ICC INTRODUCES NEW INTERNATIONAL

COMMERCIAL TERMS

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This article discusses International Commercial Terms or Incoterms which are often found in
international trade contracts
Incoterms is an abbreviation of International Commercial Terms. These terms have been published by the
International Chamber of Commerce (ICC) since 1936 and have been subject to review and updating since that date.
The most recent updates were announced in Paris by the ICC on 16 September 2010. Although earlier versions of
Incoterms may still be incorporated into future contracts if the parties agree, it is likely that most contracts made now
will refer to this latest edition of Incoterms. In order to avoid the possibility of confusion, contracts should refer
specifically to the Incoterms 2010 rather than just Incoterms, if the parties wish the new terms to apply. This will avoid
any subsequent dispute as to which set of rules apply. The assumption is that the new version of the ICC terms will
apply to Paper F4 (GLO).
The Incoterms are often to be found in international contracts, and they seek to provide a common set of rules for the
most frequently used international terms of trade with the aim of removing confusion over their interpretation. For
example, the terms set out exactly who is under the obligation to take control of and/or insure goods at a particular
point in the shipping process. The terms also deal with the obligation for the clearance of the goods for export or
import, and requirements on the packing of items.

CLASSES OF TERMS
Among the changes made in the 2010 rules is the reduction in the overall number from 13 to 11. This is the result of
the removal of four previous terms and the inclusion of two new ones. In effect, this is a replacement of four previous
rules, DAF, DES, DEQ and DDU, by two new rules that may be used irrespective of the agreed mode of transport.
These new rules are DAT (Delivered at Terminal), and DAP (Delivered at Place) (see below for more details).
Changes have also been made to better deal with cargo security and insurance, and the language has been changed
to reflect the modern usage in international trade.
The new rules have been separated into two classes rather than the previous four categories. The current two classes
of terms are:
(i) rules for use in relation to any mode or modes of transport
These can be used in cases where either maritime transport is not involved in the carriage of the goods, or where
maritime transport is used for only part of the carriage. This first class includes the following seven Incoterms that can
be used irrespective of the mode of transport selected and irrespective of whether one or more than one mode of
transport is employed:
EXW
FCA
CPT
CIP
DAT
DAP
DDP

Ex Words
Free Carrier
Carriage Paid To
Carriage and Insurance Paid To
Delivered at Terminal
Delivered at Place
Delivered Duty Paid

Most of the terms retain their former meanings, so no further explanation will be provided. However, as DAT and DAP
are new and replace previous delivery terms, they need some, if brief, explanation.
DAT replaces the more specific DEQ (Delivered ex Quay). It requires the seller to pay for carriage to the terminal,
except for costs related to import clearance, and to assume all risks up to the point that the goods are unloaded at the
terminal. The seller delivers when the goods, having been unloaded from the arriving means of transport, are placed
at the buyer's disposal at a named terminal at the named port or place of destination. As indicated, DAT requires the
seller to clear the goods for export where applicable but the seller has no obligation to clear the goods for import, pay
any import duty or carry out any import customs formalities.
DAP (Delivered at Place) replaces DAF (Delivered at Frontier), DES (Delivered ex Ship) and DDU (Delivered Duty
Unpaid). Under DAP, a seller bears all the costs, other than import clearance costs and risks involved in bringing the
goods to the named destination. Consequently, the seller assumes all risks and costs prior to the point that the goods
are ready for unloading by the buyer at the agreed destination.
It should be emphasised that although all the terms listed apply when there is no maritime transport, they can be used
in cases where a ship is used for part only of the carriage.
(ii) rules for sea and inland waterway transport
These rules apply where the point of delivery and the place to which the goods are carried to the buyer are both ports.
There are four substantives rules:
FAS Free Alongside Ship
FOB Free on Board
CFR Cost and Freight
CIF
Cost Insurance and Freight
None of these rules has been changed in practice, although in relation to the last three FOB, CFR and CIF
reference to the ship's rail as the point of delivery has now been deleted and this has been replaced with the goods
being delivered when they are on board the vessel. This is clearly done in the pursuit of updating language and as
the ICCs own introduction to the new rules states: This more closely reflects modern commercial reality and avoids
the rather dated image of the risk swinging to and fro across an imaginary perpendicular line.

SPHERE OF APPLICATION
A further change and recognition of existing practice is that the new rules apply to domestic as well as international
trade, whereas previous Incoterms applied to international sale contracts. As a result, the new rules state that the
obligation to comply with export/import formalities exists only where applicable. This alteration is in recognition of the
fact that some trade blocs, such as the European Union, have minimised if not removed the significance of border
formalities. It is also expected that this particular alteration should lead to greater use of the Incoterm rules within the
US.

SALE OF GOODS IN TRANSIT

Reflecting the fact that commodities may be sold several times over during transit, through a string of sale contracts,
the new rules have been amended to indicate that in reality a purchaser/seller in the middle of the string of contracts
does not actually ship the commodities, as they are already on board when they acquire title over them.
Consequently, under the new the rules, only the first seller will be responsible for shipping the goods and subsequent
sellers will be under the obligation to procure goods shipped. This is not a major change but it does tidy up the rules.

