ICAEW Law Textbook

ICAEW
Certificate Level
LAW
2023 Edition
Integrated Workbook
Published by:
Kaplan Publishing
Unit 2 The Business Centre
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P.2
CONTENTS
Page
Paper background P.4
Specification grid P.4
E-assessments P.4
L4 Professional accounting or taxation technician apprenticeship

standard 1
L7 Accountancy or taxation professional apprenticeship standard 3
Chapter 1 Legal principles and international law 5
Chapter 2 Contract formation 21
Chapter 3 Termination of contract 65
Chapter 4 Negligence 99
Chapter 5 Agency 135
Chapter 6 Types of trade 159
Chapter 7 Companies: The consequences of incorporation 183
Chapter 8 Companies: Ownership and management 231
Chapter 9 Companies: Finance 271
Chapter 10 Insolvency law: Corporate and personal 313
Chapter 11 Criminal law 349
Chapter 12 Employment law 381
Chapter 13 Data protection and Intellectual property law 421
Summary notes
P.3
Law
Paper background
The aim of ICAEW Law is to provide students with an understanding of the principles
of English law.
Specification grid for Law

This grid shows the relative weightings of subjects within this module and should
guide the relative study time spent on each. Over time the marks available in the
assessment will equate to the weightings below, while slight variations may occur in
individual assessments to enable suitably rigorous questions to be set.
Weighting
(%)
The impact of civil law on business and professional services 35
Company and insolvency law 40
The impact of criminal law on business and professional services 10
The impact of law in the professional context 15
––––
100
––––
E-assessments
The ‘Knowledge’ modules will be examined using computer based e-assessments.
Each computer based assessment will be 1.5 hours in length.
An example of the e-assessment can be found on the ICAEW website under the
student section; www.icaew.co.uk.
Each assessment will contain 50 questions worth 2 marks each, the total assessment
being 100 marks. Each question will therefore have a time allocation of
approximately 1.8 minutes. You will probably find some questions will take in excess
of 1.8 minutes to complete whilst others will take less, however you are advised to
monitor the overall time taken on questions throughout your assessment.
P.4
Prelims
Learning Resources
Workbook
Each chapter contains:
 Learning objectives
 Chapter diagram
 Content
 Illustrations
 Test your understandings
Question Bank
This contains exam standard questions provided by the ICAEW and is vital both
during the course and when self-studying.
MyKaplan
This online resource compliments the materials that can be found in the workbook
and can be accessed via www.mykaplan.co.uk using a designated username and
password. Additional features include:
 On-boarding video
 Knowledge checks
 Consolidation tests
 Test yourself
 Mock exams.
P.5
Law
Icon explanations
Important topic areas, key to your success in the examination.
An area for you to make notes on what you have learned and work through test your
understandings.
Test your understanding

Following key points and definitions are exercises which give the opportunity to assess the
understanding of these core areas. Within the workbook the answers to these sections are
left blank. Explanations to the questions can be found within the online version which can
be hidden or shown on screen to enable repetition of activities.
Illustration
To help develop an understanding of topics and the test your understanding exercises, the
illustrative examples can be used.
Definition
Exam technique point
Key Point
P.6
Prelims
British Values
Home study
Target
Quality and accuracy are of the utmost importance to us so if you spot an error in any
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Our Quality Coordinator will work with our technical team to verify the error and take
action to ensure it is corrected in future editions.
P.7
Law
P.8
Law
Level 4 Professional accounting
or taxation technician
apprenticeship standard
Knowledge What is required?
Business Financial information is an outcome of an organisation’s

awareness activities in the industries and environments in which it operates.
In its simplest form, financial information reflects the transactions
arising from the purchase and sale of products and services. A
Professional accounting or tax technician will understand the
industries and environments in which an organisation operates,
including customer and supplier needs, in order to create and/or
validate and/or report financial information.
Ethical standards Ethics and integrity are fundamental to the role of all finance
professionals as they often independently verify financial
information that affects individuals and institutions that are
separate from the management of an organisation. A
Professional accounting or tax technician will understand and
apply the relevant ethical standards to their own behaviour and
appropriately challenge the actions of others where they do not
meet these standards.
Regulation and Accounting and tax are governed by a series of standards and
compliance regulations which must be applied where relevant. A
Professional accounting or tax technician will be able to
understand and apply professional standards and legal
regulations to an organisation’s financial information, and to
comply with the fundamental principles of integrity, objectivity,
professional competence and due care and confidentiality.
The above technical knowledge will be understood and applied according to the
relevant statutory and regulatory environment.
1
Law
Skills What is required?
Analysis Create and interpret information, and show how that information
can be used most effectively to add value to the organisation.
Communication Effectively communicate relevant information across the

organisation and to appropriate stakeholders in both written and
verbal formats.
The above skills will be acquired and demonstrated, through a process of continuous
self improvement, in a changing and sometimes pressurised environment.
Behaviours What is required?
Adding value Actively engage in the wider business, as appropriate, and look
to provide information that positively contributes to influencing
business decisions. Continually strive to improve own working
processes and those of the organisation.
Ethics and Honest and principled in all of their actions and interactions.
integrity They will respect others and meet the ethical requirements of
their profession.
Professional Demonstrates an attitude that includes a questioning mind,

scepticism being alert to conditions which may indicate possible
misstatement of financial information due to error or fraud.
The above behaviours will be developed and exhibited, while adhering to high
standards of professionalism and quality.
For those of you studying towards a Level 7 Apprenticeship standard, you will
be developing these additional skills shown below.
2
Law
Level 7 Accountancy or
taxation professional
apprenticeship standard
A competent accountancy or taxation professional will meet the following
requirements. Given the variety of roles covered by this standard, the specific
activities which can lead to these requirements being achieved may vary.
Knowledge What is required?
Business Demonstrate knowledge of key business objectives and

acumen measurements of success.
Legislation Understand, interpret and apply the legislation, standards and

principles that apply to Standards and their role. This may
include, but not be limited to, accounting standards, auditing
Principles standards, taxation legislation, ethical codes and
internal principles adopted by an organisation.
3
Law
Skills What is required?
Business insight Influence the impact of business decisions on relevant and

affected communities based on an appreciation of different
organisations and the environments in which they operate.
Problem solving Evaluate information quickly and draw accurate conclusions.

and decision Assess a problem from multiple angles to ensure all relevant
making issues are considered. Gather the appropriate facts and
evidence in order to make decisions effectively.
Communication Communicate in a clear, articulate and appropriate manner.

Adapt communications to suit different situations, individuals or
teams.
Ethics and Identify ethical dilemmas, understand the implications and

integrity behave appropriately. Understand their legal responsibilities,
both within the letter and the spirit of the law, as well as be
aware of the procedures for reporting concerns over potentially
unethical activities.
Behaviours What is required?
Adds value Anticipate an individual’s organisations future needs and

requirements. Identify opportunities that can add value for the
individual and organisation.
Continuous Take responsibility for their own professional development by

improvement seeking out opportunities that enhance their knowledge, skills
and experience.
Flexibility Adapt approach to assist organisations and individuals to

manage their conflicting priorities as circumstances change.
Professional Apply a questioning mind to conditions which may indicate a

scepticism possible misstatement of financial information due to error or
fraud.
4
Chapter 1
Legal principles and international law
Chapter learning objectives
Upon completion of this chapter you will be able to:
understand the meaning of and relationship between criminal law and civil law,
and legislation and case law
recognise that there are situations where laws other than the laws in England
and Wales are relevant to an organisation.
understand the basic features of Islamic finance and the impact of Sharia law
understand how recent laws introduced support and promote sustainability and
identify relevant pieces of legislation
MyKaplan resources
This topic is covered on MyKaplan in the module Legal Principles and
International Law.
ICAEW resources
The underpinning detail for this chapter can be found in Chapter 1 of the ICAEW
workbook
5
Chapter 1
Overview
Criminal law versus civil law
Sources of law
Scope International law Obligations
Islamic finance
Environment Sustainability Governance
Social
6
Types of law
1.1 Criminal law versus civil law

Criminal law Civil law
Criminal law relates to conduct of Civil law is a form of private law and
which the State disapproves and which involves the relationships between
it seeks to control. It is a form of public individual citizens.
law.
Purpose – the enforcement of Purpose – to settle disputes between

particular forms of behaviour by the individuals and to provide remedies.
State, which acts to ensure
compliance.
In criminal law the case is brought by In civil law the case is brought by the
the State in the name of the Crown. A claimant, who is seeking a remedy. The
criminal case will be reported as case will be referred to by the names of
Regina v ..., where Regina means the the parties involved in the dispute, such as
Latin for 'queen'. Brown v Smith.
Burden of proof – on the prosecution. Burden of proof – on the claimant.
Standard of proof – guilt must be Standard of proof – liability must be
shown beyond reasonable doubt (high shown on the balance of probabilities
standard of proof). (lower standard of proof).
Object – to regulate society by the Object – usually financial compensation to

threat of punishment. put the claimant in the position they would
have been in had the wrong not occurred.
If found guilty the criminal court will The civil court will order the defendant to
sentence the accused and it may fine pay damages or it may order some other
them or impose a period of remedy, e.g. specific performance or
imprisonment. If innocent the accused injunction.
will be acquitted.
7
Chapter 1
Test your understanding 1

Which one of the following statements is correct?
A The aim of the criminal law is to regulate behaviour within society by the
threat of punishment.
B The aim of the criminal law is to punish offenders.
C The aim of the criminal law is to provide a means whereby injured

persons may obtain compensation.
D The aim of the criminal law is to ensure that the will of the majority is
imposed upon the minority.
This question allows you to demonstrate your knowledge of regulation

and compliance.
8
1.2 Sources of law
There are two main sources of law in England and Wales:
 Statute law – laws made by Parliament through direct legislation

and delegated legislation.
 Case law (also known as common law) – law which has been
developed over time by judges when deciding the outcome of
cases brought before the courts.
Statute law (i.e. legislation) takes precedence over case law.

because public can elect the parliament but cannot elect judges,
Direct legislation hence legislation takes precedence
Parliament is the supreme legal authority in England and Wales and only Parliament
has the authority to enact any law it wishes.
Parliament makes new laws, holds the power to set taxes and debates the issues of
the day. The House of Commons (which is elected by the public) and the House of
Lords (not elected, including people who have either inherited their position or been
awarded it due to their contribution to society) each play an important role in the work
of Parliament.
In the House of Commons, Members of Parliament (MPs) debate Bills and then vote
on them to decide whether they should become laws.
Members of the House of Lords will use their experience in business, politics and/or
society as a whole to consider the advantages and disadvantages of a Bill and
suggest improvements. Lords cannot block a bill, they can amend it or at max delay it
To create a new law (Act of Parliament) a Bill is passed through both houses of
Parliament: the House of Commons and the House of Lords, before gaining Royal
Assent (a formality when the Monarch agrees to make the Bill into an Act of
Parliament).
Delegated legislation
For many reasons, Parliament has delegated some of its legislative powers to other
bodies. Usually, Parliament passes an 'enabling' Act setting out the policy involved
and the objectives it wishes to achieve. The Act then delegates the task of filling in
the details to some other body.
*Direct Legislation: Bill -> House of Commons (readings) -> House of lords (debate) -> Royal Assent (Bill into Act) ->
New Law
*Delegated Legislation: On behalf of the parliament. Parliament passes enabling act, then body passes law in area
given power. For eg. The Road Traffic act gives local authorities the power to pass laws regarding the use of roads in
their areas. Once the enabling act is passed, the body has limited power to delegate anymore.
9
Chapter 1
Rules enacted under such powers are called delegated legislation, and the following
are examples:
 statutory instruments: made by Government Ministers Eg. Finance Act for Updated Tax
Rules
 bye-laws: made by local authorities Eg. Road Traffic Act
 Orders in Council: made by the Privy Council in the name of the Monarch on the
advice of the Prime Minister. Used when act of parliaments would not be appropriate such as in
case of emergencies.
Case law
Throughout this text you will find examples of cases which have come
before the courts. These cases illustrate the way in which the law is
made by judges in areas where no legislation exists or the precise
meaning of the wording of the legislation needs clarifying.
Doctrine of judicial precedent

The system, adopted by the judges, of following the decisions in previous similar
cases is called the doctrine of judicial precedent.
Some precedents are binding (meaning they must be followed in later cases).
Others are merely persuasive (meaning that a judge in a later case may choose to
follow it but is not bound to do so). For example, a precedent is only binding if it was
made by a higher level court and the material facts of the case are the same.

Which of the following is NOT a form of delegated legislation?
A Orders in Council
B Statutory instruments
C Local authority bye-laws
D Acts of Parliament
This question allows you to demonstrate your knowledge of legislation.
*Doctrine of judicial precedent - Its purpose is to bring consistency when cases are
decided in courts by a judge. When a judge is giving a verdict in one case, they will
consider case law by looking back at the results of similar cases in the past. In this
way, they help to ensure consistent decisions are made from one case to the next.
A precedent from previous cases can be either:
Binding – (where the judge has to follow the previous decision) or persuasive – where
10
the judge should consider the previous verdict but doesn’t have to follow it.
Determining whether previous decisions are binding or persuasive involves a number of
factors, including the hierarchy of the different courts – so for example a decision made
by a more senior court would be binding on a lower court.
International law
Whilst the legal system in England and Wales hears disputes concerning parties in
England and Wales, with international trade it is not always clear which country’s
laws apply.
Parties that enter into cross border contracts may agree in advance which country’s
laws will apply (this is known as ‘choice of laws’).
Alternatively, the United Nations (UN) and the International Chamber of Commerce
(ICC) have created rules of their own which parties can choose to use.
2.1 UN Convention on Contracts for the International Sale of Goods (UNCISG)
The UNCISG sets out rules of contract law which parties in different countries can
choose to apply.
Scope of the convention sets out the obligation of the buyer and seller
The UNCISG applies only to the commercial sale of goods where the buyer and
seller of the goods have their places of business in different countries.
The convention does not apply to the following types of sale:
 where the supply of labour is a major part of the contract
 where the buyer provides most of the materials for the goods
 where the goods are bought for personal or household use
 where the goods are sold by auction
 where the sale relates to certain specific restricted products such as electricity,
aircrafts and investments.
11
Chapter 1
Obligations of the buyer
 To pay the price for the goods and comply with any formalities to enable
payments to be made.
Obligations of the seller
 To deliver the goods to the place and at the time agreed in the contract
 If the contract does not set out the place of delivery, to follow the rules
regarding place set out in the convention.
 If the contract does not set out the time of delivery, to deliver the goods within a
reasonable time of the contract being formed.
 To deliver goods of the quantity, quality and description set out in the contract
and to package them in the agreed manner.
 If the contract does not set out the quantity, quality and packaging
requirements, to follow the conformity requirements set out in the Convention.
for eg. if buyer buys something based on a sample then the goods they receive
should be of the same quality as of the sample
Passage of risk
The Convention also sets out rules on when the risk (and therefore insurance
requirements) of loss or damage to the goods being sold passes from seller to buyer,
which are as follows:
 Where the carriage of goods is included the risk passes at the place indicated in
the contract. If not specified in the contract the risk passes when the goods are
transferred to the first carrier for transmission to the buyer.
 Where carriage of goods is not included the risk passes at the time and place
where the buyer takes over the goods or the goods are placed at their disposal.
 Where goods are sold in transit the risk passes at the moment when the
contract is concluded, even if the goods are still in transit.
12
2.2 ICC Incoterms
The International Chamber of Commerce (ICC) has set out standard terms of trade
(known as Incoterms), which parties can use in cross border contracts. The terms set
out rules in connection with paying for things such as delivery, import and export
duties, insurance and freight costs.
For example, with regard to the transportation of goods the parties can include a term
ranging from one which imposes the minimum obligations on the seller (‘ex-works’
i.e. seller only makes the goods available for collection by the buyer) to at the other
end of the spectrum a term which imposes the maximum obligations on the seller
(‘delivered duty paid’ i.e. the goods are delivered to a place chosen by the buyer with
all delivery costs paid).
13
Chapter 1

Which one of the following types of contract could terms from the UN
Convention on Contracts for the International Sale of Goods apply to?
A The supply of a service by a business in France to a business customer

in Germany service is not commercial sale of goods
B The sale of a plane by a business in the UK to a business customer in

Spain aircraft is restricted
C The sale of car parts by a business in Belgium to a business customer in

the UK
D The sale of chocolates by a business in Belgium to a consumer in Ireland

not commercial sale of goods
This question allows you to demonstrate your analysis skills.
14
Islamic finance
Islamic finance is governed by Sharia law. In some countries sharia law has been
adopted explicitly as part of the country’s legal system. This is the case in countries
such as Pakistan and Iran. In other countries where this is not the case it has
nevertheless become more commonplace for financial systems to provide finance
options which are compliant with Sharia law for those who wish to use them.
3.1 Usury
An important rule in Sharia law which affects Islamic finance is the rule against usury.
Islamic finance is based on the belief that money shouldn’t have any value in itself.
It’s just a way to exchange things that do have a value. Connected to this is the belief
that you shouldn’t make money from money which means avoiding paying or
receiving interest.
3.2 Avoiding usury

Although the charging or receiving of interest is not allowed under Sharia law,
generating and sharing profits is allowed and therefore it is necessary to structure
contracts along profit sharing lines.
Savings accounts
With traditional savings accounts a customer transfers money (i.e. lends) to the bank
(the borrower) and they receive interest on the amount deposited in return.
Under Islamic finance, the contract is structured so that the customer is an investor,
and the bank is a fund or asset manager rather than a borrower. At the end of the
investment period, the customer’s money is returned with the profit earned, less a
management fee payable to the bank.
Loans
Traditionally the bank transfers money to the customer so that the customer can buy
an asset, and over a set time in instalments the customer repays the bank the capital
loaned to them plus an interest payment.
Under Islamic finance this would be structured so that the bank purchases the asset
on behalf of the customer and then sells the asset at a profit to the customer. The
customer pays the bank in instalments, and the bank owns the asset until the final
payment has been made.
15
Chapter 1

What type of payment, which is usually paid on traditional loans and
savings accounts, is prohibited under Sharia law?
16
UK law supporting the principles of

sustainability
In recent years there has been an increase in the laws introduced to
promote sustainability. These laws include the following key pieces of
legislation.
Sustainability principle Legislation introduced
Environment Environment Act 2021

This Act allows the UK to enshrine some
environmental protection into law. It
offers new powers to set binding targets,
including for air quality, water,
biodiversity, and waste reduction.
Social Equality Act 2010 (see ch12)
Governance Bribery Act 2010 (see ch 11)

Proceeds of Crime Act 2002 (see ch11)
Money Laundering Regulations 2017
(see ch11)
Data Protection Act 2018 (see ch13)
17
Chapter 1
You are now in a position to attempt extra questions on this topic

area.
Visit the homework section on MyKaplan to see a list of

recommended questions.
18
Test your understanding answers

A
The aim of the criminal law is not to punish offenders. The criminal law
threatens punishment to offenders, and therefore aims to deter
individuals from breaking the law, i.e. it seeks to regulate behaviour by the threat
of punishment.
Orders in Council, statutory instruments and local authority byelaws

are all examples of delegated legislation.
Acts of Parliament are direct legislation.
19
Chapter 1

C
The convention only applies to the commercial sale (i.e. business to business) of
goods. So it doesn’t apply to the supply of services (option A) or the sale of
goods to an individual consumer (option D).
It also specifically excludes the sale of some specific types of asset including
aircraft (option B).

Answer
Interest
20
Chapter 2
Contract formation
define a contract
identify the essential elements of a contract
be aware of the factors which might affect the validity of a contract and their
consequences
understand and apply the rules relating to offer, acceptance, consideration and
intention to create legal relations
understand that contract terms may be express or implied into a contract.
MyKaplan resources
This topic is covered on MyKaplan in the module Contract Formation.
ICAEW resources
workbook
21
Chapter 2
Overview
CONTRACT
Creation
3 elements Validity Terms Privity of

contract
22
Contract formation
What is a contract?
1.1 Form of contract
Most contracts can be oral or in writing. For oral contracts, written

evidence may be useful as proof that it was made and where the
contract details are complex or involve some action in the future.
A contract which does not need to be in writing is known as a SIMPLE

CONTRACT.
Certain types of contracts must be in writing to be valid and enforceable. These are:
 Bills of exchange
 Regulated Consumer Credit Agreements
 Transfers of land (must be evidenced by Deed, known as specialty contracts)
 Guarantees.
1.2 Capacity
If a minor (under 18) enters into a contract, the contract is voidable at the option of
the minor (see 1.3).
Parties of unsound mind or drunkards do not have capacity to enter into contracts.
23
Chapter 2
1.3 A contract must be valid to be enforceable.
If it contains a defect it may be void or voidable or unenforceable.
VOID contracts
A void contract is not a contract at all.
Illustration 1 – Types of contract

Examples of Void contracts:
 A contract intended to achieve an illegal purpose or one contrary to public

policy.
 Where a company acts outside any restriction on its powers (in its
constitution) to enter into a contract.
VOIDABLE contracts
A voidable contract is one which can be set aside at the choice of the injured party.

Examples of Voidable contracts:
 Where a party has been made to enter into the contract by duress or undue
influence.
 Where one party makes a pre-contractual statement that is intended to and

does cause the other party to enter into the contract and that statement is
untrue (a misrepresentation), the other party can avoid the contract.
24
Contract formation
UNENFORCEABLE contracts
An unenforceable contract is a valid contract, but if either party fails to fulfil his or her
part of the contract the other party may not be able to compel them to do so.

Examples of unenforceable contracts:
 Where the contract is not in the correct form. A guarantee (a contract

whereby a guarantor promises to pay a creditor the debtor’s debts in the
event the debtor fails to pay) need not be in writing but the terms must be
evidenced in writing and signed or acknowledged by the guarantor before
any action can be brought against him or her.
 If there is a transfer of property or a Regulated Consumer Credit Agreement

and these are not in writing.
25
Chapter 2
1.4 As a general rule, parties are free to contract in whatever terms they wish
If, however, one party seeks an unfair advantage as a result of a stronger

bargaining position the court or legislation may intervene.
Illustration 4 – What is a contract?

Example of legislation intervening to change the terms of a contract:
The Consumer Rights Act 2015 implies terms into a contract whereby goods
sold in the course of a business must be fit for the purpose for which they are
supplied (for contracts entered into before 2015 these terms were implied due to
the Sale of Goods Act 1979).

The vast majority of contracts are ‘simple’. What is meant by the word ‘simple’
in this context?
A The terms of the contract are set out in writing
B The contract does not need to be in any particular form to be binding
C The contract has fewer than ten provisions
D The contract is written in plain English rather than ‘legalese’
This question allows you to demonstrate your knowledge of business

awareness.
26
Contract formation

What is the consequence of the following in relation to a supposed
contract between two parties?
Answer with void or voidable or unenforceable
A One of the parties is 17 years’ old voidable
B The contract is intended to defraud void
C The contract is oral and for the sale of land unenforceable
This question allows you to demonstrate your problem solving skills.

A voidable contract is not a contract at all - this is definition of void , not voidable
A True
B False
27
Chapter 2
The essential elements of a valid

contract
A contract is a legal agreement between two or more parties. It cannot come into
existence without the following essential elements:
 An offer
 Acceptance
 Consideration
 Intention to be legally bound.
Exam questions in this area will often focus on identifying if these elements are
present.
28
Contract formation
The offer
An offer is the first part of the agreement.
3.1 What is an offer?
An offer is a definite promise to be bound on specific terms made by

the offeror to the offeree.
The offer can be made in any form but must be communicated to the
offeree. The offeree can be a particular person, a class of persons or
even the whole world.
Illustration 5 – The offer

CARLILL v CARBOLIC SMOKE BALL 1893
Facts: The manufacturers of a medicinal ‘smoke ball’ advertised in a newspaper

that anyone who bought and used the ball as directed and still contracted
influenza would be paid a £100 reward. Mrs. Carlill used the ball in accordance
with the instructions and still caught flu. The manufacturers said there was no
contract with Mrs. Carlill because an offer could not be made to the whole world.
Held: An offer could be made to the whole world, the wording of the advert
showed a definite intention to be bound and as such it amounted to an offer.
Mrs. Carlill had accepted the offer by using the ball correctly and as such was
entitled to payment of the £100.
29
Chapter 2
3.2 What is not an offer?
If an individual has not made an offer there can be no binding contracts. There are a
number of items which have been held to not be an offer.
An invitation to treat
An invitation to treat is an invitation to someone else to make an offer to you.

Examples of invitations to treat:
 Most adverts (but remember Carlill mentioned earlier – an advert can be an

offer only if it makes it clear no further negotiations are required)
 Shop window displays
 Goods on shop shelves
 Company prospectus
 Circulation of a price list or displays on a website
 Tenders (a person asking for tenders is making an invitation to treat, the

person submitting the tender is making the offer).
30
Contract formation
A supply of information or a statement of intention
A statement made early in the negotiations is unlikely to be held to be a valid offer

and a statement of an intention to sell is not an offer. This would cover when a
possible selling price is given during initial discussions.

HARVEY v FACEY 1893
Facts: The claimants were interested in buying some land, which was not
advertised for sale. They sent a telegram asking the owners to state the lowest
price they would accept. The owners replied with a price and the claimants tried
to accept.
Held: The statement of price was merely an early stage in negotiations and not
an offer.

HARRIS v NICKERSON 1873
Facts: An auction was advertised in a newspaper. A broker saw the advert and
travelled some distance to attend. The items he was particularly interested in had
been withdrawn from the sale. The broker claimed the advert was an offer for
sale of the various items and his attendance was an acceptance of that offer.
Held: The advert was not an offer as it was not clear and definite that the
auctioneers wanted to sell the items.
If the auction is held without reserve, once the lot is put up by the auctioneer, it is
an offer to sell to the highest bidder and if withdrawn after the bid has been made
there will have been a breach of contract.
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Chapter 2
Vague statements
A statement cannot constitute an offer if it is not sufficiently specific. For example, an

offer to sell someone a car for £5,000 is valid, but a statement that a person will sell
‘…one of my cars for about £5,000’ is not an offer: it is vague and uncertain.
3.3 Termination of the offer
Once an offer has been terminated it cannot be accepted.
An offer can be terminated in the following ways:
 Rejection and counter offer
 Revocation
 Lapse of time
 Failure of a pre-condition.
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Contract formation
Rejection
Rejection occurs when the offeree turns down the original offer. It can
be express or by way of a counter offer. A counter offer is a new offer
on different terms.

HYDE v WRENCH 1840
Facts: Wrench offered to sell Hyde a farm for £1,000. Hyde made a counter offer
by offering £900
Wrench rejected this counter offer. Later, Hyde came back to Wrench and said
that he now accepted the offer at £1,000.
Held: Hyde could no longer accept the original offer as it no longer existed and
as such was not capable of acceptance. Hyde’s statement that he would pay the
original £1,000 was a new offer, which Wrench did not accept.
A request for more information about the original offer is not a rejection of the offer.

STEVENSON v MCLEAN 1880
Facts: M offered, in writing, to sell a quantity of iron to S at a given price. S replied

querying the time for delivery but, before receiving a reply, sent a further letter
accepting the offer. This acceptance crossed in the post with a letter of revocation
from M. M refused to supply the iron to S saying the enquiry about delivery times
was a counter offer.
Held: The query was not a counter offer; it was merely an enquiry as to whether
the terms might be varied. It did not destroy the original offer which was still open
when S wrote accepting it.
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Chapter 2
34
Contract formation
Revocation
Revocation occurs when the offeror withdraws his or her offer.
 Revocation can be made at any time before acceptance.
 Revocation can be made even if the offeror has agreed to keep the offer open.
 Revocation must be communicated to the offeree by the offeror or by a reliable

third party.
There are two exceptions to the rules above:
 If the offeree pays the offeror to keep the offer open this creates a collateral
contract and a revocation of the original offer would be a breach of that
collateral contract. The offeree could claim damages (the most usual remedy for
a breach of contract) for the loss of the opportunity to accept the original offer.
 In a unilateral contract.
A unilateral contract is one in which an offer is made to the whole world and as such
it would be virtually impossible to notify everyone who saw the offer of the revocation.
In addition, acceptance of a unilateral contract always involves the performance of an
act (such as using the carbolic smoke ball in Carlill v Carbolic Smoke Ball) and if an
offeree has begun the act but not completed it a revocation would be unjust.
Revocation is not, therefore, effective if the offeree is in the process of accepting a
unilateral offer (i.e. has begun performance).
Lapse of time
An offer ceases to exist if not accepted within a specified time limit and, if no time
limit is specified, then it will lapse after a reasonable time.
An offer will also lapse on the death of the offeree or of the offeror unless the offeree
accepts in ignorance of the death.
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Chapter 2
Illustration 11 – Termination of an offer

Request for information about an offer
Aoife breeds Kerry Blue Terriers. She offers a puppy to both Mandeep and
Nagina for a cost of £800 each, stating the offer is open until Friday.
Mandeep asks her whether the £800 covers the cost of all initial vaccinations.
He does not hear back from Aoife and on Thursday accepts the original offer.
Nagina replies to Aoife on Tuesday stating she will take one for £750. Again,
Aoife does not reply and on Wednesday Nagina writes accepting the original
offer.
Mandeep’s enquiry is requesting further information about the original offer. It

does not change the original offer so this is still open for acceptance until
Friday. Mandeep’s acceptance can form a binding contract with Aoife.
Nagina has made a counter offer at £750. This ends the original offer to sell at
£800. When Nagina replies saying she will pay £800 this is a new offer which
Aoife can accept or reject.
Failure of a pre-condition
A ‘conditional’ offer is one which is dependent on a specified event or change in

circumstances. A conditional offer may not be accepted unless and until the condition
or change of circumstances is met.
36
Contract formation

Simon offers to sell his car to Tony for £600. Tony is unsure but, as he is
leaving the restaurant, asks Simon if he can tell him by 9am the next day.
Simon agrees. Later that evening, Tony meets Rick, a reliable mutual friend,
who tells him that Simon has decided to keep the car. Tony visits Simon at
8.30 am and accepts the offer.
Is there a contract between Simon and Tony?
A Yes – because the revocation had not been communicated
B No – because revocation can be communicated by a third party
C Yes – because Simon has agreed to keep the offer open until 9am
D No – because the promise to keep the offer open was gratuitous
This question allows you to demonstrate your business insight skills.
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Chapter 2
Acceptance
Acceptance is the second part of the agreement; together with the offer
the acceptance completes the first essential element of a valid contract.
Acceptance is the unequivocal and unconditional assent to all the
terms of the offer.
4.1 Acceptance can be oral, in writing or by conduct
The acceptance can be express or implied by the conduct of the offeree (Carlill
case). If an offeror stipulates the type of acceptance, then that form of acceptance
must be used. If a mode of acceptance is merely requested, then other reasonable
methods can form a binding contract.
4.2 Acceptance must be communicated
As a general rule acceptance must always be communicated to the

offeror. Acceptance is not effective until this happens.
If a ‘fax’ is received during normal business hours, then it is

communicated when received. If a fax is received outside of normal
business hours, it is communicated once the business opens.
The law is unclear as to when a communication by e-mail is received but there

seems little reason to distinguish between this form and other types of instantaneous
communication such as fax or telex. The contract will be formed when the
acceptance is received by the offeror’s e-mail system and is available to be read.
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Contract formation
4.3 Acceptance must involve some act on the part of the offeree
There must be some act to indicate acceptance; silence cannot be presumed to

amount to acceptance.
Illustration 12 – Acceptance
FELTHOUSE V BINDLEY 1862
Facts: The claimant wrote to his nephew offering to buy his horse. In his offer
he stated ‘If I hear no more about him, I consider the horse to be mine’. The
nephew did not reply.
Held: The offer had not been accepted as the nephew’s silence was not
sufficient to give acceptance.
4.4 The Postal Rule
This is the exception to the rule that acceptance must always be communicated. The
postal rule states that acceptance is complete as soon as the letter is posted.
The rule only applies where the letter is properly stamped and addressed and if it
would not be unreasonable to use the post (it would be unreasonable, for example,
during a postal strike).
The postal rule applies even if the letter is never received by the offeror but not if the
offeror states he or she must actually receive acceptance.
The postal rule does not apply if on making the offer the offeror states he or she must
have ‘notice in writing’ of acceptance as this suggests the letter of acceptance must
be received to be binding.
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Chapter 2

On 1st September, Seller Ltd wrote to Buyer Ltd offering to sell a machine at a
price of £10,000 and stating that B Ltd must accept by 10th September.
On 3rd September B Ltd wrote to S Ltd asking ‘will you accept payment over
three months?’
On 5th September S Ltd sold the machine to New Ltd and on 6th September
received a second letter from B Ltd accepting the original offer and offering
immediate payment.
Which of the following statements is correct?
A There is no contract between S Ltd and B Ltd because the offer was
withdrawn on the 5th September when the machine was sold to N Ltd.
B There is no contract between S Ltd and B Ltd because B Ltd.’s letter of

the 3rd September amounted to a counter offer which destroyed S Ltd.’s
original offer.
C S Ltd and B Ltd contracted on the 3rd September.
D S Ltd and B Ltd contracted on the 6th September.
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Contract formation

An offer was made by letter posted in London and delivered in Birmingham. A
reply was made by fax in Manchester and received by the offeror’s machine in
Liverpool.
Where is the contract made?
A Where the offer is made – in London.
B Where the acceptance was put into the fax machine – in Manchester.
C Where the acceptance was received on the fax machine – in Liverpool.
D Where the letter making the offer was received – in Birmingham.
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Chapter 2
Consideration
The second essential element of a valid contract is consideration.

Consideration is an act or forbearance (or the promise of it) on the part
of one party to a contract as the price of the promise made to him by
the other party to the contract. DUNLOP PNEUMATIC TYRE CO. v
SELFRIDGE 1915
Put more simply, it is the price by which one party bought the other
party’s act or promise.
All simple contracts must be supported by consideration. However, contracts made
by deed (specialty contracts) do not require consideration unless the terms of the
agreement require it. A deed is a formal promise between the parties that must be in
writing and signed. Certain contracts must be in the form of a deed including
conveyances and leases for three years or more.
5.1 Valid consideration

Both executed and executory consideration are capable of being valid consideration.
Executed consideration
Executed consideration is a performed act in exchange for a promise, e.g. paying for
goods at the time the goods are delivered.
Executory consideration
Executory consideration is a promise given in exchange for a promise, e.g. a promise
to pay for goods that are to be delivered at a later date.
Sufficient but not adequate

Consideration must be sufficient but need not be adequate.
 Sufficient consideration is consideration which is capable of being given a
value.
 Inadequate consideration is consideration which is unequal in value. The
parties have freedom to contract under any terms they wish and a court will not
attempt to make a contract a fair bargain as long as there is some identifiable
value.
* I enter into a contract with you. Before I have fully performed the contract, it is executory.
Once performed, the contract is executed.
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Contract formation
Illustration 13 – Consideration
CHAPPELL & CO v NESTLE 1960
Facts: A promotion by Nestle offered records for a sum of money plus three
chocolate wrappers.
Held: The wrappers were part of the consideration even though they had minimal
value.
THOMAS v THOMAS 1842
Facts: A promise was made to allow Mrs Thomas to use a house for a rent of
£1 per year.
Held: The promise was binding as the consideration had value, even though it
was inadequate.
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Chapter 2
WHITE v BLUETT 1853
Facts: A son agreed with his father that he would not complain about the
father’s will and his rights under it if the father let him off of a debt he owed.
Held: The promise could not be measured in value and was too insubstantial to
amount to real consideration.
Forbearance/waiver of rights
If the one of the parties forfeits his or her rights to something this could be good
consideration if it is capable of being assigned a value.
5.2 Invalid consideration
Past consideration
Consideration is past if it involves something which has already been done at the
time the promise is made. Past consideration cannot support a contract.
RE MCARDLE 1951
Facts: A husband and wife carried out improvements to a house. At a later date
a promise was made to reimburse the couple.
Held: The works had been carried out before the promise to pay had been made.
Past consideration is no consideration.
If an act was done in response to a specific request and payment might be

expected in such a situation, then there is an implied promise to pay and this will
constitute good consideration.
44
Contract formation
RE STEWART v CASEY (CASEY’S PATENTS) 1892
Facts: An employee spent many hours of his own time in developing an

invention at his employer’s request. The work was finished and the employers
then said they would pay him a share of the profits once the invention was
patented.
Held: The employers were bound by their promise as the request they had made
for the employee’s services was treated as an implied promise to pay, even
though the actual promise was not made until later.
Existing statutory duty
Generally, performance of an existing statutory duty is not good consideration.
COLLINS v GODEFROY 1831
Facts: A witness who was legally required to attend court (subpoenaed) was
promised payment if he would attend court to give evidence.
Held: There was no consideration as the witness had a statutory duty to attend
court.
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Chapter 2
However, if it can be shown some extra service over and above that statutory duty is
required this will constitute good consideration.
GLASBROOK BROTHERS LTD v GLAMORGAN COUNTY COUNCIL1925
Facts: G Bros. required the police to provide protection over and above their
statutory duty during a miners’ strike.
Held: The payment to the police for extra protection was additional to their
statutory duty and therefore good consideration.
Existing contractual duty
Performance of an existing contractual duty will not normally be good consideration

for a new contract with the same person.
STILK v MYRICK 1809
Facts: A captain promised to share the wages of deserting seamen with the
rest of the crew if they completed the voyage.
Held: The promise was not binding as there was no extra consideration from
the seamen who, by completing the voyage, were doing no more than they
were contractually bound to do.
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Contract formation
Performance of an existing contractual duty can be good consideration in the

following situations:
 If the existing duty is exceeded.
HARTLEY v PONSONBY 1857
Facts: A large number of seamen deserted from a ship making the ship
undermanned and hence unseaworthy. The captain offered extra pay to the
remaining seamen if they would complete the voyage.
Held: The promise of more money was recoverable by the seamen as they
were involved in a dangerous situation and were doing more than they had
originally contracted to do.
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Chapter 2
 If both parties gain an additional practical benefit from the new contract not
anticipated in the original agreement.
WILLIAMS v ROFFEY BROS. 1990
Facts: Williams agreed to do some work for Roffey Bros in a block of flats at a
fixed price by an agreed date. The work ran late and R agreed to pay extra to
have the work completed on time. If the work had overrun R would have suffered
a penalty on his own contract with the owner of the flats.
Held: Even though W was only doing what he was contracted to do the extra
payment was good consideration as the new payment constituted a new contract
from which both R and W benefited.
R benefited by not incurring penalties on his contract with the owner of the flats
and by not having to find contractors to finish the work. Also R had approached
W to offer extra payment, there was no pressure put on him. The court held it
would have been inequitable for R to go back on his promise.
 Performance of an existing duty can be good consideration for a new contract

with a third party.
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Contract formation
The promise to do or the act of doing an illegal act is not good consideration
The courts will not enforce a contract for an illegal purpose and as such performance
of an illegal act is not good consideration.

