F4 - Corporate and Business Law (Global) - All Chapter

LECTURER: KHAN MOHAMMAD ASHIK
Edited by_ TAUFIK
1/11/2015
CHAPTER TITLE PAGE
01 ECONOMIC, POLITICAL AND LEGAL SYSTEMS 2-11

02 INTERNATIONAL TRADE, LEGAL REGULATION AND CONFLICT OF LAW 12-16
03 ALTERNATIVE DISPUTE RESOLUTION MECHANISM 17-25
04 CONTRACTS FOR INTERNATIONAL SALE OF GOODS 26-30
05 OBLIGATIONS AND RISKS IN CONTRACTS FOR INTERNATIONAL SALES 31-39
06 TRANSPORTATION AND METHODS OF PAYMENT 40-47
07 AGENCY LAW 48-50
08 SOLE TRADERS AND PARTNERSHIPS 51-54
09 CORPORATIONS AND LEGAL PERSONALITY 55-59
10 COMPANY FORMATION 60-65
11 CONSTITUTION OF A COMPANY 66-71
12 SHARE CAPITAL 72-78
13 LOAN CAPITAL 79-84
14 CAPITAL MAINTENANCE AND DIVIDEND LAW 85-88
15 COMPANY DIRECTORS 89-99
16 OTHER COMPANY OFFICERS 100-103
17 COMPANY MEETINGS AND RESOLUTIONS 104-107
18 INSOLVENCY AND ADMINISTRATION 108-115
19 FRAUDULENT AND CRIMINAL BEHAVIOUR 116-123
20 SUPPLEMENTARY READING 124-127
Page 1 of 127
CHAPTER – 1 :: ECONOMIC, POLITICAL AND LEGAL SYSTEMS

THE CONCEPT OF GLOBAL LAW
 Global Law is partially based on certain Model International Laws that regulate the relationship between
countries and their rights and duties towards each other.
 However, there are certain Exemplary National Laws such as the English Common Law system, the
European Civil Law system and the Islamic Shariah Law System, which have over time, spread to other
countries.
 Thus, Global Law is a combination of both International Laws and Exemplary National Laws
 Global Law is influenced by the Economic systems and the Political systems and Legal systems of countries
THE ECONOMIC SYSTEMS
Economics is described as the ways in which society decides on the three basic economic questions of What to
Produce, How to Produce and For Whom to Produce. It tries to identify the most effective way of managing limited
resources to satisfy the unlimited human wants. There are Three kinds of economic system:
PLANNED ECONOMY
 The characteristics of a planned economy can be summarized as follows:

 Decisions regarding the allocation and distribution of resources are taken by the government
 The prices of goods and services are also determined by the government
 Most of the country’s wealth is owned by the government although individuals are allowed to own
their personal possessions
 Examples of a planned economy includes: North Korea, Iran, Cuba etc
MARKET ECONOMY
 The characteristics of a market economy can be summarized as follows:

 Decisions regarding the allocation and distribution of resources are determined by the market
forces of demand and supply
 The prices of goods and services are determined by market forces
 Most of the country’s wealth is owned by individuals
 Pure market economies do not exist as the government of a country do intervene in certain sectors of the
economy such as the production and distribution of essential goods (water, electricity etc)
MIXED ECONOMY
 The characteristics of a mixed economy can be summarized as follows:

 Decisions regarding the allocation and distribution of some resources (essential goods and
services) are determined by the government where as other resources are allocated and distributed
on the basis of market forces of demand and supply
 The prices of some goods and services (public goods and services) are set by the government
whereas the prices of other goods are set by market forces of demand and supply
 Examples of mixed economy includes: USA, Bangladesh, India etc.
Page 2 of 127
THE POLITICAL SYSTEM
COMPONENTS OF THE POLITICAL SYSTEM
A country’s political system is a combination of the following:
 The various political institutions, such as political parties

 Interest groups such as trade unions, lobby groups
 The relationships between those institutions, and
 The political norms and rules that govern their functions such as Constitution, Election Law etc.
TYPES OF POLITICAL SYSTEMS
A country’s political system can be broken down into two major categories:
 Democracy: where laws are developed and implemented by officials elected by the country’s citizens
 Dictatorship: where laws are developed and implemented by an individual authority
A country’s political system is influenced by two important factors:
 The Rule of Law

 The Separation of Powers
THE RULE OF LAW
The rule of law refers to the importance of laws and regulations in a country and how those laws are implemented
by the country’s political system to govern the behaviour of the citizens.
In a Dictatorship, laws are designed by the Individual Authority and strictly enforced on people. Individuals have
very little freedom in living their lives according to their own desires
In a Democracy or Laissez Faire, laws are indirectly designed by the country’s citizens through officials elected by
them. Laws are intended to resolve disputes between people instead of controlling social behaviour. Individuals
are allowed a freedom of choice regarding their actions as long as they are bound within the law
SEPARATION OF POWERS
It refers to the division of authority amongst the various institutions within the political system to avoid
concentration of power within any one head of state.
In democratic systems, the power to govern a country is divided amongst three institutions (organs) of the state:
Legislature, Executive and Judiciary.
 LEGISLATURE
 In democracies, legislatures are usually elected and more commonly known as the Parliament
 They decide on what laws should be passed
Page 3 of 127
 If a country has a written constitution (USA, Bangladesh), legislatures cannot pass a law that
contradicts with the constitution.
 If there are no written constitutions in a country (UK), legislatures can pass any law that they see
fit. This is known as Parliamentary Sovereignty, where the laws passed by the parliament cannot be
overturned by the court system (Judiciary). However, since UK is part of the European Union, any
laws passed by the UK parliament can be overturned if it contradicts with the rules within the
Treaty of Rome, signed by the EU countries.
 EXECUTIVE
 In democracies, executives are usually elected and more commonly known as the Government
 They implement the laws passed by the legislature through various civil services (such as the
police, army etc.) and other governmental bodies and monitor and regulate the behaviour of society
 In UK (and Bangladesh), the Executive (government) is also a part of the Legislature (parliament)
 The Executive is accountable to the Legislature and subject to review by Judiciary (Court system)
 JUDICIARY
 The judiciary is more commonly known as the court system and are usually appointed by the
Executive (In US, the president appoints supreme court justices) or by Non-Departmental
Government Bodies (In UK, superior justices are appointed by the Justice Appointment
Commission)
 The decide on issues related to the law and review the actions of the Legislature and Executive
 They rule on disputes between individuals (civil law) or between individuals and the government
(criminal law)
In dictatorships, the functions of all the three organs are performed by the same individual authority
THE LEGAL SYSTEM
The legal system comprises of the country’s laws, the legislature, judiciary, the prosecution system, the police and
the prison system.
Law, can be defined as the enforceable body of rules that govern any society. Law imposed by a country’s
government is known as positive law
Law is derived from both National sources (state laws) and International sources (Human Rights Commission,
International Customs and Principles, Treaties between various nations and Conventions of International
Organizations such as the UN, EU etc.)
TYPES OF LEGAL SYSTEMS
COMMON LAW SYSTEMS
 SOURCES OF LAW IN COMMON LAW SYSTEMS

It was derived from the laws developed in England between 1066 AD and about 1400 AD. It is based on
laws established from the following sources:
Page 4 of 127
 Case Laws
 Customs and Traditions
 Legislations (laws made by the parliament)
 European Union Law (laws made by the EU parliament)
 In UK, Case Laws are laws made by judges over time through court decisions and comprises of Common
Law and Equity. Sometimes, a country’s parliament can codify a common law through parliamentary
approval. In such cases, the common law becomes a statute
 COMMON LAW
 It has been derived from the decisions taken by UK judges over the years and is based on what the
UK judges considered as acceptable social behaviour. It is common to all individuals within a
country
 It has been established as a significant source of law in common law systems through the Doctrine
of Judicial Precedence (see later).
 EQUITY
 Over time, as societies and cultures developed, many of the rules established through common law
(such as the rules on religious rights, rules on the rights of people from different ethnicity, the rules
on women’s rights etc.) became outdated, inapplicable or unfair.
 In order to restore fairness to the legal system, the principle of equity was established by the Court
of Chancery as a modification (not replacement) to the common law.
 It lead to the introduction of New Rights, Better Procedures and Better Remedies
 The Chancellor developed the following equitable remedies that were not available in other courts:
i. Specific Performance – forcing an individual (defendant) to perform a specific action
ii. Injunction – preventing an in individual (defendant) from performing a specific action
iii. Rectification – allowing an individual (defendant) to correct his mistakes or faults
iv. Rescission – forcing an individual (defendant) to restore a pre-contract situation or status
 If a common law contradicts with an Equity Law, the decision passed in the equity law will be
applicable
 ROLE OF JUDGES AND THE DOCTRINE OF JUDICIAL PRECEDENCE
 In common law systems, judges are usually required to do the following:

o Apply the Law Consistently with previous decisions of judges if certain conditions are met
o Interpret the statutes made by the legislator
o Review the law to determine whether it conflicts with the constitution or EU law
 The Doctrine of Judicial Precedent is a common law system where judges are bound to apply a
decision taken by another judge in a previous case. It is only applicable if the following conditions
are met:
i. The material Facts of both cases are same
ii. The previous court had a Higher Status (for example, the high court is bound to follow
decisions taken by a supreme court judge)
Page 5 of 127
iii. The decision previously taken was based on the Ratio Decidendi of the case
iv. The decision was taken on a Point of Law (for example, a decision made solely because a
law was broken)
 Ratio Decidendi is the legal reason based on which a judgement is made. When a judge makes a
ruling, the legal reason that he provides for making his decision is known as the ratio decidendi.
Any additional comments made by the judge are known as Obiter Dicta. Statements made as Obiter
Dicta do not have to be followed by future judges. They are merely persuasive whereas decisions
based on ratio decidendi are binding on future judges.
For example, in the case of Donogue vs. Stevenson, Lord Atkins (the judge) gave the following
judgement:
"You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be
likely to injure your neighbour. Who then, in law, is my neighbour? The answer seems to be persons
who are so closely and directly affected by my act that I ought reasonably to have them in
contemplation as being so affected when I am directing my mind to the acts or omissions which are
called in question."
The underlined statement is the ratio decidendi, reason for his decision that future judges are
bound to follow.
Any other statements that the judge made while presenting his statement, such as, explaining
where this law wouldn’t apply would be called Obiter Dicta, which future judges are not bound to
follow.
 In UK, the court system is divided into lower courts and higher courts. Lower courts do not make
precedents but are bound by the precedents set by the higher courts.
 A precedent can be avoided if it can be proved that the material facts of the cases are not same or if
it can be proved that the previous decision was taken without proper care. A precedent can also be
overturned by a higher court.
 For judicial precedence to be effective, the following procedural matters must be in place:
1. There must be an effective system for reporting cases
2. There must be a system to enable a judge to compare material facts of two cases
3. The classification of decisions and whether they are binding or persuasive must be
consistent
 STATUTORY INTERPRATATION OF JUDGES IN COMMON LAW SYSTEMS
 Statutes are legislations (laws) passed by a country’s Legislature. They may be Primary Legislation
(Act of Parliament) or Delegated Legislation (made by government bodies such as city councils).
 Statutes may be new laws, modifications of existing laws or codification of common laws
 In common law systems, judges are allowed to interpret statutes when they cannot be directly
applied in a case.
 Judges must consider the following presumptions while interpreting statutes:
i. Statutes do not override (cancel) existing laws on a subject, unless they are specifically
passed for that purpose
ii. Statutes do not alter existing common law
iii. If a statute deprives a person of his property, he must be compensated
iv. A statute is not passed with the intention of taking away a person’s freedom and rights
v. A statute is only applicable from the time when it is passed i.e. it does not have a
retrospective effect
Page 6 of 127
vi. A statute cannot impose criminal liability without proof of guilt

vii. A UK statute is only applicable in UK, although it is not applicable on the crown
viii. If a statute does not cover a topic, it cannot be assumed that it is included within the statute
 While interpreting statutes, judges are allowed to follow any of the following rules:
1. Literal Rule: It is used to apply the law exactly as it is written (Fisher vs. Bell)
2. Purposive Rule: It is used to apply the law on the basis of the purpose for which it was
created (Gardiner vs. Sevenoaks)
3. Golden Rule: It is used where the application of the literal rule provides an absurd outcome
(Adler vs. George)
4. Mischief (contextual) Rule: It is to apply the law in a way which prevents the mischief for
which it was created (Gorris vs. Scott)
5. Eiusdem Generis Rule: It is used where the general words in a law are intended to mean
the same thing as the specific words used before them (Powell vs. Kempton Park
Racecourse)
6. Expressio Unius Exclusio Alterius: It is used where any item not included in a list are
assumed to be excluded from that list
7. Noscitur A Socilis Rule: It is used to understand the meaning of a word in a law by looking
at the meaning of the words around it ( for example, if the words children’s books, toys and
clothes are used in a law, it can be assumed that the law is applicable on children’s books,
children’s toys and children’s clothes)
 COMMON LAW IN UNITED STATES

 The common law system that prevails in UK does not exist in the US. The US has a written
constitution, and any law passed by the legislature can be challenged by an individual on the
grounds of it being unconstitutional. In this case, the courts can overturn the law even if it is made
in parliament
 In order to determine whether a law contradicts with the constitution, judges can follow any of the
following theories:
1. Originalism: The rules of the constitution should be interpreted according to the intention
of the authors of the constitution (the founding fathers of US)
2. Constructivism: the rules of the constitution should be interpreted by looking beyond the
intention of the authors
LEGISLATIONS
 Legislations are the laws made by a country’s Legislature {parliament}. UK parliament consists of the
House of Commons and the House of Lords. In order for any Act to be passed, the Bill must be approved by
the House of Commons, House of Lords and receive a Royal Assent by Her Majesty the Queen
 Legislations are either Primary {Acts of Parliament} or Delegated {Made by Parliamentary Bodies}
 Primary legislations may be passed to:
 Create New Laws,
 Codify or Consolidate Existing Laws
 Overrule Existing Precedents
 Delegated legislations mainly includes the following:
Page 7 of 127
 Orders in Council – laws passed by Privy Councils, a non-party political body of high rank
parliamentarians. They are usually passed in times of national emergency
 Statutory Instruments – laws made by government ministers
 By-laws – laws made by local authorities and other local bodies
CIVIL LAW SYSTEMS
 SOURCES OF LAW IN CIVIL LAW SYSTEMS
It was developed in Europe, specifically France and Germany, during a period of revolutionary change. It is
based on the principles of Comprehensibility and Certainty. The main sources of law in civil law systems
such as France include the following:
 The Constitution
 European Union Law
 Statutes
 Administrative regulations
 CHARACTERISTICS OF CIVIL LAW SYSTEMS
 In civil law systems, the main source of law is the statute which is often codified in simple language
as general principles which is applicable on a wide range of situations. This gives the system
comprehensibility as you can find a general principle on almost any conceivable situation.
 Unlike common law systems, judges in a civil law system are not allowed to make any laws through
case decisions. They simply apply the law as it is written. This gives the system certainty as the
same principle will be applied in every situation or case. There is no system of judicial precedence
 Some civil law systems such as France have a Code (Code Napoleon) contained in a constitution. In
such cases, legislatures cannot pass any laws that contradict with the constitution. Judges are
allowed to review statutes to ensure that they do not contradict with the constitution
 There is usually no system of judicial precedence in a civil law system. However, if the situation in a
case is not covered by a statute or constitution, judges are allowed to follow some general
principles of statutory interpretation as follows:
1. Teleological Method: This is where a judge seeks to identify the social purpose of a
legislation and applies it so that the purpose is achieved
2. Historical Method: This is where the judge tries to interpret the law based on the intention
of the legislature
 In order to ensure that judges do not interpret statutes incorrectly, the Court of Cassation was set
up in France. The function of the court was to quash any decisions that they believed was based on
incorrect interpretation by a judge
Page 8 of 127
SHARIAH LAW SYSTEM
 SOURCES OF SHARIAH LAW
Shariah Law is based on the religion of Islam. It extends in areas of belief and religious practice and has a
wider significance than social order.
 The primary sources of Shariah law include the following:
1. The Quran – Allah’s divine revelation to the Prophet, Muhammad
2. The Sunnah – acceptable behaviour in accordance with the sayings of Prophet Muhammad,
known as Ahadith (singular Hadith)
 The Ahadith can be classified into three categories based on reliability:
1. Muwatir – very highly reliable
2. Mashtur – moderately reliable
3. Ahad – less reliable
 There are also five major secondary sources (schools of thought) of law known as Madhab based
on the writings and thoughts of major jurists. They are as follows:
1. The Shia School
2. The Hanafi School (Imam Abu Hanifa)
3. The Maliki School (Imam Malik)
4. The Hanball School (Imam Ahmad Ibn Hanbal)
5. The Shafii School (Iman As-Shafii)
 Many Muslim countries such as Iran and Pakistan, have a written constitution based on the system
of Shariah Law
 ROLE OF JUDGES (IMAMS) IN SHARIAH LAW SYSTEMS
 In a Shariah Law system, the laws of the Quran cannot be changed. If Quranic Law cannot be
applied in a specific situation, judges are allowed to use the Sunnah as guidance to interpret and
apply the law as appropriate. Judges are Muslim Clerics known as Imams
 The Sunnah can be used by Muslim Jurists for the following purposes:
1. Confirm the law in the Quran
2. Explain matters mentioned in the Quran
3. Clarify various versus of the Quran
4. Introduce a new rule where the Quran is silent
 INTERPETATION OF SHARIAH LAW
 There are two schools of thoughts regarding the interpretation of Shariah law:
1. Taqlid – it is based on the belief that Shariah Law doesn’t need to be interpreted. It is
practiced by Orthodox Muslims who strictly abide by the laws of the Quran
2. Fiqh – it is based on the belief that the laws of the Quran can be further interpreted through
the use Ijtihad.
 Ijtihad is the use of intelligence and scientific knowledge to explain the laws of the Quran. There are
various rules that need to be considered when using Ijtihad:
1. It cannot be used on certain matters such as the existence of Allah
Page 9 of 127
2. The judge, using Ijtihad, must be suitably qualified, known as a Muhtahid

3. There are various recognized methods that must be used
 In order to qualify as a Muhtahid, a person must be:

i. Well versed in the study of Quran and Sunnah
ii. Understand the principles of Ijma and Qiyas
iii. A good and practicing Muslim
iv. Just, reliable and trustworthy
 PRIMARY METHODS OF USING IJTIHAD
 IJMA: It is a system based on the consensus of opinion whereby Muslim Jurists come together to
discuss a matter and reach an agreement
 QIYAS: It is a process of reaching a decision by comparing and analyzing one thing with another.
 ISTIHSAN: It is a system based on the concept of equity and fairness whereby the laws of the Quran
is interpreted in a way which seems fair and reasonable
 THE RULE AGAINST USURY (INTEREST)
Usury (interest) is known as Riba. In Shariah Law systems, Riba is forbidden as it is considered as an
unlawful gain. This rule has had a significant impact on businesses
TYPES OF LAW
A country’s law can be primarily categorized as either Criminal Law or Civil Law. The main difference between
Criminal and Civil Law is summarized as follows:
CRIMINAL LAW CIVIL LAW
1 It is a form of Public Law used by a country to It is a form of Private Law used to regulate behaviour
regulate the behaviour of its citizens and relationships between individuals
2 Its purpose is to ensure that people refrain from Its purpose is to compensate claimants by settling
actions that is disapproved by the state or society, disputes between individuals and provide appropriate
with the threat of punishment remedies
3 The case is brought by the State against anyone in The case is brought by the Claimant (victim) against the
breach of state law. It is denoted as Regina vs. Joe Defendant (accused). It is denoted as Smith vs. Jones
4 Guilt must be proved beyond Reasonable Doubt. Liability must be established on the Balance of
The judge cannot declare anyone guilty if he has Probabilities. A party can only be held liable if it is more
any reasonable doubt regarding the accusation probably that it was his fault
5 Penalties include Fines, Community based Penalties include Damages and Equitable remedies
punishment, and/or Imprisonment
Page 10 of 127
THE HIERARCHY OF COURTS IN THE ENGLISH LEGAL SYSTEM
CRIMINAL COURTS CIVIL COURTS
SUPREME COURT SUPREME COURT
Five Lord Justices hear appeals from the court of Five Lord Justices hear appeals from the court
appeal, and sometimes from the high court of appeal, and sometimes from the high court
COURT OF APPEAL COURT OF APPEAL
Three Lord Justices hear appeals from the Crown Three Lord Justices hear appeals from the
Court County Court and the High Court
CROWN COURT HIGH COURT HIGH COURT

Queens Bench Division
Cases are heard by a Queen’s Bench Division hears first instance cases
Judge and Jury, who Three Judges preside of Contract and Tort
decide on questions and hear appeals from
the Magistrate Court on Chancery Division deals with Land Law,
of fact i.e. whether
points of Law. Company Law etc. It hears appeals from County
the defendant is
Courts
guilty of the offence
Appeals from the High
Court go directly to the Family Division hears matrimonial cases
Appeals go to the
Court of Appeal Supreme Court
MAGISTRATE COURT COUNTY COURT
Court of first instance. It deals with criminal cases Court of first instance for civil cases.
in various ways.
Hears all small track cases (<£5000), most fast
Appeals on questions of fact go to the Crown Court track cases (£5000 – 15000) and some multi-
track cases (>£15000)
Appeals on questions of law go to the High Court
Page 11 of 127
CHAPTER –2:: INTERNATIONAL TRADE, LEGAL REGULATION AND CONFLICT OF LAW
INTERNATIONAL LAW
 International law is a system that regulates the interrelationship between various states and their rights
and duties towards one another. It consists of both Private International Law and Public International Law
 Public International Law consists of rules and regulations that apply in general to the behaviour of
sovereign states and international organisations. It is applicable in situations involving war crimes, human
rights abuses etc.
 Private International Law consists of rules and regulations that govern the conflicts between laws of two or
more nations. It is applicable on individuals and corporations and their dealings with one another.
NEED FOR INTERNATIONAL LAW
 The need for international law has mainly arisen due to the conflict of laws between nations that trade with
one another. For example, if a Bangladeshi company trades with an American Company, a conflict may arise
over which country’s law is to be followed as both countries are likely to have a different set of laws on
business transactions
 In order to resolve this problem, various international conventions, treaties and model laws have been
developed. For example, TheRome Convention 1980 established that if there is a written contract between
two parties and their preferred choice of national law is mentioned in that contract, both parties are bound
by that country’s law. On the other hand, The New York Convention 1958 encourages companies to settle
their disputes through Arbitration
 Due to the complex nature of international transactions, many model laws and conventions have been
developed by international organisations such as the United Nations, the International Chamber of
Commerce, the World Trade Organisation, the Organisation for Economic Cooperation and Development, the
International Institute for the Unification of Private Law etc.
THE UNITED NATIONS (UN)
BASICS
 It is an international organisation established in 1945 and comprises of most independent nations of the
world. Its primary purposes include:
 Maintaining international peace and security
 Developing friendly relations amongst nations
 Co-operating in solving economic, social, cultural and humanitarian problems
 Promoting respect for human rights and international freedoms
 The UN has two bodies who are responsible for producing international law: The International Law
Commission (ICL) and The UN Commission on International Trade Law (UNCITRAL)
Page 12 of 127
UN COMMISSION ON INTERNATIONAL TRADE LAW (UNCITRAL)
 It was established in 1966 comprising of 60 member states and is responsible for drafting international
law. It attempts to overcome barriers in international trade that arise from differing national laws.
 It was given the task of harmonizing and unifying the law of international trade through the following
measures:
 Coordinating the work of active organisations and encouraging their cooperation
 Promoting wider participation of existing international conventions and wider acceptance of
model and uniform laws
 Promoting the codification and wider acceptance of international trade terms, provisions, customs
and practices
 Promoting uniform interpretation and application of international conventions and laws
 Communicating information regarding existing laws and legal developments related to
international trade
 Maintaining close collaborations with UN organs and other specialized agencies concerned with
international trade such as the ICC and WTO
 The commission operates through six working groups, comprising of ALL member states, each dealing with
a different aspect of international trade:
 Working Group I – Procurement
 Working Group II – Arbitration and Conciliation
 Working Group III – Online Dispute Resolution
 Working Group IV – Electronic Commerce
 Working Group V – Insolvency Law
 Working Group VI – Security Interests
 It has produced, amongst others, the following Model Laws and Conventions:
 The UN Convention on Contracts for International Sale of Goods
 The UN Convention on the Carriage of Goods by Sea
 The UN Convention on International Bills of Exchange and International Promissory Notes
 UNCITRAL Model Law on International Commercial Arbitration
 UNCITRAL Model Law on Electronic Commerce
 UNCITRAL Model Law on Cross-Border Insolvency
THE WORLD TRADE ORGANISATION
BASICS
 It was formed in 1995 as a successor to the General Agreement on Tariffs and Trade (GATT). It has over
150 member states which represent around 97% of international trade.
 It is devoted to the promotion of international free trade of goods and services including intellectual
property
 It seeks to remove or overcome barriers to free trade such as Tariffs, Quotas, and Import Controls etc.
 It assists developing economies in forming National Trade Policies and conducts review of such policies
Page 13 of 127
 Its main guidelines are contained in GATT which includes principles of Trade Liberalisation, whereby
members are required to operate non - discriminatory trading systems and treat each other fairly. There
are special concessions for developing economies
 It also helps nations in resolving disputes through its dispute settlement body
 All WTO members must notify the WTO about changes in their laws and regulations and are subject to
review by the WTO for significant inconsistencies with international norms
 The WTO makes their decisions usually through a consensus of all member states. The organizational
structure of the WTO can be summarized as follows:
 The Ministerial Conference: It is the top level decision making body who meet at least once every
two years
 The General Council: It meets on a frequent basis and acts as the Trade Policy Review Body and the
Dispute Settlement Body
 The Secretariat: It is led by the Director-General and is involved in providing technical support to
the various Councils, Committees and Ministerial Conference of the WTO. It also provides assistance
to developing nations in forming policies and acts as WTO Spokesperson
 Special Councils: These include the Goods Council, Services Council and Intellectual Property
Council (TRIPS) who report on related issues to the General Council
 Committees: These deal with individual agreements and areas such as the environment,
development, membership applications and regional trade agreements
ROLE IN RESOLVING DISPUTES
 The WTO resolves disputes in international trade through its Dispute Settlement Body (DSB). If the DSB is
unsuccessful, it appoints a panel of experts to resolve the issue based on the interpretation of GATT
 The panel comprises of three, or possibly five, well qualified independent individuals from different
countries, after consultation with the countries in dispute. Both parties are bound by the decision of the
panel, but they are allowed to make an Appeal
 Appeals are heard by Three qualified independent members of the DSB’s Appellate Division. The Appellate
division can uphold, modify or reverse the panel’s ruling but the final decision lies with the DSB.
 The DSB can however, only reject a panel’s ruling by consensus and on a point of law. It also monitors how
rulings and recommendations are implemented and authorizes retaliation for non-compliance
THE INTERNATIONAL CHAMBER OF COMMERCE (ICC)
 It was formed in 1919 to promote trade, investment and open markets based on free and fair competition
amongst businesses
 It also promotes economic growth in Developed and Developing Countries and helps to counter
International Commercial Crime
 It is mainly concerned with the legal processes that support trade and settlement of disputes
 It makes representations to governments and other international bodies regarding development of
international trade law. It also produces and promotes International Commercial Terms (Incoterms)
 It set up the international court of Arbitration in 1923 which promotes and facilitates the use of
Arbitration in commercial disputes. The ICA overseas all aspects of arbitration proceedings.
Page 14 of 127
THE INTERNATIONAL INSTITUTE FOR THE UNIFICATION OF PRIVATE LAW (UNIDROIT)
 It is an independent intergovernmental organisation concerned with the modernization, harmonization

and co-ordination of international private law and international trade law
 It was established in 1926 and comprises of 60 member states who have signed up to its statutes
 It also sometimes deals with Public Law, especially when they are linked with Private Law
 It addresses the need for new international laws arising due to developments in technologies and
commercial practices
 Some of its rulings are restricted to cross border relations where as others deal with a country’s internal
affairs
 Its rulings usually take the form of international conventions. Once approved and accepted by member
states, its laws take preference over the national law of the member state
 In order to promote acceptance of its laws by member states, it has issued various alternatives such as:
 Model Laws: These can be adopted or adapted by member states while drafting their own domestic
legislations
 General Principles: These can be used as a guidance by judges, arbitrators and contracting parties
while making decisions involving international trade disputes
 Legal Guides: These contain guidelines regarding internationally acceptable business techniques
and transactions
 The organizational structure of the UNIDROIT is divided as follows:
 The Secretariat: It comprises of the Secretary General along with other International Civil Servants
and is responsible for the day-to-day running of UNIDROIT
 The Governing Council: It comprises of the President and 25 elected members who are responsible
for the supervision of UNIDROIT’s policies and procedures
 The General Assembly: It is the ultimate decision making organ of the UNIDROIT
COUNCIL OF EUROPE {COE}
 It is an organisation consisting of European member states with an aim to Protect Human Rights,
Democracy and the Rule of Law, solve Problems facing European Society and Promote Europe’s Cultural
Identity
 It has 47 member countries who work towards legal cooperation in Europe. It seeks to improve judicial
procedures and promote common solutions to modern legal problems
 It has produced Conventions on Money Laundering, Protection of Wildlife, Doping in Sport, Bioethics and
Cloning, Nationality and Corruption, etc.
 It comprises of the following bodies:
 The Committee of Ministers comprising of Foreign Secretaries from the member states and is the
organisation’s official decision making body
 The Parliamentary Assembly comprising of 630 members of national parliaments and a President
 The Congress of Local and Regional Assemblies comprising of a chamber of local authorities and a
chamber of regions
 The Secretariat comprising of 1800 members headed by a Secretary General
Page 15 of 127
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT {OECD}
 The OECD is a group of member countries whose modern aim is to be a forum for discussing, developing
and refining economic and social policies. It has 30 member countries from most continents
 It creates legally binding agreements as well as non-binding guidelines, specially on Corporate Governance
BARRIERS TO INTERNATIONAL TRADE
 Barriers to international trade exist in order to protect domestic markets from outside competition. This is
known as Protectionism. Common protectionist policies include the following:
 Tariffs:
Tariffs are taxes imposed on imported goods in order to make them more expensive and hence
discourage their consumption.
 Quotas:
Quotas are restrictions on the number of goods that can be imported into a country. Although it
discourages imports, it also leads to a fall in government revenue through taxation
 Embargoes:
An embargo is a complete ban on the import of a particular item
 Subsidies:
Governments often provide various forms of assistance to domestic producers including export
credit guarantees (insurance against bad debts), Government Grants and other non-financial aids
such as development of infrastructure, in order to boost domestic production and thus reduce the
demand for imports
 Administrative Restrictions
Governments often impose various complex administrative procedures for importers in order to
make imports more difficult
Page 16 of 127
CHAPTER –3:: ALTERNATIVE DISPUTE RESOLUTION MECHANISM
COURT BASED ADJUDICATION
ENGLISH SYSTEM OF COURTS
 The English Court System is decentralized through a system of local courts whereby minor cases are dealt
by lower courts and major cases are dealt by higher courts. Cases from lower courts may move up to the
higher courts through a series of appeal courts
 The highest court in England is the Supreme Court who only deals with cases whose outcome might have a
significant impact on the country’s laws. The highest court of appeal in UK is the European Court of Justice
 Most employment related cases are heard by Employment Tribunals manned by specialist judges, instead
of courts. Any appeals from the Tribunal goes to the Employment Appeal Tribunal
ENGLISH CIVIL COURTS
 COUNTY COURT
 The lowest civil court in UK is the County Court and it is the Court of First Instance {court where a
case is first heard} for most civil cases including civil claims in contract, tort, tenancy, probate and
insolvency.
 Small track cases are heard by a District Judge whereas most fast track and some multi track cases
are heard by a Circuit Judge who must be Barristers with at least 10 years experience. In very rare
cases, Circuit Judges are accompanied by a Jury of 8 persons}
 HIGH COURT
 The High Court is manned by Puisne Judges who must also be Barristers with 10 years experience.
First instance cases are heard by one judge where as appeal cases are heard by two judges
 The High Court has three divisions, each of which deals with different types of cases as follows:
o Queen’s Bench Division – hears first instance cases of Contract and Tort
o Chancery Division – deals with land law, trusts, company law, partnership law, insolvency
etc. It also hears appeals from County Courts
o Family Division – hears matrimonial cases
 COURT OF APPEAL {CIVIL DIVISION}

