ACCA F4 - Corp and Business Law (ENG)

196 13: Company formation  Part D The formation and constitution of business organisations

Study guide

Intellectual level

D The formation and constitution of business organisations^

4 The formation and constitution of a company

(a) Explain the role and duties of company promoters, and the breach of those

duties and remedies available to the company

2

(b) Explain the meaning of, and the rules relating to, pre-incorporation contracts 2

(c) Describe the procedure for registering companies, both public and private 1

(d) Describe the statutory books, records and returns that companies must

keep or make

1

Exam guide

Questions could be set on the procedures that need to be followed in order to set up a private or public

limited company. You may also be tested on the potential liability of a promoter.

1 Promoters and pre-incorporation contracts

A promoter forms a company. They must act with reasonable skill and care, and if shares are to be

allotted they are the agent of the prospective shareholders, with an agent's fiduciary duties.

A company cannot form itself. The person who forms it is called a 'promoter'. A promoter is an example

of an agent.

A promoter is one who undertakes to form a company with reference to a given project and to set it going

and who takes the necessary steps to accomplish that purpose.

In addition to the person who takes the procedural steps to get a company incorporated, the term

'promoter' includes anyone who makes business preparations for the company. However a person who

acts merely in a professional capacity in company formation, such as a solicitor or an accountant, is not

on that account a promoter.

1.1 Duties of promoters

Promoters have a general duty to exercise reasonable skill and care.

If the promoter is to be the owner of the company there is no conflict of interest and it does not matter if

the promoter obtains some advantage from this position, for example, by selling their existing business to

the company for 100% of its shares.

If, however, some or all the shares of the company when formed are to be allotted to other people, the

promoter acts as their agent. This means they have the customary duties of an agent and the following

fiduciary duties.

(a) A promoter must account for any benefits obtained through acting as a promoter.

(b) Promoters must not put themselves in a position where their own interests conflict with those of

the company.

(c) A promoter must provide full information on their transactions and account for all monies arising

from them. The promoter must therefore make proper disclosure of any personal advantage to

existing and prospective company members or to an independent board of directors.

Key term

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