Consideration need not be adequate but must be:
A Money
B Sufficient
C Of equivalent value to the goods
D Of equal value
awareness.
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Chapter 2
The part payment problem (waiver of an existing debt)
Payment of a lesser sum in satisfaction of a greater sum cannot be any satisfaction

for the whole sum.
This is an extension to the rule that performing an existing contractual promise

cannot be consideration for a further contract with the promisor.
FOAKES v BEER 1884
Facts: Foakes obtained judgment against Beer for a sum of £2,090 plus
interest. She agreed to payment by instalments and that further proceedings on
the judgment would not be taken. B paid the £2,090 but refused to pay the
interest and F sued.
Held: B had to pay the interest. Payment of the debt itself was not
consideration for the whole amount owed which included the interest.
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Contract formation
There are many exceptions to this rule:
 Alternative consideration. If the debtor offers some alternate type of

consideration and the creditor freely accepts this, it can be valid consideration.
 Bargain between creditors. When a group of creditors jointly agree to part

payment in lieu of the full debt all creditors are bound to the specified terms.
 Payment by third party. If the payment is made by another party this can be
good consideration.

Which of the following examples of performance amount(s) to good
consideration?
(i) The performance of an existing duty under the general law
(ii) The performance of an existing contract in return for a promise by a third

party
(iii) The performance of an existing act, followed by a promise to pay for that
act.
A (i) only
B (ii) only
C (i) and (ii)
D (iii) only
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Chapter 2
Intention to create legal relations
The final essential element in a valid contract is the intention to create legal relations.
If a contract is to be created both parties must intend to enter into a

legal relationship. If the situation is not obvious there are two rebuttable
presumptions which can be applied.
(A presumption means that the claimant in the action need not prove
certain matters on a ‘balance of probabilities’ basis; the court assumes
that they exist).
6.1 Domestic agreements
It is presumed there is no intention to be legally bound in a social or domestic

arrangement.
This presumption can be rebutted or overturned by showing that there was clear
evidence that the parties did intend to create legal relations.
Illustration 24 – Intention to create

legal relations
BALFOUR v BALFOUR 1919
Facts: Mr. Balfour, who was about to go abroad, promised to pay his wife £30
per month in consideration of her agreeing to support herself without calling on
him for any further maintenance. The wife said the husband was contractually
bound by the promise.
Held: There was no legally binding contract between the parties. It was a
domestic arrangement and it was presumed the parties did not intend to be
legally bound.
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Contract formation
The presumption is also rebutted if the agreement is between spouses where the
parties were not living together happily at the time of the agreement.

legal relations
MERRITT v MERRITT 1970
Facts: A husband who was separated from his wife promised to transfer the
house into her name if she paid off the outstanding mortgage debt. The wife paid
off the debt but the husband refused to transfer the house.
Held: In this case, the husband’s promise was enforceable, the agreement
having been made when the parties were not living together amicably.
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6.2 Commercial agreements
It is presumed that there is an intention to enter into legal relations in a commercial

agreement.
Again, it is possible to rebut this presumption if a contrary intention is clearly

expressed in the agreement itself, but the courts are very reluctant to do so.

legal relations
JONES v VERNONS POOLS LTD 1938
Facts: J said he had sent a winning entry to Vernon’s but they denied having
received it. The company had inserted a clause on the pools coupon to deal with
this problem which stated that ‘any agreement ...entered into...shall not give rise
to any legal relationship...but ...is binding in honour only’. J had signed this
coupon.
Held: A contract did not exist between the parties since the wording of the
agreement clearly negated such intention. J could not sue the pools company for
breach of contract.
6.3 Subject to contract
Where 'subject to contract' is included in an agreement, there is a strong presumption

that there is no intention to create an immediately binding contract.
However, an agreement stated to be ‘a personal agreement until a fully legalised

agreement drawn up by a solicitor and embodying all of the considerations hereby
stated is signed’ was held to be a binding agreement in itself, notwithstanding that it
would eventually be replaced by a more formal document (BRANCA v CABARRO
1947).
54
Contract formation
Privity of contract
The term ‘privity of contract’ means that only a person who is a party to a contract
has enforceable rights or obligations under it:
 Parties who have not contributed consideration to a contract cannot usually sue
on it if it is breached because they are not full parties (they are not privy to the
contract).
 A contract cannot be enforced against a party to whom no consideration has

been promised.
Illustration 27 – Privity of contract

TWEDDLE v ATKINSON 1861
Facts: T was engaged to marry G. Their respective fathers contracted they

would pay a sum of money when the marriage took place. G’s father died before
making the payment.
Held: T had no right to sue G’s estate for the money since he had provided no
consideration for the promise and was merely a beneficiary under a contract to
which he was not a party.
To prevent injustice a number of exceptions have been recognised. The most

important so far as your studies are concerned are:
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Chapter 2
7.1 The Contracts (Rights of Third Parties) Act 1999
This Act allows a person who is not a party to a contract to enforce it as long as the
contract was for his or her benefit and he or she was identified expressly by name or
description. In addition, the contract must expressly allow the third party to enforce
the term.
The third party can exercise any remedy which would have been available had they
been a party to the original contract.
7.2 Trust
Trust law allows a beneficiary to enforce a trust, as a third party, to enable them to
enforce their rights in court.
7.3 Agency
Agency law allows an agent to enter into a contract with a third party on behalf of his
or her principal and it is the principal and the third party who have enforceable rights
under that contract (see chapter 5).
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Contract formation
The terms of the contract
Once a valid contract has been formed it is important to look at its contents.
Generally, there is an assumption that parties have complete freedom to contract and
can include any term they wish in their contracts.
In addition to those terms expressly included in the contract, terms can be implied by
statute, the courts and custom and practice.
8.1 Contractual terms and representations
A statement made during negotiation may be a term or merely a representation:
 It is important to know whether the statement is a term or a representation

because the remedies available to a wronged party will be different.
 If the representation is included in the contract as one of its terms and it is then
found to be untrue the party misled has a remedy for breach of the term as well
as for the misrepresentation.
 If the representation is not a term of the contract the party misled can only claim
remedies for the misrepresentation.
 A term is part of the contract.
 A representation is something said by the offeror to induce the offeree to enter

into the contract. It becomes a term once it is included in the written contract or
is an important part of the contract i.e. one on which the other party relies.
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Chapter 2
8.2 Express terms
These terms are the elements of a contract which have been specifically agreed.
They can be written, oral or a combination of the two.
Such terms are specifically inserted into the contract by either or both parties.
They must be clear for them to be enforceable.
Illustration 28 – The terms of the

contract
SCAMMELL v OUSTON 1941
Facts: An agreement provided for the balance of the price to be paid ....`on hire
purchase terms over a period of two years’….
Held: The words ‘hire purchase terms’ were considered too imprecise as the
seller had a range of such terms.
8.3 Implied terms
These are terms which are not expressly included but are still part of the contract.
They can be implied in the following situations:
Terms implied due to the type of contract
The courts will imply certain terms to certain types of contract because they are felt to
be an implicit requirement of that type of contract.
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Contract formation
Terms implied by the courts in order to give business efficacy
If the parties have failed to cover a matter which, when addressed, would make the
agreement unworkable, the courts imply a term to carry out the parties’ presumed
intentions.
Terms to comply with custom and usage
The courts will imply terms into contracts if they are felt to be usual in that type of
agreement, but only if it will not create an inconsistency with the express terms.
Terms implied by Acts of Parliament
Legislation can imply terms into particular contracts if Parliament has felt it is
important to give statutory protection.
Illustration 29 – Terms implied by the

type of contract
In an employment contract many matters may not be expressly agreed, but the
courts have implied terms described as duties of the employee (such as to give
honest service) or as duties of the employer (such as to use reasonable care in
providing a safe place of work).
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Chapter 2
Illustration 30 – Terms implied to give

business efficacy
THE MOORCOCK 1889
Facts: There was an agreement by a wharf owner to allow a ship owner to

unload his ship at the wharf. The ship was damaged at low tide when it hit a hard
ridge on the bottom of the river.
Held: The court implied a term into the agreement that the river bottom would be
reasonably safe.
Illustration 31 – Terms implied due to

legislation
 The Consumer Rights Act 2015 – goods must be of satisfactory quality
and fit for purpose
 The Partnership Act 1890 – in the absence of an express provision to the

contrary profits will be shared equally between the partners.
8.4 Battle of the forms
Contracting parties may reach a dispute when entering into an agreement when they
each have their own standard terms. Care should be taken during the negotiation
phase to identify which, if any, of the standard terms apply or whether other terms
are to apply instead. If this does not happen the courts will look at the contract
objectively, taking into account what has happened, to determine which terms are to
apply (this is referred to as using the ‘factual matrix’.)
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Contract formation

area.

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Chapter 2

B
This is a definition of a ‘simple’ contract. It does not have to be in any particular

form – e.g.it does not have to be in writing – to be binding on the parties.

Voidable
Void
Unenforceable

False
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Contract formation

B
The withdrawal of an offer can be made before acceptance and if an offer is

withdrawn, there cannot be offer and acceptance. In the case of Dickinson v
Dodds 1876 it was held that the withdrawal of an offer can be communicated
by a third party and does not have to be made directly by the offeror to the
offeree.

D
For a contract to exist there has got to be offer and acceptance. The offer was
made on 1st September; the acceptance was made on 6th September, within
the 10-day period. The contract is valid from 6th September, the date of
acceptance.

C
A fax is treated in the same way as a telephone conversation. The message

must be received for the acceptance to be communicated.
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Chapter 2

B
Consideration need not be adequate but it must be sufficient

B
Consideration occurs when one person does something in return for a promise
by another party to do something else in return. There must be an exchange of
undertakings. This occurs with example (ii). It does not occur when the
performance is a legal requirement. It does not apply in (iii), because the
performance of the act has not been in return for payment – the payment only
came later.
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Chapter 3
Termination of contract
understand the ways in which a contract may be discharged
recognise when a contract can be said to have been frustrated and

understand the consequences of this
define breach of contract and recognise when it arises
understand and apply the rules relating to damages
be aware of alternative contractual remedies and the circumstances in which

they may be awarded
recognise an exclusion clause and understand how it may be affected by the

Unfair Contract Terms Act.
MyKaplan resources
This topic is covered on MyKaplan in the module Termination of Contract.
ICAEW resources
workbook
65
Chapter 3
Overview
CONTRACT
DISCHARGE
Equitable
Damages REMEDIES
remedies
66
Discharge of the contract
A contract can be brought to an end in several ways:
 By Performance.
 By Frustration.
 By Breach of contract.
1.1 Performance of the contract
A contract is usually discharged by the performance by both parties of their

obligations under the contract.
Performance must be exact and complete
Generally, the rule is that performance must be exact and precise and that a partial
performance is no performance.
Illustration 1 – Discharge of the contract

CUTTER v POWELL 1795
Facts: C was employed on a ship sailing from Jamaica to the UK. He died before
completing the journey. His wife tried to sue to recover part of the wages due to
her husband.
Held: The widow was not entitled to anything because her husband had not
completed the journey and there was no complete performance of the contract.
Partial performance may discharge the contract if it is freely accepted by the other
party.
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Chapter 3
Substantial performance
If performance is ‘substantial’ that will be a sufficient discharge; this is a qualification

to the rule that performance must be exact. If a contractor has substantially
performed the contract with only minor defects he or she is entitled to the contract
price less the cost of remedying the defects.
HOENIG v ISSACS 1952

Facts: Hoenig was employed by Issacs to decorate his flat. The price was £750
to be paid in instalments. I paid £400 but refused to pay the rest as he was
dissatisfied with H’s work.
Held: I had to pay the outstanding amount less the cost of remedying the minor
defects in H’s work.
Severable contracts
If the contract is divisible, as in building contracts or employment contracts, the
contract can be discharged by performance of part of the obligations. For example,
with building contracts there may be several payment trigger points as different
stages of the building work are completed, and with employment contracts wages or
salaries are usually paid by reference to a weekly or monthly period. Each of these
dates represents a point at which the contract may be severed.
Quantum meruit
In some cases, one party is prevented from performing his or her duties under a
contract due to the actions of the other party (e.g. if one party refuses the other party
access to the site of building work). In these circumstances the offer of
performance is sufficient to discharge contractual obligations, and enables the party
to sue for damages or bring an action for quantum meruit (this is an order for the
defendant to pay damages for the proportion of the contract price that the work is
worth at this point).
Quantum meruit- a reasonable sum of money to be paid for services rendered or work done when the amount
due is not stipulated in a legally enforceable contract. Quantum meruit is a Latin phrase meaning "what one has
earned".
68

PLANCHÉ v COLBURN 1831
Facts: C had agreed to write a book as part of a series of titles. He was to be

paid £100 on completion. He did some research and started the book but the
series for which the book was intended was cancelled.
Held: C was entitled to a payment of half of the agreed price as reasonable pay
on a quantum meruit basis.
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1.2 Frustration of the contract
If it is impossible to perform the contract when it is made there is usually no contract

at all. If, however, the contract is made and then the performance becomes
impossible due to a matter for which neither party is responsible the contract is said
to be discharged by ‘frustration’.
Frustration at common law
There have been a number of situations where the courts have held a
contract to be frustrated.
Illustration 4 – Destruction of subject matter

TAYLOR v CALDWELL 1863
The hall let to a musician for a series of concerts was destroyed by fire before the
first one. The contract was held to be frustrated.
Illustration 5 – Personal incapacity

CONDOR v BARRON KNIGHTS 1966
A drummer contracted to play seven nights a week could only play four nights
due to ill health.
70
Illustration 6 – Government Intervention

MORGAN v MANSER 1947
A comedian was contracted to perform but was conscripted into the armed
forces.
Illustration 7 – Non-occurrence of an event
KRELL v HENRY 1903
A room was booked to watch the coronation but the King’s illness caused the
coronation to be postponed.
For a contract to be held to be frustrated performance must be

impossible. It is not frustrated if it is merely more difficult or expensive.
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The Law Reform (Frustrated Contracts) Act 1943
This Act regulates the rights and liabilities of each party following the frustration of a
contract. The Act provides that where a contract has been frustrated:
 Amounts paid by one party to another party under the contract are to be
refunded
 Amounts still outstanding are no longer due
 If a person has to repay sums he or she may set off any expenses, provided
those expenses were incurred in carrying out the contract prior to the frustrating
event
 If either party has benefited other than with a payment of money the court can,
at its discretion, order a payment of all or a part of that value as it considers just.
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1.3 Breach of contract
Actual breach of contract
Actual breach occurs at the time performance of the contract was due and happens
when:
 One party fails to put forward any sort of performance
 The performance put forward is so inadequate the injured party is substantially

deprived of the whole benefit of the contract.
Anticipatory breach
This takes place where, before the due date for performance of the
contract, one party states or shows by his or her actions that he or she
will not be performing the contract.
Anticipatory breach occurs when:
 One of the parties declares before the date of performance that he or she has
no intention of carrying out his or her duties. This is known as express
anticipatory breach.
 One of the parties does something which makes the performance of the
contract impossible. This is known as implied anticipatory breach.
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 There are two options available to the injured party when an anticipatory breach
takes place:
1 The contract may be treated as being discharged immediately and the

injured party may sue for damages.
HOCHSTER v DE LA TOUR 1853

Facts: Hochster was engaged as a courier on a European tour. Before the
contracted period was due to start he was informed that his services were no
longer required.
Held: Hochster was entitled to claim for payment as soon as he was aware of the
anticipatory breach.
2 The injured party may continue with his or her obligations under the contract
until such time as there is an actual breach of the contractual terms.
WHITE & CARTER (COUNCILS) LTD v MCGREGOR 1961
Facts: M contracted with the claimants to have advertisements put on litter bins.
He then wrote to them asking them to cancel the contract. The claimants refused
and displayed the adverts.
Held: The claimants were entitled to carry on with the contract and did not have
to accept the defendant’s anticipatory breach. They could then claim the agreed
price under the contract.
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Effect of breach
Damages may always be sought where there is a breach of contract,

but only if the breach goes to the root of the contract may it be treated
as ending the contract.
If the breach is very serious (known as repudiatory breach) the injured

party can treat:
 the contract as ended; or
 he or she can affirm the contract.
This occurs when the breach is of a fundamentally important term, or

has substantially deprived the party of the whole purpose of the
contract.
A repudiatory breach is a breach of contract that goes to the very core of the contract and gives the innocent
party the right to treat the contract as being disregarded and entitling the innocent party to refuse to be
bound by its terms.
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No breach occurs where there is a lawful excuse
There are circumstances in which there is a lawful excuse for the breach. These
include:
 If one party has offered to perform his or her obligations under the contract, but
the other party has refused.
 If one party makes it impossible for the other to perform his or her obligations.
 Where the parties have agreed that certain obligations shall not be performed.

A Ltd contracts with B Ltd to supply a ton of cement a day for a 100-day
period. The thirteenth delivery is defective.
Which of the following is correct?
A A fundamental term has been breached and B ltd can treat the contract
as discharged because the contract must be performed exactly.
B Damages only will be payable because this is a minor breach in relation

to the whole contract.
C The contract is frustrated.
D Even though the contract has been substantially performed B Ltd can
treat it as at an end.

acumen.
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Damages
Damages are a common law remedy. They are the main remedy for
breach of contract. If a contract has been breached they are available
as a right. They are intended to put both parties in the position they
would have been in had the contract been properly performed.
If there is no provision in the contract for damages the court will
determine the damages payable on the basis of the principles below.
Such damages are known as UNLIQUIDATED DAMAGES.
2.1 Remoteness
The basic rule is that damages are awarded to compensate the injured party for loss
arising from the breach.
The first issue is ‘remoteness’ of damage since it may not be justifiable to blame the
party at fault for all of the consequences of their actions. Damages will only be
awarded for losses which are not too remote.
a defendant is only liable for the harm caused by their
actions if that harm was foreseeable at the time of the
wrongdoing
Illustration 10 – Damages
HADLEY v BAXENDALE 1854
Facts: C owned a mill. One of the mill parts had broken and C made a contract
with D for the transport of the old part to London as a pattern for making a
replacement. D was responsible for a delay in delivering the part and as a result
the mill was closed for a longer duration than would have been necessary if there
had been no delay. C claimed for loss of profits during the period of delay.
Held: D did not know that the mill was inoperable without the part and whilst he
was directly responsible for the delay itself, that stoppage was not a natural
consequence of delay in transportation. C could have had a spare part and did
not alert D to the fact that the mill would be inoperable until the new part was
made. Accordingly, D was not liable for the loss of profit.
Unliquidated damages- the amount of damages decided by a court because the parties to a contract had not
agreed in advance how much the damages would be for breaking the terms of the contract. The unliquidated
damages could not have been foreseen so they were decided by the court.
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The rule in HADLEY v BAXENDALE
The case of Hadley v Baxendale established that there are two types of
loss that can be recovered:
 Losses which are a natural consequence of the breach
 Losses which were in both parties’ contemplation as a possible

consequence at the time of the agreement. Where losses are not
reasonably foreseeable, the party in breach of contract will only be
liable for them if he or she knew at the time of the contract that
such losses could arise in these particular circumstances.
VICTORIA LAUNDRIES v NEWMAN 1949
Facts: A delay in the delivery of a boiler caused the loss of the normal trading
profit plus an extra-large profit on the loss of a government contract.
Held: The loss of the normal profit could be claimed but not for the government
contract since this was not made known to the defendant and was therefore too
remote.
If i had a contract to teach you law and i breached, a natural consequence would be that you fail the
exam
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Damages are not usually recoverable for loss of enjoyment
On very rare occasions the court will award damages for mental distress where that
is the main result of the breach. Recent decisions have shown that the court is
prepared to recognise ’peace of mind’ obligations in contracts.
JARVIS v SWAN TOURS 1973
Facts: Jarvis entered into a contract for a holiday at a winter sports’ centre.
What was provided was significantly inferior to the description in the brochure. A
very low award was given for financial loss.
Held: The damages should be increased to compensate for the disappointment
and distress because the principal purpose of the holiday was the giving of
pleasure.
2.2 Measure of damages
The second issue to be considered is the financial value of the

claimant’s loss. The courts will usually value damages as the cost to put
the claimant back in the position they would have been if the contract
had been properly performed. This is often referred to as protecting the
‘expectation interest’ of the claimant (injured party).
Damages for loss of bargain
If a buyer bought goods for £50 which the seller refused to deliver, the buyer’s
damages would be the extra cost to him of acquiring the same goods from someone
else. So, if the buyer had to pay £60 the buyer’s damages would be £10.
If a buyer refused to accept the goods from the seller the seller’s damages would be
the difference between the contract price and the final selling price, if this were lower
due to market forces.
If the claimant has suffered no actual loss, the buyer will be awarded only NOMINAL
damages.
Check icaew video regarding damages for loss of bargain and write notes
what position did they expect to be in if the contract had been properly performed? The damages will be
calculated based on their ‘loss of bargain’. This means how much worse off they are than they would be if the
contract had been properly performed.
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Reliance losses
These enable the claimant to recover compensation for expenses incurred in

performing his or her part of the contract before the breach occurred. They may be
claimed where such losses exceed any likely profit.
ANGLIA TELEVISION v REED 1972
Facts: R was engaged to play a leading role in a T.V. play. The claimants
incurred expenses in preparing for filming and R then pulled out at the last
moment and the project was abandoned.
Held: R was liable for the expenses. He was not liable for any projected profit
since it is impossible to tell whether the film would have been a success or a
failure.
Mitigation of Loss
When calculating the level of damages to be awarded, the court will assume that the
claimant had taken all steps that could reasonably be expected to mitigate (reduce)
his or her loss.
BRACE v CALDER 1895
Facts: B was employed in a partnership for a fixed period of two years. After five
months the partnership was dissolved. B was offered identical employment with
the new partnership but refused the offer and sued for wages he would have
earned had he completed the two-year period.
Held: B had not mitigated his loss and could only recover nominal damages.
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2.3 Liquidated damages and Penalty clauses
Where a contract provides for the payment of a fixed sum on breach it may be either
LIQUIDATED DAMAGES or a PENALTY CLAUSE.
Liquidated damages are a genuine pre-estimate of the expected loss and are
enforceable by the court.
A penalty clause imposes a sum which is arbitrary or excessive and it will not usually
be enforceable. Instead the courts will act as if there is no provision in the contract
and as with unliquidated damages they will value the claimant’s losses.
A sum is presumed to be a penalty clause if:
 The amount is out of proportion to the potential losses
 The same amount is given for a number of potential losses.
FORD MOTOR CO (ENGLAND) LTD v ARMSTRONG 1915
Facts: The defendant had entered into a contract with Ford within which they
agreed to not sell Ford’s cars at less than the list price. A £250 penalty was
given in the contract for each breach of this provision.
Held: As the same amount was given for a number of different breaches within
the contract this was held to be a penalty clause and as such was not
enforceable.
In recent cases the courts have developed a test for a penalty clause of ‘a secondary
obligation which imposes a detriment on the contract-breaker out of all proportion to
any legitimate interest of the innocent party in the enforcement of the primary
obligation.’
Applying this test, it appears that the courts will be willing to enforce a provision to
pay more in damages than the actual losses suffered if it is held to be ‘in proportion’
to the primary obligation. This will be up to the courts to determine.
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Chapter 3
Illustration 16 – Penalty clauses

PARKINGEYE LIMITED v BEAVIS 2015
Facts: ParkingEye managed a car park. At the car park signs were displayed
stating that customers could have two hours free parking but if they stayed after
that an £85 charge would be levied. Mrs Beavis stayed for almost three hours.
Held: The charge was given as a deterrent, not a penalty. The court held the
amount was given to allow the claimants to manage the car park in the best
interests of all users by preventing visitors from overstaying. As such Mrs
Beavis had to pay.
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In the event of a breach of contract, what is the purpose of damages?
(i) To punish the contract breaker
(ii) To compensate the innocent party
(iii) To put the innocent party in the same position as if the contract had been
carried out?
A (i) only
B (ii) and (iii)
C (iii) only
D all of the above
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Chapter 3
Equitable remedies
The court can decide whether or not to award an equitable remedy,

unlike damages which must be paid if a party proves their case.
Equitable remedies are a discretionary remedy and will not be granted if:
 Damages are an adequate remedy
 The claimant has acted unfairly
 The claimant has unduly delayed bringing an action to court.
3.1 Specific performance
The court can make an order for specific performance which is simply an order to the
defendant to perform his or her part of the contract.
Specific performance is rarely granted except in connection with the sale of land: this
is because each piece of land is unique. Another property is unlikely to be an
acceptable substitute and even if damages were paid the claimant could not find an
exact replacement.
It is also possible that specific performance might be awarded on a sale of goods

contract provided the goods were unique and irreplaceable.
Specific performance will not be awarded to enforce a contract for personal services
because it would be unfair to force one person to work for another after a
disagreement resulting in a court case, and equitable remedies must be mutually
enforceable. It will also not be granted if it would require the supervision of the court.
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3.2 Injunctions
An injunction is an order for a person to do or not to do something.
There are three types of injunction:
Mandatory injunction order to make the defendant undo a previous act. Example: if bob put a barrier on a
pathway, then a order would be given to remove this barrier.
This is a direction for a party to take positive steps to undo something he or she has
already done in breach of contract. This is a relatively rare remedy. An example
might be where a building has been erected in breach of contract and a mandatory
injunction is granted to demolish it.
order not to do something. Example: order could be granted to stop you from
Prohibitory injunction contacting former employer's customers. Such orders would not be granted if it
causes hardship
This requires the defendant to observe a negative promise in a contract. This is a
common remedy for breach of ‘restraint of trade’ contracts. It would not be enforced
to make a person work for another, only to stop him or her working for another.
Prohibitory injunctions will not be granted if their impact would cause undue hardship,
for example if the effect is to deprive the defendant of any opportunities to work at all.
Asset-freezing injunction stops the defendent from trading in named assets

This prevents the defendant from dealing with assets. It might be awarded where the
claimant can convince the court that he or she has a good case and that if the
injunction were not awarded the assets might disappear.
Illustration 17 – Equitable remedies

WARNER BROS v NELSON 1936
Facts: Bette Davis (Nelson) breached her contract with W not to act for anyone
except them. She agreed to make a film for a UK company.
Held: An injunction was granted to stop her from working for the rival company.
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Chapter 3

(i) An order for specific performance will not be granted where damages
provide an adequate remedy
(ii) An order for specific performance will not be granted where the contract
is for personal services
A (i) only
B (ii) only
C Both (i) and (ii)
D Neither (i) nor (ii)

Which one of the following contracts might be specifically enforceable?
A A has contracted to sell his house to B and no longer wishes to sell it
B C has contracted to buy a new motor car but the garage is refusing to
honour the contract
C D has contracted to purchase a number of tins of fruit for her business

but the seller has withdrawn from the contract
D E has contracted to sing at a concert organised by F but E has withdrawn

as he has had a better offer from G.
This question allows you to demonstrate your business acumen skills.
86

In breach of contract C Ltd refused to sell a motor car to D Ltd at the agreed
price of £10,000.
If the type of car is readily available on the market at £9,000, which one
of the following is correct?
A D Ltd is entitled to an order of specific performance, forcing C Ltd to

carry out his contract
B D Ltd is entitled to damages of £1,000
C D Ltd is entitled to nominal damages only
D D Ltd is not entitled to damages
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Chapter 3
Exclusion clauses
Often terms are included in written contracts in an attempt to exclude or

limit liability for a breach of contract. These terms are known as
exclusion clauses or exemption clauses.
The law has tended to look unfavourably on such clauses and has developed various
rules to protect weaker parties from those in a stronger bargaining position whilst
allowing freedom of contract.
Any exclusion clause will be interpreted strictly against the party seeking to rely on it.
In order for an exclusion clause to be valid it must pass tests which have been
developed in two ways:
4.1 Common law tests
The exclusion clause will only be enforceable if it has been properly incorporated into
the contract and if the wording of the clause covers the loss suffered by the claimant.
Incorporation
The clause needs to be an integral part of the contract. An exclusion clause can be
incorporated by:
 Signature
If the claimant has signed a document containing the clause, then they will be
bound by the clause. This rule applies even if they have not read the document
(as long as the other parties do not misrepresent what the clause covers).
 Notice
If the defendant takes reasonable steps to bring the clause to the claimant’s
attention, then the clause will be held to have been incorporated. This must
have happened at the time of the agreement or before.
88
Illustration 18 – Incorporation
OLLEY v MARLBOROUGH COURT 1949
Facts: Mr Olley and his wife booked a hotel room. When they got to the room
there was a notice denying liability for loss or damages to personal belongings.
Held: The clause was not incorporated as it was brought to the party’s attention
after the agreement was entered into.
Interpretation
The defendant will only be able to rely on an exclusion clause if it covers the loss the
claimant has suffered. In the case of any ambiguity the clause will be interpreted
against the person trying to rely on it.
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Chapter 3
4.2 The statutory rules
If a clause passes the common law rules it must also satisfy the statutory rules
namely under:
 The Unfair Contract Terms Act 1977
 The Consumer Rights Act 2015
The Unfair Contract Terms Act 1977 (UCTA) applies to exclusion clauses in
contracts made in the course of a business.
It states that a clause exempting liability for
 Death or personal injury due to negligence is void.
 Other loss due to negligence is void unless reasonable.
The party seeking to rely on the clause has to prove that it is reasonable and to help
the courts decide there are various matters to take into consideration such as the
strength of the bargaining parties, whether the buyer received any inducement to
agree to the term, whether the buyer knew or ought to have known about the term
and the ability of the party to insure against liability.
The Consumer Rights Act 2015 applies to terms in a contract where the seller is
acting in the course of a business and the other party is a consumer. The Act states
that terms in contracts between a consumer and a business must be ‘fair’.
To decide this, the courts first look to see if the term is automatically
unenforceable. If it is then the clause will be void. For example, this would cover
the situation where the clause tried to restrict the consumer’s rights under the
Consumer Rights Act.
If this is not the case a number of factors will be considered to determine if the clause
was fair including:
 Does the clause put the consumer at a disadvantage?
 Were there any relevant circumstances when the contract was signed?
 What is the nature of the contract itself?
 Is the clause stated in plain, intelligible language?
 Are any relevant terms prominent?
The test is whether an average consumer who is reasonably well-informed,

observant and circumspect would be aware of the term.
If such a term is unfair it will not be binding on the consumer, though the consumer
will still be able to rely on any such terms against the business.
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Unfair Contract Terms Act (UCTA) 1977:

UCTA applies in contracts made in the course of business.
Any clause which exempts liability for death or personal injury is void. For all other losses the clause is void unless
reasonable.
Consumer Rights Act 2015:

The Consumer Rights Act only applies in contracts between a business and a consumer (member of the public). It
states that exclusion clauses in such contracts must be fair and expressed in plain language.
If the term is held to be unfair then the business will not be able to rely on it against the consumer, although, the
consumer would still be able to rely on it against the business.
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Chapter 3

By virtue of the Unfair Contract Terms Act 1977 an attempt by any
person to exclude or restrict liability for damage to property caused by
negligence is:
A Void unless reasonable
B Effective only in a non-consumer transaction
C Void
D Valid if the other party to the contract knows of the exclusion clause or
has been given reasonable notice of it.
awareness.
92

Deeanna went to drop her watch for repair. She was handed a note that
contained the words in fine print amongst many lines of text ‘the management
are not liable for any loss or damage to your watch howsoever caused’. She
did not read the note but signed it. The watch was lost by the jeweller.
(i) The clause is not incorporated into the contract even though Deeanna
has signed the note
(ii) The clause is automatically void under the Unfair Contract Terms Act
1977.
Which of the above is correct?
A (i) only
B (ii) only
C Both (i) and (ii)

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Chapter 3

area.

94

B
This is a minor breach in relation to the whole contract, therefore the remedy is
damages.

B
The aim of damages is usually to put the injured party into the position he or
she would have been in if the contract had been properly performed – often
referred to as’ bargain loss’. However, in some cases the courts award
‘reliance losses’ i.e. losses incurred in trying to perform the contract prior to the
breach. Both (ii) and (iii) are therefore purposes of awarding damages.
Damages are not intended as a punishment of the person in breach of the
contract.
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Chapter 3

C
Although specific performance is given at the discretion of the court, there are
certain circumstances where it will not be given. The two statements are
examples of when it will not be given.

A
Once contracts have been exchanged for the sale of land under English law
the contract may be specifically enforceable.

C
Damages are intended to be compensatory and not punitive. In this case D Ltd
has not suffered loss because D Ltd can obtain the same item that C Ltd
refused to sell at a lower price. D Ltd is therefore only entitled to nominal
damages, a small payment to cover any expense suffered and to acknowledge
C Ltd’s breach.
96

A
A clause excluding liability for damage to property through negligence is void

unless it can be shown to be reasonable.

