Ac04i (PC) Feb19 Uk LR

These materials are provided by BPP
ACCA
Corporate and Business Law (LW)
(Glo)
VL2020
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First edition 2007, Fourteenth edition January 2020 All rights reserved. No part of this publication may be
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Preface Contents
Welcome to BPP Learning Media's ACCA Passcards for Corporate and Business Law (LW) (Glo).
 They focus on your exam and save you time.
 They incorporate diagrams to kick start your memory.
 They follow the overall structure of the BPP Learning Media Study Texts, but BPP Learning Media's ACCA
Passcards are not just a condensed book. Each card has been separately designed for clear presentation.
Topics are self contained and can be grasped visually.
 ACCA Passcards are still just the right size for pockets, briefcases and bags.
Run through the Passcards as often as you can during your final revision period. The day before the exam, try
to go through the Passcards again! You will then be well on your way to passing your exams.
Good luck!
For reference to the Bibliography of the Corporate and Business Law (LW) (Glo) Passcards please go to
learningmedia.bpp.com and visit the 'Students' section
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Preface Contents
Page Page
1 Business, political and legal systems 1 9 Corporations and legal personality 55
2 International trade, legal regulation 10 Company formation 61
and conflict of laws 11 11 Constitution of a company 67
3 Court-based adjudication and alternative 12 Share capital 73
dispute resolution mechanisms 15
13 Loan capital 81
4 Contracts for the international
sale of goods 23 14 Capital maintenance and dividend law 87
5 Obligations and risk in contracts for 15 Company directors 91
international sales 29 16 Other company officers 103
6 Transportation documents and means 17 Company meetings and resolutions 107
of payment 39
18 Insolvency and administration 113
7 Agency law 45
19 Fraudulent and criminal behaviour 123
8 Partnerships 51
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1: Business, political and legal systems
Topic List This chapter provides an introduction to the rest of the

syllabus by looking at nations, and factors in their
systems of economics, politics and law. It identifies and
Economics, politics and law explains the main features of the most common types of
legal system – common law, civil law and Sharia law.
Common law systems
Civil law systems
Sharia law systems
Criminal and civil law
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Economics, Common law Civil law Sharia law Criminal and
politics and law systems systems systems civil law
Business activity takes place in an economic, political Legal systems

and legal context. Primarily we are concerned with law,
but must also briefly consider the context of the law. The laws of countries and the mechanisms
for regulating/enforcing law.
Law
Legal systems incorporate
The enforceable body of rules that governs any society.
Civil
 Body of laws  Policing
Society tends to be organised into nations, but nations law
 Legislators system
interact, as do individuals from within those nations.  Prison system
Criminal  Judiciary
National Law law  Prosecution
system
 Underlying
nature of law
How entities relate to each other and to the state.
 Common  Civil law  Sharia law
International Law law system system system
How sovereign states, individual organisations and  Conventions and treaties

 General principles of law
even individuals interrelate across national boundaries.
 Custom
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Economic systems Political systems

The way in which society decides what to produce, The art and science of directing and administrating
how to produce it and whom to produce it for. states and other political units.
Various types of economic system might exist in a Every political system is a balance between:
country:
 Making the law (the separation of powers between
1 Planned economy, where the government the legislature, the executive and the judiciary); and
determines resource allocation  Enforcing the law (in court systems)
2 Market economy, where resource allocation is The tone of the law will be affected by the nature of the
determined by market forces (supply & demand) rule of law (democracy.... dictatorship)
3 Mixed economy is a combination of the above

– in various degrees Religion
In some countries religion, nation and law are bound up.
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Common law systems Principles of law

Common law systems derive from, and are named  Law does not become inoperative through lapse
after, the law developed in England (now part of the of time
UK) after 1066AD.  Judicial precedent
Sources of law
 Common law + Equity = Case law
 Statute
Law is made by Parliament (government) or in

exercise of law-making powers delegated by it. In Sometimes a codifying statute will be issued,
the UK this is known as delegated legislation, in which puts the common law in an area onto a
France, administrative regulations. statutory footing.
 (In UK) EU law

 (In US) American Constitution
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Role of judges in common law systems Statute

A judge's decision in a case should be consistent Judges have to interpret the statutes made by
with previous decisions. It therefore creates a basis Parliament. There are various rules to do so, such
for future decisions – it is a judicial precedent. as the literal rule (taking words literally) and
various presumptions of statutory interpretation.
A precedent in a previous case may be avoided by For example, that statutes do not alter the existing
distinguishing on the facts. common law.
Precedent rules
 Must be based on propositions of law

Judicial review
In the US, a citizen may challenge laws that appear
 Must be the ratio decidendi to be unconstitutional. The judge must therefore
 The material facts of each case must be the interpret the constitution. There are two accepted
same methods: originalism (what did the drafters originally
 The preceding court must have a superior intend?) and constructivism (what would they intend
status now?).
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Civil law systems Principles of law

Civil law developed in Europe as a result of Two key principles are:
codification of existing law in the 18th and 19th  Comprehensibility
centuries. Ultimately they developed from  Certainty
Roman law and custom.
Sources of law
 Statute
 Custom
much of which  Administrative regulations
is codified  Constitution
 EU law
Codes (eg French Code Napoleon) In civil law, codification is a comprehensive exercise that brings
together all the law in a particular area.
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Role of judges in civil law systems Statutory interpretation

In civil law there is a distinct division between those
who draft the law (the legislature) and those who However, in application, judges may have to apply
simply apply it (judges). some general principles of interpretation:
 Where the meaning of the law is clear it must
Court of cassation be followed (judges cannot restrict the intent if
the drafting is ambiguous).
Originally this court (the highest in France) was set
 Where the statute is obscure/ambiguous, the
up simply to quash decisions where legislators felt
judge should follow the spirit of it.
judges had applied the law wrongly. Now it is an
appeal court.  If the law has a gap, the judge must resort to
custom or equity.
 Teleological method – where the judge applies
Judicial review the law in a manner which achieves its social
Some civil law countries (eg Germany) have a intent.
system of judicial review to establish whether  Historical method – looking at the original
created law is constitutional or not. intent.
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Sharia law systems Principles of law

The key principle of Sharia is that it is divinely
Sharia law is explicitly based on and part of the ordained. It cannot be changed and should only be
religion of Islam. It means 'a way to a watering interpreted by those qualified to do so.
place' and is law ordained by Allah for the guidance
of mankind.
Sources of law  Constitution (eg Iran's upholds Sharia law)

 Major schools of law (Madhab):
 The Quran
 The Sunnah Primary sources – Shia (parts of Iran)
– Hanafi (Pakistan)
Secondary
– Maliki
The Quran is Allah's revelation to his Prophet sources
– Hanbali
Muhammad. The Sunnah supplements it, as it is – Shafii
'what has come to be acceptable conduct' based on
Based on the writings of major jurists.
the sayings (Ahadith) of Muhammad.
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Role of judges in Sharia law systems Taqlid is the theory that no more interpretation of
The Quran cannot be altered. This leads to a matters of legal or religious significance is needed.
problem of who is qualified to interpret the law. This theory is the result of what was known as
Judges in true Sharia tradition are usually clerics. 'closing the gates of ijtihad'.
Sunnah Ijtihad
When clear guidance cannot be obtained from the There are processes by which an appropriate
Quran, a judge may turn to the Sunnah to see how Muslim judge (Iman) ascertains the law, including:
the Quran was interpreted by the Prophet. The  Ijma' – consensus of opinion
Sunnah may be used to:  Qiyas – analogical deduction
 Confirm law in the Quran  Istihsan – equity
 Explain matter outlined generally in the Quran
 Clarify a verse in the Quran
 Introduce a rule where the Quran is silent
Judicial review
Some islamic countries have courts to ensure
enacted statute conforms with Sharia.
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Criminal law Distinction

The distinction is not the act but the legal
A crime is conduct The state prosecutes. It must
consequences.
prohibited by law. Crimes prove beyond reasonable
are punishable, usually by doubt that the accused
committed the crime.
Example
fine or imprisonment. There
is a heavy burden of proof. A drunk driver colliding with a pedestrian
may create both a civil and a criminal
action.
Civil law
Criminal Prosecution by the State
Civil law exists to  Prove on balance of for driving with excess
regulate disputes over the probabilities alcohol.
rights and obligations of  Between claimant and
persons dealing with each defendant Civil Pedestrian sues for
other. There is a lighter  Key area for businesses compensation for
burden of proof. is contract personal injury.
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2: International trade, legal regulation and

conflict of laws
Topic List We have seen in the previous chapter that individual

nations' legal systems are different, although many
aspects may be similar to each other. Problems arise
International trade then when corporations and individuals from different
countries trade with one another. How will such
International trade organisations transactions be regulated? Under which law?
Various organisations have started to formulate laws
which states can adopt to ease this problem. Also,
adjudicators of this 'international' law now exist. A key
body is the United Nations (UN).
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International International trade
trade organisations
Many governments erect barriers to free international trade in order to protect home industries from foreign
competition eg tariffs, quotas, embargoes, hidden subsidies, import restrictions. National laws can also form a
barrier.
National laws vary. Take a contract for example. However, what makes a contract legally binding?
 Handshake
 Witnessed signature May vary from
CONTRACT = legally binding agreement country to country
 Oath
 Other conditions = Conflict of laws
Conflict of laws
Conflict of laws occur where parties from different Can be solved by international law: states
nations have a legal dispute and it is necessary to co-operating with each other using model laws
determine which law governs it. and enacting conventions and treaties to regulate
international trade between people and organisations.
Examples
 Rome Convention 1980 (choice of laws)  New York Convention 1958 (arbitration)
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trade organisations
Model laws, conventions and treaties are the UN

result of the work of international trade Almost every independent state in the world is a member.
organisation bodies working for greater
Aims:
international cooperation.
 Maintain peace and security
Examples  Develop friendly relations among nations

 Co-operate in solving economic/social/cultural/humanitarian
 The United Nations (UN) problems
 International Chamber of Commerce  Promote respect for human rights and international freedoms
(ICC) Also to develop and codify international law
 World Trade Organisation (WTO)
 Organisation for Economic Cooperation International Law UN Commission on
and Development (OECD) Commission International Trade Law
(UNCITRAL)
 UNIDROIT
There are over 500 conventions, treaties and standards that
 UNCITRAL legally bind the states which ratify them.
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trade organisations
ICC WTO OECD

Promotes trade, investment, Facilitates free international trade. Works on economic and social
open markets in foods/services,  Administers WTO Agreement (GATT) policies.
free flow of capital. for free trade between states  Legally binding agreements
 Advocate for trade to  Operates Dispute Settlement Body  Non-binding agreements
government
 Codes of practice for
businesses UNIDROIT UNCITRAL
 Combat commercial crime Researches how to harmonise private The core legal body of the UN.
international law ie remove conflict of Its main task is to harmonise
 Set up International Court and unify international trade
laws
of Arbitration law.
 Model laws
 General principles
 Legal guides
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3: Court-based adjudication and alternative

dispute resolution mechanisms
Topic List This chapter is based on the UNCITRAL Model Law on

