The Trials of a Local Free Paper Business

Introduction

James, is a business graduate, who started his business of local free paper 10 years ago. Advertising met the producing and delivering costs.After a year of owning the business for alone, he bought a pvt. ltd. company which was available as a stock item and not specially designed according to his trade requirements. He sold his trade to the company for thousand pounds. Shelf companies have advantages of their own. But, James purchased the company “off the shelf”. This kind of companies only has the sole purpose of selling registered with the Registrar of a company.

James is the sole shareholder and the sole director of the company. The company was a success who purchased their own premises six years ago. They bought the property with the assistance of a loan they took of 200,000 pounds from none other than James. James, took a fixed charge of the premises as his security against the loan he granted to the company. But in the past year, the business went downhill due to the economy suffering a big failure by losing many of its advertisers, suppliers, clients, investors and staffs which made the company suffer a lot.

Over that, a paper supplier, who was owed 60,000 pounds filed a liquidation against the company to be wound up two months ago.

Analyzing the current situation, the court made an emergency order of liquidating the company as soon as possible. The compulsory order made by the court was due to the amount of loss they suffered. And there was no chance of recovery noticed by the court. Henceforth, the court made a compulsory winding up order and also appointed a liquidator immediately.

As the economic market is on a downhill the value of the property of the company has also gone down with its premises priced at 180,000 pounds (bought it at 200,000 pounds), and including other assets 40,000 pounds more totaled at 220,000 pounds. Whereas, the total amount of debt to be cleared by the company is 300,000 pounds.

1. Cfsformations.com. 2021. UK & Offshore Company Formation Agent | Award Winning | CFS Formations. [online] Available at:< https://www.cfsformations.com/> [Accessed 9 March 2021].
2. “Simple Formations” Start Your New Company - Simple Formations accessed March 9, 2021

a) Purchasing an off the shelf company means that purchasing a company which is already registered at the Companies House, which is a private limited company, but it has never been used for trade, but is ready to be utilized immediately.

Since off the shelf companies are readily available and are not custom-made according to the requirements of the company it is easy to be used for any kind of trade but also faces, sudden losses due to the lack of security and customization and proper vigilance of the owner as we saw in the aforesaid example. The word “off the shelf” itself means that readily available for sale.

All these instances might mislead the one reading the report as in whether these companies are legal? But they are legal and do have purposes that are legitimate. To appear as an established, well-grounded business they might use shelf corporations as in certain matters.

Defrauding other businesses or trade, institutions, lenders, investors is also a part of these shelf companies, in simple words conning other institutions due to which they ultimately face huge losses as seen in the “James scenario”.

James owned a limited company because that is possible to own a limited company as all it requires is a single member one director that is enough to own a private limited company. James saw the possibility of owning and running a company on his own. During or after incorporation there is no limit to the maximum number of members to be appointed in the company.

Buying a ready-made company can only be considered when time is in a big crisis. The company formation agents will be taking care of the procedure of the purchase of the ready-made company.

Advantages that James considered before buying an off-the-shelf company-

As there are negatives to these kind of companies, there are positives too these companies that owners generally look for.

1. Jones, L. Introduc'on to Business Law (2019), 5th Edi'on, Oxford University Press
2. Plummer Parsons Chartered Accountants, “Companies House - forms you need to know about” June 11, 2014 < https://www.plummer-parsons.co.uk/business-services/company-secretarial/companies-house-forms-you-need-know-about> accessed March 9, 2021

Impressions of longevity is seen in an off-the-shelf company which attracts the banks and investors to grant loans. As these companies are already set-up and are old and experienced, hence they appear more trustworthy.

Why do you think the companies celebrate their anniversaries publicly, that gives the customers assurance and hence look more reliable. These factors attract the banks and investors. Building confidence in clients is the main factor that is looked upon in case of off the shelf companies and it fits the bill perfectly. Also changing names is not a big deal in case of off-the-shelf companies.

The Memorandum of Association: a short document confirming the subscribers' intention to form the company and to become members of that company on incorporation.

The Articles of Association: the company's principal constitutional document. It should contain detailed administrative provisions of the company's operations agreed by its members. It sets out how decisions are taken by the members and directors, as well as various matters connected with the shares, general meetings of the members, appointment and powers of directors, board resolutions and notices, helping to ensure that the company's business runs as smoothly and efficiently as possible. A company can either adopt a form of Model Articles defined by Statute or adopt their own Bespoke Articles.