D
Neither statement is correct. The clause will be included in the contract as

Deeanna signed it. It is not automatically void under the Unfair Contract Terms
Act 1977.
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Chapter 4
Negligence
understand the nature of the law of tort
understand and recognise what needs to be proved if an action for negligence

is to be successful
recognise the considerations relevant to negligence in the context of

professional advice
know the remedy available for a successful claim of negligence and when a
claim might be defended successfully
understand and recognise instances of vicarious liability.
MyKaplan resources
This topic is covered on MyKaplan in the module Negligence.
ICAEW resources
workbook
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Chapter 4
Overview
Definition of TORT
Negligence Remedies Defences
Negligent misstatement
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Negligence
Understand the nature of the law of tort
1.1 What is a tort?
As a tort is a breach of a legal duty, there is no liability unless the law

recognises that the duty exists.
1.2 Differences between contracts and torts
A contractual relationship does not have to be established for a claim in tort to be

successful. Often the parties have never even met before. For example, in a claim for
personal injury as a result of a road accident, the parties will often have had no
previous relationship at all.
However, if a contract does exist and a tort has been committed, the claimant may
choose the remedy most appropriate.
There are two options:
 Under a valid contract, the amount of damages awarded is intended to put the
claimant back in the position he or she would have been in had the contract
been properly performed.
 In tort, the amount of damages awarded is intended to put the claimant in the
position he or she would have been in had the tortious act never taken place.
Limitation periods
 In contract the limitation period is six years from the breach of contract.
 In tort the limitation period is generally six years, but three years for personal
injury.
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Chapter 4
1.3 The main elements of a tort
In order to be successful in an action for tort, the following conditions

must be satisfied:
 There must be an act or omission by the defendant.
 The act or omission must have directly caused damage or injury to

the claimant.
 The courts must be able to establish a legal liability as a result of

the damage.
A claim will only be successful if the damage or loss suffered is not “too remote” i.e.
the damage or loss must be as a direct consequence of something the defendant did
or did not do.
102
Negligence
Negligence
Negligence is the breach of a legal duty to take care, which results in

damage to another.
In order for an action in negligence to succeed, the claimant must prove

the following:
 That a duty of care was owed to him or her by the defendant
 The defendant breached that duty
 As a consequence of that breach, damage or loss has been

suffered.
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Chapter 4
2.1 Duty of care
There is a duty to take reasonable care not to cause foreseeable harm to others.
The 'neighbour principle’
The case of Donoghue v Stevenson (below) was the first to establish that a duty of
care may be owed to a person, even where no contractual relationship exists.
Prior to this case, the belief was that to allow an action to be taken where there was
no contractual relationship would undermine the principles of contract law. The
doctrine of privity states that only parties to a contract can sue or be sued.
Donoghue v Stevenson changed this principle and, as a result, manufacturers of

goods owe a duty of care to the ultimate consumer of the product.
Illustration 1 – Negligence
DONOGHUE v STEVENSON 1932
Facts: A bottle of ginger beer was purchased in a café. Donoghue drank part
of it then discovered the remains of a decomposing snail in it. As a result, she
became severely ill. The manufacturer claimed that as there was no contractual
relationship between himself and the claimant he did not owe her a duty of care.
Held: Everyone owes a duty of care to their ‘neighbour’, to ‘persons so closely

and directly affected by my act that I ought to have reasonably have had them
in contemplation as being so affected.’ Thus a manufacturer owes a duty of
care to a consumer of their product.
104
Negligence
Economic or financial loss
The case of Donoghue v Stevenson established that an action could be taken if

physical damage was suffered. However, prior to 1964, the law did not recognise
any action if only economic or financial loss was suffered. Therefore, if negligent
advice was relied upon and as a result of that advice a loss (other than a physical
one) was suffered, no claim could be made.
The case of Hedley Byrne v Heller modernised the law in this area. The House of
Lords refined the neighbour principle by acknowledging that a claim for financial loss
suffered could be made if a “special relationship” existed between the claimant and
defendant (see part 3).
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Chapter 4
The limits of the duty of care
In the case of The Nicholas H (Marc Rich & Co v Bishops Rock Marine) 1995,
four tests were laid down which should be followed in determining whether a duty of
care exists.
The issues to be considered are:
 Was the damage reasonably foreseeable by the defendant at the time of the act
or omission?
 Is there a neighbourhood principle or sufficient proximity (closeness) between

the parties?
 Should the law impose a duty of care between the parties i.e. is it fair and
reasonable to do so?
 Is there a matter of public policy which exists or requires that no duty of care
should exist?
The Nicholas H case focused on financial loss, but these tests should also be applied
when determining the duty of care for physical damage cases.
Fatma was given an iPod for her birthday by her uncle. Due to a design defect,
it set fire to her bedroom and caused damage to carpets and furniture. Fatma
was made ill by smoke inhalation. Fatma is entitled to claim damages from the
iPod manufacturer for:
 Pain and suffering caused by smoke inhalation
 Any loss of earnings whilst she recovers
 The cost of replacing furnishings and redecoration.
She is not entitled to claim the cost of replacing the defective iPod which would
be pure economic loss.
The defect does not give rise to the liability: it is the resultant damage to person
or property.
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Negligence

In assessing whether a duty of care exists, which of the following tests will be
taken into consideration?
(i) Whether the damage was reasonably foreseeable by the defendant at

the time of the act or omission
(ii) Whether it is fair and reasonable for the law to impose a duty of care
(iii) Whether the defendant has intentionally caused physical damage or

financial loss
(iv) Whether the claimant has taken reasonable steps to mitigate the loss
suffered
A (i) and (iv) only
B (i) and (ii) only
C (iii) and (iv) only
D All of the above
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2.2 Breach of duty of care
In order for a claim to be successful, a claimant must not only prove that a duty of
care existed, but also that the duty was breached by the defendant.
Was there a breach?
Establishing if there has indeed been a breach is a question of fact. Each case must
be viewed separately on its own facts.
It is usually up to the claimant to prove that there has been a breach, or

in other words that the defendant did not take reasonable care. In
some circumstances, the facts of the case speak for themselves. This is
referred to as the principle of res ipsa loquitur. In these situations, it is
felt that the fact there is a harm shows there must have been a breach.
The claimant will then have to show that the ‘res’ or ‘thing’ which caused the damage
was in the control of the defendant and the defendant has to prove that the cause of
the injury was not his or her negligence (in other words the burden of proof shifts
from the claimant to the defendant).
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Negligence
The standard of care
This is a question of law. Basically, the claimant must show that the defendant failed
to take the degree of care which a reasonable person would have taken in the
circumstances (the ‘man on the Clapham omnibus’).
The reasonable person is not expected to be skilled in any particular trade or

profession BUT if he or she acts or purports to act in a professional capacity he or
she must show the care and skill of someone of that profession.
The following principles have been established by case law:
 Particular skill
– As a general rule, the level of skill and care required is that which a
reasonable person would possess. However, if the defendant possesses a
particular skill, i.e. he or she is a qualified solicitor or a qualified surveyor,
the standard of care expected will be that of a reasonable person with that
skill.
 Lack of skill
– Lack of training or the peculiarities of the defendant are not relevant.

Therefore, the standard of skill expected from a trainee accountant is the
same as that of any reasonable accountant.
 Lack of hindsight
– The tests focus on the defendant’s knowledge at the time. Therefore,

hindsight or knowledge of facts at a later date is irrelevant.
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ROE v MINISTER OF HEALTH 1954
Facts: A doctor administered an anaesthetic using all normal precautions at the

time of his actions. The patient was paralysed due to contamination of the
anaesthetic due to contamination in a way not discovered until later.
Held: The doctor could not be judged against information that was not available
at the time of his actions. He had followed proper practice at that time.
 Body of opinion
– A professional is expected to follow the general practice and body of

opinion in that area.
 Advantage and risk
– When deciding if reasonable care has been taken the courts will weigh up
the benefit and risk of the defendant’s actions
 Emergency
– If an emergency situation caused the defendant to act negligently, this will

be taken into consideration.
 Vulnerability
– If the claimant is vulnerable and the defendant is aware of this

vulnerability, then a higher standard of care is expected.
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Negligence
PARIS v STEPNEY BOROUGH COUNCIL1951
Facts: Paris was employed by the council on vehicle maintenance. It was not
normal practice to supply the workers with protective goggles when working.
Paris was already blind in one eye. Whilst working a chip of metal flew out and
hit him in his good eye rendering him completely blind.
Held: Paris was especially vulnerable to injury and as such a higher standard of
care was owed to him than to other workers.
2.3 Loss caused by the breach
A claimant must demonstrate that he or she has suffered loss or damage as a direct
consequence of the breach. If he or she cannot prove this, he or she will not be
entitled to damages.
The claimant must establish a causal link between the defendant’s conduct and the
damage which occurred:
 If the damage was caused by something or someone else, there will be no

liability on the defendant’s part.
 If the claimant would have suffered the loss regardless of the defendant’s
conduct, then he or she has not caused the loss.
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Chapter 4
BARNETT v CHELSEA & KENSINGTON HOSPITAL 1969
Facts: Barnett attended the hospital complaining of severe stomach pains and
vomiting. The doctor on duty didn’t examine him but told the nurse to send him
home and tell him to contact his GP the next day. Mr Barnett was suffering
from arsenic poisoning and died during the night.
Held: By the time Barnett attended the hospital his symptoms were too
advanced and there was nothing the hospital could have done to prevent his
death. There was no causal link between the hospital’s breach and his death
and as such they were not liable to his wife.
 If something happened after the defendant’s breach that caused or contributed

to the damage, then the defendant’s liability will cease at that point.
The following losses are normally recoverable:
 Loss as a result of personal injury
 Damage to property
 Financial loss directly connected to personal injury (i.e. loss of wages).
Pure financial loss is very rarely recoverable.
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Negligence
SPARTAN STEEL ALLOYS v MARTIN CO CONTRACTORS 1972
Facts: The claimant was halfway through smelting a steel ingot when a cable
was damaged by the defendant, causing the electricity supply to be cut off.
Held: The claimant was entitled to damages for the damaged ingot (physical
harm) and the loss of profit on that ingot (financial losses due to physical harm).
However, they were not entitled to damages for the lost profits due to the
general disruption to the business as these were purely financial in nature.
 Even where the claimant is able to show the loss was suffered as a result of the
defendant’s breach the court will not allow recovery of that loss if it is
considered to be too remote (see part 4 below).

Which one of the following is not an essential element of the tort of
negligence?
A A duty of care owed to the claimant
B A breach of the duty of care
C An intention to cause loss or injury
D Loss or injury caused by the defendant’s breach
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Chapter 4
Professional advice and negligent

misstatement
In practice there is no difference between liability arising from negligent misstatement
and liability arising from negligent acts. A party can suffer damage by reliance on
incorrect advice just as he or she can be injured by any other negligent conduct.
With respect to a negligent statement however, the consequences of this could be

far-reaching and affect countless people. Because of this the law had been reluctant
to impose a duty of care in the making of statements.
This situation changed in1963 when the landmark case set out below marked a new
approach to the law of negligent misstatement.
Illustration 7 – Professional advice

and negligent misstatement
HEDLEY BYRNE & CO LTD v HELLER & PARTNERS LTD 1963
Facts: The claimant, an advertising agency, acted for E Ltd. The claimant
requested information from E Ltd.’s bank on the creditworthiness of E Ltd. The
bank gave favourable references but included a disclaimer (exclusion clause)
saying the information was given without responsibility.
The claimant extended credit to E Ltd and lost money when the company went
into liquidation. The claimants sued the bank for negligence.
Held: The bank’s disclaimer was adequate to exclude a duty of care.
The House of Lords went on to consider whether there could ever be a duty of
care to avoid causing loss by negligent misstatement where there was no
contractual or fiduciary relationship.
They decided that the bank was guilty of negligence, having breached the duty
of care, because a ‘special relationship’ existed. Had it not been for the
exclusion clause they would have been held liable (it is likely that the clause
would nowadays have fallen foul of the UCTA 1977).
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Negligence
Continued:
Lord Morris said the following: ‘If someone possessed of a special skill
undertakes….to apply that skill for the assistance of another person who relies on
that skill, a duty of care will arise…if, in a sphere in which a person is so placed
that others could reasonably rely on his skill…a person takes it upon himself to
give information or advice to…another person who, as he knows or should know,
will place reliance on it, then a duty of care will arise.’
3.1 The effect of HEDLEY BYRNE
The above case created a new duty situation by recognising liability for negligent
misstatement causing economic loss in circumstances where there exists a ‘special
relationship’ between the parties.
Cases involving negligent misstatement are usually concerned with establishing

whether or not a duty arises and it is difficult to establish clear principles to apply as
the law has evolved on a case-by-case basis.
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Chapter 4
3.2 The meaning of special relationship
For an action in negligent misstatement to succeed there must be a

special relationship. The considerations outlined in the NICHOLAS H
case will still be relevant.
To identify if there is a special relationship between the parties three elements must
be considered:
 Was the defendant in the business of giving professional advice?
 Was the advice given in a business context rather than a social context?
 Did the defendant know (or should they have known) that the claimant in
particular would rely on the advice? This requires the court to consider the
purpose for which the statement was made and knowledge of users of the
statement.
Where there is no special relationship
If there is no special relationship between the parties, there is no duty of care.
This concept has been particularly considered when looking at the audit of a
company. As a general rule, however, unless the defendant had prior knowledge
that a certain bidder would rely on the statement made, no duty of care would exist.
The duty is owed to the shareholders as whole and not individual bidders.
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Negligence
The concept of special relationship has now been redefined in the following leading
case:

CAPARO INDUSTRIES PLC v DICKMAN AND OTHERS 1990
Facts: Caparo, a shareholder in Fidelity plc, bought more shares in the

company after receiving the audited accounts. He later made a takeover bid.
After the takeover Caparo sued the auditors alleging that the audited accounts
had been misleading as they showed a profit when in fact there had been a
loss. Caparo said the auditors owed a duty of care to investors and potential
investors as they should have been aware that a press release saying that
profits would fall significantly had made Fidelity vulnerable to a takeover bid and
that bidders might rely on the accounts.
Held: The court set out various criteria which had to be fulfilled in order to give
rise to a duty of care:
 The standard test of foreseeability applied
 The concept of proximity limits the duty to circumstances where the

statement would be communicated to the claimant either as an individual
or a member of an identifiable group in respect of transactions of a
particular kind and that the claimant would rely on the statement.
 It is therefore necessary to look at the purpose for which the statement is

made, the statement maker’s knowledge of the person relying on the
statement and the type of transaction in which it is used
 Whether it is just and equitable that a duty of care should be imposed so

that imposing it would not be contrary to public policy.
When the court applied these criteria to the CAPARO case they found that
auditors of a public company owe no duty of care to the public at large who rely
on accounts when purchasing shares in a company nor was any duty owed to
individual shareholders who purchase additional shares.
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Chapter 4
This approach is also illustrated in the following case:

JAMES MACNAUGHTON PAPERS GROUP LTD v HICKS ANDERSON & CO
1991
Facts: The claimant company were looking to take over another company. The
chairman of the target company had requested the auditors drew up draft
accounts for him to use during negotiations. He allowed the claimant to view
these accounts and following this an agreement was reached for the terms of
the takeover.
Held: The accounts were drawn up specifically for the chairman, not for the use
of the claimant. In addition, they were labelled as draft accounts. As such no
duty of care was owed.
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Negligence
Where there is a special relationship
 If advice is given or financial statements prepared for a specific purpose, then a

duty of care is owed to those who are relying on them for that specific purpose.

MORGAN CRUCIBLE v HILL SAMUEL BANK LTD 1991
Facts: MC made a bid for X Ltd. X Ltd issued circulars containing profit records
and forecasts recommending that its shareholders reject the bid. MC increased
its bid and on the board of X Ltd.’s recommendation the bid succeeded.
MC discovered the issued circulars grossly overstated the profits and X Ltd was
in fact worthless. MC sued X Ltd, their bank, directors and accountants for
negligence in respect of the circulars.
Held: The claim succeeded:
 The bidder had been identified to the defendant
 It was intended the bidder should rely on the accounts
 Express representations had been made to the bidder by the defendant
 Where a statement is made confirming the veracity of audited results or

auditors give specific assurances to a third party they are liable to that
third party if the assurance is given negligently.
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Chapter 4
Illustration 11 – Professional advice and

negligent misstatement
ADT LTD v BDO BINDER HAMLYN 1995
Facts: ADT was considering buying a company and as such they reviewed the
accounts in which BDO, the auditor stated that they showed a true and fair
view. At a meeting with ADT when asked the audit partner specifically
confirmed that he ‘stood by’ the results of the audit. On takeover ADT alleged
that the accounts overstated the value of the company by £65m.
Held: As the statement was made by the partner specifically for the purpose of
ADT, BDO were held to be liable.
In situations not involving takeovers the courts have again considered the
knowledge of the accountants when preparing the company’s accounts.

LAW SOCIETY v KPMG 2000
Facts: KPMG were retained by a firm of solicitors to prepare annual accounts

as required by the Law Society. It was found that these solicitors had been
defrauding clients and the Law Society had to make good their losses.
Held: KPMG owed a duty of care to the Law Society and as such were liable. It
was foreseeable that if they had given an adverse opinion the Law Society
would have intervened at that point and would not have suffered such losses.
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Negligence
3.3 Factors to consider in establishing whether a duty of care exists

There are a number of factors to consider in establishing whether a duty of care
exists in respect of statements made in the course of giving advice:
 The purpose for which the statement was made
 The skill accorded to that professional
 The state of knowledge at the time
 Any responsibility that the defendant had to the claimant
 The size or class to which the claimant belongs (i.e. shareholders)
 The extent to which the advice given was relied upon
 If it was foreseeable that the advice given would be acted upon by the claimant
 If it is fair and equitable, in the given circumstances, to impose a duty of care.
Through increased litigation against professionals, businesses have sought to limit
liability. One such mechanism for this is the Limited Liability Partnership (LLP).
3.4 Companies Act liability for auditor’s report and audited accounts
S.507 of the Companies Act 2006 makes it an offence for an auditor to recklessly
cause an auditor’s report to contain any matter that is misleading or false to a
material extent. The offence is punishable by a fine.
Under s.532 a general prohibition against a company indemnifying its auditor exists
(except for in respect of those costs relating to successfully defending legal
proceedings). However:
 Under s.534 the auditors can enter into a liability limitation agreement with the
company as long as the agreement:
– is approved by the members (in meeting for public companies, this can
be by written resolution by private companies).
– is for no more than one year
– limits liability to an amount that is ‘just and reasonable’ in all
circumstances.
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Chapter 4

Which one of the following is correct?
A Professional advisors cannot be liable in respect of negligent advice in
the tort of negligence but may be liable for breach of contract.
B Professional advisors cannot be liable for breach of contract in respect of
negligent advice, but may be liable in the tort of negligence.
C Professional advisors may be liable in respect of negligent advice in
either contract or tort.
D Professional advisers cannot be liable in respect of negligent advice in
either contract or tort.

awareness.

Olga is a financial advisor. She advises her client, Zala, to invest in J Plc.
Zala does so and also passes Olga’s advice onto her cousin, Artem, who also
invests.
J Plc has now been placed into insolvent liquidation with both Zala and Artem
standing to lose large sums of money. It has come to light that if Olga had
carried out proper checks on the company she would have recognised the risk
of insolvency.
Who can bring an action against Olga for negligent misstatement?
A Neither Zala nor Artem
B Zala only
C Artem only
D Both Zala and Artem
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Negligence

In HEDLEY BYRNE v HELLER & PARTNERS, the House of Lords held that
a banker would owe a duty of care on a reference for a client given voluntarily
without consideration to a third party.
What was the basis of this decision?
A That in such a case a duty is owed to persons generally.
B That a duty is owed to those persons who could reasonably be foreseen

as relying on the statement.
C That a duty is owed to a person the defendant knew or ought to have

known would rely on the statement.
D That a duty is only owed to those with whom the defendant was in a
fiduciary or contractual relationship.
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Chapter 4
Remedies and defences in negligence
4.1 Remedies in an action in negligence
The principal remedy in any case involving negligence will be an award of damages.
The damage caused to the claimant must be of a type that is ‘reasonably

foreseeable’.
Illustration 13 – Remedies in negligence

THE WAGON MOUND 1961
Facts: The defendant company’s ship spilt some oil in Sydney harbour. The oil
drifted to a wharf where the claimant company was carrying out some welding.
A spark from the welding fell onto a piece of cotton wool which was in the oil.
This caught light and started a fire damaging the claimant’s wharf.
Held: The claimant failed as it was held that pollution was the foreseeable
consequence of the oil spillage not fire.
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Negligence
If the type of damage is reasonably foreseeable the defendant is liable. It is irrelevant

that the defendant might not have been able to foresee its cause or its severity.
Illustration 14 – Remedies and

defences in negligence
HUGHES v LORD ADVOCATE 1963
Facts: The defendant telephone engineers left an inspection hole covered only
by a tent and surrounded by paraffin lamps. A child claimant was badly injured
when he fell down the hole carrying a lamp which exploded on impact causing a
fireball.
Held: The defendants were liable as they should reasonably have foreseen that
a child would be attracted by the lamps and might be burned when playing with
them. It was irrelevant that they could not have foreseen the explosion or the
severity of the burn damage.
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Chapter 4
4.2 Defences to a claim in negligence
There are three main defences to a charge of negligence:
Contributory negligence
If the claimant is partly responsible for his or her own injuries, the
defendant can plead the defence of contributory negligence. The court
may then reduce any damages it awards to the claimant depending on
the degree to which he or she is judged responsible for his or her loss.
Many of the cases on this defence involve road accidents where for example the
claimant was not wearing a seat belt or a crash helmet.
Volenti non fit injuria
This applies where the claimant has freely consented to the risk of loss
or damage due to the defendant’s actions. It amounts to an agreement
by the claimant to exempt the defendant from a duty of care that he or
she would otherwise owe.
Volenti does not apply merely because the claimant had knowledge of the risk. They
must have taken action to show that they consented to having no legal redress.
Exclusion clauses
An exclusion clause is a provision within a contract which seeks to exclude or limit

liability for negligence. An exclusion clause may fall within the provisions of the Unfair
Contract Terms Act 1977 (see chapter 2).
If an exclusion clause is found to be valid, this constitutes a viable defence against

any action for negligence.
In addition, liability is excluded if it is possible to say that the act occurred in the
course of nature i.e. that it was an ‘act of god’; something beyond human foresight
which the defendant could not have been expected to provide against.
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Negligence

In the tort of negligence, if a claimant is partly responsible for his or her
own injuries then:
A No compensation can be recovered from the defendant.
B The defendant is fully liable if he or she was mainly responsible for the
injuries.
C If the defendant was negligent he or she remains fully liable for all the
injuries caused.
D The compensation will be reduced to take account of the claimant’s

share of the responsibility.
acumen.

If a claimant cannot show precisely how an accident occurred in relation
to personal injuries he or she receives through negligence:
A He or she cannot claim compensation
B He or she can only claim reduced compensation
C There is no effect on his or her claim
D He or she may assert ‘res ipsa loquitur’
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Chapter 4
Vicarious liability
Usually we are liable for our own torts but in certain situations we may be sued for
the torts of others for whom we are said to be vicariously liable.
This is most common in relation to employees.
5.1 What is vicarious liability?
Vicarious liability is liability imposed on a party for torts committed by

another. Therefore, an employer can be held liable for a tort committed
by an employee, if that tort was committed during the course of
employment.
The principle of vicarious liability is advantageous for a claimant, as it is likely that an

employer will be able to recover any loss suffered through his or her insurance.
A claimant is not precluded from taking out an action against the employee who
committed the tort. However, the employee may not have the financial resources to
meet any damages awarded against him or her.
The Employee
There are various tests to establish whether or not a person is an employee or an

independent contractor and these are covered in detail in chapter 12.
Although vicarious liability normally refers to the employer / employee relationship, an

employer may be liable for torts committed by agency workers, if they are acting in
the capacity of employees.
Acting in the course of employment
An employer will only be liable for torts committed by an employee in the course of
his or her employment.
The law relating to whether an employee was acting in the course of his or her
employment has been revised in the case of:
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Negligence
Illustration 15 – Vicarious liability

LISTER AND OTHERS v HESLEY HALL LTD 2001
Facts: The warden of a boarding school was found guilty of abusing children
resident there.
Held: The school was liable. The warden had carried out the acts of abuse in
the course of his employment.
Another case decided since the LISTER case was:

DUBAI ALUMINIUM CO LTD v SALAAM AND OTHERS 2002
Facts: A solicitor drafted false agreements.
Held: The drafting of such type of agreements fell within the usual scope of
work of a solicitor. As such his employers were held to be vicariously liable.
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Chapter 4
5.2 Vicarious liability and agency
A principal is vicariously liable for a tort committed by an agent acting within the limits
of his or her authority and carrying out the acts for which he or she was appointed as
agent.

ORMROD v CROSSVILLE MOTOR SERVICES 1953
Facts: A rally car driver asked his friend to drive his car to Monte Carlo where
he was taking part in a rally. The friend drove negligently and caused damage
to the claimant’s bus.
Held: The owner was vicariously liable for his friend’s actions.
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Negligence

area.

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Chapter 4

B
The intention of the defendant is irrelevant to a claim for negligence. The

claimant is under no duty to mitigate their loss.

C
The three elements of the tort of negligence are:
Duty of care: It applies in situations where an individual owes a duty of care to

someone else.
Breach of duty of care: the claimant must show the defendant failed to take the
care which a reasonable person would have done in the circumstances.
Resultant loss: there must be a resultant loss, financial or otherwise, before the
tort of negligence can be applied.
Intention to cause harm is not a pre-requisite here.
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Negligence

C
Professional advisers may be liable in respect of negligent advice in either

contract or tort.

B
The losses suffered by both Artem and Zala are purely financial. This means that
liability only exists if there is a special relationship between the parties.
This is the case for Zala as Olga is a professional advisor giving advice in a
business context with the intention that Zala would rely on it.
There is no special relationship between Artem and Olga. When Olga provided
her advice this was for the purpose of Zala. She had no intention or knowledge
that Artem would rely on it.

C
A duty is owed to a person the defendant knew or ought to have known would
rely on the statement. He or she must also know the purpose to which the
information will be put.
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Chapter 4

D
In the tort of negligence, if the claimant is partly responsible for his or her own
injuries, the compensation awarded by the court will be reduced to take account
of the claimant’s share of the injuries.

D
If a claimant cannot show how an accident occurred, he can assert ’res ipsa
loquitur’. This means that ‘the thing speaks for itself’. When this doctrine is
applied it is not necessary for the claimant to prove that the defendant is
negligent: if there was no other way the injury could have happened the
negligence of the defendant is presumed.
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Chapter 5
Agency
identify the role of agents
identify the rights and duties of agents
identify the authority an agent has to enter into contracts on behalf of a principal
MyKaplan resources
This topic is covered on MyKaplan in the module Agency.
ICAEW resources
workbook
135
Chapter 5
Overview
AGENCY
Creation
Authority Duties and Position of

liabilities commercial agents
136
Agency
The meaning and importance of agency
Agency refers to a relationship which exists where one party acts as an

agent for another.
The most familiar situations where an agency relationship can arise are
where an estate agent or travel agent acts as an intermediary. The
party for whom the agent acts is known as the 'principal'. Therefore, the
holiday company which the travel agent represents will be the principal.
The customer booking the holiday will be the third party.
Where an agency relationship is established and a contract is formed

on behalf of a principal by an agent, then the contract is enforceable
both by the principal and the third party, as if the contract had been
formed by them initially. An agent, entering into a contract establishes
'privity of contract'. Therefore, any party to the contract can sue and be
sued.
The most important types of agency relationships in the law syllabus are those seen
in partnerships and companies.
 A partner within a partnership is an agent of the business. A partner can enter

into transactions on behalf of the business. These transactions will be binding
upon the business, and thus all the other partners.
 A director is an agent of a company. They can enter into contracts on behalf of

the company which are binding on the company itself, rather than the directors.
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Chapter 5
Creation of agency
An agency relationship can be created in the following ways:
2.1 Agency by consent
An agency agreement can be created by consent; such consent may be express or

implied.
Express agreement specifically appointed as agent. Example: asking brian to sell my car to someone. I have
appointed brian expressly as my agent
This occurs where the principal actually appoints the agent as his or her agent and
the agreement can be in writing or oral.
It is usual for commercial transactions to be in writing so that the terms and rights
and duties of the agent are clear.
Where an agent is given a power of attorney the appointment must be made by

deed. A power of attorney gives the agent full authority to deal with all of the
principal’s property as defined in the deed.
appointed due to relationship/conduct between the parties. Example: if Jose is
Implied agreement appointed as the director of the company, he implying also becomes an agent of the
company and can bind contracts.
In this situation the principal has not expressly agreed to appoint an agent but the
agreement can be implied from the parties’ conduct or relationship.
The extent of the implied authority is indicated by all of the circumstances in which
the agency arose such as the relationship of the parties, the usual authority of an
agent in that business and the nature of the principal’s orders.
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Agency
Occurs if the principal has allowed the impression to be given that someone is
the agent in certain dealings. Principle will be bound by the agent's action if its
2.2 Agency by estoppel given to a third party.
This arises where the principal implies that there is an agency relationship. This is
also called ‘estoppel by holding out’ where the principal by his or her words or
conduct holds out another as having the authority to make contracts on his or her
behalf. The principal is then prevented from denying that the person has this
authority and is bound by such contracts as if he or she had expressly authorised
them. The authority here can also be known as ‘apparent’ or ‘ostensible’ authority.
Estoppel arises:
 Where the principal fails to notify third parties who have dealt with his or her
agent that the agent’s authority has been terminated
 Where the principal allows his or her agent to appear to have more authority
than he or she actually has.
To create agency by estoppel:
 There must be a representation by the principal either expressly or impliedly to
a third party who relies upon it and believes that the agent has authority to enter
contracts of that type.
It is important to note that it is the principal’s actions which can create agency by
estoppel, not the agent’s.
Illustration 1 – Creation of agency

FREEMAN & LOCKYER v BUCKHURST PARK PROPERTIES LTD 1964
Facts: D had four directors; none of them had ever been appointed as managing
director. One director effectively managed the business and entered into
contracts. On previous occasions, the board of directors had honoured the
contracts. On this occasion they refused, saying the director had no authority to
make the contract as he was not the managing director.
Held: The director had no express authority but he had acquired ‘authority by
estoppel’. The company had honoured contracts in the past and had given the
impression that the director had the authority to deal with this sort of contract.
The claimants had relied on this representation when dealing with the director.
The company was bound to honour the contracts.
The term estoppel prevents one person from contradicting an action or statement from the past
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2.3 Agency arising from necessity
This is also known as agency ‘by operation of law’ and occurs if each of the following
requirements is met:
 There is an emergency situation.
 It is not possible for the agent to communicate with the principal.
 The agent is acting in good faith in the best interests of the principal and their
action was reasonable and prudent in the circumstances.
The courts will only usually imply agency by necessity if there is an existing
contractual relationship between the agent and the principal.

GREAT NORTHERN RAILWAY v SWAFFIELD (1874)
Facts: GNR contracted to deliver the defendant’s horse to a particular railway

station for collection by the defendant. When the defendant failed to turn up, the
stationmaster made arrangements for the horse to be stabled overnight. GNR
sued to recover the costs.
Held: GNR was entitled to the costs of stabling as it had become the agent of the
defendant by necessity.
Nowadays, ease of communication has meant this is a very rare type of agency and
of little practical importance.
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Agency
2.4 Agency by ratification
If a properly appointed agent exceeds his or her authority, or a person having no

authority purports to act as an agent, the principal has no liability on that contract
unless the principal ‘ratifies’ the contract.
approved
If the contract is ratified:
 Principal becomes liable and entitled under the contract
 The ratification operates retrospectively and principal is bound from the date the
contract was actually made
 Agent is relieved from liability to principal for acting beyond his or her authority
 No authority is given for future acts.
A principal can only ratify if each of the following conditions are met:
 The principal is in existence at the time of the agent’s act.
 The principal had the legal capacity to make the contract himself or herself, both
at the time of the contract and at the time of ratification (see pre-incorporation
contracts in company law chapters)
 The agent, at the time of the contract, named or otherwise sufficiently identified
the principal.
 The principal is made aware of all the terms of the contract.
Agency by ratification occurs when an individual isnt appointed as an agent in advance but the principle later
accepts their actions. Principle becomes liable on the contract and can enforce the contract. Example: Sally
knows I want to sell my car and offers it to ben for 5000$. I didnt give the authority up front but when i found out
about the arrangement, I thought it was a good deal and accept the agreement.
Conditions to be met:
1) Principal exists at time of contract

2) Principal has capacity at time of contract
3) Principal is aware of/ratifies all terms of contract
4) Third party must be aware that the agent is acting on behalf of someone else. Need not know the name of the
principal.
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In order to ratify the principal must:
 Ratify the whole contract; a purported ratification of part will operate as a

ratification of the whole
 Ratify the contract within a reasonable time
 Communicate a sufficiently clear intention of ratifying such as refusing to return

goods purchased for him or her by an agent who lacked authority.

KELNER v BAXTER 1866
Facts: The promoters of a company entered into a contract on behalf of the

company before its incorporation to buy some wine (a ‘promoter’ in this context
meaning someone who sets up a company). The company did not pay so the
suppliers sued the promoters.
Held: The promoters were personally liable as the company did not exist at the
time the contract was made.
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This question allows you to demonstrate your communication skills.
Peter advertised his car for sale in a local newspaper and then went on holiday
leaving his car in the drive. While Peter was away, Tom, who had seen the
advert, went to look at the car and decided to make an offer for it. Peter’s
neighbour, Alf, pretending to act with Peter’s authority, entered into
negotiations with Tom and eventually accepted Tom’s offer on Peter’s behalf.
Alf had no authority to act in this way, but when Peter returned he wrote to Tom
saying that he was ratifying Alf’s act.
Advise Tom as to whether he is bound by the contract.
A void or illegal contract cannot be ratified.
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The rights and duties in an agency

relationship
3.1 General duties in an agency relationship
An agent owes a number of duties to the principal and an agent has a number of
rights.
Duties of the agent fiduciary duty
The relationship of agent and principal is similar to that between an employer and
employee, or a director and a company.
The relationship is fiduciary in nature and therefore an agent has certain duties.
An agent must:
 Act in good faith and for the benefit of the principal.
 Act in accordance with the principal’s instructions.
 Execute contracts on behalf of the principal and negotiate in a fair and proper
manner.
Duties of the principal (or rights of the agent) general duty
A principal has a duty to act in a proper manner towards the agent.
These duties are similar to those which an employer owes an employee and include:
 Giving notice of termination of contract
 Providing compensation for termination
 Furnishing an agent with all relevant information.
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Agency
3.2 Duties implied by law in an agency relationship
An agency relationship is based on trust. The courts have supported the position that
an agent and principal have duties towards one another as can be seen below.
Duties of the agent at law
The law implies a number of duties on an agent in a contract of agency:

Duty Detail
Accountability  An agent must provide full information to his or her
principal of his or her agency transactions and account
to him or her for all monies arising from them.
 If he or she accepts from the other party any
commission or reward as an inducement to make the
contract with him or her, it is considered to be a bribe
and the contract is fraudulent.
 The principal who discovers that his or her agent has
accepted a bribe may dismiss the agent and recover
the amount of the bribe from him or her.
Conflict of interest  The agent should not put himself or herself in a position
where his or her own interests conflict with that of the
principal.
Performance  The agent should properly perform the task he or she
has been engaged to do.
 He or she is justified in refusing to perform an illegal act.
Obedience  The agent should obey the principal’s legal and
reasonable orders.
Skill  The agent should show a reasonable level of skill
expected of a person in his or her profession
Personal  The agent should usually do the work himself or herself
performance
Confidentiality  The agent should keep confidential what he or she
knows about the principal’s affairs even after the agency
relationship has finished.
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The effect of a breach of duty by an agent
If an agent is in breach of his or her duties this will have the following effects:
 A breach of duty is a breach of the agency agreement and the agent is liable to
the principal for any loss.
 Where the breach is serious the principal may dismiss the agent and refuse to
pay him or her any commission.
 The principal may recover any benefit obtained or profit made by the agent.
 Where a third party is fraudulently party to the breach the principal may avoid
the contract.
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Agency
Rights of the agent or principal's duties
The agent also has a number of rights implied by law (or duties owed to him or her by
the principal). These are:
Right Detail
Indemnity  The agent is entitled to be repaid expenses properly
compensate for expenses paid
and against losses and  He or she is also entitled to be indemnified by his or
liabilities incurred in
performing her principal against losses and liabilities, provided
acts within the agent's his or her acts are done properly within the limits of
scope. his or her authority.
Remuneration  The agent is also entitled to be paid any agreed
must pay the agent the remuneration for his or her services by the principal.
agreed remuneration for  The entitlement to remuneration may have been
the tasks performed
expressly agreed or may be inferred from the
circumstances
 If it is agreed that the agent is to be remunerated but
the amount has not been fixed, the agent is entitled
to a reasonable amount.
Lien  The agent has the right to exercise a lien over
If the principal owes money to the property owned by the principal, i.e. a right to retain
agent, the agent is able to retain and hold goods pending payment of sums owed to
and hold the principal’s goods
him or her.
until such time as the debt is paid.
This is called a ‘lien’.
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Authority of agents
An agent binds the principal when entering into a contract. However,

there are exceptions to this rule. If an agent acts beyond his or her
authority, then the contract will be invalid.
Authority can be given in various ways:
 Actual express
 Actual implied
 Apparent or Ostensible
4.1 Actual express authority
Express authority is stated expressly, specifically and explicitly by the

principal to the agent.
Whether express authority existed or not can be determined by a

number of factors. If the appointment was made in writing, then look at
the document and if oral then look for other evidence.
specifically given to the agent by the principal. example: if bob says to mark that "I want you to arrange with
cedric for him to decorate my house". Bob gives mark express authority to do so.
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Agency
4.2 Actual implied authority
Even if authority has not been expressly given it can be implied in a number of
circumstances.
In determining if an agent has implied authority, a number of factors must be taken

into consideration:
 Behaviour which is customary or usual in the circumstances
 Past conduct/authority.
For example, a partner will have implied authority to undertake a number of things
such as enter into contracts, attend meetings on behalf of the business, execute
contracts and employ staff.
Illustration 4 – Authority of agents

WATTEAU v FENWICK 1893
Facts: The principal owned a hotel and employed the previous owner as a
manager to run it. Against his employer’s express instructions, the manager
entered into a contract to buy some cigars on credit.
Held: Such a contract was usual for a manager of a hotel and as such when the
contract was entered into it was within the manager’s implied authority. The third
party was unaware of any restrictions on the manager’s actual authority and as
such he could enforce the contract against the owner.
created due to the relationship between the principal and the agent.
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Harry wanted to insure the contents of his house against all loss and damage
and appointed Colin to effect a policy, instructing him to ‘insure any furniture’.
Having obtained quotes from various companies Colin took out insurance with
H Ltd. Sometime later, vandals broke into Harry’s house and did substantial
damage to his furniture. They did not steal anything. When Harry claimed on
his insurance policy H Ltd refused to pay as the policy covered loss by theft or
fire but not damage by vandals.
Advise Harry whether he can recover the value of the damaged furniture
from Colin.
An agent can also do all things incidental to actions expressly authorised and all
things usually done by an agent.
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Agency
evident authority
4.3 Apparent or ostensible authority
Apparent or ostensible authority arises where the principal, by words or

conduct, holds out to another party that the agent has authority to act
on his or her behalf.
An agent may have limited actual express authority but, by virtue of the conduct of
the principal, has that authority extended.
Apparent authority is therefore not restricted and is determined by the actions of the
principal. The extent of authority differs according to individual circumstances and
cannot be defined generally.
If a third party enters into a contract with an agent in these circumstances, relying on
the original conduct of the principal, then the contract is binding.
If a principal makes a representation as to the level of authority of an agent, but the

authority is subsequently revoked, liability under the contract will only be escaped if
the third party is informed of the change in circumstances.
This is particularly relevant where a partner leaves a partnership.
If the principal acts as if the agent has the authority to bind them in contracts, they will be bound as if they do. So,
the apparent authority of an agent can exceed the express authority. Example: Mark and simon run a partnership
running a shop which sells furniture, mark has offered additional services of home decoration for customers. He
carries out this work himself but advertises it using the name of the partnership, simon is aware mark does this and
has not stopped him. When mark is selling clearance, he is binding the partnership within his ostensible authority.
If mark breaches the contract, the customers will be able to sue simon as well as mark.
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Liability of the parties
A contract entered into by an agent binds the third party and the principal for whom
the agent has acted. The circumstances differ depending on whether the principal is
disclosed or undisclosed and if the agent acts without authority.
5.1 Where the principal is disclosed
A principal is disclosed where his or her existence has been made known to the third
party. It is not necessary for the principal to be identified to the third party.
As a general rule, the contract is made between the principal and the third party and
the agent is neither liable nor entitled under the contract. However, the agent will be
liable in the following circumstances:
 The agent has shown an intention to undertake personal liability e.g. by signing
a contract in his or her own name.
 Trade usage or custom.
 Where the agent refuses to identify the principal.
 Where the agent is acting on behalf of a fictitious principal.
 Where the agent makes a contract under seal (unless he or she is acting as a
trustee).
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Agency
5.2 Where the principal is undisclosed
An undisclosed principal is where the principal’s existence has not been

made known to the third party; in other words, the third party thought he
or she was dealing with the agent on his or her own behalf.
When the third party discovers the true position he or she can elect to treat the
principal or the agent as being bound by the transaction.
An undisclosed principal cannot intervene in the following circumstances:
 The terms of the contract are inconsistent with the existence of the agency.
 The identity of the principal or of the agent is of material importance to the third
party.
 Where the agent did not have the actual authority to make the contract.
Illustration 5 – Liability of the parties

HUNTER v HUMBLE 1848
Facts: An agent was appointed to charter out the principal’s ship. He did charter
out the ship, but failed to disclose that he was acting as an agent and instead
signing the contract as the ‘owner of the good ship Ann’.
Held: The principal could not enforce the charter as to allow evidence that the
principal was the true owner would be to contradict the terms of the contract.
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5.3 Where the agent has no authority
If an agent has no authority, then there is no valid contract. A principal cannot be

sued, nor sue under the contract.
A principal can, if he or she so chooses, validate the contract by ratification.
If an agent knowingly enters into a contract, without authority, the third party can take
action against the agent for any loss suffered. The agent will be liable to the third
party for misrepresentation. If the intention to deceive is present, the third party has
an action in the tort of deceit.