 The Court of Appeal is manned by Three Lord Justices of Appeal, who are usually judges promoted
from the High Court
 They hear appeals from the High Court and in some cases, the County Court and makes a ruling by
majority
 SUPREME COURT
 The Supreme Court is manned by Five Law Lords who hear appeals from the Court of Appeal and in
some cases, the High Court
 They only hear cases whose outcome has a significant impact on public interest and national law
Page 17 of 127
ENGLISH CRIMINAL COURTS
 MAGISTRATES COURT
 It is the lowest criminal court that deals with most first instance criminal cases. It is manned by
either Three Lay Magistrates who are not legally qualified, or a District Judge who must be a
Barrister with 7 years of experience.
 Criminal Cases are either:
o Summary Offences – where the judge decides whether the defendant is guilty and imposes
the penalty
o Indictable Offences – where the case is passed on to the crown court to be tried on by a
Judge and a Jury of 12 persons
 Appeals on questions of Fact go the Crown Court where as appeals on questions of Law go to the
High Court
 They also deal with civil cases relating to family matters such as contact orders, adoption and child
maintenance
 CROWN COURT
 The Crown Court hears appeals on questions of Fact from the Magistrates Court. It is manned by a
Circuit Judge and a Jury of 12 persons
 The Judge considers the legal issues related to the case where as the Jury decides on issues related
to the facts of the case and decides on the punishment by a majority ruling
 Appeals from the Crown Court moves on to the Court of Appeal
 HIGH COURT {Queens Bench Division}

 It is manned by Three District Judges and hears appeals from the Crown Court on questions on fact
 Appeals from the High Court go directly to the Supreme Court
 COURT OF APPEAL {Criminal Division}

 It is manned by Three Lord Justices of Appeal and hears appeals from the Crown Court
 Appeals from the Court moves on to the Supreme Court
 SUPREME COURT
 It is the Highest Court in England and is manned by Five Law Lords who hear appeals from the
Court of Appeal and sometimes, from the High Court
 Any appeals from the Supreme move on to the European Court of Justice or the European Court of
Human Rights
INTERNATIONAL COURTS
ROLE OF INTERNATIONAL ADJUDUCATORS
 International include International Courts {e.g.: ECJ} and International Venues for Arbitration {ICA}
 They can sort out conflict of laws between nations and enforce rulings to settle of disputes
EUROPEAN COURT OF JUSTICE
Page 18 of 127
 The ECJ is the highest court in the EU and the highest Court of Appeal in each member state of the EU
through a Treaty signed by each of the 28 member states
 It settles disputes and provides legal advice on issues put before it by international organisations
 It has 15 judges, each from a different country, elected by the General Assembly of the UN for a term of 9
years. Elections are held every three years for one-third of the seats and retiring judges may be re-elected
INTERNATIONAL CRIMINAL COURT
 It is an independent international organisation, formed by a treaty between nations in 1998, to deal with
the gravest of crimes against humanity, such as genocide and war crimes
 It only has the power to rule on cases of countries who have accepted their authority
INTERNATIONAL COURT OF ARBITRATION
 The ICA is a body set up by the International Chamber of Commerce in 1923. It has played a significant part
in the development and promotion of the use of Arbitration in settling international commercial disputes.
 Countries who have ratified their authority through the Treaty of the 1958 New York Convention, must
recognise Written Arbitration Agreements as legally valid and not submit such disputes to court
 It is a suitable method of resolving disputes where the parties involved belong to countries with different
legal systems
 The ICA overseas all aspects of the Arbitration process including the Appointment of Arbitrators, Fixing
Arbitrator fees, Approving arbitral awards, deciding on challenge to Arbitrators etc.
ALTERNATIVE DISPUTE RESOLUTION {ADR}
ARBITRATION
 It is the settlement of a dispute by an independent person usually chosen by the parties themselves.
 It usually leads to different solutions to court based adjudication such as:
 A change in the way a person or organisation behaves
 A promise that a person or company won’t do something
 An apology
 An explanation for what happened
 A mistake corrected
 Compensation
 An agreement between parties to submit any dispute that may arise to Arbitration is a Contract, subject to
the rules of Contract Law. This means that if two parties decide to resolve their dispute through
arbitration, they cannot go to the court first. However, they are allowed to appeal to a court once a decision
has been made in arbitration
 Arbitration is highly recommended in Islamic Law and is known as Takhim. Arbitrators are called Hakam,
who must be Male Muslims, learned in Sharia and qualified to act as an Arbitrator
Page 19 of 127
MEDIATION AND CONCILIATION

 It involves the use of an independent third party who assists the disputing parties in finding a solution to
their own problems.
 Mediation agreements are usually not legally binding and hence any party can take the matter to court if
they wish to do so
 Mediation in Islamic Law is known as Soth, whereas Conciliation is known as Wasta
ARBITRATION vs. COURT BASED ADJUDICATION

 ADVANTAGES:
 The parties involved in the dispute are allowed to choose their own Arbitrator {judge} and hence a
specialist, with expert knowledge in the particular commercial field that they are in, can be used
unlike Court Judges, who are mainly specialized in matters of law. Such persons are likely to come
up with better and more practical decisions
 Arbitration is cheaper than court based proceedings as the use of legal representations {lawyers}
are not mandatory
 Arbitration is Informal, and hence more Flexible and Quicker than court proceedings
 Arbitration allows the parties to settle the dispute privately, which is likely to be desirable by both
parties, especially if the matter in dispute is of a commercially sensitive nature
 Parties in international disputes will usually want to avoid litigation in a foreign country.
Arbitration may take place in a neutral place which offers no advantages to either party
 DISADVANTAGES:
 Court based judges are more legally equipped and are hence likely to deliver better decisions on
disputes related to legal matters
 Court decisions are based on the doctrine of judicial precedents which gives the system more
predictability and stability whereas arbitration decisions are made on a case-by-case basis which
may lead to inconsistencies
 There is must more scope for appeal in the court system
UNCITRAL MODEL LAW ON INTERNATIONAL COMMERCIAL ARBITRATION
INTERNATIONAL COMMERCIAL ARBITRATION
 The UNCITRAL adopted the Model Law on International Commercial Arbitration in 1994. Although it is not
a Convention, it is a set of rules which can be adopted into a country’s National Law. It is applicable on
Arbitration arrangements that are both International and Commercial
 According to Article 1 of the Model Law, Arbitration is International if:
 The parties have their place of business in different states
 The parties have their place of business in the same state but the business transaction is to take
place in a different state or the Arbitration Proceedings are to take place in a different state
 The parties agreed that the subject matter of the arbitration relates to more than one country
 If a party has more than one place of business, the place of business most closely related to the
Arbitration Agreement must be considered
 According to Article 1, Arbitration is commercial if it covers matters relating to trade, whether or not there
is a contract
Page 20 of 127
WRITTEN COMMUNICATION
 According to Article 3 of the Model Law, any written communication in an Arbitration Arrangement is
deemed to have been received if it is delivered to the recipient personally or at his place of business,
habitual residence or mailing address.
 If none of the above places are found after reasonable inquiry, the communication is assumed to have been
received if it is sent to the last-known place of business, habitual residence or mailing address by a
registered letter.
 The communication is assumed to have been received on the day it is delivered, not on the day it is
received.
ROLE OF COURTS
 According to Article 5 of the Model Law, national courts must not interfere in matters governed by the
Model Law unless it is allowed by the Model Law
 According to Article 6 of the Model Law, each state who adopts the Model Law should specify a court within
the law who will perform the necessary functions such as default appointment of arbitrators
FORM OF THE ARBITRATION AGREEMENT
 According to Article 7 (1) of the Model Law, an Arbitration Agreement is an agreement between the parties
to resolve their current or potential disputes through arbitration, whether or not a contractual relationship
exists between them
 According to Article 7 (2) of the Model Law, an Arbitration Agreement must be in Writing. The Model Law
explains that a written arbitration agreement can be any of the following:
 A document signed by both parties or an exchange of communication which provide a record of a
written agreement
 An exchange of Statement of Claim and Statement of Defence, where one party claims that an
agreement exists but the other party doesn’t deny it
 A written contract between the parties makes reference to another document containing an
arbitration agreement
 For example: X enters into a contract with Y in 2010 to sell some product. The contract contains
many conditions including an arbitration agreement. In 2011, X enters into another contract with Y
to sell some more products. This contract states that all the conditions of the previous contract are
applicable. Although the new contract doesn’t mention an arbitration agreement, it makes a
reference to such an agreement in a previous contract.
COURT PROCEEDINGS
 According to Article 8 (1) of the Model Law, if a matter which is supposed to be resolved through Arbitration
is brought into a court, the court should refer the matter to Arbitration, unless the agreement is found to be
void {invalid}. For example, if the agreement was not made in writing
 According to Article 8 (2) of the Model Law, Arbitral Proceedings regarding a dispute may continue, even if
the matter is brought to a court on the grounds that the agreement is invalid
Page 21 of 127
ARBITRAL TRIBUNALS
COMPOSITION OF THE ARBITRAL TRIBUNAL
 According to Article 10 of the Model Law, the parties may decide the number of Arbitrators that would form
a Tribunal. However, if the parties fail to do so, the article states that there must be at least 3 Arbitrators
 According to Article 11 of the Model Law, the parties may decide on how to appoint arbitrators provided
that the following conditions are met:
 A person should not be stopped from being an Arbitrator on the grounds of his Nationality
 If a party fails to appoint an arbitrator, they may request the relevant court, specified in their
National Law, to appoint an arbitrator on behalf of the party
 If any of the Arbitrators or a relevant third party fails to perform his functions properly, any party
may apply to the relevant court to take action
 Any decision taken by the relevant court is not subject to an appeal
 If the parties decide to use a single arbitrator, they must agree on who that arbitrator shall be or they may
request the relevant court, specified in their national laws, to choose one on their behalf
 If the parties or the relevant courts fail to reach an agreement, then the Model Law gives the following
procedure:
 Each party will appoint a single Arbitrator of their choice within 30 days of the commercial
agreement.
 The two Appointed Arbitrators should appoint a third Arbitrator within 30 days of their
appointment
QUALIFICATIONS OF ARBITRATORS
 According to Article 11 (5) of the Model Law, an Arbitrator must be Independent and Impartial in relation to
matter subject to Arbitration
 According to Article 12 of the Model Law, an Arbitrator must disclose any relevant facts that might make
them not Independent and Impartial at all times throughout the arbitration process.
 However, a party cannot challenge the appointment of an arbitrator on the basis of information they
already knew when the arbitrator was appointed
CHALLENGING AN ARBITRATOR’S APPOINTMENT
 According to Article 13 of the Model Law, the parties may agree on a procedure for challenging the
appointment of an Arbitrator. If they fail to do so, the Model Law must be followed
 The Model Law sets out the following procedures for challenging the appointment of an Arbitrator:
 The challenging party must send a written statement of challenge to the Arbitral Tribunal within 15
days of become aware of the grounds for challenge
 The challenged Arbitrator may withdraw from office as a result of the challenge
 If the other party agrees to the challenge, the challenged Arbitrator must withdraw from office
 If the challenge procedure is not successful, the challenging party may refer the matter to the
relevant court within 30 days
 While the court considers the challenge, the Arbitral Tribunal may continue their proceedings
 Once the court decides on the challenge, no further appeal can be made
Page 22 of 127
 According to Article 14 of the Model Law, the appointment of an Arbitrator is terminated if it becomes
impossible for him and he withdraws from office or if the parties agree to the termination
 According to Article 15 of the Model Law, if an Arbitrator retires, a substitute Arbitrator must be appointed
on the same basis as the original Arbitrators
 According to Article 16 (1) of the Model Law, if an Arbitration agreement is contained in another contract
and that contract becomes invalid, the clause in the contract relating to the arbitration agreement still
remains valid
 According to Article 16 (2) of the Model Law, if a party wants to challenge the jurisdiction of the Tribunal to
conduct the proceeding, a plea must be sent to the Tribunal before the statement of defence is submitted
 According to Article 16 (3) of the Model Law, if the Tribunal agrees that it has jurisdiction, any party may
appeal to a relevant court within 30 days of the Tribunal’s decision, to judge whether the Tribunal’s
decision is valid
ARBITRAL PROCEEDINGS
GENERAL RULES THAT APPLY TO ARBITRAL PROCEEDINGS
 According to Article 18 of the Model Law, Both parties must be treated equally and given the opportunity to
present his case
 According to Article 19 of the Model Law, the parties are free to agree on the procedure to be followed. If the
parties fail to agree, the Arbitral Tribunal shall conduct the proceedings in a manner which it considers fit
SPECIFIC GUIDELINES TO BE FOLLOWED
 According to Article 20 of the Model Law, the parties shall decide the place where the arbitration is to take
place. If the parties fail to agree, the Tribunal will decide the place
 According to Article 21 of the Model Law, the parties shall agree when the proceedings are to begin. If the
parties fail, it can be assumed to begin when the request for Arbitration is received by the Arbitrator
 According to Article 22 of the Model Law, the parties shall agree on the language in which the proceedings
are to be held. If the parties fail to do so, the Tribunal may determine the language
 According to Article 23 of the Model Law, the party referring to Arbitration must send a Statement Of Claim
to which the other party must respond with a Statement of Defence
 According to Article 24 of the Model Law, the following rules must be followed regarding documents and
hearings:
 Unless the parties make a decision regarding the matter, the Arbitral Tribunal shall decide whether
to hold hearings for the presentation of evidence Orally or on the basis of documents.
 However, if any of the party requests for a oral hearing, the proceeding must be held orally.
 The parties shall be given Advanced Warning of hearings or any inspection of goods or documents
by the Arbitral Tribunal.
 All statements, documents and other information from one party must be publicized to the other
party
 Any materials used by the Tribunal to make its decisions must be disclosed to both parties
 According to Article 25 of the Model Law, if either of the parties fail to attend a hearing or present
documentary evidence, the Tribunal will continue with its proceedings on the basis of evidence available
Page 23 of 127
 According to Article 26 of the Model Law, the Arbitral Tribunal may appoint one or more experts in specific
fields to assist them in reaching a decision
 According to Article 27 of the Model Law, the Tribunal or one of the parties with permission of the Tribunal,
may seek assistance from a court in preparing or inspecting evidence
STATEMENT OF CLAIM AND DEFENCE
 According to Article 23 of the Model Law, the Claimant in an Arbitration Proceeding, must send a Statement
of Claim stating:
 The facts supporting the claim
 The points at issue
 The remedy sought
 In response to the Statement of Claim, the other party must send a Statement of Defence
 Both statements must be sent within a time period agreed by the parties, or the Tribunal if no such
agreement was made
 If the claimant doesn’t present their Statement within the specific time period, the Tribunal must terminate
the proceedings. If the defendant fails to provide their Statement, the proceedings must continue. However,
the lack of response from the defendant should be considered as an admission to guilt
TERMINATION OF PROCEEDINGS
 According to Article 32 of the Model Law, an arbitration proceeding is terminated when:

 An award{decision} is made
 The Tribunal issues an Order to terminate the proceedings
 An order to terminate the proceedings may be issued in the following situations:
 The claimant withdraws its claim
 The parties agree to terminate the proceeding
 The arbitration becomes unnecessary or impossible
ARBITRAL AWARDS {DECISIONS}
DECISION PROCEDURES
 According to Article 28 (1) of the Model Law, the Arbitral Tribunal shall make its decision based on the rules
of law chosen by the parties
 According to Article 28 (2) of the Model Law, if the parties do not specify a law, the decision should be based
on the law the Tribunal sees fit
 According to Article 29 of the Model Law, the decision should be made by a majority of the Arbitrators
 According to Article 30 of the Model Law, if the parties settle their disputes before a decision is made, the
Tribunal should end the Arbitration and record the settlement as if it had been the arbitral award
FORM AND CONTENT OF THE ARBITRAL AWARD
 According to Article 31 of the Model Law, an arbitral award must:

 Be in Writing
 Be Signed by the Arbitrators
Page 24 of 127
 State the reasons behind the award

 State the Date of the award and Place of arbitration
 Be Copied and sent to both parties
 According to Article 33 of the Model Law, a party may request the Tribunal within an agreed time or 30
days, to correct any errors in the award or explain a point made in the award. If the Tribunal considers the
request to be valid, it must make the correction within 30 days of the request.
 Moreover, the Article further states that a party may request the Tribunal to make an Additional Award if it
was suggested during the proceedings. If the Tribunal considers the request to be valid, it must grant the
award within 60 days of the request
RECOURSE AGAINST AN ARBITRAL AWARD
 According to Article 34 of the Model Law, a party may apply to the relevant court, within Three Months of
the granting of an award, to have the arbitral award set aside{cancelled} if:
 The agreement is no longer valid according to the law chosen by the parties or one of the party was
under some incapacity
 A party was not given proper notice of the Arbitral Proceedings or Appointment of an Arbitrator
and was therefore not able to present their case properly
 The award deals with a matter not covered by the arbitral agreement
 The composition of the Tribunal was incorrect
 The subject matter of the dispute cannot be settled by Arbitration according to the law chosen by
the parties
 The award conflicts with the public policy of the law of the state chosen by the parties
 The court may suspend a setting aside procedure for any time period. During this period, the Tribunal may
resume the original proceeding or take other actions to remove the need for a setting aside the award
 A setting aside procedure is effective in all states involved in the arbitration
ENFORCEMENT OF AN ARBITRAL AWARD
 According to Article 35 of the Model Law, an Arbitral Award is binding on both parties regardless of where it
is made, unless either of the party appeals to the relevant court
 According the Article 36 of the Model Law, as the arbitration panel doesn’t have the authority to enforce an
award it sets, the Claimant needs to enforce the award by making a written application to the court. An
application for enforcing an award can only be refused by the court if:
 The hearing and all the rules of the proceedings were not followed properly
 The subject matter of the dispute is not capable of being settled by arbitration or where
enforcement would go against that country’s public policy
 An award for recognition or enforcement is only valid in the state where the party seeks recognition or
enforcement
Page 25 of 127
CHAPTER –4:: CONTRACTS FOR INTERNATIONAL SALE OF GOODS

UNITED NATIONS CONVENTION ON CONTRACTS FOR INTERNATIONAL SALE OF GOODS {UNCISG}
APPLICATION OF UNCISG
 As per Article 1, UNCISG applies to contracts for the Sale of Goods between buyers and sellers whose places
of business are in different states. A sale of goods is an Agreement by which the Seller transfers, or agrees
to transfer, the property in goods {legal title} to a Buyer for monetary compensation called the Price
 It is applicable in the following situations:
 Where both parties are in states that have ratified (accepted) the convention. Such states are known
as Contracting States
 Where only one party is in the contracting state but, through mutual agreement, the contract is
governed by the law of the contracting state.
 As per Article 2, UNCISG doesn’t apply to goods bought for Personal, Family or Household use, unless the
Seller didn’t, or couldn’t have known, that they were bought for that use.
 The Convention also doesn’t apply to the following transactions:
 Goods bought by Auction
 Goods bought on execution of/by authority of Law
 Sale of Stocks, Shares, Investments, Negotiable instruments or money
 Sale of Ships, Vessels, Hovercraft or Aircraft
 Electricity bought by one country from another
 As per Article 3, the Convention doesn’t apply to the Supply of Services or contracts where the main
obligation of one party is to provide Labour. It also doesn’t apply to contracts of manufacture where the
Buyer provides the substantial part of the materials.
 As per Article 4, the Convention mainly applies to the Rights and Obligations of the Buyer and Seller in a
contract for sale of goods. It is not concerned with issues such as the validity of the contract or its effect on
the actual goods being sold
 As per Article 5, the Convention doesn’t apply to the Liability of the Seller for death or personal injury
caused by the goods to any person
 As per Article 6, the Convention would not be applicable if both parties agree not to follow it
 As per Article 7, the Convention was mainly formed with the intention of developing a set of rules and
regulations that was International, Uniform and Based on Good Faith so that it can be used in International
transactions
 As per Article 8, the Nationalities of the contracting parties are not relevant; it is their location of business
that is considered. Moreover, if the dealings between the parties or the terms in the contract make it clear
that they are actually doing business from the same state, the Convention would not apply
 As per Article 9, parties to a contract governed by UNCISG, must follow all its rules and regulations,
including the customs and practices that they have agreed to follow
 As per Article 10, if a party doesn’t have a place of business, its habitual residence must be considered. If
they have more than one place of business, the place most closely connected with the contract must be
considered
 As per Article 11, contracts for sale of goods do not have to be in Writing, they can also be made orally. The
existence of oral contracts may be proved in any way, including the use of witnesses.
 As per Article 12, if the National Law of a State requires contracts to be in Writing, any oral contract would
be considered invalid
Page 26 of 127
 As per Article 13, written contracts include Telegrams and Telex
OFFER
DEFINITION OF AN OFFER
 As per Article 14 of the UNCISG, an Offer is a Sufficiently Definite proposal made by the Offeror, for entering
into a contract Addressed to one or more Specific Person(s), known as the Offeree, which indicates the
intention of the Offeror to be bound on specified terms, in case of Acceptance.
 An Offeror is a person(s) who makes an offer where as an Offeree is a person(s) who receives the offer and
has the option to accept it
 An offer is Sufficiently Definite when it indicates the following:
 The Goods in question
 The Quantity of the goods being offered
 The Price at which the goods are being offered
 Therefore, for an Offer to be considered as Acceptable, it must have the following three elements:
 It must be made to one or more specific person(s) rather than the world at large
 The contents of the Offer must be sufficiently definite with clear indication of the goods in question,
its quantity and its price
 There must be clear indication that the Offeror intends to be bound on specified terms with the
Offeree if the offer is accepted
 Any Offer that doesn’t have the above characteristics is usually considered as an Invitation To Treat. An
Invitation to Treat cannot be Accepted.
COMMENCEMENT OF AN OFFER
 As per Article 15, an offer only becomes Effective when it reaches the Offeree.
 An offer is assumed to Reach the Offeree when:
 It can be communicated to them orally,
 It is delivered by other means to them personally at their place of business or mailing address.
 It is delivered to them personally at their habitual residence if their place of business doesn’t exist
 This “reaching” rule is applicable on the communication of an Offer, Acceptance, Rejection, Withdrawal,
Revocation and Counter Offer
END OF AN OFFER
 An offer may come to an end if there is a Withdrawal, Revocation, Rejection or Counter Offer any time
before the Offeree communicates their acceptance.
 As per Article 15, even an irrevocable offer may be Withdrawn if the withdrawal reaches the Offeree Before
or at the same time as the Offer itself
 As per Article 16, an Offer may be revoked if the revocation reaches the Offeree before they send their
Acceptance. However, an offer cannot be revoked in the following circumstances:
 The Offer was Irrevocable
 It was reasonable to assume that the Offer was Irrevocable and the Offeree acted on that
assumption
 As per Article 17, any offer can be Terminated by Rejection, when rejection reaches the Offeror
Page 27 of 127
ACCEPTANCE
DEFINITION
 As per Article 18, Acceptance is a statement made by the Offeree or an Act performed by him, such as the
dispatch of goods or payment of an agreed price, which indicates his assent to the Offer. Acceptance takes
effect when the indication of it, reaches the Offeror.
 Silence or Inaction of an Offeree, on receiving an offer, cannot be considered as Acceptance.
 Acceptance becomes Effective when it reaches the Offeror, unless:
 It does not reach the Offeror within a Agreed period of time
 It does not reach the Offeror within a Reasonable period of time
 As per Article 20, the period of time within which an offer must be accepted begins:
 From the moment an Offer made through Telegram is handed in
 From the date shown on the Envelope or in the letter containing the Offer made through post
 From the moment an Offer is made through instant communication
 A Reasonable Period of Time depends upon the method of communication used. For example, an Oral Offer
Must be accepted Immediately, whereas, an Acceptance made by Post could reasonably take several days
 If, based on past dealings, an Offeree usually shows his Acceptance by performing an Act, then Acceptance
becomes Effective as soon as the Act is performed but Acceptance is only effective if performed within the
correct period
 Official Holidays and Non-business days are included within the time period, although an extra business
day may be allowed in certain circumstances
 As per Article 21, late acceptance can be valid if the Offeror did not notify the Offeree that the offer has
lapsed or he accepts it without delay or notifies the Offeree of his approval
 As per Article 22, acceptance may be withdrawn if the withdrawal reaches the Offeror before or at the same
time as the acceptance itself
COUNTER OFFERS
 As per Article 19, an Acceptance which contains Additions, Limitations or Modifications to the terms of the
offer, such as significant changes in Price, Quantity, Place or Time of delivery or Method of Settling
Disputes, is known as a Counter Offer.
 A Counter Offer is considered as a Rejection of the Original Offer and hence the original offer can no longer
be accepted
 However, if the Additions or Modifications do not Materially alter the terms of the offer, it is still considered
as an Acceptance. Unless the Offeror objects, the modified terms of the contract will be valid
INCOTERMS
BACKGROUND
 Incoterms are International Commercial Terms, developed by the International Chamber of Commerce and
used in International Sale Contracts
 It was developed to address the following points, which needs to be agreed upon by the contracting parties,
for a contract to be effective:
 The extent of Carriage, Insurance and Customs Costs in the Contract Price
 The party that bears the risk of Damage or Loss
 The Time at which the Risk and Property in the goods pass
Page 28 of 127
 The party responsible for raising customs documentation

 Although the contracting parties aren’t compelled to use Incoterms, they help to clarify details in the way in
which goods are made available to the buyer
 The main issues in International Trade that are addressed by deciding to use particular Incoterms are:
 Who pays the cost of carriage
 Who bears the risk of damage
 Who bears the cost of insurance
 Where does the ownership transfer from buyer to seller
 Where does the risk pass from buyer to seller
 Who pays customs duties and raises customs documentation
INCOTERMS RELEVANT ON ANY MODE OF TRANSPORT:
 CARRIAGE AND INSURANCE PAID {CIP}

 This is where Carriage and Insurance are paid by the Seller up to a named destination.
 The Seller has to deliver the goods to a Carrier named by the Buyer and clear the goods for Export.
 Thereafter, the Buyer assumes all the costs such as Import duties, Customs duties, Insurance etc
 DELIVERED AT TERMINAL {DAT}

 Under this contract, the Seller is responsible for Carriage Costs to a named terminal at a named
destination, and Unloading the goods for the Buyer
 A terminal may be a warehouse, container yard, road, rail or air cargo terminal
 The Seller bears the risk of Delivery, Unloading and all Tasks and Payments relating to Export
clearance. The Buyer is responsible for Import related tasks and payments.
 DELIVERED AT PLACE {DAP}

 Under this contract, the Seller fulfils his responsibilities and forgoes his liability when the goods are
ready for Unloading by the Buyer at the agreed destination
 The Buyer is responsible for Import Clearance
 DELIVERED DUTY PAID {DDP}

 Under this contract, the Seller is responsible for and bears all the risks of, Delivering the goods to a
named place in the country the goods are being Imported, with all duties relating to import, paid.
 FREE CARRIER {FCA}

 Under this contract, the Seller fulfils his obligations when the goods have been cleared for export
and handed over to the Carrier named by the Buyer at a named point
 CARRIAGE PAID TO {CPT}

 Under this contract, the Seller pays for Carriage to a named location.
 The risks for the goods passes from the Seller to the Buyer when the goods are handed over to the
First Carrier
Page 29 of 127
 EX WORKS {EXW}
 Under this contract, the Seller has Minimum Obligations in respect of delivery as the Seller only
has to make the goods available to the Buyer at the Buyer’s own place of business.
INCOTERMS RELEVANT TO INLAND WATERWAY AND SEA TRANSPORT
 COST, INSURANCE AND FREIGHT {CIF}

 A CIF contract only applies to Sea and Inland Waterway Transport. The Seller is assumed to have
delivered the goods when they pass the ship’s rail in the port of shipment in the country of Import
 The Seller is required to bear the cost of Insurance and Freight and clear the goods for Export
 The Seller must contract for Carriage on the usual terms and use the usual routes, normally used
for these goods, and deliver them to a named port of destination in the country of Import
 Risk of Loss or Damage is borne by the Buyer, but the Seller must arrange for Insurance for the
Buyer from a well reputed Insurance company, covering 10% more than stated in the contract
 FREE ON BOARD {FOB}

