or promoting a limited company unless he gets an explicit permission from the court. But Becky one of the director, knew candy’s plan but did nothing to stop or inform candy about the court regarding his bankruptcy and the implications thereafter. It was therefore unlawful for Becky that even having known that candy was bankrupt, he went ahead and allowed him to negotiate with yuenshiu on an exclusive agreement on behave of the company (gallery company) that once formed, yuenshiu’s output and sell it in return for 50% commission on the first year and with opportunity to extend for further five year and at 40%. candy had to use the inside knowledge of the company to profit at the expense of other investors .But even then, the articles of association of this company ought to have included rules relating to bankruptcy and he should not have been allowed in the first place to transact any business on behave of the company. Even if he may have received the gift rex2010, the blame falls squarely on the directors of the company for having accorded him privileges for example negotiation with potential investors in total contravention of the law. The law requires that, once the decision has been reached about the type of company, its formation has to occur through clear steps with the registrar of Companies .It is therefore paramount before registration that, any person promoting the company to attract investment is obliged to disclose all substantial facts about the venture and how it intends to get its finances. If the person negotiating on behave of the company claims he/or she is a company secretary or agent the investor has to verify the information given from the top management in the company to be sure that the information he received from either the secretary or company agent was indeed right. We don’t see yuenshiu doing these. He does consult with the company directors to disclose everything he has transacted with candy. It’s only when things go overboard that we see yuenshiu disclosing what went on during the agreement. In addition, the gift given to candy was an appreciation gift and there is no evidence relating the gift to improper soliciting of investors. In summary there is no way we can blame candy for the wrong she may have committed. The directors and to some extend yuenshiu have to bear setbacks of their transactions. Question 4 Gallery- world wide.com and worldwide gallery on-line ltd are the same names only that positioning of words has been changed. Gallery- worldwide is the same as worldwide gallery and on-line ltd is the same as .com to mean they are internet based. Since the two names are the same, gallery-worldwide.com will take a court based action to ensure that gallery online ltd changes its name so as to safeguard its Intellectual Property and also to ensure that the proposed name does not infringe an existing trade mark the same as an existing name on the index of company names. If accused in the court of law then worldwide gallery online Ltd will have to pay for the damages caused by infringing into the intellectual properties of gallery worldwide.com and also because of infringement to the existing trade mark of gallery worldwide.com .Before choosing a name worldwide gallery online ltd ought to have used a WebCHeck service to ensure that the chosen name is different from existing names in the index of company names to ensure that the name that has been proposed doesn’t infringe in the existing trade mark Intellectual Property of any other company. Worldwide gallery online ltd can only be allowed to register the company if the name they have proposed will be part of an existing company( Gallery- world wide.com), Gallery- world wide.com company consents to the registration of the proposed name (Worldwide gallery online ltd) or Worldwide gallery online ltd applies to register requesting the company to be registered .In this case letter or statement from the existing company (Gallery- world wide.com) that confirms its consent to the incorporation of the new company(Worldwide gallery online ltd) which will form part of the same group should be included in the application. Obtaining the views of the body specified in the regulations will also be mandatory so that the body concerned indicates whether it has objection to the proposed name or not. If the bodies concerned in the registration of companies object the name of the company, it should explain the reasons as to why it the company should not be allowed to register with the proposed name. During application for company registration copies of responses should and must be included with the application and requires the approval of the State Secretary because failure to do so may imply that the new company is connected with government (government parastatals). A company which chooses a name that includes the words below must obtain views of the registering body a copy of the responses has to be attached in the application: Names differing by additional words cannot be treated to be similar in spite of whether the added words describe activities carried out by the company or not. However, names differing by inclusion of words associated with names ending with company” or partnership will be treated to mean the same thing. In other words the names are alike. All objections be addressed to the ‘Secretary of State’ and delivered to Companies House in time for deliberation. If a company is affected, it will be required to re-name itself within THREE month from the date of the direction. Words and expressions included in a company or business and which could:, a particular status, cause a criminal offence ,suggest business pre-eminence, imply a specific function, devolved administration ,imply a connection with a government or public authority need the approval of State to protect the public from being misled. Question 6 WEBSITES http://www.lawdonut.co.uk Rating 1/10 It provided minimal information that was useful in the introduction part www.behanlegal.com/.../DirectorsShareholdersRightsObligations/.../D.? Rating 2/10 Rich source of information especially the share holders rights and obligation www.companieshouse.gov.uk Rating 2/10 It was a rich source of information that was vital as far as company laws are concerned http://www.legislation.gov.uk/ukpga/1986/46/contents Rating 3 /10 It provided the bulk of my information source http://legalonline.blogspot.com/2011/03/pre-incorporation-contracts-legal.html Rating 2/10 A good source of information especially why pre-incorporation agreements cannot oblige a company. Read More