SECURITY
Given the context of uncertainty regarding potential terrorism and the need for heightened security, many countries
have introduced security checks in relation to goods crossing their boundaries. The new Incoterm rules now require
both sellers and buyers to provide sufficient information to one another so that export/import clearance can be
obtained.

TERMINAL HANDLING CHARGES

The new rules look to clarify responsibility for costs arising at the end of the journey. Under the old Incoterms rules
CPT, CIP, CFR, CIF, DAT, DAP, and DDP , the seller was required to make arrangements for the carriage of the goods
to the agreed destination but it was actually the buyer who actually paid the costs, as these were included in the total
selling price. This gave rise to problems where the carrier or terminal operator charged further handling costs to the
buyer/receiver of the goods. The new Incoterms rules seek to avoid this eventuality by clearly allocating such costs
between the parties.

ELECTRONIC DOCUMENTATION
The previous rules provided for the use of electronic data interchange, where the parties had agreed its use. The new
rules provide for the use of paper communications or equivalent electronic record or procedure where agreed or
customary, with customary indicating recognition of current practice in this regard.

CONCLUSION
Incoterms are a core constituent of international contracts and have frequently formed the basis for questions in the
Paper F4 Global exam. Although in the manner of an updating exercise, the new Incoterms 2010 do introduce
significant new rules for students of the Paper F4 Global syllabus to take into consideration in their preparation for
future exams.
Written by a member of the Paper F4 examining team

BRIBERY ACT 2010

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Focusing on the Bribery Act 2010, this article considers the likely key role accountants will play in reviewing
organisational risks relating to bribery, and implementing adequate procedures and controls
The Bribery Act 2010 was passed in April 2010 and will be examinable from June 2012. The Act repeals old UK
bribery laws and is aimed at dealing with the risk of bribery and corruption, which undermines corporate governance,
the rule of law and damages economic development.

BRIBERY OFFENCES
There are four offences of bribery under the Act:
S1 Offences of bribing another person
It is an offence to offer a financial or other advantage to another person to perform improperly a relevant function or
activity, or to reward a person for the improper performance of such a function or activity.
S2 Offences relating to being bribed
It is an offence where a person receives or accepts a financial or other advantage to perform a relevant function or
activity improperly.
Relevant function or activity includes any function of a public nature, any activity connected with a business, any
activity performed in the course of a persons employment, and any activity performed by or on behalf of a body of
persons. The activity may be performed in a country outside the UK.
S6 Bribery of foreign public officials
It is an offence directly, or though a third party, to offer a financial or other advantage to a foreign public official (FPO)
to influence them in their capacity as a FPO, and to obtain relevant business, or an advantage in the conduct of
business.
FPO means an individual who holds a legislative, administrative or judicial position of any kind outside the UK, or
who exercises a public function outside the UK, or is an official or agent of a public international organisation.
S7 Failure of commercial organisations to prevent bribery
It is an offence for a commercial organisation (a UK company or partnership) if a person associated with it bribes
another person intending to obtain or retain business, or to obtain or retain an advantage in the conduct of the
business for the organisation. This could take place outside the UK. S.8 defines associated persons as someone who
performs services for or on behalf of the commercial organisation, and, therefore, could be an employee, agent or
subsidiary.
An organisation does, however, have a defence under s7 if it can prove it had in place adequate procedures designed
to prevent bribery. S9 requires the Secretary of State to publish guidance about adequate procedures. The guidance,
which was published in March 2011, states that what counts as adequate will depend on the bribery risks faced by an
organisation, and the nature, size and complexity of the business. Further, if there is no risk of bribery, then an
organisation will not require any procedures to prevent bribery. The guidance is not prescriptive and is based around
six guiding principles.

THE SIX PRINCIPLES

1. Proportionate procedures
The procedures taken by an organisation should be proportionate to the risks it faces and the nature, scale and
complexity of its activities. A small organisation would require different procedures to a large multinational
organisation.
2. Top-level commitment
The top-level management should be committed to prevent bribery and foster a culture within the organisation in
which bribery is unacceptable.
3. Risk assessment
Organisations should assess the nature and extent of its exposure to risks of bribery, including potential external and
internal risks of bribery.
For example, some industries are considered higher risk than others, such as the extractive industries; some
overseas markets may be higher risk where there is an absence of anti-bribery legislation.
4. Due diligence
The organisation should apply due diligence procedures in respect of persons who perform services for or on behalf
of the organisation in order to mitigate bribery risks.
5. Communication
The organisation should ensure its bribery prevention policies and procedures are embedded and understood
throughout the organisation through internal and external communication, including training, proportionate to the risks
it faces. Communication and training enhances awareness and helps to deter bribery.
6. Monitoring and review
The organisation should monitor and review procedures designed to prevent bribery and make improvements where
necessary. The risks an organisation faces may change and, therefore, an organisation should evaluate the
effectiveness of its anti-bribery procedures and adapt where necessary.
The question of whether an organisation had adequate procedures in place to prevent bribery is a matter that will be
determined by the courts by taking into account the circumstances of the case. The onus will, however, be on the
organisation to prove it had adequate procedures in place.
It should be noted that genuine hospitality that is reasonable and proportionate is not prohibited by the Act.