 It is usually followed by the name of the port of Departure and only applies to Sea and Inland
Waterway Transport
 The Buyer makes all the arrangements for shipping and the Seller discharges their duty by putting
the goods on board the ship in the country of Export
 The Seller is required to provide export license and other necessary authorization and bear all the
risks and expenses until the goods are on board
 Once on board, the Seller has no obligations and the Buyer bears all the risks and responsibilities
and must obtain import license, if required.
 FREE ALONGSIDE SHIP {FAS}

 It is only applicable when goods are transported by ships
 The Seller’s obligation is discharged when the goods are placed alongside the ship in a named port,
to be transported to the Buyer’s country
 Thereafter, all the obligations fall to the Buyer
 COST AND FREIGHT {CFR}

 Under this contract, the Seller pays for all the Costs and Freight to take the goods to a named
terminal or port in the country of Import
 Once on board, the exporting country, the Buyer bears all the risks
 The Seller is required to clear the goods for export and the Buyer arranges for Marine Insurance
Page 30 of 127
CHAPTER –5:: OBLIGATIONS AND RISKS IN CONTRACTS FOR INTERNATIONAL SALES

OBLIGATIONS OF THE SELLER
OBLIGATIONS OF THE SELLER IN RELATION TO DELIVERY
 As per Article 30, the Seller must deliver the goods, and the related documents as required by the contract.
If no specifications are made in the contract, the rules of the Convention must be followed
 As per Article 31, if the Buyer specifies a place of delivery in the contract, the goods must be delivered at
that place. If a contract doesn’t specify a Place, the convention implies the following rules:
 For a contract Involving Carriage (where goods have to be transported to the Buyer), the Seller
fulfills his obligation when the goods are handed over to the First Carrier.
 For contracts not Involving Carriage:
o If the parties know that the goods are in a particular place, such as a warehouse or factory,
at the time of the contract, the Seller fulfills his obligations by placing the goods at the
Buyer’s disposal at that place (Basically, pack it and have it ready)
o In other instances, the Seller’s obligation is fulfilled when the goods are placed at the
Buyer’s disposal at the Seller’s place of business when the contract was formed
 As per Article 32, if the goods in a contract Involving Carriage is not clearly identified, the Seller must give
the Buyer Notice of the Consignment and specify the goods with Markings, Shipping Documents etc.
Moreover, the means of transport used must be reasonable and suitable for the type of goods being
transported.
 As per Article 33, the delivery should take place Within the Period, or on the Date, specified in the contract.
If the contract allows the Seller to determine the Date, delivery should take place on the date determined by
the Seller. If there are no such specifications, delivery should be made within a Reasonable Time of the
contract being formed
 As per Article 34, the Seller is obligated to hand over the Documents related to the contract, at the Time and
Place specified within the contract. The Seller may amend any incorrect documents handed over before the
due time, provided it doesn’t cause the Buyer Unreasonable Expenses
OBLIGATIONS OF THE SELLER IN RELATION TO QUALITY AND CONFORMITY
 As per Article 35 (1), the Seller must deliver the goods which are of the Quantity, Quality and description
required by the contract and that are contained or packaged in the manner required by the contract
 As per Article 35 (2), if the contract doesn’t specify the required level of Quality and Quantity or
Description, the following Conformity requirements must be met:
 The goods are fit for the purposes for which goods of the same description would ordinarily be used
 The goods are fit for any particular purpose expressedly or impliedly made known to the Buyer at
the timing of the contract unless the Buyer did not, or reasonably could not, rely on Seller’s
judgement or skill
 The goods possess the qualities of any sample or model held out by the Seller to the Buyer
 The goods are contained or packaged in the manner usual for such goods
Page 31 of 127
 The Seller is not obliged to sell goods which satisfy ALL the Statutory requirements of the Buyer’s state
unless the same rules apply in the Seller’s state or the Seller knew, or were told about the rules by the
Buyer.
 As per Article 35 (3), the Seller is not liable for any lack of Conformity if the Buyer knew, or ought to have
known about any Non Conformity at the time of the contract
 As per Article 36 (1), the Seller is liable for any lack of Conformity which exists at the time the risk passes
from the Seller to the Buyer
 As per Article 36 (2), the Seller is also liable for any non-conformity caused by the Seller’s Failure to
perform his obligations even after the risk has passed. This includes a breach of any Guarantee provided by
the Seller that the goods will remain fit for purpose they were bought for, or it will retain some specific
qualities
 As per Article 37, if goods lacking Conformity are delivered before the Due Date, the Seller is allowed to
make up for the Deficiency until the due date is passed, unless it causes Unreasonable Expenses or
Inconvenience for the Buyer
 As per Article 38, the Buyer must examine the goods to ensure Conformity as soon as possible after
delivery. If the Buyer sells the goods immediately after receiving it, and the Seller knew he would, the goods
may be examined at the next destination.
 As per Article 39, the Buyer loses the right to blame the Seller for lack of Conformity if he does not give
Notice to the Seller and specifies the problem within a Reasonable Period of Time. The maximum period
allowed is Two years
 As per Article 40, the Seller is liable if he knew, or ought to have known, that the goods did not comply with
all the requirements
THE RIGHTS OF THIRD PARTIES, ESPECIALLY IN RELATION TO INTELLECTUAL PROPERTY
Intellectual property refers to property such as Trademarks, Patents and Copyright, which provide the owner with
a form of limited monopoly or a degree of exclusivity
 As per Article 41, the Seller must deliver goods which are free from any Right or Claim of a third party,
unless the Buyer agreed to take the goods despite that right or claim.
 As per Article 42, the Seller must deliver goods which he knew, or ought to have known, are free from any
right or claim based on Industrial or Intellectual Property under the law of the state where the goods would
be resold/used or under the law of state of the Buyer’s place of business
However, in either case, the Seller is not liable if the Buyer agrees to take the goods regardless of a right or claim
attached to it.
 As per Article 43, if the Buyer is aware of the presence of such a third party right or claim, he must notify
the Seller within a Reasonable Time, unless the Seller already knew of that right.
 As per Article 44, if the Buyer has a reasonable excuse for failing to give notice of third party rights, he may
still claim a reduction in price
Page 32 of 127
BUYER’S REMEDIES FOR SELLER’S BREACH OF CONTRACT
 BREACH OF CONTRACT
 Breach of contract occurs where a party fails to perform his obligations under the contract.
 As per Article 25, a breach is Fundamental if it substantially deprives the party from what he was
expecting according to the contract
 In case of breach, the Buyer is given certain Specific Rights in the convention as well as Damages.
 As per Article 45, a Buyer is Always entitled to claim Damages regardless of what other remedy he
seeks
 SPECIFIC PERFORMANCE
 As per Article 46, the Buyer may require specific performance of the obligations of the contract by
the Seller, unless he chooses to declare the contract avoided. If the goods delivered do not conform
to the contract or Convention requirements, the Buyer may require the Seller to deliver Substitute
Goods {if breach was Fundamental} or Repair the Goods {if lack of conformity was slight and the
request is not unreasonable}
 As per Article 47, the Buyer may set an Additional Period of time for the contract to be performed,
during which, he may not resort to another remedy for breach.
 As per Article 48, unless the contract is avoided, the Seller may remedy his own failure to perform
at his own expense if, there is no unreasonable delay or it doesn’t cause the Buyer unreasonable
inconvenience. The Seller must notify the Buyer of his intentions and it must be communicated and
accepted by the Buyer. Lack of response can be considered as acceptance.
 As per Article 52, if the Seller delivers the goods early, the Buyer can accept or refuse to take
delivery at that time. Moreover, if the Seller delivers more than was ordered, the Buyer may accept
some, or part, or none of the excess goods.
 AVOIDANCE OF CONTRACT
 As per Article 49, the Buyer may declare a contract avoided in case of non-delivery or if the Seller
declares that he will not be able to deliver in the fixed time period
 As per Article 51, the Buyer may also declare a contract avoided if the breach of contract was
Fundamental.
 A declaration of avoidance is effective only if notice is given to the other party.
 REDUCTION OF PRICE
 As per Article 50, if the goods do not conform to the requirements of the contract, the Buyer is
entitled to reduce the price in proportion to the lack of conformity, unless the Seller corrects the
lack of conformity or the Buyer refuses to accept correction.
 The Buyer may also reduce the price if the Buyer has a reasonable excuse for failing to give notice of
third party rights
Page 33 of 127
OBLIGATIONS OF THE BUYER
OBLIGATIONS OF THE BUYER REGARDING PAYMENT AND DELIVERY
 As per Article 53, the Buyer must Pay the Price for the goods and Take Delivery of them as required in the
contract
 As per Article 54, the Buyer has a duty to Comply with any Formalities to enable payments to be made
 As per Article 55, if the contract doesn’t specify the price, the price generally charged at the time the
contract was formed is assumed to be the price of the goods
 As per Article 56, if the price is to be fixed according to weight, the Net Weight must be used to determine
the price i.e. excluding the weight of packaging
 As per Article 57, if the contract doesn’t specify Where the price is to be paid, the Buyer must pay it either
at the Sellers place of business or the place where the goods and documents are handed over.
 If the contract doesn’t specify When the payment is to be paid, the Buyer must pay the price when the Seller
places the goods and/or documents at the Buyer’s disposal. However, if agreed upon by the parties, the
Buyer is not obliged to pay until he has examined the goods
 As per Article 58, in a contract involving carriage, the Seller may dispatch the goods on the condition that
they will not be released unless payment is made
 As per Article 59, if a fixed date for payment has been set, the Buyer must pay the price at that date, even
without the Seller’s request
 As per Article 60, the Buyer is Must Take over the goods when delivered and perform all acts which could
reasonably be expected of him in order to enable the Seller to make delivery
SELLER’S REMEDIES FOR BUYER’S BREACH OF CONTRACT
BREACH OF CONTRACT
 If the Buyer breaches the contract, the Seller has the right to require payment and acceptance of the goods,
declare the contract avoided and seek damages.
 As per Article 61, the Seller is given a number of specific rights and the right to seek damages
 If the Seller seeks a remedy for breach of contract, the court is allowed not to give the buyer any
additional time to make the payment
SPECIFIC RIGHTS OF THE SELLER
 As per Article 62, the Seller has the right to require the Buyer to Make Payment, Take Delivery or Perform
his other obligations, unless he chooses to declare the contract Avoided.
Page 34 of 127
 As per Article 63, the Seller may fix an additional reasonable time period for the Buyer to perform his
Obligations, during which time; he may not resort to any other Remedy. The Seller may however, claim for
Damages
AVOIDANCE OF CONTRACT
 As per Article 64, The seller may declare the contract avoided if the Buyer’s breach of contract was
fundamental or the Buyer does not, or declares that he will not, accept or pay for the goods within the fixed
time period
 If the Buyer has paid for the goods, the Seller may not declare the contract avoided unless the Buyer makes
a delay in performing his obligations, of which, the Seller did not have any knowledge.
BUYER’S FAILURE TO PRODUCE SPECIFICATIONS
 As per Article 65, if the contract requires the Buyer to specify the form, measurements or other features of
the goods and the Buyers fails to do so, the Seller may make the specifications by himself, based on the
Buyer’s known requirements.
 The Seller must inform the Buyer of their specifications and request for amendments within a reasonable
period of time. If the Buyer fails to respond, the Seller’s specification is binding.
BREACH OF CONTRACT
A breach of contract is the failure of one party to perform their obligations under the contract.
ANTICIPATORY BREACH
 As per Article 71, Anticipatory breach occurs when it becomes clear that one of the parties to a contract will
breach the contract even if the time for performance has not arrived
 A party may suspend performance, if it becomes apparent that the other party will not perform a
substantial part of his obligations due to:
 A serious deficiency in his ability to perform or his creditworthiness

 His conduct in preparing to perform/performing the contract
 If a party commits anticipatory breach, the injured party can either Suspend the Performance of his
obligations or wait until the breach.
 The party suspending performance, must notify the other party of his actions. If the other party assures
that he will perform his obligations, suspension should not be carried out. However, if the other party does
not deny that they are in anticipatory breach, the injured party may suspend performing his own duties
until the other party performs their obligation
 As per Article 72, if it becomes clear that a party is going to commit a Fundamental breach of contract, the
injured party may declare the contract Avoided. The party avoiding the contract must provide Reasonable
Notice of avoiding the contract
Page 35 of 127
 An injured party, who anticipates that the other party might breach the contract, may still continue to
perform his obligations until the actual date of performance.
 The injured party may claim Damages from the party in breach for the loss they suffered due to the breach.
However. the injured party has a duty to mitigate his loss
 If the Seller dispatches goods before anticipating that the Buyer will be in breach, he may prevent the goods
from being handed over to the Buyer, even if the Buyer holds the documents of title
INSTALMENT CONTRACTS
 Failure to perform an installment of a contract may allow a party to avoid that installment or the whole
contract
 As per Article 73(1), if the failure to perform an installment only affects that installment, a party may
declare the contract Avoided in respect of That installment
 As per Article 73(2), if the failure to perform an installment can be reasonably assumed as a sign that the
rest of the contract will not be fulfilled, a party may declare the Whole contract Avoided
 As per Article 73(3), if the deliveries are Interdependent, and the failure to perform one delivery adversely
affects the whole contract, a party may declare the whole contract avoided
DAMAGES
 An injured party is always entitled to claim Damages regardless of any other Remedy sought, though he is
required to Mitigate the extent of the loss made.
 As per Article 74, Damages is a Monetary Sum equal to the loss, including the loss of profit, suffered by the
injured party as a consequence of the breach of contract. The amount of damages May Not be greater than
the loss which the party in breach Foresaw, or could have Reasonably Foreseen, at the time of the contract
 As per Article 75, if a Buyer avoids a contract on valid grounds and buys replacement goods, the value of
these goods may be claimed as damages. On the other hand, if a Seller avoids a contract on valid grounds
and sells the goods to a third party, the proceeds from this sale must be deducted from any damages
awarded
 If the contract is avoided Before the transfer of goods and there is a Market Price for the goods, the party
claiming damages may recover the difference between the Contract Price and Market Price at the time of
avoidance
 As per Article 76, If the contract is avoided After the transfer of goods, the party claiming damages may
recover the difference between the contract price and market price at the time of transfer. The market
price is the price prevailing at the place where delivery of the goods should have been made or a
reasonable substitute of such a price
Page 36 of 127
 As per Article 77, a party claiming damages is required to take Reasonable Steps to Mitigate his Losses. For
example, a Seller may sell the goods Rejected by the Buyer to a Third Party or a Buyer may buy
Replacement Goods if the seller fails to deliver. A party claiming damages would not be awarded
compensation for losses he could reasonably have mitigated
UNEXPECTED IMPEDIMENTS TO PERFORMANCE
 As per Article 79(1), a party is not liable to pay damages for a failure to perform their obligations if it can be
proved that the failure was due to Impediments Beyond their Control
 As per Article 79(2), if a party engaged a third party to perform part or whole of the obligations of the
contract, such as a sub-contractor, then they are only exempt from liability if they can prove that both they
themselves and the sub-contractor would be exempt from liability under Article 79(1)
 As per Article 79(3), they must prove that they could not reasonably have been expected to have taken the
impediment into account at the time of the contract, or overcome the impediment or its consequences. The
exemption applies only to the period during which the impediment existed
 As per Article 79(4), the party suffering from the impediment must notify the other party about the
impediment and its effect on their performance. The notice must be received within a reasonable period of
time; otherwise the defaulting party is liable for damages
 As per Article 79(5), Article 79 only affects the parties’ rights in respect of Damages and not to other rights
within the convention
 As per Article 80, If one party’s Act or Omission causes failure of the other party to perform, the first party
may not rely on the second party’s failure to perform
EFFECTS OF AVOIDANCE OF CONTRACTS
 As per Article 81, when one of the party Avoids a contract, both parties are released from fulfilling any
further obligations. However, this doesn’t apply to the following:
 The Parties’ right to claim Damages

 Any rules regarding settlement of disputes
 Any rules regarding the parties’ rights and obligations in case of avoidance
 The right to claim Restitution (compensation) of the Goods by a party who has performed the
contract wholly or in part
 As per Article 82, if the Restitution of the goods cannot take place, for example, if a party sold or used up
the goods, the contract cannot be avoided unless:
 The restitution cannot take place because of the party’s own fault
 The goods have perished due to examination by the Buyer
 The goods have been used, sold or transformed by the Buyer before they discovered the lack of
conformity
 As per Article 83, even where restitution cannot take place, a party may still claim Damages
Page 37 of 127
PRESERVATION OF GOODS
 Both parties to a contract for international sale of goods have a duty to preserve the goods under the
contract. When the goods are in their possession, they must take reasonable care to keep them in
reasonable condition.
 As per Article 85, even when the Buyer refuses to accept delivery or make payment at the agreed time, the
Seller has a duty to preserve the goods. However, the Seller needn’t deliver the goods until payment is
received.
 As per Article 86, if the Buyer takes possession of the goods but intends to reject them and the Seller is not
present, he must still preserve the goods in reasonable condition until the goods are returned, unless it
becomes unreasonably expensive and inconvenient and the Seller is making undue delay
 As per Article 87, the party preserving the goods, either by themselves or in a third party’s warehouse, is
entitled to keep them until any reasonable expenses incurred in preserving them are recovered
 As per Article 88, if goods that are perishable such as food or flower, are to be preserved by the party, and
the other party makes unreasonable delay in taking possession, the party possessing the goods may sell
them to a third party at the best available price in order to prevent them from becoming worthless.
However, they must give reasonable notice of such action. The amount obtained from selling the goods to a
third party must be forwarded to the other party after deducted reasonable selling expenses
PASSAGE OF RISK
 The time or place when the Risk in goods passes from the Seller to the Buyer is an important feature of
International Contracts as it determines the Parties’ Obligations and Rights for the goods.
 As per Article 66, loss or damage to the goods after the risk passes from the Buyer to the Seller does not
discharge the Buyer from paying for the goods.
 The UN Convention applies to the following types of contracts:
CONTRACTS INVOLVING CARRIAGE {Article 67}
 If the contract specifies the place at which risk passes to the Buyer, then the Seller discharges his
obligations when the goods are transferred to the carrier at that place.
 If there are no specifications in the contract, the risk passes to the Buyer when the goods are transferred to
the first Carrier.
 In either case, the risk in goods only passes on to the Buyer, if the Seller clearly identifies, through
markings, shipping documents or notice, that the goods relate to the contract
CONTRACTS FOR GOODS SOLD IN TRANSIT {Article 68}
 When goods in transit are sold, the Buyer may agree, within the contract, to assume the risk when the
goods were transferred to the Carrier responsible for carriage
Page 38 of 127
 If there is no such agreement, risk passes on to the Buyer at the time the contract is formed
 However, if at the time of the contract, the Seller knew, or ought to have known, that the goods have been
stolen or damaged and did not notify the Buyer, then the risk remains with the Seller
CONTRACTS NOT INVOLVING CARRIAGE (Article 69}
 Risk normally passes to the Buyer when the take over the goods or when the goods are placed at their
disposal
 If the Buyer is bound to take over the goods at a place other than the Seller’s place of business, risk passes
to the Buyer when delivery is due and the Buyer aware that the goods have been placed at their disposal
 In either case, the risk in goods only passes on to the Buyer, if the goods are clearly identified to the
contract
Page 39 of 127
CHAPTER –6:: TRANSPORTATION AND METHODS OF PAYMENT

BILL OF LADING:
BASICS OF BILL OF LADING
 A Bill of Lading is a document which is issued by a Carrier to the Delivery Agent acknowledging that the
Carrier has received the shipment of goods and that they have been places on board a particular vessel,
bound for a particular destination. It can be illustrated using the following diagram:
SELLER DELIVERY AGENT CARRIER BUYER
 The Carrier issues a copy of the Bill to the Delivery Agent and retains the main copy to be delivered to the
Buyer along with the goods. The Delivery Agent passes on the copy of the Bill to the Seller. The Seller
usually has to present a copy of the Bill to the Bank in order to receive payment
 It is a document of title of the goods being shipped and is ultimately passed on to the buyer. It usually
comprises of, or provides evidence of, contract of carriage. Once the Carrier issues the Bill, the risk in the
goods passes from the Seller
 There are four main types of Bill of Lading as follows:
 Inland Bill: It relates to a contract for transporting goods overland to the Seller’s Carrier
 Ocean Bill: It relates to a contract for carriage of goods from a Seller in one country to a specified
port in another country
 Through Bill: It relates to a contract for domestic and international transport between two specified
points
 Airway Bill: It relates to a contract for transport via Domestic and International Air
 Forms of Bill of Lading:
 Negotiable Bill: It is a Bill which gives Title to the Goods {ownership} and the right to Re-route them
to the person who legitimately holds the bill. This simply means, the First Carrier can transfer the
responsibility of delivering the goods to a Second Carrier, who can also transfer the responsibility
of transferring the goods to a Third Carrier and so on. From the perspective of the contract, the
First Carrier is liable is the goods are damaged or stolen in transit
 Non-Negotiable Bill: It is a Bill which requires the First Carrier to deliver the goods to a specified
person or place. This means that no other Carriers may be used
LETTERS OF COMFORT
BASICS OF LETTERS OF COMFORT
 It is a letter issued to a third party lender by a Parent company, acknowledging the Parent’s approval of the
Subsidiary’s plan to raise finance. It is NOT a Guarantee provided by the parent to the lender, but a
Reassurance of the parent’s awareness or approval of the situation
 Lenders and Creditors of insolvent subsidiaries or subsidiaries nearing insolvency look to the parent and
their letter to recover their debt
Page 40 of 127
 The Liability of the Parent depends on the wording of the Comfort Letter. Parents can avoid their liability
for the debts of the insolvent subsidiary by carefully wording the letter. Unless the Parent clearly indicates
their intention to pay for the Subsidiary’s Debts, they cannot be asked for payment
 In the case of Kleinwort Benson Limited vs. Malaysia Mining Company, a creditor attempted to demand
payment by a parent company for amount owed to it by its subsidiary. However, it was held that the
wording of the Letter of Comfort was sufficient to protect the parent company from liability
LETTERS OF CREDIT
BASICS OF LETTERS OF CREDIT
 It is a method of payment in International Trade which gives the Seller a Risk-Free method of obtaining
payment. It is therefore a suitable method of payment in the following circumstances:
 When the risk of non payment is very high

 When the Seller is dealing for the first time with an unknown Buyer
 A Letter of Credit Arrangement must be made BEFORE the Sale takes place and involves a system of
guarantee between Buyer and its Bank (Issuing Bank), and Seller and its Bank (Advising Bank)
 The Seller receives Immediate Payment of the amount due, less any discount. On the other hand, the Buyer
is given a Period of Credit. The interim period is funded by banks involved in the letter of credit
THE PROCEDURE
 The buyer requests its Bank (Issuing Bank) to issue Letter of Credit in favour of the Seller. If the Bank
agrees to Issue the Letter, it Guarantees payment to the Seller, provided the Seller presents the necessary
documents
 The Issuing Bank asks a Bank in the Seller’s country (Advising Bank), to advice the Letter of Credit to the
Seller. If the Advising Bank agrees to handle the credit, it also provides a guarantee of payment to the Seller.
 Once the Advising Bank confirms their intention to handle the credit and informs the Seller, the Seller ships
the goods to the Buyer.
 If the Seller then presents Evidence of Shipment to the Advising Bank, the Advising Bank makes the
payment to the Seller and forwards the Documents to the Issuing Bank.
 After checking the documents sent by the Advising Bank, the Issuing Bank pays the Advising Bank by
debiting the account of the Buyer and then forwards the documents to the Buyer.
 Once the Documents are received, the Buyer can claim the goods from the Carrier
TYPES OF LETTERS OF CREDIT
 Confirmed Letter of Credit: It is an LC where the Advising Bank guarantees payment to the Seller, even if
the Buyer or Issuing fails to make their payment
Page 41 of 127
 Unconfirmed Letter of Credit: It is an LC where the Advising Bank doesn’t Guarantee payment to the Seller,
unless it receives money from the Issuing Bank
 Revocable Letter of Credit: It is an LC that can be Cancelled by the Buyer anytime without giving any notice
to the Seller
 Irrevocable Letter of Credit: It is an LC that cannot be amended without confirmation from All parties
 Revolving Letter of Credit: It is an LC that allows the Buyer to obtain a Credit Limit. It is used by Buyers that
deal with a particular Seller(s) on a regular basis. A new LC doesn’t have to be issued every time a payment
is required to be made.
 Transferable Letter of Credit: It is an LC which allows the Seller to transfer the right to receive payment to a
third party
 Back-to-Back Letter of Credit: It is an LC which allows the Seller to use the Buyer’s LC as a security to issue
a second LC by him Buyer, to the Original Supplier
INTERNATIONAL BILLS OF EXCHANGE
BASICS OF INTERNATIONAL BILL OF EXCHANGE
 A Bill of Exchange is a written instrument which contains an unconditional order, made by one person,
Drawer (Buyer), to another, Drawee (Bank), to pay a definite sum to a specified person, Payee (Seller),
payable either at a Specified Date or On Demand
 It must be dated and signed by the Drawer and contain the words International Bill of Exchange. If the
Drawee acknowledges the order, say, by signing it, the Bill is accepted and the Drawee becomes liable to
make the payment.
 The Bill may be endorsed by the Payee to another person, Endorsee (usually by signing it), who then
becomes the holder of the Bill. If the Bill is not endorsed to a specific person {Blank Bill}, it becomes a
Bearer Bill, payable to anyone who presents it for payment
 The Bill of Exchange must specify at least two of the following places, at least two of which must be in
different states:
 Place where the Bill is drawn

 Place where the Drawer signed
 Place next to the Drawer’s name
 Place next to the Payee’s name
 Place where it is paid
 Besides the Acceptor {usually a Bank}, a Bill may also have a Guarantor, who may or may not be a party to
the Bill. A guarantee must be in writing on the Bill
 The amount payable on a Bill must be a Definite Amount. If there is a difference between the amount
written in Words and the amount written in Figures, the amount written in words must be given
preference
Page 42 of 127
 If the amount is to be paid with Interest, unless specified, Interest is assumed to be payable from the date
the Bill has been drawn
THE PARTIES TO AN INTERNATIONAL BILL OF EXCHANGE
DRAWER:
 The Drawer is the person who has instructed the payment to be made to the Payee, through the Drawee
 If a Bill is dishonoured, the Drawer usually assumes the liability to pay the holder of the Bill, either the
Payee or an Endorsee
 The Drawer may limit its liability by an express stipulation in the Bill
DRAWEE:
 The Drawee is a person, usually a bank, who is instructed by the Drawer to pay the Payee
 Once Accepted, usually with a signature written on the Bill, the Drawee becomes liable on the Bill, above
the Drawer. The Drawee is not liable until the Bill is Accepted. The signature must be made either on the
front or back of the Bill
PAYEE:
 The Payee is the person or persons to whom the Drawer has instructed payment to be made. A Bill may be
addressed to two or more Payees.
 The Payee may endorse the Bill on to another person, Endorsee, in which case, the Endorsee is entitled to
receive the payment
ACCEPTANCE AND PRESENTATION OF THE BILL
 A Bill may be accepted before, at or after maturity or after it has been dishonored, if the Drawee wishes to
do so. However, the Acceptance must be Unqualified (unconditional)
 A Bill must be presented (to the Drawee) for payment if the Drawer requires it to be or if the Bill is payable
at a fixed period or if it is payable at any place other than the Drawee’s place of business
 A Bill is considered to be Properly presented if:
 It is presented on a business day
 It is presented to authorized personnel of the Drawee
 If it is presented on the time, or within the period of time specified by the Drawer
 A Bill which is Not Payable On Demand, must be presented on the Date of Maturity or Within Two days
after the Date of Maturity
 A Bill which is Payable of Demand must be presented within One Year
 If the Payee fails to Present the Bill Properly, the Drawee is not liable for the payment
 A Bill not Accepted by the Drawee upon presentation is considered to be Dishonored, Unless, the Bill is
Payable on Demand
 If a Bill is dishonored without any fault of the Payee, he may sue the Drawer or their Guarantor for the non-
acceptance
Page 43 of 127
ENDORSEMENT OF A BILL
 A Payee may transfer the right to receive the payment to another person(s) through a process called
Endorsement, where the Payee is the Endorser and the other party who is entitled to receive the payment,
is the Endorsee
 An endorsement must be written on the instrument or on a slip affixed to it and be signed. An endorsement
may be:
 In blank, in which case, payment must be made to anyone who presents the bill
 Special, in which case, payment must be made to a specific person
 If the Bill contains phrases such as “not negotiable”, “not transferable”, “not to order”, “pay X only”, or does
not contain words authorizing the endorsee to collect the payment, the Bill is only deemed to be
transferred for the purpose of Collection (the endorsee can only collect the money but it does not own it)
 If an endorsement contains the words “for collection”, “for deposit”, “value in creation”, “by procuration”,
“pay any bank” or similar words, the Endorsee is assumed to have ownership of the payment but he may
not endorse the Bill to another
 If an endorsement contains the words “value in Security” , “value in pledge”, the Endorsee is assumed to
have ownership of the payment and he may endorse the Bill to another person
 An endorsement must be unconditional, with no additional obligations to be met by the endorsee
 An endorsement cannot be made in respect of a part of the sum due. This means that the Payee cannot keep
part of the money himself, and endorse the other part to another person
 If there are two or more endorsements, it is deemed to be made in the order in which it appears on the Bill
FORGERY OF ENDORSEMENTS
 If an endorsement is forged, the person whose endorsement is forged or the party who signed the Bill, has
the right to recover compensation for any loss or damage suffered against:
 The forgerer
 The person to whom the Bill was directly transferred to by the forgerer
 A party or Drawee who paid the money to the forgerer
 An Endorsee for collection or the Drawee, who pays the Bill, is not liable if they are without knowledge of
the forgery. However, their lack of knowledge must not be due to their failure to act in good faith or to
exercise reasonable care
 If a Bill is dishonoured, the endorser, by previous agreement, is liable to pay the Bill. Unless otherwise
agreed, a person who transfers a Bill by endorsement represents to the holder that:
 It doesn’t have any forged or unauthorized signature

