ACCA Applied Skills · Corporate and Business Law (Global)
The Formation and Constitution of a Company for ACCA LW
This chapter covers how a company comes into existence and what governs it. You learn the types of company, separate legal personality, when courts lift the veil, promoters, pre-incorporation contracts, the articles, capacity and authority, share capital and names. Solve questions by identifying the rule first, then applying it to the facts.
What this chapter covers
This chapter explains how a company is created and what rules it lives by. You start with the idea that a company is a legal person, separate from its owners. Then you see the limits of that idea, how a company is formed, who sets it up, and what happens to contracts made before it exists.
You then move to the constitution, mainly the articles of association, and to the question of who can bind the company and when. The chapter ends with share capital basics and the rules on company names.
These ideas are the base for the rest of LW. Directors' duties, meetings, capital maintenance, insolvency and agency all assume you understand separate personality and the constitution. Questions in later chapters often quietly test points from this one. Keep to the general principles of the Global variant and do not rely on the section numbers of any one country's statute.
LW is a two-hour computer-based exam with 25 two-mark and 20 one-mark objective questions in Section A, plus five six-mark multi-task questions in Section B. Objective questions are marked all or nothing, so you need precise rules, not vague ideas. Formation topics suit short, clear-cut questions, such as whether a company is liable on a contract or whether a person is personally liable. They are also scenario-friendly, so a Section B task can combine several of them. Knowing this chapter well gives you reliable marks and makes later chapters easier.
The formation and constitution of a company: topics in the order to study them
- 1Types of Company and Legal PersonalityEverything else rests on the company being a separate legal person, so learn the types and this principle first.
- 2Lifting the Corporate VeilIt is the exception to separate personality, so it only makes sense straight after the rule.
- 3Company Formation and PromotersNext you see how a company is created and who acts for it before it exists.
- 4Pre-incorporation ContractsThese arise from the promoter's activity, so they follow naturally and test who is liable.
- 5Constitution: Articles of Association and Model ArticlesOnce the company exists you learn the document that sets its internal rules.
- 6Company Capacity, Authority and ContractsYou need the constitution first to judge what the company and its agents can validly do.
- 7Share Capital Basics and Company NamesThese are more self-contained rules, best learned last as a final layer once the structure is clear.
How to prepare The formation and constitution of a company
Aim to understand each rule, then drill it with questions. The chapter is full of who-is-liable decisions, so practise applying rules to facts.
- Read each topic once for understanding. Write the rule in one sentence in your own words.
- Build a one-page comparison of company types, noting liability of members and whether shares can be offered to the public.
- For veil lifting and pre-incorporation contracts, list the situations and the outcome for each. Practise saying who is liable and why.
- Learn the role of the articles and how they can be changed, then test yourself on who is bound by them.
- Practise objective questions after each topic. For every wrong answer, write down the exact condition you missed.
- Attempt multi-task scenarios that mix topics, such as a promoter signing a contract for a company not yet formed.
- Revise with a short list of rules two or three days before the exam, then again on the last day.
Common mistakes in The formation and constitution of a company
Assuming the veil is lifted whenever a company is controlled by one person.
Fix: Start with the default rule. Lift the veil only if the facts show fraud, sham or evasion of an existing obligation.
Saying the company is liable on a pre-incorporation contract.
Fix: Remember the company did not exist when the contract was made. The person who signed is usually liable, and the company is not bound unless it makes a new contract.
Mixing up capacity and authority.
Fix: Ask two separate questions: can the company do this at all, and did this person have power to act for it?
Treating the articles as a contract with outsiders.
Fix: Link the articles to the company and its members, and check separately what a third party can rely on.
Missing the exact condition in a question and picking the nearly right option.
Fix: Underline the key facts, name the rule, and eliminate options that break one of its conditions.
Last-day revision: The formation and constitution of a company
- 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.
The formation and constitution of a company practice questions
- Karim is the sole shareholder and director of Zenith Ltd. Zenith Ltd is properly run and has never been used for improper purposes. It enter…
- Marta transferred her only property, a warehouse, to a newly formed company, Orbit Ltd, solely to avoid an existing court order requiring he…
- Mira was previously the director of a company that went into insolvent liquidation. She is disqualified from acting as a director. She forms…
- Delmar Ltd's articles contain a provision allowing the directors to refuse to register any share transfer. The members now wish to amend the…
- Priya signs a contract to buy equipment, stating that she is acting 'on behalf of Zenith Ltd, a company to be formed'. Zenith Ltd is not yet…
- Marco signs a supply contract as 'agent for Bluefin Ltd, to be incorporated'. Bluefin Ltd is later incorporated and its directors write to t…
- Kestrel Co's constitution says the directors may not borrow more than 1 million dollars without shareholder approval. The directors, without…
- Lena signs a contract with a printer 'for and on behalf of Harbour Ltd', which is not yet incorporated. Under the rule in Kelner v Baxter, t…
The formation and constitution of a company in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
The formation and constitution of a company: frequently asked questions
How much of LW does this chapter cover?
ACCA does not publish a fixed share of marks for each chapter, so avoid guessing. Treat it as foundation material, since later topics rely on it. Expect it in both Section A and Section B.
Do I need to learn case names for this chapter?
Learn the principle behind each leading case, as questions test the rule applied to facts. A case name helps your memory, but the objective questions rarely depend on recalling it. Do not invent or guess names.
Should I learn statute section numbers?
The Global variant tests general principles, not one country's section numbers. Focus on the rules and their conditions. Use section numbers only if your study material gives them and you are sure of them.
How should I practise this chapter on a phone?
Use short objective questions in small sessions and keep a notes list of the rules you got wrong. Read the full scenario before choosing an answer. Do longer multi-task practice at a larger screen if you can.