Beatrice instructs Farah to sell her house and agrees to pay her £1,000
commission on completion of the sale. Farah sells the house and on
completion is paid her commission by Beatrice. Beatrice subsequently
discovers that Farah has also been paid a £500 commission by the purchaser.
Advise Beatrice whether she can sue Farah and if so what remedies are
available to her.
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Agency

area.

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Where a person purports to act as another’s agent even though he or she has
no authority to do so, the principal is only bound by the contract if he or she
decides to ratify it.
The principal can only ratify the contract if certain requirements are met. The
principal must have the contractual capacity to make the contract both at the
time the contract is made and when ratified. The principal must have been
identified to the third party at the time the contract was made.
The principal must be aware of all material facts and ratify the contract as a
whole within a reasonable time. It would appear all of these requirements are
met and Peter is able to ratify the contract
Once a principal ratifies a contract it is binding on the parties from the date on
which it was originally made. Tom is bound by the contract.

When an agent is appointed, he or she is given express authority to act on
behalf of the principal. However, where the terms of the authority are
ambiguous or where the agent is given discretion to act, the law implies
authority to enable an agent to carry out his or her express duties. The agent
must always act in the best interests of the principal.
Colin’s authority is very ambiguous. He can decide which policy to take out ‘to
insure the principal’s belongings’.
If Colin can show that when he made the decision to take out this policy as
opposed to any other, he was acting in Harry’s best interests then he will be
acting within his authority. Harry will not be able to recover the value of the
damaged furniture from Colin.
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Agency

An agent owes various duties to his or her principal and the most important is
the fiduciary duty. This means that the agent must not allow his or her own
personal interests to conflict with the interest of the principal.
The agent must not make a secret profit from his or her dealings on behalf of
the principal or accept any bribes or commissions.
The situation is very similar to BOSTON DEEP SEA FISHING AND ICE CO.
LTD. v ANSELL 1957 where the MD, as the agent of the company, was paid a
bribe by a supplier to deal with that supplier on behalf of the company. The
court held that the agent had acted in breach of his fiduciary duty.
As Farah has been paid a commission by the purchaser Farah is in breach of

her fiduciary duty to Beatrice.
Beatrice can recover the £1,000 paid to Farah and also the £500 bribe paid by
the purchaser.
If the purchaser knew that Farah had accepted the £500 in breach of her duty
the contract for the sale of the land is voidable at Beatrice’s option.
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Chapter 6
Types of trade
define a partnership
understand and apply the rules of agency as they apply to partnership
identify the differences between company and partnership
understand the concept and characteristics of a limited liability partnership
know the procedure for the formation of a limited liability partnership and the
administrative consequences thereof.
MyKaplan resources
This topic is covered on MyKaplan in the module Types of Trade.
ICAEW resources
workbook
159
Chapter 6
Overview
BUSINESS FORMATION
Partnership
Sole trader
Ordinary partnership
Liability and authority
Comparison with
companies
Limited liability
partnerships
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Types of trade
Sole traders
1.1 What is a sole trader?
In a sole trader business, a single person owns and runs the business. He or she
contributes the capital to set up the business and all the profits and losses of the
business belong to him or her. He or she may engage employees or work
independently.
1.2 Legal status of a sole trader

At law there is no distinction between the owner of the business and the business
itself. The trader may have set up the business using a business name but it is still
not a separate legal entity.
Advantages of trading as a sole trader:

 Profits all belong to the owner
 No formal procedures to set up
 Independence (no need to gain approval from other people)
 Self-accountability (no need to disclose information about the business other
than to tax authorities).
Disadvantages of trading as a sole trader:

 Risk (debts of the business accrue to the owner personally)
 Limited options for capital injection (either the owner must contribute personally
or take on personal loans)
 High dependence on the owner (if the owner is ill it can lead to issues for the
business, death of the owner is likely to lead to end of the business)
 If the trader does not engage employees the success of the business is
dependent on owner’s skills. For example, the owner may be a skilled
craftsperson but have no marketing skills.
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Chapter 6
Ordinary partnerships
A partnership is a form of business organisation.
There are various types of partnership: ordinary partnerships, limited partnerships

and limited liability partnerships. Limited partnerships are partnerships registered
under the Limited Partnership Act 1907 and are now extremely rare. Limited liability
partnerships are dealt with in detail later in the chapter.
2.1 Definition of partnership
A partnership is ‘the relation which subsists between persons carrying on

a business in common with a view of profit’ (s1 Partnership Act 1890).
The relation which subsists
Unlike a company, a partnership is not a separate legal entity; it is merely a

relationship between persons.
The partners enter into an agreement which they may have negotiated and they are
bound by its terms.
Between persons
There must be at least two persons for a partnership to exist. ‘Person’ can include
companies. If there are two partners and one of them dies or retires the remaining
partner becomes a sole trader.
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Types of trade
Carrying on a business
 A business includes ‘every trade, occupation or profession’.
 The business can be a single transaction.
 There must be some joint business activity; merely sharing revenue is not
enough.
Illustration 1 – Ordinary partners

MANN v DARCY 1968
Facts: A group of individuals bought potatoes wholesale in order to resell.
Held: The group were trading as a partnership.
 Joint ownership of property that happens to produce revenue is insufficient to

establish a partnership. The term ‘business’ necessarily implies some activity.
 HM Revenue and Customs uses the date on which the parties open a bank
account to decide when a partnership begins.

KHAN v MIAH 2001
Facts: Parties to a joint venture to run a restaurant were carrying on a business

by leasing property, hiring equipment and opening a bank account.
Held: The parties were partners even before the restaurant opened.
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Chapter 6
In common
The partners are joint proprietors of the business. (This is normally evidenced by the
sharing of profits).
With a view of profit
Charitable or mutual benefit schemes are not partnerships. The persons involved
must intend for the business to yield a profit.
2.2 Why form a partnership?
The word ‘firm’ is sometimes used to describe a partnership and this is perfectly
correct; it is not correct to call a registered company a ‘firm’.
Partnerships are subject to the legal rules which affect individuals, in particular
contract and agency, as well as special rules which apply only to partnerships.
2.3 How a partnership is formed
The partnership agreement
A partnership can be entered into informally; people can merely agree to run a
business together and then do so. Alternatively, they may choose to have a
partnership agreement. If they have such an agreement, it acts like a contract
between the partners.
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Types of trade
The Partnership Act 1890
In addition to any agreement, the Partnership Act 1890 sets out the
rights and duties of the partners and if the provisions of the agreement
do not deal with a particular issue the Partnership Act will apply. These
rights and duties can be overruled by any express agreement already
made between the partners.
The main provisions of the Act are:
 Profits and losses are shared equally
 Every partner is entitled to take part in the management of the business.

Ordinary management decisions can be taken by a majority of members
 The firm must indemnify the partners against liabilities incurred in the ordinary
and proper conduct of the partnership business
 No partner is entitled to remuneration for carrying out partnership business
 A partnership agreement can only be varied with the consent of all of the
partners
 Any change in the nature of the partnership business must be a unanimous

decision
 No interest on the original capital is paid (5% can be paid on further advances)
 New partners are only admitted with the approval of all existing partners
 A partner can be expelled from the partnership by way of a majority of partners

as long as the partnership agreement allows this
 If a partnership is dissolved the partners’ authority continues to allow the affairs

of the partnership to be wound up. On dissolution any partner can compel
selling the firm’s assets, paying the firm’s debts and distributing any excess
proceeds
 If there is a capital deficiency this is shared between the partners in a ratio

equivalent to the capital they originally contributed
 All partnership records and accounts are to be kept at the place of business and
available for inspection by all partners.
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Chapter 6
Fiduciary duties
In addition to the above rights, the partners owe fiduciary duties to the partnership
and every partner is an agent of the partnership so must carry out his or her work in
good faith.
The fiduciary nature of the relationship prohibits partners from keeping profits made
in the partnership without the consent of the other partners and requires partners to
avoid conflicts of interest. Breach of these duties can make the partner in question
liable to the firm for any losses suffered.
2.4 How does a partnership come to an end?
According to the Partnership Act 1890 a partnership will automatically

end in the following situations:
 Death or bankruptcy of a partner (unless the partnership

agreement states otherwise)
 Expiry of a fixed term
 Completion of a single joint venture if stated that this will happen in

the partnership agreement
 Continuation of the partnership would be illegal
 A partner gives notice for the firm to be dissolved
 Order of the court.
In addition, the partnership agreement may include other situations which would lead
to the dissolution of the partnership.
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Types of trade

HUDGELL, YEATES AND CO v WATSON 1978
Facts: Practising solicitors are required by law to have a practising certificate.

One of the partners in a firm of solicitors forgot to renew his certificate which
meant it was illegal for him to practise.
Held: The failure to renew the certificate brought the partnership to an end,
although a new partnership continued between the other two partners.
In addition, under s.35 Partnership Act 1890 the court can bring a partnership to an
end in the following situations:
 Partner has mental disorder or permanent incapacity.
 Partner engages in activity prejudicial to the business.
 Partner persistently breaches the partnership agreement.
 Business can only be carried on at a loss.
 It is just and equitable to do so.
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Chapter 6
Partners’ authority and liability
3.1 The authority of partners
Express or actual authority
This is set out in the partnership agreement.
Implied or apparent authority
The implied authority of a partner can exceed their actual authority. The implied
authority of partners is set out in s5 Partnership Act 1890.
S5 states that every partner is an agent of the firm and of the other partners. This
means that each partner has the power to bind all the other partners in any
transaction entered into in the course of the partnership business. A partner will be
acting within his or her authority if he or she enters into transactions that are usual for
a partner.
In addition, in a trading partnership the partners have the implied authority to enter
into contracts to borrow money on behalf of the firm.
In a question it is important to think about the type of business involved

to determine if the partner is acting within their implied authority. So, for
example, if a partner in an accountancy partnership entered into a
contract to sell auditing services it is likely that this would be held to be
within his or her implied authority even if he or she does not have the
express authority to do. It is usual for that type of business.
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Types of trade
Actions beyond the partners’ express authority
If a partner acts in a way that is within the usual business of the partnership it is likely
that the other partners will be bound by his or her actions (even if he or she is acting
beyond his or her actual authority) unless
 He or she has no actual authority and
 The third party either knows he or she has no actual authority for the
transaction or does not believe him or her to be a partner.

Jekyll and Hyde are in partnership providing forensic services to the police.
The partnership agreement states that all scientific equipment is to be supplied
by a third party, James, and that neither partner may incur liability of more than
£2,000 without consulting the other. Jekyll, although he contributed the entire
firm’s initial capital, does not have any active involvement and visits the
premises only rarely. Hyde receives a salary as well as a share of the profits
and works full-time for the firm.
Jekyll seeks your advice as he has found out that Hyde has ordered £5,000
worth of equipment from Edgar.
Advise Jekyll.
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Chapter 6
3.2 Liability of partners
Every partner is responsible for the full amount of the firm’s liabilities.
Outsiders have the choice of taking action against the partners

collectively, or against individual partners. This is referred to as joint
and several liability.
If damages are recovered from one partner only, the other partners are liable to
contribute equally to the amount paid.
Liability on debts and contracts
The firm is liable for contracts made by a partner if he or she was acting within his or
her actual or implied (apparent) authority.
Holding out
A person who, by his or her words or conduct, represents himself or herself (or
allows representation to be given) as a partner, is liable as if he or she is a partner to
anyone who gives credit to the firm as a result of that representation.
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Types of trade
Who is liable?
 Generally, every partner is jointly and severally liable for debts and contracts
 New partners are not liable personally for debts incurred before they became a
partner
 Retiring partners remain liable for debts incurred while they were partners. If no
notice of retirement is given, the firm continues to be bound by the retired
partner as he or she is being held out as a partner.
 In addition, the partner will continue to be liable for the ongoing debts of the
business until notice of retirement is given
 If there is a change of partners and a third party deals with the partnership after
the change, the partners of the old firm remain liable unless the third party has
notice of the change
 A ‘novation’ occurs where a creditor agrees the liability on the debt will be that
of the continuing or incoming partner, not the outgoing partner
 The incoming or continuing partners may agree to indemnify the outgoing

partner against any debts incurred prior to retirement.

Following their earlier dispute, Jekyll and Hyde do not believe that they can
continue in partnership. It is proposed that Jekyll will retire and Edgar will be
admitted as a partner.
What will be the liability for the firm’s debts of:
 Jekyll
 Edgar?
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Chapter 6
Comparison between ordinary

partnerships and registered companies
In the exam you may be asked to distinguish between companies and partnerships.
The key differences are highlighted below:
Company Partnership
Separate legal person, i.e. can own Not a separate legal person – the
property, sue or be sued, and contract partners own any property, are liable on
in own name. contracts and are liable if sued.
The company is liable for its debts. (No The partners are personally liable for the
personal liability for shareholders debts of the firm. Their liability is joint
beyond any unpaid portion of the and several. In a general partnership
nominal value of their shares or the there is no cap on the partners’ liability.
amount they have agreed to The partnership is not a separate person
contribute.) and so cannot be liable in its own name.
Created by registration – with a written No special formality required to create.
constitution. May choose to have a partnership
agreement but no legal requirement.
Shares are transferable. Limits on transfer of share (may require
dissolution of partnership or consent of
other partners to enable partners to
realise their share).
Can create both fixed and floating Can only create fixed charges as security
charges as security for borrowing. for borrowing.
Managed by directors, who may or may Managed by partners, who are also the
not also be shareholders. owners of the business.
The company cannot usually return Partners may withdraw their capital.
capital to its members (except on
dissolution).
Must make information about financial Private business. No disclosure of
affairs and ownership publicly available. results.
The business is run by the directors. Every partner has the right to take part in
Members have no right to participate. the management of the business.
Must comply with Companies Act No administrative requirements
requirements concerning meetings. regarding meetings.
Formal dissolution procedure (known May dissolve by agreement.
as liquidation). Death/bankruptcy of any Automatically dissolved on the
member/director do not dissolve the death/bankruptcy of any partner.
company.
Companies pay corporation tax. Partners pay income tax on own share of
the profits.
172
Types of trade
173
Chapter 6
Limited liability partnerships
The Limited Liability Partnerships Act 2000 introduced the concept of a

limited liability partnership. In essence, it is an incorporated partnership
that has a legal personality separate from its members i.e. the partners
(whose liability is limited). However, it is subject to less regulation than
a registered company.
The major accountancy firms were keen to be able to limit their liability because, as
partnerships, the partners were liable to pay all of the debts. It is possible, since the
Companies Act 1989, for accountancy firms to incorporate and trade as limited
companies but very few took this step because of the need to publish accounts and
pay corporation tax. Parliament responded to this by passing the Limited Liability
Partnerships Act.
5.1 Formation of a limited liability partnership
To form an LLP an incorporation document must be submitted to the Registrar of

companies. The document must state the following:
 The name of the LLP (which must end with the words Limited Liability
Partnership or the abbreviation LLP).
 The location (domicile) of its registered office (England and Wales or Wales).
 The address of its registered office.
 The names and addresses of all the members of the LLP.
 A statement specifying which of the members are to be designated members or

stating that every member is a designated member. (A designated member is
one who performs the administrative and filing duties of the LLP).
174
Types of trade
A statement must be made by a solicitor engaged in forming the LLP, or anyone who
has subscribed their name to the incorporation document, that the requirements of
the Act have been satisfied.
When the Registrar receives the document (and the fee) he or she registers it and
issues a certificate that the LLP is incorporated with the name specified.
If a partnership is not registered it is an ordinary (general) partnership.

A limited liability partnership can only be formed through registration.
175
Chapter 6
5.2 Regulation and administration
The partnership agreement
As in the case of ordinary partnerships, if an LLP does not have a partnership

agreement or the agreement does not cover an issue the Act will apply together with
the Limited Liability Partnerships Regulations 2001. These regulations apply
company legislation to LLPs and also deal with profit share, remuneration, inspection
of books and expulsion of partners.
Members
There is no maximum number of members of an LLP.
New members can only be admitted with the agreement of the existing members.
A person can cease to be a member by giving reasonable notice to the other

members. Changes to the membership must be notified to the Registrar within 14
days.
Every member can take part in the management (subject to anything to the contrary
in the partnership agreement) and the position of the members is similar to that of the
director of a company with similar duties and responsibilities.
Members of an LLP may apply to the court in cases of unfair prejudice although this
right can be excluded by unanimous consent.
176
Types of trade
Books and records
The obligations to keep and retain accounting records and to prepare and publish
annual audited accounts apply to an LLP in the same way as they do to a company.
Similarly, small and medium-sized LLPs can claim exemption from certain filing
requirements and, where applicable, from the requirement to have their accounts
audited.
There is no requirement for the equivalent of a directors’ report.
However, the LLP must comply with the following:
 To maintain a register of charges and to register charges with the Registrar
 To notify the Registrar of any changes to the membership or registered office
 To provide the name of the LLP on correspondence and outside its place of
business
 To file a confirmation statement.
5.3 Authority and liability of LLP members
As the LLP is a separate legal entity, it is primarily liable for the debts and obligations
of the firm’s business. Every member of the LLP is an agent and can bind the LLP in
contract. The LLP will not be bound by a member’s actions if
 The member had no actual authority and
 The third party is aware that he or she does not have authority or does not
believe him or her to be a partner.
The members of an LLP will not usually incur personal liability. However, in the case
of an LLP of professionals, each member owes a duty of care.
A member of an LLP may be found liable for fraudulent or wrongful trading (more
detail in company law chapters).
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Chapter 6
5.4 Termination and insolvency of an LLP
A change in membership does not result in the termination of an LLP.

Instead, an LLP can be terminated or dissolved by agreement of the
members unanimously (or otherwise in accordance with any
agreement).
Where the LLP becomes insolvent the members may:
 Propose a voluntary arrangement
 Apply to put the LLP into administration
 Resolve to go into compulsory or voluntary liquidation.
Generally, the law relating to companies’ insolvency applies to LLPs except:
 Withdrawals made by members in the two years prior to winding-up may clawed
back if it can be shown that at the time of the withdrawal the member knew, or
should have known, that the LLP was or would become insolvent
 On winding up members may be called on to contribute to the assets of the LLP

to the extent that they have agreed to in the partnership agreement.
178
Types of trade

area.

179
Chapter 6

The Partnership Act 1890 states that a partnership is a relationship which
subsists between two or more persons carrying on a business with a view of
profit. Each partner is liable for the debts of the firm.
Jekyll is a sleeping partner who takes no part in the running of the business,
but he is treated as any other partner with respect to his liabilities.
Hyde is a salaried partner which means that he can run the business. Any act
done within the ordinary course of the firm’s business is binding on all partners
and they are jointly liable for the debts of the business.
When Hyde enters into the contract with Edgar, he is exceeding the authority
given him in the partnership agreement. However, the partnership agreement
is not a public document and Edgar could not be expected to know of any
limitation imposed on H’s authority. In addition to express authority, every
partner has the implied authority under s5 to enter into contracts on behalf of
the business. As long as the equipment could be used in the ordinary course
of the business the contract will be binding on both parties.
When Hyde enters into the contract with Edgar, he is acting in breach of the
partnership agreement and Jekyll can sue him for breach of agreement and
recover damages for any loss suffered.
180
Types of trade

A partner who has retired from the firm is not liable for any debts that arise
after his or her retirement. He or she must notify the partnership’s usual
suppliers of his or her retirement and make sure that his or her name is taken
off the list of partners and any headed notepaper.
A notice should also be placed in the Gazette to give notice to the persons
who have not previously dealt with the firm that he or she is no longer a
partner. Accordingly:
 Jekyll will continue to be liable for the debts that arose while he was still
a partner. However, it is possible to avoid this by agreement with Hyde,
Edgar and the creditors
 An incoming partner is only liable for the debts arising after he became a
partner. However, if there is an arrangement with the creditors by which
the new partners assume the obligations of the old, Edgar will be liable
for the old debts as well. This agreement can be express or implied from
the conduct of the partnership.
181
Chapter 6
182
Chapter 7
Companies: The consequences of
incorporation
define the different types of company and to understand their characteristics

and the concept of corporate personality
recognise the circumstances in which the veil of incorporation may be lifted
explain the procedure for forming a company, what constitutes a company’s

constitution and how it can be altered
state the law relating to promoters and pre-incorporation contracts
detail the various administrative requirements which will apply as a result of

incorporation.
MyKaplan resources
This topic is covered on MyKaplan in the module Companies: Consequences of
Incorporation.
ICAEW resources
workbook
183
Chapter 7
Overview
TYPES OF BUSINESS
UNINCORPORATED INCORPORATED
ORGANISATION
PRIVATE TYPES OF COMPANY PUBLIC
VEIL OF
INCORPORATION
LIFTING OF THE VEIL
OFF THE SHELF

PROMOTERS
COMPANIES
REGISTRATION
CO RECORDS ARTICLES
CO SECRETARY ALTERATION
LEGAL EFFECT
184
Companies: The consequences of incorporation
Types of business organisation
1.1 Different forms of business organisation
Sole trader The owner ‘is’ the business – owns the assets and is liable for all the
debts.
No legal formalities are required to set up a sole trader business.
This form of business is inappropriate for large businesses or those

involving a degree of risk.
Partnership Defined by Partnership Act 1890 as the relationship which subsists

between persons carrying on a business in common with a view of
profit.
Limited An artificial legal entity with ‘perpetual succession’. It can hold

liability property in its own right, enter into contracts in its own name, create
partnership floating charges, sue and be sued.
The liability of the members of a limited liability partnership (LLP) is

limited to the amount of capital they have agreed to contribute.
Requirements similar to that of a company (see chapter 6).
Company A corporation is an artificial legal person (see below).
1.2 Company v Partnership
The differences between a company and a partnership were discussed in chapter 6,

section 4. You may want to review this section again to remind you of these before
attempting the following questions.
185
Chapter 7

In relation to E Ltd., a company limited by shares, which one of the
following statements is correct?
A The liability of the company and its shareholders is limited, but the
directors are fully liable for the company’s debts
B The liability of the company and its directors is limited, but the
shareholders are fully liable for the company’s debts
C The liability of the company, its directors and shareholders is limited
D The liability of the directors and shareholders is limited, but the company
is fully liable for its own debts
This question allows you to demonstrate your knowledge of regulation and
compliance.

Mrs X owns shares in Y Ltd. This means that Mrs X:
(i) is a part-owner of Y Ltd
(ii) is a part-owner of Y Ltd.’s property.
Which of the above is/are correct?
A (i) only
B (ii) only
C Both (i) and (ii)
186
The veil of incorporation
2.1 Meaning
The term ‘veil of incorporation’ refers to the fact that a company is a

separate legal entity (i.e. separate from its shareholders). This
separates the legal identity of the company from that of its members,
and also its liability from that of the members.
Illustration 1 – The veil of incorporation

Salomon v Salomon & Co Ltd. 1897
Facts: S transferred his business to a limited company. He was the majority

shareholder and a secured creditor. The company went into liquidation and the
other creditors tried to obtain repayment from S personally.
Held: S as shareholder and director had no personal liability to creditors, and

he could be repaid in priority as a secured creditor. This enshrined the concepts
of separate legal personality and limited liability in the law.
187
Chapter 7
2.2 Consequences of Incorporation
There are a number of consequences of being a separate legal entity:
Management is Co. is subject to

separate from Companies Act
ownership 2006
Co. has perpetual
succession –
irrespective of
shareholders Consequences of Co. enters into contract
being a separate in own name
entity
Company owns its own
property
Co. liable for its own

debts. If a Co. fails, Can sue or be sued in
liability of members is its own name
limited to:
any amount they have

amount unpaid on
OR agreed to contribute (if
their share capital
limited by guarantee)
188

Macaura v Northern Assurance Co. Ltd. 1925
Facts: An individual had incorporated his business but insured the premises
(now belonging to the company) in his own name. The property was destroyed
by fire.
Held: The company should have insured its own assets; as an individual there
was no insurable interest (either as a creditor or a member).
2.3 Lifting the veil of incorporation
‘Lifting the veil of incorporation’ means that in certain circumstances the

courts can look through the company to the identity of the shareholders.
This is intended to prevent inequitable results and expose the
commercial reality of the situation.
The usual result of lifting the veil is that the members or directors become personally
liable for the company’s debts.
In some cases, the veil will be lifted only where ‘special circumstances exist
indicating that it is a mere facade concealing the true facts’: Woolfson v Strathclyde
(1978). There are common law instances arising from cases coming before the
courts as well as statutory provisions for ‘lifting the veil’. Examples of where the
courts have been willing to lift the veil of incorporation are as follows:
Groups of companies
This has been done in cases where the court felt the subsidiary may be regarded as
an agent of the parent. It should be noted that in most cases, subsidiaries retain their
separate legal status from that of their parent or holding company.
189
Chapter 7

Firestone Tyre & Rubber Co Ltd v Lewellin 1957
Facts: UK subsidiary of an American holding company. The distributors should

have entered into direct contracts with the holding company but instead
contracted directly with the UK company.
Held: UK company was held to be an agent of the American holding company.

This was done to recognise a tax liability

Smith, Stone & Knight Ltd v Birmingham Corporation 1939
Facts: Property was owned by the parent company, but occupied by the
subsidiary. Compensation for compulsorily purchased premises would be
payable to an owner occupier but not a tenant.
Held: The subsidiary was classed as an owner occupier as the companies had
the same directors and the subsidiary was wholly owned by the parent. This
was done to give entitlement to a compensation payment.
190

Re H & Others 1996
Facts: Evasion of customs duties by the parent company; the case concerned
whether assets belonging to the subsidiary could be restrained.
Held: The veil would be lifted; the assets of the subsidiary could be restrained.
To reveal national identity
In times of war it is illegal to trade with companies located in countries we are at war
with. If the company is registered in the UK but its funds are being used in an enemy
country or its shareholders are citizens of an enemy country the veil may be lifted.

Daimler Co Ltd v Continental Tyre & Rubber Co 1916
Facts: Although the company was registered in the UK all of the shareholders
but one was German.
Held: The veil would be lifted; on the facts the company was considered to be a
German company and as such an English company should not be trading with
them at this time.
191
Chapter 7
Sham Companies
A sham company is a company which has been registered for an improper

purpose, for example, to evade a legal obligation or to hide the national identity of
a business.

Gilford Motor Co Ltd v Horne 1933
Facts: H formed a company to run a business in competition with G. H had a

personal contract with G restraining competition
Held: The veil was lifted to restrain the company from competition, as H had set
it up to evade his own legal obligations.
Quasi-partnerships
A quasi partnership is a business which is registered as a company but is run as if

it were a partnership.
192
Statutory occasions
There are a number of occasions where statute will intervene to lift the
veil. The following are examples of these where a director is also a
member of the company (but be aware that there are other provisions):
Legislation: Applies when: Effect
Company Directors A director who is Director will be jointly or

Disqualification Act 1986 disqualified participates in severally liable for the
the management of a company’s debts.
company.
Insolvency Act 1986 Wrongful or fraudulent Directors may be

trading (see Companies; personally liable for losses
Ownership and arising as a result.
Management chapter).
S.767 CA06 Public company trades Directors can be made

without first obtaining a personally liable for any
trading certificate. loss or damage suffered by
a third party.
In the exam you should consider whether any of the situations in which
the veil should be lifted discussed above applies. If not you should
assume that the veil will stand and the courts will not look behind the
company to see who the shareholders and/or directors are.
193
Chapter 7
Types of company
3.1 Limited and unlimited companies
PRIVATE
PUBLIC
LIMITED UNLIMITED
(no need to file
accounts)
LIMITED BY
SHARES BY SHARES BY GUARANTEE
(often for non-profit purposes.
Liability of members limited to
amount agreed to contribute
– stated in memorandum.)
A company can alter its status once provided it amends its name and articles as
applicable and notifies the Registrar:
 A private company can apply to the Registrar of Companies to be re-registered

as a public company (or vice versa).
 A limited company can change to an unlimited company with the consent of all
the members.
 An unlimited company can change to a limited company by passing a special

resolution.
194
3.2 Private company v public company
Public companies Private (limited) companies

Definition Must be registered as a public Any company that is not a public
company under CA06. company.
Name Ends with ‘plc’ or ‘public limited Ends with ‘Ltd.’ or ’limited’ (or
company’ (s.58). same in Welsh) but some
companies (including charities)
may be exempt from this (ss.59-
62).
Capital Must not be less than the No minimum requirements.
authorised minimum (currently
£50,000) and, in order to trade,
must have allotted shares of at
least that amount.
Raising May raise capital by advertising Prohibited from offering its shares
capital its securities (shares and to the public (s.755).
debentures) as available for
public subscription and can be
listed on the Stock Exchange or
similar institution.
Payment for Shares must be at least 25% No restrictions.
shares paid up (s.586) and rules on non-
cash consideration (s.593) must
be observed.
Reduction Special resolution needed – Special resolution needed – and
of capital must be approved by the courts statement of solvency made by
(s.641) directors (s.642).
Purchase of Not allowed, repurchase from Permitted – subject to the
own shares distributable profits only. company’s articles (s.709).
out of
capital
Start of Must obtain trading certificate Can begin from date of
trading from Registrar before commence incorporation.
trading (s.761).
Directors Minimum of two (s.154). Minimum of one.
Loans Members’ approval needed for Not usually applicable unless the
loans and quasi-loans made to company is a public company.
directors and connected
persons.
195
Chapter 7
Public companies Private (limited) companies

(Cont.)
Secretary Required; must be qualified Optional: need not be qualified
(s.271). (s.270).
Accounts Must lay before general meeting Need not lay accounts before
and file accounts within 6 general meeting. Must file within
months of end of accounting 9 months (s.442). Small or
period (s.442). medium sized companies may
benefit from less stringent
reporting requirements.
Audit Accounts must be audited Accounts must be audited unless
(s.489). qualifies as small or micro sized.
AGM Must be held each year (s.336). Need not hold an AGM.
Resolutions Cannot pass written resolutions. Can pass written resolutions
instead of calling meetings
(s.288). This is subject to some
exclusions.
Pre-emption Cannot be excluded. Can be excluded.
rights

Which one of the following statements is incorrect in relation to a public
company limited by shares?
A The company must have at least one director
B The company must obtain a trading certificate before commencing trade
C The company must have an allotted share capital of at least £50,000
D The company must be registered as a public limited company

legislation.
196

What is the main requirement of the Companies Act 2006 relating to a
private company?
A The allotted capital must not exceed £50,000
B It must not have more than fifty members
C The liability of its members must be limited
D It must not invite the public to subscribe for its shares


Which one of the following is a requirement for any public company?
A No restrictions may be placed on the transfer of its shares
B Its shares must be publicly for sale
C It must have a minimum paid-up capital of £50,000
D The final words of the company’s name must be ‘public limited company’
(or plc)
compliance.
197
Chapter 7
Formation of a Company
4.1 Registration Documents
The following documents must be submitted to the Registrar in order to form a

company:
Memorandum of association
Signed by all subscribers and stating that they wish to form a company and
agree to become members of the company.
Application
The application form must include:
• The proposed name of the company
• Whether the members will have limited liability (by shares or guarantee)
• Whether the company is to be private or public
• Details of the registered office (whether in England and Wales, Wales,
Scotland or N. Ireland) and intended address of the registered office (see
below)
Articles
The model articles apply if no articles are supplied
Statement of capital and initial shareholdings

This must state:
• the number of shares
• their aggregate nominal value
• details of each class of share
• how much has been paid up on each share
198
Statement of guarantee (if applicable)

This states the maximum amount each member undertakes to contribute
Statement of proposed officers

This gives details of the first directors (and company secretary, if applicable) and
their consent to act
Statement of compliance
This provides confirmation that CA 2006 has been complied with
Registration fee
On receipt of the above documents the Registrar must:

• Inspect documents and ensure Companies Act requirements fulfilled.
• Issue certificate of incorporation which is conclusive evidence that
Companies Act requirements fulfilled: s.15 CA 2006.
The company exists from the date on the certificate of incorporation.
In addition, a public company must also obtain a trading certificate (see below).
199
Chapter 7
4.2 Trading certificate – Public Companies only
A plc cannot commence trading until the Registrar has issued a trading certificate.
To obtain a trading certificate, must If it trades before the certificate is

apply to the Registrar stating: issued:
Nominal value of allotted share capital >= The company and any officers in default
£50,000. are liable to a fine.
At least ¼ of the nominal value and all of It is a criminal offence to carry on

the premium have been paid up. business, but any contracts are still
binding on the company.
The amount of preliminary expenses and The directors are personally liable if the
who has paid or is to pay them. company defaults within 21 days of due
date.
Any benefits given or to be given to Ground for winding up if not obtained

promoters. within one year: s.122 Insolvency Act
1986.
200

Sunita and Precious decided to form a company. On 1 March 20X6 they sent
the necessary documents to the Registrar. On 10 May 20X6 they received the
certificate of incorporation dated 1 May 20X6. Subsequently they discovered
that the company was registered on 1 June 20X6.
What was the date of incorporation?
A 1 March 20X6
B 1 May 20X6
C 10 May 20X6
D 1 June 20X6

The effect of a public company trading without a Section 761 trading
certificate is that:
A The contracts are valid.
B The contracts are voidable at the option of the company.
C The contracts are voidable at the option of the third party.
D The contracts are void.
201
Chapter 7
4.3 Off-the shelf companies
An ‘off-the-shelf’ company is one that has already been formed. Buying off the shelf
has a number of advantages and disadvantages:
Advantages Disadvantages
Cheap and simple to buy. The Articles of Association may be unsuitable

(e.g. name, share capital and structure).
Can trade immediately. Altering the Articles will incur costs and may
be inconvenient.
No problem of pre-incorporation Need to change officers.

contracts.
4.4 Promoters
There is no statutory definition of a promoter. A promoter is anyone who

makes business preparations for a company or as stated in the case
of Twycross v Grant (1878), a person who, ‘undertakes to form a
company and who takes the necessary steps to accomplish that
purpose.’
The definition excludes people acting in their professional capacity.
A promoter is under a fiduciary duty to:
 Exercise reasonable care and skill;
 Disclose any interest in transactions with the company and not to make a
‘secret profit’, and
 Disclose any benefit acquired to an independent board and/or to the

shareholders.
202
Remedies available to the company if a promoter makes a secret profit:
Remedy Problems
Rescind the contract. Not always possible e.g. if a third party has rights under
the contract.
Obtain damages. Must prove loss.
Recover the profit. Must prove that the promoter failed to disclose profit.
4.5 Pre-incorporation contracts
A pre-incorporation contract is a contract made by a person acting on

behalf of an unformed company. The position at common law is that a
company, prior to its incorporation, does not have contractual capacity
and the promoter is therefore personally liable. (This is because a
company does not legally exist until it is incorporated.)
In summary, with a pre-incorporation contract:
 The company cannot ratify the contract.
 The company is not bound by the contract.
 The company cannot enforce the contract against a third party.
203
Chapter 7
Illustration 8 – Pre Incorporation

Contracts
Kelner v Baxter 1866
Facts: A, B and C entered into a contract with the claimant to purchase goods
on behalf of the proposed Gravesend Royal Alexandra Hotel Co. The goods
were supplied and used in the business. Shortly after incorporation the
company collapsed.
Held: As the Hotel Co. was not in existence when the contract was made it was
not bound by the contract and could not be sued for the price of the goods.
Neither could it ratify the contract after incorporation.
S.51 CA 2006 reinforces the common law position by providing that, subject to any
agreement to the contrary, the person making the contract is personally liable. Clear
and express words are needed in order to negate liability: Phonogram Ltd v Lane
(1981).
204
Protection for the promoter
entering into an agreement of

‘novation’ (this involves Postponing
discharging the original finalising contracts
contract and replacing it with a until the company
new one). is formed.
buying an ‘off the agreeing with the

shelf’ company, so it Promoter may protect company that it
is ready to contract. his position by: will meet his
expenses
including a term giving the co. the right to sue

under the Contracts (Rights of Third Parties)
Act 1999. N.B. this does not remove the
promoter’s liability.