 It has not been materially altered
 The endorser has no knowledge of any fact that would impair the right of the endorsee to payment
of the Bill
Page 44 of 127
 The amount payable for a dishonored Bill equals to the Principal Amount, plus any interest, plus any
expenses incurred in protesting against the default.
INTERNATIONAL CREDIT TRANSFER
BASICS OF INTERNATIONAL CREDIT TRANSFER
 The UN Model Law on International Credit Transfer sets out the terms on which funds are to be transferred
from Buyer to Seller via International Banks or Similar Institutions and applies to credit transfers where
the Sending Bank and Receiving Bank are in different states.
 It applies to International Credit Transfers, and is not restricted to credit transfers made by electronic
means or only by businesses. It also applies to transfers made by institutions other than Banks
 It involves an Originator (usually the person sending money), and the Sender, the person who issues a
Payment Order and transfers funds to a Receiving Bank or an Intermediary, which is ultimately transferred
to the Beneficiary {usually the person receiving the money}
 The Originator and the Beneficiary may be Branches or Subsidiaries of the same organisations or different
organisations all together
 A Payment Order refers to an unconditional instruction, along with funds, in any form, by a Sender in one
country, to a Receiving Bank in another country, to place at the disposal of a Beneficiary, a fixed or
determinable amount of money, if:
 The Receiving Bank is to be reimbursed by debiting an account of the Sender

 The instruction does not provide that payment is to be made at the request of the Beneficiary
 Except otherwise provided in the Model Law, the Rights and Obligations of the parties to a credit transfer
may be varied by their agreement. Hence, with some exceptions, the Model Law is not mandatory
 The Process can be illustrated as follows:
Orginator Sending Bank Intermediary Receiving Bank Beneficiary
 The Originator Issues a Payment Order along with Payment to the Sending Bank, who subsequently issues
another payment order along with payment to the Intermediary.
 The Intermediary then issues their payment order along with payment to the Receiving Bank, who
ultimately transfers the payment to the Beneficiary
Page 45 of 127
OBLIGATIONS OF SENDER AND RECEIVING BANK
 The Sender of a Payment Order has an obligation to pay the Receiving Bank for the payment order when
the Receiving Bank accepts it, usually in a future execution date or period. However, payment is not due
until the beginning of that period
 The obligation of the Receiving Bank, other than the Beneficiary’s Bank, is to issue a Payment Order that
will properly implement the order received. The Beneficiary’s Bank is obliged to place the funds at the
disposal of the Beneficiary. Until the Receiving Bank accepts a payment order, it has no obligation to
execute it
 The Article further states that the Receiving Bank {Intermediary} accepts an order when it issues its own
payment order to the Beneficiary’s Bank. The Beneficiary’s Bank is deemed to have accepted a payment
order when it credits the account of the Beneficiary, unless:
 It is involved in a fund transfer system where acceptance is assumed when order it received
 A Receiving Bank has an account of the Sender, in which case, acceptance is assumed when the
Sender’s account is debited
 The Receiving Bank has not rejected the order within a specified time as per Article 11 of the Model
Law
OBLIGATION OF THE RECEIVING BANK WHEN SOMETHING GOES WRONG
 A Receiving Bank is obligated to notify the Sender if there is an “inconsistency in the data” or there is
“insufficient data” in the payment order
 If a credit transfer is not completed due to procedural errors, the Originator’s Bank is obligated to refund to
the Originator, any payment received from it, with interest from the day of payment to the day of refund.
The Originator may then recover any amount paid to the Receiving Bank, plus interest.
LIABILITY FOR DELAYING PAYMENTS
 If a bank delays the execution of payment, it must pay interest, which must be passed on to the Beneficiary,
who is legally entitled to receive that interest
 Payment of interest is the only remedy unless the delay was a result of a specific intent to cause loss or in
ignorance or recklessness, in which case, the doctrines in National Laws are applicable
COMPETION OF A CREDIT TRANSFER
 A credit transfer is completed when the Beneficiary’s Bank accepts a payment order. Any subsequent
failure of the Beneficiary’s Bank to pay the Beneficiary lies on the Bank itself
LIABILITY OF THE SENDER FOR UNAUTHORISED PAYMENT ORDERS
 A Sender is bound by a payment order if it was issued by the Sender or by another person who had the
authority, determined by national laws, to bind the Sender
Page 46 of 127
 When a payment order is subject to authentication, by agreement between Sender and Receiver, the Sender
is bound if:
 The authentication method used is Commercially Reasonable

 The Receiving Bank complied with all the authentication procedures
 The Receiving Bank is responsible for designing and implementing a commercially reasonable
authentication procedure and would thus be liable, if such procedures do not exist. What is commercially
reasonable would depend on the Time, Place, Technology available and Cost effectiveness of the
procedures
 If the authentication procedure is commercially reasonable and the Receiving Bank followed it, the Sender
is bound by the payment order
 The Sender or Receiving Bank is responsible for any unauthorized payment order that could be shown to
have been sent as a result of the fault of that party
Page 47 of 127
CHAPTER –7:: AGENCY LAW
BASICS OF AGENCY RELATIONSHIP
 An Agency is a relationship that exists between a Principal and an Agent. A Principal is a person who
authorizes another person to act on his behalf. An Agent is a person who has been authorized by a Principal
to act on his behalf
 There are various types of Agency relationships. Some of them are listed below:
 Partners: Partners in a Partnership are agents of one another
 Company Directors: Directors are agents who act on behalf of the Shareholders or Owners of the
company
 Promoters: Promoters are agents of Directors or Shareholders, who undertake the responsibility to
form a company
 Factors: Factors are agents who Buy or Sell goods on behalf of another person
 Brokers: Brokers are agents who arrange contracts between people in exchange for a commission
FORMATION OF AN AGENCY RELATIONSHIP
An Agency relationship can be formed in the following ways:
 BY EXPRESS AGREEMENT:
 This is where the principal expressedly appoints another person to be his agent through an
agreement. The agreement may be oral or written. However, in cases where a person is given
power of attorney over another person’s affairs, the agreement must be in writing.
 The Agent is said to have Actual Authority to act on behalf of the Principal
 BY IMPLIED AGREEMENT:
 An Agency relationship can be formed through an Implied agreement if it is reasonably clear from
the Conduct or Relationship of the parties that such an agreement exists, or, can be reasonably
assumed to exist.
 BY NECESSITY:
 An Agency relationship can be formed through necessity if the Principal’s property is entrusted to
the Agent and an emergency arises which requires the agent to act but it is impossible to
communicate with the Principal.
 However, for the relationship to be valid, the Agent must act in the best interest of the Principal
 BY RATIFICATION
 If an Agent enters into a contract that he was not authorized to form, or a person with no authority
enters into a contract by pretending to be an agent, the Principal is not liable for the contract unless
he ratifies {approves} it.
 However, for this to be valid, the following requirements need to be fulfilled:
o The Principal existed and had legal capacity at the time the contract was formed
o The Ratification takes place within a reasonable period of time
Page 48 of 127
o The Ratification is communicated to the third part sufficiently clearly

o The entire contract is ratified and communicated to the third party within a reasonable
period of time
o The Agent clearly stated that he was acting on behalf of a Principal when forming the
contract, even if he doesn’t name the Principal
o The Principal is aware of all the material facts of the circumstances
 BY ESTOPPEL
 This occurs when the Principal holds out {pretends} to a third party, that a person is their Agent,
even though an agency relationship does not exist between them at that time.
 If the parties rely on the Principal’s representation and enter into a contract with the assumed
agent, the Principal is ‘estopped’ (prevented) from denying that the person is indeed their agent
SOURCES OF AUTHORITY OF AN AGENT
Agents are authorized by their Principals to enter into contracts on their behalf. If an agent enters into a contract
outside his authority, the Principal is not liable for the contracts unless he ratifies it.
Agents may have Actual Authority (Express and Implied) or Apparent Authority. Actual Authority is created by a
consensual Agreement between the Agent and the Principal
The authority of an agent to enter into contracts comes from the following sources:
 EXPRESS AUTHORITY
 An express authority specifies the exact nature and type of contracts the agent can enter into or
actions that he can take on behalf of the Principal. It may be oral, with supporting evidence, or in
writing. The Agent is said to have Actual Authority.
 If an agent acts outside his express authority, he is liable to the Principal for breach of contract and
to the third party for breach of warranty of authority
 IMPLIED AUTHORITY
Implied authority exists when it is clear from the relationship or conduct of the parties that a person is an
agent. Third parties are free to assume that an agent has implied authority unless they are told otherwise.
Implied authority may be Incidental, Customary or Usual
 Incidental Implied Authority applies to transactions or actions which are incidental to the
transactions or actions the agent was expressedly authorized to take. Example: A marketing
director, responsible for sales, should also have the authority to advertise the product
 Customary Implied Authority applies to actions which are customary to the action the agent was
expressedly authorized to take. Example: a director of an estate agency, responsible for selling a
house, should also have the authority to show potential buyers around the house
 Usual Implied Authority applies to the authority that an agent occupying a particular position could
be reasonably expected to have. Example: An HR Director should have the authority to dismiss an
employee
Page 49 of 127
 APPARENT/OSTENSIBLE AUTHORITY
 An agent is given Apparent Authority if the Principal makes a representation to a third party that a
person is their agent, even though an agency relationship doesn’t between them at that time. The
representation may be express, or implied from previous dealings or from conduct.
 It may also arise when the principal is aware that a person is claiming to be their agent but doesn’t
do anything to correct that impression.
 If the third relies on the Principal’s representation and enters into a contract with the agent, the
Principal is liable for the contract. However, if the third party knew, or ought to have known, that
the agent did not have authority, then the Principal is not liable unless he ratifies the contract
 If the principal revokes {terminates} an agent’s apparent authority, he is still liable under the
contracts entered into by the agent until the revocation is communicated to third parties
TERMINATION OF AN AGENCY RELATIONSHIP
 An agency relationship may be terminated under the following circumstances:

 Through mutual agreement
 The Agent dies
 The Principal dies
 The Agent becomes Insane or incapacitated to act as an agent
 Either the Principal or the Agent becomes bankrupt and can no longer continue their business
 The Principal is still however liable for contracts entered into by their agent until the termination of the
relationship is communicated to third parties
LIABILITIES OF AGENTS
 Agents have Fiduciary duty towards their Principal, which means that they have a duty to exercise
reasonable care when acting on behalf of their Principal, and they have a duty to act in good faith.
 Generally, when agents enter into contracts on behalf of their principal, they have no liability for the
contract
 An agent will be personally liable under a contract in the following circumstances:

 When he intended to undertake personal liability
 Where it is usual business practice or trade custom for an agent to be liable
 Where the agent is acting on his own behalf
 Where the agent entered into a contract outside his authority and the contract was not ratified by
the Principal
 Where the Agent provides a Collateral for the contract
Page 50 of 127
CHAPTER –8:: SOLE TRADERS AND PARTNERSHIPS
SOLE TRADERS
BASICS
 A Sole Trader is a person who owns and controls a business by himself. He may manage the business by
himself or with employees. He is entitled to all the profits earned in the business and is liable for all the
losses incurred. Unlike limited companies, a Sole Trader is not a Separate Legal Entity, which means that
the Owner is personally liable for all the debts of the business.
 The advantages of being a sole trader are as follows:

 No formal procedures are required to set up the business
 Decisions can be made quickly as the sole trader is independent and needn’t consult with anyone
 Sole Traders tend to be more flexible and can respond to market changes quickly
 A sole trader can provide personal service to his customers and can supervise his employees
directly, thus ensuring that goal congruence is maintained
 Profits do not have to be shared
 The disadvantages of being a sole trader are as follows:
 A sole trader has unlimited liability, which means that he is personally liable for all the debts of the
business
 The business is entirely dependent on the sole trader and his skills and abilities
 Sole traders find it difficult to raise finance and hence are unable to grow beyond a certain size
 Responsibilities and losses cannot be shared
 The business will continue if the sole trader dies or falls into illness
PARTNERSHIPS
BASICS
 A partnership is a relation which subsists between two or more persons, carrying on a business in common
with a view to make profit.
 A business can include an occupation, profession or any form of activity containing one or more
transactions, of which the partners are joint proprietors.
 A partnership may be formed informally through an oral agreement, or formally through a written
agreement referred to as the Partnership Deed. The Deed sets out the terms and conditions that the
partners must abide by.
 The terms in a written agreement take preference over the terms set out in the Partnership Act 1890
AUTHORITY AND LIABILITY OF PARTNERS IN UNLIMITED LIABILITY PARTNERSHIP
Page 51 of 127
 The authority of partners to bind each other is based on the principles of agency. According to the
Partnership Act 1890 {UK}, partners are agents of one another and are thus, jointly liable for all the debts of
the Partnership.
 If a partner enters into a contract which is related to the normal course of business of the firm, all the other
partners of the firm are liable under the contract, unless the partner did not have any actual or implied
authority to enter into such a contract and the third party knew or ought to have known of that fact
 If a transaction entered into by a partner is not related to the normal course of business of the firm, the
other partners of the firm are not liable for the transaction, unless the partner was given specific authority
to enter into such a contract
 If a third party knows or ought to have known that the person with whom they are entering into a contract
does not have the authority or is in fact, not a partner at all, then only that individual is liable for that
contract
 Partners are assumed to have authority to bind the partnership into a contract with a third party if it is
reasonable for a third party to believe that the partner, due to his position, or previous dealings, has
authority to enter into contracts on behalf of the other partners
 A new partner is only liable for debts incurred after he becomes a partner.
 A retired partner is liable for the debts incurred while he was in the partnership. Moreover, the retired
partner remains liable for the debts incurred after his retirement, unless his retirement is notified to the
creditors of the business
TYPES OF PARTNERSHIPS
TRADITIONAL/UNLIMITED PARTNERSHIP
 According the Partnership Act 1890 (UK), a traditional Partnership is formed when two or more persons
agree to work together in a business with a view to make profit
 In a traditional partnership each partner, including a sleeping partner who takes no part in managing the
business, is jointly and severally liable for the debts of the partnership
 A creditor of the partnership may choose to seek payment from all the partners as a whole, from individual
partners or from both, even where the debt was incurred by one partner alone.
 In a traditional partnership, partners are not required to produce financial statements in a prescribed form,
neither do they need to appoint a Board of Director. They are however required to make a return of their
profits to the Income Tax Authority and in some cases, register for VAT
Page 52 of 127
 Partners are required to disclose their names, either within the name of the firm, or on the letterhead at
their place of business.
LIMITED PARTNERSHIP
 A limited partnership may be formed under the Limited Partnership Act 1907
 It must be registered with the Registrar of Companies.
 It must contain at least one partner who is fully liable for the debts of the partnership.
 The liability of other partners is usually limited to their capital contribution to the partnership
 Usually limited partners may not:

 Take part in the management of the business
 Withdraw their capital
 Bind the partnership in any contract/transaction, unless they are expressly given such an authority.
 If a limited partner breaches any of these rules, he loses his limited liability status
LIMITED LIABILITY PARTNERSHIP (LLP)
 An LLP may be formed under the Limited Liability Partnership Act 2000.
 It must be registered with the Registrar of Companies
 The liability of partners in an LLP is limited to their capital contribution.
 An LLP must get incorporated by sending an Incorporation Document and a Statement of Compliance to the
Registrar of Companies specifying
 The Name of the LLP
 Location and Address of its Registered Office
 Names of the two Designated Members
 Names and Address of all Members
 Once incorporated, an LLP becomes a Separate Legal Entity, which means it can own property in its own
name and sue or be sued on its own name.
 An LLP doesn’t dissolve if one of its member retires or dies
Page 53 of 127
 Every member of an LLP is its agent and may bind the LLP by entering into contracts, unless they are no
longer a member or they do not have the authority to enter into such contracts and the third party is aware
of that fact
 The Rights and Duties of the partners are usually set out in the Partnership Agreement. In the absence of
such agreement, the rules within the LLP Act 2000 shall apply.
 Every LLP must have two Designated Partners responsible for filing notices and accounts and appointing
auditors if appropriate
TERMINATION OF A PARTNERSHIP
 A partnership is terminated in the following circumstances:

 Passing of time if the partnership was entered into for a fixed term
 Termination of the venture, if the partnership was formed for a single activity
 The Death or Bankruptcy of a partner
 The Activities of the partnership becomes illegal
 Notice is given by a partner to end the partnership
 The Court has granted an Order to end the partnership
 The partners mutually agree to end the partnership
 In the event of termination, the assets are sold and the proceeds are distributed in the following order:
 Payment of debts to third parties
 Repayment of any loan provided by a partner to the partnership
 Repayment of partners’ capital contribution
 Any leftover is paid to the partners in the profit sharing ratio
Page 54 of 127
CHAPTER –9:: CORPORATIONS AND LEGAL PERSONALITY

LEGAL PERSONALITY OF COMPANIES
Corporate personality is a common law principle that means that a company has a legal identity, separate from the
members who own the company. This principle was established in the case of Salomon vs. Salomon Ltd. The
company went into liquidation but the owner, who owned almost all the shares in the company, was not held liable
for the debts of the company because the company was considered as a separate legal entity
There are a number of consequences of the separate legal personality of companies as follows:
 LIMITED LIABILITY
This states that shareholders are not personally liable for the debts of the company, unless they have
specifically agreed to bear the liability. Their liability is limited to any unpaid amount on the shares they
own.
 LEGAL CAPACITY
A company can enter into agreements and contracts in its own name and sue and be sued upon in matters
of contract law, criminal law and tort. Individual shareholders cannot take any action or claim
compensation for any damages suffered by the company. The decision to sue or claim damages must be
made through a majority voting of the shareholders
 PERPETUAL EXISTENCE
Unlike traditional partnerships, a company continues to exist despite changes in its membership. The
company only ceases to exist when it’s liquidated and removed from the companies register
 ASSETS
All assets transferred to the company become the property of the company. Shareholders do not have an
direct claim on company assets. This allows companies to put up their assets as collateral when raising
finance.
TYPES OF COMPANIES BASED ON LIABILITY
The Companies Act 2006 {UK} states that the members of an incorporated company may have unlimited liability,
liability limited by shares or liability limited by guarantee.
 UNLIMITED COMPANIES
 In unlimited companies, there is no limit to the liability of members (shareholders). If the company
liquidates, the members are required to pay off all the debts of the company.
 An unlimited company does not have to file copies of its annual reports unless:
o It is a subsidiary of a limited company
o It is a parent of a limited company
 An unlimited company can only be a private company
 COMPANIES LIMITED BY GUARANTEE

 In companies limited by Guarantee, member’s liability is limited to the amount they have
guaranteed to pay in case the company goes into liquidation.
 Creditors of the company have no direct claim on members, as the guarantee is between the
member and the company
Page 55 of 127
 Companies limited by guarantee are appropriate for non commercial activities such as Charity or
other non-profit organisations
 Companies limited by guarantee have no share capital
 COMPANIES LIMITED BY SHARES

 In companies limited by shares, member’s liability is limited to any amount unpaid on the shares
that they own. The price of the shares is specified in the constitution of the company and the
members can either pay the whole price at once, or in installments.
 Creditors have no direct claim on the members if the company goes into liquidation
FORMATION OF LIMITED COMPANIES
 A business can only trade as a limited company if it is registered with the Registrar of Companies. A
registered company must have a written constitution comprising of Articles of Association and any other
Resolutions or Agreements that it may make.
 The following documents must be sent to the Registrar of Companies:
 An Application for Registration containing the company’s proposed name, location and address of its
registered office and a statement that the liability of members is to be limited by shares or
guarantee
 A Memorandum of Association, signed by the members, stating that they wish to form a company
and buy at least one share of the company
 Articles of Association stating the procedures by which the company is to be run, voting rights
attached to shares, timing and frequency of meetings etc.
 Statement or Proposed Officers stating the names and addresses of the company’s first directors and
secretary {only for Plc} with their signed consent to act
 Statement of Compliance stating that the requirements of the Companies Act have been fully
complied with
 Statement of Capital and Initial Shareholdings stating the details of the company’s shares and the
initial shareholding of the members
 Once the documents are verified and accepted by the Registrar of Companies, a Certificate of Incorporation
is issued. On receipt of the Certificate, a private limited company may begin trading.
 Before a public limited company can trade, the directors must obtain a Trading Certificate by submitting a
form to the Registrar of Companies.
 In order for a company to receive a Trading Certificate, the following conditions must be met:
 The name of the company must end with the words “public limited company” or “plc”
 The Constitution of the company states that it is a Public Company
 The allotted share capital of the company is at least £50,000
 It is a company limited by shares
 Unlimited Companies or Companies limited by Guarantee cannot form public limited companies
Page 56 of 127
DIFFERENCE BETWEEN PRIVATE AND PUBLIC LIMITED COMPANIES
Public limited companies tend to be large scale businesses with a wide variety of shareholders whereas private
companies tend to be small enterprises in which, some, if not all, shareholders are also directors. Both Public and
Private companies must have at least one shareholder. The main differences between them are listed below:
 A public company can raise capital from the public, through the stock exchange, but a private company
cannot offer its shares to the public
 A public company must have a minimum allotted share capital of £50,000, but a private company has no
minimum requirements
 A private company can start trading when it receives a Certificate of Incorporation, but a Public company
needs to obtain a Trading Certificate along with the Certificate of Incorporation before they can begin to
trade
 A public company must state in its constitution that it is a public company and it must comply with the
requirements of the stock exchange. There are no such requirements for private companies
 The name of a public company must end with the words “public limited company” or “PLC/plc” whereas a
private company’s name must end with the words “limited” or “Ltd”
 A public company must produce and file its statutory audited accounts within 6 months from the end of its
accounting year with the Registrar of companies, whereas a private company has 9 months. Small private
companies needn’t have their accounts audited but they must submit a copy of their accounts to the
Registrar of companies
 A public company must have at least two directors but a private company need only have one
 A public company must have a company secretary, but a private company needn’t have one
 Public companies must hold an Annual General Meeting (AGM) within 6 months from the end of the
accounting year. Private companies do not need to hold any AGM
ADDITIONAL CLASSIFICATIONS
PARENT (HOLDING) AND SUBSIDIARY COMPANIES
 A company will be the Parent of another company, its Subsidiary, if:

 It exercises Control over the Subsidiary Financial and Operational Decision Making
 It has the majority voting rights of the Subsidiary
 It has the power to appoint or remove a majority of the board members of the Subsidiary
 It has the right to exercise a Dominant Influence over the Subsidiary
 Legally, both the Parent and its Subsidiary are considered to be Separate Entities but for accounting
purposes, they are considered to be a Single Unit
 A Parent Company must produce Group Accounts to reflect the Consolidated Financial Position and
Prospects of both the Parent and the Subsidiary as if they were a single unit
SMALL COMPANIES REGIME
 Companies falling under the Small Companies Regime usually have to face lower Legal and Regulatory
burdens in relation to Accounting and Auditing.
 For Accounting purposes, a company falls under the Small Companies Regime, if it meets any TWO of the
following criteria:
 It has a Statement of Financial Position Total of not more than £3.26 million
Page 57 of 127
 It has a Turnover of not more than £6.5 million

 It has 50 or fewer employees on average
 For Auditing purposes, a company falls under the Small Companies Regime if it meets BOTH of the
following criteria:
 It has a Statement of Financial Position Total of not more than £3.26 million
 It has a Turnover of not more than £6.5 million
THE VEIL OF INCORPORATION
BASICS
 Companies have separate legal personality, which means that people can look at them and not know who
or what owns or runs them. The fact that members are ‘hidden’ in this way is sometimes referred to as the
“Veil of Incorporation”. It protects the members from having to face the public for the actions of the
company
 However, in certain circumstances, this veil may be lifted by Statutes to enforce the law, to prevent the
evasion of obligations and in certain situations where companies trade as a group
LIFTING THE VEIL BY STATUTE TO ENFORCE THE LAW
 If a public company commences trading without obtaining a Trading Certificate, the directors become
personally liable for any loss or damage suffered by a third party for any transactions entered into by the
company
 Persons, usually the directors, who have knowingly committed Fraudulent or Wrongful Trading are
personally liable under Civil Law, for the debts and other liabilities of the company resulting from such
trading
 If a Director(s), who is not allowed to get involved in the management of a company under the Company
Directors Disqualification Act 1986, participates in the management of a company, he will be jointly and
severally liable, along with the other directors, for the debts of the company
 If the director of a company that goes into insolvent liquidation, becomes involved with the directing,
managing or promoting of a business which as an identical name or a name similar enough to suggest that
it has a connection to the original company, he is considered to have committed a criminal offence under
the Insolvency Act 1986
LIFTING THE VEIL TO PREVENT EVASION OF OBLIGATIONS
 A court may decide to ignore the distinction between a company and its members and directors, especially
if they use the distinction to evade their existing legal obligations. This was established in the case of Gilford
Motor Co Ltd vs. Horne
 In time of war, a company is not allowed to trade with “enemy aliens”. The court may lift the veil and hold
the directors personally liable, if the company is suspected to be controlled by “aliens”, even if it is
registered in UK
 The Veil may also be lifted and the directors held personally liable if the directors ignore the separate legal
personality of two companies and transfer assets from one to the other in order to avoid an existing
liability. This was established in the case of Re vs. H and Other
Page 58 of 127
 The court may also lift the veil if it is being used to conceal the nationality of a company in order to avoid
taxes. This was established in the case of Unit Construction Co Ltd vs. Bullock
 If the members of a company, who are also actively involved in the management, makes an application to
liquidate the company on the “Just and Equitable” ground under the Insolvency Act 1986, the court may lift
the veil to reveal the company as a partnership. The members are then treated as partners and held
personally liable for the debts of the company. This was established in the case of Ebrahimi vs. Westbourne
Galleries Ltd
LIFTING THE VEIL IN GROUP SITUATIONS
 The principle of the veil of incorporation also applies to parent/subsidiary relationships. Although parents
and subsidiaries are part of a group, they are considered to have separate legal personalities.
 In the case of Adams vs. Cape Industries Plc, the court established three reasons, based on which the veil
may be lifted:
 The Subsidiary is acting as an Agent of the Parent
 The Group is to be treated as a single economic entity
 The corporate structure is being used as a sham(fraud) to conceal the truth
ALTERNATIVE CLASSIFICATION OF COMPANIES IN UK (Additional Reading)
 CORPORATIONS SOLE
It is an Official Position which is filled by one person who is replaced from time to time. Examples include
The Public Trustee, The Treasury Solicitor etc.
 CHARTERED CORPORATIONS
These are usually charities or bodies such as the ACCA, formed by the Royal Charter
 STATUTORY CORPORATIONS
Corporations formed through Special Acts of Parliament, usually for a specific purpose
 COMMUNITY INTEREST COMPANIES

These are special form of companies for use by Social Enterprises pursuing purposes that are beneficial to
the community
 REGISTERED COMPANIES
Companies registered with the Registrar of Companies
CHAPTER –10:: COMPANY FORMATION

