Separate Legal Personality of a UK Company Incorporation with Reference to Case Study of Salomon v A Salomon & Co Ltd


04 Jan

When companies house register new company the main target of a newly established company is to generate revenue. The revenue plays a role in its fast company formation UK. The profit gained by the company describes the success of that company and it can be termed as best company formation UK. A company may distribute its assets or profits amongst its members. However, Companies Act 1985 outlines certain rules and regulations for the governance of such distribution. These rules are stated in Section 263-269 of Companies Act 1985. This article discusses the rulings mentioned in these sections regarding the limitations on a company to utilise its power of distribution.

Prohibition on certain Distributions

Section 263 of Companies Act 1985 states that:

  • A company is not allowed to make a distribution of anything other than the profits that have been kept for this purpose.
  • This part refers the word “distribution” to every type of distribution of the property of company to the members in the form of cash or any other form, except these:
  • The shares that are issued as partially or fully paid shares of bonus.
  • When the shares belonging to the company have to be purchased or redeemed out of capital, with any freshly issued shares’ proceeds included or out of profits that have not been realised according to ch:7 of part 5.
  • When the share capital is minimised by annihilation or reduction of liability of any member towards the company in relation to any shares upon which the amount of share capital has not been paid or by paying off the share capital that has been paid up.
  • Dispensing the property to the members when the company is to be liquidated.
  • In relation to this part, the profits of a company that can be distributed are collective and realised as long as they have not been used for dispensing or capitalisation in the past, less its collective, losses that have been realised, as long as they are not written off in past as a reduction or the capital has been rearranged duly. The clauses regarding investment and other firms in the sections 265-266 are subjected to this rule.
  • A company is not allowed to pay any amount on the shares that have been issued but not paid for or any debenture, in the form of unrealised profits.
  • In cases where after every possible investigation, the directors fail to determine that whether any profit is realised or unrealised before the date of December 22nd 1980, it will be considered as a realised profit and if after every possible investigation the directors fail to know whether any loss is realised or unrealised then, it will be considered as unrealised.

Assets Distribution Limitations

Section 264 of Companies Act 1985 states that:

  • A company that is UK plc company formation is allowed to distribute in the following cases only:
  • When at the time of distribution, the total worth of all the assets is lesser than the aggregated value of the reserves that cannot be distributed and the share capital that has been demanded; and
  • When the distribution does not lessen the amount of the property to an extent that it becomes lesser than that aggregate.
  • The clauses regarding investment and other firms in the sections 265-266 are subjected to this rule.
  • The first provision of this section means by the “total assets” the aggregated assets of the company less the aggregated liabilities of company. “Liabilities” involves any clause relevant to charges or liabilities in Schedule 4’s paragraph 89.
  • The following may be deemed as the un-distributable reserves of a company:
  • The account of premium share
  • The reserve for redeemed capital
  • The sum regarding which the collective, unrealised profits of the company that have not been used in past for capitalising any description given by this paragraph, become greater than the collective unrealised losses that have not been written off as reduction or the duly rearrangement of the capital has been done. And
  • Any other type of reserve that is not permitted to the company for distribution under any enactment apart from this act or by the articles or memorandum of the company and the previous paragraph is applicable on every kind of description of capitalisation. However, any transfer made for the company’s profits to the reserve for redemption capital on or later than December 22nd 1980 is exempted from the description of capitalisation.
  • A company that is UK plc company formation is not permitted to have any share capital that has been called as a property in any accounts related to this section.

Distributions made by Investment Companies

Section 265 of Companies Act 1985 states that:

