PRIVATE COMPANIES

Evening Post, Volume CXVI, Issue 48, 25 August 1933, Page 9

PRIVATE COMPANIES

THE LAW REVIEWED

ACCOUNTANT'S ADDRESS

ENGLISH COMPARISON

An address on "Private Companies" was given by Mr. F. IT. Bass, F.A.1.5., at the annual meeting of the Wellington branch, of tho New Zealand Division of the ■ Australasian Institute of Secretaries last evening. "Tho typo of company known as a private company in terms of the New Zealand Companies Act differs in many respects from the private company of the English Act," said Mr. Bass. "In tho English Companies Act, 1929, a private company is defined as one that:— (a) Restricts the right to transfer its snares; (b) limits the number of its members to fifty (excluding employee shareholders); (c) prohibits any invitation to the public to subscribe for any shares or debentures of tho company. It will therefore be seen that the main difference between a public company and a private company in England is that a public company may issue a prospectus, whereas a private company is not allowed to do so. "Under the New Zealand Act, however, a private company is defined as one that is registered under Part V of the Act, and this part of the Act contains special provision dealing -with this class of company. PRIVILEGES. "Private companies enjoy, generally, the rights and privileges attaching to public companies, and are subject to most of the restriction attaching to limited concerns. The provisions relating to private companies under the New Zealand Act go far beyond the provisions in the English Act. "An important distinction between ordinary companies~and private companies is that the whole of the share capital of a private company must be subscribed for in the memorandum of association. In the case of a.public company, the original subscription need only be one share for each subscriber, that is, seven shares, and other subscriptions may be received after registration. The company may have a large nominal capital, and yet have only a small amount actually subscribed for. In the ease of a private company, however, there is no such thing as unallotted shares when the company is first formed, but under the present Act there is nothing to prevent a subsequent increase of capital, part of which may be left unissued or unallotted. For example: A private company may be registered with a capital of £100 today, and tomorrow a resolution may be passed increasing the capital to £10,000, of which £9900 may be unissued, or unallotted. This is, in the minds of many people, a defect as it may give the impression of a stability which may be non-existent. r "One of the most important of the special privileges enjoyed ,by P™^ companies is.tho provision in the Act that 'Anything that may be done by a company registered under Part IX of the Act by resolution, special resolution, or extraordinary resolution, may be done by a private company by an entry'in'its minute book, signed by at least three-fourths of the members holding in the aggregate at least threefourths of the shares in the capital ot the company.' If such an entry is not signed by the whole of the members, a copy (including'the signatures)■"must be sent to every member who has not signed the entry. Such an entry can be signed by tho attorney ol: a member but it should be noted, particularly, that at least three-fourths of the members must sign. Therefore a company with three members could not take advantage of this provision unless the entry was signed by all three members. DIRECTORS' POSITION. "The directors of a private company arc in the same position as directors ot other companies, in so far as their actions are governed by the terms of the articles of association, or by table A, and it is desirable to have special regulations dealing with the powers of directors, quorum, etc., as a private company may find it necessary to entrust the control of its affairs to one director. "A private company must comply with such provisions of the Companies ' Act in respect of which it is not specially exempted. For example: it must have a registered office with the name painted or affixed on the outside; a common seal; it must keep a register ol mortgages; and appoint an auditor (although there is no penalty for non-ap-pointment). When any special or extraordinary resolution is passed, either in the form of a minute or by resolution in general meeting, notice must-be sent to the Registrar of Companies. An annual licence must be taken out by a private company. "In conclusion, it may be stated that there are distinct advantages to traders by incorporation as a private company. The principal advantages arc:— "The limitation of liability as against the unlimited, liability of an individual trader or a partnershp. ' "The private company enjoys the privilege of all companiesin being able to give a floating security over its undertaking and assets, including its stock-in-trade. This form of security is denied to a sole trader or a partnership. OBTAINING CAPITAL. "The private company, .has a better chance of obtaining additional capital without disturbing the control of its business. For example,... preference shares can be issued convoying no voting rights upon tho holders, and leav.ing the control of the concern in the hands of the ordinary .shareholders. The transfer of the interest of a member in a private company can be effected much more readily than .the transfer of a share in a partnership. Tho partnership is dissolved by the death or bankruptcy of one of the partners, whereas these events need Dot necessar 51y mean the end of a private limited ]iability company. "Although there are many benefits attaching to the style of company termed a 'private company 5 under the provisions of the New Zealand Companies Act, this style of trading has given rise to certain abuses. Particular mention may be made of the common practice of giving a debenture over tho whole of the undertaking, and thus depriving ordinary creditors of claims against the assets in the event of liquidation, i A company may be formed consisting of two shareholders, one of whom owns tho majority of the shares, and tho company may then give a debenture over its property and assets to tho principal shareholder. In the event of trouble arising, therefore, this deben-ture-holder has the right of seizing the property of tho company, and leaving the unsecured creditors without any assets to claim upon. As, however, registration of such debentures must be effected to make them valid against a liquidator, the creditors are to some extent to be blamed for granting credit to a concern whose assets are subject to such a security."