International Commercial Arbitration (UN, 2008). This is
a set of rules which can be adopted by national laws to
Court-based adjudication and make international practice uniform. Here we shall look
alternative dispute resolution (ADR) at four aspects of it:
Role of international courts  The agreement
Arbitration  The arbitral tribunal
Arbitration agreement  Proceedings
 Awards
Arbitral tribunal
Proceedings Many cases relating to constraints for the international
sale of goods are referred to arbitration under these
Awards
model agreements.
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Court-based adjudication and Role of Arbitration Arbitration Arbitral Proceedings Awards
alternative dispute resolution (ADR) international courts agreement tribunal
Resolving disputes in Court Arbitration

Settlement of a dispute by an independent person chosen
1 Dispute between two parties by the parties.
2 Case starts
Court of
first instance Mediation and conciliation
3 Case decided Settlement of a dispute by the parties, assisted by an
independent third person.
4 Decision appealed
Appellate
 Point of law ADR
court
 Point of fact
 Expertise of Adjudicator  Informal
Court system
 Cheaper (sometimes)  Quick
 Helpful legal  Expenditure  Private  Lack of established
solutions appeal system and
 Slow
skilled judges
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European Court of International Court of

Justice (ECJ) Arbitration (ICA)
Highest appeal court of each Set up by the ICC.
member state of the European
Oversees the operation of the ICC's
Union.
rules on arbitration.
Is not involved in the arbitration
process itself.
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UNCITRAL Model Law on International The courts

Commercial Arbitration (UN, 2008) Arbitration is not carried out in the courts,
but the Model Law requires each adopting
Settlement of a dispute by an independent person, country to nominate a court or authority to
usually chosen by the parties themselves. perform certain functions, if required.
An agreement is international if the: This rule Written communications are deemed to

 Parties have their places of business in applies to have been received on the day of delivery if
different states agreements delivered to the addressee personally, or to
 Place of arbitration is in a different state under the his place of business, habitual residence or
Model Law mailing address.
 Obligations of the relationship are
to be carried out in a different state unless the If none of these can be found, it is deemed
 Parties have agreed that the agreement parties agree received if sent by registered letter to the
relates to more than one country otherwise. last known address of the person (Art 3).
Commercial means 'relating to trade'. A list of exclusions is given in the Model Law.
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Arbitration Agreement
An agreement by the parties to submit to arbitration all or certain disputes between them in their legal
relationship (contractual or otherwise). May be an arbitration clause or separate agreement.
The arbitration agreement must be in writing. Relationship with court proceedings

 Contained in a document providing If a matter is brought before a court and it is found
written evidence of the agreement. that it is subject to an arbitration agreement, the
 Referred to by a party in a document court should refer the matter to arbitration, unless the
relating to legal proceedings and the agreement is found to be null and void.
other party does not deny its existence. Arbitral proceedings may be brought where a matter
 A written contract between the parties is subject to arbitration, even if court proceedings
makes reference to another document have been initiated.
containing an arbitration agreement.
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Number of arbitrators Arbitrator

The parties may determine the number of arbitrators. Must:
If they do not, the number of arbitrators will be three.  Be impartial
 Be independent
Rules for appointing the arbitrators  Possess any qualifications specified in the
agreement
Each party shall appoint one arbitrator within 30 days.
 Disclose any relevant factor re: impartiality
The two appointed arbitrators will then appoint a third
within 30 more days.
Challenge
An arbitrator may be challenged by either party if
Rules for appointing sole arbitrators they are not independent, impartial or do not have
If the parties have agreed to a sole arbitrator, they the necessary qualifications.
must agree on who it shall be. Otherwise, it must be
referred to the nominated court/authority to decide.
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General rules
The parties shall be treated with equality and each party shall be given a full opportunity to present their case.
The parties are free to agree on the procedure to be followed, subject to the requirements of the Model Law.
If the parties do not agree on procedure, the tribunal shall conduct the arbitration as it sees fit.
Statement of claim and defence Place: determined by parties or, if not, the tribunal.
The claimant shall state the facts supporting their Language: agreed by parties or, if not, the tribunal.
claim, any points at issue and any remedy sought. Commencement: agreed by parties or, if not, on the
The defendant shall answer these points. date when referral is received by respondent.
The tribunal shall decide whether hearings are Experts: unless the parties agree not to, the tribunal
written or oral. may make use of experts to report to it.
All statements, documents and other information Court assistance: parties or the tribunal may
from one party shall be publicised to the other. request assistance in taking evidence from
competent court.
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Deciding the dispute There are certain circumstances where an award may
be set aside.
Arbitrators
Allowable circumstances
 Take majority decision
 In accordance with law specified in agreement  A party to the agreement was under an incapacity
 Or, if not specified, with law it sees fit to apply or the agreement is not valid under relevant law
If the parties settle the dispute before the tribunal  A party was not given proper notice of the
does, the tribunal shall record that as final arbitrator's appointment or was otherwise unable
settlement. to present their case
The award shall:  The award deals with matters outside the
 Be in writing agreement
 Be signed by a majority of the arbitrators  The composition of the tribunal was incorrect
 State the reasons behind the award  The subject matter is not capable of being settled
 State the date/place or arbitrations by arbitration under relevant law
 Be copied and copies sent out to the parties  The award conflicts with the public policy of the
state
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4: Contracts for the international sales of

goods
Topic List In this and the following two chapters we shall look at
some of the provisions of the UN Convention on
Contracts for the International Sale of Goods (UNCISG)
Contracts for the International Sale of (UN, 2010).
Goods (CISG) In this chapter we focus on the formation of the contract,
Offer and specifically at an offer being accepted, or how a
contract may be modified or terminated, and the
Acceptance, modification/termination particular terms that may be incorporated in the contract
ICC Incoterms – ICC INCOTERMS (ICC, 2010).
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Contracts for the International Offer Acceptance, modification/ ICC Incoterms
Sale of Goods (CISG) termination
CISG (UN, 2010) applies to sales of goods Sale of goods

between parties whose place of business are in
different states when: A contract by which the seller transfers, or agrees to
transfer, property in goods to a buyer in exchange
 The states are contracting states for monetary compensation, called the price.
 The rules of private international law lead to
the application of the law of the contracting state Goods
(Art 1)
 Not for personal, family or household use (Art 2)
 Not bought at auction
Place of business (PoB)  Not bought on execution of law
Not nationality. If a party has >1 PoB then the relevant  Not stock/shares etc/money/ships etc/aircraft/
one is the one most closely connected to the contract electricity
(Art 10).  Not the supply of services or provision of labour
(Art 3)
Such a contract is formed when acceptance of an offer becomes effective (Art 18). The contract does not
have to be in writing unless this is required by the national law of one of the parties (Arts 11 and 12).
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Offer Invitations to treat

A proposal for concluding a contract addressed to Any other proposal, unless it clearly indicates to
one or more specific persons that is sufficiently the contrary.
definite and that indicates the intention of the
offeror to be bound by acceptance (Art 14).
1 It indicates the goods in question End of offer

2 It makes provision for price/quantity An offer may end in one of three ways:
Offer becomes effective when it reaches the  Withdrawal. Only if the withdrawal reaches the
offeree (Art 15). offeree before, or at the same time as, the offer
(Art 15)
 It is made orally to him  Revocation. If the revocation reaches the offeree
 It is delivered to him personally at his business before acceptance is despatched, only if offer
or mailing address was not irrevocable (Art 16)
 If there is no business or mailing address it is  Rejection. Outright or by counter offer (Art 17)
delivered to him personally at his residence
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Acceptance Counter-offer
A statement made by the offeree, or other conduct A reply to an offer which purports to be acceptance
of the offeree, that indicates assent to an offer (not but which contains additions, limitations or
silence or inactivity) (Art 18). modifications to the terms of the offer (Art 19).
Acceptance becomes effective when: A reply which does not materially alter the terms is
an acceptance
1 Indication of assent reaches the offeror
2 Accepting act is performed
Material alterations might include:
must be within:  Significant alteration to price (although correction
 Any relevant fixed timescale of old price might be immaterial)
 Reasonable time (Art 20)  Significant alteration to quantity (again, correction
Judged in relation to method of offer (eg oral/ of error immaterial)
written/posted)
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The period of reasonable time commences:

Withdrawal of acceptance
Acceptance may be withdrawn if the withdrawal
 From the moment the offer is received reaches the offeror before or at the same time as
 From the date shown in the document containing the acceptance (Art 22).
the offer (or on the envelope)
 When the offer is contained in instantaneous
Modification/termination
Once found, the contract may be:
communication, when it reaches the offeree
 Modified
 Terminated
Official holidays and non-business days form part
of the time period, but when acceptance cannot be by agreement unless one party has led the other
delivered because the last day of the time period is to rely on the contract in some way: Art 29
one, the time period is extended by a business day.
Late acceptance may be valid if accepted by the offeror (Art 21).
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ICC Incoterms (ICC, 2010) are 'international contract terms', which are standard trade definitions commonly used in
international trade contracts. Common Incoterms include:
Ex works (EXW) Free on board (FOB)

Seller has minimum obligations. Must make goods Buyer makes arrangements for shipping and seller discharges
available to the buyer only. their duties by putting the goods on board the ship. Seller only
has duty to provide necessary export licences/authorisation.
Cost, insurance and freight (CIF) Buyer bears responsibilities for the goods on ship.
Seller is required to bear the cost of insurance and
carriage (freight) for the goods. Carriage is to be
on usual terms to named port of destination by the
Carriage paid to (CPT)
usual route and manner. Insurance must be the Seller pays for carriage to named location. Risk passes to
minimum stated in the contract plus 10%. buyer when goods reach that destination.
Delivered duty paid (DDP)

Seller has maximum obligations: discharges delivery when goods are made available at named place in country of
importation and has paid all the relevant carriage charges, duty and tax.
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5: Obligations and risk in contracts for

international sales
Topic List In this chapter we focus on the parties' obligations under a

contract for international sale of goods (CISG) (UN, 2010)
and also the relevant remedies when parties fail to meet
Seller obligations these requirements because they are in breach of contract.
Buyer obligations We also look at the commercially vital issue of risk and
when it passes between the parties.
Remedies
Breach of contract
Risk
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Seller Buyer Remedies Breach of Risk
obligations obligations contract
Delivery
The seller must deliver the goods, hand over any documents
relating to them and transfer the property in them as required If the contract does not specify the
by the contract and this Convention (Art 30) (UN, 2010). place of delivery, these rules apply:
2 If contract does not involve carriage, and

