Welcome to the World of Company Building!
Hello there! Today, we are going to dive into how a company is actually "born" and the rules that govern how it behaves. Think of this like the "birth certificate" and the "house rules" of a business. This chapter is a crucial part of your ACCA LW studies because it sets the foundation for everything else you will learn about corporate life. Don't worry if it seems like there is a lot of terminology—we will break it down bit by bit together!
1. Promoters: The Architects of the Company
Before a company exists, someone has to have the idea, find the investors, and fill out the paperwork. This person is called a Promoter.
Who is a Promoter?
A promoter is anyone who "undertakes to form a company and who takes the necessary steps to accomplish that purpose." Think of them as the architect who designs the building and hires the builders before the building actually exists. Note: Professional advisors, like lawyers or accountants just doing their normal jobs, are NOT promoters.
The Duties of a Promoter
Because a promoter is in a powerful position, they have Fiduciary Duties. This is a fancy legal way of saying they must act with good faith and honesty. The main rules are:
• They must not make a secret profit. If they sell their own property to the company, they must tell the independent board or the shareholders.
• They must exercise reasonable skill and care.
What happens if they break these rules?
If a promoter makes a secret profit, the company can:
1. Rescind the contract (cancel the deal and get the money back).
2. Sue for damages (ask for money to cover the loss).
3. Recover the profit (force the promoter to hand over the extra cash they made).
Quick Review: A promoter is the "parent" of the company before it is born. Their biggest "no-no" is making money behind the company's back!
2. Pre-Incorporation Contracts
This is a common "trick" area in exams, so pay close attention! A company does not legally exist until it gets its Certificate of Incorporation. But what happens if a promoter signs a contract for the company before that date?
The Golden Rule
A company cannot be bound by a contract made before it was formed. Why? Because you can't sign a contract for a person who doesn't exist yet! It’s like trying to buy a house in the name of a baby that hasn't been born.
Who is Liable? (Section 51)
Under Section 51 of the Companies Act 2006, the person signing the contract (the promoter) becomes personally liable for it. This means if the company "is born" later and decides they don't want the contract, the promoter is the one who has to pay up!
Can the company "adopt" the contract later?
No. In the UK, a company cannot ratify (approve) a pre-incorporation contract. If they want the deal, they have to sign a brand new contract (this is called novation) once the company is officially registered.
Common Mistake to Avoid: Students often think the company automatically takes over the contract once it is registered. It does not! The promoter stays on the hook unless a new contract is signed.
3. The Registration Process
To "birth" a company, you must send certain documents to the Registrar of Companies at Companies House. Here is your step-by-step checklist:
Step 1: The Memorandum of Association
This is a very short document now. It is simply a statement signed by the original shareholders (subscribers) saying they want to form a company and agree to take at least one share each.
Step 2: Form IN01 (The Main Application)
This is the "ID form" for the company. It must include:
• The proposed name (it can't be offensive or too similar to another company).
• Whether the registered office is in England and Wales, Scotland, or Northern Ireland.
• Whether the liability of members is limited by shares or guarantee.
• Whether the company is Private or Public (Ltd vs. PLC).
• Statement of Capital: How many shares exist and what they are worth.
• Details of Officers: Who the directors are (and the company secretary if it's a PLC).
• Statement of Compliance: A confirmation that all legal requirements have been met.
Step 3: The Articles of Association
This is the "Rulebook." We will look at this in the next section.
The Certificate of Incorporation
Once the Registrar is happy, they issue the Certificate of Incorporation. This is the company's Birth Certificate. It proves that the company legally exists from that date and is now a "legal person" separate from its owners.
Key Takeaway: No certificate = no company. The date on the certificate is the legal "birthday."
4. The Constitution: Articles of Association
The Articles of Association are the most important internal document. They set out the rules for how the company is run.
What do they cover?
The Articles usually include rules on:
• How to issue shares.
• How to conduct meetings (AGMs).
• How to appoint or remove directors.
• How to pay dividends.
Model Articles
Don't worry! Most companies don't write their own rules from scratch. The government provides Model Articles. If a company doesn't submit its own custom rules, the Model Articles apply automatically. It's like a "default setting" on a phone.
The Legal Effect (Section 33)
The Articles act as a statutory contract. This is a special kind of contract that binds:
1. The Company to the Members.
2. The Members to the Company.
3. The Members to each other.
Note: The Articles do NOT bind the company to outsiders (like third-party suppliers) or even to directors in their capacity as directors.
Changing the Articles
A company can change its Articles at any time. To do this, they need a Special Resolution. This means 75% of the shareholders must vote in favor of the change.
Did you know? Even if 75% agree, you cannot change the Articles to force a member to buy more shares or to do something illegal. The change must be made "bona fide" (in good faith) for the benefit of the company as a whole.
5. Summary and Quick Memory Aids
Promoter: The "architect" who has a duty not to make secret profits.
Pre-incorporation: The company isn't born yet, so the promoter is personally liable (Section 51).
Form IN01: The "ID form" for registration.
Articles: The "Rulebook" for members and the company.
75%: The magic number (Special Resolution) needed to change the rules.
Encouraging Note: You've just finished one of the most technical parts of the syllabus! If you can remember that a company is a "separate person" created by registration, the rest of the law starts to make a lot more sense. Keep going, you're doing great!