PENALTIES
An individual found guilty is liable to imprisonment for a maximum of 10 years. (This has been increased from seven
years.)
An organisation found guilty is liable to an unlimited fine. The obvious further damage to the organisation is
reputational damage and the consequences of this, as well as potential civil claims against directors for the failure to
maintain adequate procedures.

CONCLUSION

The Bribery Act 2010 aims to combat bribery and encourage free and fair competition. It replaces outdated and
criticised laws on bribery. All of the offences have extra-territorial application. Of most significance is the introduction
of a new offence against commercial organisations that fail to prevent a bribe being paid on their behalf, subject to the
statutory defence.
Organisations will be responsible for putting adequate procedures in place to prevent bribery; the core principle
behind these being proportionality. It is likely accountants will be key to the organisation reviewing risks relating to
bribery and implementing adequate procedures and controls.
Sally McQueen is ACCA examinations content manager

THE SUPREME COURT

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On 1 October 2009, the House of Lords was replaced by a new Supreme Court as the highest court within the
English legal system
The House of Lords, as the upper chamber of parliament, continues to exist, but its membership has been reduced by
the 12 Law Lords who previously sat there, and who now sit as justices in the new Supreme Court.

THE SEPARATION OF POWERS

The idea of the separation of powers, which can be traced back to ancient Greek political philosophy, is based on the
existence of three distinct functions of government (the legislative, executive and judicial functions) and the conviction
that these functions should be kept apart in order to prevent the centralisation of too much power.

The legislature is the body within the constitution in which the power of making law is located. Under
democratic constitutions the body will normally be elected. In the UK, Parliament is bicameral and is made of
the House of Commons and the House of Lords. It is also worth stating that in countries with a written
constitution and a strong separation of powers, there are limits to the power of the legislature to make law, in
that it is not permissible for laws to be made which conflict with the rights provided under the constitution. If any
such law is passed, it is open to challenge in the courts, which may strike it down as being unconstitutional.
However, the UK has no written constitution as such and functions under the doctrine of parliamentary
sovereignty. This effectively means that Parliament is not just the ultimate source of law, but it can make such
law as it determines, which cannot be challenged in the courts as to its content. Even the Human Rights Act
1998, which introduced the European Convention of Human Rights and Fundamental Freedoms into UK law,
maintains the doctrine of parliamentary sovereignty to the extent that the courts cannot declare primary
legislation to be invalid on the grounds that it conflicts with the convention. Courts may issue a declaration of
incompatibility, but such a declaration does not invalidate the legislation in question and any action to remedy
the conflict must be undertaken by the legislature.
The executive, as its name suggests, is the institution that executes the law, ie carries it into effect. It is
essentially the government operating through the instrument of the state, such as the civil service and other
state functionaries. In theory, the executive implements, rather than creates, the law and is subject to the
scrutiny of the legislature and the judiciary.
The judiciarys role is to decide issues in relation to the law of the state in which they are located. A corollary
of this description is the conclusion that it is not the function of the judges to make law.

The fact that, before October 2009, the highest court in the UK was located in, and constituted part of, the countrys
legislative body was always considered at least somewhat anomalous. Such a situation was clearly contrary to any
idea of the separation of powers and one that was not lost on Lord Falconer, the former Lord Chancellor, who in 2005
explained the need for reform thus:
The present position is no longer sustainable. It is surely not right that those responsible for interpreting the law
should be able to have a hand in drafting it. The time has come for the UKs highest court to move out from under the
shadow of the legislature.
The relevance of Lord Falconers argument was given added power by the decision of the Scottish Court of Sessions,
the equivalent of the Court of Appeal, in Davidson v Scottish Ministers (No 2) (2002). The case involved a challenge
to a previous court decision, on the grounds of Article 6 of the ECHR, for the reason that one of the judges in the
earlier case, the former Lord Advocate Lord Hardie, had spoken on the issue before the court while a member of the
Scottish Assembly.

The Court of Sessions held that Lord Hardie should at least have declared his previous interest in the matter and that,
in the light of his failure to do so, there was at least the real possibility of bias, and ordered the case to be retried.
The enormous historical change involved in remedying the unsustainable situation was brought about by the
implementation of Part 2 of the Constitutional Reform Act 2005, which provided for the following:

The establishment of the new independent Supreme Court, separate from the House of Lords with its own
independent appointments system, its own staff and budget and its own building: Middlesex Guildhall. This new
Supreme Court should not be confused with the old Supreme Court, which was the title previously given to the
High Court and Court of Appeal. In future those courts will be known as the Senior Courts of England and
Wales.

The 12 judges of the Supreme Court are titled Justices of the Supreme Court and will no longer be allowed
to sit as members of the House of Lords. As a matter of fact, all of the present members are life peers and as a
result will be able to sit in the House of Lords on their retirement from their judicial office, but this may not always
be the case in the future.

