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on if the profits are insufficient. See Re Gelly Deg Colliery Co., 33 L. T. 440 ; South Llanharran Co., 12 Ch. Div. 503. But such guarantees require to be very carefully framed. See Stuart's Trusts, 4 C. D. 213, where it was held that the guarantee amounted to a provision for payment of dividends out of capital, and accordingly that the members could not claim the benefit thereof as against the company's creditors. Sometimes the performance of the guarantee is secured by the investment of a fund in the names of trustees. A company can in some cases release a guarantee by a vendor. Sheffield Nickel Co. v. Unwin, 2 Q. B. D. 214. Where several businesses were sold to a company it was held that the discontinuance of one of them did not discharge the vendor from his guarantee. Brown & Co. v. Brown, 35 L. T. 54; 36 L. T. 272. Where there is a guarantee fund, it is sometimes provided that if the profits in any year amount to the guaranteed sum, a part of the fund shall be released. In the South Llanharran Co., ubi supra, it was provided that any monies paid under the guarantee should be repaid out of the surplus profits which in any subsequent year remained after payment of a 10 per cent. dividend for that year.
Where there is to be a guarantee fund, the following Form, or Form 6e., may be used in connection with the above :
The following are some other forms :—
The vendor guarantees and undertakes that the net profits of the Form 6a. company made during each of the three years next following the incorporation of the company shall amount to a sum (hereinafter referred to as the guaranteed sum), sufficient to enable the company to pay a dividend upon the capital for the time being paid up on the said 10,000 preference shares of the company, or such of the same as shall be issued, at the rate of 5 per cent. per annum, and that if the net profits of the company in any of the said three years shall not amount to the guaranteed sum, the vendor shall immediately after the deficiency shall have been ascertained and notice to pay the same given to him, pay to the company the amount thereof. The certificate in writing of the auditor or auditors for the time being of the company of the existence and amount of any such deficiency shall as against the vendor be conclusive evidence thereof: AND IT IS HEREBY DECLARED that the foregoing guarantee is given to the company as trustee for the holders of the said preference shares.
As a security for the performance of the guarantee aforesaid the Form 6b. vendor shall, at or before the time fixed for the completion of the purchase, pay to P. and Q. or such other persons as the company shall appoint the sum of [10,0007.] upon trust to invest the same in [consolidated 31. per cent. annuities], and to pay the dividends thereof to the vendor until some breach of the said guarantee shall have been committed; and, from and after the commission of such breach, upon trust to sell so much of the said annuities as shall be sufficient to make good the breach, and pay the proceeds of such sale to the company in trust for the holders of the said preference shares, and upon trust to hold the residue of the said annuities, and the dividends thenceforth to accrue
Form 6b. thereon upon trust, by sale or otherwise to make good any subsequent breach of the said guarantee, and subject as aforesaid to hold the same in trust for the vendor.
Sometimes part of the vendor's shares are made a security for the performance of the guarantee, thus:
As a security for the performance of the guarantee aforesaid, the residue of the 5,000 shares mentioned in Clause hereof, namely, 3,000 shall be allotted to — and or such other persons as shall be agreed on between the vendor and the company, and such shares shall be held by them upon trust to pay the dividends thereon, &c., [as in Form mutatis mutandis.] Any such sale may be made in such manner as the trustees shall think fit, and no sale made in purported execution of the aforesaid trust shall, as against a purchaser, be impeached on the ground of any irregularity therein or on any other ground whatever.
Sometimes no personal guarantee is given, but merely a fund, as in the following Form:
The residue of the said 5,000 shares mentioned in Clause namely, 3,000 shall be allotted to as a guarantee and security that the net profits, &c., and such shares shall be held by them upon trust to pay the dividends thereon to the vendor until it shall have been ascertained that there is a deficiency in such profits, and the vendor shall have failed to pay the amount thereof to the company after fourteen days' notice in writing from the company so to do, and then upon trust to sell so many of the said shares as shall be sufficient to make up the deficiency and to pay the proceeds thereof to the company in trust for the holders of the said preference shares, and to hold the residue of such shares and the dividends thenceforth to accrue thereon upon trust, by sale or otherwise to make good any subsequent deficiency which the vendor shall fail to make good within fourteen days after a like notice, and subject as aforesaid in trust for the vendor : PROVIDED ALWAYS that nothing herein contained shall be deemed to be an agreement by the vendor to make good or pay any such deficiency except in manner aforesaid.
AGREEMENT FOR SALE upon conversion of BUSINESS into a PRIVATE
AN AGREEMENT made the
day of between A. B. and Parties. C., all of (hereinafter called the vendors) of the one part, and A. B. and Co., Limited (hereinafter called the company), of the other part. WHEREAS the vendors are the joint proprietors of a business for the Recitals. manufacture of now carried on by them at, in partnership under the style of A. B. and Co.: AND WHEREAS the nominal capital of the company is 16,0007., divided into 1,600 shares of 107. each: AND WHEREAS the vendors have by the memorandum of association of the company agreed to take 1,580 of such shares in manner following, namely, the said A. 790, and the said B. and C. each 395, of such shares :
NOW THEREFORE IT IS AGREED as follows :-
1. The vendors shall sell and the company shall purchase: First, the Sale. leasehold hereditaments specified in the schedule hereto, upon which the said business is now carried on, and the goodwill of the said business; Secondly, the monies, bills, notes, and other negotiable instruments and securities for money, and the book and other debts and things in action of the said partnership, and the full benefit of all contracts to which the vendors are entitled in relation to the said business; and, Thirdly, the plant, machinery, furniture, stock-in-trade, books and effects of the said partnership in or about the said leasehold hereditaments.
