ACCA Applied Skills · Corporate and Business Law (Global)

The formation and constitution of a company: formula sheet

Full chapter guide

Key formulas

Separate legal personality: Company ≠ its members ≠ its directors; From the date of incorporation. Source: Salomon v Salomon & Co Ltd (1897).
Liability: company limited by shares: Member's maximum liability = unpaid amount on their shares; If shares are fully paid, the member owes nothing more on liquidation.
Liability: company limited by guarantee: Member's maximum liability = amount guaranteed; Called only on winding up. Usually no share capital.
Liability: unlimited company: Member's liability = no limit; Members are personally liable for all debts if the company cannot pay.
Public v private: Public = may offer shares to the public; Private = generally may not; Public status is not the same as being listed on a stock exchange.
General rule: Company = separate legal person; members' liability limited; Salomon v Salomon. Start every answer here before discussing any exception.
Sham or façade test: Company used to evade an EXISTING legal obligation or conceal the true facts → veil may be lifted; Gilford Motor v Horne and Jones v Lipman. A company formed for a legitimate purpose is not a sham, even if it limits liability.
Fraud exception: Company used as a cover for fraud → veil lifted; The company must have been used to commit or hide the fraud. Mere suspicion is not enough.
Group rule: Parent and subsidiary = separate persons unless agency or sham is proved; Adams v Cape Industries. Group membership alone does not lift the veil.
Agency exception: Company acts as agent of its controller or parent → principal is liable; Needs proof of a real agency relationship, not just control.
Statutory lifting: Statute imposes personal liability on directors or members in specified cases; Examples: fraudulent trading, wrongful trading, trading below minimum membership.
Moment of existence: Company exists from the date on the certificate of incorporation; Before this date there is no separate legal person.
Effect of certificate: Certificate of incorporation = conclusive evidence that registration requirements were met; Defects in the process cannot be used to challenge the company's existence.
Promoter's duties: Good faith + no secret profit + full disclosure of any interest; Owed to the company, as a fiduciary relationship.
Remedies against a promoter in breach: Rescind the contract OR recover the secret profit (with damages where relevant); Rescission needs restitution to be possible. The company can also seek an account of the profit.
Promoter's pre-incorporation liability: Person who signs for a non-existent company is personally liable; The company cannot ratify a contract made before it existed.
Typical application contents: Name + type + registered office + constitution + officers + members and shares; Exact documents vary by jurisdiction. Know the common pattern.
Core rule: Contract made before incorporation → company not bound and, under the common law rule, cannot ratify; The company did not exist, so it could not be a principal when the contract was made. Follow any statutory rule the question gives.
Liability of the signatory: Person who signs as agent for a non-existent company → personally liable; Kelner v Baxter. Look at the wording and intention of the parties.
Signing the company name alone: Company name signed with no agent wording → contract can be a nullity; Newborne v Sensolid. The contract was void and the signatory, who signed only in the company's name, could not enforce it. Do not say the signatory can never be sued. It depends on the facts and intention.
How the company becomes bound: Novation = new contract after incorporation, agreed by all parties; Old contract is discharged and replaced. Adoption or ratification alone is not enough under the common law rule.
Exclusion of personal liability: Clear wording that signatory is not liable → no personal liability; Look for clear wording. Signing for a future company does not by itself exclude liability.
Alteration of articles: Special resolution = at least 75% of votes cast; This is the usual threshold. Written resolutions use 75% of eligible votes. Check the percentage the question gives.
Contractual effect: Articles = contract between company and members, and between members; It covers rights as a member only. Outsider rights do not arise from the articles.
Default articles: No own articles registered → model articles apply; Model articles can be adopted fully, partly or excluded.
Test for alteration: Bona fide for the benefit of the company as a whole; A good-faith alteration is valid even if it hurts some members. Fraud on the minority is not allowed.
Filing: Copy of amended articles and special resolution sent to the registrar; Often within a set number of days, such as 15 in the UK. Cite the time limit only if the question gives it.
Capacity (modern rule): Company capacity = unrestricted, unless the constitution restricts it; A restriction in the objects clause generally does not invalidate a contract with a good-faith outsider. It may expose directors to liability to the company.
Actual authority: Actual authority = express authority + implied authority; Express comes from the constitution, resolution or contract. Implied comes from the role or the usual course of dealing.
Apparent authority test: Representation by the company + reliance by the outsider + outsider unaware of lack of authority = company bound; The representation must come from the company, not from the agent alone. A person cannot create their own apparent authority.
Turquand rule (indoor management): Outsider in good faith may assume internal rules were followed; Does not apply if the outsider has knowledge or suspicion, is an insider, or the document is forged.
Breach of warranty of authority: No authority + no ratification = agent personally liable to the third party; Remedy is damages against the agent, not against the company.
Nominal value of issued capital: Issued share capital = number of shares issued × nominal value per share; Share premium is the excess received over nominal value and is not part of nominal capital.
Unpaid amount on shares: Unpaid = (nominal value − amount paid per share) × number of shares; Here the amount paid means the part of the nominal value that has been paid. This is the amount the company can call from shareholders. A shareholder's liability in a limited company is limited to this. Treat any unpaid premium separately.
Share premium: Premium = issue price − nominal value; Applies when shares are issued above nominal value. Shares cannot normally be issued below nominal value.
Company name rule: Name = distinctive words + required ending showing company type; The name must not be identical or too similar to a registered name, offensive, or misleading.
Passing off: Misrepresentation + goodwill + damage to the claimant; The claimant must show all three elements to succeed.

