By: Aoife O Donoghue, LL.M (International Law), Current Examiner in F1 Business Laws

Transcription

1 Article: Companies and other Business Organisations By: Aoife O Donoghue, LL.M (International Law), Current Examiner in F1 Business Laws Introduction This article deals with companies and other forms of business organisations under Irish law. The four discussed are; sole traders, agency, partnerships and companies. Of these four, companies are probably the most important form of business organisation under Irish law. The reasons for this will be discussed but their inclusion of limited liability in their constituent elements set them apart from other forms of business organisation. Each section of this piece discusses how all these business organisations are defined, the rules of their operation and how they are wound up. This piece aims to give a general overview of the development and role of business organisations within Irish law by considering their different aims, rules and operations and analysing their distinct characteristics. Companies Companies are the most highly regulated and, as such, complicated form of business relationship under Irish law. Their distinguishing features include their possession of legal personality, and thus their separate legal identity to its members. The Companies Acts regulate companies' operation. A private company restricts the right of transfer of shares so that they cannot be issued to the public and has between two and ninety-nine members. A public company is any registered company that is not private and has seven or more members. All companies are limited by guarantee, by shares or are unlimited. Limited by guarantee means that members are liable for the amount they have promised to contribute where the assets of the company are insufficient to discharge the debts of the company. A company limited by guarantee is not public. A company limited by shares means that members are liable to the nominal value of the shares held by them. If the shares are not fully paid up and the company goes into liquidation the members are liable only for the outstanding amount to be paid up. In unlimited liability members are personally liable for all the debts of the company. Shares are the interest which members hold in a company. Ordinary Shares entitle members to full rights, including voting at the annual general meeting, rights to receive a dividend, though this is not guaranteed if there is low or no profit. In contrast, preference shares do not carry any voting rights but receive a fixed percentage dividend each year which is given out in priority to members holding ordinary shares. A company's distinguishing feature is its separate legal personality. Separate legal personality allows a company to make contracts, own property, sue and be sued as legal persons. This was confirmed by the Court in Saloman v Saloman & Co. (1897). In this case Saloman was found not to be liable for debts of the company he had set up a year previously. Nonetheless, there are circumstances where it is considered unjust to allow individuals to hide behind separate legal personality and this is known as lifting the veil of incorporation. The Companies Act details occasions when this may occur but the Court may also lift the veil if it decides that the company is being used to escape legal obligations and liabilities or is acting for another company. Page 1 of 5

2 The memorandum and articles of association are the core documents setting out how companies, both externally and internally, operate and are unique to a particular company. Once registered with the Registrar of Companies the memorandum and articles are binding on all the members of the company. However, both can be altered by special resolution or under the Companies Acts. Section 6 of the Companies Act 1963 sets out the required contents of a memorandum of association which are: a name clause, an objects clause, a limited liability clause, a share capital clause and an association clause. The name clause is company s chosen moniker. If a company is limited by shares or by guarantee, limited or teoranta must form part of its name. Public limited companies' name must contain public limited company or cuideachta phoiblí theoranta. The objects clause sets out the aims of the company. The company fulfilling may enter into contracts only to fulfil these aims otherwise the company will have acted ultra vires or beyond its capacity. A third party may still be able to enforce the contract if they were unaware that the company was acting ultra vires. The share capital clause sets the amount of proposed share capital and its division into different classes. The association Clause contains the witnessed signatures of the original subscribers, the amount that they are subscribed for and their agreement to be bound by the memorandum. Articles of association set the internal rules of the company and the rights of its shareholders. It also confers authority on the directors to act on behalf of the company. Table A of the Companies Act 1963 are the default articles if a company does not specify or fails to exclude its contents. Normally, the articles of association set out the division of capital, shareholder s rights, the transfer of shares, the appointment and removal of directors, directors powers and duties, the appointment and removal of secretaries, declaration of dividends, preparation of accounts and the winding up of the company. All companies are managed by persons appointed by shareholders known as the Board of Directors. The Companies Acts require every company to have two directors, one of which, with some exceptions, must reside within Ireland. The appointment procedure is usually set out in the articles of association Some persons are barred from holding directorships, for example, a person who was the director of a company struck off the register of companies or a person found guilty under the Company Law Enforcement Act The directors powers are usually included in the articles of associations including; the payment of dividends, the power to borrow money or to allot shares. Directors act as agents of the company and since they are fiduciaries owe a special duty of care to the company and must avoid conflicts of interest or personal gain from their position. To register a private company in the Registrar of Companies a memorandum of association, articles of association, a statement of capital duty, a letter of confirmation that the proposed name is available and a statutory declaration of compliance with the Companies Acts are necessary. To register a public company, the documentation necessary for a private company are required. These documents are combined with details on the nominal value of the allotted shares, the amount of paid up allotted shares, estimations of the preliminary expenses of the company as well as particulars on amounts paid or intended to be paid to the promoter of the company. The articles of association usually set out how a company should be wound up. Liquidation occurs when a company is wound up and its assets are distributed among its members and creditors. Liquidation usually occurs in three circumstances, if the company is created for a specific purpose when this has been completed, if the company can no longer meet its obligations or when the members decide to end the business. Receivership usually occurs where a principle sum has been unpaid over a period of time, where the company has failed to pay an instalment or interest or the failure of a condition. A receiver takes control over charged assets and sells them to discharge the debts of the company. A receiver maybe appointed either by the court or under the terms of a deed of debenture. An examinership is Page 2 of 5