UK limited companies are generally very simple to set-up as the UK government have tried to remove the bureaucratic barriers that can exist in some countries that put potential entrepreneurs off of starting a new enterprise.

The very minimum requirements are -

There must be at least one director appointed.

All directors must be at least 16 years old.

1. Paramount Company Formations, “Vintage Companies” < https://www.paramountformations.com/blog/vintage companies> accessed March 9, 2021
2. AABRSNovember 27, 2020 “Insolvency Practitioners and Company Rescue Experts: London” https://www.aabrs.com/ accessed March 9, 2021
3. Supra 3

There must be at least one natural person appointed as a director (Not solely other companies acting as corporate directors)

The company must have a registered office address in the UK. For companies registered in Scotland the address must be in Scotland, for Northern Ireland the address must be in Northern Ireland and likewise for companies registered in England or Wales the registered address must be in England or Wales. Companies registered in Wales can have an English registered address as can English companies have a Welsh registered address.

The chosen company name must not be exactly identical, or too similar, to any other company name currently held on the register at Companies House.

The company must issue a minimum of one share at the time of incorporation.

Other points worth remembering -

Company Secretary is an optional position for private limited companies. You can appoint one if you feel it will assist in administering your company.

The director, secretary and shareholders do not have to be based in the UK. Virtually anyone can own and manage a UK limited company but there must always be one real person who is at least 16 years of age appointed.

The address for directors must not be a PO Box. Certain countries use PO Boxes as standard, in which case a street name must also be supplied.

Corporate bodies can act as director, secretary and shareholder but there must still be another director who is a natural person. Using corporate entities as directors and shareholders can make opening a bank account more difficult in some circumstances.

A company can be set up with one natural person as the director who also holds the shares and can use their home address as the business and registered address. You just need to keep in mind that Companies House make your home address publicly available on their website if you use it as the registered address and directors service address. This can be avoided by purchasing an address service from us on an annual basis.

Your private limited company must have a physical address in the UK. This is where official communications will be sent, such as correspondence from Companies House and HM Revenue and Customs.

This address will be publicly available on the online register and will be the location where the public is able to inspect the statutory registers of the company, unless the company adopts a single alternative inspection location (SAIL).

b) Since, it’s in the hands of the liquidators according to law in the UK, the Creditors should get the debt cleared first during a liquidation of a company. It has been clearly established in the Insolvency act, 1986 according to the laws in the concerned country. In one of insolvency procedures such as creditors voluntary liquidation (CVL), a liquidator can be appointed such as in James’s case the paper supplier claimed his share of investment as a creditor. These kinds of emergencies liquidation decision are taken when the company in debt is not being able to pay its investors. The CVL process involves calling meetings of shareholders and creditors to pass the appropriate resolutions and to appoint a liquidator who is licensed. The liquidator is appointed to close the company in a professional manner, making sure a fair distribution of the company’s assets takes place amongst creditors. Neither the Court or the official investors are involved in a CVL procedure by the liquidators

In Members Voluntary Liquidation (MVL) also involves the liquidators who are appointed by the court. Where the company is able to pay all of its creditors in full this is where the company is solvent. The decision to go down the MVL route for tax purposes or to restructure the companies are taken by the directors frequently. The appropriate resolutions must be passed at a general meeting to wind up the company and appoint a liquidator in this scenario.

An official receiver is typically appointed when a company is forced into liquidation by irate creditors and a winding up order is issued by the Court in contrast. In this situation it is to investigate the reasons behind the company’s failure and to deal with its assets and liabilities is the role of the liquidator appointed by the legal authority.

1. Ronde Ede, December 23, 2020 “UK Corporate Governance And Narrative Reporting: Key Developments Checklist Corporate/Commercial Law - UK” (Welcome to Mondaq)) < https://www.mondaq.com/uk/shareholders/1018806/uk-corporate-governance-and-narrative-reporting-key-developments-checklist> accessed March 9, 2021
2. Ibid
3. Ibid

A . Contract or Lease can it be disclaimed by a liquidator?

The liquidator’s main duty is to realise the assets and property of the company and use the proceeds to pay off the company’s debts and liabilities, when an insolvent company goes into liquidation. That said, one of the liquidator’s key powers is the Right to disclaim “onerous property” put simply, this means that any contract that is unprofitable or company property that is unsaleable or produces liabilities can be disclaimed by the liquidator. A commercial lease is typically “onerous” as there’s a liability to pay rent and other sums to maintain the property for instance.