1 Contract involves carriage of goods. goods are specific goods or goods are
Delivery = handing goods first carrier from specific stock at a place known at the
time of contract;
Additional requirements delivery = placing goods the buyer's disposal
at that place.
 If goods are not clearly identified to the Types of goods

contract, seller must give buyer notice of
Specific goods: those identified as the goods to be
the consignment, specifying the goods
sold at the time the contract was made.
 The means of transport must be Identified goods from specific stock: not specific
reasonable/typical goods but drawn from larger specific stock.
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3 Otherwise, delivery = placing goods at the

buyer's disposal at seller's place of business
Timing (of delivery/document)
 On specified date/within specified period; or
Quality  Reasonable time after date of contract
Buyer's duty to examine the goods
The seller must deliver goods which are the quality,
quantity and description required by the contract
and which are contained or packaged in the manner  The buyer has a duty to examine the goods as
required by the contract. soon as possible after delivery (Art 38)
 If the contract involves carriage, the goods
Seller is not liable for lack of conformity if at formation should be examined as soon as they arrive
of contract the buyer knew, or ought to, that the goods  If the seller knows that the goods are being
did not conform (Art 35). re-dispatched, they should be examined
Seller is liable for lack of conformity that only becomes immediately on arrival at the next destination
apparent after time of delivery (Art 36). The buyer loses right to rely on lack of conformity if
If the seller delivers goods early, they may correct they do not give reasonable notice of it to the seller.
the deficiency in the remaining time, providing this If the seller actually knew of lack of conformity and
does not cause the buyer unreasonable inconvenience did not tell buyer, then the seller still has
(Art 37). responsibility (Art 40).
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Conformity requirements
The goods are fit for the purpose for which goods of the same description would ordinarily be used.
The goods are fit for any particular purpose expressly or impliedly made known to the seller at the time of
forming the contract, except where circumstances show that the buyer did not rely, or that it was unreasonable
to rely on the seller's skill and judgement.
The goods possess the qualities of any sample or model used in the formation of the contract.
The goods are contained or packaged in the manner usual for such goods, or where there is no such
manner, in a manner adequate to preserve and protect the goods.
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Buyer obligations
The buyer must pay the price for the goods and take delivery of them as required by the contract and this
convention (Art 53).
1 Price not concluded. Deemed to If the contract does not specify the time and place of payment,
be price at time contract formed the following rules apply:
(Art 55).
1 Price to be paid at seller's place of business, or, if at time
2 Price by weight. If there is any of handover, where goods are handed over (Art 57).
doubt, net weight is used (Art 56).
2 Price to be paid at time of handover, although:
Taking delivery  Buyer may inspect goods first
Obligation includes requirement to:  Payment may be a condition of handing over the goods
 Do all reasonably expected acts to  If the contract involves carriage, seller may dispatch
facilitate delivery goods but not release them until paid (Art 58)
 Taking over the goods (Art 60)
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Breach of contract
Where a party fundamentally fails to perform their contracted obligations.
Remedies for buyer (seller failure) Remedies for seller (buyer failure)
1 Performance (unless an inconsistent remedy 1 Payment and acceptance of the goods
already sought). Buyer may set an additional (unless an inconsistent remedy already
time period for performance/repair or sought). Seller may fix an additional time
substitution of non-conforming goods (Art 46). period within which the buyer should pay
(Art 61).
2 Avoidance. Buyer may declare contract
avoided if failure to perform is a fundamental 2 Avoidance. Seller may declare contract
breach. They lose the right if goods are avoided if buyer fails to accept goods or pay
delivered unless they are late, or a different for them. They lose the right if the buyer pays
breach of contract has been committed (Art 49). unless payment is late or a different breach of
contract has been committed (Art 64).
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3 Reduction of the price. If the goods do not

conform to the requirements of the contract,
the buyer is entitled to reduce the price, in
proportion, unless the seller remedies the
defect (Art 50).
Both parties are always entitled to claim damages if the other party is in breach, regardless of any other
remedies claimed.
Damages If the seller has sold the goods (rejected by the

buyer) to another party, the proceeds of such a sale
would be deducted from any damages awarded.
A monetary sum equal to the loss (including
loss of profit) suffered by the injured party as a This is known as mitigation of the loss and
consequence of the breach (Art 74). the injured party is required to take reasonable
measures in this respect (Art 77).
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Anticipatory breach Interest

If sums are overdue, interest will be due at the
Anticipatory breach is when it becomes clear statutory rate.
that one party will not perform a substantial part
of their obligations, due to serious deficiencies in
their ability to perform/their creditworthiness or their
Preservation of the goods
conduct in preparing for the contract. Both parties have a duty to take reasonable steps
to ensure that the goods are preserved.
If one party commits anticipatory breach, the other

party may suspend performance of the contract. Examples
If anticipatory breach turns into fundamental Seller: When buyer delays taking delivery
breach, that is, the party actually fails to perform the When goods transfer/payment was to be
contract at the appointed time, the injured party may concurrent but payment was delayed.
declare the contract avoided. Buyer: When they receive goods but intend to
reject them.
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Loss or damage to the goods after risk has passed to the buyer does not discharge them from their obligation
to pay the price, unless loss or damage is due to an act or omission of the seller Article 66.
Contracts including carriage Contracts not including carriage

1 Contract specifies the place: Risk passes to the buyer when they take over
the goods, or, when the goods are placed at their
Risk passes when goods are given to the disposal and they commit breach by not accepting
carrier at that place. them. If they are placed at their disposal somewhere
2 Contract does not specify the place: other than the seller's place of business, the buyer
must be aware of it.
Risk passes when seller passes goods to
the first carrier.
If the goods do not conform to quality standards
and the buyer is not aware until after risk has
In either case risk does not pass unless goods
passed to them, the seller will still be liable for the
are clearly identified to the contract.
lack of conformity.
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Notes
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6: Transportation documents and means of

payment
Topic List We look at the practical issues of transportation and

payment in this chapter.
Documents of transfer are very important when goods
Bills of lading are being shipped from seller to buyer. We shall look, in
Payment by bank transfer particular, at the bill of lading.
Payment by bill of exchange We shall also look at making payments internationally,
which is more complex than making payments
Letters of credit/comfort
domestically. We consider bank transfers, bills of
exchange and letters of credit.
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Bills of Payment by Payment by Letters of
lading bank transfer bill of exchange credit/comfort
Goods are usually transported bill of lading

from buyer to seller by a third party Shipper
(the carrier). Often, in practice, the Seller (delivery Buyer
picture is complicated by the fact agent) Carrier
that delivery can be subcontracted,
giving this situation transfer of goods
Bill of lading A bill of lading does three things:

 Provides evidence that the carrier received the goods
A document issued by the actual  Provides evidence of the contract of carriage
carrier of the goods to the person  Can be a document of title to goods
(shipper) with whom they have a
contract to transport the goods.
The bill of lading is therefore important in ascertaining when risk
passed to the buyer (remember, according to the model law, this
is when the goods are passed to the first carrier).
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Bank transfers UNCITRAL Model Law on International Credit Transfers

Where a buyer instructs
their bank to transfer
(UN, 1994)
money to a receiving bank, Regulates credit transfers when sending and receiving bank are in different states:
where it is credited to the Article 1. It is not a mandatory law.
seller.
Credit transfers
Advantage
The series of operations made to place funds or beneficiary disposals.
 Straightforward to
arrange and carry out Payment order (PO) incorporates information by a sender via their bank to a
(electronically) receiving bank in another country to place a fixed or determinable amount of money at
Disadvantage the beneficiary's disposal at the beneficiary bank.
 Does not have to be Sender's Receiving Beneficiary's
arranged in person, Sender Beneficiary
bank bank bank
therefore scope for
frauds Country A Country B
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Obligations of parties to potential credit transfer:

Sender (including sender's bank) Receiving bank
To pay the receiving bank. To execute the sender's payment order that it 'accepts'
The model law also sets out the parties' obligations and to issue a payment that will properly implement
when something goes wrong, such as: the payment order received.
 Execution of an unauthorised payment order Beneficiary's bank
 Actions relating to a defective payment order To place the funds at the disposal of the beneficiary.
 Delay in payment
 Non-completion of a credit transfer
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Bills of exchange UN Convention on International Bills of Exchange

A written instrument containing an order and International Promissory Notes (UN, 1988)
for a bank to pay a definite sum to the Parties to the bill
payee, usually on demand. It is
international and covered by the  The payee, whom payment will be made (eg the seller)
convention if at least two of the drawer,  The drawer, who has instructed the payment (eg the buyer)
the bank or the payee specified within
 The drawee, who is instructed by the drawer to pay and who
in it are in different states.
is not liable until the payment is accepted
Advantages  The acceptor who accepts liability to pay (a bank)
 Convenient method of collection  A guarantor may also be a party, guaranteeing payment by
 Provides immediate finance/allows the drawee/acceptor
period of credit
Transferring an international bill by endorsement
 Acts as a receipt Instead of receiving payment, the payee may transfer the right to
 May be used to pursue legal action payment to somebody to whom they owe money (eg their own
 Payment may be guaranteed
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Letters of credit (LOC) Types of letters of credit

An arrangement between banks, buyers and sellers
 Confirmed: Bank will pay even if it is not reimbursed
to guarantee payment. Arrangement must be made
before the actual sale of goods takes place.  Unconfirmed: this is no guarantee of payment, but
LOC is authentic
Advantages and disadvantages  Revocable: buyer can amend or cancel LOC at any
time
 Irrevocable: cannot be amended without agreement
 Seller receives immediate payment of all
 Buyer has period of credit from bank  Standby: used in conjunction with other payment
 Essential with new, unknown customers methods, but only call in if those payment methods fail
 Revolving: used in a course of dealing between buyer
 Cumbersome administration and seller. LOC is always open
Letters of comfort  Transferable: allows payment to be transferred to
Given by parent company to a lender to a subsidiary. another person
Purports to support future of subsidiary, but is not  Back to back: first LOC from buyer to seller acts as
usually binding. security for LOC from seller to his supplier
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7: Agency law
Topic List Agency is an important area of the syllabus because it

contributes to your understanding of:
 Partnerships
Creation of agency  Promoters
 Directors' duties
Authority of the agent
Relations with third parties (3P)
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Creation Authority of Relations with
of agency the agent third parties (3P)
Agency
A relationship which exists between two legal Example
persons (principal and agent) in which the function P asks A to take P's shoes to be mended. P has
of the agent is to form a contract between the expressly asked A to be his agent for the purposes
principal and a third party. of making that contract with the shoe repairer.
Agency may be created by:
Agreement
 Express Types of agent
Agent is expressly appointed by the principal
Partners Promoters
(as in the example above)
Directors Factors
 Implied Auctioneers Commerical agents
Two persons imply such a relationship by their Brokers
conduct
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Ratification
A principal can ratify the actions of another to
create an agency relationship after the event. Agent of necessity
Where a person who, when
Principal must: faced with an emergency
situation, intervenes on behalf
 Exist when the contract is made of another.
 Have legal capacity at that time
 Ratify within a reasonable time
 Ratify the whole contract
Agency created:
Communicate ratification clearly
Estoppel by agreement without agreement
Where a principal holds out to a thrid party (3P) express ratification implied estoppel necessity
that a person is their agent, they are estopped
from denying the agent's authority. This is
agency by estoppel.
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The contract made by the agent is binding on the principal and the 3P only if the agent was acting within the
limits of their authority from the principal.
Types of authority Actual authority

A legal relationship between principal and agent
1 Express created by a consensual agreement to which they
Actual alone are parties.
2 Implied/usual Between the agent and principal, implied authority
(the usual authority of such an agent) can never
3 Ostensible exceed express authority (what is agreed between
them).
The agent can therefore have more authority than

