Regulations for Members as Subscribers in a Company and Classification of Companies having Business Formation UK as Parent and Subsidiary Companies

26 Oct

An integral part of the business formation UK are the members that may also hold the shares of the company and may contribute in the finance required for the establishment of a new company formation UK. This article states the laws given by Companies Act 1985 for the members of companies. In contrast to this, the rulings given by the latest version of Companies Act 2006 about the members and parent and subsidiary companies are also mentioned in the article.

Members as Subscribers

A company cannot be incorporated without the inclusion of members. Members are those persons who are the subscribers to the memorandum at the time of registration of a company. As mentioned in Section 22 of Companies Act 1985, all the persons who subscribe to the memorandum are assumed to have given their consent for the membership of the company and after the registration of the company, their names are written in the record of members by the registrar. As a consequence, anyone who gives his/her consent for holding the membership and his/her name gets registered in the records as a member, he/she will be considered as a member of the company, once the company starts running.

Role of Subscribers in the Validation of Memorandum

Subscribers play an important role at the time of incorporation of a company. In fact, Section 2(6) of Companies Act 1985 states that the memorandum should be signed by every subscriber and there should be at least one person who witnesses the signature of each subscriber.

Liability of Members

Section 1 of Companies Act 1985 explains different modes of forming a company. These may be defined as public, private, limited or unlimited. In case of limited, the members are given a limited liability. Liability may be limited either in the form of guarantee or in the form of shares. In case of unlimited companies, the liabilities of members are unlimited.

Shares of Members in Companies

In Companies Act 1985 Section 2(5), it is mentioned that the minimum number of shares that a subscriber should own to become a member is one. Moreover, it should be mentioned in the memorandum against the name of each subscriber the number of shares that each subscriber holds in the company to be incorporated.

Parent Company as a Member

There is another form of Great Britain company register that may involve more than one corporate bodies in the form of collaboration. The business that are large scaled may work in the form of corporate groups. Such groups may include large sized companies holding shares in subsidiary companies. These companies are known as Parent and Subsidiary companies.

Definition of Parent Company in Companies Act 2006 

According to Companies Act 2006 which is also the most advanced form of Companies Acts, under the Section 1159, a company may be defined as a parent company if:

  • A major portion of the rights of voting of the subsidiary company are bestowed to the parent company.
  • The parent company being a member of the subsidiary company has the right to make removal or appointment of the major number of directors in the board.
  • The parent company, again being a member, with the consent of the rest of the members of subsidiary company, controls the voting rights of that company.
  • If a company is parent to any company that is parent to a third company, the third company will be considered as the subsidiary of the first company.

Companies Act 1985 about the Membership of Parent Company 

Section 23 of Companies Act 1985 outlines a number of rulings governing the conduct of Parent Company and Subsidiary Company:

  • No company that is already a subsidiary company to a parent company, can own the shares or hold the membership of its parent company. Moreover, the transfer of shares or any kind of allotment to the subsidiary by the parent company is not allowed, in fact, it will be considered as invalid. However, any exceptions may be given under this section.
  • An exception to the above mentioned rule will be a subsidiary company that only acts as a personal agent of the holding company. Or if it acts as a trustee to the parent company. However, the above mentioned rule remains applicable on a trustee subsidiary company if either a parent company or any of its subsidiary companies has some beneficial interest under the trust.
  • When the amount of interest on any parent or subsidiary company is to be determined, the following forms of interest should be ignored:
  • Any interest that may be applied as a security on routine business dealings of the parent or subsidiary company. This may include the debts of a company.
  • Any interest that has the nature of the interest specified by the 1st part of 2nd Schedule.
  • Another situation where the prohibition of the first statement of this section is inapplicable is where the subordinate company holds shares in the parent company in routine business matters as a mediator. As stated by subsection 3, the mediator may be someone who:
  • Runs a business that is authentic and related to securities’ dealing.
  • Holds the membership of EEA exchange. Provided that all the requirements for dealing in securities as mentioned by the exchange are fulfilled by the mediator. Alternatively, the person may get approval or supervision for the dealing in securities per the rulings provided by an EEA state.
  • Also, it is must that the person who intends to be the mediator does not have any excluded business on his responsibility.
  • As far as the elaboration of excluded business is concerned, it is mentioned in this section as well under subsection 3(A). The following businesses fall under the category of excluded business:
  • Businesses whose major concern is the making or management of investments.
  • Businesses whose major concern is to provide those persons with services who are related to the person running any such business.
  • Businesses related to insurance matters.
  • Businesses that either act as trustees or manage as trustees for the purpose of a pension programme. Also, it may include businesses that are run by any pension programme’s manager or trustee, again related to the aim of pension programme.
  • Businesses that involve the operation or action as trustees for the programme of investing collectively. Businesses that are run by operators or trustees of any such scheme are also included in it.