PROMOTERS
Page 59 of 127
BASICS
 A promoter is a person who undertakes the responsibility and takes all the necessary steps to form a
company with reference to a given project. It also applies to anyone who makes any business preparations
for the company.
 Promoters may be the owners of the company to be formed or external parties. An external party, acting as
a promoter is an Agent of the people wishing to form the company
 Solicitors, Accountants or other Professionals who act in their professional capacity towards the formation
of a company are not promoters.
 Once the company is formed, the promoter must be reimbursed for all the expenses incurred in forming the
company. Although they don’t have an automatic right to claim reimbursement.
DUTIES AND REGULATIONS
 A promoter owes the fiduciary duties of Reasonable Care and Skill, to the company he is promoting.
 A Promoter cannot put himself in a position where his own interest conflicts with the interest of the
company
 Any benefits or personal advantages the promoter receives must be accounted for and disclosed to the
company he is promoting or to its existing and potential shareholders
 A promoter cannot profit personally from a contract as promoter unless he sells his own property to the
company at a profit
 If a promoter breaches his fiduciary duty, the company may rescind (cancel) the contract and recover its
money. If the contract cannot be cancelled, the promoter must repay any wrongful profit he made or be
sued for damages
PRE-INCORPORATION CONTRACTS
BASICS
 A pre-incorporation contract is a contract made by a company or its agent at a time before the company has
received its Certificate of Incorporation.
 Since the company doesn’t exist at that time, it is not liable for the contract, nor can it ratify it.
 The company can however enter into a new contract {novation contract} on similar terms after
Incorporation. Although, simply performing the pre-incorporation contract or accepting benefits under it
does not form a new contract
LIABILITY FOR PRE-INCORPORATION CONTRACTS
Page 60 of 127
 Under the Companies Act 2006 (UK), the person or Agent entering into the pre-incorporation is personally
liable for the contract, unless the parties agree, through an express agreement, that the person shall not be
liable.
 It is not relevant whether the contract is made in the company’s name or the agent’s name or whether the
third party knew that the company didn’t exist.
 A person entering into a pre-incorporation contract can seek to avoid liability by:
 Postponing completion of the contract until incorporation by keeping the contract as a Draft
 Agreeing with the other party that his liability will cease when the company enters into a novation
contract
 Including an express agreement in the contract which relieves him of personal liability
 Purchasing an ‘Off the Shelf’ company
 An “Off the Shelf” company
OFF THE SHELF COMPANIES
 Certain Enterprises specialize in registering a stock of limited companies, ready to be sold to anyone who
wishes to enjoy the benefits of incorporation without any delay
 Purchasing an “Off the Shelf” company has the following advantages:
 There is no need to file documents required for registration or wait until the receipt of the
certificate of incorporation as the company is already registered
 There will be no risk of potential liability arising from pre-incorporation contracts
 Disadvantages of purchasing an Off the Shelf company includes:
 The company is likely to have Model Articles, which may be not be acceptable for the Directors
 The Directors may wish to change the name of the company
 The shares in the company will need to be transferred to the new shareholders
COMPANY REGISTRATION
BASICS
 A limited company must be registered with the Registrar of Companies according to the Companies Act
2006.
 To obtain registration, an Application for Registration, Various Documents and a Fee must be sent to the
Registrar
 The Documents that must be sent to the Registrar of Companies include:
Page 61 of 127
 An Application for Registration containing the company’s proposed name, location and address of
its registered office and a statement that the liability of members is to be limited by shares or
guarantee
 A Memorandum of Association, signed by the members, stating that they wish to form a company
and buy at least one share of the company
 Articles of Association stating the procedures by which the company is to be run, voting rights
attached to shares, timing and frequency of meetings etc. If no Articles of Association are sent,
Model Articles shall apply
 Statement or Proposed Officers stating the names and addresses of the company’s first directors
and secretary {only for Plc} with their signed consent to act
 Statement of Compliance stating that the requirements of the Companies Act have been fully
complied with
 Statement of Capital and Initial Shareholdings stating the details of the company’s shares and the
initial shareholding of the members
 Once the documents are verified and accepted by the Registrar of Companies, a Certificate of Incorporation
is issued and the Company’s name is included in the Companies Register.
 On receipt of the Certificate, a private limited company may begin trading but a Public Company must also
obtain a Trading Certificate before commencing their trade
 The Certificate of Incorporation:
 Identifies the company by its name and registered number
 States that it is limited and whether it is a private or public company
 States whether the registered office is in England and Wales, Scotland or Northern Ireland
 States the Date of Incorporation
 Is signed by the Registrar
 Provides Evidence that all the requirements of the Companies Act 2006 has been complied with
 Any errors, later discovered in the certificate, does not make it invalid
 Upon Incorporation, the directors and secretary specified in the statement of proposed officers,
automatically become such officers
RE-REGISTRATION PROCEDURES
 A private limited company may apply for re-registration as a public limited company if its allotted share
capital exceeds or is equal to £50,000 of which at least 25% is paid up plus the whole of any premium
 A public limited company MUST re-register as a private company if its share capital falls below £50,000
 The Procedure for re-registration can be summarized as follows:
 The shareholders must convene a general meeting and pass a special resolution (75%) in favour of
the re-registration
 The company must then apply to the Registrar to go public/private by:
o Sending an competed Application form to the Registrar along with a copy of the special
resolution
o Sending Additional information about the company regarding its allotted capital, proposed
articles, proposed name, proposed directors and secretary (if applicable) and financial
statement information
o Sending a Statement of Compliance
Page 62 of 127
THE REGISTRAR
 The Registrar of Companies is usually referred to as the Companies House. It is responsible for the
Registration and Re-Registration of limited companies, both Public and Private
 The Registrar must maintain an index of all Registered Companies identified by their Name and Serial
Number, which must also be present on every document that it receives from the companies
 The Registrar must also keep a file for each company containing the following documents:
 Certificate of Incorporation
 Public Company Trading Certificate (only for public companies)
 Annual Accounts and Returns
 Copies of Special and Ordinary Resolutions passed by the Company
 Copies of Altered Articles
 Notice of various events such as change of directors or secretaries
 Copy of company prospectus
STATUTORY BOOKS
COMPANY REGISTERS
Under the Companies Act 2006 (UK), a company is required to maintain the following statutory registers available
for public inspection in their registered office or a Single Alternative Inspection Location (SAIL) which must be
registered at the Companies House. Companies are not allowed to have more than one SAIL.
Companies must keep the following registers:
 A Register of Members
 It contains the names and addresses of the members, the numbers and class of shares they hold
and the date at which they became a member, or ceased to be a member
 Any member can inspect the register for free. However, a general member of the public has the
right to inspect the register for a fee
 A Register of Assets
 It contains a brief description of each asset, any asset put up as collateral and any fixed or floating
rate charges applicable to any asset
 A Register of Charges
 It contains:
o Details of fixed or Floating charges
o Brief description of the property charged
o The amount of the charge
o The name of the person entitled to the charge
 Any member can inspect the register for free. However, a general member of the public has the
 A Register of Directors
 It must contain:
Page 63 of 127
o Present and former forenames and surnames

o A service address
o Residency and Nationality
o Business Occupation
o Date of Birth
o The Firm name and Address of registered office (if the director is a company)
 The Register does not include Shadow Directors and any member can inspect the register for free.
However, a general member of the public has the right to inspect the register for a fee
 The company is also required to maintain a register of Director’s Residential Address, which is not
available for inspection by members
 A Record of Service Contracts of directors, including the contracts for any other services provided by the
directors. Any member can inspect the register for free. However, a general member of the public has the
 A Record of Resolutions passed through shareholder voting and Minutes of Meetings held between
members
ACCOUNTING RECORDS
 A company is required to produce and preserve accounting records that comply with the requirements of
the Companies Act 2006 (UK) and International Accounting Standards.
 The Companies Act 2006 (UK) requires companies to keep the following records:
 A record of Assets and Liabilities

 Statement of goods bought and sold, together with details of Suppliers and Customers
 Daily entries of sums paid and received, with details of the source and nature of the transactions
 Statement of amount and type of inventory held at the end of the financial year
 Statement of Stocktaking {Inventory Count}
 A public company must preserve their accounting records for a minimum of 6 years, whereas a private
company must preserve their accounting records for a minimum of 3 years
 Accounting records should be kept at the company’s registered office or some other place deemed fit by the
directors and should be available for inspection by company officers
 Shareholders have no statutory rights to inspect the records unless it is allowed by the company’s Articles
ANNUAL ACCOUNTS
 Companies are required to prepare annual accounts approved by its Board of Directors, either in
accordance with the Companies Act or International Accounting Standards
 The Annual Accounts must provide a True and Fair view of the company’s Assets, Liabilities, Financial
Position and Financial Performance
Page 64 of 127
 A Public Company is required to lay its accounts along with a Director’s Report before its members in an
annual general meeting
 Private Companies are required to file a copy of their accounts with the Registrar within 9 months of the
end of the accounting year, where as a Public Company is required to file their accounts with 6 months
 The Accounts of quoted companies must be audited and the Audited Accounts along with the Auditor’s
Report and Director’s Report must be presented in the AGM to be held within 6 months of the end of the
accounting year
 Members are Debenture holders of public companies are entitled to receive copies of the accounts 21 days
before the AGM. Any other person entitled to attend the AGM, such as the company auditor, must also be
sent a copy of the accounts
 At other times, members and creditors should be provided with a copy of the accounts within 7 days of
request without any fees
 Quoted Companies are required to publish their Annual Accounts and Reports on company website,
available for free inspection by any member of the public
STATUTORY RETURNS
Every limited company must make an annual return to the Registrar containing the following:
 The Address of the Registered Office and the Office where Registers are kept
 The Type of company and its principal business activities
 The total number of issued shares, their nominal value and amounts paid and unpaid
 Details of the members of the company
 Details of the various class of shares held by the members
 Details of Directors and Secretary
CHAPTER –11:: CONSTITUTION OF A COMPANY

Page 65 of 127
MEMORANDUM OF ASSOCIATION
According to Companies Act 2006, a company’s Memorandum of Association is a document signed by its
shareholders, stating that they:
 Wish to form a Company in accordance with the rules of the Companies Act 2006
 Agree to become members of the company and, to take at least one share each if the company is to have a
share capital
COMPANY CONSTITUTION
 According to the Companies Act 2006, the constitution of a company consists of:
 The Articles of Association
 Resolutions and Agreements of Members
 The Constitution of the Company binds its members to the company, the company to its members and the
members to other members
 This principle applies only the rights and obligations which affect members in their capacity as members
 The company’s constitution does not bind the company to third parties
RESOLUTIONS AND AGREEMENTS
 Resolutions are decisions passed by members which directly affect the company’s constitution as they are
used to Introduce, Amend or Remove terms in the company’s Articles. Agreements between members and
the company are also considered to be amendments to the constitution of the company
 Copies of Resolutions and Agreements must be sent to the Registrar within 15 days of being passed. Where
resolutions and agreements are made orally, a written memorandum must be sent to the Registrar.
 Failure to file copies with the Registrar is and Offence punishable with Fines
ARTICLES OF ASSOCIATION
BASICS
 The Articles of Association consist of the internal rules that relate to the management and administration of
the company
 A company may develop its own Articles or it may adopt Model Articles developed by the Secretary of
State.
 Model Articles may be altered by the members of a company.
 Different Models are available for different types of companies
Page 66 of 127
 Model Articles typically include guidelines regarding the following issues:
 Appointment and Dismissal of Directors
 Powers, responsibilities and liabilities of Directors
 Payment of Dividends and Alteration of Capital Structure
 Member’s Rights and Communication with Members
 General Meetings, Director’s Meetings and Class Meetings
 Transfer and Issues of Shares
 Documents and Records
 Company Secretary
 If the company’s Articles contradict with the provisions of the Companies Act, the rules and guidelines of
the Companies Act must be followed
EFFECT OF ARTICLES OF ASSOCIATION
 A company’s Articles bind the company to its members, its members to the company and its members to
each other. The Articles don’t bind the company to third parties and it only applies to the Rights and
Obligations of the members in their capacity as members.
 In the case of Eley vs. Positive Government Security Life Assurance Co, it was established that if a member
acts outside his capacity as a member, the company is not bound to him. Eley, who was a member, brought
a claim against the company as a Lawyer, but the claim was held as not binding on the company
 In the case of Rayfield vs. Hands, it was established that the members of a company are contractually bound
by the Articles in their dealings with one another
 If a company enters into a contract with a third party and a particular term or condition is missing in the
contract but specified in the Articles, then the term or condition is considered to be applicable to the
contract
ALTERATION OF ARTICLES
 A company’s Articles may be altered through a Special Resolution passed in a General Meeting. The
amended Articles are binding on the company and members in the same way as the previous Articles
 An Article cannot be made to be unalterable by:
Giving a member additional voting rights so that they can block a resolution to alter articles in the
future
 Providing that the member (who doesn’t want the alteration) must be present in the meeting where
the resolution for altering the article will be passed
 Providing that the articles can only be amended if certain conditions are met such as attendance of
all members
 However, an alteration will be void if it contradicts with the Companies Act.
Page 67 of 127
 An alteration cannot have a retrospective effect
 An alteration which varies the rights attached to a class of shares may only be made if the correct
procedures have been followed. Moreover, a 15% minority may apply to the court to cancel the Alteration
 A alteration will also be void if it compels any member to buy additional shares or if the majority of the
members who approved the alteration are not acting in the best interest of the company
 An alteration which gives the majority shareholders the right to buy out the shares of the minority
shareholders will not be valid.
 A company cannot be prevented from altering its Articles even if it results in a breach of a contract entered
into by the company. However, it may be liable to damages for that breach
 Any alteration must be filed with the Registrar within 15 days along with a copy of the Resolution
BONA FIDE
 An alteration is only valid if it is Bona Fide
 The term ‘bona fide’ means ‘in the best interest of the company as a whole’. It is used as a test to judge
whether an alteration of the Articles can be considered as valid. In the case of Greenhalgh vs. Arderne
Cinemas Ltd, the Court of Appeal stated that the test is subjective and must be carefully interpreted.
 The company as a whole refers to the general body of shareholders. The test establishes whether the
alteration of the Article would, in theory, benefit all the shareholders of the company.
 Any alteration that is intended to benefit the majority shareholders will not be considered as valid. If an
alteration is likely to be in the best interest of the company as a whole, it is likely to considered as valid,
even if the minority do not agree to the alteration
COMPANY OBJECTS
 A company’s constitution, specially its Articles of Association, contains its Objects. According to Companies
Act 1985, a company could not enter into any agreements that were not consistent with its Objects
 The Companies Act 2006 states that all companies who adopt Model Articles are deemed to have
Unrestricted Objects and may enter into any contract as long as it is legal.
 However, the members of a company can restrict their Objects through a Special Resolution if they want to
prevent the Directors from entering into certain types of contracts
ULTRA VIRES
BASICS
 The contractual capacity of registered companies is usually unrestricted, which means they can enter into
any contract as long as it is legal.
 However, any contract entered into by the company, which is specifically prohibited by its Objects is Ultra
Vires {Void}
 However, third parties aren’t able to impose the Ultra Vires Rule as the validity of the company’s act cannot
be questioned as long as it has acted legally. Moreover, the company cannot use the Ultra Vires Rule to
avoid their obligation towards a third party
Page 68 of 127
 The Ultra Vires principle only applies to members who are acting in their capacity as members
 An Ultra Vires transaction between a company and a director is voidable unless:
 It is ratified by the members or

 Restitution (restoring the previous situation) can no longer be made or
 Invalidating the transaction would result in a breach of third party rights
INTERNAL ULTRA VIRES
 The Ultra Vires rule is applicable on the Directors of the company who have a duty to act in accordance
with the company’s constitution.
 A member can obtain an injunction to prevent a Director from committing an Ultra Vires (Invalid) act.
However, if such as Act is performed, the members are also allowed to ratify the act through an Ordinary
Resolution
 If the members do not ratify the contract, the director is liable to repay any profit earned or make good on
any losses incurred from the contract
EXTERNAL ULTRA VIRES
 The Companies Act states that a company’s act cannot be considered as invalid if it contradicts with its
Objects, as long as it is legal. Neither the company, nor a third party can plead ultra vires to escape their
obligations
 Ultra Vires is therefore, not applicable to acts done between the company and a third party, unless the third
party acted in bad faith and the directors exceeded their authority
 If a third party acts in good faith, they can assume that the directors have the authority to bind the
company. They do not need to check the Articles for any restrictions
COMPANY NAMES
BASICS
 The name of a company must be specified in the company’s constitution and is used to identify the
company.
 The Registrar of Companies has control over the names a company can choose in order to ensure that they
comply with the requirements and restrictions of both Statutory and Common Law.
 These rules apply to both the name applied during initial registration and on any subsequent change of
name by the company
PUBLIC AND PRIVATE COMPANIES
 The name of a public company must end with the words ‘public limited company or ‘plc’ whereas the name
of a private limited company must end with the words ‘limited’ or ‘ltd’]
Page 69 of 127
 Private Companies working as a charity or companies that registered before 25th February 1982 need not
include the word “ltd” in its name provided the following conditions are met:
 The company is involved in the Promotion of Commerce, Art, Science, Education, Religion, Charity
or any Profession
 The Profits earned are reinvested in carrying out the promotional work and not distributed to
members in the form of dividends or return of capital
CHANGE OF NAME
 A company can change its name by:
 Passing a Special Resolution
 Any other means indicated in the Articles
 A copy of the Resolution passed, or a written memorandum of any other procedure used, must be sent to
the Registrar
 The change is effective when a New Certificate of Incorporation is issued
RESTRCITIONS ON NAMES
 A company cannot share the name of any existing company which appears in the Statutory Index of the
Companies Registry.
 Moreover, a company cannot use a name which, in the Secretary of State’s opinion, is offensive, sensitive,
constitutes a criminal offence or suggests a connection with the government
 The words ‘British’ or ‘National’ will only be permitted if the nature and size of the company is appropriate.
 A name which suggests some professional expertise will be permitted only if that expertise exists in the
company and other professional bodies have no objection.
 Under the Companies Act 2006, the Secretary of State may order a company to change a name if it is too
similar to another company on the register
PASSING OFF
 Under the common law, a company can be prevented from using its registered name if it causes the
company’s goods or services to be confused with that of another company.
 The court may grant an injunction (an order to prevent someone from doing something) in a ‘passing off’
tort action in favour of the victimized company, or force the other company to change its name. This was
established in the case of Ewing vs. Buttercup Margarine Co Ltd.
 If, however, the two companies’ businesses are different, confusion is unlikely to occur and hence courts
will refuse to grant an injunction. This was established in the case of Dunlop Pneumatic Tyre vs. Dunlop
Motor Co Ltd.
 Injunctions are not awarded for words which have a general use, such as Light, Heavy, Diet etc.
Page 70 of 127
COMPANY NAMES ADJUDICATORS
 Under the Companies Act 2006 (UK), companies have the right to appeal to the Company Names
Adjudicators if they feel that another company is using a similar name.
 The Adjudicator will look into the case and make a decision binding on both parties.
PUBLICATION OF COMPANY NAMES
 The company’s name must appear legibly and conspicuously (clearly):
 Outside the registered office and all places of business
 On all business letters, order forms, notices and places of business
 On all receipts and invoices issued on the company’s behalf
 On all Bills of Exchange, Letters of Credit, Promissory Notes, Cheques and Orders for money
 On its Website
 If a Company, Partnership or a Sole Trader, uses a name other than its corporate or registered name in
conducting out its activities, they are required to:
 State its registered name, number and address on all business documents
 Display its name and address in a prominent position in any business premises accessed by its
suppliers and customers
 Give notice of its name and address if requested by anyone with whom they do business
REGISTERED OFFICE
 A company must, at all times, have a registered office to which all communications and documents can be
sent
 A company may change its Registered Office but not its Domicile (Residency)
 For a period of 14 days after notice of the change is given, any party may validly send documents to the
previous address
CHAPTER –12:: SHARE CAPITAL

COMPANY MEMBERS
 A company member is a person who has agreed to become a member and whose name has been entered in
the register of members, submitted to the Registrar
Page 71 of 127
 A person, other than those who were initially registered as members, may become a member of the
company by:
 Acquiring and being allotted shares
 Applying as a personal representative or trustee of a Deceased or Bankrupt Member
 The names of any new member must be entered in the register of member for the transfer of membership
to be legal
 An existing member ceases to be a member in the following scenarios:
 He transfers all his shares to another person and the transfer is registered
 The shares of a bankrupt member are registered in the name of his trustee
 A member who is a minor repudiates his shares
 The trustee of a bankrupt member disclaims his shares
 The company forfeits or accepts the surrender of shares
 The company sells the member’s shares in exercise of a lien
 The company dissolves and ceases to exist
 The member dies
 Both Private and Public limited companies must have at least one member. However there are rules on the
maximum number of members a company can have
TYPES OF CAPITAL
 AUTHORISED SHARE CAPITAL

 It is the maximum amount of shares that a company is authorized to issue.
 However, under Companies Act 2006, the concept of authorized share capital has been removed
 ISSUED AND ALLOTTED SHARE CAPITAL

 It is the Type, Class, Number and Amount of the shares issued and allotted to specific shareholders
 Part of the allotted share capital that is not issued by companies are known as Unissued shares
 CALLED UP SHARE CAPITAL

 It is the amount which the company requires the shareholders to pay for their shares, either now or
in a future date
 The amount which is not called (asked for) by the company at a particular time is known as
Uncalled Capital
 Shareholders are liability to the company for the uncalled capital. This liability is passed on to the
new shareholders if the shares are sold
 PAID UP SHARE CAPITAL

 It is the amount which shareholders have actually paid on the shares issued and called up
 On allotment, public limited companies must receive at least 25% of the nominal value of the shares
issued plus the whole of any premium
 EQUITY SHARE CAPITAL
Page 72 of 127
 It is the company’s Issued Share Capital less capital which carries Preferential Rights. Equity refers
to the residual interest in a company’s assets after deducting its liabitlies
 LOAN CAPITAL
 It comprises of Debentures and other long term loans to a business
TYPES OF SHARES
SHARES
 In the case of Borland’s Trustee vs. Steel Bros & Co Ltd, the definition of a share was established as “the
interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the
first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by
all the shareholders”
 A share’s nominal value (face value) is the minimum value at which a share can be issued. A company
cannot issue shares at a price below the nominal value. A $1 ordinary share has a nominal value of $1.
Shares may be sold at a price, greater or lower than the Nominal Value
 The Market Value of a share is the value for which the share can be bought or sold in the stock market. It
usually differs, and in most cases, tends to be higher than the Nominal Value. The market value of a share
depends on the company’s performance and prospects. If a company consistently performs poorly, the
market value of its shares are likely to fall below its nominal value
 A member who holds one or more shares is called a Shareholder. However, owners of companies who do
not have a share capital (such as a company limited by guarantee) are not known as shareholders
ORDINARY SHARES (Equity)
 Ordinary shares are shares which entitle the holders to receive the company’s distributable profits (and
assets if the company liquidates) after all other creditors and preference shareholders have been paid
 Ordinary Share holders may or may not carry voting rights. Holders of ordinary shares that carry voting
rights are known as the owners of the company
 Ordinary Shares carry a high level of risk as they do not provide the shareholders with any
rights/guarantee regarding repayment of capital or return in the form of dividends
PREFERENCE SHARES
 A Preference share is a share carrying one or more rights such as a fixed rate of dividend or preferential
claim to any company profits available for distribution
 A preference share is considered as a slightly less risky investment than an ordinary share as they carry
one or more rights that ordinary shareholders do not enjoy.
 Common differences between ordinary and preference shares include:
Page 73 of 127
 Preference shares carry a prior right to receive a fixed amount of annual dividends, usually a fixed
percentage of the nominal value of the shares. The right cannot be used by the shareholder to force
the company to pay the dividends. It simply entitles them to be the first to receive dividends when
and if the company decides to pay out dividends
 Preference Shares may be Cumulative, where unpaid dividends are carried forward, or Non-
Cumulative, where unpaid dividends are not carried forward.
 In the event of liquidation, cumulative unpaid dividends do not have to be paid unless the company
declares that it will pay the dividends or it is specified in the Company Articles
 Unlike ordinary shares, preference shares do not carry any voting rights. However, voting may be
permitted in certain circumstances, especially regarding dividend payments or liquidation
 Preference shareholders carry a prior right to return of capital if the event of liquidation. This
means that if the company liquidates, preference shareholders are repaid their capital before
ordinary shareholders. However, they do not get any share from any surplus of assets remaining
after all creditors are paid
 Preference shares provide the holder with a greater security of income and a greater security of capital.
However, in times of inflation, people with fixed incomes usually lose out
REDEEMABLE SHARES
 Redeemable Shares are shares issued by the company on terms that they may be bought back by the
company either at a future date or at the shareholder’s or company’s option
TREASURY SHARES
 Treasury shares are created when the company legitimately purchases its own shares out of cash or
distributable profits
 Treasury shares can be re-issued by the company without the usual formalities of share issues
 Treasury shares can only be sold for cash and do not carry any voting power
VARIATION OF CLASS RIGHTS
 A Class Right refers to the rights given to a shareholder as a result of his ownership of the share such as
Voting Rights, Rights to Dividends and Right to Return of Capital on liquidation
 Variation of Class Rights refers to an Alteration to the shareholders Class Rights
 Class Rights can only be varied with consent of all the shareholders of that Class or according to the rules
within the Articles.
 Model Articles require a Special Resolution to be passed by the members of the Class concerned
 The following cannot be considered as Variation of class rights:

 Issue of shares of a particular class to persons who are not members of that class
 Subdivision of shares of another class leading to an increase in their voting powers
 Return of capital to the holders of Preference Shares
Page 74 of 127
 Issue of a new class of shares of preference shares with priority over an existing class of ordinary
shares
 Members of a particular Class of shares holding 15% of the issued shares of that class can appeal to a court
within 21 days of the approval of the alteration to cancel the variation of the class rights. This would only
be valid if neither of those members took part in voting for the variation
 The court may either cancel the variation or uphold it. Courts cannot change the terms of the variation
STATEMENT OF CAPITAL AND INITIAL SHAREHOLDING
 It is a document that must be sent annually to the Registrar of Companies. It must be updated every year to
reflect any changes. It provides a public record of the following details in respect of the share capital of the
company:
 The total number of shares of the company

 The total nominal value of the shares
 The various classes of shares issued. For each class of shares, the Total Number issued, their
Nominal Value and the Rights attached to them.
 The amount Paid-Up and the amount Unpaid on each share
 There must be sufficient information to identify each member whose names have been registered in the
Memorandum of Association along with the Number and Class of Shares they hold, their nominal values
and the amounts paid and unpaid on the shares.
ALLOTMENT OF SHARES
BASICS
 Allotment of shares is the issue and allocation to a person of a certain number of shares under a contract of
allotment
 A share is Allotted when the person who bought the share acquires the right to be entered into the
company’s register of members with the consent of the Board of Directors (to whom the power to allot
shares is usually given)
 A share is Issued when the person who bought the shares receives a Letter of Allotment or Share Certificate
PUBLIC COMPANY ALLOTTMENT
 Public companies use various methods of selling shares to the public as follows:
 PUBLIC OFFER: Where members of the public subscribe for shares directly to the company
 OFFER FOR SALE: An offer to members of the public to apply for shares based on information in a
prospectus
 PLACING: A method of raising share capital where shares are offered in a small number of large
blocks to persons or institutions who have previously agreed to purchase the shares at a
predetermined price
PUBLIC COMPANY ALLOTTMENT
Page 75 of 127
 Private companies cannot sell their shares to the public. The allotment of shares in a private company is
fairly straightforward
 An application must be made to the board of directors, who, upon approval, issues and allots the share and
enters the name of the member in the register
POWERS OF DIRECTORS TO ALLOT SHARES
 Directors of private companies with one class of shares have the authority to allot shares unless restricted
by the company’s articles
 Directors of public companies or private companies with more than one class of shares do not have the
authority to issue shares without the approval of the members. However, they can allot shares to members
in the Memorandum of Articles or under the Employee Share Scheme
 Shares allotted by directors without authority if a criminal offence punishable by fines. However, the
allotment remains valid
TYPES OF SHARE ISSUES
PRE-EMPTION RIGHTS
 It refers to the rights of existing ordinary shareholders to be offered new shares issued by the company in
the ratio of their existing shareholding of that class of share.
 The right only applies if the shares are being issued for cash and the offer is on the same or more
favourable terms as the original allotment
 A private company may exclude these rights within its Articles so that there is not statutory right of first
refusal. Both Private and Public Limited Companies can exclude these rights for a particular issue through a
Special Resolution
RIGHTS ISSUE
 A Rights Issue is the right given to existing shareholders, to buy further shares in the company, usually in
proportion to their existing shareholding, at a price below the market price
 The offer must be made in writing and a period of at least 21 days must be specified during which the offer
may be accepted but may not be withdrawn. If the offer is not accepted within this period, it is deemed to
be rejected.
 Equity shares, which have not been accepted by the existing shareholders, may then be offered to non-
members. These shares cannot be issued at a price below or equal to the nominal value
BONUS ISSUE
 Bonus issues are also known as Capitalization or Scrip Issues. They are offered to existing shareholders in
proportion to their existing shareholding
Page 76 of 127
 The issues are fully Paid-Up out of the undistributed reserves of the company. No cash is required to be
paid by the shareholders
 The share premium account is usually used to fund a bonus issue. This is permitted because the process
simply involves the transfer from one undistributable reserve {share premium} to another {share capital}
DISCOUNTS AND PREMIUMS
ISSUING SHARES AT A PREMIUM
 When shares are issued at a ‘premium’, shareholders are required to pay the Nominal Value plus an
additional value known as the premium. The payment can be made in cash or other form of assets such as
property, goodwill or know-how
 The payment of the Nominal Value is recorded in the Share Capital Account and the payment of the
Premium Value is recorded in the Share Premium Account. Both these accounts form part of the fixed
capital of the company
 The share premium account, may, however, be used to fund Bonus Issues and Issue Costs and Commission
incurred in New Share Issues. It may also be used to finance any premiums due when redeemable shares
are redeemed.
 The share premium account cannot be used to pay dividends to shareholders as it forms part of the
undistributable reserves of the company.
ISSUING SHARES AT A DISCOUNT
 According to the Companies Act 2006 (UK), a company cannot issue shares at a price below its Nominal
Value. If they are issued as such, the company cannot enforce the contract (force him to pay) on the person
buying the shares.
 However, if a person agrees to buy the shares, they become liable to the company to pay the Full Nominal
Value of the shares they acquired. In the case of Ooregum Gold Mining Co of India vs. Roper, it was
established that if a person buys shares with a nominal value of $1 for 25 cents, he is liable to pay the
remaining 75 cents if the company goes into liquidation
 Although the company is not allowed to offer shares at a price below the nominal value, shareholders may
make payment for their shares in installments, even if the first installment is lower than the nominal value.
The shareholder remains liable for any amounts unpaid on their shares
 The company may accept non-cash considerations, such as goodwill, know-how, etc. as payments for the
shares as long as it is of sufficient value.
 In Private Limited Companies, the value of non-cash considerations may be determined by directors. The
value will be accepted if it appears to be reasonable and honest. However, in Public Limited Companies, the
value must be determined by an Independent Third Party
Page 77 of 127
PRIVATE COMPANY SHARE ISSUES
 A private company may allot shares in exchange for goods or services. The value of the goods or services
shall be determined by the director
 The consideration will only be acceptable if it is Reasonable and Honest. Any unjustified over valuation of
consideration will be considered Invalid by the court
PUBLIC COMPANY SHARE ISSUES
 Public companies must receive at least 25% of the nominal and the whole of any premium on its issued and
allotted shares
 Any non cash considerations offered for the shares must be independently valued
 Non cash considerations will not be allowed if its performance takes more than five years after the
allotment. If the performance is offered within five years and the party fails to deliver the consideration, he
will be liable to pay cash on default
 Any offers to do work or perform services in return for shares will not be accepted. However, shares may
be used to pay for services already performed
 A public company cannot accept non cash considerations in exchange for shares within two years of
receiving its Trading Certificate unless the value of the shares is less than 10% of the issued nominal capital
CHAPTER –13:: LOAN CAPITAL

BORROWING
Page 78 of 127
 All companies under the Companies Act 2006 have an implied power to borrow for the purposes incidental
to their trade or business
 The power to borrow is usually delegated to the company’s directors. However, where this is the case, a
maximum limit is set on the amount that can be borrowed by the directors on behalf of the company
 A contract to repay borrowed money would be unenforceable it:
 The money is borrowed for an Ultra Vires purpose and the lender is aware of that fact
 The Directors exceeded their borrowing powers or had no powers to borrow and the lender is
aware of that fact
 If lenders are unaware of the purpose of the borrowing or of director’s borrowing powers, they will usually
be able to enforce the contract and force the company to repay the amount
 If the contract is within the capacity of the company to borrow, but beyond the delegated powers of the
directors, the company may ratify the loan contract
 Directors with delegated powers to borrow also has the authority to put up company assets as security for
the loan
 Some lenders require a personal guarantee from the members of the company in which case, the
member(s) would be personally liable for the debts of the company
LOAN CAPITAL
 A company’s loan capital comprises of all amounts which it borrows including for the long-term such as
Permanent overdrafts, Unsecured loans. Secured loans, Debentures etc.
 The main difference between a company’s Share Capital and Loan Capital is that the loan capital must
usually be repaid after a certain point in time. Share Capital need only be repaid when the company is
wound up
DEBENTURES
BASICS
 A debenture is a written acknowledgement of debt in the form of a formal printed legal document which
states the terms on which a company has borrowed money including the Payment of Interest and
Repayment of the Principal.
 A debenture is usually secured on either a specific asset or all assets of the company. Debentures may also
be unsecured. Secured Debenture holders can enforce their security by taking possession of the asset
secured and selling them, or appointing a receiver.
 The debenture holder (person who lends the money) is entitled to payment of interest and repayment of
the principal amount as a creditor, but does not have any voting rights over company matters.
Page 79 of 127
 The company must maintain a register for all debenture holders and register the allotment within two
months
TYPES OF DEBENTURES
 SINGLE DEBENTURES
 A Single Debentures is issued to a Single Lender
 They are usually secured by providing the holder with various safeguards and powers
 DEBENTURES ISSUED AS A SERIES