Which of the following statements is true in respect of a promoter in
breach of their duty not to make a secret profit?
A The company can always sue the promoter for damages.
B The company can only rescind the contract with the promoter when the
promoter owned the property before the promotion began.
C The company can always rescind the contract with the promoter.
D The company can only rescind the contract with the promoter when the
promoter acquired the property after the promotion began.
205
Chapter 7

Which of the following are correct?
(i) Purchasing an ‘off-the-shelf company’ enables a business to commence

more quickly
(ii) It is generally cheaper to purchase an ‘off-the-shelf company’ than to

arrange for a solicitor or accountant to register a new company
(iii) Incorporating a company by registration enables the company’s

documents to be drafted to the particular needs of the incorporators
A (i) and (ii) only
B (ii) and (iii) only
C (i) and (iii) only
D (i), (ii) and (iii).


A company’s contractual capacity before incorporation is limited in that it
may:
A Only make contracts necessary to form the company
B Only ratify, once formed, contracts necessary to form the company
C Only make or ratify, once formed, contracts necessary to form the

company
D Not make or ratify, once formed, any contract even if necessary to form
the company
206

Mohammed ordered goods from Seller Ltd on behalf of H Ltd, before H Ltd had
obtained its certificate of incorporation. Mohammed signed the order
‘Mohammed, for and on behalf of H Ltd.’ Upon receipt of a certificate of
incorporation, the board of H Ltd agreed that the company should adopt the
contract with Seller Ltd.
If the contract with Seller Ltd is broken, who is liable for the breach?
A Mohammed
B H Ltd
C The board of H Ltd
D The shareholders of H Ltd

207
Chapter 7
A company’s name
5.1 Choosing a name
Must have limited (Ltd) or public limited company (plc) at end as applicable
Cannot be the same or virtually the same as another in index of names
Cannot use certain words which are illegal or offensive
Must have Secretary of State’s consent to use certain words (e.g. England,
Chartered, Royal, National, University, Insurance, etc.) or any name suggesting
a connection with the government or any local authority.
Cannot use words indicating the company is of another type or legal form.
Note: Most companies trade under their registered name, but there is nothing to stop
a company trading under a different ‘business’ name. If a company chooses to do
this, the business name will be subject to the same rules as the registered name as
regards offensive words, names suggesting a prohibited connection etc.
208
5.2 Disclosure of the company’s name
The company’s name must be displayed at certain locations and on certain

documents as specified by regulations made by the Secretary of State (s.82). The
name must also be legible on the company seal if the company has chosen to have
one. Breach of either provision can lead to a fine.
5.3 Changing the company’s name
A company can change its name by the shareholders passing a special resolution
(see chapter on Companies: Ownership and management) and notifying the
Registrar.
The Secretary of State can require a company to change its name in the following
circumstances:
Reason Period
The name is the same as, or too like, an existing registered name. 12 months
The name gives so misleading an indication of the nature of the No time limit
company’s activities as to be likely to cause harm to the public
Misleading information or undertakings were given when applying 5 years

for a name that required approval.
209
Chapter 7

Which one of the following names could not without further consent be a
permissible name under the Companies Act for a company, the main
object of which is to contract refuse collection services for Westminster
City Council?
A Westminster City Refuse Services Ltd.
B Council (Refuse Collection) Services Ltd.
C Refuse Collection (Westminster) Ltd.
D City Waste Disposal Ltd.

A business has been registered under the name ‘The Mark Jones Partnership
Co. Ltd’.
What type of business organisation must this be?
A A partnership.
B A private limited company.
C A public limited company.
D Any of the above as this is a business name.

awareness.
210
Articles of association
6.1 Introduction
The articles of association form part of the company’s internal constitution, along with
any other agreements or resolutions (s.17). They:
 Set out the manner in which the company is to be governed, and
 Regulate the relationship between the company and its shareholders.
6.2 Model Articles
For companies incorporated under CA06, model articles will be prescribed by the
Secretary of State.
These model articles will apply where a company is formed without registering
articles or where the articles registered do not exclude or modify the model articles.
A company:
 May adopt the model articles in full or in part
 Is deemed to have adopted the model articles if there is no express or implied

provision to exclude them, or
 May draft its own unique articles.
211
Chapter 7
6.3 Contractual effect of a company’s constitution
The company and its members are bound by the articles as if they had signed and
sealed covenants to that effect: s.33 CA 2006.
The articles bind:
 The company to its members
 The members to the company, and
 The members to one another.
They do not bind:
 The company to non-members, or
 The members in any other capacity, e.g. if a member is also a professional

adviser to the company, that relationship will not be governed by the
constitution.
Illustration 9 – Articles of association

Eley v Positive Government Security Life Assurance Co 1876
Facts: The articles of association of the company stated that Eley was to be the
only solicitor of the company and could only be dismissed for gross misconduct.
The company employed another solicitor and Eley tried to sue for breach of the
articles.
Held: Eley was trying to protect his rights as a solicitor to the company not in
his capacity as a member. As such the articles were not enforceable.
In the exam it is important to identify in what capacity the claimant is

acting. The articles can only be enforced if the individual is trying to
protect his or her rights as a member, not in any other capacity.
212
Although the articles themselves are not binding on anyone other than the company
and its members they may provide evidence of what is in a contract between the
company and a third party. Another contract may incorporate the articles as an
implied term of the contract in which case that contract itself would be binding against
the company by a third party.
213
Chapter 7
6.4 Alteration of articles
Procedure:
 The articles can usually be altered by a special resolution of the shareholders

(75% majority)
 Copies of the amended articles must be sent to the Registrar within 15 days.
It is possible to ‘entrench’ some of the articles, such that entrenched provisions can
only be altered by using a set procedure, for example, with the agreement of all
company members or by court order.
S.25 prevents a member being bound by any alteration made after he or she
becomes a member that requires him or her to increase their liability or contribute
further to the company.

Which of the following statements is/are correct?
(i) The Articles of Association of a company limited by shares contain the

internal regulations of the company
(ii) The Articles of Association form a contract between the shareholders and
the company
A (i) only
B (ii) only
C Both (i) and (ii)

compliance.
214

The Articles of Association of a company limited by shares form a
contract between:
A The shareholders and the company in respect of all provisions in the

Articles
B The shareholders and the directors in respect of all provisions in the

Articles
C The company and the directors in respect of directors’ rights only
D The company and the shareholders in respect of shareholder rights only
215
Chapter 7
Administrative consequences of
incorporation
7.1 Company records
The company must keep the following registers:
Register of: Contents:
Members Names, addresses, date became/ceased, number of shares,

type, amount paid up.
Directors and Name, occupation, nationality, other directorships within the

company secretary last five years and date of birth. Addresses of directors are
(if applicable) maintained but are not publicly disclosed.
People with Names of people who own or control the company. A PSC is
significant control someone who owns or controls more than 25% of the shares
(PSC) or voting rights, or someone who has the power to appoint or
remove the majority of the members of the board of directors.
Charges Name of chargee, type of charge, property charged, amount

and date created.
Other documents Resolutions and minutes of general meetings must be kept for
ten years. The Directors’ statement and auditor’s report must
also be kept, plus directors’ service contracts and details of
any indemnity provisions restricting directors’ liability.
The registers must be:
 Kept at the company’s registered office (although the register of members and
register of directors’ interests can be kept where they are made up), and
 Must be available for public inspection.
The registered office of a company is the address where documents may be legally
delivered or ‘served’ and where a company’s registers are normally kept (although
there is provision for the registers to be kept at any place to be specified in
regulations by the Secretary of State). The registers may be kept electronically or in
hard form.
Contravention renders the company and every officer in default liable to a fine.
216
217
Chapter 7
7.2 The register
The Registrar of Companies maintains the following details in respect of each

company:
 The certificate of incorporation
 The trading certificate (if it is a public company)
 Certificates of registration of charges
 The annual accounts;
 The confirmation statement
 Special resolutions (and some ordinary resolutions), and
 Changes of directors.
The public can inspect any of the above, subject to payment of a fee, apart from:
 The directors’ residential addresses, and
 The contents of any charges.
218
7.3 Accounts and reports
Confirmation Can be sent at any time but no more than 12 months can pass
Statement between each Statement.
The Statement confirms that no changes to key information
have happened during the year. If changes have been made
it states what they are.
Changes need to be communicated on, for example:
 address of registered office
 type of company
 principal business activities
 details of officers
 details of issued shares and their holders
 the Register of people with significant control
 particulars of those who have ceased to be members
since the last Statement
Accounting The company must keep accounting records containing
Records: s.386 sufficient information to show and explain the company’s
transactions. In particular, the records must show:
 details of all money received and spent
 a record of assets and liabilities
 statement of inventory (stocks) at end of year.
Annual Companies are required to produce annual accounts
Accounts: s.393 including:
 balance sheet and profit and loss account showing true
and fair view
The annual financial statements must be approved and signed
on behalf of the board of directors and a copy filed with the
Registrar.
219
Chapter 7
Directors’ Names of directors, principal activities of the company and a

Report: s.415 statement that the auditor is not unaware of any relevant audit
information.
This report usually (but not always) includes a recommended
dividend and a note of likely future developments for the
company as well as the risks or uncertainties facing the
company; the report must be approved by the Board.
Under the Companies (Directors’ Report) and Limited Liability
Partnerships (Energy and Carbon Report) Regulations certain
businesses (quoted companies, large unquoted companies
and large LLPs) must publish information in their directors’
report information regarding the emissions, energy
consumption and energy efficiency of the business.
Directors’ Quoted companies only, subject to members’ approval.

Remuneration
Report: s.420
Auditor’s Report  Identifies accounts audited and the reporting framework

(if applicable): applied
s.495
 Describes the scope of the audit
 States whether, in the auditor’s opinion, the accounts

give a true and fair view of the company’s financial affairs
 States whether, in the auditor’s opinion, the directors’

report is consistent with the accounts.
Strategic report Under the Companies Act 2006 (Strategic Report and
Directors’ Report) Regulations 2013 large and medium-
sized companies must prepare this as part of their financial
statements.
The report must contain:
 A fair review of the company’s business
 A description of the principal risks and uncertainties

facing the business.
The review should give a balanced analysis of the

company’s performance during the year.
220
Companies Under this legislation the following disclosures are also now
(Miscellaneous required:
Reporting)
Regulations 2018  A report on engagement with stakeholders
 A statement is required in the strategic report as how the

directors have complied with their duty to promote the
success of the company
 A statement of corporate governance arrangements

stating which corporate governance code has been
applied and how it was applied.
 Within the directors’ remuneration report (quoted

companies only) various additional disclosures are
required including a ratio of the CEO’s pay to UK
employees’ pay.
Non-compliance with any of the provisions above may result in the company and
any relevant officer being fined. In some circumstances the officer may be
imprisoned.
221
Chapter 7
7.4 Small and medium-sized companies
The rules for small and medium-sized companies are less stringent than for large
companies.
In addition, micro-entities can elect to benefit from certain accounting exemptions

including the right to file a simple profit and loss account or no profit and loss account
at all. However, a balance sheet is required but is only required to provide a minimum
of accounting information (referred to in the regulations as minimum accounting
terms).
Micro-entities and small and medium-sized companies are private companies who
fulfil at least two of the following requirements:
Micro Small Medium
Turnover £632k £10.2m £36m
Balance sheet assets £316k £5.1m £18m
Number of Employees 10 50 250
222
7.5 Audit Requirements
The following companies are exempt from audit requirements (unless they are a
specified company, such as insurance or banking):
 Micro and small companies (see above)
 Dormant companies
 Non-profit making companies
 Subsidiary companies whose parent company guarantees their liabilities

outstanding at the balance sheet date.
Even if a company is exempt, 10% of the members (in number or representing 10%
of the nominal value of the issued share capital) can require an audit to be
undertaken.
An auditor has a right of access to all of the company’s books and accounts. He or
she may be removed by an ordinary resolution with special notice.
It is an offence to cause misleading, false or deceptive statements to be included

within the auditor’s report. This is punishable by a fine.
223
Chapter 7
Company secretary
Every public company must have a qualified company secretary. Private companies
may choose to appoint a secretary, but are not obliged to do so. The company
secretary is the chief administrative officer of the company.
The secretary is usually appointed and removed by the directors.
The secretary of a public company must be qualified under one of the following
conditions:
 Is a solicitor, barrister or member of ICAEW, ACCA, CIMA, ICSA, CIPFA, or
 Has held the role of secretary in a public company for at least three out of the
last five years, or
 Appears capable of discharging the functions by virtue of another position or

qualification.
There are no statutory duties; therefore, the duties will be whatever the board
decides. The company secretary will typically undertake the following:
 Make returns to the Registrar,
 Keep registers, and
 Give notice and keep minutes of meetings.
The company secretary has the authority to bind the company in contract. Authority
may be:
 Actual – this is the authority delegated by the board; or
 Implied – this usually involves contracts of an administrative nature. It does not

extend to making contracts of a commercial nature or to borrowing money.
224

area.

225
Chapter 7

D
Answer D gives a definition of liability for a limited liability company limited by

shares.

A
A shareholder is a part-owner of the company, but is not a part-owner of the

property owned by the company. In law, this property belongs to the company
itself, which is a legal person.

A
A public company must have at least two directors. Statements B, C and D are
correct.
226

D
A private company cannot invite the public to subscribe for its shares. This is
the key difference between a public and a private company.

D
A public limited company must have a name ending with the words ‘public
limited company’ (or the letters ‘plc’). It may have its shares traded publicly, but
this is not a requirement of plc status. It must have allotted share capital of
£50,000, but this need not be fully paid up.

B
Regardless of the actual date of registration, the only date that matters is the
date on the certificate of incorporation.
227
Chapter 7

A
Contracts are valid, although if not paid within 21 days the directors become
jointly and severally liable with the company.

A
The company can always sue the promoter for damages. However, the right to
rescission may be lost where, for example, there has been unreasonable
delay.

D
Buying a company off the shelf means that the company has already been
incorporated. It saves the time of going through the procedures for
incorporation. A company can be bought off the shelf for about £100, which is
much cheaper than using a solicitor or accountant to register a new company.
However, the registered details (such as the name and directors) may need to
be changed. All three statements are therefore correct.
228

D
The position at common law is that a company cannot be bound by a contract

that was made before it was formed, and after its formation it cannot ratify or
formally adopt a pre-incorporation contract. Section 51 CA 2006 provides that
a person acting for the company should have personal liability on a pre-
incorporation contract that he or she enters into.

A
S.51 of the Companies Act 2006 deems the person purporting to act on behalf
of a company personally liable on a pre-incorporation contract, unless
otherwise agreed. Merely signing as agent (e.g. using the words ‘for and on
behalf of’) is not sufficient to avoid personal liability. The company cannot
unilaterally adopt (or ‘ratify’) a pre-incorporation contract.

B
S.54 CA 2006 prohibits a company, unless given approval by the Secretary of

State from having a name that would be likely to give the impression that the
business is carried on in connection with the government or a local council.
Here, the use of the word ‘Council’ in the business name would not be
permitted.
229
Chapter 7

B
The fact that the name ends with the letters ‘Ltd’ indicates that it is a private
limited company.

C
Both statements are correct.

D
The Articles of Association form a contract between the shareholders and the
company, but only in respect of individual Articles that affect the rights of the
shareholders.
230
Chapter 8
Companies: Ownership and
management
know how directors are appointed and removed and to understand their role in
the company
understand the powers and duties of directors
recognise the consequences of being a director in breach of their duties
appreciate the role of the members of a company and in particular to

understand in what circumstances they can exercise control over the directors
understand the principle of majority rule and when minority shareholders can
take action
recognise the various rules regarding company meetings and resolutions.
MyKaplan resources
This topic is covered on MyKaplan in the module Companies: Ownership and
Management.
ICAEW resources
workbook
231
Chapter 8
Overview
Management and
ownership
Directors
Member’s rights
appointments
minority
shareholders
removal
meetings
powers
duties
disqualification
232
Companies: Ownership and management
Directors
1.1 Definition of director
The term ‘director’ includes every person occupying the position or

fulfilling the role of director, whatever he or she is called: s.250 CA06.
Every company must have at least one director and a public company
must have at least two directors: s.154 CA06.
Generally, a director must be at least aged 16 (but there are some exceptions).
The decision as to whether someone is a director is therefore based on his or her

function, not title.
1.2 Types of director
De facto director  Anyone who acts as a director, although not validly

appointed as one.
 A person who becomes liable as a director due to his or

her conduct.
De jure director  A person who has been appointed following the correct
legal procedure (seen later).
I
Shadow director  ‘A person in accordance with whose directions or
instructions the directors of a company are accustomed
to act’ s.251 CA06
 Not a shadow director if directors only act on advice

given by him or her in a professional capacity.
Alternate director  A director may appoint an alternate director to attend

and vote at board meetings.
 The alternate director may be another director or an

outsider.
 Some articles provide for such an appointment to be

subject to the approval of the board.
Executive director  Likely to be a full-time employee involved in

management.
 Usually has a specific role, e.g. marketing director.
233
Chapter 8
Non-executive  Usually part-time.

director (NED)
 Brings outside expertise to board.
 Not an employee.
 Exerts control over executive directors.
Managing  The board usually delegates to the MD the day-to-day

director (‘MD’) management of the company’s business.
Chairman  Responsible for ensuring procedure in meetings is

followed.
 Usually a non-executive director.
1.3 Appointment
Appointment  Usually appointed by the existing directors or by

procedure ordinary resolution (see later in this chapter).
 Directors of public companies should generally be
voted on individually: s.160 CA06.
 A director’s actions are valid notwithstanding that his or
her appointment was defective: s.161.
Publicity  The company must notify the Registrar within 14 days
of new appointments and any changes in particulars. It
must also enter details in the Register of Directors.
234
1.4 Removal
A director might leave office in any one of the following ways:
 Death of the director or winding up of the company
 Removal
 Disqualification (seen later in the chapter)
 Resignation
 Not offering himself or herself for re-election, where the articles provide for
retirement and re-election of directors.
The model articles provide that a director should leave office in the following
circumstances:
 He or she is prohibited from being a director by law
 A bankruptcy order is made against him or her
 He or she is the subject of a composition with creditors with regards to his or

her debts
 A registered medical practitioner gives a written opinion that he or she is

physically or mentally incapable of acting as a director
 The court passes an order that, due to his or her mental health, he or she is to
be prevented from exercising the powers of a director
 The director gives notice as to his or her resignation of office.
235
Chapter 8
The procedure for the removal of a director is as follows:
Special notice (28 days) is required of the resolution

by persons wishing to remove a director; s.168 CA
2006. The company must forward a copy of the
resolution to the director concerned.
Ordinary
Resolution Notice of the meeting goes to the director and all
but
members entitled to attend and vote.
Special The director in question can require the company to

Notice circulate written representations to members (s.169).
At the meeting, the director can read out

representations if there was no time for prior
circulation.
The director must be allowed to attend the meeting
and to speak.
An ordinary resolution is needed to remove the
director: s168.
The removal of an executive director may be held to be a breach of his or her service
contract and he or she may be able to sue for such.
The power of the members to remove a director may be limited:

 A director who is also a member may validly be given weighted voting rights in
respect of a decision to remove him or her (see Illustration below).
 A shareholder agreement may state that shareholders holding each class of
shares must be present at a meeting for the decisions to be valid. This would
mean that if there is only one shareholder in a class, by not attending a meeting
he or she could prevent the director from being removed.
236
Illustration 1 – Directors
BUSHELL v FAITH (1970)
Facts: A provision in the articles tripled the number of votes of shares held by
directors on a resolution to remove them. Statute only required an ordinary
resolution and made no provision as to how it could be obtained or defeated.
Held: The weighted voting rights provided in the articles were valid.

Which of the following states the requirements for removal of a director?
A Special resolution with ordinary notice
B Ordinary resolution with special notice
C Ordinary resolution with ordinary notice
D Special resolution with special notice

237
Chapter 8
Powers
2.1 The division of power within a company
The legal theory is that all decisions about the running of the company’s
business should be taken by the members in general meeting.
However, the members usually delegate the power to manage the
business to the directors and they exercise all the powers of the
company on a day-to-day basis.
Directors are required to exercise their powers in accordance with the company’s
constitution. Most companies registered under the Companies Act 2006 have
I unrestricted objects, unless the articles specifically restrict them.
Note that the power to manage the business of the company is given to the board as
a whole, not to the individual directors. Where a company’s articles delegate the
management of the company’s business to the board, the members have no right to
interfere in decisions made by the board. Directors are not agents of the members
and are not subject to their instruction as to how to act.
Agents of the company
Illustration 2 – Powers
In SHAW v JOHN SHAW (1935) it was held that it was for the board to decide
whether or not the company should commence litigation and therefore an
ordinary resolution instructing the board to discontinue litigation had no legal
effect.
238
2.2 Restrictions on the directors’ powers
Although the directors are given the power to run the company once they are
appointed by the members there are some restrictions put on this power.
General statutory restriction
The Companies Act 2006 states that directors must only use their powers ‘for the
purpose for which they are conferred’. A director using his or her powers for any
other reason would be held to be in breach of their duties.
Specific statutory restrictions
When running the company, the Companies Act states that there are certain
decisions for which the directors must gain shareholder approval by way of an
ordinary or special resolution, for example alteration of the articles and reduction of
share capital (seen in the next chapter).
Restrictions in the articles
The directors’ powers may be restricted by a provision in the company’s articles, for
example stating the maximum amount the company can borrow.
Restriction of powers made by the members
If the members are unhappy with the way a company is being run, they have two
additional courses of action open to them:
 A director can be removed at any time by an ordinary resolution of the members

and they may see fit to exercise this right should their views be ignored.
 The members can alter the articles by passing a special resolution. This power
could therefore be used to restrict the directors’ powers.
239
Chapter 8
2.3 Authority of directors
Transactions by individual directors
Individual directors cannot bind the company without being given authority to do so.
There are three ways in which this authority may be given:
Express  Where authority is expressly given, all decisions taken are
binding.
Implied  Authority flows from a person’s position.
 The person appointed as the managing director has the
implied authority to bind the company in the same way as the
board.
 The managing director is assumed to have all powers usually
exercised by a managing director.
Apparent/  Such authority arises where a director is held out by the other
Ostensible board members as having the authority to bind the company.
 At common law, if a third party acts in good faith on such a
representation, the company is ’estopped’ from denying its
truth: Freeman & Lockyer v Buckhurst Park Properties
(1964).
 For these purposes the third party is deemed to be acting in
good faith unless the contrary is proved, i.e. unless he or she
had actual knowledge of the lack of authority.
The rules regarding agency law are important here. If you are struggling
with these ideas, you may wish to revisit the chapter on Agency Law
again at this stage before moving on.
240

GLM plc’s articles of association contain the following regulation:
‘No single director is empowered to enter into contracts on behalf of the

company in excess of £250,000 without written authorisation by the chairman
of the board of directors’.
Matthew, the managing director, has recently committed the company to a

contract with PQR Ltd for the supply of equipment valued at £300,000. The
board of GLM plc wishes to avoid the contract.
Does Matthew have any of the following types of authority?

Express Yes No
Implied Yes No
Apparent Yes No

Is GLM plc bound by the contract? Yes No
241
Chapter 8
Transactions beyond the board’s powers
 Where the directors of a company acting together act as if they have authority
to bind the company, legislation provides that this authority will be treated as
binding, even where the transaction exceeds the board’s actual authority under
the articles of the company.
 To this effect, s.40 CA 2006 states that the power of the directors to bind the
company, or to authorise another to bind the company, will not be limited by
anything in the company’s constitution, provided the other party is acting in
good faith.
 S.40 also states that even when the other party has actual knowledge of the
directors lack of express authority in the articles this is not enough to
demonstrate lack of good faith (in contrast to the position re individual directors
at common law, outlined above) so on the face of it, any contract entered into
by the board of a company will be binding.
 It should be noted that even under these provisions, there is nothing to stop a
member from acting to restrain the directors from entering a transaction that is
beyond their powers (s.40 (4)).
 Where, however, the third party to the transaction is also a director of the
company or a person associated with a director, the transaction becomes
voidable at the company’s instance (s.41 CA 2006).
 Moreover, the third party director or associate, and any director who authorised
the transaction, is then liable to compensate the company for any profit made
or to indemnify the company for any loss or damage arising, whether the
company chooses to avoid the contract or not.
 In some circumstances this will not apply, such as where reimbursement is no

longer possible or where the company has affirmed the contract (i.e. done
something to acknowledge or accept it).
242
Duties
3.1 General duties
Prior to the Companies Act 2006, common law rules and ‘equitable
principles’ made up the law on directors’ duties. These have now been
replaced by the specific statutory duties provided in the Companies Act
2006.
It should be noted that there are specific legal duties given in the legislation to
directors such as the duty to prepare a directors’ report, and as such these may be
referred to as the general duties of the directors.
It is important that you learn these duties as in the exam you are likely
to be asked to identify or apply one or more of these. The section
numbers given all relate to the Companies Act 2006.
s.171 To act  A director must act in accordance with the company’s

within powers constitution and only use his or her powers for the purpose
which they were given.
 If a director carries out a transaction which he or she does
not have authority for, the transaction will be void, unless it
is approved by shareholders in a general meeting.
s.172 To  A director must act in good faith, in a way which promotes
promote the the success of the company and for the benefit of the
success of the members as a whole.
company  The Act requires directors to have regard to:
(a) the likely consequences of any decision in the long
term
(b) the interests of the company’s employees
(c) the need to foster the company’s business
relationships with suppliers, customers and others
(d) the impact of the company’s operations on the
community and the environment
(e) the desirability of the company maintaining a
reputation for high standards of business conduct; and
(f) The need to act fairly as between members of the
company.
243
Chapter 8
s.173 To  Trio late

This duty is not infringed by a director acting:
exercise (a) in accordance with an agreement duly entered into by
independent the company that restricts the future exercise of
judgment discretion by its directors, or
(b) In a way authorised by the company’s constitution.
s.174 To  The standard expected of a director is that of a reasonably
exercise diligent person with:
reasonable (a) the general knowledge, skill and experience that could
care and reasonably be expected of a director, and
diligence
(b) The actual knowledge, skills and experience held by
the director.
s.175 To avoid  A director must avoid any situation which places him or her
conflicts of in direct conflict with the interests of the company or the
interest performance of any other duty.
 This duty is not infringed if the matter has been authorised
by the directors, provided the articles do not invalidate the
authorisation (in the case of a private company) or expressly
allow the authorisation (in the case of a public company).
 This duty does not apply to a conflict arising in relation to a
transaction or arrangement with the company (where the
s177 duty applies)
 The relevant director does not count towards a quorum and
his or her votes are not included in determining whether
authorisation has been given.
s.176 Not to  A director must not accept any benefit from a third party
accept benefits which arises by reason of him or her being a director or
from third performing/not performing an act as a director, unless
parties acceptance cannot reasonably be regarded as likely to give
rise to a conflict of interest.
s.177 To  A director must declare the extent and nature of such an
declare an interest to the other directors.
interest in a  This declaration can be made in writing, at a board meeting
proposed or by a general notice that he or she has an interest in a
transaction or third party.
arrangement
244
Illustration 3 – Duties
Duty to act within powers
HOGG v CRAMPHORN (1967)
Facts: The directors issued further shares and gave financial assistance for
their purchase in an attempt to fight off a takeover bid, believing it to be in the
best interests of the company.
Held: The directors were in breach of the duty to act within their powers;
however, it was open to the members to ratify their actions, which they did.
Duty to exercise reasonable care and diligence
DORCHESTER FINANCE CO.LTD v STEBBING (1989)
Facts: The company was a money-lending company and had three directors,
Parsons, Hamilton and Stebbing. All three had considerable accountancy and
business experience (Parsons and Hamilton were chartered accountants). No
board meetings were ever held and Parsons and Hamilton left all the affairs of
the company to Stebbing. Parsons and Hamilton did, however, turn up from
time to time and signed blank cheques on the company’s account which they
left Stebbing to deal with. Stebbing loaned the company’s money without
complying with statutory regulations applying to money lending, such that the
loans were unenforceable.
Held: All three were liable in negligence. If a director has a special skill (e.g. as
an accountant) he or she is expected to use it for the benefit of the company.
245
Chapter 8
Duty to declare any interest in a proposed transaction or arrangement
IDC v COOLEY (1972)
Facts: Cooley, the managing director of IDC, had been negotiating a contract
on behalf of the company, but the third party wished to award the contract to
him personally and not to the company. Without disclosing his reason to the
company (or its board) he resigned in order to take the contract personally.
Held: He was in breach of fiduciary duty as he had profited personally by use of

an opportunity which came to him through his directorship: it made no
difference that the company itself would not have obtained the contract. He was
therefore accountable to the company for the benefits gained from the contract.
The IDC case illustrates that an individual may still be subject to the duties even
after he or she ceases to be a director.
246
3.2 Breach of directors’ duties
Directors owe their duties to the company as a whole. This has

traditionally been taken to mean to the shareholders as a collective
body, which includes present and future shareholders.
The directors owe no general duty to individual members: Percival v

Wright (1902).
If a director breaches his or her duty that breach may be subsequently

ratified by the members, subject to the rules regarding ratification seen
in the Agency Law chapter.
Breach of duty may carry the following consequences:

 The director may be required to make good any loss suffered by the company.
 Contracts entered into between the company and the director may be rendered
voidable.
 Any property taken by the director from the company can be recovered from
him or her if still in his or her possession.
 Property may be recovered directly from a third party, unless that third party
acquired it for value and in good faith.
 An injunction may be an appropriate remedy where the breach has not yet
occurred.
S.232 provides that any provision to exempt a director from or indemnify against any
liability for breach of duty or negligence is void.
In any action for breach of duty the court may conclude the directors are not liable if it
believes the directors acted honestly and reasonably and, considering all the
circumstances of the case, they ought fairly to be excused.
247
Chapter 8

Wakana has acted in breach of her duty to disclose her interest in a contract
as a director of WK Ltd.
Which one of the following is correct?
A The breach cannot be ratified by the shareholders
B The breach may be ratified by a written or ordinary resolution
C The breach may be ratified by a provision in the company’s articles
D The breach may be ratified by a resolution of the board of directors

Len is a director of Mod plc, but he also owns a majority interest in Nim Ltd.
Last year Mod plc entered into a contract to buy new machinery from Nim Ltd.
Len attended the board meeting that approved the contract and voted in
favour of it, without revealing any link with Nim Ltd.
Owen is a shareholder in Mod plc and has found out about Len’s links with
Nim Ltd.
Has Len breached any of the statutory duties?
248
3.3 Wrongful and fraudulent trading
Fraudulent trading Wrongful trading
Definition The company’s business is On winding-up it appears to the

carried on with intent to court that the company has gone
defraud creditors and into insolvent liquidation and,
other persons or for before the start of the winding up, a
fraudulent purpose. director knew or ought to have
concluded there was no
The offence may be reasonable prospect that
criminal or civil and could company could avoid insolvent
involve just a single liquidation and did not take
transaction. sufficient steps to minimise
potential loss to creditors: S.214
Note: there is a high Insolvency Act 1986 (IA86).
burden of proof involved in
proving dishonesty.
Who is liable? Any persons knowingly Directors and shadow directors.

party to the carrying on of
the business. This applies Standard applied is that of a
to persons taking the reasonably diligent director taking
decisions or playing an the steps expected of a
active part in the business. ‘reasonable’ director, or if the actual
director has higher skills than a
‘reasonable’ director then the
standard is those higher skills.
Consequences Must contribute to the Contribute to company’s assets. Up

company’s assets on a to 15 years’ disqualification under
winding up: s.213 IA86. Up CDDA86.
to 15 years’ disqualification
under the Company
Directors Disqualification
Act 1986 (CDDA86). Fine
and/or imprisonment for up
to 10 years: s.993 CA06.
Case law R v Grantham – ordering Re Produce Marketing Consortium

goods on credit knowing – the defence that all reasonable
that they would not be paid steps were taken to minimize the
for was held to be loss to creditors was successful.
fraudulent trading.
249
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250
3.4 Disqualification
Under the Company Directors Disqualification Act 1986, a disqualified director cannot
be concerned in the management of a company, directly or indirectly, or act as a
liquidator, receiver or promoter.
Grounds for disqualification:
 Persistent breaches of the Companies Act e.g. failure to file returns (maximum
5 years’ disqualification). Three convictions for default in five years is conclusive
evidence of persistent breach.
 Conviction of a serious offence in connection with the management of a

company (max. 15 years’ disqualification).
 Fraudulent or wrongful trading (max. 15 years’ disqualification).
 An investigation by Secretary of State finds the director to be unfit to be

concerned in the management of a company (max. 15 years’ disqualification).
 Liquidator’s report finds the director to be unfit to be concerned in the

management of a company (min. 2 years’ and max. 15 years’ disqualification).
 Secretary of State feels it is in public interest (max. 15 years’ disqualification).
 Breach of competition law (max. 15 years’ disqualification).
Breach of a disqualification order:
 This is a criminal offence, which could result in a fine and imprisonment.
 The disqualified director (or any person who acts on his or her instructions) is
personally liable for the debts of the company while so acting.
251
Chapter 8
Members
4.1 Regulation of members
The articles of association set out the company’s internal regulations. A

shareholders’ agreement may also exist. This is a contractual agreement setting out
the members’ rights and duties. It is a private document and does not need to be filed
with the Registrar. It often gives more protection to the members than is provided in
the legislation.
4.2 Members’ rights
The members have the right:
 To be sent a copy of annual accounts and reports. (These may be sent in an

electronic form, provided the member has agreed)
 To require the directors to call a general meeting; and
 To appoint a proxy to exercise their rights.
A member can take action to enforce their personal rights of membership.
Many individuals hold shares as part of a managed fund – e.g. an ISA.

In the past they had no right to receive the accounts as their shares
were held in the name of the fund manager. Now the fund manager can
nominate another person (i.e. the beneficial owner) to receive the
accounts: s.146 (this is known as claiming information rights).
252
4.3 Approval of directors’ actions
Certain matters require the approval of the members in a general meeting in order to
be valid. For example:
Service contracts (s.188)  Approval is required if the contract is for a
guaranteed period of two years or more.
 If not approved, the contract is deemed to
include a term allowing the company to
terminate it by reasonable notice at any time.
Substantial property  This is where a director acquires from the
transactions (s.190) company (or vice versa) a substantial non-cash
asset.
 An asset is ‘substantial’ if its value either
exceeds £100,000 or exceeds 10% of the
company’s asset value and is more than £5,000.
 Failure to obtain the members’ approval results
in the following consequences:
– the transaction is voidable by the
company, unless the members give
approval within a reasonable period
– The director is liable to account to the
company for any gain or indemnify it
against any loss.
Loans to directors (s.197)  Any loan by a company to a director or for any
guarantee or security by a company in
connection with a loan made by another party to
a director.
 A written memorandum setting out the details of
the transaction proposed must be given to the
members
 Failure to obtain the members’ approval results
in the following consequences:
– the transaction is voidable by the
company, unless the members give
approval within a reasonable period; and
– The director is liable to account to the
company for any gain or indemnify it
against any loss.
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Chapter 8
 The following loans do not require approval:

– expenditure on company business,
defending proceedings or regulatory
action or investigation
– minor transactions or any in the ordinary
course of business
– intra-group transactions; and
– Where the business of the company is
money-lending.
Payments for loss of office  Payments or benefits to be made on loss of

(s.217) office or retirement
 A written memorandum of the proposed
payment (or other benefit) must be sent to all
members.
 Payment will be held on trust for the company
where approval is not sought.
 Any director who authorised the payment is
liable to indemnify the company for any loss.
Laneimburse
254
The rights of minority shareholders
5.1 Minority protection
A company is ultimately controlled by its members, although the

directors manage the company on a day- to-day basis. Most decisions
require a majority of over 50% (although some require 75%); therefore,
shareholders who are in the minority may find that their wishes are
ignored.
Members can exercise their votes in their own interests. They are not required to act
for the benefit of the company. Minority shareholders who are unhappy with a
decision have the following remedies:
Requirement Remedy
Any member Can apply to court to prohibit a payment out of capital by a
private company.
Can prevent the registration of a limited company as an
unlimited company.
5% voting rights Can force the inclusion of a resolution on the agenda of the
AGM.
Can require the directors to call a GM.
15% voting rights Can apply to court to cancel a variation of class rights.
> 25% voting rights Can defeat a special resolution to alter name, alter articles,
and reduce share capital or wind up company.
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Chapter 8
5.2 The rule in Foss v Harbottle
As a general rule, if a wrong has been done to a company, then the

proper claimant is the company. If the minority is unhappy with a
decision, then they have no recourse as a company is a separate legal
person.
Illustration 6 – The rights of minority

shareholders
FOSS v HARBOTTLE 1843
Facts: Foss, a shareholder, sued the directors of the company alleging that
they had defrauded the company by selling land to it at an inflated price.
Held: The action must be dismissed. The company was the proper claimant,
not the shareholders.
5.3 Derivative actions

A
Under s.260 CA 2006, a member may bring a ‘derivative’ claim on behalf of the
company against a director where there has been breach of duty or negligence. The
claim requires the permission of the court.
In deciding whether to refuse or grant permission for the action the court will
consider:
 Whether a member is acting in good faith
 Whether the company had decided not to pursue the claim
 The views of members with no personal interest in the matter; and
 Whether the member has the ability to pursue the matter in his or her own right,
rather than on behalf of the company.
contract between two parties which

derives its value/price from an
underlying asset. The most common
types of derivatives are futures,
options, forwards and swaps.
256
The court will refuse permission where it is satisfied that:
 The act was authorised beforehand or ratified subsequently; and
 A person acting in accordance with the duty to promote the success of the
company would not seek to continue the claim.
Even if permission is granted, the court may relieve a director of liability if it considers
that:
 He or she acted honestly and reasonably, and
 He or she ought fairly to be excused.
5.4 Protection against unfairly prejudicial conduct
Under s.994 CA 2006, any member may apply to the court for redress on the
grounds that ‘the company’s affairs are being or have been conducted in a manner
that is unfairly prejudicial to the interests of the members generally or of some part of
the members….or that an actual or proposed act or omission of the company is or
would be so prejudicial’.
There is no statutory definition of what constitutes unfairly prejudicial conduct. The

test to be applied is an objective one. Some examples below from decided cases
illustrate conduct which amounts to unfair prejudice.
 If a shareholder is dismissed as a director, then he or she may be unfairly

prejudiced if the company is a quasi-partnership.
 Failure to pay dividends or failure to call a General Meeting.
 Improper allotment of shares, which merely allowed a majority shareholder to

increase their holding.
 Diverting business opportunities from the company.
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In order to claim relief:

 The petitioner must be a member of the company, and
 The complaint must be based on prejudice to them as a member.
If a petition is successful, the court may make whatever order it thinks fit. This will
usually be one of the following:
 Requiring the company or the members to purchase the shares of the petitioner
at a fair price
 Authorising court action in the company’s name
 Regulating the future conduct of the company’s affairs, or
 Ordering the company to perform (or refrain from performing) some act.
5.5 Just and equitable winding up

A minority shareholder may petition the court to wind up the company on the ground
that it is just and equitable to do so. The member must show that there is no other
suitable remedy available.
Orders tend to be made for winding up if:
 The company was initially formed for an illegal or fraudulent purpose,
 There is complete deadlock in the management of the company’s affairs, or
 Shareholders have lost confidence in the company’s management.