Apparent/ostensible authority their actual authority as a result of what their
principal has represented to 3P.
The authority that a principal (not the agent) holds
The 3P must have relied on the representation,
out to a 3P that their agent has.
even if this is just by altering their position.
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Principal Agent
The principal is liable to the 3P for contracts An agent generally has no liability on the contract and is not
formed by an agent within their actual or entitled to enforce it.
ostensible authority.
Exceptions:
 Agent intended to take personal liability
 Usual business practice for agent to be liable
 Agent is contracting on his own behalf, not for a principal
An agent who exceeds their authority will have no liability

to the principal, but the agent will be liable to the third
party for breach of warranty of authority.
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Notes
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8: Partnerships
Topic List In this chapter we consider the concept of a partnership

and the important issue of partners' liability.
Limited Liability Partnerships (LLPs) are an important
Partnerships form of partnership for professionals such as
accountants.
Partners' liability
The material in this chapter is based on two key pieces
Limited liability partnerships of legislation:
 The Partnership Act 1890 (HMSO, 1890)
 The Limited Liability Partnership Act 2000
(TSO, 2000)
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Partnerships Partners' Limited
liability liability partnerships
The Partnership Act 1890 (HMSO, 1890)

A partnership is the relation which subsists between persons carrying on a business in common with a view of profit
Corporations can There must be at Includes every trade, Partners must be Partnership can
be partners least two partners occupation and 'joint proprietors' be loss-making
profession. Can be a – the test is one
single transaction of intention
Formation Termination
Partnerships can be very informal – in essence Unless the partnership agreement states otherwise,
they are formed when the parties agree to act in partnerships may terminate:
business together.  On death or bankruptcy of a partner
However, they can be put into place more formally  On agreement between the partners
with written partnership agreements, and the Passing of time
adoption of a firm name.
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The firm (all partners) liable

Partners' liability
Did the partner have actual authority? YES
Partners are liable for each
other's acts under the rules NO
of agency. The rules are Did the transaction relate to the firm's business? YES
summarised again to the
right in this context. NO
New partners: Liable for Would a partner in such a firm usually have authority to do this?
YES
debts incurred after they NO
became a partner only.
Did the other party know, or have reason to believe, that the
Retiring partners: 'partner' was not a partner? NO
Continue to be liable for YES
debts unless they have
Did the other party know or believe that the 'partner' was a partner? YES
given notice of retirement
to each creditor. NO
Individual 'partner' liable

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Limited Liability Partnership Act 2000 (TSO, 2000)

An 'LLP' is cross between a company and a partnership. Crucially, partners have limited liability, so LLPs are
more regulated than partnerships.
To be incorporated, the subscribers to the LLP must file the following details with the Registrar of Companies:
 The name of the LLP
 The location of its registered office (in England and Wales, or in Wales, or in Scotland) and its address
 The names and addresses of all LLP's members
 Who the designated members are (who take responsibility for the LLP's publicity requirements)
With regard to publicity, the LLP's designated members must:
 File certain notices with the Registrar
 Sign and file accounts
 Appoint auditors if appropriate
Every member-partner is treated as an agent of the partnership (just like a director of a company) and
therefore can bind the LLP by their actions.
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9: Corporations and legal personality
Topic List In this chapter it is important to get to grips with:

 The essential features of a company
 The distinction between companies and partnerships
Sole traders and legal identity
Understanding the features of a company will aid your
Company liability understanding of the rest of company law.
Types of company The Companies Act 2006 (TSO, 2006) and the Small
Veil of incorporation Business, Enterprise and Employment Act 2015 (TSO,
2015) apply to this chapter unless otherwise stated.
Distinction between companies
and partnerships
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Sole traders Company Types of Veil of Distinction between
and legal identity liability company incorporation companies and partnerships
Sole traders Companies

Sole traders own and run businesses which are not Companies are legal entities, separate from the
legally distinct from the owner. natural persons connected with them, for example,
their members.
Legal status of sole traders Corporate legal personality

 No formality The law recognises a company is a distinct legal
 Independence and self-accountability person.
 Personal supervision The company is liable for its debts and has its own
 All profits accrue to owner rights and obligations.
 Owner's wealth at risk
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Liability of a company and its members

Case box
Salomon v Salomon and Co Ltd 1897 Lee v Lee's Air Farming Ltd 1960
Key points to remember:

The Salomon case established that a company  The company is liable without limit for its
is a legal entity separate from its owners. own debts
The fact that a company is a separate legal  Members of the company do not have to pay
entity gives rise to many of its characteristics. the debts of the company if it fails
The most important characteristic is limited  Members will have to pay any money still
liability for the members of the company. owed from purchasing their shares, or under
a guarantee
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Limited Public
 Can be limited by shares/guarantee  May offer securities to the public

 Members' liability limited only (not  Minimum share capital £50,000
company's)  Minimum one member/two directors
 Name must end with plc
 Two types: private and public  Must have a trading certificate to trade
Private Unlimited
 May not offer securities to the public  Members have unlimited liability
 No minimum capital requirement  Can only ever be a private company
 Minimum one member/one director
 Name must end with word Limited/Ltd  Reduced disclosure and may purchase
shares from members easily
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Statutory examples of Case law examples of

lifting the veil lifting the veil
Case box
Liability for trading without a To prevent evasion of: Gilford Motor Co Ltd v Horne 1933
trading certificate (public)  Legal obligations
Re H and Others 1996
Fraudulent and wrongful  Liability
trading  Taxation Unit Construction Co Ltd v Bullock 1960
Disqualified directors Public interest Re F G Films Ltd 1953
Abuse of company names Quasi-partnership Ebrahimi v Westbourne Galleries Ltd
1973
Groups (agent, single
economic entity, façade) Adams v Cape Industries plc 1990
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Distinction between companies and partnerships

Companies Partnerships
 Separate legal entity to members  No existence beyond members

 Members' liability usually limited  Partners' liability usually unlimited
 May have any number of members (at least one)  May be limited to 20 partners (not professional
 Perpetual succession practices), but at least two
 Members own transferable shares  Partnership dissolves when a partner leaves
 The company owns its assets  Partners cannot assign their interest
 Company must have at least one director (two for  Partners own assets jointly
a public company)  Every partner may participate in management
 Must have a written constitution  May have written partnership agreement (not required)
 Must usually file accounts with Registrar  Does not have to file accounts
 May offer security of a floating charge over assets  May not create a floating charge over assets
 Strict rules over repayment of capital  Partners may withdraw capital easily
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10: Company formation
Topic List In this chapter we consider how companies are formed

and how contracts made by those forming the company
are treated by the law.
Promoters and pre-incorporation It is important to understand the obligations of a
contracts company to file accounts and returns as well as to keep
Registration procedures and specific company registers.
commencement of business The Companies Act 2006 (TSO, 2006) and the Small
Statutory registers Business, Enterprise and Employment Act 2015 (TSO,
Accounts and returns
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Promoters and Registration procedures and Statutory Accounts and
pre-incorporation contracts commencement of business registers returns
A company promoter Pre-incorporation expenses cannot automatically be

recovered by a promoter, but once formed, the company
may agree reimbursement.
A person who undertakes to form a company for a specified
purpose and takes the necessary steps to create it. Those
who act solely in a professional capacity are not promoters.
A pre-incorporation contract
Duties of promoters A pre-incorporation contract is a contract purported to
be made by a company or its agent at a time before the
General duty of reasonable skill and care. company has received its certificate of incorporation.
Fiduciary duty to those people who are to own the
company (if different from themselves). This includes the
following duties of an agent: Liabilities of promoters
 Disclosure of interests
 Not to make a wrongful profit The company is not bound by pre-incorporation
 Avoidance of conflict of interests contracts.
Promoters are personally liable on pre-incorporation
Wrongful profits can be recovered; sometimes contracts contracts.
may be rescinded.
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Registration Memorandum
of association
The memorandum should be signed by the subscribers. Each
subscriber agrees to become a member and to subscribe for
procedures at least one share.
A company is formed when Articles of Articles are signed by the same subscriber(s), dated and
association (if not witnessed. Default model articles, relevant to the type of
the Registrar issues it a default model company formed, become the company's articles if no articles
certificate of incorporation. articles) are sent to the Registrar.
This states its name,
registered number, the Statement of The statement gives the particulars of the first director(s) and
liability of its members, and proposed officers secretary (if applicable). They must consent to act in this
whether it is public or private. capacity.
Statement of The statement that the requirements of the Companies Act in
compliance respect of registration have been complied with.
To obtain a certificate
of incorporation, Statement of capital A Statement of Capital and Initial Shareholdings must be
the promoters of a completed by all companies to be limited by shares.
company send the Registration fee A registration fee is payable on application.
Registrar:
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Off-the-shelf companies The alternative way of setting up a company is to buy a company which has
already been registered. This is called buying a company 'off the shelf'.
Advantages Disadvantages
 The application and the following documents are
 Directors may want to amend the articles
already filed:
(usually default model articles provided)
– Memo and articles – Fee
 May need to change the name
– Statements of proposed officers, compliance
and capital  Need to transfer subscriber shares
 No risk of liability arising on pre-incorporation
contracts
Commencement of business
Private company: may commence business from the date of incorporation as stated on the certificate of
incorporation.
Public company: must obtain a trading certificate from the Registrar before it is allowed to trade.
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The key source of information on a UK company

is its file at Companies' House. Statutory registers
Register
Companies are also required by law to keep a
number of registers, records and returns. Register of members
They must be kept at the company's registered
Register of people with significant control (PSC)
office or another registered place known as a Register of directors and secretaries
Single Alternative Inspection Location (SAIL). Register of directors' residential addresses
Private companies are permitted to file their Record of directors' service contracts and indemnities
registers of members, directors and secretaries, Records of resolutions and meetings of the company
people with significant control and directors'
Register of debentureholders
residential addresses at Companies House
instead of a registered office or SAIL. Register of disclosed interests in shares (public
company ONLY)
The register of directors' residential addresses is not available to the public.