Quick revision

A company is a separate legal person from its members once incorporated.
Members of a limited company are liable only up to the amount unpaid on their shares or their guarantee.
The veil is lifted only in limited cases, such as fraud or sham use of the company, not simply because a company is small.
A promoter acts to set up a company and owes it duties, including not making secret profits.
A company cannot ratify a contract made before it existed.
Under a pre-incorporation contract, the person who signed for the company is usually personally liable.
The articles set out internal rules of management and the rights of members.
A company's capacity is the power to act at all; authority is whether a particular person can bind it.
Third parties acting in good faith are generally protected against limits in the constitution.
A public company can offer shares to the public; a private company generally cannot.
Share capital has a nominal value, and shares cannot normally be issued at a discount.
A company name must not be identical or misleadingly similar to an existing one and must show its limited status.

Common mistakes

Saying a shareholder owns the company's assets. Fix: Shares are the member's property. Assets belong to the company. A member has no insurable interest in them merely as a shareholder.
Treating a public company as the same as a listed company. Fix: A public company is allowed to offer shares to the public. Listing is a separate decision. Check what the question says.
Saying the veil is lifted whenever the outcome seems unfair. Fix: Remember that courts lift it only in exceptional cases. Adams v Cape shows they refuse to do so just for justice.
Treating a parent company as automatically liable for its subsidiary's debts. Fix: State that a group is a set of separate persons. Liability needs a sham, fraud or genuine agency.
Saying a company exists once the documents are signed or submitted. Fix: A company exists only from the date on the certificate of incorporation.
Treating a promoter as an agent or director of the company. Fix: A promoter acts before the company exists and is a fiduciary. A director manages an existing company. One person may hold both roles at different times.
Saying the company can ratify the contract after incorporation. Fix: Remember ratification needs a principal in existence when the contract was made. A company not yet formed has none.
Saying nobody is liable because the company does not exist. Fix: Always move on to the person who signed. They are usually personally liable.
Saying the memorandum contains the rules for running the company. Fix: Remember that the articles hold the internal rules. The modern memorandum is only a short founders' statement.
Saying alteration needs unanimous consent. Fix: State that a special resolution of at least 75% is enough, subject to good faith and other protections.

Exam tips

Learn the one-line facts of Salomon: valid incorporation, separate person, secured creditor paid first. Use them in a six-mark scenario.
In objective questions, watch for traps that swap company and member, such as who owns assets or who is liable.
Write the liability of each company type in one sentence each. Questions often ask you to match type to liability.
Use the legal system named in the question for public company rules. Do not import detail from another country.
In a written answer, follow rule, application, conclusion. Name the parties and the company in your application.
Begin every written answer with the Salomon rule in one sentence. It earns a mark and frames the analysis.
In multi-task questions, name the case and give the one-line reason it applies. A bare case name rarely scores.
Spot the trigger words: fraud, sham, evade, façade, agency, group. Each points to a different branch.