 These are Debentures issued as a series to different lenders. The Debentures must be registered
and each lender receives a debenture in identical form.
 The rights of the lenders rank equally (pari passu) in respect of interest and principal repayment.
 The Debentures are may be transferable to other parties
 DEBENTURE STOCK
 Public Limited Companies may also issue Debenture stock to members of the public by means of a
prospectus.
 Each lender has a right to be Repaid their Capital at the due date and receive interest until the
principal is repaid
 Debentures Stock are usually transferable in multiples of $1, $10 etc. which enables the stock
holder to sell part of his stock to others
DEBENTURE TRUST DEED
 A Debenture Trust Deed involves the appointment of a Trustee, such as a Bank who conducts the
transactions involving Debenture Issues on behalf of the company
 The Nominal Value of the Debenture (maximum amount that can be raised) is specified including the
interest to be paid and the date at which the principal is to be repaid
 If the Debenture is secured, the Deed creates a charge or charges over company assets. The Trustee is
authorized to enforce the security in case of default
 Debenture Trust Deed is advantageous as follows:
 Individual Debenture holders do not have to deal with the company to enforce their right to
company assets in case of default. It is done by the Trustee
 The company doesn’t have to deal or negotiate with individual Debenture holders. It is done by the
Trustee
REGISTER OF DEBENTURE HOLDERS
 Companies are not normally required to maintain a register of debenture holders unless the debenture is
Issued as a Series or when Debenture Stock is issued
 If a register is maintained, the following regulations apply:

 The register must be kept at the registered office or at their Single Alternative Inspection Location
Page 80 of 127
 The register should be properly kept in accordance with the requirements of the Companies Act
and made available to anyone unless access is restricted in the constitution or the deed
 The register must be open for inspection for a fee to anyone within five days unless an exemption is
obtained from the court
 Holders of debentures issued under a trust deed may require the company or the trustee to supply
them with a copy of the deed for a fee
SIMILARITIES AND DIFFERENCES BETWEEN DEBENTURES AND SHARES
 SIMILARITIES BETWEEN DEBENTURES AND SHARES
 They are both Transferable Company Securities and are long term investments in the company
 The Procedures for Issue and Transfer of Shares and Debentures are usually the same
 DIFFERENCES BETWEEN DEBENTURES AND SHARES
 Shares holders are Owners where as Debenture holders are Creditors of the company
 Shareholders usually have voting rights where as Debenture holders do not
 Shares Cannot be issued at a Discount to their Nominal Value but Debentures Can be issued at a
Discount to their Nominal Value
 Dividends paid to Shareholders are dependent on company profits and director’s discretion where
as Interests to Debenture holders Must be paid regardless of company profits
 On liquidation, Debenture holders have to be repaid their capital before any distributions are made
to shareholders
ADVATAGES AND DISADVANTAGES OF DEBENTURES
 ADVANTAGES OF DEBENTURES INCLUDE:
 Debentures are easily traded and popular due to the guaranteed income it provides
 Interest on Debentures are Tax Deductible
 Assets subject to Floating charge may be traded
 Unlike Shares, there are no restrictions imposed on the company on Repurchasing Debentures
 DISADVANTAGES OF DEBENTURES INCLUDE:
 Interest payments are mandatory and may put a strain on company’s cash position or its ability to
pay dividends
Page 81 of 127
 If Debenture holders are not paid their interests, they may appoint a Receiver in order to liquidate
the company
 Companies may have to pay high levels of interest in order to make debentures more attractive
CHARGES
DEFINITION
 A charge over the assets of the company gives the creditor a prior claim over other creditors to payment of
their debt out of those assets. They are used as security for a debt owed to the charge holder
 The most common form of charge is a legal mortgage to secure the indebtedness of borrowers in a house
purchase transaction. Companies provide charges on their assets to persons who provide loan capital to
the company
 Charges may either be Fixed, which attach to the relevant asset on creation, or Floating, which attach only
on crystallization
FIXED CHARGES RELATING TO DEBENTURES
 A fixed charge is a form of protection given to secured debenture holders and is based on specific assets
(usually non-current) of the company. If the company liquidates, the debenture holder has the right to take
possession of the asset and dispose it in order to recover the money owed to him.
 Fixed charges rank first in the order of priority in the event of liquidation. This means that fixed charged
debenture holders will be able to claim the company’s assets before other creditors. A mortgage is an
example of a fixed charged debenture
 If the company disposes off a fixed charged asset, it must repay the debt to the debenture holder out of the
proceeds from the sale, or pass over the asset to the purchaser as a collateralized asset.
FLOATING CHARGES RELATING TO DEBENTURES
 A floating charge is not based on a specific asset, but it rather applies to a class of assets, such as receivables
or inventory. It is applicable on both future and current assets
 The company retains the right to deal with these assets in the ordinary course of their business until the
charge crystallizes (becomes enforceable). A charge crystallizes in the following events:
 The liquidation of the company
 Cessation of the company’s activities
 Intervention by the Charge (where the Charge decides to enforce the charge)
 The crystallization of another floating charge causes the cessation of the company’s activities
 The contract specifies that the charge would crystallize if a specific event occurs and that event
actually occurs
 A charge may be determined as Fixed or Floating on the basis of the rights of the company and the
Debenture holder over the assets. How the charge is labeled in the contract is not relevant.
Page 82 of 127
 If a company can use a charged asset without needing to notify the debenture holder, the charge is likely to
be Floating. On the other hand, if the asset charged is specified and the company cannot deal with it without
notifying the debenture holder, the charge is likely to be Fixed.
 Floating charges rank after Fixed charges even if the Fixed charge was created after the Floating charge.
This means Fixed charge holders will be paid first.
 Floating charge holders receive their payment after the Preferential Creditors (such as employees) are paid
 A fixed charge holder enjoys more certainty compared to a floating charge holder as they are entitled to the
immediate possession and disposal of the specified asset.
 However, Floating charge holders are likely to find it easier to realize their debt as they are mostly attached
to Current Assets, which can be sold relatively quickly
 Floating charge holder may expressly prohibit within the agreement, the creation of any future Fixed
charges. This is known as a Negative Pledge Clause. If the company breaks the clause, the Fixed Charge
Holder would still have priority unless he knew that such as a clause existed
 A Fixed charge may become invalid automatically if the company liquidates within 6 months of the creation
of the charge. A Floating charge may become invalid if the company liquidates within 1 year
PRIORITY OF CHARGES
 If more than one charge exists over the same class of property then the following rules must be followed:
 Fixed Charges rank according to the order of their creation i.e. the one created first will receive
their debt first
 A Floating Charge created before a fixed charge will take priority only if the Fixed charge holder
knew of the existence of the Floating charge
 A Fixed Charge created before a Floating Charge will take priority
 Two Floating Charges take priority according to the order of their creation i.e. the one created first
will receive their debt first
REGISTRATION OF CHARGES
 If a company creates or acquires property subject to a fixed or floating charge over its assets, then the
charge must be registered with the Registrar of Companies within 21 days after the creation of the charge.
 The particulars of the charge including the Date, Amount, Description of the Property and the Name of the
Chargee, may be delivered by the company or any person interested in the charge. However, it is the
company’s duty to ensure that the documents are filed on time
 Upon acceptance, the Registrar would issue a Certificate providing conclusive evidence that the charge has
been duly registered
 If the company doesn’t register its charges or deliver the particulars within 21 days of the creation of the
charge, the following consequences are suffered:
Page 83 of 127
 The charge will be void against a liquidator, administrator, creditor or any person with an interest
in the charged property. Hence, creditors who properly register their charges will get preference
over those who do not
 The company and its officers, who are responsible for the delivery of particulars and charges will be
personally liable to a fine
 Any mistake or errors in the registered particulars can only be rectified by a court order. The court will
make the order if the error or mistake was accidental or it is just and equitable to do so
 A Charge can only be registered late if it does not prejudice the Creditors or Shareholders of the company.
Registered Fixed Charges take priority over those that are Registered Late
 A company is also required to keep a register of charges and enter the details of all charges. In addition, a
company is required to keep copies of every debenture that creates a charge.
 The register and the copy of the debenture must be kept available for inspection by any creditor or member
without fee at the Registered Office or SAIL
DEBENTURE HOLDER’S REMEDIES
RIGHTS OF UNSECURED DEBENTURE HOLDERS
 Unsecured Debenture Holders is given a number of rights as any other creditors. They may:
 Sue the company if their debts are not repaid
 Present a petition to the court for the Compulsory Liquidation of the company
 Apply to the court for an Administration Order
 Secured Debenture Holders or their Trustees may:

 Take possession of the charged Asset if the charge is fixed. Floating charge holders can only take
possession if the contract allows it
 Sell the Charged Asset and retain the proceeds provided the debenture was made by Deed
 Apply to the court for transfer of ownership of the charged asset
 Appoint a Receiver to realize (sell) the Charged Asset or, in case of a floating charge holder, appoint
and Administrator
CHAPTER –14:: CAPITAL MAINTENANCE AND DIVIDEND LAW
Page 84 of 127
CAPITAL MAINTENANCE
BASICS
 Capital Maintenance is a Fundamental principle of company law, that limited companies should not be
allowed to make payments out of capital to the detriment of company creditors
 The Companies Act contains rules that dictate how a company is to manage and maintain its capital to
strike a balance between member’s enjoyment of limited liability and the creditor’s requirement that the
company shall remain able to pay its debts
 The company must follow the rules related to Dividend Payments and Capital Reduction Schemes
PROCEDURE FOR REDUCING CAPITAL
 A limited company may reduce its issued share capital if:
 It has the power to do so in its Articles

 It gains the power to reduce its capital by altering its articles through a special resolution
 It obtains confirmation of the reduction from the court (PLC) or makes a statement of solvency
(Ltd)
REASONS FOR REDUCTION OF SHARE CAPITAL
 The company has suffered a loss in the value of its assets

 The company wishes to extinguish the interests of some members entirely
 The company wishes to change its capital structure
METHODS OF REDUCTION OF SHARE CAPITAL
 The Companies Act 2006 (UK) permits a company to reduce its issued share capital by the three following
methods:
 The company can reduce the liability of members on partly paid shares. For example, if members
pay 75 cents for shares with a nominal value of $1 and the company decides to reduce the nominal
value of shares to, let say, 85 cents, the members would only be liable to pay 10 cents per share
instead of the remaining 25
 The company can pay off part of the paid up share capital out of surplus assets. For example, if
shares with a nominal value of $1 is fully paid up and the company decides to reduce the nominal
value to 70 cents, the company can repay the members the extra 30 cents that they have paid
 The company can simply write down the nominal value of its paid up capital if it falls below its net
assets by debiting its reserves and crediting its assets
COURT APPROVAL
 When the court receives an application for reduction of capital, its first concern is the effect of the
reduction on the company’s ability to pay its creditors.
Page 85 of 127
 If the reduction is by extinguishing liability or paying off part of the paid up share capital, the court requires
the company to invite its creditors to state their objections (if any), usually through an advertisement. If the
paid up capital is cancelled, the court may require an invitation to creditors
 The company usually tries to persuade the court to avoid having to advertise by:
 Paying off the creditors before making an application or

 By providing a guarantee that the existing debts will be paid off
 The second concern for the court is the effect of the reduction on the various classes of shareholders and
their rights over the company.
 If the reduction involves a variation of the rights of different classes of shareholders, then their consent
must be obtained. It is usual, though not mandatory, for the company to reduce the value of every class of
shares equally
 The court may require the company to publish explanations for the reduction of the nominal value in order
to prevent the company from misleading or confusing people who may deal with the company in the future
 If the court is satisfied, it issues an order, confirming the reduction of the capital. A copy of the court order
and a statement of capital, approved by the court is sent to the Registrar
SOLVENCY STATEMENT
 A private limited company may reduce its capital through a special resolution, supported by a solvency
statement. It need not apply to the court.
 A solvency statement is a declaration by the directors, provided within 15 days in advance of the meeting
where the special resolution is to be passed. It states that there are no grounds for the directors to believe
that the company will not be able to pay all of its possible debts for the next 12 months.
 The statement should be in the prescribed form, naming all the directors. The solvency statement, along
with the copy of the special resolution must be sent to the Registrar within 15 days from the passing the
resolution
DIVIDENDS
DECLARATION OF DIVIDENDS
 All companies have the power to declare dividends. Dividends are the return given to the members of the
company for their investment.
 A Dividend becomes a Debt when it is declared and due for payment. Directors cannot be Forced to declare
Dividends.
 The following rules are applicable regarding dividend payments:
 Dividends may be declared in General Meetings

 Directors have an implied authority to declare dividends. Dividends paid cannot exceed the amount
recommended by the directors
Page 86 of 127
 Directors may declare Interim Dividends if they think it’s justified without the approval of members.
However, final dividend must be approved by the members, usually by an ordinary resolution at the
AGM
 For a private company, a written resolution with a simple majority of members is sufficient
 Dividends are usually declared payable on the Paid Up Share Capital. However, dividends may also be
paid partly or wholly with non cash assets
 Dividends can be paid in the form of Cash, or other forms such as shares
FUNDING OF DIVIDENDS
 Dividends can only be paid out of the Distributable Profits of the company. Companies are not allowed to
pay dividends out of their undistributable reserves {share capital and share premium}
 Distributable Profits refer to the Accumulated Retained Earnings of the company, derived after writing
down any Accumulated Losses brought forward from previous years or incurred in the current year. It
represents the Retained Earnings figure included within the Equity section of the company’s Statement of
Financial Position
PUBLIC COMPANY DIVIDENDS
 In addition to the normal rules, a public limited company can only pay dividends if its Net Assets are equal
to or greater than its Called Up Share Capital and Undistributable Reserves. The company cannot pay
dividends if it reduces the company’s net assets below its Share Capital and Undistributable Reserves
 Undistributable reserves comprises of the following:
 Called up Share Capital (Capital Redemption Reserve)

 Share Premium
 Any Surplus of Accumulated Unrealized Profits or Losses
 Any Reserves that the company is prohibited from distributing by law or its own constitution
 The rules relating to Dividends are not applicable in the following situations:
 The Issue of Bonus Shares
 The Repurchase of company shares out of Capital or Profits
 A Reduction of Share Capital
 The Distribution of Assets to members on Liquidation
CONSEQUENCES OF BREACH OF DIVIDEND RULES
Page 87 of 127
 If dividends are paid out of the Undistributable Reserves of the company, the directors and members may
choose to make good of the unlawful distribution, usually by withdrawing the dividends
 The directors are held liable since they are responsible for declaring interim dividends and recommending
the final dividend to members at the AGM.
 The Directors are liable if, without preparing proper accounts, they declare or recommend a dividend
which proves to be paid out of Undistributable Reserves
 The Directors are liable if they make some mistake of law or interpretation of the constitution which leads
them to declare or recommend an unlawful dividend
 However, the Directors will not be held liable if they declared dividends which they could have reasonably
assumed to be lawful, based on accounts which they had reasonable grounds to believe, were properly
prepared.
 A member may obtain an injunction to restrain the directors from paying an unlawful dividend
 Members cannot authorize the payment of an unlawful dividend or release the directors from their liability
to pay it back
 If an unlawful dividend is knowingly accepted by members, directors are allowed to claim indemnity
{compensation} from the members.
 The company can recover from members, any unlawful dividends if the members knew or had reasonable
grounds to believe that it was unlawful
 If an unlawful dividend is paid by mistake on the basis of Erroneous Audited Accounts, the company may
claim compensation from the auditors, if it can be proved that the error was undiscovered due to the
negligence of the auditors.
CHAPTER –15:: COMPANY DIRECTORS
Page 88 of 127
DIRECTORS
 Companies are run by directors collectively in the form of a Board of Directors. A public company must
have at least TWO directors; whereas a private company need only have ONE.
 Directors may be natural persons or artificial persons (company). According to company law, at least one
director must be a natural person.
 A director is a person who is responsible for the overall direction of the company’s affairs. In company law,
director means any person occupying the position of a director, regardless of whether he has been formally
appointed.
 A person who is given the title of a director (such as a Sales Director, Director of Operations etc), but
doesn’t actually perform the functions of a director will not be considered as a director
 Directors who are expressly appointed by the company are known as De Jure Directors
 A person, who has not been formally appointed as a director, but performs all the functions of a director
and is treated by the board as a director, is known as a De Facto Director
TYPES OF DIRECTORS
EXECUTIVE DIRECTORS {De Jure}
 An Executive Director is a director who is actively involved and is responsible for the management of the
day-to-day activities of the company. They are Agents of the Company, and thus, they have a fiduciary duty
towards it.
 They may also be Employees of the company with a Service Contract to perform other specific services,
such as Finance, Marketing, and Operations etc.
 An individual can only be both a director and an employee if it is allowed within the company’s Articles. A
director, who is also an employee, is not allowed to vote in a board meeting regarding their own
employment.
 Directors, who have additional management duties as an employee, may be distinguished by special titles
such as Finance Director, Marketing Director etc. This means that they have a two distinct legal positions:
 Executive Directors may hold two distinct legal positions within a company:
 As a member of the Board of Directors {where he is bound by an Agency Relationship}

 As an employee with management responsibilities {where he is bound by the employment
contract}
NON EXECUTIVE DIRECTORS {De Jure}
Page 89 of 127
 Non-Executive Directors are not responsible for the management of the day-to-day activities of the
business, but they are involved in the governance and supervision of the actions of the Executive Directors.
 They are Agents of the Company but they are not Employees of the company. They do however, receive a
Director’s Fee
 According to the Code of Corporate Governance, the Board of Directors of a listed company must have a
balance of Executive Directors and Independent Non-Executive Directors. At least half the board members
should be NEDs, excluding the chairman.
 The main roles of Non-Executive Directors are as follows:
 Contribute External Experience, Expertise and an Independent view to the board

 Ensure that the executive directors are managing the company effectively by challenging and
scrutinizing their decisions and performance
 Ensuring that the highest standards of integrity and financial probity is being maintained and
appropriate internal control and risk management systems are in place
 Attending board meetings, forming independent committees such as the Audit Committee,
Remuneration Committee, and determine executive pay
 Helping the board provide the company with effective leadership
SHADOW DIRECTORS
 The company law states any person occupying the position of a director is responsible for the company’s
activities, regardless of whether he is actively involved in the management of the company or not
 A Shadow Director is a person who seeks to control the affairs of the company but avoid the legal
responsibilities of being a director. This usually occurs when the board is accustomed to act in accordance
with the directions and instructions of an influential individual, even though the person has not been
properly appointed as a director
 An example of a shadow director would be a major shareholder who uses his power to manipulate the
board of directors. However, a professional adviser such as an Accountant or a Lawyer, acting within his
capacity as an adviser, is not considered as a Shadow Director
 In order to prevent shadow directors from abusing their powers, the company law has made such directors
subject to the same legal duties and liabilities as a properly appointed director.
 Shadow Directors can be distinguished from De Facto Directors as De Facto directors tend to be actively
involved in the day to day management of the business where as shadow directors tend to exert their
influence through meetings and internal dealings
LEADERS OF THE BOARD OF DIRECTORS
Page 90 of 127
CHAIRMAN
 The Chairman is appointed by the board of directors to run the board and chair board meetings. He does
not have executive authority to be involved in the day-to-day management of the business
 The Chairman, usually a Non-Executive Director, must be Independent and their powers are usually
contained within the company’s Articles
 According to the Corporate Governance Code of UK, the same individual is not allowed to hold the positions
of Chairman and CEO.
 The Chairman also chairs the General Meetings of Members and acts as a channel of communication
between the executive directors and the shareholders of the company
CHIEF EXECUTIVE OFFICER/MANAGING DIRECTOR
 The CEO of the company is one of the executive directors who is appointed to lead the executive directors
in managing the day-to-day activities of the company
 The Model Articles allow the board to appoint one or more individuals as CEO and delegate the powers that
are usually required for the effective management of the company’s affairs
 The CEO is an agent of the shareholders and is assumed to have a wider apparent authority, compared to to
other directors, to bind the company into contractual agreements with third parties
POWERS OF DIRECTORS TO BIND THE COMPANY
THE BOARD OF DIRECTORS
 The board of directors is the elected representative of the shareholders who are collectively responsible for
the management of the company. The powers of the board, and individual directors, are defined by the
company’s Articles
 Under the Model Articles, the board has the full capacity (power) to bind the company into contracts with
third parties. However, this authority can be delegated to a committee of the board (eg: executive
directors) or to individual directors.
 Members seek to control the actions and powers of directors by using their voting rights in general
meetings where they can:
 Appoint a new director or remove an existing director
 Re-allocate the powers of directors (such as their borrowing limits) by altering the articles through
a special resolution
 Pass a special resolution to instruct the directors to act in a specific manner (specify what they can
or cannot do)
Page 91 of 127
 The board must act in accordance with the Companies Act and the Company’s Constitutional Documents.
This means that they cannot enter into any transactions which may be considered as Ultra Vires or against
the Companies Act, in which case, they will be liable to the members of the company
 Directors must exercise their power:
 In what they honestly believe to be in the best interests of the company
 For a proper purpose, for which the power was assumed to have been given
THE CHIEF EXECUTIVE OFFICER (CEO)/MANAGING DIRECTOR
 The CEO is one of the Executive Directors who is appointed to carry out the functions of the day-to-day
overall management. The Model Articles allow the board to appoint one or more directors as CEO, other
than the Chairman, and to delegate to him, any power it sees fit
 As the board only meets occasionally, they usually delegate their powers of managing the company affairs,
to the CEO. Moreover, the CEO has wide implied authority to bind the company into contracts with third
parties
 In the case of Hely-Hutchinson vs. Brayhead Ltd, it was established that a third party acting in good faith is
entitled to believe that a person appointed as a CEO has the authority to bind the company into contractual
agreements.
 If the CEO ceases to be a director, he also ceases to be the CEO, but he is not subject to retirement by
rotation
INDIVIDUAL DIRECTORS
 Directors other than the CEO, do not have the apparent authority to make general contracts which attaches
to the position of a CEO, but they have apparent authority in matters related to their management position
 Individual directors may be given express authority to bind the company into contracts with third parties
 Removal from the office of director may be a breach of their service contract if that contract stated that the
person was to have the status of a director as part of the condition of employment
STATUTORY DUTIES OF DIRECTORS
THE STATUTORY DUTIES
The Company’s Act 2006 introduced seven statutory duties that all directors must meet:
 DUTY TO ACT WITHIN POWERS (Section 171)

 Directors are required not to exceed the powers given to them by the company in its constitution.
 Directors must only exercise the power given to them, for the purpose for which it was given
 Directors must be Honest and their actions must be Bona Fide.
 Directors, who enter into transactions beyond their authority, are personally liable to the company
for such transactions, unless the transaction is ratified by the members in a general meeting.
However, the ratification will not be valid if:
Page 92 of 127
o It defrauds the minority members

o It involves misappropriation of assets
o It prejudices the creditors’ interest at a time when the company is insolvent
For example: If a director(s) of a public limited company allots shares to a new member(s), the
allotment will be invalid unless the members agree to ratify the transaction in a general meeting.
However, neither the director, nor the new shareholder(s), may participate at that meeting
 DUTY TO PROMOTE THE SUCCESS OF THE COMPANY (Section 172)

 The principle of enlightened shareholder value requires directors to act in a way which is most
likely to promote the success of the company for the benefit of the members as a whole. However,
they must consider the needs and expectations for other stakeholders as well
 The main purpose of the regulations contained within the Companies Act 2006 (UK) is to help
companies in doing business successfully. Thus, according to the principle of the ‘enlightened
shareholder value’, directors are required to promote the success of the company, in the best
interest of the shareholders
 The principle also encourages long termism and requires directors to act in good faith and pursue
the interest of shareholders in an enlightened and inclusive manner. Therefore, directors are also
required to consider the needs and expectations of other stakeholders, while pursuing the interest
of the shareholders
 The duty mainly requires directors to consider the following issues:
o The consequences of their decisions in the long term
o The interests of their employees
o The need to develop good relationships with customers and suppliers
o The impact of the company on the environment
o The need to act fairly with all the members of the company, regardless of their shareholding
o The need to maintain high standards of business conduct and reputation
 Although the Act doesn’t define what should be regarded as the success of a company, the issues
within the list are consistent with the modern day expectations of responsible business behaviour,
specially the emphasis put on the company’s social and environmental impact
 Directors must be careful in carrying out their duties as they are required to consider the needs of a
wide variety of stakeholders, which may put them in a conflicting position. Moreover, the Act
doesn’t give any guidance on what the correct course of action should be, and hence, the directors
must exercise their own judgment
 DUTY TO EXERCISE INDEPENDENT JUDGEMENT (Section 173)

 Directors must exercise independent judgement, hence they must not delegate their powers of
decision making or be swayed by the influence of others
 Directors are however, allowed to follow established procedures and practices
 DUTY TO EXERCISE REASONABLE SKILL, CARE AND DILIGENCE (Section 174)

 Directors are expected to exercise the same standard of skill and care that would reasonably be
expected from a person with:
Page 93 of 127
o The knowledge, skill and experience which may be reasonably expected from a person in
their position (established by an Objective Test)
o The knowledge, skill and experience the director actually has (established by a Subjective
Test)
 The company may recover damages from its directors for loss caused by their Gross Negligence. A
director is deemed to have acted negligently if:
“No man/woman with any degree of prudence, acting on their own behalf, would have entered into
such a transaction as they entered into”
 DUTY TO AVOID CONFLICT OF INTEREST (Section 175)
 Directors are required to avoid circumstances or acts which may put them in a position where their
own interest conflicts with the interest of the company (eg: buying shares of the competitor, acting
as an NED for a competitor etc.)
 As Agents of the company, Directors must:
o Retain their freedom in decision making
o Avoid conflict of duty and interest
o Not obtain any personal advantage from their position as directors without the consent of
the company
 However, the duty doesn’t apply to a conflict of interest in relation to a transaction or arrangement
where the directly clearly declared their interest to the company
 Directors will not be liable for a breach of this duty if:
o Members of the company authorized their actions
o The situation cannot reasonably be regarded as likely to give rise to a conflict
o The company expressly rejected the opportunity the director took up
o The action was authorized by the board provided it is a private company or the articles of a
public company expressly allow them to take such actions
 DUTY NOT TO ACCEPT BENEFITS FROM THIRD PARTIES (Section 176)

 Directors are not allowed to accept any kind of benefits from third parties (bribes)
 The Directors will not be held liable if:
o Their action is approved by the members
o Their action is unlikely to give rise to a conflict of interest
 DUTY TO DECLARE INTEREST IN A PROPOSED TRANSACTION OR ARRANGEGMENT (Section 177)

 Directors are required to disclose any interest they may have in the current or proposed
transactions of the company.
 Directors are required to disclose their interest in any transaction before the company enters into
the transaction by:
o Written Notice
o General Notice
o Verbally at a board meeting
 The Disclosure must be made Both to the Members as well as other Directors. If the declaration is
inaccurate or invalid, a further disclosure must be made
 No declaration is required if the transaction could reasonably be expected not to give rise to any
conflict of interest
 According to Section 182 of the Companies Act, Directors also have a Statutory Duty to disclose any
direct or indirect interest in an existing transaction entered into by the company unless:
Page 94 of 127
o It has already been disclosed under Section 177

o The director is not aware of the Interest or the Transaction itself
o The Director’s interest is unlikely to give rise to a conflict of interest
o It is related to the director’s service contract
The disclosure must be made either by Written Notice, General Notice or Verbally at a meeting, as
soon as reasonably practicable.
WHO OWES THE DUTY TO WHOM
 Every person who is classed as a director owes the company these statutory duties. The duty also applies to
Shadow Directors and Past Directors (only for their actions when they were directors)
 According to the Companies Act, directors owe their duties to the Company, not the Members. In the case of
Percival vs. Wright, it was established that only the Company may take action against a director for
breaching his duties. However, a member may bring a subsequent claim on behalf of the company
CONSEQUENCES OF BREACH OF DUTY
 If a Director breaches his statutory duties, the Company may sue the director under Civil Law. However, the
actions of the director may be approved by the members in a general meeting
 The following remedies are available:
 Damages payable to the company where it has suffered a loss

 Restoration of company property
 Repayment of any profits made by the director
 Rescission of contract (where the director did not disclose an interest)
LIABITLITY OF DIRECTORS
 Directors are not personally liable for the actions of other directors unless they knew, or reasonably should
have known, of the breach of duty of another director and failed to inform the members of the
circumstances
 Generally directors are not personally liable for the debts of the company unless:
 The Veil of Incorporation is lifted

 The Director committed Fraudulent or Wrongful Trading
 The Director provided a guarantee to a creditor before undertaking a transaction
 The company’s Articles provide that the directors shall be personally liable
OTHER CONTROLS OVER DIRECTORS
 Director’s Service Contracts lasting more than Two years must be approved by members
Page 95 of 127
 Directors or any person related to them may not buy non-cash assets of the company worth more than
£5000 or 10% of company’s asset value without the approval of members. All purchases above £100,000
must be approved
 Any loans or guarantees used as a security for loans, provided to directors must be approved by members if
the value exceeds £10,000
 Credit transactions entered into with a director must be approved by members if its value exceeds £15,000
(for plc only)
 Directors must seeks members approvals for capital expenditures for business purposes if their value
exceeds £50,000
 Non contractual payments to directors for loss of office must be approved by the members
APPOINTMENT, REMUNERATION AND REMOVAL OF DIRECTORS
APPOINTMENT
 The first Directors of the company are those whose names appear in the documents submitted to the
Registrar of Companies for incorporation. The procedures for appointing subsequent directors are
determined by the company’s Articles
 A New Director may be appointed as a replacement or addition to Existing Directors. Model Articles, which
are adopted by most companies, state that new directors must be appointed either by:
 An ordinary resolution of shareholders
 By a decision taken by the board as a whole (co-option)
 In a public company, if an appointment is proposed in a general meeting, a new resolution (vote) must be
passed for each new director to be appointed. The minimum age for a director is 16, and in most cases,
there is no upper limit
 The appointment of a new director or changes in the details of existing directors must be notified to the
Registrar within 14 days
REMUNERATION
 Details of Director’s Remuneration are usually contained within the Service Contract. If the service contract
is for more than two years, an ordinary resolution of members would be required to confirm the contract
 Most articles state that directors are entitled to reimbursements (return) of all reasonable expenses
incurred while carrying out their duties or functions as directors
 Director’s may also be paid non-contractual compensation for loss of office provided that ALL members
approve of the payment
Page 96 of 127
 Quotes companies are required to publish a Director’s Remuneration Report as part of their Annual Report,
including:
 Details of each Director’s Remuneration Package