In the register of directors a director may provide a service address instead of their residential address.
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Annual accounts Accounting records

The directors must for each accounting period: The directors are required to keep accounting
records which show the company's financial
 Prepare a balance sheet and profit and loss
position at any given time. They should include:
account giving a true and fair view
 Daily entries of sums paid and received
 Lay those accounts and a directors' report
before the general meeting of shareholders  A record of assets and liabilities
(public companies only)  Statements of stock held at the end of each
 Deliver a copy of those accounts (often in financial year
abbreviated form) to the Registrar to be put on  Statements of stocktaking to back up the above
the company's file  Statements of goods bought and sold (except
retail sales)
Confirmation statement
The company must send a return to the Registrar
annually confirming details of, for example,
directors, secretary and shares.
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11: Constitution of a company
Topic List Under the Companies Act 2006, a company's constitution

comprises its articles of association as amended by any
resolutions or agreements that it makes.
A company's constitution A company's objects describe the activities it may take
Company objects and capacity part in. For most companies they are unlimited but in
some companies they may be restricted. It is important
The constitution as a contract to understand the implications of breaching the objects.
Company name The Companies Act 2006 (TSO, 2006) and the Small
Business, Enterprise and Employment Act 2015 (TSO,
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A company's Company objects The constitution Company name
constitution and capacity as a contract
The Memorandum of Association

Content of articles
The historic document which states that the
founders (the subscribers) wish to form a  Appointment and  Dividends
company and agree to become a member, dismissal of directors
taking at least one share each.  Communication with
 Powers, responsibilities members
and liabilities of
The Articles of Association directors
 Class meetings
 Issue of shares
The articles provide the basis of a company's  Directors' meetings
constitution. They define the rules and  Transfer of shares
 Administering general
regulations governing the management of meetings  Documents and
the affairs of the company, the rights of the records
members and the powers of the directors. Members' rights
 Company secretary
A company may adopt all or part of the relevant statutory model articles. These contain all the items mentioned here.
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Model Articles Restrictions on alteration

Where a company fails to register articles, it will be automatically
given default model articles relevant to the type of company  Alterations may not conflict with the Companies
formed. Act
Companies may also choose to adopt model articles and amend  Members may not be compelled to subscribe for
them if they wish by special resolution. additional shares or to accept increased liability
for shares already held
Alterability  Certain alterations require the correct rights
The articles may be amended by a special resolution or a variation procedure to have been followed
written resolution with a 75% majority. However, alterability  Alterations cannot remove rights already
can be reduced by: acquired by performing a contract
Providing members with additional notes so they can
1 block an alteration.
 A person whose contract is contained in the
articles cannot prevent it from being altered
Requiring a particular member to be present for a quorum
2 to exist. The member may prevent the meeting from being
 All alterations are void if the majority who
approve them are not acting bona fide in the
held by absenting themselves.
interest of the company as a whole.
'Entrenching' provisions in the articles. This means
3 specific articles can only be amended or removed if
certain conditions (that are more restrictive than a special
resolution) are met. Provisions cannot be drafted so they
can never be altered.
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Company objects Ultra vires

Where a company acts in contravention of any restrictions placed on the objects,
Historically, a company's the actions are deemed ultra vires.
objects clause stated the
activities which a company
intends to follow. Statutory third party protection re ultra vires
Under the Companies Sections 39 and 40 of the Companies Act 2006 give security to commercial
Act 2006 a company has transactions for third parties, so they can enforce an ultra vires contract.
unrestricted objects. This
means it can carry out any Where a third party deals with a company in good faith, but the contract is ultra vires
lawful activity. for the company, the company cannot argue that the third party should have known
that the contract was ultra vires. Third parties are not required to enquire whether or
Companies may pass a not the objects are restricted and can enforce the contract in such circumstances.
special resolution (75% The ultra vires rule still works internally between the company and its members. Ultra
majority) to introduce vires transactions with a director, or in connection with a director, are voidable at the
restrictions into a company's instance of the company. Such people are deemed to know they are ultra vires.
objects.
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The constitution as a contract

Members to company/company to members Case box
The articles bind members to the company. Hickman v Kent or Romney
Marsh Sheepbreeders
 In their capacity as members Association 1915
 Not in any other capacity (eg member is company
solicitor) Eley v Positive Government
Security Life Assurance Co
Members to members 1876
The articles bind the members to each other. Rayfield v Hands 1958
Supplement to other contracts
If any outsider makes a separate contract with the
company which is silent on a point covered in the
articles, the articles can form part of the contract on
that specific point.
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Statutory rules on company names Passing off

A company which believes its rights have been
 Must end Ltd (limited) or plc (public limited infringed may apply for an injunction to restrain
company) where relevant another from using a name.
 May not have same name as another company If it causes confusion in the eyes of
on the register (incidental words are ignored) consumers
 May not be 'offensive', 'sensitive' or criminal  Unless businesses are different
 Or exclusive word has general use
 Official approval is required for words which
suggest an official connection
 May omit 'Ltd' if it is a private company limited
Case box
by shares or guarantee licensed before Ewing v Buttercup Margarine Co Ltd 1917
25/02/82 whose objects are to promote
commerce, art, science, education, religion or A company can also appeal to the Company
charity and assets are spent promoting them Names Adjudicators under the Companies Act
2006.
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12: Share capital
Topic List It is vital that you master the different types of share, and
the characteristics/implications of a share as opposed
to a debenture. The key issue is that a shareholder is a
Shares and capital member of the company, rather than a creditor.
Class rights The Companies Act 2006 (TSO, 2006) and the Small
Issuing shares 2015) apply to this chapter unless otherwise stated.
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Shares and Class rights Issuing
capital shares
Share capital
A share is the interest of a shareholder in the company measured by a sum of money, for the purposes of
a 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.
 It must be paid for (liability)
 It gives entitlement to dividends and return of capital (interest)
 It is a bargain with other shareholders (mutual covenants)
The term capital is used in several senses in company legislation.
Loan capital Issued and allotted share capital Called/paid up share capital
Loan capital consists Issued share capital is the type, Called up share capital is the amount
of debentures or other class, number and amount of shares which the company has required
long-term loans. issued and allotted to specific shareholders to pay on the shares issued.
shareholders. Paid up share capital is the amount which
shareholders have actually paid on the
shares issued and called-up.
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Equity share capital Preference shares

Equity share capital is a company's issued share Preference shares carry a fixed rate of dividend,
capital less capital which carries preferential rights. paid in priority to any other dividend.
Equity share capital normally comprises ordinary
shares. Rights of preference shareholders
 The right to a dividend is usually cumulative, and

does not mean the dividend must be paid annually
Ordinary shares  In liquidation, holders are usually entitled to unpaid
dividend arrears
Ordinary shares entitle the holder to a company's  There is no entitlement to participate in dividends
remaining divisible profits and assets after prior above the fixed rate
investors (creditors and preference shareholders)
have been paid in a liquidation.
Treasury shares
Redeemable shares These are created when a company legitimately
Redeemable shares are shares issued by the purchases its own shares for cash or out of
company that it is entitled to re-purchase at a later distributable profit. The company can re-issue these
date. shares without the usual formalities.
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capital shares
Companies have discretion to issue shares which have special rights attached to them. For example regarding
dividends, return of capital in winding up, voting and appointment of directors.
Variation of class rights Minority rights

Variation of class rights involves an alteration A minority of holders of the class of share may appeal to
of the position of shareholders with regard to the court about a variation if they:
those benefits or duties which they have by  Together hold > 15% of relevant shares
virtue of their shares.  Have not consented to the variation
Such a variation can only be made by the  Apply to the court within 21 days
consent of: In order to be successful, the minority have to show that
 The holders of the shares the majority was seeking advantage as a different class.
 A majority specified in the articles
When variation rights do not apply
The standard procedure for a variation of class
 Issuing shares in the class to others
rights is a special resolution (75% majority)
 Subdividing other classes of shares
cast at a separate meeting of the holders or by
 Returning capital to preference shareholders
written consent.
 Creating/issuing new forms of preference share
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capital shares
Directors' power to allot

Public companies and private companies with > 1 class of share:
Power given by members or general authority to allot.
Private companies with one class of share:
Directors have authority to allot unless restricted by the articles.
Value of shares Shares have a nominal value and must not be issued at a discount to that value.
They can be issued at a premium to the nominal value.
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capital shares
Pre-emption rights Rights issues

Pre-emption rights are the rights of existing A rights issue is a right given to shareholders to
shareholders to be offered any new issues of subscribe for further shares in the company, usually
ordinary shares pro rata to their existing holding. pro rata to their existing shareholding.
There is generally a statutory duty for companies to

offer new issues of shares to existing shareholders
Bonus issues
first, in proportion to their current holdings. This
A bonus issue is the capitalisation of the reserves
means that their voting power does not become
of a company by the issue of additional shares
diluted by the issue.
to existing shareholders in proportion to their
A private company may permanently exclude shareholdings – usually fully paid up.
pre-emption rights in its articles. Any company
may disapply pre-emption rights by special
resolution (75% majority) for individual issues.
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Issuing shares at premium

Shares may be issued at a premium to their nominal value but never at a discount.
Consideration for shares

At least the nominal value of the shares, plus the whole of any premium, must be
obtained in money or money's worth (cash or non-cash).
Share premium account

When shares are issued at a premium, the premium is accounted for in the share
premium account. Uses of share premium account:
 To create fully paid shares under a bonus issue
 To pay issue costs and commission in respect of a new share issue
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Notes
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13: Loan capital
Topic List The topics in this chapter are prime examination topics.
You could be asked to identify the differences between
shares and debentures, or fixed and floating charges. It
Borrowing and loan capital is therefore an important chapter to get to grips with and
to practise questions on.
Charges
The Companies Act 2006 (TSO, 2006) and the Small
Debentureholders' remedies Business, Enterprise and Employment Act 2015 (TSO,
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Borrowing and Charges Debentureholders'
loan capital remedies
All companies formed under the Companies Act 2006 have implied borrowing powers for purposes incidental to the
trade or business. There is usually a maximum borrowing power given to directors contained in the articles. Even if
the directors breach this power the lender still has rights to enforce it.
Loan capital Debentures

All long-term borrowing: Written acknowledgments of debt by a company,
 Permanent overdrafts usually referring to interest/terms of repayment. May be
 Secured and unsecured loans secured on company assets.
Debenture trust deed Advantages of debenture trust deed
 Trustee appointed for prospective holders of The key advantage is that a body of debenture stock
debenture stock holders are represented by one trustee.
 Nominal amount and repayment details defined  Trustee intervenes in default
 Company enters covenants, eg about secured  Trustee can consult all holders and seek agreement
assets  Security can be legal mortgage
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Rights of debentureholders
Although both own transferable company securities, it is helpful to contrast the rights of debentureholders with
those of shareholders.
Factor Shareholder Debentureholder

Role Is a proprietor or owner of the company Is a creditor of the company
Voting rights May vote at general meetings May not vote
Cost of investment Shares may not be issued at a discount Debentures may be offered at a discount
Dividends only paid from distributable
Return Interest must be paid when it is due
profits when directors declare them
Statutory restrictions on redeeming
Redemption No restriction on redeeming debentures
shares
Shareholders are the last people to be Debentures must be paid back before
Liquidation
paid in a winding up shares
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Advantages of debentures Disadvantages of debentures
 Easily traded  May have to pay high interest rates to make

 Terms clear and specific them attractive
 Interest payments mandatory
 Assets under a floating charge may be traded
 Interest payments to debentureholders may
 Popular due to guaranteed income
upset shareholders if dividends fall
 Interest tax-deductible by company  Debentureholders' remedies of appointing
 No restrictions on issue or redemption by a liquidators or receivers may be disastrous for
company the company
 Crystallisation of a floating charge can cause
trading difficulties for a company
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Charges Fixed charges

A charge is security over company assets which is given A fixed charge is given to secured creditors relating
to a lender. It is often given in the form of a legal mortgage to specific assets of the company. It gives the
and gives the lender rights over the assets. Charges holder the right of enforcement against that specific
must be registered to be valid. However, the debt is still asset. It ranks first in order of priority in liquidation.
valid even if the charge is not registered.
Floating charge Priority of charges