Final Statement of Account of a liquidator what should it be?

Which shows how much he or she realised for assets and property and how that amount was redistributed, during every liquidation process, the liquidator must prepare a final statement of account. The final statement of account shows receipts and payment of cash. In line with legislation, payments are made to creditors following the official hierarchy of repayment.

Any person with significant control must be registered on incorporation. The purpose of this is to improve corporate trust and transparency by making it clear who ultimately owns and controls UK companies. This is intended to improve corporate behaviour, deter money laundering and help sanction those who those seeking to hide their ownership or control for facilitating illegal activities.

A person with significant control is an individual (person or registerable legal entity) who meets one or more conditions relating to share ownership, voting rights, appointment of directors, or rights to exercise or exercises control of the company.

Vacating an office by the liquidator, when is it done?

Once the company’s affairs are fully wound up, the liquidator will give notice to the company’s directors, creditors, and the Court. At this time, creditors have the right to request further information from the liquidator, challenge his or her fees and expenses or even object to his or her release from office. However, this must be done in writing up to eight weeks after the liquidator has given notice, according to protocol.

Stating that no creditor has objected to his or her release, will be released and vacate office. If everything is fully wound up and in order, the liquidator, once he or she has delivered the final statement of account to Companies House and given notice to the Court.

c) After the liquidator was appointed by the court, James was diverting money from customers account to his account which was discovered by the liquidator appointed by the court after the liquidation was filed by one of the unsecured creditors who was a supplier of the papers, who was owed by the company an amount of 60,000 pounds. Since, James was business-graduate more responsible decisions were expected out of him. And Yes, obviously, he was breaching his duties towards his customers by committing a breach of trust towards the company.

Since, the liquidator has been appointed to claim the debt money the amount of money that James transferred from customers account, the liquidator can claim that amount of money and equalize that amount of money with the assets that has been collected from the liquidation of the company. Being a business graduate, he should have had better knowledge about the duties of a trader.

1. Companies House - forms you need to know about June 11, 2014) https://www.plummer-parsons.co.uk/business-services/company-secretarial/companies-house-forms-you-need-know-about accessed March 9, 2021

Liquidation process shall be carried out correctly because number of issue might come up even though the process is straight forward, to make the process of liquidation easier as a company owner, investor, creditor, supplier, trader, the following process shall be followed.

A liquidator while appointed by the court is fully entrusted with his liquidation duties, which includes selling the company’s assets and settling debts keeping in mind the interest of all the investors.

The liquidator interviews the directors and reports on the reasons for the liquidation, companies claim made by the investors are all settled, the authorities are informed deadlines for paper work are met on time and the control of the business is taken in hands fully by the liquidator.

The liquidator also has the duty of dissolving the company completely and also remove its name from company’s house public register.

When a liquidator is appointed by the court it marks the end of the company, all its proceeds and assets are sold and settled which marks the companies closer. But after the company closure the shareholders and directors return is generally very small in amount.

BIBLIOGRAPHY

Book

Jones, L. Introduc'on to Business Law (2019), 5th Edi'on, Oxford University Press

Internet Sources

Cfsformations.com. 2021. UK & Offshore Company Formation Agent | Award Winning | CFS Formations. [online] Available at:< https://www.cfsformations.com/> [Accessed 9 March 2021].

“Simple Formations” Start Your New Company - Simple Formations accessed March 9, 2021

Plummer Parsons Chartered Accountants, “Companies House - forms you need to know about” June 11, 2014< https://www.plummer-parsons.co.uk/business-services/company-secretarial/companies-house-forms-you-need-know-about> accessed March 9, 2021

Paramount Company Formations, “Vintage Companies” < https://www.paramountformations.com/blog/vintage companies> accessed March 9, 2021

AABRSNovember 27, 2020 “Insolvency Practitioners and Company Rescue Experts: London” https://www.aabrs.com/ accessed March 9, 2021

Ronde Ede, December 23, 2020 “UK Corporate Governance And Narrative Reporting: Key Developments Checklist Corporate/Commercial Law - UK” (Welcome to Mondaq)) < https://www.mondaq.com/uk/shareholders/1018806/uk-corporate-governance-and-narrative-reporting-key-developments-checklist> accessed March 9, 2021

Companies House - forms you need to know about June 11, 2014) https://www.plummer-parsons.co.uk/business-services/company-secretarial/companies-house-forms-you-need-know-about accessed March 9, 2021

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