 The Company’s Remuneration Policy
 The role of the Board and the Remuneration Committee in deciding the Remuneration
 The service contracts of directors must be kept available for inspection by members for at least one year in
the company’s Registered Office or SAIL
REMOVAL
 A director must leave office if:
 They Resign by notice in writing

 They are disqualified by the Act or any rule of law
 They become bankrupt or enter into an arrangement with creditors
 They become insane
 They are absent for three consecutive months from board meetings without obtaining leave
 The company liquidates or and an Administration order is imposed on the company
 They are not re-elected upon retiring in the AGM
 The Model Articles of Public Companies provide the following rules regarding rotation and retirement:
 At the first AGM, all directors shall retire

 At every subsequent AGM, any directors appointed by the other directors since the last AGM shall
retire
 Directors who were not appointed or re-elected at one of the previous two AGMs shall retire
 The Companies Act states that any director may be removed from office at any time by an Ordinary
Resolution at a meeting, of which, special notice (28 days) to the company has been given by the
shareholder proposing the removal. The shareholder must have at least 10% holding, or 10% voting rights
or be 100 shareholders with at least £100 worth of shares, to be able to make the proposal
 The company must send a copy of the notice to the relevant director, who may require the members to
delay the meeting by a reasonable time by issuing a memorandum of reasonable length. The director may
also attend and speak at the meeting where the resolution will be considered
 The Articles or Director’s service contract cannot override the statutory power of members to remove a
director. Moreover, the articles may allow a director to be removed by a resolution of the board of directors
themselves.
 However, in the case of Bushell vs. Faith, it was established that a director, who is also a member, may have
weighted voting rights, which means that they can use their voting powers to defeat any proposal made in
order to remove them
 A director must vacate their office if they are disqualified by statute, become bankrupt, enter into an
arrangement with their creditors, become insane, resign by written notice, or if they are absent from board
meetings for three consecutive months without the consent of the other directors
Page 97 of 127
DISQUALIFICATION OF DIRECTORS
DISQUALIFICATION UNDER THE DIRECTOR’S DISQUALIFICATION ACT
 A court may formally disqualify a person from being a director, or being involved directly or directly in the
promotion, formation or management of a company or acting as its consultant.
 Directors may be disqualified under the following statutory grounds:
 Where a person is convicted of an indictable offence (a serious offence dealt with by the
Crown Court) in connection with the promotion, formation, management or liquidation of a
company or with the management of a company’s property
 Where it appears that a person has been persistently breaching the rules of Company
Legislations within the Companies Act. The Companies Act requires directors to file annually, all
the statutory documents to the Registrar within a specified time period. Three defaults in five
years is considered as persistent default. The maximum period of disqualification under this
section is five years.
 Where it appears that a person has been guilty of fraudulent trading. This applies to directors
who carry on business with an intent to defraud creditors, or to directors who are found guilty of
committing fraud against the company itself. The maximum period of disqualification under this
section is fifteen years
 Where the Secretary of State applies to the court for an order to disqualify a director in the
public interest. The order will be issued by the court if it finds the conduct of the director to be
harmful for society as a whole. The maximum period of disqualification under this section is fifteen
years
 Where a director has breached the terms of the competition policy.
 Where a director of an insolvent company participated in wrongful trading
UNFITNESS
 A court must make a disqualification order where a person has been a director of a company which has at
any time become insolvent and their conduct as a director of that company makes then unfit to be involved
in the management of any other company.
 This applies to all directors, regardless of whether they are actively involved in management or not. The
minimum disqualification period under this section is two years where as the maximum period is five years
MITIGATION OF DISQUALIFICATION
 The period of disqualification imposed on a director may be reduced in the following circumstances:
 There was a lack of dishonesty

 The director lost his own money
Page 98 of 127
 There was an absence of personal gain

 They director took steps to mitigate the situation
 There is less chances of the offence being repeated
CHAPTER –16:: OTHER COMPANY OFFICERS

COMPANY SECRETARY
ROLE OF SECRERATIES IN CORPORATE GOVERNANCE
Page 99 of 127
 Corporate governance is the system by which companies are directed and controlled. The Company
Secretary plays an important role in how the organisation is run.
 Every public limited company must have a Company Secretary. Private companies needn’t have a Company
Secretary
 The Company Secretary is one of the Officers of the company and may be a Director
 According to the Corporate Governance Code of UK, the secretary is responsible for advising the chairman
on all governance matters and ensuring that there is effective communication channel between directors
and members.
APPOINTMENT OF SECRETARIES
 Company Secretaries are appointed by the Board of Directors as a whole

 The role of the Secretary may be performed by One individual, Two individuals (Joint Secretaries) or a
Separate Firm all together (in which case a register must be kept)
 The directors of a public company must take all reasonable steps to ensure that the secretary is suitably
qualified for the post by their knowledge and experience
 A public company secretary may be anyone who:
 Has been a public company secretary for at least three out of the last five years prior to their
appointment
 Is a member of ACCA or other professional bodies such as CIMA, ICAEW, ICAS, ICAI or CIPFA
 Is a Barrister, Advocate or Solicitor in the UK
 Is a person who, due to his previous work experience or membership of other professional bodies,
appears to the directors to be qualified for the post
DUTIES OF THE SECRETARY
 The duties of the Secretary are determined by the board of directors, depending on the size and nature of
the organisation. Generally, they are responsible for ensuring that the company and its officers comply with
the statutory rules and Regulatory requirements.
 The Specific duties of the Secretary may include:
 Making all the necessary arrangements required to conduct board meetings. This includes the
Issuing of Notice and Agenda, Preparing documents required in the meeting, Taking Minutes of the
meeting and communicating the decisions of the meeting to people inside and outside the company
 Signing forms and returns as required
 Maintaining register of members, recording transfer of shares and issuing certificates to members
 Ensuring that all statutory documents, registers, notices and returns are maintained and delivered
to the Registrar of companies on time
 Ensuring that accounts are kept in accordance with the requirements of the Companies Act, unless
there is an Accountant or a Finance Department
 Ensure good information flows within the board and its committees
 Facilitate induction of board members and assist with professional development
 Advise the Chairman and the Board on Governance issues
POWERS OF THE SECRETARY
 Generally, a company secretary may be considered to have an apparent authority to bind the company into
contractual agreements related to the Administrative side of the company, unless they were expressly
denied that authority and third parties are aware of that restriction
Page 100 of 127

 In the case of Panorama Developments Ltd vs. Fidelis Furnishing, the Court of Appeal recognized that it is the
normal function of the company secretary to enter into contracts connected with the administration of a
company.
COMPANY AUDITORS
BASICS
 The general role of external auditors is to support the concept of good corporate governance by providing
an Independent opinion regarding the accuracy and reliability of the company’s financial statements.
 The purpose of an external audit is to enhance the confidence of shareholders as it acts as a confirmation as
to whether the directors are running the company in the best interest of the shareholders
 All public limited companies must have an external independent auditor. Certain private companies, who
fall under the Small Companies Regime of the Companies Act are exempt from an audit
APPOINTMENT OF AUDITORS
 The first Auditors of the company may be appointed by the Directors until the first AGM, where their
appointment will be considered by the members.
 Auditors are usually appointed by the company’s members in the AGM by passing an Ordinary Resolution
 Auditors hold office from 28 days after the meeting where they are appointed until the next AGM.
 Auditors of Public Limited Companies need to be Re-appointed at each AGM in order for them to continue
working as the Auditor
 Auditors of Private Companies are deemed to be automatically re-appointed unless:
 The Auditor was appointed by the Directors
 Members holding 5% of the voting rights serve notice that the auditor should not be re-appointed
 A resolution has been passed to prevent the re-appointment
 The company becomes Exempt from Audit
 If the company fails to appoint Auditors, the Secretary of State may appoint an Auditor for the company
 The remuneration of Auditors is usually decided by the person(s) who appoint them
QUALIFICATION OF AUDITORS
 The Companies Act states that in order to be eligible, an Auditor must have an Appropriate Qualification
and Membership of a Recognized Supervisory Body.
 The Companies Act states that an Auditor is deemed to have an Appropriate Qualification if:
 He satisfies the criteria for appointment as an Auditor
 Holds a recognized qualification in the UK
 Holds and Approved Overseas Qualification
 An Audit firm may be either a Corporate Body, a Partnership or a Sole Practitioner
 The Auditor cannot be:
 An Officer of the Company
 An Agent or Employee of the company
 A Partner or Employee of either of the above
Page 101 of 127

 The Auditor must be Independent. If during his term of office, the Auditor loses his Independence or
Eligibility, he must Resign immediately and notify the client of his resignation along with an explanation.
Failure to resign is punishable with a Fine
 The Act does not disqualify a Shareholder, Debtor, Creditor or a close relative of an Officer or Employee of
the company from being its Auditor
EXEMPTION FROM AUDIT
 In order for a company to be exempt from an Audit, the following conditions must be fulfilled:
 The company falls under the Small Companies Regime (Annual Revenue < £6.5 million and Balance
Sheet Total < 3.26 million)
 The company is a Dormant Company with insignificant activities
 The company is a non-commercial, non-profit making public sector body which is subject to audit
by public sector auditor
 The exemptions do not apply to public companies, banking or insurance companies or those subject to a
statute based regulatory regime
 Members holding 10% or more of the capital of any company may veto (cancel) the exemption
RIGHTS OF AUDITOR
 The Companies Act provides the following Statutory Rights for Auditors to enable them to carry out their
duties:
 Auditors have the right to access all the accounting records, books and vouchers of the company
 Auditors have the right to any information and explanations necessary for their audit, from the
employees and officers of the company
 Auditors have the right to attend all General Meetings and receive notice of such meetings
 Audits have the right to speak at General Meetings on matters related to audit
 The Auditors have the right to receive a copy of any written resolutions passed or proposed by
members or directors
 If the company deprives as Auditor of his rights, the Companies Act imposes a penalty of maximum two
years imprisonment, a fine or both on the officer guilty of the offence
DUTIES OF THE AUDITOR
 The Statutory Duty of Auditors is to report to the members whether the financial statements give a True
and Fair view and whether they have been prepared in accordance with the Companies Act. They must also
state whether the Director’s Report is consistent with the financial statements
 In listed companies, auditors are also required to report on certain parts of the Directors Remuneration
Report and state whether it has been prepared in accordance with the Companies Act
 The auditors must gather sufficient appropriate evidence in order to reach their conclusion regarding the
appropriateness of the company’s financial statements
 The Auditors must also carry out all the necessary investigations in order to form an opinion as to whether:
 Proper Accounting records have been kept and all the required returns from other branches have
been received
 Financial Statements agree with the accounting records
 The information in the Director’s Remuneration Report is consistent with the accounts
 The Audit report must be signed by the Auditor stating their Name and Date
 The Audit report must be read at the General Meeting where the accounts are presented and must be open
to members for inspection
Page 102 of 127

 Auditors have to make disclosure of any other Service that it provides to the company and the
Remuneration that they receive from such services
AUDITOR’S LIABILITY
 Company auditors are not responsible for the preparation of true and fair financial statements. They simply
form an opinion as to whether the financial statements give a true and fair view. The auditors, are however,
liable to the members, for negligence or breach of their duties as auditors
 The Companies Act allows auditors to limit their liability with their clients. However, any agreement
between a company and the auditor that indemnifies the auditor for their own negligence, default or
breach of duty is void.
 Auditors liability can only be limited if they perform their contractual obligations and responsibilities in the
professional standard expected of them. Such agreements must be approved by members and publicly
disclosed in the accounts or director’s report
 Any limitation agreement is only valid for One Financial Year and must therefore be replaced annually
TERMINATION OF AUDITOR’S APPOINTMENT
 Departure of Auditors from office can occur in the following ways:

 Auditors may resign by giving notice in writing to the company, delivered at their Registered Office
 Auditors may decline Re-appointment
 Auditors are not Re-appointment for a subsequent period
 Auditors may be removed from office by the passing of an Ordinary Resolution in a General
Meeting. Special Notice is required to be given to the Members and the Auditor. Auditors must be
allowed to Attend and Speak at that meeting
 Private companies cannot remove an Auditor with a Written Resolution, a meeting must be held.
 When an Auditor Resigns or is Removed, he MUST present a Statement of Circumstances/Statement of No
Circumstances that lead to their Resignation/Removal at the company’s Registered Office 14 days before
the next Auditor is appointed
 The company must send a copy of the Statement to every person entitled to receive a copy of the Annual
Accounts
 If Auditors deposit a Statement of Circumstances, he may:
 Circulate a statement of Reasonable Length to the members
 Request a General Meeting to explain his reasons
 Attend and Speak at any meeting where appointment of new Auditors is to be discussed
 The company must send a copy of the Resignation to the Registrar
CHAPTER –17:: COMPANY MEETINGS AND RESOLUTIONS

TYPES OF MEETINGS
Page 103 of 127

ANNUAL GENERAL MEETING {AGM}
 Every Public Limited Company must hold an Annual General Meeting (AGM) each year within six months of
the year end.
 Private companies are not required to hold an AGM.
 At least 21 days’ Written Notice must be given for each AGM unless all members agree to a shorter notice.
 The notice may be delivered in hard copy, or in electronic form such as email or publication on company
website
 The notice must specify that the meeting is an AGM and the Time, Date and Place where the meeting is to be
held. It should also contain the full text of any resolutions proposed to be considered in the AGM
 The usual activities that are conducted in an AGM include the following:
 The Presentation and Consideration of Company Accounts, the Director’s Report and the Auditor’s
Report
 The Election of Directors (One Third, usually in accordance of seniority, must retire and submit
themselves for re-election each year)
 The Declaration of Dividends
 The appointment of Auditors and fixing of their remuneration
OTHER GENERAL MEETINGS
 Any meetings, other than the AGM are called General Meetings. A minimum of 14 days’ of Written Notice
(with some exceptions) is required to convene General Meetings. The Meetings may be called:
 By the directors whenever they see fit
 By the court, on the application of a director or member, usually when there is an internal dispute
 By the auditor, who is resigning and wants to explain the circumstances (Statement of Circumstances)
that led to his resignation
 Compulsorily, by the directors of a public company where the net assets of the company fall to half or
less of its called up share capital
 At the request of the members. When members request General Meetings, the following rules are
applicable:
o The members must hold at least 5% of the paid up share capital carrying voting rights
o The request must be submitted at the company’s registered office specifying the resolution that is
being proposed
o A Notice for the meeting must be sent out within 21 days of the request being submitted.
o The meeting be held within 28 days of the notice
o If no Quorum (people attending a meeting) is present, the meeting is adjourned
CLASS MEETINGS
 A class meeting may be called upon by a director, or holder of one class of shares to approve a proposed
variation of the rights attached to those shares
 Similarly if the directors propose a new scheme (new rights) for shareholders, each class of shareholder
must be called upon separately to a class meeting for approval of the change
 The standard rules on issuing notices and voting apply to a class meeting as well.
 The standard Quorum for a class meeting is two persons, with at least one third of the nominal value of the
issued shares of that class. One person quorum is permitted when all the shares of that class is held by one
person.
Page 104 of 127

TYPES OF COMPANY RESOLUTIONS
MEETINGS
 Generally, meetings are called and held by directors

 The Notice must be sent to each members (only those with voting rights) 14 days in advance
 The Notice must include any information that may be viewed as reasonably necessary for the shareholders
 If the meeting is requested by the members, the notice must be sent out within 21 days and the meeting
must be held within 28 days of the notice
NOTICES
 Generally, the company is required to send a Notice of a meeting 14 days in advance.

 Members holding 90% issued shares in an Ltd and 95% issued shares in a Plc may agree to reduce the
notice period
 In certain circumstances, Notice must be send 28 days in advance (Special Notice) to the company
 A Special Notice may be send by Members to the company for the following purposes:
 To Remove an existing auditor or Appoint a New auditor
 To Remove an existing Director or Appoint a Replacement Director
 A Special Notice is given To The Company, not, By The Company
RESOLUTIONS
 Generally, the directors of a company decide on what resolutions to be voted on in a meeting. For a
member to request for a resolution to be voted upon:
 They must represent at least 5% of the voting rights or there must be 100 members, each with a
paid up capital of £100
 The resolution must be delivered to the company at least 6 weeks in advance of the meeting
 The members may also request the directors to distribute a statement regarding the resolution (of less
than 1000 words) to all the other members of the company
 Members requesting the meeting must pay all the incidental expenses of the meeting, unless the company
agrees otherwise
ORDINARY RESOLUTIONS
 An ordinary resolution is passed when 51% votes are received in the favour of a decision. This could be
achieved through a “show of hands” or calling a poll”
 A 14 days’ notice period applies to meetings where an ordinary resolution is considered. They are
commonly used for issues such as approval of a dividend, removal of a director etc.
SPECIAL RESOLUTIONS
 A special resolution is passed when a majority of 75% votes are received in the favour of a decision. It also
requires a notice period of 14 days. The full text of the resolution must be included in the notice and they
must be described as special resolutions
 Special resolutions are usually used for issues such as Changing of company name, reduction of share
capital, restrictions of company objects, alteration of company articles etc.
 A signed copy of all special resolutions must be filed with the Registrar within 15 days of being passed.
Ordinary resolutions needn’t be filed
Page 105 of 127

WRITTEN RESOLUTIONS (For Private Companies)
 A written resolution may only be passed by a private company. They are available to them because private
companies are not required to hold general meetings. They can be used to pass almost any type of decision.
 However, written resolutions cannot be used to remove a director or auditor from office since both have a
right to attend and speak at a meeting where any proposal for removal is to be discussed
 Copies of the resolutions must be sent to all members eligible to vote as a hard copy, email or through a
website. A statement should be sent along with the resolution stating how members can give their approval
and when the resolution is to be passed
 The majority of votes required to pass a resolution would depend on the nature of the issue being
considered. A serious issue would require a 75% vote where as a less serious issue would require a 51%
vote
 Members with 5% voting rights may request a written resolution provided it’s not defamatory or frivolous
and it would bring about an effective outcome.
 A statement of no more than 1000 words, explaining the resolution, could be sent along with the copy of
resolution itself. Members requesting resolutions are liable for all incidental expenses unless they company
decided otherwise.
 Once circulated, the resolution must be passed within 28 days. Any agreement after this period is
ineffective
 Copies of any written resolutions must be sent to the auditors. If the copy is not sent, the resolution
remains valid but the directors would become liable for a fine
PROCEEDINGS IN A MEETING
BASICS
 A meeting can only reach binding decisions if:

 It has been properly convened by notice
 A Quorum is present
 A Chairman presides
 Each issue is separately discussed and resolutions are put to the vote
 Meetings must be led by a Chairman, who usually has no voting rights unless allowed by Articles.
 The Chairman is responsible for maintaining order and ensuring that all the procedures are being
followed by the meeting attendees. The Chairman:
o May Dissolve or Adjourn the meeting if he feels it is becoming too ineffective
o Must adjourn the meeting when it is over and all issues have been discussed and voted upon
 A meeting must have a Quorum.
 A Quorum is the minimum number of persons required to be present at a particular type of
meeting.
 Generally, a meeting must be attended by at least two members (or their proxies). A single member
meeting will only be allowed in the following circumstances:
o It is a Class Meeting and one member holds all the shares of that class
o The company is a single member private company
o The court orders the meeting to be held with one member
 Meetings that lack the Quorum are known as Inquorate Meetings. A meeting will be Inquorate if:
o The required number is not present
Page 106 of 127

o The required number was present in the beginning but not throughout the whole length of
the meeting
 Model Articles require Inquorate Meetings to be adjourned compulsorily.
 Members, entitled to vote, may allow Proxies to attend meetings on their behalf.
 A proxy is a person (can be anyone), appointed by a member to vote on behalf of that member at
company meetings
 A member may appoint more than one proxy, provided each proxy represents the member for a
different class of shares
 Members, who intend to appoint proxies, must give notice to the company 48 hours (excluding
weekends and bank holidays) before the meeting
 The proxy may Speak, Cast Vote or Demand a Poll at the meeting on behalf of the member
 The rights of members to vote and the number of votes to which they are entitled in respect of their shares
are fixed by the company’s Articles. Votes may be taken through a Poll or a “Show of Hands” method
 A “Show of Hands” is a method of voting for or against a resolution by raising hands
 A Poll allows members to use as many votes as their shareholding grants them (It is usually used
for significant decisions or for accuracy)
 A Poll may be demanded by:
o Five or more members or their proxies
o Members representing at least one tenth of the total voting rights or paid up capital
 The members of a Quoted company may require the directors to have the results of a poll
independently verified if:
o They hold at least 5% voting rights
o There are at least 100 members, each with at least £100 of paid up capital
 The results of the votes of a quoted company must be published on the company website as soon as
reasonably practicable for at least two years. It should have the following information:
o Meeting date
o Description of the Resolution
o Number of votes for, and against the resolution
 Every company is required to keep minutes of their meetings for ten years
 Minutes are a record of the proceedings of the meeting and are usually signed by the chairman
 Minutes must be kept at the company’s registered office or SAIL
 Members of the company have a right to inspect the minutes for free
CHAPTER –18:: INSOLVENCY AND ADMINISTRATION

LIQUIDATION
BASICS
Page 107 of 127

 Liquidation is the dissolution or winding up of the company. When a company is wound up, its assets are
sold off, debts are paid out of the proceeds and any surplus amounts are returned to the members.
 There are three different methods of liquidation:
 Compulsory Liquidation {for Insolvent Companies}
 Creditors Voluntary Liquidation {For Insolvent Companies}
 Member’s Voluntary Liquidation {For Solvent Companies}
 The decision to liquidate a company may be taken by its Directors, its Creditors or its Members.
 Directors, however, cannot initiate liquidation proceedings, they can simply recommend that the company
needs to be liquidated to its members. If the members refuse to liquidate, directors can Resign to avoid
committing Fraudulent or Wrongful Trading.
 Once the decision to liquidate a company has been taken, it goes under the control of a Liquidator, who
must be a Qualified and Authorized Insolvency Practitioner.
 Once insolvency procedures are initiated:
 Shares cannot be traded
 Director’s power to manage ceases
 All company documents and website must state that the company is in liquidation
VOLUNTARY LIQUIDATION
 Voluntary liquidation occurs when the company is not forced to liquidate by the court, but its members or
creditors decide that the company should be liquidated
 The decision to liquidate voluntarily may be taken by members {where the company is solvent} or
creditors {where the company is insolvent}
MEMBERS VOLUNTARY LIQUIDATION
 A member’s voluntary liquidation takes place when the company is Solvent but the members decide to
liquidate the company anyways.
 This is usually achieved by passing a Special Resolution, or if the articles permit, an Ordinary Resolution of
Members. A signed copy of the resolution must be sent to the Registrar within 15 days
 In this type of liquidation, the directors must issue a Declaration of Solvency to the Registrar, stating that
the company will be able to pay off its creditors within the next 12 months. The following rules are
applicable:
 The Declaration must be made by All the Directors, or if there are more than two directors, by a
majority of them
 The Declaration must include the a Statement of the company’s Assets and Liabilities (latest)
 The Declaration must be made at least 5 weeks before the resolution to liquidate is to be passed
and must be delivered to the Registrar within 15 days
 It is a criminal offence to make a declaration of solvency if there are no reasonable grounds to believe that
the company is solvent
 The Liquidator, appointed by the Members, disposes the company assets, pays off the creditors, and
distributes the surplus to the members.
 The actions of the liquidator must be approved in a General Meeting of Members.
Page 108 of 127

 If the liquidation takes more than one year, the liquidator must report to the members regarding the
company’s accounts during liquidation, within Three Months of each anniversary of the liquidation period
 Once the liquidation is complete, the liquidator presents the Final Account of the company to its members
and sends a copy of the accounts to the Registrar
 The Registrar must dissolve the company and take it off the register within Three Months
CREDITORS VOLUNTARY LIQUIDATION
 A Creditor’s Voluntary Liquidation is initiated by Members, despite its name, and takes place when the
company is Insolvent.
 For a public company, the Members must pass a Special Resolution to liquidate the company. For a private
company, the members may pass a Written Resolution with 75% majority to liquidate the company
 The meeting of members is held for the following purposes:
 To resolve to wind up
 The appoint a liquidator
 To nominate up to Five Representatives to be members of the liquidation committee
 The Directors must also convene a meeting of creditors within a maximum of 14 days after the members
pass the resolution to liquidate. A 7 days’ notice must be given in advance. The notice must be advertised in
the Gazette and two local newspapers stating either:
 The name and address of a Qualified Insolvency Practitioner from whom the creditors can obtain
information about the company
 Location of the company’s principal place of business from where a list of creditors can be
inspected
 In this meeting, the creditors are presented with a statement of the company’s affairs and a list of creditors
and the amounts they are owed.
 The creditors may appoint a Liquidator (who will take over the liquidator appointed by members) and
nominate up to Five Representatives to be members of the Liquidation committee
 The liquidator is initially appointed by members, but the creditors have the right to replace him with their
own liquidator within the 14 days leading up to the creditors meeting.
 The actions of the liquidator must be approved by a Liquidation Committee, comprising of Representatives
of Members and Creditors
 If the liquidator appointed by the members take office (where creditors do not appoint their own
liquidator), his power is restricted in order to prevent Centrebinding.
 Centrebinding occurs when the assets of the liquidating company is sold cheaply to another company
formed by the members of the liquidating company.
COMPULSORY LIQUIDATION
GROUNDS FOR COMPULSORY WINDING UP
Page 109 of 127

 Compulsory winding up involves the termination of a company’s life by a Court Order, based on any of the
seven grounds (although only two are common) contained within Section 122 of the Insolvency Act 1986.
 The two most important grounds are as follows:
 THE COMPANY IS UNABLE TO PAY ITS DEBTS
 IT WOULD BE JUST AND EQUITABLE TO LIQUIDATE THE COMPANY
 The Creditors of a company, specially secured creditors, can file a petition to liquidate the company if the
company is unable to pay its debts. The company’s inability to pay its debts can be established in the
following ways:
 Where a creditor is owed more than £750 and makes a written demand for payment and the
company fails to pay the debt, or offer reasonable security for it within 21 days, the company is
deemed unable to pay its debts {Statutory Test}
 The creditor proves to the court that based on the company’s contingent liabilities and provisions,
it will become insolvent in the near future { Commercial Insolvency Test}
 The creditor proves to the court that the assets of the company are less than its liabilities {Balance
Sheet Test}
 A creditor obtains a judgment against the company for repayment of his debt and attempts to
enforce the judgment but no assets of the company can be found and seized
 A Member, who is dissatisfied with the Directors or Controlling Shareholders over the management of the
company, may apply to the court to wind up the company on Just and Equitable grounds. However, he must
prove to the court that no other remedy is available.
 The company can itself present a petition to the court for its compulsory winding up by passing a Special
Resolution of the Board of Directors.
 The Government may also petition for the compulsory winding up of a company if a public company fails to
obtain a Trading Certificate within one year of incorporation or it considers that the company should be
liquidated in the public interest
 An Administrator may also apply for the compulsory liquidation of the company as a means of ending an
Administration Process
PROCEDURES
 A member or a creditor who has grounds for compulsory liquidation may present a petition to the court for
a winding up order. The winding up is deemed to begin when the petition is presented.
 If a member files a petition, he must show that:
 The company is insolvent or refuses to show its financial statements
 The member has been a Registered Shareholder for at least 6 out of the 18 preceding months. This
is unless he was allotted shares directly by the company or he received the shares as a Trustee
 Once the petition is approved, the court appoints an official Receiver. The Official Receiver is an officer of
the court who is appointed as a Liquidator to wind up the company. He must also investigate the company
affairs and the causes of its failure
EFFECTS OF COMPULSORY LIQUIDATION
Page 110 of 127

 The Official Receiver becomes responsible to manage the company, until some other liquidator, usually an
authorized Insolvency Practitioner is appointed by the court, members or creditors
 The powers of the directors ceases and they are dismissed
 The contracts entered into by the company do not get cancelled unless the contracts are deemed to be void
if the company liquidates
 Any disposition (disposal) of company properties or transfer of shares is void unless approved by the court
 Creditors cannot start or continue any legal action against the company without the approval of the court
 The company staffs are dismissed unless the Liquidator keeps them to assist him with his activities
 All floating charge holders are given possession of the assets that were secured for them i.e. all floating
charges crystallize
DUTIES OF THE OFFICIAL RECEIVER
 The Official Receiver must investigate:

 The causes of the failure of the company
 Generally the promotion, formation, business dealings and affairs of the company
 The Official Receiver may require public examination of people suspected to be involved in wrong doings
regarding the company’s operations on the request of either Half the Creditors or Three-quarters of
Shareholders
 Within 12 weeks of appointment, the Official Receiver may conduct meetings with members and creditors
and provide them with the opportunity to appoint their own Liquidator or appoint a Liquidation
Committee to work alongside the Official Receiver
 Any Liquidator appointed by members or creditors must be a Licensed Insolvency Practitioner. If the
members or creditors fail to appoint a Liquidator, the Official Receiver automatically becomes the
Liquidator
 Any time after the winding up order is made, the Official Receiver may ask the Secretary of State to appoint
a Liquidator
 Notice of the Winding up order and appointment of the Liquidator must be sent to the Registrar
DSTRBUTION OF ASSETS AND DISSOLUTION
 Within 21 days of the order for winding up, the directors must deliver a statement of affairs showing the
company’s assets, liabilities and a list of all creditors.
 Upon disposal of all assets (except assets carrying a fixed charge), the liquidator distributes the proceeds in
the following order:
1. Paying the cost of the Liquidator
2. Settling preferential debts such as Employee Wages
3. Settling Secured Debts such as Floating Charge holders
4. Settling Unsecured Debts
5. Settling deferred debts such as dividends declared but unpaid and accrued interest
6. Repaying any surplus to members
 On completion of his tasks, the liquidator reports to the government and applies to the court for dissolution
of the company and removal from the Register
 He may also apply to the Registrar for an early dissolution if the company assets are unlikely to cover his
expenses
MAIN DIFFERENCES BETWEEN VOLUNTARY AND COMPULSORY LIQUIDATION
Page 111 of 127