Some additional rulings are provided for subsection 3 and 3(A) under the subsection 3(B):

  • The provisions given under Section 839 by Income and Corporation Taxes Act 1986 may be used to determine whether there is any connection between a regular person and the one who runs the business.
  • Any business may be considered as collective investment scheme if it fulfils the definition as presented by Section 75 in Financial Services Act 1986.
  • A market that is listed by EEA state under the 16th provision of Council Directive 93/22/EEC, which is related to services for investment in the field of securities, is considered as EEA exchange.
  • The definition of insurance business is given in the 1st section of Insurance Companies Act 1982.
  • The list of investments given by 7th, 8th and 9th paragraphs of Financial Services Act’s Schedule 1, defines the securities. Paragraph 11 of the same Schedule, provides relevant data regarding the definition of securities.
  • Section 75(8) of the Financial Services Act 1986, gives the interpretation of an operator and a trustee in a scheme of collective investment.

Subsection 3(C) of Section 23 of Companies Act 1985 provides that in situations where:

  • A subsidiary that is also dealing in securities takes purportedly the ownership of shares in its parent company violating the prohibition given by the first statement of this section or
  • Any person unknown to the prohibition has assented to acquire from the subsidiary the shares of the parent company, or the person has acquired the shares from anyone who has purportedly gained the shares from a subsidiary

The transfer of ownership of shares as defined by (a) will remain as effective for that person as it would have been if the shares were transferred to the subsidiary without contravening the prohibition.

  • Any corporate structure that acquires ownership of shares in any company prior 1st of July, 1948 or on or after that date but prior 20th of October 1997, in situations where the under consideration section, as was effective at that time, was inapplicable.
  • However, from 20th of October 1997and the prohibition of subsection (1) is applicable, the member will not be given the right to vote at company’s meetings on the shares whose acquisition falls under the prohibition. However, the member will be allowed to continue working as a member in the company.
  • The same rule applies even if the prohibition given by subsection (1) is not applicable on the acquisition of shares, but the acquisition falls under the prohibition subsequently.
  • A member that has contravened the prohibition of subsection (1) but is allowed to continue as a member, may get allotted shares that are paid fully via capitalisation of reserves lawfully. However, as long as the prohibition remains valid on the shares, the member will not be allowed to vote upon the allotted shares as well.
  • The rulings of this section are applicable on the representative of subsidiary in the same manner as they are applicable on the subsidiary itself.
  • Any references made in this section regarding any company excluding the company having limited shares, will be considered as references made to any form of interests of the members of that company.

Minimum number of Members required for Forming a Company

According to Section 24 of Companies Act 1985, when a company that does not have the form of a private company offering limited shares or guarantee to its members, runs its routine business for more than six months and includes just one member, any person who runs the business after the first 6 months will be considered:

  • As a member of that company.
  • As known to the fact the company is being run with only one member.

The member will be liable to paying the debts of the company that may be contracted for any duration after the six months pass. Hence, formerly the Great Britain company register could be done via one member for public companies, but for private limited companies, the minimum number of members was two.

Single member Private Companies 

As mentioned above, the rule of single member companies was not applicable on a private limited company. However, it was only in 1992 that the private companies were allowed to get formed with a single member. In fact, Companies Act 2006 provides special rulings under different sections to govern the conduct of single member private companies. A proper guidance may be given for how to setup a private limited company UK with single member via Companies Act 2006 as well as via the provisions of Single Member Private Limited Companies Regulations 1992. For instance, section 357 of Companies Act 2006 demands for a written record of the verdicts and decisions made by such companies. Moreover, recently in 2011 an announcement was made by BIS that a new type of corporate structure having single member was under consideration.

Concluding the discussion, the members play a key role in the growth of new company formation UK. Harmony between the members keeps the environment of the company positive and productive.

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