In many cases the agreement refers to a schedule. See Form 5. And not uncommonly it contains general words-e.g., "all the property of the vendors in connection with the said business, and in particular, &c.;" or, after specifying certain items, " and all other the property of the vendors in connection with the said business." Sometimes part of the property is excluded-e.g., money.
2. As part of the consideration for the said sale the shares agreed to Consideration. be taken by the vendors respectively as aforesaid shall be deemed to be fully paid up. [See supra, p. 15.] The said shares shall be numbered as follows: namely those taken by the said A., 1 to 790 inclusive, those taken by the said B., 791 to 1185 inclusive, and those taken by the said C., 1186 to 1580 inclusive.
Sometimes the vendors take part of the price in cash or debentures. Where the shares subscribed for are only to be considered as partly paid up, clause 2 will be altered so as to provide that the shares "shall be credited as paid up to the extent of 7. per share."
3. As the residue of the consideration for the said sale, the company Further shall pay, satisfy, and discharge all the debts and liabilities of the consideration. vendors in relation to the said business, and shall indemnify the vendors
How sale to
and their respective heirs, executors, and administrators against all actions, claims, and demands in respect thereof.
4. The said sale shall take effect as from the date hereof, and shall take effect, &c. be completed on the next, when the said shares shall be issued to the vendors. On or at any time after that day the vendors respectively will, upon the request and at the cost of the company, execute and do all such assurances and things, &c. [supra, p. 24].
5. All rates, taxes, and other outgoings shall be paid by the vendors up to the date hereof, and if necessary, an apportionment of outgoings shall be made for the purpose of this clause.
6. Until the completion of the purchase the vendors shall carry on the said business in trust for the company.
7. The company shall accept without investigation such title as the vendors have to the property agreed to be hereby sold.
This clause is generally insterted in the case of a private company.
AS WITNESS, &c.
[Particulars of leaseholds.]
Where a company is formed to acquire and carry on an existing business, and is to be worked without appealing to the public for capital, it is very commonly called a "private company," and the transfer of the business to the company is in common parlance termed "the conversion of the business into a private company." Many such companies are formed each year. Where the business belongs to an individual, or to less than seven persons, a few friends generally subscribe the memorandum of association for a share a-piece, in order to make up the number to seven. And the owner or owners usually acquire under the agreement for sale most of the remaining shares. The vendor's shares are sometimes issued as fully and sometimes as partly paid up, according as it is desired to limit or not to limit their liability to the assets.
Not uncommonly the vendors subscribe the memorandum of association as at Form, p. 31, and the consideration or part of the consideration for the sale is the crediting a certain amount per share as paid up. This is valid, provided the agree ment is duly filed before the shares are issued. See Anderson's case, 7 C. D. 75, and supra, p. 15. But it is essential that the agreement should identify the shares -i.c., should say that the shares subscribed for are to be deemed fully or partly paid up, as the case may be. Fothergill's case, 8 Ch. 282. A popular account of the inducements to such conversion is given in the author's work, intituled, "Private Companies; or, How to convert your business into a private company, and the benefit of so doing," published by Messrs. Stevens & Sons.
There can be no doubt that the great inducement to conversion is the desire to trade with limited liability; but another inducement which often operates is the fact that a company with a good business has greater facilities than an individual or firm for raising money-e.g., it can issue debentures.
The name of a private company is generally formed by adding the word "Limited" to the firm-name of the vendor.
The articles of association of a private company very commonly contain special provisions as to transfer of shares (Forms 82 and 83), and sometimes vest the management in the vendors for life, or so long as they hold a certain number of shares.
Forms 1, 5, and 7 have been used with more or less variation for many private companies.
AGREEMENT by COMPANY ADOPTING CONTRACT MADE, ON ITS BEHALF, Form 8. For indorsement on original contract.
BEFORE ITS INCORPORATION.
pany, Limited (hereinafter called the company), of the third part. WHEREAS, since the execution of the within written agreement, the Recitals. company has been incorporated in accordance with the intention in that behalf referred to in such agreement :
Now IT IS HEREBY MUTUALLY AGREED as follows:
1. The within-written agreement shall be, and the same is hereby Ratification ratified and adopted by the company, and shall be binding on the com- written pany in the same manner as if the company had been incorporated prior agreement. to the date thereof, and had duly authorised the said B. to enter into the same on its behalf.
2. The said B. shall henceforth be discharged from all liability under Discharge or in respect of the said agreement (a).
IN WITNESS, &c.
(a) As to the above agreement, see supra, p. 2.
Adoption and Ratification.
As already mentioned (p. 2), contracts are very commonly made on behalf of n intended company by some person who purports to act as its agent or trustee, and the question often arises how such contracts are to be rendered binding on the company when formed.
It is said that at common law a company could not ratify any such contract
question as to whether the company has or has not become bound by the
(2.) A clause is inserted in the articles authorising and directing the directors to
Company, Limited. In wit-
(3.) A clause is inserted in the articles of the company purporting to adopt the
of B. from liability.