The immediately previously serving Law Lords became the first Justices of the Supreme Court, and Lord
Phillips, the former Lord Chief Justice, was appointed the first President of the Supreme Court. In fact, only 11
of the previous Lords of Appeal in Ordinary have taken positions as Justices of the Supreme Court, Lord
Neuberger, instead, taking the position of Master of the Rolls in the Court of Appeal.

As has been stated above, in other constitutional systems, both civil, as in France, or common law, as in the US, not
only is there a clear separation of powers between the judiciary, the executive and the legislature, but there is also a
distinct Constitutional Court with the power to strike down legislation on the grounds of its being unconstitutional.
It has to be emphasised that the UK Supreme Court will not be in the nature of these other supreme courts, in that it
will not be a constitutional court as such and it will not have the powers to strike down legislation. Consequently,
although the proposed alterations clearly increase the appearance of the separation of powers, the doctrine of
parliamentary sovereignty remains unchallenged.
It remains to be seen, however, whether under the changed circumstances of the contemporary constitution the
Supreme Court, as the highest court in the land, will simply assume the previously limited role of the House of Lords,
or whether it will, with the passage of time, assume new function and increased powers as are consonant with
Supreme Courts in other jurisdictions. This issue arose in September 2009 when the former Law Lord, Lord
Neuberger, who gave up his position in the House of Lords to become Master of the Rolls, spoke on a BBC radio
programme expressing the opinion that the advent of the Supreme Court was not unproblematic. As he put it, the
danger is that you muck around with a constitution like the British constitution at your peril because you do not know
what the consequences of any change will be. And that there was a real risk of judges arrogating to themselves
greater power than they have at the moment.
Former Lord Chancellor, Lord Falconer, also expressed the view that the Supreme Court will be bolder in vindicating
both the freedoms of individuals and, coupled with that, being willing to take on the executive, but Lord Phillips the
President of the Supreme Court was more conciliatory towards the executive expressing the view that, although he
could not predict how the court would function in the future, he did not foresee it changing in the way suggested by
Lord Neuberger.
The changes will make little practical difference to the student of law; the previous decisions and precedents of the
former House of Lords will still be binding and the previous rules of law and procedure for hearing appeals from lower
courts will continue to operate. Consequently, the shift from House of Lords to the Supreme Court should be
seamless and unproblematic.
More information cane be found on the Supreme Court website

Written by a member of the Paper F4 examining team

COMPANY DIRECTORS DISQUALIFICATION ACT

1986

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by David Kelly
04 Feb 2005
This article examines the way in which the law tries to prevent unsuitable individuals from acting as company
directors. Such an individual can be disqualified from acting as a director for up to 15 years under the Company
Directors Disqualification Act 1986 (CDDA).
The Act was introduced in an attempt to prevent the misuse of the company form. One of its specific aims was the
control of the 'phoenix company'. This is a company set up by a director of a very similar company which ceased
trading due to extensive debts. The new company carries on essentially the same business, but with no liability to the
creditors of the former company. Such behaviour is reprehensible and is clearly an abuse of limited liability. The
CDDA1986 seeks to remedy this practice by preventing certain individuals from acting as company director, but the
ambit of the Act's control is much wider than this one instance.
Categories of conduct
The CDDA1986 identifies three distinct categories of conduct which may, and in some circumstances must, lead the
court to disqualify certain persons from being involved in the management of companies. These are:
a. General misconduct in connection with companies

Misconduct is defined as:

- a conviction for an indictable offence in connection with the promotion, formation, management or liquidation of a
company or with the receivership or management of a company's property (S2 of the CDDA1986). The maximum
period for disqualification under S2 is five years where the order is made by a court of summary jurisdiction, and 15
years in any other case.
- persistent breaches of companies legislation in relation to provisions which require any return, account or other
document to be filed with, or notice of any matter to be given to, the registrar (S3 of the CDDA1986). Section 3
provides that a person is conclusively proved to be persistently in default where it is shown that, in the five years
ending with the date of the application, he has been adjudged guilty of three or more defaults (S3(2) of the
CDDA1986). This is without prejudice to proof of persistent default in any other manner. The maximum period of
disqualification under this section is five years.
- fraud in connection with winding up (S4 of the CDDA1986). A court may make a disqualification order if, in the
course of the winding up of a company, it appears that a person:
- has been guilty of an offence for which he is liable under S458 of the Companies Act 1985, that is, that he has
knowingly been a party to the carrying on of the business of the company either with the intention of defrauding the
company's creditors or any other person or for any other fraudulent purpose
- has otherwise been guilty, while an officer or liquidator of the company or receiver or manager of the property of
the company, of any fraud in relation to the company or of any breach of his duty as such officer, liquidator, receiver or
manager (S4(1)(b) of the CDDA1986). The maximum period of disqualification under this category is 15 years.
b. Disqualification for unfitness

This covers:

- disqualification of directors of companies which have become insolvent, who are found by the court to be unfit to be
directors (S6 of the CDDA1986). Under S6, the minimum period of disqualification is two years, up to a maximum of

