Explain what is meant by purchasing a company ‘off the shelf.’
What steps would James have had to take if he wished to form a new company by registration?
Purchasing off the shelf company refers to the process of buying a readymade limited company. Off the shelf, the company is a preregistered limited company at Companies House but has never traded and is ready to be used immediately (Direct, 2020). These companies are ready for sale to individuals who want to set up a new company quickly. If James wanted to start a new company by registration, these are the steps he could have taken.
Deciding on the structure of the company. James must decide whether he wants the company to be a limited company or not. A private company protects the shareholders from the liabilities of the business while giving the legal rights of an individual. James may also opt to register a private limited shares company (“Set up a limited company: step by step – GOV.UK”, 2020). A private limited company will bring efficiency in managing tax where he will be able to draw his income from the company dividends resulting in paying less in income tax. operating as a private limited company will also enhance limited liability where his assets will not be at any risk of being liquidated when a company gets into trouble.
After decidingdeciding on the type of business he wants to come up with, James should come up with a good company name. James should check the rules for setting a company name. He should then proceed to choose the name of the company while counterchecking the list of established companies to avoid coming up with a name that is already available. The process of coming up with a good name is not simple. It involves researching the market he wishes to operate in, the names of Competitors Company, which should inspire him to come up with his own name. Choosing a short, punchy company name is advantageous since it’s the first thing that people learn about your company (“Set up a limited company: step by step – GOV.UK,” 2020). The proposed company name must gain approval from the Companies House.
James needs to gather all the details that he will use to register the company. These include coming up with a company name, having a UK registered office address, details of share capital created, company director and secretary details who can be one of the shareholders, James must also come up with details which can be used for the identification of each shareholder, and details of persons with significant control (“Company formation checklist- the information you need”, 2020).
James needs to prepare a memorandum and articles of association, which will essentially become the constitution of the company. The constitution will define how the company will be run by the director on behalf of the shareholders. James can adopt a private company model or bespoke articles, which requires legal consultation. The Companies House requires that an agreement by the shareholders to start a company and the standard clause to be filed during the registration.
James will then proceed to file all the above with the Companies House for approval. James has three options which call for different charges that are online filing which uses a dedicated software web incorporation by use of Companies House online portal and paper filling the IN01 form which he will send to the Companies House accompanied by supporting documents (“How To Register A UK Company | 7 Simple Steps”, 2020).
The next step that James will take is waiting for the approval of his company by the Companies House, who will check the submitted documents. James cannot be able to operate a limited company without approval. The online filling is faster as compared to the use of paper forms (“How To Register A UK Company | 7 Simple Steps”, 2020).
Once the company is approved, James can proceed to start business operations. This may involve convening the first board meeting. Convening a meeting is important as it sets the tone for the company. It’s a law requires that the company should keep a record of the register of directors, their residential addresses, secretaries, shareholders PSC, and allocation of shares details (share transfer) and list of mortgages and charges (“Set up a limited company: step by step – GOV.UK,” 2020). Holding the first meeting of directors is important as they will authorize the issuing of certificates for shareholders in the company on top of the already established membership register. James should also consider creating a bank account, registering with HMRC, setting employees PAYE, creating a website, and a trademark for the company that the customers will identify the company with.
By diverting cash payments from customers in the last few months of trading into his personal account as repayment for the money he had loaned to the company, James breached his duty to the company. James breached his duty to the company by keeping the company running at the expense of the creditors. James’ act of diverting money was fraudulent as he acted dishonestly by ordinary standards, and he recognized it. According to the Insolvency Act section 213, any person who knowingly carries any activity in a business or company with the intent of defrauding creditors can be sued from committing fraudulent trading. The fact that James was diverting customers’ money into his personal account means he was aware of what was happening to the company, but he decided to pay himself instead of the creditors, which were illegal. As a director,’ James has a duty to put the interests of the creditors first when insolvency strikes. He also have a duty to limit creditors exposure to more debts which means that he ought to have stopped trading after realizing that insolvency was inevitable. Continuous trading by James at the expense of the creditor’s maybe termed as wrongful trading. According to section 214 and section 246ZB of the insolvency Act of 1986, a director has a duty to take a step that a probable man would take to minimise potential loss to the creditors of the company once they realize that the company is unable to avoid insolvent liquidation. The fact that James continued to trade, accepting supplier’s credit prior to liquidation with the knowledge that the financial condition of the company could not pay the suppliers, can be termed as fraudulent trading.
After scrutinizing the activities of the company, the liquidator came to the realization that James, who was the sole director of the company, had breached his duties to the company. The liquidator has a role in recovering the assets of the company, and thus he or she may seek a legal remedy. Section 213 of the insolvency act declares any activity that is carried out by a company to defraud the creditors for any fraudulent purpose the court may declare that the people involved as liable to make contributions to the company’s asset as long as they knowingly carried out those activities. Fraudulent trading liability also arises under section 993 of the CA 2006.
However, following Morris and Bank of India, the liquidator is required by the court to show knowledge was concurrent with the alleged act. The liquidator must be able to prove that James was the director of the company and that he knew that insolvent liquidation was inevitable. The liquidator may not be willing to take the claims under section 213 and 214 of 1986, and he or she may opt to use a third party. This was made possible by the establishment of the small business, enterprise, and employment act of 2015, which introduced section 246ZD IA1986 that permits liquidators to assign the claims to a third party. If the liquidator decides not to bring James’ case before the court and give it to the third party, they will be able to get some money for the benefits of the creditors.
If the liquidator’s claim is successful, James will contribute to the assets of the insolvent company since he did not take any step to minimize the loss of creditors after learning that the insolvency of the company was inevitable. James ought to have stopped the company from working to remove the threat of personal liability. James is faced with the danger of criminal and civil liability, which can lead to his disqualification as a director for up to fifteen years.
References
Direct, F. (2020). Off The Shelf Companies, Ready Made Companies, Off The Shelf Limited Companies. Formationsdirect.com. Retrieved 17 May 2020, from https://www.formationsdirect.com/offtheshelfcompanies.
Set up a limited company: step by step – GOV.UK. Gov.uk. (2020). Retrieved 17 May 2020, from https://www.gov.uk/set-up-limited-company.
Company formation checklist- the information you need. Inform Direct. (2020). Retrieved 17 May 2020, from https://www.informdirect.co.uk/company-formation/company-formation-checklist/.
How To Register A UK Company | 7 Simple Steps. The Formations Company. (2020). Retrieved 17 May 2020, from https://www.theformationscompany.com/register-a-company-uk.