Emma & Teresa each own a 10% shareholding in Grouse Ltd. Julia is the
majority shareholder, owning 80% of the share capital. Julia has decided to
announce a 1 for 2 rights issue, but only shareholders with more than 15% of
the total share capital qualify to participate in the rights issue.
State the remedies available to Emma & Teresa.
258
Meetings
6.1 Types of meeting
Annual General Meeting (AGM)
Timing Held once a year, within the 6 months following the

accounting reference date: s.336.
Failure to hold The company and every officer in default can be fined.
Private Private companies are not required to hold an AGM.
companies
Notice 21 days’ notice is required unless every member entitled to
attend and vote agrees to a shorter period.
Must state that the meeting is an AGM.
Business Usual business includes:
 consider accounts
 appoint auditors
 elect directors
 declare dividends.
Resolutions Members can force the inclusion of a resolution on the agenda
of the AGM if they:
 hold 5% of voting rights, or
 100 members each hold an average of £100 of the paid
up share capital: s.338 CA 2006
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Chapter 8
General Meetings (GM)
Timing Held whenever required.
Must be held by a plc if a serious loss of capital has occurred, i.e.

net assets have fallen to less than half of the called up share
capital.
Notice At least 14 days.
Business The person who requisitions the meeting sets the agenda.
Class meetings
Purpose Meeting of a class of shareholders (or debenture holders), usually

to consider a variation of their class rights.
Procedure Notice, etc. as for general meetings.
Quorum Two persons holding or representing by proxy at least one-third in

nominal value of the issued shares of the class in question.
260
6.2 Who can call a meeting?
Directors Articles usually delegate power to directors
Members Members may require the directors to call a GM if they hold:
 at least 5% of the paid up voting capital, or
 at least 5% of the voting rights (in a company with no share

capital)
Directors must call a meeting within 21 days of receiving a

requisition.
The meeting must take place within 28 days of the notice

convening the meeting.
If the directors do not call a meeting, the members who requested

the meeting (or any members holding over 50% of the total voting
rights) may themselves call a meeting to take place within three
months of the initial request and recover expenses from the
company.
Resigning Auditors may require the directors to convene so they can explain
auditor the reasons for their resignation.
Court A court can call a meeting on the application of a director or

member where it would otherwise be impracticable e.g. to break a
deadlock.
261
Chapter 8
6.3 Notice
Who must Every member and every director: s.310.

receive notice?
Failure to give Accidental failure does not invalidate the meeting: s.313.
notice
Contents of Date, time and place of the meeting.

notice
The general nature of business to be transacted.
The text of any special resolutions.
Length of AGM – 21 days

notice period
Less if every member entitled to attend and vote agrees.
GM – 14 days
Less if the majority of members holding at least 90% of the

shares agree (this can be increased to 95% by the articles).
Reference to days is ‘clear’ days, i.e. this does not include the
day the notice is given or the day of the meeting.
Special notice Requires 28 days’ notice.
Required for the removal of a director or auditor.
During this time the person in question can submit written

representations and require them to be circulated.
262
6.4 Types of resolutions

Type: % To When used?
required Registrar?
to pass:
Special 75% Yes – within When the law or the articles state a
15 days special resolution should be used.
For example
 Alter name.
 Wind up company.
 Alter articles.
 Reduce share capital.
Ordinary >50% Only if Used whenever the law or the articles do
required by not require a special resolution.
statute
Written Same Yes if a Can be used for any decision apart from
(private majority as 75% resolutions requiring special notice e.g.
companies required in majority is removal of director/auditor
only) GM required
Members cannot revoke their agreement.
The date of the resolution is the date
when the necessary majority has been
reached. The resolution must be passed
within 28 days of its circulation.
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Chapter 8
6.5 Procedure at Meetings
A quorum is the minimum number of members that needs to be present

at a meeting in order to validate business. It is generally two persons,
members or proxies. If a quorum is not present, the meeting is often
described as being inquorate.
Voting is by a show of hands initially, unless a poll is demanded. A

show of hands means one member one vote, irrespective of the number
of shares held.
A poll may be demanded by members holding at least 10% of the total voting rights.
A poll means the members get the number of votes they are entitled to by their
shareholding. The result of a poll replaces the result of the previous show of hands.
Quoted companies must publish the results of polls on their website: s.341 CA 2006.
Members of companies have a statutory right under s.324 to appoint one or more
persons as their ‘proxy’. A proxy can attend meetings, vote and speak on behalf of
the member for whom he or she is acting.
264
6.6 Single Member Companies
A single member can conduct business without the need for notice or minutes, but he
or she must still keep a full written record of any decision which should have been
taken in a general meeting. These records must be retained for ten years.

Fill in the gaps:
21
An annual general meeting requires ……..…… days’ notice.
5
Members may require the directors to call a GM if they hold at least ….… % of
the paid up voting capital
28
Special notice requires ….…… days’ notice.
15
A special resolution must be filed with the Registrar within ….……… days.
265
Chapter 8

area.

266

B
The removal of a director requires an ordinary resolution with special notice.

Matthew does not have the express authority to enter into this contract
however it is within the usual authority of a Managing Director and as such he
is acting within his implied authority.

GLM plc is bound by the contract. S.40 CA06 provides in favour of a person
dealing with a company in good faith, that the power of the board of directors
to bind the company, or authorise others to do so, shall be deemed to be free
of any limitation under the company’s constitution.
267
Chapter 8

B
S.239 CA 2006 states that where an interest has not been disclosed, the action
can be ratified by passing an ordinary resolution.

Through his majority interest in Nim Ltd., Len has an interest in the contract
with Mod plc. This means that he should have declared his interest to the
board of Mod plc at the meeting at which the contract was discussed in order
to comply with Mod plc’s articles and s.177 CA 2006. He should not have
voted at the board meeting at which the contract was approved, nor should he
have been counted in any necessary quorum for the meeting.

Emma and Teresa are minority shareholders and so have a variety of actions
available to them. Julia is the majority shareholder, but also the wrongdoer.
The fact that she has intentionally allotted shares and excluded the minority
would allow a petition for unfairly prejudicial conduct (s.994 CA06).
Alternatively, Emma and Teresa could petition the court for just and equitable
winding up.
268

An annual general meeting requires 21 days’ notice.
Members may require the directors to call a GM if they hold at least 5% of the
paid up voting capital
Special notice requires 28 days’ notice.
A special resolution must be filed with the Registrar within 15 days.
269
Chapter 8
270
Chapter 9
Companies: Finance
understand the key types of shares in a company, including the procedures for
the issue, payment and transfer of shares
identify different types of share capital and know how share capital can be
altered
understand the key issues in relation to capital maintenance
understand the key aspects of loan capital and debentures
recognise fixed and floating charges and to know the rules relating to their
registration and priority.
MyKaplan resources
This topic is covered on MyKaplan in the module Companies: Finance.
ICAEW resources
workbook
271
Chapter 9
Overview
TYPES OF CAPITAL
LOAN CAPITAL SHARE CAPITAL
ADVANTAGES AND
DISADVANTAGES CLASS RIGHTS
CHARGES
ISSUING SHARES
FIXED FLOATING CAPITAL

MAINTENANCE
PRIORITY,
REGISTRATION AND
VALIDITY DISTRIBUTIONS
272
Companies: Finance
Types of capital
The two main sources of finance for a company are share capital and loan capital.
A share is the interest of a shareholder, or member, in a company

measured in monetary terms, with rights and liabilities and contractual
relationships as provided by the Companies Acts. The share capital of a
company is divided into units, or shares, which define each member’s
proportion of interest in the company.
A company may also raise money by borrowing. The loan capital of a company is
often referred to as its issued debentures.
A person who invests in the shares of a company is an owner of the

company, whereas a person who invests in debentures is a creditor of
the company.
1.1 Loan capital v share capital

Loan capital Share capital
Definition A debenture is a document A share is the interest of a
issued by a company shareholder in a company
containing an measured by a sum of money. It is
acknowledgment of its a bundle of rights and obligations.
indebtedness whether
secured or unsecured.
Voting rights A debenture holder is a A shareholder is a member (owner)
creditor of the company and of the company and therefore has
therefore has no voting rights. voting rights, depending on the
class of shares held.
Income A debenture has a contractual Dividends depend on the
right to interest, irrespective of availability of profits.
the availability of profits.
Liquidation A debenture has priority with Shareholders receive repayment
respect to repayment. after creditors, but can participate
in surplus assets.
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Chapter 9
1.2 Classes of shares
A company can issue different types, or classes, of shares. Some common classes
are ordinary shares, preference shares and redeemable shares.
Preference shares Ordinary shares (equity)
Voting rights None, or restricted. Full.
Dividend Fixed dividend normally paid in Paid after preference dividend.
rights priority to other dividends, usually Not fixed and not cumulative
cumulative.
Surplus on If issued with preferential rights to Entitled to share surplus
winding up return of capital will have the right assets after repayment of
to be repaid their capital first, but preference shares.
cannot participate in any surplus.
Redeemable shares
Redeemable shares are those which under their terms of issue
must be bought back by the company at a certain time.
274
Companies: Finance
1.3 Share capital – terminology

21236034
 Issued share capital
–
07783363934
This is the value of the shares sold by the company of which:
 Paid-up capital:
– is the amount of the capital that the members have paid over to the
company.
 Unpaid capital:
– is the proportion of the share capital value that is still outstanding; of

which:
 Called-up capital:
– is the proportion of the unpaid capital which has been requested to be paid
into the company but payment has not yet been received.
275
Chapter 9
1.4 Special issues of shares

Bonus issues Rights issues
 Carried out by using some of the  New shares offered to existing
company’s reserves to issue fully shareholders in proportion to their
paid shares to existing shareholdings.
shareholders in proportion to their
 Raise new funds.
shareholdings.
 Shares usually offered at discount
 Does not raise new funds. to current market value (but not at
discount to nominal value).

XYZ plc has issued shares on terms that they will be bought back by the
company 12 months after the date of issue.
What are these shares called?
A Ordinary shares
B Bonus shares
C Preference shares
D Redeemable shares
awareness.
276
Companies: Finance
Class rights
2.1 What are they?
Class rights are the special rights attached to each class of shares,
such as dividend rights, distribution of capital on a winding up and
voting. (See section 1.2 above concerning the different rights that
normally attach to ordinary shares and preference shares.)
2.2 How can they be varied?

The procedure for varying class rights depends on whether any procedure is
specified in the articles:
Is procedure to Method of variation
vary specified?
Yes Procedure set out in articles must be followed.
Variation needs special resolution or written consent of 75%
No in nominal value of the class: s.630 CA06.

Class rights may be altered by written resolution.
What type of companies cannot use a written resolution?
A Micro entities
B Companies limited by guarantee
C Large companies
D Public Companies
compliance.
277
Chapter 9
2.3 Minority protection
Minority protection concerning the variation of class rights is provided in s.633 CA06:
If holders of >= 15%

of class of shares
affected object to the
variation
May apply to courts

within 21 days to
cancel variation
Petitioner must prove

that the variation is
‘unfairly prejudicial’.
Does the variation merely Does variation change the

affect the value, enjoyment rights themselves? If so,
or power derived from the court will cancel the
rights? If so, court will allow variation.
the variation.
278
Companies: Finance
Illustration 1 – Class rights

White v Bristol Aeroplane 1953
Facts: The company carried out a bonus issue giving free shares to the holders of
a particular class of shares. This reduced the percentage holding that
shareholders of other classes had in the company.
Held: Although the bonus issue diluted the voting rights of the other shareholders
no changes were made to the rights themselves and as such no remedy was
provided.
Illustration 2 – Class rights

Greenhalgh v Arderne Cinemas 1950
Facts: The company had in issue two classes of shares, 50p shares and 10p
shares. Shareholders in each class were entitled to one vote per share. The
company carried out a subdivision of the 50p shares splitting them into five 10p
shares.
Held: Although the 50p shareholders now had five times as many shares, and
thus five times as many votes the voting rights themselves were unchanged at
one vote per share. As such no remedy for variation of class rights could be
claimed.
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Chapter 9

What percentage of the shares in a company must a member hold to
petition a variation in class rights and what must the member prove for
the variation to be cancelled?
A 15%; the change was not in the interests of the company as a whole
B 25%; the change was not in the interests of the company as a whole
C 15%; the change was unfairly prejudicial to their interests
D 25%; the change was unfairly prejudicial to their interests
280
Companies: Finance
Allotment of shares
3.1 Authority, discounts & premiums
The directors need authority to allot shares. This may be given by:
 The articles, or
 Ordinary resolution.
The authority must state:
 The maximum number of shares to be allotted, and
 The expiry date for the authority (max. 5 years).
The directors of a private company with only one class of shares may allot shares of
that class unless it is prohibited by the articles: s.550 CA 2006.
Issue at a discount Issue at a premium

 Shares cannot be issued at a s.610 CA06 requires any premium to be
discount on nominal value (s.580 credited to a share premium account,
CA06). which may only be used for:
 If this rule is breached, issue is still  writing off the expenses of the
valid but the shareholder is liable to issue of those shares
pay the company the discount, plus  writing off any commission paid on
interest. the issue of those shares
 Debentures may be issued at a  issuing bonus shares.
discount if no immediate right to
convert to shares.
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Pre-emption rights
Pre-emption rights are rights of first refusal. If shares have pre-emption

rights this means a new issue must be offered to the existing
shareholders first.
The Companies Act 2006 gives statutory pre-emption rights. A company cannot allot
ordinary shares without first offering them to existing shareholders:
 On a pro rata basis
 At the same/more favourable terms than to outsiders.
The shareholders then have 21 days to accept the offer.
Contravention
If this procedure is not followed the allotment remains valid, but the existing
shareholders can sue the company or the directors for any loss within two years.
Exceptions
The pre-emption provisions do not apply in the following circumstances:
 On an allotment to an employee share scheme
 On an allotment for non-cash consideration
 A private company may exclude or modify the pre-emption rights in the articles,
and
 Any company may restrict or modify the statutory pre-emption rights by special
resolution.
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3.2 Paying for shares – private companies
Private companies may issue shares for non-cash consideration. The value of such
consideration can be determined by the directors. The court will interfere with the
valuation only if there is fraud or the consideration is ‘illusory, past or patently
inadequate’.
3.3 Paying for shares – public companies
There are a number of additional rules relating to the issue of shares in public
companies contained in CA06:
s.584 Subscribers to the memorandum (the first shareholders in the company)
must pay cash for their subscription shares.
s.585 Payment for shares must not be in the form of work or services.
s.586 Shares cannot be allotted until at least one-quarter of their nominal value
and the whole of any premium have been paid up.
s.587 Non-cash consideration must be received within five years.
s.593 Non-cash consideration must be independently valued and reported on
by a person qualified to be the company’s auditor.
3.4 Registration
An allotment of shares must be registered within two months: s.554.
A return of the allotment must be delivered to the Registrar together with a revised
statement of capital: s.555.
Failure to comply is an offence and the company itself and every officer of the
company in default are punishable by a fine.
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3.5 Transfer of shares
Shares are freely transferable in accordance with the company’s articles: s.544.
Regarding unlisted shares:
 They are transferred using a stock transfer form together with the share
certificate
 Both are sent to the company for registration
 The company must register the transfer or give reasons for its refusal within two
months, and
 If the transfer is refused, the transferee is still entitled to any dividends or return
of capital, but may not vote.
Listed shares are usually transferred electronically using the ‘CREST’ system, the
multi-currency settlement system for UK and Irish securities.
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3.6 Alteration of share capital
Subject to any restrictions in the articles, shares may be:
 Subdivided or consolidated, or
 Redenominated in another currency
by passing an ordinary resolution.
Notification must be given to the Registrar within one month, together with a revised
statement of capital.

How can the authority to allot shares be given in a private company?
1 By ordinary resolution in meeting of the members
2 By written resolution with more than 50% majority
3 In the articles of association
A 1 only
B 2 or 3 only
C 1, 2 or 3
D 1 or 3 only
compliance.
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Chapter 9
Capital maintenance
4.1 Purpose
The capital of a limited company is regarded as a ‘buffer fund’ for creditors. This
doesn’t mean that the creditors can withdraw funds from the share capital directly.
Note that the creditors’ buffer is an accounting fund, not real money. The actual cash
or assets subscribed can be used by the company.
The rules on maintenance of capital exist in order to prevent a company reducing its
capital by returning it to its members, whether directly or indirectly. A member of the
company cannot simply withdraw his or her capital from the company
Loan capital is not subject to the maintenance rules.
4.2 Reduction of capital
Under s.641, a company can reduce its share capital provided that any reduction
does not result in only redeemable shares being left in issue.
A reduction in share capital must follow the correct procedure as discussed below.
Such a reduction reduces the members’ liability to the company.
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Procedure:
Public Companies
Pass a special resolution
Apply to the court to confirm the special resolution.
Court must require company to settle a list of creditors entitled to object.
The court must not confirm the reduction until it is satisfied that all creditors
have either consented to the reduction or had their debts discharged or
secured.
The company must file documents with the Registrar. If the share capital of a
public company falls below £50,000, it must re-register as a private company.
Simplified procedure for private companies:
Pass a special resolution supported by a solvency statement.
The solvency statement is a statement by each of the directors that the

company will be able to meet its debts within the following year.
A solvency statement made without reasonable grounds is an offence

punishable by fine and/or imprisonment.
Copies of the resolution, solvency statement and a statement of capital must

be filed with the Registrar within 15 days.
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A public company limited by shares may reduce capital by:
A Passing an ordinary resolution and obtaining the court’s permission
B Passing a special resolution and obtaining the court’s permission
C Passing an ordinary resolution supported by a solvency statement
D Passing a special resolution supported by a solvency statement

Under s.641 Companies Act 2006 a private limited company can reduce its
issued share capital if certain conditions are fulfilled.
Which one of the following is not a necessary condition?
A The articles must not prohibit the reduction
B The reduction must not result in only redeemable shares being left in
issue
C A special resolution must be passed
D The sanction of the court must be obtained

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Companies: Finance
4.3 Acquisition of own shares
When dealing with a purchase of its own shares by a company two terms may be
used; redemption of own shares or purchase of own shares.
 If the shares that the company purchases from a shareholder were issued as
redeemable, the company is carrying out a redemption of their own shares (see
section 4.4).
 If the company purchases shares of a class that did not include a term for future
redemption, this is a share buy-back, or purchase of own shares (see section
4.5).
Under either of the above the terms of the purchase by the company must be in line
with the rules given in the Companies Act. Contravention of this rule:
 Is an offence which renders the company and defaulting officer(s) liable to a fine
and/or imprisonment of up to two years
 Renders the acquisition void.
The other occasions in which a company can purchase its own shares are:
 A company can acquire its own fully paid shares otherwise than for valuable
consideration i.e. as a gift
 An acquisition in a lawful reduction of capital
 An acquisition pursuant to a court order, or
 A forfeiture of shares for failure to pay any sum in respect of them.
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4.4 Redemption of shares
If a company has redeemable shares in issue it may redeem (buy back) these shares
provided:
 The articles of a public company authorise the redemption. (A private company
may redeem shares subject to any restriction in its articles)
 The company must have some non-redeemable shares still in issue after the
transaction
 The shares to be redeemed must be fully paid and provide for payment on
redemption
 The redeemed shares must be cancelled, and
 The company must make a return to the Registrar within one month,
accompanied by a revised statement of capital.
The redemption must be financed out of:

 Distributable profits – A transfer equivalent to the nominal value of redeemed
shares must be made to the capital redemption reserve (this is a non-
distributable reserve, used only for bonus issues)
 The proceeds of a new issue
 A permissible capital payment (Private Co only) – only to the extent that the
distributable profits and the proceeds of a new issue are insufficient. (See below
for further details).
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Companies: Finance
4.5 Permissible capital payment – private companies only
Private companies can purchase or redeem shares out of capital, subject to any
restriction or prohibition in their articles.
The following formalities must be complied with:
The directors must make a declaration of solvency (statutory declaration

stating that the company will be able to pay its debts as they fall due over the
next year).
The auditors must make a statement supporting the directors’ declaration.
A copy of the directors’ statement and auditor’s report must be available to

members before the resolution approving the payment is passed, otherwise
it will be ineffective.
A special resolution must be passed within one week of the directors’

statement.
A public notice must be made within one week of the resolution, inviting
creditors to apply to the courts to prevent the payment within five weeks if they
object.
The payment out of capital must be made between five and seven weeks
following the resolution.
The documents must be filed with the Registrar.
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Chapter 9
4.6 Purchase of own shares
If a company wishes to buy back non-redeemable shares they can do so as long as it

is not prohibited by the articles of the company. The procedure and finance are the
same as for the redemption of shares.
There are two types of purchase:

Market purchase = purchase on the Off-market purchase = purchase
Stock Exchange. directly from a shareholder.
 an ordinary resolution is required  a special resolution is required
stating the maximum number of  a contract of sale must be available
shares and the maximum and for inspection by members for at
minimum prices least 15 days before the meeting
 the authority to purchase lasts for a and at the meeting
specified time – the maximum is 18  vendors may not vote on the
months.
resolution with the shares which are
to be purchased.
A return giving details of any purchase of own shares must be delivered to the
Registrar within 28 days: s.707. Default is again an offence and subject to a fine.
When the company buys back its own shares they are usually cancelled but they can
instead be held by the company ‘in treasury’. Treasury shares may then be sold by
the directors at a later date without having to get the authority of the existing
members.
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Companies: Finance

1 In what circumstances can a permissible capital payment be made?
2 What type of resolution is required to authorise a permissible capital

payment?
3 When must the permissible capital payment be made?

compliance.
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Chapter 9
4.7 Financial assistance
A public company may not give financial assistance to a third party to enable them to
purchase shares in that company. A private company may provide financial
assistance, but subject to the provisions of the Act.
Financial assistance includes:

 A gift, loan or indemnity
 A guarantee or security of third party loan
 Any other financial assistance whereby the net assets of the company are
materially reduced.
Financial assistance does not include:

 Dividends or bonus shares
 A distribution in winding-up
 A capital reduction under the Act, or
 A purchase or redemption of shares.
Financial assistance is not prohibited if:
 Its principal purpose is not to enable the acquisition of shares, but the
assistance is incidental to some larger purpose and it is given in good faith in
the interests of the company
 The company lends money in the ordinary course of its business
 It is for the purpose of an employees’ share scheme, or
 It is given to an employee (not a director) to enable them to purchase fully paid

shares.
If unlawful assistance is given, company/officers commit a criminal offence

punishable by a fine and/or imprisonment for up to two years.
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Companies: Finance
Distributions
5.1 Introduction
A company can only make a distribution (e.g. pay a dividend) out of profits available
for that purpose i.e. distributable profits.
The model articles provide that dividends should be paid as follows:
 The directors recommend the payment of a dividend
 The general meeting declares it by passing an ordinary resolution.
 The amount paid cannot exceed the amount recommended by directors.
5.2 Distributable profits
Distributable profits are:
 Accumulated realised profits (which have not previously been distributed or

capitalised), less
 Accumulated realised losses (which have not previously been written off in a
reduction of capital): s830 CA 2006.
 Profit/loss – trading or capital.
 Accumulated – overall profit/loss, not just one year in isolation.
 Realised – not revaluation reserve. However, provisions (e.g. depreciation) are

deemed realised.
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Chapter 9
5.3 Additional rules for a public company
A public limited company can only declare a dividend if, both before and after
distribution, its net assets are not less than the aggregate of its called-up share
capital and undistributable reserves (s.831 CA 2006).
Undistributable reserves are:

 The share premium account
 The capital redemption reserve
 Unrealised profits (i.e. revaluation reserve), and
 Any reserves that the company is forbidden to distribute.
The latest audited accounts are used as the basis of the calculations.
5.4 Consequences of an unlawful dividend
The company can recover the distribution from:

 Shareholders who knew or had reasonable grounds to know the dividend was
unlawful at the time of payment.
 Any director unless he or she can show he or she exercised reasonable care in
relying on properly prepared accounts
 The auditors if the dividend was paid in reliance on their erroneous accounts.

A company had a balance on its profit and loss account reserve at the
beginning of its accounting year of losses of £3,000. During the year the
company made trading profits of £7,000 and revalued its fixed assets by
£5,000.
What are the profits available for distribution?
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Companies: Finance
Debentures
A debenture is a document issued by a company containing an

acknowledgment of its indebtedness. The loan may or may not be
secured on the company’s assets.
All trading companies have the implied power to borrow for the purpose
of their business.
Advantages Disadvantages
 The board does not (usually) need  Interest must be paid out of pre-tax
the authority of a general meeting profits, irrespective of the profits of
to issue debentures. the company.
 As debentures carry no votes they  Default may precipitate liquidation
do not dilute or affect the control of and/or administration if the
the company. debentures are secured.
 Interest is chargeable against the  High gearing will affect the share
profit before tax. price.
 Debentures may be cheaper to
service than shares.
 There are no restrictions on issuing
debentures at a discount or on
redemption.
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Chapter 9

Eduarda and Fatima
Eduarda and Fatima wish to invest in Fizz, a listed plc. They have the choice
of investing by buying shares or by subscribing to an issue of debentures.
Fill in the gaps as appropriate.
Eduarda and Fatima will have the choice of being ……………………

shareholders or ……………………….... shareholders. The
………………………... have the real voting rights while the
……………………….... will have a less risky investment.
List three differences between debentures and shares.
(i)
(ii)
(iii)
acumen.
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Companies: Finance
Fixed v floating charges
7.1 Characteristics
If a debenture is issued with a charge the creditor is given security for their loan.
Characteristic Fixed Charge Floating Charge
Type of asset Charge relates to a specific Charge relates to a class of
charged asset. assets, and refers to these
assets present and future.
Must the asset Yes: intention is to retain the No: the assets within the
be retained asset permanently in the class may change from time
business e.g. trading to time e.g. stock.
premises.
Freedom to deal The company has no general The company has freedom
with the asset freedom to sell the asset. If it to deal with the charged
does dispose of it, it must assets in the ordinary course
either repay the debt or of its business.
transfer the charge to the
purchaser.
7.2 Crystallisation
A fixed charge attaches to an asset as soon as the charge is created. However, a

floating charge does not attach to any particular asset until crystallisation.
Crystallisation means the company can no longer deal freely with the assets. It
occurs in the following cases:
 On liquidation
 When the company ceases to carry on business; or
 On any event specified in the debenture (e.g. the company is unable to pay its
debts; the company fails to look after its property; the company fails to keep
stock levels sufficiently high).
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Chapter 9
7.3 Advantages and disadvantages of floating charges

o
Advantages – for the company
The company can deal freely with
Disadvantages for the chargee

o
The value of the security is
the assets. uncertain until it crystallises.
 A wider class of assets can be  It has a lower priority than a fixed
charged. charge.
 A liquidator can ignore it if it was
created within 12 months of winding
up.

JIH Ltd has borrowed money from K Bank plc and has provided security by
executing a fixed charge debenture in favour of the bank.
A fixed charge is:
A a charge over specific company property that prevents the company from
dealing freely with the property in the ordinary course of business
B a charge over a class of company assets that enables the company to

deal freely with the assets in the ordinary course of business
C a charge over specific company property that enables the company to

deal freely with the assets in the ordinary course of business
D a charge over company land enabling the company to deal freely with the
land in the ordinary course of business.
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Companies: Finance

NMP Ltd has borrowed money from K Bank plc and has provided security by
executing a floating charge debenture in favour of the bank.
A floating charge is:
A a charge over specific company property that prevents the company from
dealing freely with the property in the ordinary course of business
B a charge over a class of company assets that enables the company to deal
freely with the assets in the ordinary course of business
C a charge over specific company property that enables the company to deal
freely with the assets in the ordinary course of business
D a charge over company land enabling the company to deal freely with the
land in the ordinary course of business.
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Chapter 9
7.4 Postponement of charges
A further disadvantage to the charge-holder of floating charges is that even after

such a charge has crystallised the creditor may find that their payment is made after
the following other creditors:
 A judgment creditor. A creditor who has received a court judgment in their

favour allowing them to seize one or more named assets and sell them to gain
repayment of their debt may be allowed to keep the proceeds if this happened
before appointment of a receiver (see Insolvency chapter).
 Preferential creditors (i.e. employees) are paid before floating charge-holders

on liquidation. If the only assets available at this point are those subject to a
floating charge the funds may be used to repay these persons first.
 Fixed charge-holders. Even if the floating charge was created first if both a fixed
and floating charge were made over the same asset the fixed charge takes
priority.
 A reservation of title creditor (a creditor who has sold goods on condition that
they will retain legal ownership until the goods are paid for)
 On liquidation a proportion of the funds available will be ring-fenced to repay the

unsecured creditors (seen in more detail in the Insolvency chapter).
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Companies: Finance
Priority, registration and validity of

charges
8.1 Priority
The priority of a charge depends on the type of charge and whether or not it has
been registered:
Equal charges – first

created has priority
Fixed charge has

priority over a floating
charge.
An unregistered
registerable charge
has no priority over a
registered charge.
A charge-holder can prohibit the creation of a later charge with priority, but the
prohibition is only effective if a subsequent chargee has notice of the prohibition as
well as the charge.
Fixed charges are known as legal charges as these relate to a known asset. These
take priority over floating, or equitable, charges on the same asset unless the fixed
charge-holder had notice of the floating charge.
When a floating charge crystallises it attaches to the asset over which it was created.
The company loses any right to freely deal with asset.
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Chapter 9
8.2 Validity
The liquidator can ‘avoid’ a floating charge if:
 It was created within one year prior to winding up (two years if the chargee is
connected), and
 At the time the company was unable to pay its debts.
However, the charge is valid to the extent of any new consideration provided.
8.3 Registration
The company must notify the Registrar within 21 days of the charge’s creation.
The charge is valid from the date of creation.
Registration can be undertaken by:
 The company, or
 The charge holder.
Failure to register:
 Renders the charge void against the liquidator
 Results in a fine on the company and every officer in default, and
 Renders the money secured immediately repayable.
The company must also include the charge in its own register of charges. However,
failure to include the charge in the company’s own register does not invalidate the
charge.
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Companies: Finance

A A floating charge has priority over a fixed charge
B The preferential creditors take priority over fixed charge holders
C A fixed charge has priority over a floating charge
D Unsecured creditors take priority over floating charge holders

Which of the following is the correct period within which company
charges must be registered with the Registrar of Companies?
A 7 days following the creation of the charge
B 14 days following the creation of the charge
C 21 days following the creation of the charge
D 28 days following the creation of the charge

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area.

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Companies: Finance

D

D
Written resolutions can be used in private companies for any decision other
than removal of a director or auditor.

C
To petition a variation in class rights a member must hold 15% of the shares,
and must prove that the change was unfairly prejudicial to their rights, in other
words that it negatively affected their rights as compared to those of other
members.
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Chapter 9

C
The authority may be provided in the articles of association. If not, a resolution

of the members is required. An ordinary (>50%) majority is needed for this
decision. In a private company the decision can be taken in meeting or by
written resolution.

B
Once the special resolution to reduce the share capital has been passed, it
must be approved by the court. The procedure involving a special resolution
supported by a solvency statement is only available to private companies.

D
The Articles must not prohibit the reduction of capital. A special resolution must
be passed. However, it is not necessary for the reduction of capital by a private
company to be sanctioned by the court.
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Companies: Finance

A permissible capital payment can be made by a private company to the extent
that its distributable profits and the proceeds of a fresh issue of shares are
insufficient to finance the redemption or purchase of its shares.
A special resolution.
The permissible capital payment must be made between five and seven weeks
following the resolution.

The company can distribute up to £4,000. This represents the £7,000 profit for
the year, less the accumulated losses of £3,000. The unrealised profit on the
revaluation of fixed assets is excluded.

 ordinary
 preference
 ordinary shareholders
 preference shareholders
(i) Shareholders are members; debenture holders are creditors.
(ii) Shareholders receive a dividend; debenture holders receive interest.
(iii) Shares cannot be issued at a discount, debentures can.
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Chapter 9

A
A fixed charge is a charge over a specific asset which attaches to the asset
immediately upon its creation. This means that the company cannot deal freely
with the asset in the ordinary course of business.

B
Answer B provides a good basic definition of a floating charge.

C
A fixed charge has priority over a floating charge (over the same asset or
assets), even if the floating charge was created at an earlier date.
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C
Charges must be notified to the Registrar of Companies within 21 days.
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Chapter 9
312
Chapter 10
Insolvency law: Corporate and personal
recognise when administration might be appropriate and how it is achieved
know how winding-up is brought about and what happens in a liquidation
understand the rationale for and the workings of company voluntary

arrangements
understand issues relating to personal bankruptcy that can have implications for
sole traders, partners and directors
understand the rationale for and workings of individual voluntary arrangements.
MyKaplan resources
This topic is covered on MyKaplan in the module Insolvency Law: Corporate and
Individual.
ICAEW resources
The underpinning detail for this chapter can be found in Chapter 10 of the
ICAEW workbook
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Chapter 10
Overview
Financial difficulty
Company Individual
Liquidation Administration IVA Bankruptcy
Voluntary Compulsory
Creditors Members
314
Administration
1.1 Introduction
If a company finds itself in financial difficulty, the two main options available to it are:
 Administration. This aims to rescue the company so that it may continue trading
as a going concern.
 Liquidation. This winds up the company, thus bringing its life to an end.
1.2 Purpose
Administration involves the appointment of an insolvency practitioner,

known as an administrator, to manage the affairs, business and
property of a company. It was first introduced by the Insolvency Act
1986, but has subsequently been amended by the Enterprise Act 2002.
The law relating to insolvency can now be found in the new section B1
to IA1986.
Administration is often used as an alternative to putting a company into liquidation,

with the following purposes in the order set out:
 To rescue a company in financial difficulty with the aim of allowing it to continue

as a going concern
 To achieve a better result for the creditors than would be likely if the company
were to be wound up
 If neither is practicable, and provided the administrator does not unnecessarily

harm the interests of the interests of the creditors as a whole, to realise the
company’s assets to make a distribution to one or more secured or preferential
creditors.
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Chapter 10
1.3 Who can appoint an administrator?