A floating charge is given on a  Fixed and floating charges must be registered within 21 days of creation
class of assets which changes to be valid and enforceable
all the time due to its nature (eg  Fixed charges always rank ahead of floating charges regardless of date
stock). The assets may be used of creation unless the fixed charge holder had notice of the floating
in the course of business until the charge when the fixed charge was created
holder enforces the charge.  Fixed charges on the same asset rank according to date of creation
 Floating charges on the same asset rank according to date of creation
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Floating charges crystallise (become fixed) in certain Principal disadvantages of a floating

situations: charge
 Liquidation of the company/cessation of the business
 Active intervention of the chargees (eg appointing a  Until crystallisation, assets making up the security
are uncertain
receiver)
 If the charge provides, at the time when the provision
 Chargeholder is less important than other creditors
states  May become invalid if liquidation arises within
 A different charge crystallises, leading to liquidation/ 12 months (this period is only six months with a
fixed charge.)
cessation
Unsecured debentureholders Secured debentureholders rights
rights
 Seize legally charged asset
 Sue the company/seize property
 Sell that asset (if there is a deed)
 Petition for compulsory liquidation
 Appoint a receiver of the asset (provided there is
 Apply for administration order as a temporary no administrator)
reprieve to rescue the company
 Appoint an administrator (floating chargeholders)
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14: Capital maintenance and dividend law
Reduction of share capital and dividend law are probably

Topic List the most complicated areas of the syllabus, but there are
some straightforward rules which you can apply.
Remember that in most issues relating to capital
Reduction of share capital
maintenance, the rules are designed for the protection of
Dividends creditors and members.
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Reduction of Dividends
share capital
Capital maintenance: Companies should not make payments out of capital because this threatens creditors.
Basic principle on capital maintenance: Limited companies should not be allowed to make payments out of capital.
Exception to basic principle: Reducing share capital (not restricted in articles, special resolution, court approval).
Method What happens Effects
Extinguish or reduce liability on Eg Company has nominal value $1 shares 75c paid Company gives up claim
partly paid shares. up. Either (a) reduce nominal value to 75c; or (b) for amount not paid up (no
reduce nominal value to figure between 75c and $1. return to shareholders).
Pay off part of paid-up share Eg Company reduces nominal value of fully paid Assets of company are
capital out of surplus assets. shares from $1 to 70c and repays this amount to reduced (by 30c in $).
shareholders.
Cancel paid-up share capital Eg Company has $1 nominal fully paid shares but net Company can resume
which has been lost or assets only worth 50c per share. Difference = debit payments out of future
no longer represented by balance on reserves. Company reduces nominal value profits without having to
available assets. to 50c, and applies amount to write off debit balance. make good past losses.
The reduction must be approved by the court, whom must protect the interests of creditors. Private companies may
avoid going to court by issuing a solvency statement.
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Reduction of Dividends
share capital
Dividends, profits and reserves

Dividends represent a debt of the company once
they are declared and due for payment.
A dividend is an amount payable to shareholders
from profits or other distributable reserves.
Distributable reserves are accumulated realised

profits less accumulated realised losses.
Undistributable reserves are: share premium

account, capital redemption reserve, revaluation
reserve, and any other reserve made
undistributable by law or the company’s
constitution.
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Notes
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15: Company directors

Directors run the company as its agents. They are officers of the
Topic List company and may be executive or non-executives. Normally one
director acts as Managing Director.
The powers of directors can seem a difficult area. Remember the
The role of directors following three key things:
Appointment of directors  Directors' powers are usually set by the articles
Vacation of office  Members have some control through their appointment/
removal of directors and by changing the articles
Powers of directors  Directors are agents of the company. Third parties have
Duties of directors protection when dealing with them
Directors have duties as agents of the company. They also have
duties under various statutory provisions.
The Companies Act 2006 (TSO, 2006) and the Small Business,
Enterprise and Employment Act 2015 (TSO, 2015) apply to this
VL2020 chapter unless otherwise stated.
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The role Appointment Vacation Powers Duties
of directors of directors of office of directors of directors
Director De jure director

A person who is responsible for the overall direction A person who is expressly appointed by the
of the company's affairs. All companies must have company as a director.
at least one. Public companies need two. A director
is an officer of the company. At least one director
must be a natural person. De facto director
A person who is held out by a company to be a
Shadow director director and who performs the functions of a
director although they have not been validly
A person whose instructions the other directors are appointed as such.
accustomed to follow. This rule is in place to prevent
a person from not taking up appointment as a
director, but using their position (say as major De facto/non-executive/shadow directors still owe
shareholder) to manipulate the board of directors. statutory and fiduciary directors' duties.
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Executive director Non-executive director

Executive directors perform specific roles in a A non-executive director does not usually have a
company under service contracts requiring regular management function other than attending board
involvement in management. meetings.
Board of Directors Chief Executive Officer/Managing Director

The elected representative of the shareholders One of the directors of the company appointed to
acting collectively in the management of a carry out overall day to day management functions.
company's affairs. The CEO/MD has wider apparent authority than
other directors.
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Methods of appointment Publicity

A company's first directors are appointed as part of its Companies must give 14 days' notice to the
formation via the statement of proposed officers. Registrar of changes in directors.
Thereafter, appointment of directors is as the articles The directors must keep the register of directors
provide (election of directors in general meeting, or and secretary (which can be inspected by any
co-option by directors). member of the public) at the registered office.
Rotation Remuneration of directors

Model articles provide for rotation of directors of PLCs: Fees
 At the first AGM, all the directors shall retire Reasonable expenses
 Any directors appointed by the other directors Usually have written service contracts – open to
since the last AGM shall retire members' inspection. May receive contractual or
non-contractual (approved by members)
 Directors who were not appointed or re-elected at compensation for loss of office
one of the two preceeding AGMs shall retire
Directors' remuneration report published in annual
All directors selected for retirement by rotation can still
offer themselves for re-election. report to members of quoted companies
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Vacation of office Grounds under articles

A director may be
removed from office The articles may provide that a director is
 Resignation disqualified if they become bankrupt,
by an ordinary
 Not offering to be re-elected resolution (special resign in writing, or at the resolve of other
 Death notice). directors if they are absent from board
 Dissolution of the company meetings for three months.
 Disqualification Disqualification may also be under
 Removal from office statute.
This important member power given by s168 CA 2006 is restricted by three limitations:
 To propose a removal resolution, the members must call a meeting and so must hold 10% of the
paid up share capital or voting rights
 Once a meeting has been convened, 100 members with an average of £100 share capital may
request the resolution (this is true of any resolution not just the removal of a director)
 If the director is a member, they may have weighted voting rights to prevent removal
 A member director may also be protected by class rights attaching to their shares
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Disqualification of directors under statute Compulsory grounds for disqualification

The court must make an order where a person has
Under the Company Directors Disqualification Act 1986 been a director of a company which has become
(HMSO, 1986) the court may make an order for insolvent, and where their conduct makes them unfit
disqualification. to be a director. The length of disqualification
Potential grounds for disqualification period is generally at the discretion of the court
(minimum disqualification: two years).
 Person convicted of an indictable offence connected Mitigating factors
with a company Lack of dishonesty, loss of own money in the
 Person in persistent default in relation to the transaction, absence of personal gain, efforts to
provisions of company law mitigate the situation, likelihood of re-offending,
proceedings taking a long time.
 Person has been guilty of fraudulent trading
 After investigation, the Secretary of State believes it
to be in the public interest
Examples
Directors have been disqualified for: insider dealing,
 Director has been involved in competition violations failing to keep proper accounting records, failing
 Director of an insolvent company has participated in to read the accounts, irregularities connected with
wrongful trading lending the company's money.
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The directors' powers are Statutory restrictions on directors' powers

defined by the articles of
Many transactions (eg altering the articles) can only be effected by a decision of
association.
the company in general meeting, often via a special resolution (75% majority).
Members' control of directors

Model articles state that Members have control over the board of directors by retaining the power to
the directors are usually remove directors under s168, and by having the power to change the articles by
authorised to: special resolution. Directors can also be members, but they don't have to be.
'Manage the business of
the company' Restriction on directors' powers in the articles
The articles can contain restrictions, eg, a maximum amount that the directors
and
can borrow without the consent of the members in general meeting.
'Exercise all the powers of
Directors must exercise their powers:
the company for any
purpose connected with the  In the interests of the company
company's business'.  For a proper purpose (the purpose for which the power was given)
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CEO/MD's powers Case box

The CEO/MD is an agent of the company. Therefore these  Freeman & Lockyer v Buckhurst Park
rules apply: Properties (Mangal) Ltd 1964
Actual authority What the board has given them
Apparent authority To make business contracts for the Conditions to claim holding
company. (No other director has this out
Holding out general apparent authority) 1 Representation was made to the
claimant that the director had authority
Under the rules of apparent authority, if the board allows a to make such a contract
director to hold themselves out as being a CEO/MD and takes
2 The person who made the
no steps to correct that impression, that director will have the representation had actual authority to
authority of a CEO/MD outlined above. manage the business
Other working directors 3 Claimant was induced by the
representation
Only have the specific apparent authority as agents which 4 The constitution would not restrict the
attaches to their management position. board giving such authority
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Fiduciary duty
A duty imposed upon certain persons Statutory duties of directors
because of the position of trust and
confidence in which they stand in relation Under the Companies Act 2006 directors have seven
to each other. Directors are said to hold statutory duties to the company:
a fiduciary position because they act as  Act within powers (s171)
agents of the company.
 Promote the success of the company (s172)
 Exercise independent judgement (s173)
 Exercise reasonable skill, care and diligence (s174)
 Avoid conflicts of interest (s175)
 Not to accept benefits from third parties (s176)
 Declare an interest in a proposed transaction or
arrangement (s177)
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Remedies for breach of duty

Action may be taken by shareholders. Where directors have breached a duty, the company may
authorise or ratify the act.
Director may have to: This can be done by:
 Account to company for personal gain  Provision in the articles
 Indemnify the company  Passing a resolution
Company might be able to: This right is restricted if the directors, who are also
 Rescind the contract members, defraud the company and then ratify their acts
 Have the courts declare it ultra vires in general meeting. It may also be restricted if the directors'
and therefore unlawful acts altered the share balance to allow subsequent
ratification.
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Duty of care (s174) Directors' personal liability for

Directors should show the objective degree of skill as
could reasonably be expected from a competent
company debts
person in that role, or a higher personal degree of skill May arise from:
if the director has particular expertise.  Lifting the veil
 A provision in the constitution
 A special resolution
 Some insolvency situations
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Notes
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16: Other company officers
Topic List You may face questions on company secretaries and

auditors in your exam. In both cases you should learn
about their appointment and duties. The removal of an
auditor is also important.
Company secretary
Company auditor
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Company Company
secretary auditor
Company Secretary Qualification

 Employment as a plc's secretary for three/five
Every public company must have a company secretary years preceding appointment
with requisite skill and knowledge. Private companies
are not required to have a company secretary.  Membership of one of a list of qualifying
bodies, such as the ACCA
Responsibility for:  Qualification as a solicitor or barrister in the
UK
 Statutory registers and returns  Employment in a position, or membership of
 Organising board and general meetings a professional body that, in the opinion of the
directors, appears to qualify that person to act
as company secretary
Company secretaries have ostensible authority to
enter the company into contracts connected with the A sole director of a private company cannot also
administration of the company: be the company secretary, but a company can
have two or more joint secretaries. A corporation
Panorama Developments (Guildford) Ltd v can fulfil the role of company secretary.
Fidelis Furnishing Fabrics Ltd 1971
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Company Company
secretary auditor
Auditor Appointment Termination of office