15 years
- disqualification after investigation of a company under Pt XIV of the CA1985 (S8 of the CDDA1986).
A disqualification order may be made as the result of an investigation of a company under the companies legislation.
Under S8 of the CDDA1986, the Secretary of State may apply to the court for a disqualification order to be made
against a person who has been a director or shadow director of any company, if it appears from a report made by an
inspector under S437 of the CA or Ss94 or 177 of the Financial Services Act 1986 that 'it is expedient in the public
interest' that such a disqualification order should be made. Once again, the maximum period of disqualification is 15
years.
The CDDA1986 sets out certain particulars to which the court is to have regard where it has to determine whether a
person's conduct as a director makes them unfit to be concerned in the management of a company (S9). The detailed
list of matters to be considered is set out in Schedule 1 to the Act.
In addition, the courts have given indications as to what sort of behaviour will render a person liable to be considered
unfit to act as a company director. Thus, in Re Lo-Line Electric Motors Ltd (1988), it was stated that: 'Ordinary
commercial misjudgement is in itself not sufficient to justify disqualification. In the normal case, the conduct
complained of must display a lack of commercial probity, although... in an extreme case of gross negligence or total
incompetence, disqualification could be appropriate.'
A 'lack of commercial probity', therefore, will certainly render a director unfit, but, as Vinelott J stated in Re Stanford
Services Ltd (1987): '...the public is entitled to be protected, not only against the activities of those guilty of the more
obvious breaches of commercial morality, but also against someone who has shown in his conduct of a company a
failure to appreciate or observe the duties attendant on the privilege of conducting business with the protection of
limited liability.'
Consequently, even where there is no dishonesty, incompetence may render a director unfit. Thus, in Re Sevenoaks
Stationers Ltd (1990), the Court of Appeal held that the director was unfit to be concerned in the management of a
company on the basis that: 'His trouble is not dishonesty, but incompetence or negligence in a very marked degree,
and that is enough to render him unfit; I do not think it is necessary for incompetence to be "total" to render a director
unfit to take part in the management of a company.'
c. Other cases for disqualification

This relates to:

- participation in fraudulent or wrongful trading under S213 of the Insolvency Act 1986 (S10 of the CDDA1986)
- undischarged bankrupts acting as directors (S11 of the CDDA1986)
- failure to pay under a county court administration order (S12 of the CDDA1986).
Disqualification orders
For the purposes of most of the CDDA1986, the court has a discretion to make a disqualification order. Where,
however, a person has been found to be an unfit director of an insolvent company, the court has a duty to make a
disqualification order (S6 of the CDDA1986).
The precise nature of any such order is set out in S1, under which the court may make an order preventing any
person (without leave of the court) from being:

a director of a company

a liquidator or administrator of a company

a receiver or manager of a company's property

in any way, whether directly or indirectly, concerned with or
taking part in the promotion, formation or management of a company.

However, a disqualification order may be made:

i. with leave to continue to act as a director for a short period of time, in order to enable the disqualified director to
arrange his business affairs (Re Ipcon Fashions Ltd (1989))
ii. with leave to continue as a director of a named company, subject to conditions (Re Lo-Line Electric Motors Ltd
(1988))
iii. with leave to act in some other managerial capacity but not as director (Re Cargo Agency Ltd (1992)).
Period of disqualification
With regard to the period of disqualification, in Re Sevenoaks Stationers (Retail) Ltd (1990), Dillon LJ in the Court of
Appeal divided the potential maximum 15 year period of disqualification into three distinct brackets:
i. over 10 years for particularly serious cases (for example, where a director has been disqualified previously)
ii. two to five years for 'relatively not very serious' cases
iii. a middle bracket of between six and 10 years for serious cases not meriting the top bracket.
Penalty for breach of a disqualification order
Anyone who acts in contravention of a disqualification order is liable for either:
i. imprisonment for up to two years and/or a fine, on conviction on indictment
ii. imprisonment for up to six months and/or a fine not exceeding the statutory maximum, on conviction summarily
(S13 of the CDDA1986).
Under S14 where a company is guilty of an offence under S13, then any person who consented or contributed to its
so doing will also be guilty of an offence. In addition S15 imposes personal liability for company debts arising during a
period when a person acts as a director while disqualified, either under an order or while personally bankrupt. The
Secretary of State is required to maintain a register of disqualification orders which is open to public inspection (S18).
Re Uno, Secretary of State for Trade and Industry V Gill
The operation of the CDDA1986 was considered extensively in Re Uno, Secretary of State for Trade and Industry v
Gill (2004). This case related to a group of two furniture companies which, although in severe financial difficulties,
continued to trade while the directors investigated possible ways of saving the businesses. During this period one of
the companies, Uno, continued to raise its working capital from deposits taken from customers to secure orders that
were never to be met, as the company eventually went into liquidation.
Although the directors were advised that they could have safeguarded the deposits by placing the money in a trust
account for the customers, they decided not to do so, as they needed the money to keep the business going in the
short term. An application from the Department of Trade and Industry for the disqualification of the directors on the
basis of this behaviour was unsuccessful. In refusing the application, the court emphasised the fact that in order to
justify disqualification there had to be behaviour that was either dishonest, or lacking in commercial probity. Moreover,
that behaviour had to be such as to make the person concerned unfit to be involved in the management of a
company. Under the circumstances of the case the court found that the directors had pursued realistic opportunities to
save the businesses and consequently were blameless for the eventual failure of the businesses and the loss to the
customers.
David Kelly is examiner for Paper F4