An administrator can be appointed by any of the following persons:
 The court in response to a petition by e.g. a creditor (this could be a non-QFCH
– see below), the directors or the company itself.
 The court will only agree to appoint an administrator if it is satisfied that:
– The company is or is likely to become unable to pay its debts, and
– The administration order is likely to achieve its objectives.
 The holder of a qualifying floating charge over the company’s assets (a
qualifying floating charge holder (QFCH) is a lender who has at least one
charge that on its own, or taken with other charges amounts to a charge over
the whole, or substantially the whole, of the company’s property). At least two
days’ notice must be given to any prior QFCH.
 The company (by ordinary resolution) or its directors (by majority decision)
provided that winding up has not already begun. This is currently the most
usual way for an administration to begin. To do this the company must give at
least five days’ notice to any QFCH.
1.4 Consequences of administration

The appointment of an administrator has the following effects:
 The company continues to trade as before but the company’s website and
documents must state that the business is being run by an administrator
 The company enters into a 'moratorium' which is a period during which:
– The rights of creditors to enforce any security over the company’s assets
are suspended
– Any petition for winding up is dismissed
– No resolution may be passed to wind up the company
– No other legal proceedings can be commenced
– No property which the company has under an HP/leasing agreement can
be recovered without consent of the administrator or the court.
 The directors still continue in office, but their powers are suspended. The
administrator may appoint new directors and/or remove existing ones.
 The employees are not automatically dismissed but the administrator may
terminate contracts of employment.
 The administrator can sell property subject to a floating charge and use the
proceeds for the business without gaining the chargee’s permission.
 The administrator can sell assets on HP or subject to a fixed charge with the
court’s permission and use the proceeds to pay off the chargee/owner.
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Chapter 10
1.5 Carrying out the administration
The administrator has a number of tasks:
 He or she is the company’s agent, but must act in the best interests of all the
company’s creditors.
 He or she takes on the powers previously given to the directors. Therefore, he

or she may manage the business and property of the company, and has the
power to bring and defend legal proceedings, sell assets and borrow money.
 He or she has the power to remove and replace directors and employees.
 He or she must file notice of appointment within 7 days with the Registrar of
Companies. A statement of affairs can also be requested within this time from
the company’s officers and employees. They have 11 days from receipt of this
request to comply.
 He or she must draw up a statement of proposals within eight weeks of

appointment and submit to the company’s members and creditors as well as the
Registrar.
 The proposals must be approved by the creditors of the company. This

approval can be given by
– Deemed consent process (see section 4.3)
– Virtual meeting
– Some other reasonable method.
 The creditors have the right to form a creditors committee of between 3 to 5

creditors. If formed the administrator must hold a meeting of the committee
within 6 weeks of its establishment.
 If the creditors do not approve the proposals, the court may dismiss the
administrator or make such provisions as it sees fit.
 If the creditors approve the proposals, the administrator can carry them out.
318
1.6 Ending the administration
The administration will end when it is completed or when the administrator is

discharged by the court:
The administration must normally be completed within 12 months of the date on

which it commenced. However, this term can be extended with the consent of the
court or by a majority of the creditors (this can only happen once).

Sergei has been appointed as administrator of Meerkat Ltd.
Within how many days of appointment can he make a request for a

statement of affairs from the company’s officers?
A 5 days
B 7 days
C 11 days
D 21 days
compliance.
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Chapter 10
Receivership
2.1 Introduction
Receivership involves the realisation of a company’s assets, which are

then sold to enable the company to pay off some of its debts. Receivers
were used frequently in the past.
Administrative receivers
Administrative receivers are usually appointed by floating charge holders of the

company. They acted as both receivers and managers of the company.
Following the Enterprise Act 2002, the lender’s right to appoint was severely
restricted and instead administration and Company Voluntary Arrangements are
more commonly used.
Fixed charge receivers
The holder of a fixed charge over land may appoint a receiver following default by the
borrower. These types of receivers are also known as ‘LPA receivers’ (as they were
traditionally appointed under the Law of Property Act 1925). Such a receiver’s duties
are collect rent and/or sell the property.
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2.2 Powers and Duties
The powers and duties of a receiver are virtually identical to those of an

administrator. These include the powers:
 To borrow
 To commence and take legal proceedings
 To appoint advisers
 To pay off company debts.
The duties the receiver owes are primarily to the person who appointed him or her,
i.e., the creditor. A receiver must act reasonably, in good faith and for the benefit of
the creditor.
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Chapter 10
Company Voluntary Arrangements
3.1 Introduction
A company voluntary arrangement (CVA) allows a corporation to enter into an

arrangement with its creditors whereby it either agrees to pay a set proportion of its
debts (a composition of debts) or to pay its debts over a set period of time (a scheme
of arrangement).
3.2 CVA procedure
The CVA usually commences with the appointment of a nominee. The nominee
must report to the court as to whether he or she feels the CVA has a reasonable
prospect of success.
The nominee (usually a qualified insolvency practitioner) can be appointed by
 The company
 An administrator
 A liquidator.
The CVA must be approved by the creditors:
 This is usually given by electronic meeting or the deemed consent process

though a physical meeting can be used if requisitioned by the creditors.
If there is any difference between these results the creditors’ choice will prevail.
Once approved the CVA becomes binding on all unsecured creditors entitled to vote
in the meeting. The approval must be reported to the court.
322
A creditor who was entitled to vote has 28 days from the approval to challenge the
CVA. This can only be made if he or she can show:
 The CVA unfairly prejudices his or her interests
 There was some material irregularity in the conduct of the procedure used to
gain approval of the CVA.
If the challenge is successful, the courts may revoke or suspend the approval of the
CVA.
If the CVA is approved, and not successfully challenged, the nominee then
supervises the implementation of the CVA.
The company may continue trading during the CVA.
3.3 Moratorium
While preparing for a CVA proposal the directors may apply for a moratorium of 28
days. This is a period of ‘breathing space’ to allow them to prepare their proposal.
To do this they must submit to the court:
 The proposed CVA
 A statement of the company’s affairs
 Confirmation from the nominee that the CVA has a reasonable prospect of
success.
The fact that there is a moratorium must be stated on all business documents and
also notified to the Registrar.
Whilst in moratorium:
 No insolvency proceedings may be commenced
 No security against assets may be enforced
 Any winding-up proceedings brought prior to this period will be stayed
 The company must gain consent of the nominee or court to hold meetings
 The company can only sell property (other than normal trading transactions)
with the permission of the nominee, or if there is one, the creditors’ committee
 The nominee must monitor the company’s affairs.
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Chapter 10

When a company is planning a CVA they may apply for a moratorium.
What is the minimum period for a moratorium in a CVA?
A 20 days
B 28 days
C One month
D Two months
324
Voluntary liquidation
4.1 Introduction
Liquidation is the formal process of ending the life of a company. Unlike

partnerships, the company continues to exist when trade is ceased and will remain in
existence until the process of liquidation is completed.
Liquidation can be described as:

 Voluntary
 Compulsory (seen in section 5 below)
A voluntary liquidation occurs where the members pass a resolution to

go into liquidation.
The type of resolution needed depends on the circumstances:

 Where the period fixed for the duration of the company expires or an event
occurs upon which the articles provide that a company should be wound up, an
ordinary resolution must be passed.
 A special resolution must be passed if the company is being wound up for any
other reason.
Once the resolution has been passed, notice of the liquidation should be posted in
the Gazette within 14 days.
There are two types of voluntary liquidation:
MVL=solvent  A members’ voluntary liquidation is used where the company is solvent.
CVL=insolvent A creditors’ voluntary liquidation is used where the company is insolvent.
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Chapter 10
4.2 Members’ voluntary winding up
The directors make a declaration of solvency stating that they are of

the opinion that the company will be able to pay its debts* within 12
months. It is a criminal offence to make a false declaration. The
declaration must be made not more than five weeks before the
resolution to wind up is passed and must be delivered to registrar
within 15 days.
Winding up commences from the date of passing of the appropriate

resolution.
The members appoint a named insolvency practitioner as liquidator by

passing an ordinary resolution.
The liquidator is responsible for realising the assets and distributing the
proceeds.
The liquidator presents his or her report to a final meeting of the

members.
The liquidator informs the Registrar of the final meeting and submits a
copy of the report.
The Registrar registers the report and the company is dissolved three
months later.
*this figure would include any interest at the applicable rate.
326
4.3 Creditors’ voluntary winding up
Winding up commences from the passing of the appropriate resolution.
The directors appoint a liquidator. The directors must then deliver a

notice to the creditors seeking their decision on the liquidator. The
directors must also send to the creditors a statement of affairs within 7
working days.
The creditors can approve the liquidator either by virtual meeting or by

the ‘deemed consent’ process. Under this process approval is deemed
unless 10% of the creditors of the company raise objections to the
proposed liquidator.
proceeds.
The liquidator submits his or her final report to the members and
creditors.
The liquidator submits a copy of this report to the Registrar.
The Registrar registers the report and the company is dissolved three
months later.
327
Chapter 10

Complete the following sentences:
A voluntary winding up takes place when the company resolves by

……….resolution
special to be wound up for any cause whatsoever.
14
The passing of the resolution must be advertised within ……….. in the
Gazette.
In the case of a members’ voluntary winding up, the directors make a

declaration of solvency
……………………………….stating that they are of the opinion that the
company will be able to pay its debts and any relevant interest within
12
………………of the commencement of the winding up.
awareness.
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Compulsory liquidation
5.1 Grounds for winding-up: s122 IA 1986
A compulsory winding up commences when a petition for a winding up

order is presented to the court. The court then passes an order that the
company is to be wound-up.
The possible grounds for the petition are set out in s122 Insolvency Act 1986. The
main ones of these are:
 A public company has not been issued with a trading certificate within a year of
incorporation.
 The company is unable to pay its debts. A company is deemed to be unable to
pay its debts if:
– a creditor who is owed at least £750 has served a written demand for
payment and the company has failed to pay the sum due within three
weeks.
– creditor has attempted to enforce a judgment against a company by
execution against the company’s property but has been unable to do so
– on consideration of the company’s liabilities the court feels that this is the
case.
 It is just and equitable to wind up the company. However, the court will only
make an order under this ground if no other remedy is available.
5.2 Petitioners
The following persons may petition the court for a compulsory liquidation:
 The BEIS (Department for Business, Energy and Industrial Strategy)
 A member (to claim for just and equitable winding-up they must have been a
registered shareholder for at least six of the last 18 months)
 A creditor who is owed at least £750.
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Chapter 10
5.3 Effect of winding-up
The winding-up petition has the following effects:
 All actions for the recovery of debt against the company are stopped.
 Any floating charges crystallise.
 Any legal proceedings against the company are halted, and none may start
unless leave is granted from the court.
 The company ceases to carry on business except where it is necessary to

complete the winding up, for example to complete work-in-progress.
 The powers of the directors cease, although they still continue in office.
 The employees are automatically made redundant, but the liquidator can re-
employ them to help him or her to complete the winding-up.
 The assets of the company may remain the company’s legal property but they
are now under the liquidator’s control.
330
5.4 Subsequent procedures
On the making of the winding-up order, the Official Receiver becomes

liquidator (though they may be replaced by a licensed insolvency
practitioner at a later date)
The Official Receiver must investigate the causes of failure of the

company
Creditor approval of the liquidator is sought via the ‘deemed consent’

process. If 10% or more object an alternative decision making
procedure such as virtual meeting should be used.
proceeds.
The liquidator returns to the court and the court passes an order
dissolving the company.
The liquidator files the order and his or her final report with the Registrar.
The Registrar registers the report and the company is dissolved as

from the date of the order.
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Chapter 10
5.5 Avoidance of charges

made void
The following charges entered into by the company may be invalidated:
 Any charges which are not registered within 21 days are void. The chargee
becomes an unsecured creditor.
 A floating charge created within 12 months prior to winding up (or 2 years if
the person is connected to the company) may be void or voidable. (‘Connected’
generally means a director, shadow director or associate).
 A transaction at an undervalue is a gift or a transaction, within the 2 years pre
liquidation, by which the company gives greater consideration than it receives.
S238 Insolvency Act 1986 gives the example of a sale at less than market price.
Any such transaction will be invalidated, unless it can demonstrate that the
company:
– Acted in good faith
– Entered into the transaction for the purpose of carrying on the business,
and
– Believed on reasonable grounds that the transaction was for the benefit of
the company.
 If a company gives a preference to a creditor, then this can also be invalidated.
Preference will be given if:
– A creditor’s position will be benefited if the company goes into insolvent
liquidation
– It is entered into with the intention of producing that result, and
– It takes place six months before the commencement of liquidation with an
unconnected person or two years’ prior in the case of a connected person.
If, at the time of the transaction at an undervalue or preference, the company was
unable to pay its debts, or became so by reason of the transaction and then later
goes into administration or liquidation, the liquidator can apply to the court for an
order to restore the position to what it would have been had the transaction never
been entered into. This normally takes the form of the property being returned to the
company.
332

Assume today is 31 July 2017. Dingbat Ltd has just been put into compulsory
liquidation.
Can the following transactions be avoided by the liquidator?
1 In June 2016, a piece of land was sold to an unconnected party for

£100,000, when its market value was £150,000. The transaction was
entered into because the business was struggling for cash.
2 In August 2016, a floating charge was given against the company’s

stock to Penny. Penny is a good friend of Belle (one of the directors)
and had lent the company a small amount of cash.
3 In December 2016, a loan which Bessy (a director) had made the

company in 2014 was paid back.
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Chapter 10
5.6 Priorities on liquidation
On liquidation any fixed charge-holder may appoint a receiver to sell the named
asset(s) in order to repay the debt to them. Any surplus funds pass to the liquidator.
The liquidator must repay debts in the following order:
COL  Costs of liquidation, including the costs of recovering the assets and the
remuneration of the liquidator
PC
 Preferential creditors
– Wages or salaries due to employees in the four months preceding the

commencement of winding up
– All accrued holiday pay
– Employee’s occupational pension contributions
(All preferential creditors rank equally amongst themselves)
SPC  Secondary preferential creditors
– HMRC. Taxes collected from employees and customers that are held
temporarily by the business and due to be paid over to HMRC (for
example income tax and VAT).
FCH  Floating charge-holders. When selling assets subject to a floating charge a

percentage of the funds must be ring-fenced for the unsecured creditors. This
ring-fenced fund is calculated as:
– 50% of the first £10,000 and
– 20% of the rest
– Subject to a maximum ring-fenced fund.

UC  Unsecured creditors – rank equally amongst themselves
PLI  Post-liquidation interest
M-Div  Members – declared but unpaid dividends

M-Cap  Members – return of capital (in accordance with class rights)
Surplus
 Any surplus to be distributed to members.
334

Sharepak Ltd is being wound-up.
Rank the following persons in the order in which they will be paid by the
liquidator:
 Preference shareholders
 Mrs Patel – an employee who is owed holiday pay of £1,000
 Barlloyd Bank – which has a charge over all the company’s current
assets, both now and in the future
 HMRC – which is owed corporation tax of £15,000
 Ordinary shareholders.
335
Chapter 10
Individual Voluntary Arrangements
6.1 Introduction
The processes of administration and insolvency are available to incorporated entities.

For sole traders, IVAs are an option which may protect the survival of the business.
An IVA is an arrangement made by an individual with his or her

creditors to pay reduced amounts to them over a specific time period.
This is normally five years.
If an IVA is granted, then no creditor can petition for bankruptcy. An IVA allows an
individual to continue trading, with the aim of being in an improved position in the
future to meet debts due.
336
6.2 Procedure
The debtor appoints a nominee, who is a licensed insolvency

practitioner
Application for interim order is made in which nominee submits

proposals to court with comments on chances of success
Once an order is made by the court, no action can be taken by a

creditor.
Creditors’ approval of the proposals must be gained by the deemed

consent process or an alternative decision making procedure.
If approved, a supervisor is appointed. (Normally the nominee).
Supervisor is responsible for supervising scheme and distributing assets
If all terms are complied with, on completion of IVA, debtor is

discharged from all liabilities contained in it.
A creditor may apply to the court on the basis that the terms of an IVA are unfairly
prejudicial or there has been some material irregularity in relation to the decision
making process.
If the debtor fails to comply with the terms of the IVA, then a petition for bankruptcy
may be made.
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Chapter 10
6.3 Advantages and disadvantages
The advantages of an IVA are:
 The individual can continue in business
 There is more flexibility for the individual in drawing up proposals
 There are fewer restrictions on the subject of an IVA
 The details of the IVA are not published in the press
 The costs of an IVA are less than the costs of bankruptcy, allowing a higher
return to the creditors.
The disadvantages of an IVA are:
 The period of an IVA (five years) is longer than that for bankruptcy (three years)
 The trustee does not have the opportunity to investigate the debtor’s actions.

Stan is a sole trader who has several creditors. Stan is of the opinion that if he
is able to pay reduced instalments to his creditors, then he will be able to
continue trading. Stan has heard of IVAs, but does not fully understand the
purpose or how they operate.
Stan has asked for your advice on the subject.
338
Bankruptcy
7.1 Introduction
A person may be declared bankrupt, following a petition being received.
For a sole trader or partnership, proceedings for bankruptcy are effectively the
equivalent of a compulsory liquidation for a company.
7.2 Procedure
Petition for own bankruptcy
If an individual wishes to petition for his or her own bankruptcy he or she must do so
online. Once the application has been made online a decision is made by an
adjudicator.
Petition for another person’s bankruptcy
If a person wishes to bankrupt someone else, he or she must bring a petition to court.
Such a petition is usually brought by a creditor. To bring such an action the creditor
must be owed at least £5,000. A copy of the petition must also be served to the
person the application is against.
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Chapter 10
If a creditor applies for bankruptcy, he or she must show that:
 He or she has served a statutory demand for payment which has not been
satisfied, or
 His or her attempts to enforce a judgment order have not been satisfied.
340
7.3 Effect
Once a bankruptcy order is made, the debtor will become an undischarged bankrupt
and the order will be advertised in the Gazette.
The debtor will then be prohibited from acting as a director or an insolvency

practitioner whilst the order is in place. The debtor also will not be able to borrow
more than £500 without telling the lender about his or her bankruptcy. In addition,
under the ICAEW rules he or she may not practise as a chartered accountant.
The debtor must comply with all requests for information and must co-operate with
the Official Receiver who is appointed to administer the bankruptcy and act as
trustee of the bankrupt’s estate (unless an insolvency practitioner is appointed to act
as trustee). To fail to do so is a criminal offence.
Any payment of money from the date of the petition must be approved by the court. If
no approval is obtained, the payment of such money will be void.
Any estate of the trader will vest in the trustee in bankruptcy. This estate would
exclude
 Tools of trade/required for his or her business
 Clothing and household provisions required to satisfy basic human needs
 Property held on trust for another person
 Certain tenancies protected by law.
Distributions to creditors will be ranked, as for a winding up, in a certain order. The
order of payment is:
 Costs.
 Pre-preferential debts (i.e. funeral expenses if the bankrupt is deceased).
 Preferential debts (employee wages).
 Secondary preferential debts (HMRC).
 Unsecured ordinary debts.
 Interest payable.
 Postponed debts (e.g. debts owed to bankrupt’s spouse).
 Any surplus is returned to the bankrupt (although this is unlikely).
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Chapter 10
A bankruptcy order is normally discharged after one year, although there may be
restrictions within the order for between 2 and 15 years.
Once a bankruptcy order is discharged, all debts are also treated as being
discharged

Melissa has been declared bankrupt. She has an estate valued at £44,000.
Her creditors are as follows:
Unpaid wages for employees £18,000
Costs relating to bankruptcy order £5,000
Monies owed to suppliers £25,000
State the order of payment of the debts.
342

area.

343
Chapter 10

B
An administrator must draw up a statement of proposals within 8 weeks of

appointment. To allow him or her to do so a statement of affairs can be
requisitioned. The administrator must make this request within 7 days of
appointment. The requisition must be complied with within 11 days.

B
A moratorium usually lasts for 28 days though it can be extended by up to two

months with the consent of both the creditors and members (for more detail
see your ICAEW workbook).
344

A voluntary winding up takes place when the company resolves by special
resolution to be wound up for any cause whatsoever (an ordinary resolution
can only be used if the articles provide for winding up in a specific situation)
The passing of the resolution must be advertised within 14 days in the

Gazette.
In the case of a members’ voluntary winding up, the directors make a

declaration of solvency stating that they are of the opinion that the company
will be able to pay its debts and any relevant interest within 12 months of the
commencement of the winding up.

No The transaction for sale of the land was done in good faith and for the
benefit of the company. Therefore, upon liquidation, this cannot be
avoided.
Yes Any floating charges created within the past 12 months can be avoided.
Yes The repayment of the loan is regarded as a preference. As Bessy is a

connected person and the repayment of the loan has taken place within
the two years prior to liquidation, this transaction can be avoided. Bessy
will be ordered to pay back the money to the company.
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Chapter 10

The liquidator will repay in the following order:
 Mrs Patel – employees who are owed holiday pay are classed as
preferential creditors.
 HMRC are classed as a secondary preferential creditor
 Barlloyd Bank – the charge over all the company’s current assets is a
floating charge.
 Preference shareholders.
 Ordinary shareholders – the ordinary shareholders will share in any
surplus assets.

An Individual voluntary arrangement allows a trader to pay reduced amounts
towards his or her total debt over a period of time, which is normally 5 years.
This allows the trader to continue in business. An IVA binds all creditors and
whilst in place, none are allowed to petition for bankruptcy.
The individual appoints a nominee, who must be a licensed insolvency

practitioner. Proposals are submitted to court, with comments on chances of
success. This constitutes an application for an interim order. If an interim order
is granted, creditors cannot take any action against the trader, during the
period allowed for acceptance or rejection of the IVA.
A statement of affairs is submitted to the list of creditors along with the

nominee’s comments. The creditors may accept or reject the proposals by an
approved decision making procedure.
Provided that all conditions are complied with, on completion of the IVA, there
will be a full discharge from liabilities.
346

The order of payment will be:
Costs £5,000
Wages £18,000
Unsecured creditors (suppliers) £21,000
The balance of £4,000 owing to the unsecured creditors will remain unpaid.
347
Chapter 10
348
Chapter 11
Criminal law
explain whistleblowing and the protection it affords employees
identify instances of fraud, bribery, money laundering and insider dealing and to
know the consequences of each
be able to select appropriate courses of action in the event of money

laundering, in accordance with national and international regulations
explain the meaning of legislation, case law, ethics and ethical codes in relation
to these offences.
MyKaplan resources
This topic is covered on MyKaplan in the module Criminal Law.
ICAEW resources
ICAEW workbook
349
Chapter 11
Overview
Legislation, case
CRIMINAL ACTIVITY WHISTLEBLOWING law, ethics and
ethical codes
FRAUD
INSIDER DEALING
BRIBERY
MONEY
LAUNDERING
350
Criminal law
Whistleblowing
The relevant statutory provisions are in The Public Interest Disclosure Act 1998, as
updated by the Enterprise and Regulatory Reform Act (ERRA) 2013 which affords
protection to workers making:
 A qualifying disclosure of information
 In the public interest
 To the appropriate person.
1.1 What is a ‘qualifying disclosure’?
A ‘qualifying disclosure’ means any disclosure of information which, in the reasonable

belief of the worker making the disclosure, shows one or more of the following:
 That a criminal offence has been committed, is being committed or is likely to
be committed.
 That a person has failed is failing or is likely to fail to comply with any legal
obligation to which he or she is subject.
 That a miscarriage of justice has occurred, is occurring or is likely to occur.
 That the health and safety of an individual has been, is being or is likely to be
endangered.
 The environment has been, is being or is likely to be damaged.
 That information tending to show any matter falling into the above categories
has been, is being or is likely to be deliberately concealed.
The wrongdoing is usually the act of the employer, but may be that of a fellow
employee.
The requirement that the worker has a “reasonable belief” means that there must be
more than an unfounded suspicion or rumour in order for protection to be afforded to
him or her.
351
Chapter 11
Illustration 1 – Whistleblowing
BILL v D MORGAN PLC 2000
Facts: An accountancy assistant could not point to any documentation to back

up his allegations of financial and accounting irregularities.
Held: The accountancy assistant could not have had a reasonable belief in
those circumstances.
It is likely that an employment tribunal would want to see evidence that there
were objective and verifiable grounds for a belief that an event is likely to occur
before they would decide that the disclosure is protected.
352
Criminal law
1.2 Public interest
ERRA 2013 requires that disclosures are made in the ‘public interest’.
This repealed the prior requirement for them to be made in ‘good faith’.
The term public interest has not been defined by the Act.
However, if a disclosure is not made in good faith the court or tribunal may reduce
compensation by up to 25%. Good faith has generally been taken to mean that the
intention is honest.
1.3 An ‘appropriate person’
The Act aims to encourage workers to raise concerns internally, but there is provision
for the disclosures to be made to other persons or bodies. In order to obtain
protection from the Act the disclosure must be made to one of the following:
 Internally
 Legal adviser
 Minister of the Crown
 Prescribed person/regulator
– Persons such as HMRC who are prescribed as being able to receive such
disclosures.
– Under the Small Business, Enterprise and Employment Act 2015

prescribed persons have a duty to report annually on disclosures received.
 Wider
– This would cover people such as the media, police, MPs and non-
government regulator. Protection would only be given here if the
disclosure is not made for personal gain and the whistle-blower
reasonably felt they would be victimised if they made the disclosure
internally or to the prescribed person, they believed a cover-up was likely,
or had already raised the matter internally or to the prescribed person.
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Chapter 11
There are a number of factors that would be taken into account in deciding whether a
disclosure was reasonable. These include:
 The seriousness of the matter
 Whether the matter is ongoing
 The person to whom disclosure has been made; and
 Whether there were any duties of confidentiality.
1.4 The protection afforded
Protection is afforded to a worker who has made a protected disclosure. This

protection ensures that a worker cannot be subjected to “any detriment by any act, or
any deliberate failure to act” by his or her employer as a consequence of making the
disclosure.
This protection extends to any indirect detriment arising as a consequence of the

disclosure, such as:
 Being overlooked for promotion
 A change in working practices, or
 Changes in the training of the worker.
An employment tribunal may award damages to a worker who has suffered detriment
as a consequence of making a disclosure. There is no limit to the amount of
damages; it will be whatever the tribunal considers is just and equitable.
1.5 The validity of confidentiality clauses
Any confidentiality clause which seeks to limit a worker’s right to make disclosures, or
in any way conflicts with the Act, will be void to the extent of such conflict.
The Act does not cover work the subject of The Official Secrets Act nor does it cover
members of the armed forces.
354
Criminal law

Rodrigo is an auxiliary nurse working in the National Health Service under a

temporary contract. He has seen Natalie, a senior consultant, stealing medical
supplies from the hospital and has made a report to management.
If Rodrigo is denied a permanent contract due to his disclosure will he be

entitled to compensation?
A Yes
B No
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Chapter 11
Fraud
2.1 Definition of fraud
Historically, both common law and statute attempted to deal with the offences of
defrauding and deception but it was not until The Fraud Act 2006 that the specific
offence of fraud was recognised.
To bring a successful action for fraud the prosecution needs to prove:
 Dishonesty
 Intention to make a gain or to cause a loss to another.
The maximum penalty for fraud under the Act is 10 years’ imprisonment and an
unlimited fine.
The single offence of fraud can be committed in three ways:
 Fraud by false representation
 Fraud by failing to disclose information
 Fraud by abuse of position
Fraud by false representation
This offence is committed where the individual makes false statements of fact or law
with the intention to make a gain for him/herself or another or cause a loss to
someone else.
Fraud by failing to disclose information
This covers where the individual has a legal duty to disclose information but doesn’t
do so with the intention of making a gain for him/herself or another or causing a loss
to another.
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Criminal law
Fraud by abuse of position
An individual can be prosecuted here if he or she was in the position where he or she
was expected to safeguard the interests of another person and abuses that position
with the intention of making a gain for him/herself or another or exposing the other
person to a loss.
A person also commits an offence if they possess, make or supply any ‘article’ used
in fraud (see below).
Fraud and cyber crime
The National Crime Agency’s website recognised the growth in fraud opportunities
due to increased use of the internet and online transactions. On the website there
are specific cyber threats identified which include:
 Phishing – bogus emails asking for an individual’s personal details,
 Webcam manager – involves the user’s webcam being taken over,
 File hijacker – the individual’s online files are hijacked and held to ransom,
 Keylogging – involves a record being kept of what a user types into their
keyboard,
 Screenshot manager – screenshots are taken of the user’s computer screen,
 Ad clicker – a user’s computer is directed to click a specific link.
The Fraud Act states that ‘articles’ used in fraud include any program or data held in
electronic form.
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2.2 The Computer Misuse Act 1990
The Computer Misuse Act creates offences related to the unauthorised access or
change to computer material. If convicted of such an offence a defendant can be
handed a punishment of prison or a fine. Illegal activity covered by this Act includes:
 unauthorised access to computer material
 unauthorised access with the intention to commit further offences
 unauthorised access with the intent to impair online material
 unauthorised access causing damage, or risk of damage, to computer systems
 making, possessing or supplying articles to facilitate the above offences.

Mariam receives an email which states it is from HMRC, and that she is
entitled to a tax refund on entry of her bank details. The email has actually
been sent by Bernadette who has no connection with HMRC and is aiming to
gain access to Mariam’s funds.
Which type of cybercrime is Bernadette engaging in?
A Keylogging
B File hijacker
C Phishing
D Screenshot manager

and compliance.
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Criminal law
2.3 Fraudulent trading
The offence
The offence may be committed where a business is carried on with the

intent to defraud creditors of the company or creditors of any other
person or for any fraudulent purpose.
The criminal offence arises under s.993 Companies Act 2006 and the offence is
committed even while the company is operating as a going concern, so that it is
immaterial whether or not the company is in liquidation.
There is also civil liability for fraudulent trading. Any person knowingly party to it can
incur civil liability, however such liability only arises where the company is in
liquidation and only the liquidator can apply to court for a declaration of civil liability.
The liquidator can apply for the individual to contribute to the company’s assets.
Who can commit the offence?
Any person who knowingly participates in the fraudulent trading may be guilty of the
offence. Typically, this will be the directors of the company.
Illustration 2 – Fraudulent trading

RE MAIDSTONE BUILDINGS 1971
It was established in this case that a person is not ‘party’ merely by reason of
knowledge, they must take some active role such as in the ordering of goods.
An example of a person who might be knowingly a party would be a company

secretary or financial adviser.
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The test for intent to defraud
‘Any fraudulent purpose’ is intended to be a very wide test, and offers protection to
future creditors in addition to existing ones.
Illustration 3 – Fraudulent trading

R v GRANTHAM 1984
Facts: The directors ordered a consignment of potatoes on a month’s credit at

a time when they knew that payment would not be forthcoming at the end of the
month when it was due.
Held: The directors were convicted of fraudulent trading.
The penalties
When a court considers that a person, whether director, company secretary or some
other person has been guilty of fraudulent trading it can:
 Disqualify that person for up to 15 years from acting as a director or being

involved in the management of companies under the Company Directors
Disqualification Act 1986
 As this is a criminal offence the person can be fined an unlimited fine or

imprisoned for up to 10 years.
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Criminal law
Insider dealing
3.1 Insider dealing
Insider dealing is a term covering three separate offences involving

information about securities which is not commonly available and which
would affect the price of those securities were it commonly known.
The legislation governing insider dealing is contained in the Criminal

Justice Act 1993.
The offences
An individual who has information as an insider is guilty of insider dealing if:
 He or she deals in securities on which he or she has inside information
 He or she encourages someone else to deal in securities on which he or she

has inside information
 He or she discloses inside information.
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Explanation of terms
 Dealing
– Dealing is acquiring or disposing of, or agreeing to acquire or dispose of

relevant securities whether directly or through an agent or nominee or a
person acting according to direction.
 Encouraging another to deal
– If someone with information encourages another to deal in price affected

shares knowing or having reasonable cause to believe the dealing will
take place
 Securities
– Shares, debts securities and warrants traded on a regulated market, such

as the Stock Exchange.
 Inside information
– Relates to particular securities or to a particular issuer of securities
– Is specific or precise
– Has not been made public
– If made public would be likely to have a significant effect on the price.
 Insider
– An insider is someone who has information which is (and they know it is)
inside information and they have (and know they have) it through being is
an employee, shareholder or officer of the company (primary insider) or
have access to it because of their employment, office or profession (e.g.
as auditor) or is someone who gains information from such a person.
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Criminal law
Defences to the offence

The individual has a defence regarding dealing and encouraging others to deal if he
or she can show that he or she:
 Did not expect the dealing to result in a profit (or avoidance of a loss)
attributable to the fact that the information in question was price-sensitive
 Had reasonable grounds to believe the information had been widely disclosed
 Would have done what he or she did even if he or she did not have the
information
If the information is disclosed in the course of an employment or
profession, no offence is committed. For example, if an auditor passes
information to a review partner and the partner then acts upon it, no
offence has been committed by the auditor. (However, the partner may
have committed an offence).
Penalties
The maximum penalties imposed by the statute are seven years’ imprisonment
and/or an unlimited fine.
The transaction itself remains valid and enforceable.
If the individual is a director, he or she is in breach of his or her statutory duties under
CA06 and may be liable to account to the company for any profit made.
3.2 Market abuse

As insider dealing is a criminal offence, the standard of proof required to
convict is high where guilt must be shown beyond reasonable doubt.
This means that it can be difficult to obtain a conviction for insider
dealing. To counter this difficulty, the offence of market abuse was
created.
Cases of those suspected of market abuse are heard under the civil law, rather than
criminal law. Civil law has a lower standard of proof with a requirement to show
liability on the balance of probabilities, so individuals can be brought to account for
wrongs under the market abuse regulations when they may have escaped justice
under the insider dealing rules.
Market abuse is also a wider ranging offence than insider dealing and covers any
situation where an individual has failed to observe the standard of behaviour that
could reasonably be expected of a person in their position in relation to the market.
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Celine is a fund manager with Big Investors Ltd. She hears that Lucky plc is
about to announce a successful takeover and rings her husband, Liam telling
him to buy shares in Lucky plc but not telling him why.
Liam purchases a large number in Lucky plc.
Which offence, if any, under insider dealing, has Celine committed?
A Insider dealing
B Encouraging others to deal
C Improper disclosure
D None
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Criminal law
Bribery
4.1 Introduction
Bribery is covered by the Bribery Act 2010 which came into force in July 2011. The
Act gives three main bribery offences:
 Bribing another person
 Being bribed
 Bribing a foreign public official.
In addition, the Act also gives corporate liability for an organisation which fails to
prevent bribery.
4.2 The bribery offences
Bribing another person
This offence is committed when one person gives or offers a financial or other
inducement to a person to perform a relevant function improperly. It is irrelevant
whether the person offered the inducement is the same person who performs the
function.
Being bribed
The offence by which a person accepts or requests a financial or other advantage to

perform a relevant function improperly. It is irrelevant if the inducement is received
directly or indirectly.
A relevant function
In both of these offences the term ‘a relevant function’ is taken to mean a function of
a public nature, or any function of a business nature where the person performing it
is in a position of trust or is expected to perform it in good faith or impartially.
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Illustration 4 – Bribery
Celia works for Tebbit Ltd. She offers the auditor a sum of money not to
investigate their inventory records.
She is likely to be guilty of bribing another person. In addition, Tebbit Ltd may
be liable for failure to prevent bribery (see below).
Bribing a foreign official
This offence is committed where a person offers or promises to give a financial or

other inducement to a foreign official with the intention that this will influence the
official in his or her professional capacity and allow the individual a business
advantage.
The penalties and defences
A person charged with bribery may have a defence if he or she can prove that his or
her conduct was necessary for proper exercise of an intelligence service or of any
function of the armed forces when engaged on active service.
The maximum penalty is ten years’ imprisonment and/or an unlimited fine.
4.3 Corporate Liability
Any commercial organisation can be sued for failure to prevent bribery. This action
can be taken against an organisation when a person within the business has
committed a bribery offence.
The organisation has a defence if it can prove that it had in place

‘adequate procedures’ to prevent bribery. It should be considered what
the potential risks of bribery are before deciding if the procedures taken
are adequate.
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Criminal law
Money laundering
5.1 Introduction
Money laundering covers any activity by which the apparent source and
ownership of the proceeds of crime are changed in such a way that the
cash or other assets appear to have been obtained legitimately.
Illustration 5 – Money laundering

R v K 2007
Facts: The defendant had run a money exchange business and concealed
£5.9 million of cash transactions. In addition, he had systematically cheated the
Revenue of income tax and VAT by under-declaring takings of his legitimate
business.
Held: If there was a prima facie case that a defendant had cheated the
Revenue, the unpaid tax could be ‘criminal property’ for money laundering
purposes.
The two relevant pieces of legislation on money laundering are the

Proceeds of Crime Act 2002 and the Money Laundering Regulations
2017.
The legislation imposes important obligations on professionals, such as accountants,

auditors and legal advisers to report money laundering to the authorities and to have
systems in place to train staff and keep records.
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5.2 The money laundering process
Money laundering covers any activity by which the apparent source of money or
property is changed and the process usually involves three phases:
 Placement
 Layering
 Integration.
5.3 The offences
The Proceeds of Crime Act 2002 sets out three offences:
Money laundering
Under s.327 it is an offence to conceal, disguise, convert, transfer, or remove

criminal property from England, Wales, Scotland or Northern Ireland.
Concealing or disguising criminal property includes concealing or disguising its

nature, source, location, movement or ownership.
Under s.328 an offence is committed when a person enters into or becomes

concerned in an arrangement which he or she knows or suspects will facilitate
another person to acquire, retain, use or control criminal property.
Under s.329 an offence is committed when a person acquires, uses or has

possession of property which he or she knows or suspects represents the proceeds
of crime.
It is also an offence to incite another person to commit a money laundering offence.