Every company which is Removal by ordinary resolution with special
A person independent of the not exempt must have an notice. Auditor's rights:
company. They are not permitted auditor.
to be a company officer by law Submit a statement of circumstances
and by the rules of their Appointment is made by: surrounding their removal
recognised supervisory body.  Written statement to members
 Shareholders
(normally)  Speak at general meeting
 Directors Resignation in writing to registered office
 Secretary of State Circulate a written statement to members
 Requisition a general meeting
 Speak at general meeting
Not seeking re-election
A written statement of circumstances is
always required when auditors leave.
The auditor has the right to obtain explanations from officers of the company and the duty to report on the truth
and fairness of the accounts.
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Notes
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17: Company meetings and resolutions
Topic List The legal details regarding meetings can seem

confusing. Therefore, focus on the key issues which you
must know:
Types of meeting  The distinction between types of meeting
Types of resolution  The types of resolution that can be passed
Convening/quorum/proxies/ The Companies Act 2006 (TSO, 2006) and the Small
procedures Business, Enterprise and Employment Act 2015 (TSO,
VL2020
AC04I(PC)FEB19.indb 107 1/20/2020 9:55:18 PM

Types of Types of Convening/quorum/
meeting resolution proxies/procedures
The importance of meetings Annual general meeting (AGM)

The company is managed by directors. Statutorily protected general meeting held annually
by public companies, called by the directors.
However, decisions which affect the existence,
structure and scope of the company are reserved
to the members in general meeting.
General meeting
Members can, to an extent, exercise control over General meetings which can be called in response
directors in general meeting. They can: to a need arising by either a members' requisition or
 Remove them (ordinary resolution) by the directors.
 Approve their behaviour, eg to
– Exceed their power given in the articles
– Allot shares
– Make contracts where they have a personal
interest
– Grant a long term service agreement
AC04I(PC)FEB19.indb 108 1/20/2020 9:55:18 PM


Members holding 5% of the voting rights or of at least 100 in number with an average of £100 paid up capital may
requisition a resolution to be considered at an AGM or general meeting, at least six weeks in advance.
Requires simple (50%+) majority of The texts of special resolutions

Ordinary must be set out in full in the
votes cast
Members may (all companies) notice convening the meeting.
14 days' notice
circulate a All special resolutions must be
statement of delivered to the Registrar for filing.
<1,000 words Special Requires 75% majority of votes cast
(all companies) 14 days' notice It is rare that ordinary resolutions
to accompany are filed.
the notice.
Used for all resolutions (ordinary and When special notice is required
Written
special) except those needing special for an ordinary resolution (eg for
(private
notice (director's and auditor's a member to remove a director/
companies)
removal) auditor) the member must give the
company 28 days notice, and the
Requires a 50% majority Members holding 5% of the voting rights may
company must give all members
for ordinary business request a written resolution and circulate a
21 days notice.
and a 75% majority for statement of <1,000 words to accompany the notice
special business. which must be sent to all members within 21 days.
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Rules concerning calling a meeting

AGM (public companies General meetings
only)
The directors may call a general meeting whenever they see fit, giving
Timing 14 clear days notice.
 Must be held each year The following rules apply for members requisitioning a general
 Within six months of year-end meeting.
Notice Shareholding of requisitioners
 In writing or as articles prescribe  Must represent 5% of the paid up share capital or voting rights
 At least 21 days notice Requisition by members
 Notice must specify it is an AGM
Business  Must provide a statement of the general business to be conducted
 Must provide a text of the proposed resolution
 Declaration of dividends
 Election of directors Date of requisitioned meeting
 Appointment of auditors  Notice for a meeting must be sent within 21 days of requisition
 Meeting within 28 days of notice
AC04I(PC)FEB19.indb 110 1/20/2020 9:55:18 PM

Convening Quorum
 Called by a competent person  One person cannot generally be a meeting

 Clear notice given to members  An exception to this is for single member private
 Notice must be sent to all entitled to receive it companies
 Notice must contain certain facts  The articles usually fix a quorum for meetings
 Notice may be sent electronically (email and Procedures
website)
 Chairman must preside
 Show of hands vote means all present get one vote
 Poll vote means votes are weighted in relation to
Proxies
shareholding
 Any member can appoint a proxy  Minutes must be kept
 The proxy does not have to be a member  The assent principle allows a unanimous decision
 Proxy may vote, speak and demand a poll to stand
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Notes
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18: Insolvency and administration
Topic List Once you have understood that there are two main types
of liquidation (compulsory and voluntary) and two types
of voluntary liquidation (members' and creditors') it
should be straightforward to learn the features of each of
Liquidation
them.
Compulsory liquidation
Company administration is also important in this
Voluntary liquidation syllabus.
Compulsory & voluntary liquidation The Insolvency Act 1986 (HMSO, 1986) applies to this
Administration chapter unless otherwise stated.
VL2020
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Liquidation Compulsory Voluntary Compulsory & voluntary Administration
liquidation liquidation liquidation
Liquidation
A company is dissolved and its affairs wound up (hence it is sometimes referred to as winding up). The assets
are realised, debts are paid from the proceeds and any surplus amounts are paid to members.
There are two main types of liquidation (compulsory and voluntary). When a company is liquidated, a liquidator
must be appointed.
A liquidator must be an authorised insolvency practitioner. A company does not
They have a statutory duty to report directors of an BUT have to be insolvent
insolvent company if they are considered unfit to be to be liquidated.
involved in management.
Once a company enters liquidation:

 No share dealings
 Communications must state the company is in liquidation
 Director's power to manage ceases
AC04I(PC)FEB19.indb 114 1/20/2020 9:55:18 PM


Compulsory liquidation When the court approves the order:

Various parties may apply to the court for a company to be  Official receiver is the liquidator
wound up. Key reasons:  Liquidation from date petition presented
 Company is unable to pay its debts (creditors)  Subsequent sale of assets void
 It is just and equitable to wind up the company (members)  Legal proceedings halted
 A public limited company has traded without a trading  Employees dismissed
certificate > one year  Floating charges crystallise
 It is in the public interest to wind up the company The liquidation is deemed to have started
when the order was first applied for. The
Company cannot pay debts official receiver holds meetings with the
A creditor can show a company is unable to pay its debts in creditors and contributories (members) who
three situations: can appoint their own liquidator. Creditors'
choice takes priority. The official receiver
 A written demand is served for £750 at the registered office
must investigate the affairs of the company
and the debt is still unpaid within 21 days
and may report to the court, seeking a public
 There are no assets against which to enforce payment examination of those responsible. They may
 The creditor proves to the court that the company is unable apply to the Registrar for early dissolution if
to pay its debts. assets do not cover their expenses.
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Just and equitable compulsory liquidation

A member who is dissatisfied with
the directors/controlling shareholders
Case box Examples of orders made
can petition for a just and equitable Re German Date  Main purpose of company has gone
winding up of the company. Coffee Co 1882
 Company formed for illegal purposes
The petitioner must show that no Re Yenidje Tobacco
other remedy is acceptable. Co Ltd 1916  Complete management deadlock
Winding up an otherwise healthy  Understandings between members/
Ebrahimi v
company is a big step, so incidences directors unfairly breached by lawful
Westbourne Galleries
of this are rare. action
Ltd 1973
Order of payments on liquidation
1 Costs of liquidation 4 Unsecured creditors
2 Preferential debts (employee pay) 5 Deferred debts (dividends and interest)
3 Floating charges (subject to prescribed part) 6 Distribution to members
AC04I(PC)FEB19.indb 116 1/20/2020 9:55:18 PM


Members' voluntary liquidation Creditors' voluntary liquidation

The company is solvent but the members decide to The company is insolvent and the members agree
liquidate anyway. to wind it up.
Mostly commonly achieved by passing a special Special resolution passed (75%).
resolution (75%). Meeting of members convened to resolve to wind
Directors must issue a declaration of solvency up, nominate a liquidator and form a liquidation
that debts can be paid up in full in a period < 12 committee.
months. Creditor approval of the nominated liquidator is
Creditors play no part in a members' winding up, as sought.
it is assumed the debts will be paid in full.
Making a declaration of solvency without reasonable grounds is a criminal offence.
VL2020
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Control Compulsory liquidations are controlled by the court, members' voluntary liquidations are
controlled by the members and creditors control a creditors' voluntary winding up.
Timing A voluntary winding up commences on the day the resolution to wind up is passed. It is not
retrospective. A compulsory winding up commences on the day the petition was presented to
the court.
Liquidator The official receiver plays no role in a voluntary winding up. The members or creditors select
the liquidator who is not an court officer.
Legal proceedings There is no automatic stay of legal proceedings against the company nor are previous
dispositions or seizure of its assets void in a voluntary winding up. However the liquidator has a
general right to apply to the court to make any order which the court can make in a compulsory
liquidation.
Management and staff In any liquidation the liquidator replaces the directors in the management of the company
(unless they decide to retain them). The employees are not automatically dismissed by
the commencement of voluntary liquidation. However, insolvent liquidation may amount to
repudiation of their contracts of employment (and provisions of the statutory employment
protection code apply).
AC04I(PC)FEB19.indb 118 1/20/2020 9:55:18 PM


Administration is a procedure under The Enterprise Act 2002 (TSO, 2002). It puts an insolvency practitioner in control of the
company with a defined programme for rescuing it from insolvency, as a going concern (it cannot already be in liquidation).
The administrator will seek to save the company, or to achieve a better result for creditors than immediate liquidation, or to
realise property for distribution to creditors.
Effect of administration Advantages of an administration
 A moratorium commences (no creditors may  The company is not dissolved
enforce debts against the company)
 It provides breathing space to attempt a rescue of the
 Items with charges may be sold (fixed
company
chargeholders to give permission)
 Past transactions of the company can be challenged
 The powers of management are subjugated to
the appointed administrator, who must act in the
 It allows creditors to continue to trade with the company
interests of all creditors if the rescue is successful
 Outstanding petitions for the winding up of the  Members continue to own shares in the company which
company are dismissed may be successful in the future
The court may be petitioned for an administration order by:

 The company (a 50% majority of members)  Creditors
The directors  The Magistrates' Court (for non-payment of
fines) NOT by individual members.
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Appointment of administrators without reference to the court

Certain parties can appoint an administrator without going to court.
Floating chargeholders Company/directors
May appoint an administrator if: May (depending on articles) appoint if:

 They have given two days' notice to holders  No administration/moratorium in last 12 months
of prior floating charges (unless they consent)  Company cannot pay debts
 The floating charge is enforceable  No petitions for winding up/administration have
After two days' notice, an appointing floating been made
chargeholder must file certain documents at the  No liquidator/administrative receiver/administrator
court making the appointment valid. already in office
The company/directors must give floating chargeholders
notice so that they may block appointment if they wish.
They then file the appropriate documents with the court
to make the appointment valid.
AC04I(PC)FEB19.indb 120 1/20/2020 9:55:18 PM