UNFAIR PREFERENCE BY COMPANIES

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by Dr Low Kee Yang
30 Apr 2003
Directors have to choose which creditors to pay and which to stall as requests, or in the case of more aggressive
creditors demands, are made on a company. At times, the considerations that come into play in the decision-making
process may be less than proper. For example, the managing director, in arriving at a decision to pay, may have been
motivated by the fact that a creditor is a very close personal friend. The law frowns upon such conduct, known as
unfair preference.
The subject of unfair preference by insolvent companies under Singapore law is complex and abstruse. There are two
reasons for this. The legal position can only be ascertained by the careful reading and juxtaposing of three different
pieces of legislation: the Companies Act (s.329); the Bankruptcy Act (s.99 to s.102) and the Companies (Application
of Bankruptcy Act Provisions) Regulations (the Regulations). The definition of persons who might be considered as
being connected with the company is broad and intricate.
The aim of this article is to guide readers through the labyrinth of provisions and provide a good overview of the law in
this area.
Interplay of legislative provisions
The starting point is s.329 of the Companies Act. This section provides that any payment, transfer of property or other
act relating to property which would be void or voidable, as against an individual under, inter alia, s.99 of the
Bankruptcy Act, is void or voidable in the same manner in the winding-up of a company. Section 99 deals with unfair
preference. Section 329 therefore borrows a provision from the Bankruptcy Act to deal with unfair preference by an
insolvent company.
Section 99 and s.100 of the Bankruptcy Act state the key elements of unfair preference, while s.101 details definitions
of who may be regarded as associates of an individual. Section 102 deals with the orders that a court may make.
The purpose of the Regulations is to clarify how the Bankruptcy Act provisions apply to companies by:

giving the general guideline that Bankruptcy Act provisions apply to companies with the necessary textual
modifications

providing additional definitions of certain terms

laying down additional legal rules.

The key aspects and issues of unfair preference by a company in the context of the three pieces of legislation are as
follows.
The proscribed conduct
The general principle here is that if a company being wound up has given unfair preference to any person, the
liquidator of the company may apply to the court for an order to restore the position (s.99(1) Bankruptcy Act). The
following scenarios illustrate unfair preference:
1.
The company does something, the act, which has the effect of putting the creditor in a better position in the
event of the winding-up of the company.
2.
The decision to do the act was influenced by the companys desire to put that creditor in the better position.
3.
The company was insolvent at the time of, or as a result of, the act.
4.
The act was done within six months before the commencement of the winding-up of the company or, if done
in relation to a person connected with the company, within two years.
Better position
Unfair preference is described as doing something that puts a creditor in a better position in the event of the
companys winding-up. The implication is clear. The creditor need not prove they have been paid earlier in the

subsequent winding-up, avoiding the prospect of receiving little or no payment. This is a common experience in a
winding-up, since there is usually little money left after the statutorily preferred creditors (s.328 Companies Act) are
paid.
The provision also requires culpability on the part of the company in that the act must be motivated to some degree by
an intention to give preference. The exact words used are influenced by a desire to produce the effect (s.99(4)).
This is a significant shift from the previous provision1 which used the words with a view to giving a preference.
Case law had interpreted with a view to mean with the intention or object, and that such intention should have been
the principal or dominant intention2. The current requirement influenced by the desire is a much lower threshold than
dominant intention. The test appears to be whether the act (e.g. payment) was influenced by the desire to prefer or
whether it was decided on a purely commercial basis.
Insolvency
It is clear from s.100(2) that the desire to prefer and the effect of giving preference are insufficient to constitute the
conduct which the provisions seek to proscribe. Additionally, the company must be insolvent at the time of the act or
as a consequence. Insolvency is defined as either the inability to pay debts as they fall due or a situation where the
amount of the liabilities (including contingent and prospective liabilities) exceeds the value of the assets: s.100(4).
Unfair preference by a company, therefore, occurs when the company does an act with the desire and the effect of
giving preference to a creditor, and the act was done while the company was insolvent or the act resulted in the
company being insolvent.
Catchment period
The provisions set out two different catchment periods six months and two years respectively, from the
commencement of winding-up. The shorter period is for creditors in general while the longer period is for creditors
who are connected with the company (s.100(1)(b), read with Regulation 4). The rationale for a longer, thus earlier,
period is probably that preference usually begins with those creditors who are closer to the company before moving to
other creditors.
Connected persons
Section 101 is complex. It deals with the relationships between the bankrupt individual and those whom the law
deems are close to him and therefore likely to be favoured by him. The term used is associates. The long list of
persons who are considered associates of a bankrupt includes the following:

spouse, including former spouse

relatives, which comprise: siblings; uncles and aunts; nephews and nieces; lineal ancestors (presumably, it
means parents, grandparents and other ancestors of direct lineage) lineal descendants (children, grandchildren
and other direct descendants)

partner in a partnership

employer

employee

director or other officer in the company where he is employed

trustee of a trust in which he is a beneficiary and

company of which the bankrupt, or the bankrupt and his associates, had control of.