3 created in circumstances where a company is in financial difficulties but maybe viable in the future. Examinerships were created under the Companies (Amendment) Act An examiner is appointed by the High Court if the Court believes that it is reasonable that the company will be able to operate as a solvent business in the future. Sole Traders Sole traders are perhaps the most straightforward group of business organisations under Irish law and, as such, are fairly lightly regulated. In contrast to the other forms of business discussed in this article, sole traders are not incorporated nor to do they possess limited liability this is due to the lack of limited liability and makes a sole trader liable for all the assets and debts of their business. As they are not incorporated their tax regimes are also different to companies, for instance they do not pay corporation tax, though they are bound by employment, environmental as well as health and safety regulations. The Registration of Business Names Act 1963 requires sole traders to register their business name if it is different from the sole trader's given name with the Companies Registration Office and they must also register with the Revenue Commissioners as a self-employed persons. A sole trader ceases to operate on the decision of the sole trader, although they remain liable for any liabilities that have been incurred when operating. Agency Agency is a very particular form of business arrangement under Irish law. An agency is a contractual relationship that arises when one person, an agent, has the legal authority; either express or implied, to bind another person, called a principal, into contracts on their behalf. The most important aspect of being a legal agent is the authority to make a binding contract on behalf of the principal s. There are three main types of agents, a general agent, a special agent and a universal agent. A general agent has implied authority to enter into a contract on behalf of a principal that is normal for the course of business, profession or trade in which they are acting. A special agent only has authority to enter into contracts relating to a specific purpose. A universal agent has unlimited authority to enter into any kind of contract on the principal s behalf. A universal agent is usually granted a power of attorney. To establish an agency relationship there must be intention that is created by an agreement between the principal and the agent. The agreement may be express through a written contract, implied, through the conduct of the relationship or by necessity where in extreme circumstances the agent has no choice but to act to prevent detriment to the principal. An agency relationship may also be formed through the operation of law, this is called ratification. Ratification occurs if a principal ratifies a contract after its completion by the agent. To establish this, the agent must purport to act on behalf of the principal, the principal must have existed when the contract was made, the principal must have the capacity to enter into a contract and must accept the contract within a reasonable period time. As agents are in a position of power the law curtails the types of contracts in which they can bind the principal. The agent is also bound by certain duties. For example, an agent must carry out the agreed task as the principal prescribes unless the agent is acting for free. An agent should exercise the skill and care expected of someone acting in their trade or profession. If the agent is acting free then they must act to the standard of a person managing their own affairs. An agent must disclose all transactions and accounts when requested to by the principal. An agent must also ensure that the principal s funds are kept separate from her own and cannot delegate their authority without the express or implied authority of the principal. An agent has the right to be paid an agreed and reasonable commission for their work and is entitled to be indemnified for any loss, liabilities or expenses accrued when acting on behalf of the principal. Although if the agent is negligent or acted outside of their authority they are not entitled to be indemnified. Page 3 of 5