  • In relation to the clauses of this section, an investment company as per the section 266 (listed below), which is in the process of fast company formation UK is permitted to dispense any time its collective realised profits on revenue, provided they have not been used in past for capitalising or distributing, less its collective, loss on revenue either unrealised or realised, provided they have not been written off as a reduction or the rearrangement of the capital has been done duly, when:
  • At the time of distribution, the assets are minimum equal to 1.5 times of the aggregated liabilities of the company.
  • And when the distribution does not result in reduction of that amount of assets to less than 1.5 times of the aggregate.
  • “Liabilities” in this section refers to any clause regarding charges or liabilities as specified by section 89 of 4th schedule.
  • An investment company is not permitted to have any share capital that has been called as a property in any accounts related to this section.
  • Any distribution is not possible for investment company under first provision of this section unless:
  • The shares of such a company are mentioned in a well acknowledged exchange of investment and not on any overseas exchange of investment as specified by Financial Services Act of 1986.
  • And in the relevant duration it:
  • Has not made any distribution of any of its profit on capital, except by redeeming or purchasing any of the shares of the company according to section 162 or 160 of ch:7 of part 5 or
  • Has not used the profits that are unrealised or the profits on capital either realised or unrealised, for paying up for any amount that has not been paid on issued shares or for debentures.
  • Relevant duration in previous provision means:
  • It begins with accounting reference duration’s 1st day immediately coming before the duration in which the distribution has to be done.
  • Or in cases where the distribution has to be done in 1st accounting term of the company, it will begin from the 1st day of that duration.
  • It will end on the date of distribution.
  • An investment company is not permitted to dispense under the 1st provision of this section as long as the company has not submitted to the companies’ registrar, the preconditioned notice under section 266(1) mentioning the intention of the company for running the business in the form of an investment company.
  • Prior the commencement of the relevant duration as in the above mentioned in the 4th clause of this section.
  • Or if the company has been incorporated on or later than December 22nd 1980, then it should be submitted as soon as possible after the formation of company.

Defining an Investment Company

Section 266 of Companies Act 1985 states that:

  • The section 265 refers by “Investment Company” to a company that is public and has submitted a notice according to the required form which is still valid, to the companies’ registrar and the notice should specify the aim of the company to work as an investment company and since the date of giving notice the company should abide by the following requirements.
  • The requirements are:
  • The business involves investment of funds in securities majorly and with the goal of expanding risk of investment and providing the benefits gained by the administration of funds to the members of the company.
  • No holding of the company in other companies except for the time being holdings in investment companies, should represent by value more than 15% of the investment of investing company.
  • In relation to the provision 2A of this section, the company is not allowed to dispense its profits of capital by the articles or memorandum of the company.
  • The company should not keep more than 15% of the income that it has gained from securities, in relation to the accounting reference duration, except when complying with this part.
  • It is provision 2A stating that there is no need to bound via the articles or memorandum, an investment company from purchasing or redeeming its shares following the section 162 or 160 in ch:7 of part 5, from its profits on capital.
  • The notice given to the companies’ registrar can be made void by submitting another notice at any time that specifies that the company no longer wants to run its business as an investment company under this section, and after this notice is given the company will not remain an investment company anymore.
  • The provisions 1A- 3 of 842nd section of the Income and Corporation Taxes Act 1988 impose for the reason of second provision’s subpart 2 of this section in the same way as for that section’s subsection (1)(b) .

Extending Provisions of subsection 265 and 266 to different other Companies

Section 267 of Companies Act 1985 states that:

  • The State’s Secretary is authorised to extend the rulings of sections 265-266, after modification or without any change, to companies that mainly do business by an investment of funds in land, other property or securities for the goal of expanding risk of investment and providing the benefits gained by the administration of funds to the members of the company.
  • Rulings within this section:
  • May prepare varying provisions for different companies’ classes and may include supplemental or transitional provisions as may seem necessary to the State’s Secretary.
  • And should not be prepared as long as a draft of the instrument of statute including the provisions has not been presented to the Parliament and accepted via each House’s resolution.

Treating the Costs of Development

Section 269 of Companies Act 1985 states that:

  • When the costs of development are presented as a property in the account of company, the amount regarding these costs will be treated as:
  • A loss that has been realised, by virtue of section 263.
  • And as a loss of revenue that has been realised, by virtue of section 265.
  • It is not applicable on any sum that has been used for representation of any profit that is unrealised and made on revaluating those costs. Also it is inapplicable if:
  • There are special scenarios which justify the directors in taking decision that the amount specified there is not to be considered as requirement of 1st provision.
  • And the required note for the accounts as per schedule 4’s paragraph 20 or schedule 8’s paragraph 20, (purposes for presenting the costs of development on a property), mentions that such treatment is not to be given to the amount and elaborates the cases which are depended upon for justification of the director’s decision to that effect.
  • The omission of “or” has been done accidentally in second provision’s second part of this section.
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