Two qualifications are used to ascertain relationships, half-blood relationships are included, and so are step-children,
adopted children and illegitimate children: s.101(7). As for companies, a bankrupt is taken to have had control of a
company if the directors of a company (or of another company having control of it) are accustomed to act in
accordance with his directions or instructions; or if the bankrupt had one-third or more of the voting power of the
company (or of another company having control of it): s.101(9). In this regard, control is therefore either at board level
or shareholder level.
However, in applying the unfair preference provisions to companies, Regulation 4 states that references to an
associate of an individual should be read as a reference to a person connected with a company, except in s.101.
Regulation 2 provides its own definition of a person connected with a company, namely:

a director

a shadow director (s.149(8) of the Companies Act)

an associate (s.101 Bankruptcy Act, as modified by Regulation 5) of a director or shadow director

and
an associate of the company (Regulation 5).

Firstly, the definitions of associate in s.101, which are outlined above, are relevant to unfair preference by
companies. A preference given to a relative of a director, for example, would amount to a preference to a person
connected with a company.
Secondly, Regulation 5 introduces another category of associates an associate of a company. Regulation 5
provides that a company shall be an associate of another company if:
the same person controls both companies

a person controls one company and his associates, or he and his associates, control the other company

or

a group of persons or their associates control both companies.

An associate of a company is therefore a company which is connected by the element of common control.
Viewed as a whole, the picture which now emerges is an elaborate labyrinth of relationships and connections.
Depending on the relationship of the particular creditor with the company or its directors, the ascertainment of
whether the transaction is caught by the provisions can be a Herculean task. The principle of the matter, however, is
simple enough. A company should not give preference to individuals connected to its directors; neither should it give
preference to a company connected to it by reason of being controlled by the same person(s).
Presumed influence
The longer period of catchment for persons connected with the company are outlined above. There is another legal
implication where the creditor is connected with the company. Section 99(4) (read with Regulation 4) provides that
where a company has given a preference to a creditor connected with the company, the company shall be presumed,
unless the contrary is shown, to have been influenced by the desire to prefer. This effectively reverses the burden of
proof instead of the liquidator having to show influence, the burden now rests on the connected person to show that
there was no influence. In practical terms, the difference is very significant.
Conclusion
The provisions surrounding unfair preference by companies can be confusing. However, upon careful reading and
analysis, one can arrive at a clear framework of rules on the subject.
Basically, s.329 of the Companies Act borrows from s.99 to s.102 of the Bankruptcy Act while the Regulations
elaborate on how the bankruptcy sections are to be modified to suit companies; a roundabout process which is less
than ideal. Central to this modification is the use of the term person connected with the company in place of the term
associate. The objective is to spell out situations where a creditor company is regarded as being an associate of a
company. Yet, at the same time, the s.101 definitions of associates of an individual are retained through the inclusion
of the associates of directors in Regulation 2s definition of person connected with a company.
The essence of unfair preference is putting a creditor in a better position, financially, in the event the company is
wound-up. A key element of the current provisions is that the company is influenced by the desire to put the creditor
in a better position. Of critical significance is the fact that where the preference is to a connected person, the influence
is presumed and the catchment period is longer. Another important element is that the company was insolvent when
making the preference or as a result of making the preference.
References
1.
Section 53 of the old Bankruptcy Act (Cap20).
2.
See e.g. Ho Mun-Tuke Don v. Oslo Finans [1990] 3 MLJ 84 and Lin Securities v. Royal Trust Merchant Bank
(Asia) [1995] 1 SLR 97.

Dr Low Kee Yang is Examiner for Paper 2.2 (SGP)

EXAMINER'S APPROACH TO PAPER F4 (ENG)

AND (GLO)

RELATED LINKS
Student Accountant hub page
The Paper F4 exam will undergo significant changes in the coming year, with a new format for the written papers, both
for English and Global, applicable from December 2014 and the introduction of computer-based exams (CBEs) for
both English and Global from 19 November 2014.
It cannot be denied that the new structure of Paper F4 represents a major change inhow the content is examined, but,
hopefully, what follows will reassure learning providers and, more importantly perhaps, candidates that what is
examined has changed little and how the content examined is suitable to this new format. This article explains the
validity of the content and approach in relation to the exam structure. In dealing with the new format, it focuses on the
written paper as reference can be made directly to the specimen paper that is available on the website currently. CBE
specimens will be made available in advance of the introduction of English and Global by the on-demand CBE model.
Moving Paper F4 (ENG) and (GLO) to the on-demand CBE model allows us to introduce added flexibility into our
exam schedule, while, as detailed below, ensuring our assessments are relevant for finance professionals.