Administrator's duties Administrator's proposals
As soon as reasonably practicable after their  Must set out proposals to achieve the aim of
appointment, they must send notice of it to: administration or why they do not consider it
reasonable or practical that the company be
 The company
rescued
 Each creditor
 The Registrar (within seven days)  Must not affect the right of a secured creditor to
enforce their security, or result in preferential debt
They must also publish news of the appointment. losing priority to non-preferential debt, or to one
They must ensure all company documents preferential debt being paid proportionately less
publicise that it is 'in administration'. than another
They must consider the statements of affairs Must be provided if requested by the
submitted to them and set out proposals to administrator. It is in a prescribed form and
achieve the aims of administration. contains details of company property, debts
and liabilities, company creditors and security
given for debts.
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Administrator's powers End of administration

When:
To do anything necessarily expedient for the
 Administration has been successful
management of the affairs, business and property
of the company:  12 months have passed since appointment
 The administrator or a creditor applies to court to
 Remove/appoint directors
end the appointment
 Call meeting of creditors/members
 An improper motive of the applicant for applying
 Apply to the court for direction for administration is discovered
 Make payments to secured/preferential
creditors Interaction with other insolvency procedures
 Make payments to unsecured creditors (with  Prevents voluntary winding up application and
court permission) order for compulsory winding up
 Prevents appointment of administrative receivers
The administrator must call a meeting of creditors within ten weeks of appointment to approve the proposals.
AC04I(PC)FEB19.indb 122 1/20/2020 9:55:18 PM

19: Fraudulent and criminal behaviour
Topic List Crime, as we know, is conduct prohibited by the law.

Here we shall look at five aspects of financial crime;
insider dealing, market abuse, money laundering, bribery
Insider dealing and criminal activity relating to companies.
Market abuse
Money laundering
Bribery
Criminal activity relating to companies
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Insider dealing Market abuse Money Bribery Criminal activity
laundering relating to companies
Insider dealing Price-sensitive specific or precise information for

a particular company, likely to have a significant
The offence is dealing in securities while in
possession of inside information as an insider, effect on price if made public.
the securities being price-affected by the
information. Director, employee, shareholder; or obtained
through employment, office or profession; or
In the UK the rules on insider dealing are contained obtained from one of the above.
in the Criminal Justice Act 1993 (HMSO, 1993).
Problems with the law
'Dealing' in this context includes encouraging
someone else to purchase the shares whether on  Determining whether information is precise
behalf of the insider or not, with the reasonable enough to have been inside information
belief that the person would deal.  'Price-sensitive issue' limits the scope of the
Defences include not expecting a profit to be made, law to fundamental matters such as takeovers
having reasonable belief that the information was  The offence of 'market abuse' was introduced
public, acting despite the information. into the UK to deal with these deficiencies
AC04I(PC)FEB19.indb 124 1/20/2020 9:55:18 PM


The offence of market abuse under the Financial Services and Markets Act 2000 (TSO, 2000) complements
legislation covering insider dealing, by providing a civil law alternative.
Market abuse
Behaviour that satisfies one or more prescribed conditions that are regarded as a failure on the part of the
person concerned to observe the standard of behaviour reasonably expected of a person in their position in
relation to the market.
Examples
 Misuse of information
 Market distortion
 Manipulating transactions
 Recklessly manipulating devices
 Dissemination of information
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The rules on money laundering in the UK are

found mainly in the Proceeds of Crime Act 2002
Money laundering
(TSO, 2002), the Criminal Justice Act 1993 (HMSO,
The term given to attempts to make the proceeds of
1993) and the Money Laundering Regulations 2017
crime appear respectable. There are five UK offences:
(TSO, 2017). New legislation is being introduced in
response to International and European measures.  Acquisition, possession or use of such proceeds
 Assisting another to retain such proceeds
Accountants and other professionals have a  Concealing such proceeds
duty to report money laundering. Failure in  Failure to report knowledge/suspicion of ML
relation to that duty is a criminal offence which  Tipping off (warning a suspected launderer)
may result in a prison term of up to five years.
There are three phases in the process of money laundering:

 Placement – The actual disposal of the proceeds of initial illegal activity Laundering
 Layering – The transfer of monies to conceal the original source
 Integration – Having been layered, the money has the appearance of legitimate funds
Companies need to take action to be aware of anti-money laundering regulations.
AC04I(PC)FEB19.indb 126 1/20/2020 9:55:18 PM


Bribery
The Bribery Act 2010 (TSO, 2010) created four offences concerning bribery.
Bribing another person Being bribed

Offering financial or other advantages to induce another Requesting or accepting financial or other advantages
to perform a relevant function or activity improperly. in return for performing a relevant function or activity
improperly.
Bribing a foreign public official Corporate failure to prevent bribery

Offering financial or other advantages to a foreign official This is a corporate offence which is commited by an
with the intention of influncing that person in their official organisation that fails to prevent a bribery offence being
capacity. A foreign public official is anyone holding a commited by anyone that represents the organisation.
legislative, administrative or judicial position. An organisation has a defence if it has 'adequate
procedures' in place to prevent bribery.
VL2020
AC04I(PC)FEB19.indb 127 1/20/2020 9:55:18 PM

1 Criminal offences in insolvency: making a

declaration of solvency without reasonable grounds. Fine. Imprisonment (criminal penalty)
2 Fraudulent trading: the business of a company is

found to have been carried on: Civil law proceedings (insolvent companies
only)
 With the intent to defraud creditors
 For any fraudulent purpose
Criminal law proceedings under the
 Directors are liable for company debts under
Companies Act (whether or not the company
civil law or punishment under criminal law
is insolvent)
3 Wrongful trading: directors of an insolvent Directors are liable to contribute to the

company knew, or should have known, that company's assets
insolvent liquidation could not be avoided, and took
insufficient steps to minimise losses of creditors. Not a criminal offence
These are all offences under the Insolvency Act 1986 (HMSO, 1986) and Companies Act 2006 (TSO, 2006).
AC04I(PC)FEB19.indb 128 1/20/2020 9:55:18 PM

Other offences in relation

to winding up
 Managing whilst disqualified

 Phoenix companies
 Fraud and deception
 Defrauding creditors
 Misconduct during a liquidation
 Falsification of company books
 Omissions
Where there is evidence that a company or partnership has committed certain offences, such as fraud, money
laundering, bribery or forgery, it is possible for the prosecution and the organisation to make a deferred
prosecution agreement (DPA) under the Crime and Courts Act 2013 (TSO, 2013).
Such agreements mean that the organisation admits wrongdoing but stops short of pleading guilty to the
offence. In return, a Judge awards a fine against the business but no criminal prosecution takes place.
VL2020
AC04I(PC)FEB19.indb 129 1/20/2020 9:55:18 PM

Companies Act offences
The Companies Act 2006 (TSO, 2006) created a number of

offences in relation to the management of a company.
 Failure to keep adequate company records or their
falsification
 Failure to keep adequate accounting records
 Failure to make required trading disclosures
 Failure to file accounts on time
 Making false disclosures in company reports
AC04I(PC)FEB19.indb 130 1/20/2020 9:55:18 PM

Other offences
The Fraud Act 2006 (TSO 2006) created a single offence of fraud, which a person can commit in
three different ways by:
 False representation
 Failure to disclose information when there is a legal duty to do so
 Abuse of position
The Criminal Finances Act 2017 (TSO 2017) potentially makes companies and partnerships
criminally liable if their staff or agents are involved in tax evasion. It applies even if the
organisation was not involved in the act or had no knowledge of it. The business will be liable if:
 There is criminal tax evasion
 A member of staff or agent facilitated the tax evasion
 The business failed to prevent the member of staff or agent from committing the offence
VL2020
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Notes
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Notes
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Notes
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Notes
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Notes
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Notes
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Notes
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Notes
VL2020
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Notes
AC04I(PC)FEB19.indb 140 1/20/2020 9:55:18 PM

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AC04I(PC)FEB19.indb ii 1/20/2020 9:55:14 PM

AC04I(PC)FEB19.indb iii 1/20/2020 9:55:15 PM

AC04I(PC)FEB19.indb iv 1/20/2020 9:55:15 PM

1: Business, political and legal systems

Topic List This chapter provides an introduction to the rest of the

AC04I(PC)FEB19.indb 1 1/20/2020 9:55:15 PM

Business activity takes place in an economic, political Legal systems

How sovereign states, individual organisations and  Conventions and treaties

AC04I(PC)FEB19.indb 2 1/20/2020 9:55:15 PM

Economic systems Political systems

3 Mixed economy is a combination of the above

AC04I(PC)FEB19.indb 3 1/20/2020 9:55:15 PM

Common law systems Principles of law

Law is made by Parliament (government) or in

 (In UK) EU law

AC04I(PC)FEB19.indb 4 1/20/2020 9:55:15 PM

Role of judges in common law systems Statute

 Must be based on propositions of law

AC04I(PC)FEB19.indb 5 1/20/2020 9:55:15 PM

Civil law systems Principles of law

AC04I(PC)FEB19.indb 6 1/20/2020 9:55:15 PM

Role of judges in civil law systems Statutory interpretation

AC04I(PC)FEB19.indb 7 1/20/2020 9:55:15 PM

Sharia law systems Principles of law

Sources of law  Constitution (eg Iran's upholds Sharia law)

AC04I(PC)FEB19.indb 8 1/20/2020 9:55:15 PM

AC04I(PC)FEB19.indb 9 1/20/2020 9:55:15 PM

Criminal law Distinction

AC04I(PC)FEB19.indb 10 1/20/2020 9:55:15 PM

2: International trade, legal regulation and

Topic List We have seen in the previous chapter that individual

AC04I(PC)FEB19.indb 11 1/20/2020 9:55:15 PM

AC04I(PC)FEB19.indb 12 1/20/2020 9:55:15 PM

International International trade

Model laws, conventions and treaties are the UN

Examples  Develop friendly relations among nations

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ICC WTO OECD

AC04I(PC)FEB19.indb 14 1/20/2020 9:55:15 PM

3: Court-based adjudication and alternative

Topic List This chapter is based on the UNCITRAL Model Law on

AC04I(PC)FEB19.indb 15 1/20/2020 9:55:15 PM

Resolving disputes in Court Arbitration

AC04I(PC)FEB19.indb 16 1/20/2020 9:55:15 PM

Court-based adjudication and Role of Arbitration Arbitration Arbitral Proceedings Awards

European Court of International Court of

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UNCITRAL Model Law on International The courts

An agreement is international if the: This rule Written communications are deemed to

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Court-based adjudication and Role of Arbitration Arbitration Arbitral Proceedings Awards

The arbitration agreement must be in writing. Relationship with court proceedings

AC04I(PC)FEB19.indb 19 1/20/2020 9:55:15 PM

Number of arbitrators Arbitrator

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Court-based adjudication and Role of Arbitration Arbitration Arbitral Proceedings Awards

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4: Contracts for the international sales of

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CISG (UN, 2010) applies to sales of goods Sale of goods