CHARACTERISTICS VOLUNTARY COMPULSORY

CONTROL MEMBERS OR CREDITORS COURT
TIMING (COMMENCEMENT) FROM THE TIME THE RESOLUTION WHEN THE PETITION IS
IS PASSED PRESENTED
LIQUIDATOR APPOINTED BY MEMBERS OR THE COURT APPOINTS AN
CREDITORS OFFICIAL RECEIVER AS
LIQUIDATOR
LEGAL PROCEEDINGS CREDITORS/MEMBERS MAY SUE CREDITORS/MEMBERS MAY NOT
THE COMPANY DURING SUE THE COMPANY DURING
LIQUIDATION LIQUIDATION
MANAGEMENT AND STAFF DIRECTORS ARE REMOVED BUT DIRECTORS ARE REMOVED AND
EMPLOYEES MAY RETAIN THEIR ARE AUTOMATICALLY DISMISSED
JOBS UNLESS RETAINED BY THE
LIQUIDATOR
ADMINISTRATION
ADMINISTRATION WITHOUT COURT ORDER
 Administration is a process whereby an Insolvency Practitioner is put in control of a company in order to

rescue the company from insolvency
 Its purpose is to insulate the company from its creditors while it seeks:
 To save itself, or if that’s not possible
 To achieve a better result for creditors than liquidation would bring, or if that’s also not possible
 To dispose company assets and repay off creditors
 During the process, the company is protected as follows:
 Voluntary and Compulsory Liquidation cannot be applied for
 Company property cannot be seized
 Goods on lease and hire purchase cannot be seized
 Legal Proceedings against the company cannot be instigated
 Once an Administration order is granted, a petition for a Winding up order cannot be made to the court. On
the other hand, if a Winding up order is granted first, an Administration order cannot be made.
Administration orders and Liquidation are mutually exclusive
 Members, Directors and Floating Charge Holders may appoint an Administrator without the approval of the
Court. However, Fixed charge holders can only put the company into Administration through a Court order
ADMINISTRATION BY FLOATING CHARGE HOLDERS
 A floating charge holder may appoint an Administrator even if the Company is Solvent or under
Compulsory Liquidation.
 This is only applicable if the floating charge entitles the holder (in the contract itself) to appoint an
Administrator and the Charge is applicable on All, or Substantially All, of the company’s assets.
 Moreover the floating charge holder may only appoint an administrator if:
 They have given a Two Days’ Notice to other Floating Charge Holders who have a right to appoint
an Administrator
 Their Floating Charge in enforceable
 Once the notice is delivered, the charge holder will submit the following documents at court:
 A notice of appointment of the Administrator
Page 112 of 127

 A statement of Consent of the Administrator

 A statement by the Administrator that the purpose of Administration is likely to be achieved
 A declaration that the charge holder has the valid right to appoint an administrator
 Once these documents are filed and no objections are made within 5 days, the appointment is valid
and must be communicated to the relevant people. Any petitions for winding up are dismissed and
the court cannot appoint any administrative receiver
 Once these documents are filed and no objections are made within 5 days, the appointment is valid and
must be communicated to the relevant people. Any petitions for winding up are dismissed and the court
cannot appoint any administrative receiver
ADMINISTRATION BY MEMBERS OR DIRECTORS
 A company’s Member or Director can appoint an Administrator without a court order if:
 No Administrator have been appointed in the last 12 months or no agreement have been entered
into with creditors which might prevent them from appointing an Administrator (Moratorium)
 The company is, or is unlikely to be, unable to pay its debts
 No petition for Winding up or Administration order has been presented to the court
 No Administrator or Receiver is already in office
ADMINISTRATION WITH COURT ORDER
 The following parties may apply to the court for an Administration Order:
 The Company (through an Ordinary Resolution of Members)
 The Directors
 One or More Creditors
 The Justice and Chief Executive of the Magistrate’s Court following non-payment of a fine(s)
 The court will grant the order if it believes that:
 The company is, or is likely to be, unable to pay its debts
 The purpose of Administration is likely to be achieved
EFFECTS OF APPOINTING AN ADMINISTRATOR
 Creditors cannot enforce their debt during the Administration period

 All outstanding petitions for winding up are dismissed
 The Administrator becomes responsible for the management of the company and managers can only act
with the consent of the Administrator
 Any Administrative Receiver must vacate their office
 Creditors may only exercise their right over company property with the consent of the court
DUTIES OF THE ADMINISTRATOR
Page 113 of 127

 The Administrator is an Agent of the company and its Creditors and thus owes them the Fiduciary Duty of
Reasonable Care and Good Faith
 The Legal Duties of the Administrator includes:
 Sending Notice of their appointment to the Company and the Creditors
 Publish Notice of their appointment
 Send Notice of their appointment to the Registrar within 7 days
 Obtain a Statement of Affairs of the Company from its Directors
 Formulate a proposed plan to rescue the company from liquidation and send copies of their
proposal to the Registrar and the Creditors. The proposal must also be made available to every
member of the company within a maximum of 8 weeks
 Manage the affairs of the company
 The statement of affairs must be provided to the Administrator within 11 days of request and include:
 Details of the company’s property
 Details of the company’s Liabilities
 The Names and Addresses of the company’s Creditors
 Details of any security held by any creditor
 The Administrator must call a meeting of creditors within 10 weeks of their appointment in order to seek
approval regarding his proposal. The creditors may accept or reject the proposal. Once accepted, no
significant modifications may be made without the creditors’ consent
POWER OF THE ADMINISTRATOR
 The Administrator of a company is allowed to do anything it sees necessary to manage the affairs of the
company and fulfill his responsibilities. He usually takes on the power previously enjoyed by directors.
Administrators have specific authorities to:
 Remove or appoint a new director
 Call a meeting of members or creditors
 Apply to court for directions on how to manage the company
 Make payments to secured and preferential creditors
 Seek the court’s permission to make payments to unsecured creditors ( a court approval will not be
required if the payment is likely to assist in achieving the purpose of administration)
END OF ADMINISTRATION
 The administration period ends when:

 The administration has been successful
 12 months have elapsed from the date of the appointment of the administrator
 The administrator applies to court to end the appointment
 A creditor applies to court to end the appointment
 A discovery is made which suggests that the person applying for administration had improper
motives
 The administrator automatically resigns from office after 12 months of his appointment, although this time
period can be extended by courts or creditors
 The administrator may also resign by applying to the court if he thinks:
Page 114 of 127

 The purpose of administration cannot be achieved

 The company should not have entered into administration
 The administration has been successful
ADVANTAGES OF ADMINISTRATION
 TO THE COMPANY
 Unlike Liquidation, Administration does not necessarily lead to the end of the company
 It provides a temporary breathing space from creditors to formulate a rescue plan
 It prevents any creditor applying for compulsory liquidation
 It provides for past transactions to be challenged
 TO THE MEMBERS
 They will continue to have shares in the company
 If the business is rescued, the value of shares is likely to increase in the short term
 TO THE CREDITORS
 Creditors are more likely to receive their debt through Administration rather than Liquidation
 Any creditor may apply to the court for an Administration Order
 The interest of creditors may be better served if the business continues to exist rather than
liquidate
CHAPTER –19:: FRAUDULENT AND CRIMINAL BEHAVIOUR

INSIDER DEALING
Page 115 of 127

BASICS
 The Criminal Justice Act 1993 {CJA} contains the rules on Insider Dealing and states it to be a Criminal
Offence as it enables an Insider to gain an Unfair Advantage.
 An Insider is someone who has information which must be, and they must know it to be, inside
information. Moreover, they must have it, and know they have it, from an inside source:
 Through being a director, employee or shareholder of an issuer of securities
 Through access because of employment, office or profession
 If the direct or indirect source is a person within these two previous categories
 To convict someone of insider dealing, it must be proved that the possessor of inside information:
 Dealt in price sensitive securities on a regulated market.
Dealing refers to the Acquiring, Disposing or Agreeing to Acquire or Dispose of relevant securities
{shares} whether directly or indirectly through an agent or nominee
 Encouraged another person to deal in price sensitive securities on a regulated market
This occurs where an individual, having information as an insider, encourages another person to
deal in price-affected securities based on inside information. They must know or have reasonable
cause to believe that the dealing would take place.
It is irrelevant whether the person who is being encouraged by the insider is actually given the
inside information or whether he is aware that he is being encouraged on the basis of inside
information
 Disclosed the information other than in the proper performance of their Employment, Office or
Profession
This would occur for instance where a finance director provides inside information to a friend at a
social gathering and not as part of his professional duties
INSIDE INFORMATION
 The CJA defines inside information as price-sensitive information which:

 Relates to a particular issuer of securities which are price-affected
 Is specific or precise and not made public
 Is likely to have a significant effect on the price of securities
DEFENCES
 An insider, on being charged of insider dealing, usually has the right to defend himself. CJA gives certain
General Defences to insiders if the individual concerned can show that:
 He did not expect there to be a profit or avoidance of loss
 He had reasonable grounds to believe that the information was made public (disclosed widely)
 He would have done what he did even if he didn’t have the information
 He didn’t expect the person to whom the information was given to take any actions
 Information is made public if:
 It is Published under the rules of the regulated market such as the Stock Exchange
 It is in Public Records such as the London Gazette
 It can be readily acquired
 It is derived from public information
 Information May be treated as made public even though:
 It can only be acquired exercising skills and expertise (such as financial analysis)
Page 116 of 127

 It is communicated only to a section of the public

 It can be acquired only by Observation
 It is communicated only on a payment of a fee
PENALTIES
 The maximum penalty for insider dealing is 7 year imprisonment and/or unlimited fine.
 If the person charged with insider dealing is a director, he may also be disqualified under the CDDA.
 However, the contracts that result from insider dealing are valid and enforceable
MARKET ABUSE
 Market Abuse refers to any behaviour which satisfies one or more of the prescribed conditions likely to be
regarded as a failure on the part of the person or persons concerned to observe the standard of behaviour
reasonably expected of a person in their position in relation to the market.
 In simple terms, market abuse is said to occur when a person dealing in a regulated market commits an act
that contradicts the Code of Market Conduct
 Examples of Market Abuse include:
 Misuse of Confidential Information for personal benefit.
 Manipulation of transactions to increase/decrease share prices
 Issuing false statements to induce others to make incorrect decisions
 Manipulation of financial statements
 Dissemination(spreading) of false or misleading information
 Directors are personally liable for all statements issued by the company
 Market Abuse is a Civil Offence punishable by unlimited fines
MONEY LAUNDERING
BASICS
 Money laundering refers to the attempt to make money from criminal activity appear legitimate.
 Its covers any activity by which the source and ownership of the proceeds of crime are changed so that the
money appears to have been obtained legitimately
 Money laundering was declared as a Criminal Offence in the Vienna convention. An independent body, The
Financial Action Task Force {FATF} was set up to implement the decisions of the convention and promote
policies to combat money laundering
TYPES OF CRIMINAL OFFENCES RELATING TO MONEY LAUNDERING
 The Proceeds of Crime Act recognized three categories of criminal offenses relating to money laundering:
 LAUNDERING
Page 117 of 127

o This refers to the Acquisition, Possession or Use of the proceeds of criminal conduct, or
assisting another person to retain the proceeds of criminal conduct and Concealing,
Disguising, Converting, Transferring or Removing criminal property.
o Criminal property refers to any property that results from criminal conduct.
o There is no De Minimis Limit, which means that even a laundering of $1 would lead to a
criminal offence
o The maximum punishment for this crime is 14 years imprisonment and/or fine
 FAILURE TO REPORT KNOWLEDGE OR SUSPICION OF MONEY LAUNDERING

o A person who suspects money laundering must disclose this to a nominated Money
Laundering Reporting Officer {MLRO} within their organisation if it has one, or report
directly to the Serious Organized Crime Agency {SOCA}.
o However the person may have a defence if he can show that there was a reasonable excuse
for not making disclosure.
o The maximum punishment for failing to disclose knowledge or suspicion is 5 years
imprisonment and/or fine
 TIPPING OFF
o This refers to disclosing information to any suspected launderer or other person which may
hamper an investigation into drug trafficking, laundering drug money, terrorist related
activities and laundering the proceeds of criminal conduct.
o The maximum punishment is 2 years imprisonment and/or fine
THE MONEY LAUNDERING PROCESS
 PLACEMENT
This refers to the initial disposal of proceeds from criminal activity into legitimate businesses or property
 LAYERING
This refers to the continuous transfer of money from business to business or from one source to another, in
order to conceal the original source
 INTEGRATION
Once the layering is complete, the funds obtained from the final source is invested as legitimate money
THE MONEY LAUNDERING REGULATIONS ACT 2007
 The Money Laundering Regulations Act 2007 requires each organisation to establish internal systems and
procedures to deter criminals from using the organisation to launder money or finance terrorism.
 Specifically, the MLRA 2007 requires organisations to establish the following systems:
 Internal reporting procedures:
This includes appointing a Money Laundering Reporting Officer {MLRO} to receive internal reports
of suspected money laundering and, where appropriate, report them to SOCA
 Customer Due Diligence Measures
Page 118 of 127

This includes identifying and verifying customers and monitoring the business relationship
according to the level of risk of money laundering
 Record keeping procedure

This includes retaining copies of customer identity details such as passports and significant
transactions with customers to ensure that
 Ensuring that employees are educated

Employees should receive appropriate training about the laws relating to money laundering
regulations and the business policies and procedures in dealing with them
 Failure to implement these measures leads to a criminal offence regardless of whether any laundering took
place or not. It is punishable with a maximum of 2 years imprisonment and/or unlimited fine
FRAUDULENT TRADING
 If a court finds that the business of a company in liquidation has been carried on with the intent to defraud
its creditors or for any other fraudulent purposes, it may declare that any person(s) who were knowingly
involved in carrying on the business in such fashion shall be personally liable for the debts of the company.
This is a civil penalty imposed by the Insolvency Act 1986
 Moreover, the Companies Act 2006 imposes a Criminal Penalty on any person(s) who carries on a business
with the intent to defraud creditors, other persons or for any other fraudulent purposes, regardless of
whether the company is solvent or insolvent
 The following rules are applicable in relation to Fraudulent Trading:

 Only the persons who take the decision to carry on the company’s business are liable
 “Carrying on business” may include a single transaction or a mere payment of debts
 It is applicable on all forms of fraudulent activities in relation to trade
 If a liquidator considers that there has been fraudulent trading, they should apply to the court for an order
to make the person(s) involved in fraudulent trading, make good to the company, all or some specified
parts of the company’s debts
 The liquidator should also report the facts to the Crown Prosecution Service and Director of Public
Prosecutions so that the Criminal Proceedings may be initiated under the Companies Act 2006
 The burden of Proof for liability for fraudulent trading is high, and hence the liquidator must prove that
there was an intention to defraud
WRONGFUL TRADING
Page 119 of 127

 The problem of proving intention to defraud in cases of Fraudulent Trading resulted in a new civil law of
Wrongful Trading within the Insolvency Act 1986. It only applies to companies in Liquidation but no
dishonesty or intention to defraud needs to be proved
 A director will be liable for wrongful trading if the liquidator can prove that they:
 Knew, or should have known, that there was no reasonable prospect that the company could have
avoided going into insolvent liquidation.
 Did not take sufficient steps to minimize the potential loss to creditors
 The Act also states that the director will be deemed to know that the company could not avoid insolvent
liquidation if that would have been the conclusion of a reasonably diligent person with the knowledge, skill
and experience that might reasonably be expected of a person in the director’s position.
OTHER OFFENCES IN RELATION TO WINDING UP
 The Company Directors Disqualification Act 1986 makes a person who acts as a Director whilst disqualified
personally liable for the company’s debts
 The Insolvency Act 1986 makes it a criminal offence for Directors who create Phoenix Companies. Phoenix
Companies are companies created by the Directors of an Insolvent Company with a Name similar to that of
the Insolvent Company (to suggest that there is a connection). The Act prohibits the creation of such
companies within 5 years of the original company being liquidated. The Director(s) is liable for a fine or
imprisonment
 The Insolvency Act 1986 makes it a criminal offence to Conceal or Fraudulently Remove company assets or
debts including falsification of records. It is also an offence to dispose of property that was acquired on
credit that has not been paid for
 The Insolvency Act 1986 makes it an offence to make a gift or transfer property during liquidation unless it
can be proved that there was no intention to defraud the creditors
 According to the Insolvency Act 1986, a company officer may be liable for Misconduct with a Liquidator
during the Liquidation process
 The Insolvency Act 1986 makes it an offence to Destroy, Mutilate, Alter or Falsify of company records
 The Insolvency Act 1986 makes it an offence to Omit Material Information when making statements
concerning a company’s affairs
THE FRAUD ACT 2006
Page 120 of 127

 The Fraud Act 2006, to which the Directors and Secretaries are subject, created a single offence of Fraud,
which a person can commit in three different ways:
 False Representation of Fact or Law
 Failure to Disclose information when there is a Legal Duty to do so
 Abusing ones position of employment, agency or any other commercial relation
THE BRIBERY ACT 2010
BRIBERY
 Bribery is a serious offence which involves Offering or Receiving Money, Hospitality, Gifts or other Benefits
in return for performing a particular function. Example: buying a bank manager a car to get a loan
sanctioned could be considered as bribery
 The Act applies on all functions and activities of a public nature; activities connected with business or
carried out in the course of one’s employment. It also applies to the relationship of Agency.
 The Bribery Act 2010 has been effective since July 2011. It created four main offences, three of which can
be committed by individuals, while the fourth one is a corporate offence
INDIVIDUAL OFFENCES
1. BRIBING ANOTHER PERSON

 This offence is committed when a person Offers, Promises or Gives Financial or other Advantages to
another person with the intention of encouraging that person to perform his activity or function
improperly or reward them for improper performance.
 It doesn’t matter whether the person being bribed is the same person who actually performs the
function or activity, or whether the offer is made directly or via a third party.
 It is also applicable where Acceptance of an Advantage itself constitutes improper performance of a
function or activity
2. BEING BRIBED
 This offence is committed where a person requests or accepts a financial or other advantage as a
reward for improper performance of an activity or function
 It doesn’t matter whether the advantage is received directly or through a third party.
 The offence also applies if a person receives a benefit on behalf of another person
3. BRIBING A FOREIGN PUBLIC OFFICIAL

 This offence is similar to that of bribing another person, but the bribe is offered to a foreign public
official {FPO}. It is committed where a person offers financial or other advantage to an FPO or a
third party with the intention of influencing the FPO to commit improper performance of his
function or activities.
Page 121 of 127

 An FPO is any 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 who is an official or agent of a
public international organisation
 The terms ‘Activity and Function” include:

 Any functions (jobs or position) of a public nature
 Any activity connected with business
 Any activity carried out in the course of employment
 It applies to individuals who perform their activities from a position of trust and are expected to act
Impartially and in Good Faith. It is also applicable on activities that have no connection with the UK.
 Improper performance refers to performance that doesn’t meet the standard that a reasonable person in
the UK would expect
DEFENCES AND PENALTIES FOR INDIVIDUAL OFFENCES
 An individual charged with Bribery can defend themselves by proving that their conduct was necessary for
the proper exercise of their function in an intelligence service or armed force
 The maximum penalty for bribery under the Act is 10 years imprisonment and/or unlimited fine
CORPORATE OFFENCE
 CORPORATE FAILURE TO PREVENT BRIBERY

 It is committed by a company that fails to prevent a bribery offence that is committed by its
employees, agents or subsidiaries
 It is applicable on organisations such as Companies and Partnerships based in UK or doing business
in UK
DEFENCES AND PENALTIES FOR INDIVIDUAL OFFENCES
 An organisation will not be liable for this offence if it can prove that it maintains “Adequate Procedures” to
prevent the act of bribery.
 The establishment of adequate procedures (not yet defined) is based around six principles:
 The Procedures should be proportionate to the size and complexity of the company’s activities
 Senior Management should be committed to preventing bribery
 The company should regularly assess the risk of bribery being committed
 The company should perform due diligence procedures on those involved in company activities
 Anti-Bribery procedures and policies should be incorporated within the company’s Internal Control
and Information Systems
 The Anti-Bribery Procedures and Policies and their effective implementation should be regularly
monitored and reviewed
 The maximum penalty for this offence is an Unlimited Fine
Page 122 of 127

EXTRA
Page 123 of 127

F4 – CORPORATE AND BUSINESS LAW {GLOBAL}
SUPPLEMENTARY READING
Civil law is a private law. It settles matters between two individuals and organisations. It still has the roman
standard in many countries because it was originated from the Roman law. The end result is mostly damages in
civil law. Example of civil cases includes Donoghue v Stevenson [1993] where Donoghue sued Stevenson for
damages of £500 for drinking contaminated ginger beer which had negative effect on his health, Millar v Taylor
(17690) is another example of civil case
5Criminal law considers crimes committed against the crown (R). “Government identifies and criminalizes
behaviour that is considered wrong, damaging to individuals through criminal law” Jacqueline Martin and Chris
Turner define crime as a conduct forbidden by the state. When a conduct is regarded by the state as being criminal,
there is always a punishment attached to it”. i.e. murder and theft. Example of criminal case includes R v Wilson
(1994) and R v Brown (1991) where R stands for the Crown or the State. Criminal law was made to protect
organisations, individuals, the society and their properties. They are also made to punish offenders. The aim of
sentencing offenders also include reparation, incapacitation, deterrence and reformation
Differences
Criminal law is drafted by the government. It is made by the crown (R) and passed by Parliament before it goes to
the monarch for “rubber-stumping” as law. (This process is known as ‘Royal Assent’). Offenders are prosecuted by
the Crown when they commit crimes against citizens. It is the duty of the police to enforce the law. Civil law applies
to the principals of common law but in civil actions unlike criminal proceedings, the Crown takes no sides. The
crown supplies the court, the judge and if necessary the enforcement of the judge’s rulings.
Punishment
Criminal law punishes guilty defendant by either incarceration in a jailed. There are also fine paid to the
government in exceptional cases. Community service could be the punishment on offenders depending on the type
of crime committed. Contrary to criminal law, defendant in civil law is not imprisoned when found liable but
reimburse the claimant for losses by the defendants act.
Burden of proof
In criminal law, one can never be guilty without “proven 99 percent guilty beyond reasonable doubt “as per Lord
Denning. When one feels that the crime committed is done due to his or her insanity, then the burden lies on the
defendant to prove it. The Crown has the right to punish criminal offenders because all crimes are against the state.
For example, if one commits the crime of burglary by breaking into a house and steal, the state will prosecute the
offender when even the victim brings private proceedings against the burglar.
In civil law, the burden of proof is initially on the claimant. There are a number of factors which could make the
burden shift to the claimant. For example, the defendant in a prima facie case will have to refute the claimants
evident. Lord Denning said “there should be 51 percent balance of probability in civil cases to be a winner.
Page 124 of 127

European court of human rights

The European court of human rights (ECtHR) is an international judicial body established under the European
Convention on human rights of 1950 to monitor respect of human rights by states. It was established in1959 and
fully came into practice in the United Kingdom in 1966. It is made up of 47 judges, one for each member state and
sits full-time in Strasbourg-France. It decisions binds all lower courts in its member states. There were an
increasing number of cases being taken to the European court of human rights in 2008 which caused a backlog of
cases, with over 90,000 cases to with, in 2009.
Procedures
The Court accepts applications of instances of human rights violations from individuals as well as states. However,
it is rare for a state to submit allegations against another state, unless the violation is severe. In order for an
application to be accepted by the Court, all domestic legal remedies available to the applicant must have been
exhausted. Example of individual cases to the court the case the case of S and Marper v UK (2008) regarding
indefinite retained of DNA on the database of police without being found guilty of an offence.
Role of Solicitor
Solicitors deal with most of the paper works and act as am mediators between clients and Barristers. Accountant
and other professionals may contact Barrister (advocates) directly Most of the legal work done outside the court is
performed by solicitors. A solicitor may draw contracts, wills and conveyance. A solicitor owes duty of
confidentiality to his client. A client has the right to sue his or her solicitor for damages if he feels the solicitor is
negligent. If the conduct of a solicitor is contrary to the law, he may be liable for criminal proceedings. A solicitor is
not above the law. They can me punish when found guilty or offence or can be suspended for misconduct.
The tribunal members of the Supreme Court have the jurisdiction to suspend him for misconduct. Like a barrister,
a solicitor can be liable for contempt of court.
Roles of Barristers
Barristers (advocates) accept instruction for clients upon referral from solicitors. All Barristers have duty to their
clients. They must, by any legitimate means, devote themselves entirely to their clients’ legal needs in a position of
trust and confidence. A barrister must not mislead the court or an opponent and must acquaint the court with the
true state of the law whether or not it favours the client’s case. Their duties to the law and court require them to
maintain a high standard of legal learning with a commitment not to assist or participate in a breach of the law
because of their traditional functions as special advocates. Barristers practicing at the Bar are self-employed. They
can share administrative expenses by working from set of chambers with other barristers.
Roles of Judges
Judges interpret the law. They are independent from the police and the government. If someone is unhappy with a
judge’s decision, they must appeal to a higher court. It is the job of a judge, that offenders are punished. Judges also
apply ‘common law’, which is the law that has grown out of decisions by judges in court cases over decades and
even centuries.
Page 125 of 127

Decisions made by judges in higher courts are recorded, and judges on lower courts must follow them.
Juries
Juries are a sworn body of people convened to render impartial verdict. Juries were used in the English Legal
System before the Norman Conquest. Originally they acted as witnesses rather than decisions makers. Modern
juries tend to be found in courts to decide whether an accused person is guilty or not guilty of a crime in criminal
cases. They are used in civil cases in limited circumstances to decided cases of defamation, malicious prosecution
and fraud. They are used in the courts below Crown court for criminal trials, High court, Queen’s Bench Division,
County court and Coroner’s courts.
Magistrates
There are two types of magistrates. Lay magistrates and stipendiary magistrates. Lay magistrate have long history
in the English legal system, dating back to the justice of Peace Act 1361 which probably in response to a crime
wave, gave judicial powers to appoint lay people. They are entitled to claim travel and subsistence expenses. They
are usually people with no previous experience and they are appointed by the Lord Chancellor on the
recommendation of the Lord Lieutenant of a county or the council of a borough. They undergo a course of training
on appointment but the main purpose of this is not so much to teach them law as to train them act in judicial
manner. Lay magistrates work on a part time bases.
Stipendiary magistrate is a paid full-time qualified lawyer, appointed by the Crown on the recommendation of the
Lord Chancellor. Stipendiary magistrates in London are known as Metropolitan Stipendiary magistrates. Both
types of magistrates must retire at the age of seventy and both may be removed from office by the Lord Chancellor
for incompetence
Page 126 of 127

*** END ***
taufikacca@hotmail.com
Page 127 of 127

F4 - Corporate and Business Law (Global) - All Chapter

Uploaded by

Copyright:

Available Formats

You might also like

F4 - Corporate and Business Law (Global) - All Chapter

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

F4 - Corporate and Business Law (Global) - All Chapter

Uploaded by

Copyright:

Available Formats

LECTURER: KHAN MOHAMMAD ASHIK

Edited by_ TAUFIK

CHAPTER TITLE PAGE

01 ECONOMIC, POLITICAL AND LEGAL SYSTEMS 2-11

CHAPTER – 1 :: ECONOMIC, POLITICAL AND LEGAL SYSTEMS

THE ECONOMIC SYSTEMS

 The characteristics of a planned economy can be summarized as follows:

 The characteristics of a market economy can be summarized as follows:

 The characteristics of a mixed economy can be summarized as follows:

THE POLITICAL SYSTEM

COMPONENTS OF THE POLITICAL SYSTEM

A country’s political system is a combination of the following:

 The various political institutions, such as political parties

TYPES OF POLITICAL SYSTEMS

A country’s political system is influenced by two important factors:

 The Rule of Law

THE RULE OF LAW

THE LEGAL SYSTEM

TYPES OF LEGAL SYSTEMS

COMMON LAW SYSTEMS

 SOURCES OF LAW IN COMMON LAW SYSTEMS

 ROLE OF JUDGES AND THE DOCTRINE OF JUDICIAL PRECEDENCE

 In common law systems, judges are usually required to do the following:

 STATUTORY INTERPRATATION OF JUDGES IN COMMON LAW SYSTEMS

vi. A statute cannot impose criminal liability without proof of guilt

 COMMON LAW IN UNITED STATES

CIVIL LAW SYSTEMS

 SOURCES OF LAW IN CIVIL LAW SYSTEMS

 CHARACTERISTICS OF CIVIL LAW SYSTEMS

SHARIAH LAW SYSTEM

 SOURCES OF SHARIAH LAW

 INTERPETATION OF SHARIAH LAW

2. The judge, using Ijtihad, must be suitably qualified, known as a Muhtahid

 In order to qualify as a Muhtahid, a person must be:

 PRIMARY METHODS OF USING IJTIHAD

 THE RULE AGAINST USURY (INTEREST)

THE HIERARCHY OF COURTS IN THE ENGLISH LEGAL SYSTEM

CRIMINAL COURTS CIVIL COURTS

SUPREME COURT SUPREME COURT

COURT OF APPEAL COURT OF APPEAL

CROWN COURT HIGH COURT HIGH COURT

MAGISTRATE COURT COUNTY COURT

CHAPTER –2:: INTERNATIONAL TRADE, LEGAL REGULATION AND CONFLICT OF LAW

NEED FOR INTERNATIONAL LAW

THE UNITED NATIONS (UN)

UN COMMISSION ON INTERNATIONAL TRADE LAW (UNCITRAL)

THE WORLD TRADE ORGANISATION

ROLE IN RESOLVING DISPUTES

THE INTERNATIONAL CHAMBER OF COMMERCE (ICC)

THE INTERNATIONAL INSTITUTE FOR THE UNIFICATION OF PRIVATE LAW (UNIDROIT)

 It is an independent intergovernmental organisation concerned with the modernization, harmonization

COUNCIL OF EUROPE {COE}

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT {OECD}

BARRIERS TO INTERNATIONAL TRADE

CHAPTER –3:: ALTERNATIVE DISPUTE RESOLUTION MECHANISM

COURT BASED ADJUDICATION

ENGLISH SYSTEM OF COURTS

ENGLISH CIVIL COURTS