THE SYLLABUS
The general aim of Paper F4 remains the development of knowledge and understanding about the general legal
framework within which an accountant operates. To that end it is thought necessary to develop an awareness of
specific legal areas of central importance to business in general, and to accountants in particular.
It has to be emphasised that Paper F4 does not aim to make candidates into lawyers. For the most part, in a real life
context, legal questions will be dealt with by legal professionals. Accountants must be aware, however, of the legal
framework within which their legal professionals operate, and indeed which controls their operation, and must be
sufficiently sensitive to the fact that certain issues require expert legal advice.
The stated capabilities of the Paper F4 syllabus remain as follows:

Identifying the essential elements of the legal system, including the main sources of law. (It is felt that
candidates must have a minimum understanding of the legal framework in order to understand the operation of
the substantive law. Now that the Human Rights Act 1998 has bedded into English law it has been decided not
to examine it as a substantive topic, although its effect remain pervasive and may arise in a consideration of
specific aspects of law.)

Recognising and applying the appropriate legal rules relating to the law of obligations (both contractual and
tortious). (These are the essential legal relationships that people generally enter into, but accountants in
particular must be aware of the issues raised. Negligence is felt essential as it is the basis for understanding
professional negligence. It should be noted that in terms of tort law attention will be focussed on the essential
business-centred torts of passing off and negligence and others, such as the personal torts of nuisance and
trespass, have been removed from the syllabus.)

Explaining and applying the law relating to employment relationships. (This is an important and popular
element of the syllabus.)

Distinguishing between alternative forms and constitutions of business organisations.

Recognising and comparing types of capital and the financing of companies.

Describing and explaining how companies are managed, administered, and regulated.

Recognising the legal implications relating to insolvency law.

Demonstrating an understanding of various criminal offences that may arise in the operation of businesses.
This latter aspect of the syllabus was enhanced by the necessary introduction of the law relating to bribery but,

in recognition of the fact that the syllabus cannot just be allowed to grow, it was decided to remove corporate
governance from the Paper F4 syllabus. This was in no way to imply that corporate governance was not an
essential aspect of the operation of businesses, but it was recognised that the issue was dealt with more fully in
Papers F8 and P1.
The foregoing has referred specifically to the Paper F4 (ENG) syllabus. The Paper F4 (GLO) syllabus, designed to
reflect international aspects of business law, remains essentially unchanged, although with the removal of corporate
governance.

THE EXAM
This is the area where real change will take place. From December 2014 the exam will move from the current threehour paper to a two-hour paper, which will be divided into two sections.
Section A will be worth 70 marks. It will contain a mixture of 20 one-mark and 25 two-mark questions. The use of the
word mixture is deliberate, as it is important to emphasise that within the exam paper questions will be randomised,
so candidates will have to recognise the area of law they are dealing with before offering an answer. It should also be
emphasised that the whole syllabus will be open to exam and the availability of 45 questions makes it highly likely that
all aspects of the syllabus will be examined in each exam.
Candidates will be required to select the correct one from a list of potential answers. As objective test (OT) questions
there can only be one correct answer to each question. The allocation of marks will depend on the complexity of the
question with one-mark questions having fewer possible answers than two-mark questions. It will be apparent that the
format of Section A will lend itself to computer-based marking and will facilitate conversion to computer-based exam,
when that is made available.
Section B will contain five six-mark multi-task questions (MTQs) and in effect will replicate the three
analysis/application questions to be found at the end of the previous exam paper. The format of the questions will be
similar to the previous problem scenarios and they will contain a series of tasks that relate to a scenario.

COMMENT
A significant part of any educational process is about imparting knowledge, and clearly objective testing is capable of
assessing whether that knowledge has been assimilated or not. The current Paper F4 exam structure, to a very large
degree, is designed to assess whether candidates possess a sufficient level of legal knowledge to be deemed fit to
function as accountants. It might be thought that the use of OTs would exacerbate the mere unthinking collection of
knowledge, but in fact the reverse may prove to be the case. Knowledge will have to be marshalled appropriately;
there will only be one correct answer and candidates must know it. Also, the new format will stop the questionspotting provider of prepared answers. The sheer number, together with the randomisation, of questions will require
candidates to cover the whole syllabus and should require them to think about what aspect of that syllabus they are
being questioned on.
However, education is much more than the mere passing on of knowledge; it is about the inculcation of the higher
level skills of analysis, reflection and synthesis. Well written questions in Section B of the new format will be capable
of testing those higher skills. Candidates may only be required to provide short responses to question prompts, but in
order to get the correct answer, they must engage in the appropriate processes of analysis, and reflection. Candidates
may not be required to write out those processes but the provision of the correct answer is the proof that they have
nonetheless engaged in those processes.
ACCA has an established approach to exam development that ensures that levels of rigour across the qualification
are maintained when changes are introduced. In developing the new format for Paper F4 we undertook extensive

consultation, including review sessions with subject matter experts and global exam trialling with exam ready
candidates. These are key steps of our exam development process that ensure that the new exam format is fit-forpurpose.

CONCLUSION
Paper F4 will continue to recognise that candidates are potential accountants, rather than potential lawyers. The
structure of the new paper will change significantly from December 2014 but the syllabus will not significantly change
subject to the changes mentioned in the article above.
Candidates should ensure that they take the time to familiarise themselves with the relevant structure and question
types for the exam they will be sitting.