4 An agency relationship comes to an end by the acts of the parties or the operation of law. For example, if the agency relationship is for a period of time or one transaction, it will automatically end once the period is passed or the transaction completed. The principal and agent can bring it to end by agreement. If the agent seriously breaches the agreement then the principal is entitled to revoke authority without notice and maybe entitled to sue for damages. If the agent is an employee they are entitled to protection of employment legislation. Agency is terminated by the death, insanity or bankruptcy of either the principal or the agent. Agency is a very particular form of business relationship which is only useful for certain types of transactions and, as such, is limited in its scope. The liabilities are very much based around the law of contract and the liabilities are incurred in this regard. Although employment law may also play a role if the agent is an employee of the principal. Partnerships Partnerships are a very common form of business relationship in Ireland although the law is based around two rather old pieces of legislation, the Partnership Act 1890 and the Limited Partnership Act Section 1 of the Partnership Act 1890 defines a partnership as a relationship which subsists between persons carrying on a business in common with a view to profit. Section 45 of the Act defines a business as every trade, occupation or profession. There are actually no formal arrangements to establish a partnership, it can be formed expressly through a contract, or impliedly through the conduct of the parties, although the former is the most common. Such a contract would normally include details on the nature of the partnership, its duration and commencement, the admission and expulsion of partners, its dissolution, the powers and duties of the partners, among other elements. Each partner is an agent of the partnership and of the other partners. Under section 5 of the Partnership Act 1890 a partner can bind all the other partners unless they are acting outside of their authority in the partner relationship and the third party they are dealing with is aware that the partner does not have the authority. Apparent authority enables a partner to carry out transactions within the scope of the business which may not be express in the partnership arrangement. The Partnership Act 1890 sets the default position when a partnership contract does not detail its operation. The partners may through agreement, express or implied, vary the terms of their partnership. Under section 24 of the 1890 Act all partners are equally entitled to capital and profits and equally liable for any losses or liabilities. Each partner is jointly liable for all the debts and obligations of the firm which are incurred in the course of the partnerships operation. All the partners are jointly personally liable for any action taken against the partnership. In circumstances where an action is only against some of the partners, only those partners will be liable. If a partner acts within the scope of actual or apparent authority the partnership is liable for the misapplication of funds. Partnership contracts often make provision for its dissolution although the Partnership Act 1890 also sets default provisions. The Act states that if a partnership is for a specific period of time or purpose, if and when this time lapses or the transaction completed, or in case of the death or bankruptcy of one of the partners, among several other circumstances, the partnership is at an end. If a partner willingly and persistently breaks the partnership agreement, if a partner has become permanently insane or permanently incapable of carrying out the duties under the partnership agreement or is found guilty of conduct that is damaging to the business under section 35 of the Partnership Act 1890 the Court may order the partnership be dissolved. It may also do so if the partnership will only make a loss or if the court believes that in the circumstances it is just and equitable to do so. After the partnership has been dissolved the partners retain residual authority to complete any transactions or to wind up any transactions. Page 4 of 5

5 The Limited Partnership Act 1907 enables one or more general partners to be liable in the manner described above; however a partner who initially contributes a capital sum to the partnership liability is limited to that sum which must remain with the firm as long as it is operating. Such a limited partnership must be registered with the Register of Companies. Partnerships come in many variations and are a very fluid form of business organisation. The liability of partners for all other partners makes it high risk, but it is far less regulated than companies. Conclusion The four main forms of business organisations in Irish law are sole traders, partnerships, agency relationships and companies. While companies are the most complex and onerous form of business organisation it also provides the members with the most protections from liabilities which the company may incur. This is in contrast to sole traders and partnerships where the sole trader and partners are liable for any debts accrued. Yet their relative flexibility in comparison to companies may make them relatively attractive to those wishing to start a business. Page 5 of 5