Inciting means knowingly encouraging or assisting another person.
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Criminal law
It is a defence to show that:
 A report was made to the National Crime Agency (NCA) or the firm’s Money
Laundering Reporting Officer (MLRO), or
 It was intended to report, but there was a reasonable excuse for not having
done so.
The maximum penalty for this offence is an unlimited fine and up to fourteen years’
imprisonment.
Failure to report
Under s330 it is an offence for individuals carrying on a `relevant’ business to fail to

disclose to the NCA or the business’s MLRO any knowledge or suspicion of money
laundering where they know or suspect, or have reasonable grounds for knowing or
suspecting, that another person is engaged in money laundering.
Suspicions of money laundering should be reported to the NCA using a suspicious

activity report (SAR) by the MLRO. If there is no MLRO the individual should report
in the same way to the NCA him/herself.
Defences – again it is a defence to say there was a reasonable excuse for not
making the report and it is also a defence to say the person does not know or
suspect money laundering and that the employer has not provided him or her with
appropriate training.
This offence only relates to individuals, such as accountants, who are acting in the
course of business in the regulated sector.
The maximum penalty for failure to report is five years’ imprisonment and an
unlimited fine.
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Tipping off
Under s.333A it is an offence to disclose that a report has been submitted to the NCA
if this may prejudice a money laundering investigation.
Defences – there is a defence that the person did not know or suspect that the
disclosure would be likely to prejudice the investigation or that the person had lawful
authority to make the disclosure.
The maximum penalty for tipping off is two years’ imprisonment and an unlimited fine.
Illustration 6 – Money laundering

In 2007 a group of individuals were convicted of money laundering over £500
million over four years from the late 1990s to the early 2000s through abuse of
the Islamic financial system of ‘hawala’.
This involved a safe deposit of cash at one point and its collection elsewhere,
on the lines of cabled funds. The money was then deposited into business and
personal accounts at various banking outlets, converted into foreign currencies
and transferred to the US and across Europe.
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Criminal law
5.4 Knowledge and suspicion
‘Knowledge’ includes the position whereby a person had actual knowledge or where
he or she deliberately failed to make enquiries which an honest and reasonable
person would have made and which would put them on inquiry.
‘Suspicion’ does not have a definition in case law, but is understood to be something
less than actual knowledge, but more than unsubstantiated rumour.
5.5 Confidentiality and legal professional privilege
In general, the obligation to file a report takes priority over client confidentiality. The
Act affords protection to those who make proper disclosures and, consequently,
breach their duty of client confidentiality. legal right which allows persons to resist compulsory
disclosure of documents and information.
There is one exception to this rule; where a professional adviser is
protected by legal privilege, this provides a defence for non-disclosure.
Legal privilege applies to the provision of legal advice and acting in
respect of litigation (this advice may be provided by professionals other
than lawyers).
For example, if a client seeks advice on how to evade tax, there would be no
protection afforded by legal privilege. However, if a client has a suspicion that tax
evasion has taken place and is seeking advice in respect of action taken by HMRC,
legal privilege would apply.
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5.6 The Money Laundering Regulations 2017
The Money Laundering Regulations 2017 (MLR) came into force in June 2017 and
amendments were introduced in 2019. They have two purposes:
 To enable suspicious transactions to be recorded and reported; and
 To ensure that if a client comes under investigation in the future an audit trail
can be provided.
The MLR apply to ‘relevant persons’. This is a broad concept including, for example,
auditors, tax advisers and insolvency advisers as well as businesses such as estate
agents or casinos. Under the MLR relevant persons are required to take a risk-
based approach to money laundering.
This requires the firm to:
1 Carry out whole firm risk assessment to analyse the business’s exposure to the
risk of money laundering,
2 Put policies and controls in place to mitigate the perceived risks. Controls must
cover money laundering and terror financing risks.
3 Customer due diligence (CDD) measures must be carried out by relevant

persons. A third party can carry out this work on their behalf but only if the third
party is also subject to the MLR
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Criminal law
Customer due diligence (CDD)
This aspect of the Regulations considers the need for relevant persons to:
 Identify customers and their agents and verify their identity
 Identify and verify companies through their registered number
 Identify any beneficial owners
 Obtain information on the purpose and nature of any business relationships
 Identify politically exposed persons and their associates.
This should be performed when relevant persons enter into a business relationship
as well as carry out occasional transactions or at any other time if they have a
suspicion of money laundering. This work is to be carried out on a risk-sensitive
basis.
The record-keeping aspects of the MLR are important as if a money laundering

investigation is carried out and information cannot be obtained from the client the
investigators may ask the practitioner for it.
Non-compliance
Failure to comply with the regulations is a criminal offence and as such is punishable
by a fine and/or up to two years’ imprisonment.

Which Act contains the legislation on money laundering?
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The law and its interaction with ethics
6.1 Legislation, case law, ethics and ethical codes
Chartered accountants must have regard to legal requirements embodied in case law
and legislation but in addition they must uphold ethical standards and have regard to
ethical codes. It is important to understand the interaction between ethics and law.
Legislation
Legislation is the law created by Parliament and other bodies to whom it has
delegated powers. An Act of Parliament is binding on everyone in its jurisdiction and
in any community laws are essential to be able to regulate the actions of its citizens.
Examples of legislation or statutes referred to in this chapter include The Fraud Act
2006 and The Proceeds of Crime Act 2002.
Case Law
A system of judicial precedent has developed over time whereby Judges make a
decision in a particular case and this is recorded so that should another case with
similar facts come before them, the earlier decision will be followed. This is known as
case law and it forms part of the common law.
Ethics
It is said that ‘ethics begin where the law ends’. If an action is legal, individuals
generally have a choice as to their conduct. However, good ethical behaviour may be
above that demanded by the law. Ethical behaviour goes beyond obeying laws, rules
and regulations. It is a commitment to do what is right as well as merely what is
allowable. As a professional you have a duty to act ethically and in the public interest.
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Criminal law
Ethical codes
These are guidelines from the ICAEW and other relevant bodies which accountants
must have regard to in addition to the legal requirements of statute, regulations and
the common law.
6.2 Accountants’ responsibility
The criminal offences outlined above are capable of causing severe disruption to
trade and the development of economies (particularly those of emerging markets).
They are detrimental to a company’s reputation and may impact on the ability of a
company to secure investment in the future.
As professionals, accountants are expected to conduct themselves with integrity.

Under no circumstances should they become involved in bribery or any other
offence, and they are under a professional duty to comply with the MLR. Failure to do
so could result in a criminal action being brought against the individual, in addition to
bringing the profession into disrepute.
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6.3 The ICAEW code of ethics
The current code of ethics came into effect in March 2006 and there are five
fundamental principles:
 Integrity
I
O  Objectivity
P  Professional competence and due care

C  Confidentiality
P  Professional behaviour
6.4 Applying the rules in practice
If you come across any of the criminal matters in this chapter then you will need to
consider whether the need for the disclosure overrides the duty of confidentiality. An
example would be where the information is in the public interest or is required to be
disclosed by law.
You should carefully investigate the matter first, since a reported suspicion will trigger
certain enquiries, and such reports should not be made based on incorrect or
incomplete facts.
Where appropriate, you should:
 Consult/report with any person in accordance with any legal requirement
 Refer to any guidance from the ICAEW
 Obtain legal advice
 Discuss the matter with your line manager
 Seek advice from the ICA Ethics Advisory Service.
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Criminal law

This question allows you to demonstrate your knowledge of ethical
standards.
Xiao is on secondment to a charity and has been commissioned to write an

internal report for its executive committee. She is concerned about
unauthorised payments made by former trustees using the charity credit card
for their personal use.
Her report suggests various policies and procedures that should be put in
place to prevent this practice and suggests that the individuals concerned be
investigated by the appropriate regulatory body. Xiao suspects that the
organisation will not act on her recommendations because it will want to avoid
adverse publicity.
Should Xiao take the matter further herself or leave it to the charity to
sort out? Which of the following solutions is most appropriate?
A Xiao could report the charity and the individuals concerned to the
national regulator.
B Xiao could report their conduct as a potential case of money laundering.
C Xiao could reiterate her concerns to the charity’s current trustees in

writing and stress the importance of implementing the recommendations
in her report.
D Xiao could do nothing further. Her concerns are already in the report
along with her recommendations to prevent the same thing from
happening again.
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area.

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Criminal law

A
Under the Public Interest Disclosure Act Rodrigo is entitled to not suffer a
detriment for making a qualifying disclosure. This appears to be the case here
so he will be entitled to an award to the amount that a Tribunal sees as fair and
equitable.

C
Phishing is the offence of fraud by false representation. Bernadette is

pretending to be someone she isn’t to gain access to information she is not
entitled to.

B
Celine is encouraging Liam to deal in shares on which she has inside

information.
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The Proceeds of Crime Act 2002

C
Solution A is a possible course of action, but it goes beyond the remit of the
accountant, who made her concerns clear to the trustees and indicated what
steps they should take.
Solution B is inappropriate. These are small amounts of money for personal

use, so it is unlikely to be a case of money laundering.
Solution D is not as ideal as C, but X’s concerns are covered in the report so
at least she has made the trustees aware of the problems. It is important
however that the trustees understand the importance and nature of the
problem and how to deal with it.
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Employment law
distinguish between an employee and an independent contractor
understand the legal consequences of being an employee
understand that an employment contract includes terms implied by law and to

know what they are
identify the circumstances in which an employee is unfairly dismissed and

appreciate the consequences
identify the circumstances in which an employee is wrongfully dismissed and

appreciate the consequences
recognise whether an employee is entitled to a statutory redundancy payment
MyKaplan resources
This topic is covered on MyKaplan in the module Employment Law.
ICAEW resources
ICAEW workbook
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Chapter 12
Overview
EMPLOYMENT LAW
Employee or Independent
contractor
Express terms Formation of contract Implied terms
Wrongful
Termination of contract Unfair dismissal
dismissal
Redundancy
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Employment law
Employed or self-employed
1.1 Introduction
There are two types of working relationship:
Self-employed
Employee
(independent contractor)
Works under a contract of
Works under a contract for
service
services
1.2 Tests used to determine the worker’s status
The courts apply a multiple test in determining if an employment relationship exists.

There are three essential elements that must be present for a contract of service:
 The worker must have agreed to perform the work him/herself unless the
employer expressly agrees to delegation.
 There must be an element of control exercised by the employer.
 There should be mutuality of obligations; the employer must be obliged to

provide work (or payment if no work is available) and the employee should be
obliged to perform said work when provided.
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If these are not present, there cannot be an employee/employer relationship. But

even if the three elements are present it does not necessarily follow that the
individual is an employee. To determine this, the courts will consider further factors:
 If the individual is free to delegate he or she is more likely to be held to be self-

employed.
 If the employer provides the tools and equipment or a uniform used by the
individual this suggests an employment relationship.
 If the individual can use the employer’s support staff he or she is more likely to
be classed as being employed.
 If the individual is paid net of tax this is indicative that he or she is an employee.
 If the individual suffers a degree of financial risk as hours and payment are
irregular, this suggests the worker may be held to self-employed.
 If the employee is expected to have a level of exclusivity in his or her contract

(the worker cannot work for other employers) it is more likely that he or she will
be held to be an employee.
The court may also consider whether the parties consider the individual to be
employed. However, the label applied by the parties does not by itself define the
relationship.
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Employment law
Illustration 1 – Employed or self-employed

MARKET INVESTIGATIONS LTD v MINISTER OF SOCIAL SECURITY 1969
Facts: A market researcher worked on a series of contracts following

instructions issued by the company. She had to complete the work in a
specified time but had no specified hours of work and was not given holiday or
sick pay. She was free to work for others if she wished.
Held: The Company did have some control over the manner in which she did
her work and the terms of the contract were consistent with a contract of
service. She did not provide her own tools and took no risk.
She was not in business ‘on her own account’ and was thus an employee not
an independent contractor.
Illustration 2 – Employed or self-employed

Mutuality of obligations
O’Kelly v Trusthouse Forte (1983)
Facts: A wine waiter was called a ‘regular casual’ because he was given work
when it was required in the banqueting hall. He had no other employment and it
was generally accepted that he would be offered work in preference to others
when work was available, and that he would accept such work when offered.
Held: He was an independent contractor because there was ‘no mutuality of

obligation’ in that the company was under no duty to offer him work and he was
under no duty to accept it. However, when at work he wore a company uniform,
did not use his own equipment, did not share in the profit and had no
investment in the business (aside from his time as a waiter).
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1.3 The importance of the distinction
The type of working relationship has a number of consequences:
 Employees receive statutory protection (e.g. unfair dismissal/redundancy).
 There are implied terms in a contract of employment (e.g. duty of obedience).
 An employer is vicariously liable for the acts of employees when they act in the
course of the employer’s business. The employer is not liable for the acts of
independent contractors.
 On the insolvency of the employer, an employee is a preferential creditor,

whereas someone who is self-employed ranks as an ordinary unsecured
creditor.
 Employees receive their pay net of income tax and national insurance under the
PAYE system. Independent contractors are taxed under the trading income
provisions.
 Certain benefits are only available to employees.
More details on the consequences can be found in the table in the ICAEW chapter.
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Employment law

Which of the following statements suggest that Jamal is an independent
contractor in relation to the work he carries out for Z Ltd?
(i) He is required to provide his own tools
(ii) He is required to carry out his work personally and is not free to
send a substitute
(iii) He is paid in full without any deduction of income tax
A (i) and (ii) only
B (ii) and (iii) only
C (i) and (iii) only
D all of the above
This question allows you to demonstrate your business analysis skills.
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(i) An employer is vicariously liable for the torts of employees

committed in the course of their employment
(ii) An employer is vicariously liable for the torts of independent

contractors, if they were committed whilst carrying out work for the
employer
A (i) only
B (ii) only
C Both (i) and (ii)

awareness.
1.4 Workers
As well as employees and independent contractors, UK law recognises a third

category of employment – the worker. Workers are a group that fall short of being
recognised as employees, but nonetheless provide work for an organisation, so they
do not fall into the independent contractor category either.
The law provides some protection to workers (such as payment of at least the
minimum wage and to be given the minimum amount of paid leave) but not all of the
benefits that are given to employees (such as protection against unfair dismissal and
the right to request flexible working).
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Employment law
The contract of employment
An employment contract is like any other contractual relationship. The basic rules of
contract will apply, meaning the standard elements of agreement, consideration and
intention must be present.
As such if a term of the employment contract is breached the parties may sue. The
terms can be express or implied.
2.1 Express terms
Express terms are those agreed by the parties themselves. Their agreement may be
written or oral.
A change in terms generally requires the consent of both parties, unless it is

introduced by new legislation.
Sometimes an express term will give the employer the right to vary the terms of
employment. For example, a mobility clause allows the employer to change the
location of the employment. Such changes must, however, be reasonable.
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The written particulars
The Employment Rights Act 1996 requires an employer to provide an

employee with a written statement of certain particulars of his or her
employment on or before the first day of employment.
The statement must include details of:
 The names of the employee and employer
 Pay rates and interval (i.e. weekly, monthly, etc.)
 Job title
 Hours of work
 Length of notice*
 Holiday and sick pay entitlement*
 Details of any pension entitlement*
 Details of disciplinary or grievance procedures*, and
 The date the employment commenced.
 Whether any service with previous employer counts towards period of

continuous employment.
* The statement may provide this information or reference as to where to find it.
The statement does not constitute a contract, but it does provide evidence of the
contents of the contract.
2.2 Terms implied by the courts
The courts imply terms into a contract of employment even if they have not been
specifically agreed. These terms give additional contractual duties to the employee
and the employer.
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Employment law
Implied duties of the employee
 To obey lawful and reasonable orders
– If the employer asks the worker to do something and it is legal and

reasonable for his or her job role, then he or she would be in breach of
their employment contract if he or she did not do so.
 To give honest and faithful service
– The duty of fidelity is of fundamental importance. It is breached if an

employee works for a competitor.
 Duty to exercise reasonable care and skill
– The employee must act with reasonable care in performing his or her
duties. A single act of negligence will not usually justify dismissal, unless it
is gross negligence.
– An extension of this duty of care is a duty to indemnify the employer for

any damages incurred as a result of the employee’s negligence.
Illustration 3 – The contract of employment

LISTER v ROMFORD ICE 1972
Facts: An employee ran over another employee (his father!) with a fork-lift
truck.
Held: The employee was liable in damages to his employer for breach of
contract.
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 Not to misuse confidential information
– An employee must not disclose trade secrets to a third party nor misuse
confidential information he or she has acquired in the course of his or her
employment. This duty can continue even after the employment has
ended.
 To give personal service
– The employee must carry out his or her duties personally unless he or she
has express or implied permission to delegate.
 Mutual co-operation
– This is a mutual obligation imposed on both parties and is based on

respect and consideration for each other.
Implied duties of the employer
An employer owes the following common law duties:
 To pay reasonable remuneration.
 To indemnify employees for properly incurred expenses.
 To take reasonable care for the safety of their employees.
 To give reasonable notice of termination
 To maintain mutual co-operation, trust and confidence.
 To provide work (though as long as the employer pays the employee this will
usually be classed as good enough)
Note that there is no general duty to:
 Provide references (but, if they do so, they must be truthful).
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Employment law
2.3 Terms implied by statute

The principal duties imposed by statute are as follows:
Pay
Legislation deals not only with minimum wage and equal pay but other terms such as
holiday and sick leave. An equality clause is implied into all contracts of employment
if employees of the opposite sex do the same job or a different job of equal value.
Health and safety

The Health and Safety at Work Act 1974 imposes the following duties:
 All employers are required, so far as is reasonably practicable, to ensure the
health, safety and welfare at work of all their employees. This duty includes:
– The provision and maintenance of plant and systems of work that are safe
and without risks to health
– Arrangements for ensuring the safe use, handling, storage and transport
of articles and substances
– The provision of such information, training and supervision as is necessary
– The maintenance of safe places of work, with adequate means of access
– The provision and maintenance of a safe working environment.
Breach of the Act is a criminal offence punishable by up to two years’ imprisonment
and/or an unlimited fine.
Social security law and work life balance
Laws in this area set out statutory duties for employers in connection with:
 the obligation to pay class 1 NIC on behalf of employees
 flexible working requests must be considered and not unreasonably refused
 ante-natal care
 maternity leave and pay
 paternity leave and pay
 parental leave, shared parental leave and pay
 parental bereavement leave
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Equality Act 2010
Under the Act, employees have the right to not be discriminated against because of a
‘protected characteristic’. The Act covers all terms of employment including pay, sick
pay, holiday pay and working hours.
The ‘protected characteristics’ are:
 age
 disability
 sex (including sexual orientation or gender re-assignment)
 race (that is colour, nationality and ethnic or national origins)
 religion or belief
 marriage or civil partnership
 pregnancy or maternity
Employers can avoid liability under the Act if they can prove that their actions were a
‘proportionate means of meeting a legitimate aim’.
Legitimate aims include health and safety reasons, and the specific training
requirements of the job.
Actions are proportionate if the discriminatory effect is significantly outweighed by the

benefits of achieving the legitimate aim. However, if the aim can be achieved with
less discrimination, that option should be followed.
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Employment law
Notice
It is usually a matter of negotiation between the employer and employee how much
notice is to be given in order to terminate the contract. This will usually be an express
term stated in the employment contract.
Statute lays down certain minimum periods which apply in the employment contract.
The express terms of the contract can increase these notice periods but the notice
given can never be less than the statutory minimum.
The minimum notice an employer must give depends on the continuous employment
period:
Continuous Employment Minimum notice
From 1 month but less than 2 years Not less than one week
From 2 years but less than 12 years Not less than one week for each year of
continuous employment
From 12 years 12 weeks
The minimum notice an employee must give his or her employer once he or she has
worked for them for four weeks, is at least one week.
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A An employer is obliged to provide a careful and honest reference
B An employer is obliged to provide a safe system of work
C An employer is obliged to provide employees with smoking facilities

during authorised breaks
D An employer is obliged to give two days off a week

An employer must provide a written statement of particulars to the
employee:
A Within one month of the employment commencing
B As soon after the commencement of employment as possible
C On or before the first day of employment
D Within a reasonable time of the employment commencing
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Employment law
Unfair dismissal
The law on unfair dismissal is governed by The Employment Rights Act

1996 as updated by the Employment Act 2008. It provides statutory
protection for employees.
Claims for unfair dismissal are brought before the Employment Tribunal.
3.1 Who can claim for unfair dismissal?
Excluded employees
There are certain categories of employee who are excluded from the statutory unfair
dismissal code. These include persons employed to work outside Great Britain and
those employees dismissed whilst on unofficial strike or other industrial action.
Continuous employment
 The employee must have been continuously employed for at least two years,
part time or full time with the same or an associated employer.
 It is possible to exclude certain weeks from the calculation of continuous

employment if, for example, there was time spent on strike or in service in the
armed forces.
 Where a business is transferred and the employee then works for the new
employer that change will not break the continuity.
 Where the reason for the dismissal is automatically unfair (for example where
the employee is pregnant) there is no continuous employment requirement.
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What must the employee show?
In order for a claim for dismissal to succeed, an employee must show that:
 He or she is a qualifying employee
 He or she was dismissed.
When to make the claim
A claim must be made to an Employment Tribunal within three months of the

effective date of termination. The effective date of termination is determined as
followed:
 If termination is by notice, the date on which the notice expires.
 If no notice is given, the date the termination takes effect.
 If a fixed term contract is not renewed, it is the date on which the fixed term
expired.
3.2 What is ‘dismissal’?
Dismissal can be any one of the following:
 Termination of a contract by the employer (with or without notice).
 Expiration of a fixed term contract.
 Constructive dismissal.
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Employment law
Constructive dismissal
Constructive dismissal occurs where an employee terminates the contract, with or

without notice, by reason of the employer’s conduct.
The employer’s conduct must be sufficiently serious for the employee to leave at
once. If he or she continues for any length of time without leaving, he or she may be
regarded as having affirmed the contract. Affirmation results in him or her losing the
right to treat him/herself as dismissed.
Illustration 4 – Constructive dismissal

DONOVAN v INVICTA AIRWAYS 1970
Facts: The employer put pressure on the employee, a pilot, to take abnormal
risks on a flight. The employer did this three times in quick succession. Each
time the employee refused. Relations with the management deteriorated and he
resigned.
Held: The employer had committed a serious breach of contract and the
employee succeeded in his claim for constructive dismissal.
Simmonds v Dowty Seals Ltd 1978
Facts: S had been employed to work on the night shift. When his employer
attempted to force him to work on the day shift he resigned.
Held: He could treat himself as constructively dismissed because the

employer’s conduct had amounted to an attempt to unilaterally change an
express term of the employment contract.
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In British Aircraft Corporation v Austin (1978) a failure to investigate a health
and safety complaint was held to be conduct sufficient to entitle the employee to
treat the contract as terminated.
Has a dismissal occurred?
In determining whether a dismissal has occurred, each case must be viewed on its
own facts. Provided the employee has been continuously employed for at least two
years, he or she is entitled to request a written statement giving the reasons for his or
her dismissal within 14 days.
3.3 Actions not constituting a dismissal:
A dismissal will not occur where:
 The employee resigns (unless it is constructive dismissal)
 The contract is frustrated
 The parties come to a mutual agreement to end the contract.
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Employment law
Automatically unfair reasons for dismissal
If a dismissal is deemed to be automatically unfair, it is not necessary to have two

year’s continuous employment. A dismissal will be automatically unfair in the
following circumstances:
 Victimisation of health and safety complainants or whistle-blowers
 Pregnancy or exercise of maternity leave rights
 Trade union membership/non-membership/activities
 Assertion of a statutory right (e.g. relating minimum wage)
 A spent conviction
 Taking steps to protect him/herself when he or she believes there to be a

serious and imminent danger
 Dismissal on the transfer of an undertaking
3.4 Potentially fair reasons for dismissal
In order for a dismissal to be fair the employer has to show:
 The principal reason for the dismissal
 That the reason was one or more of the statutory fair reasons as set out in s.98
of the Employment Rights Act 1996
 That he or she acted reasonably.
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The statutory fair reasons for dismissal
 Capability or qualifications of the employee
– The lack of the capabilities (skills, aptitude or physical or mental health) or

qualifications (academic or technical) for performing the work he or she
was employed to do can be grounds for dismissal.
 Conduct
– If the employer genuinely believes the employee to be guilty of misconduct

(abusive language, drink and drug abuse, theft and dishonesty, violence,
etc.) this can be grounds for dismissal.
Illustration 7 – Unfair dismissal

STEVENSON v GOLDEN WONDER LTD 1977
Facts: A manager took part in an unprovoked assault on another employee at a
company social event held outside working hours in the company canteen.
Held: This was a fair reason for dismissal.
 Redundancy
– A dismissal for redundancy may be grounds for unfair dismissal if
someone was selected in breach of a customary arrangement or agreed
procedure or if the reason for the selection was connected with trade
union membership.
 Statutory restriction
– If there is a statutory restriction preventing the employment from being
lawful (for example where a solicitor forgets to renew his or her practicing
certificate).
 Some other substantial reason
– If there is some other substantial reason such as an employee being
married to a direct competitor or an employee in a position of trust being
convicted of a criminal offence involving dishonesty.
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Employment law
Reasonableness
Once the Employment Tribunal has found that the dismissal was for a potentially fair
reason they must then decide whether ‘on the basis of equity and the substantial
merits of the case’ the employer acted ‘reasonably’. This will be a question of fact
depending on all the circumstances.
Case law shows that this ‘reasonableness test’ involves two questions:
 Whether the reason given was sufficiently serious to justify dismissal.
 Whether the employer adopted reasonable procedures both in coming to the

decision to dismiss and in the manner of dismissal.
Illustration 8 – Unfair dismissal

The following examples might not be considered reasonable:
 If an employee was dismissed without warning (except in the most flagrant

cases)
 If the dismissal was on the grounds of capability or qualifications and the

employer did not allow time for improvement, training and consultation to
discuss areas of difficulty
 If the employer is relying on the grounds of ill health there must be proper
medical evidence
 In the case of misconduct where the employer did not fully investigate the
complaint and did not listen to what the employee had to say by way of
explanation or mitigation.
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Procedural irregularity
A dismissal may be held to be unfair if it was carried out in breach of any relevant
procedures relating to workplace dispute resolution. If this happens the tribunal may
increase any award by up to 25%. They may also reduce any potential award by up
to 25% as the result of any unreasonable failure by the employee.
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Employment law
3.5 Remedies for unfair dismissal
The remedies for unfair dismissal are wide-ranging and may be more advantageous
to an employee than an action for wrongful dismissal.
The remedies are:
 Reinstatement
 Re-engagement
 Compensation
Reinstatement
This is an order that the employee may return to their old job without any break in
continuity. This would usually only be granted if it was in line with the employee’s
wishes.
Re-engagement
This is an order to the employer to give the employee a new job with comparable
terms and seniority. This would not be given if there has been a breakdown in
confidence between the parties.
Compensation
This is the usual remedy in a case of unfair dismissal. There are three types of
payment: the basic award, the compensatory award and the additional or special
award.
 The basic award depends on: employee’s age, weekly pay and length of
continuous service.
 The amount is reduced if a redundancy payment has been made or the

employee caused or contributed to their dismissal.
 The award is made regardless of loss suffered by the employee and there is no
duty to mitigate.
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 The compensatory award
– This is discretionary and will be an amount that is just and equitable

having regard to the employee’s losses up to a statutory maximum. The
losses will be assessed on the usual principles of damages for breach of
contract
 The additional award
– This award is made if an order for reinstatement or re-engagement is

ignored, the dismissal was on the grounds of discrimination or the reason
for dismissal was an automatically unfair one.
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Employment law

List the five potentially fair reasons for dismissal
……………………………………..
……………………………………..
……………………………………..
……………………………………..
……………………………………..
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Wrongful dismissal
4.1 Wrongful dismissal or unfair dismissal?
Unfair dismissal provides statutory protection for employees. Wrongful dismissal,

however, is a common law concept that gives employees the normal protection and
remedies afforded by the common law, such as an action for breach of the
employment contract.
Cases are commonly brought in the County or High Court but an Employment
Tribunal will have jurisdiction if the claimant is an employee.
In certain cases, a claim for damages for wrongful dismissal might be preferable to a
claim for compensation for unfair dismissal.
Illustration 9 – Wrongful dismissal

Examples of when wrongful dismissal claim might be preferable to a claim for
unfair dismissal:
 Where the damages sought exceed the statutory maximum for unfair
dismissal.
 Where the deadline for commencing an unfair dismissal claim has passed.
(An unfair dismissal claim must be brought within three months of the
effective date of termination; a wrongful dismissal claim can be brought
within six years of the breach).
 Where the dismissal was fair, but insufficient notice was given.
 Where the employee lacks two years’ continuous service.
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Employment law
4.2 What is wrongful dismissal?
Wrongful dismissal occurs when the employee is dismissed in breach of the

employment contract. The most likely examples of this are discussed below.
Termination without notice by the employer
Dismissal without the required notice period is known as summary dismissal.

Summary dismissal will be held to be wrongful unless:
 It was due to a fundamental breach by the employee
 The employee accepted shorter notice.
Illustration 10 – Wrongful dismissal

Examples of serious breaches of the contract of employment:
 Wilful disobedience of a lawful order
 Gross misconduct, for example assault on another employee. The

misconduct must usually be carried out at work although, if sufficiently
serious, misconduct outside work would be sufficient
 Dishonesty, where the employee is in a position of trust
 Gross or persistent negligence
 Breach of an express term of the contract or work rules where the

employee has been warned that such a contravention will not be tolerated.
Whether or not summary dismissal is justified is a question of fact based on:
 The standards of ordinary people, and
 The standards prevailing at the time.
Summary dismissal also occurs where an employer is unable to continue to

employ the employee, for example where:
 A personal employer dies
 An employing partnership is dissolved, or
 An employing company is wound up.
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410
Employment law
Termination without notice by the employee
This occurs where the employee repudiates the contract by leaving. This would be a
breach of contract by the employee unless the employer has wrongfully repudiated
the contract and the employee ‘accepts’ the breach by leaving (the common law
equivalent of constructive dismissal).
4.3 Expiry of a fixed term contract or for a specific task
If a fixed term contract expires without notice at the end of the term, there is no
breach by either party. The contract has simply been performed.
If an employee is employed under a fixed term contract and is dismissed before the
expiry of that term they may claim wrongful dismissal.
If an employee is employed to perform a specific task and is dismissed before the

completion of the task he or she may claim for wrongful dismissal.
4.4 Remedies for wrongful dismissal
As wrongful dismissal focuses on a breach of the contract of employment, the normal

remedy will be damages. The quantum of damages is normally based on the loss of
earnings suffered as a result of the dismissal.
An employee is under a duty to mitigate the loss. Therefore, alternative work must be
sought in the intervening period.
If damages are deemed not to be an adequate remedy, the court may award an
injunction to prevent the breach of contract. However, this only happens in extremely
rare cases.
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Mario is entitled to one month’s notice.
Consider both of the following situations and state whether he has been
wrongfully dismissed.
(i) The employer dismisses Mario on one month’s notice, but gives him no
reason for the dismissal
(ii) The employer dismisses Mario without notice for fighting in the workplace
with another employee.
(i)
(ii)
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Employment law
Redundancy
5.1 What is redundancy?
Under s139 ERA 1996, an employee is treated as dismissed by reason of

redundancy if the dismissal is wholly or mainly attributable to the fact that:
 The employer has ceased, or intends to cease, to carry on the business for the
purposes for which or in the place where the employee was employed.
 The requirements of that business for employees to carry out work of a

particular kind or in a particular place have ceased or diminished or are
expected to cease or diminish.
Illustration 11 – Redundancy
European Chefs v Currell 1971
Facts: A pastry cook was dismissed because the requirement for his speciality
(éclairs and meringues) had ceased. He was replaced by a new pastry cook
whose speciality was the new requirement (continental pastries).
Held: It was held that the dismissed pastry cook had been dismissed for
redundancy as the need for the particular work he contracted to do had ceased.
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Vaux and Associated Breweries v Ward 1969
Facts: A quiet public house was modernised by installing a discotheque. The

57-year-old barmaid was dismissed in order to make way for a younger more
glamorous barmaid.
Held: Mrs Ward had not been dismissed for redundancy as there was no
change in the nature of the particular work being done.
The place where a person is employed means in this context the place where he or
she is habitually employed and any place where, under his or her contract, he or she
can be required to work. There will not, therefore, be a redundancy situation where
the transfer of location is reasonable or where the contract gives the employer an
express or implied right to move the employee in question from one place to another.
5.2 Who is entitled to a payment?
In order to claim a redundancy payment, a person must:
 Have been continuously employed for two years.
 Apply to the Employment Tribunal within six months of dismissal.
 Prove he or she was dismissed, laid off or kept on short time for at least four
consecutive weeks. (Laid off means that the employee earned nothing in that
particular week; short time means he or she earned less than half of a normal
week’s pay).
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Employment law
There is no entitlement to a redundancy payment if the employee is:
 Guilty of misconduct which would justify dismissal
 Made a reasonable offer of a renewed contract which he or she refuses
 Made an offer of suitable alternative employment in the same capacity, which

he or she unreasonably refuses.
Taylor v Kent County Council 1969
Facts: T was headmaster of a school. The school was amalgamated with

another school and a new head appointed to the combined school. T was
offered employment in a pool of teachers, standing in for short periods in
understaffed schools. He would retain his current salary.
Held: T was entitled to reject this offer and claim a redundancy payment: the
new offer was substantially different, particularly in regard to status.
If an offer of alternative employment is made, the employee is entitled to have a four-

week trial period in the alternative employment, from the end of his or her
employment under the previous contract.
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What is the necessary period of continuous employment in a claim for a
statutory redundancy payment?
A 3 months
B 3 years
C 2 years
D 1 year
416
Employment law

area.

417
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C
Usually independent contractors would have their own tools and would be paid
in full for their work without deduction of income tax. They may do the work
personally or they may send a substitute. Items (i) and (iii) apply, but not (ii).

A
An employer is vicariously liable for the torts of his or her employees whilst
they are at work, but is not liable for the torts of an independent contractor.

B
An employer does not have to provide a reference for an employee (although

if he or she does it has to be accurate).
Nor does an employer have to provide smoking facilities at work.
An employer is obliged to give only one day off a week under the Working
Time Regulations.
An employer is under an obligation to provide a safe system of work.
418
Employment law

C
Any changes to these terms should also be notified to the employee in writing
within one month.

 Lack of capability or qualification
 Employee’s misconduct
 Legal prohibition
 Redundancy
 Some other substantial reason.

 Mario has not been wrongfully dismissed as he has been given the
appropriate amount of notice
 Mario has not been wrongfully dismissed as his conduct puts him in
serious breach of his contract.
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C
2 years
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Chapter 13
Data protection and intellectual property
law
understand the consequences and significance of the Data Protection Act
recognise the requirements of protecting intellectual property.
MyKaplan resources
This topic is covered on MyKaplan in the module: Data Protection and Intellectual
Property Law.
ICAEW resources
ICAEW workbook
421
Chapter 13
Overview
DATA PROTECTION AND

INTELLECTUAL PROPERTY LAW
DATA
INTELLECTUAL
PROTECTION ACT
PROPERTY
2018
Data Data
subjects protection Types Offences
principles
422
Data protection and intellectual property law
The Data Protection Act 2018
1.1 The scope and purpose of the Act
The individual is known as the data subject.
The Act is concerned with personal data held on computer-based

information systems or manual files. The Act does not apply to domestic
use.
The term 'personal data' means data relating to an individual who can
be identified from the data with or without other information in the data
controller’s possession.
A data controller determines the purpose and means of processing

personal data.
A data processor is responsible for processing personal data on behalf

of a data controller.
The Act not only covers facts about the data subject but also any
expression of opinion about him or her, or the intentions of the data
controller towards him or her.
The Act is also concerned with any processing of the data, such as the use,
collection or destruction of it.
The Act is overseen by the Office of the Information Commissioner. They must be
informed within 72 hours of a breach that affects the rights and freedoms of
individuals.
Non-compliance with the act can lead to:
 A criminal conviction when a criminal offence under the Act has been committed
 A fine of up to 20 million euros (approximately £18 million) or 4% of the

organisation’s global turnover.
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Chapter 13
424
1.2 The data protection principles
The Act enacts the principles set down in the EU’s General Data Protection
Regulation (GDPR). These are:
 Lawfulness, fairness and transparency
– There must be valid grounds for holding the data. The data must be
processed fairly and there must be openness about how it is used from the
start
 Purpose limitation
– The purpose for holding the data must be specified from the start. It must
be a legitimate purpose.
 Data minimisation
– Data shall be adequate, relevant and not excessive for purpose
 Accuracy
– Data shall be accurate and up to date
 Storage limitation
– Data shall not be kept for longer than is necessary. There should be a
retention policy which can be justified.
 Integrity and confidentiality (security)
– Data processing must take appropriate security measures as regards risks

to it that might arise.
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Chapter 13
1.3 The rights of data subjects
Data subjects are given various rights under the Act in relation to their personal data:
 To be informed
– Data subjects have the right to be informed about the collection and use of
their personal data.
 Access
– Data subjects have a right to access data held about them (which must not
be kept in an encoded form). Subjects should be able to obtain copies of
information held within one month of their request.
 Rectification
– Data subjects have a right to have incorrect data on them corrected and
incomplete data made complete.
 To erasure/to be forgotten
– Data subjects have a right to have information about them erased in
certain circumstances.
 To restrict processing
– Data subjects have the right to restrict or suppress their data in certain
situations. This means the data can be held, but not processed.
 To data portability
– Data subjects have the right to obtain data they have given to a data
controller and reuse it in a different service
426
 To object
– Data subjects have a right to object to the processing of their data. In the
case of direct marketing this is an absolute right, in all other cases it can
be refused.
 Automated decision making and profiling

– Automated decision making and profiling can only be used in a strict set of
circumstances. The subject has the right to information about the
processing and to request human intervention or to challenge the decision.
1.4 Data exempted from the Act
The following types of data are exempt from the Act:
 Processing of employee data by employers
 Academic institutions processing data for academic purposes
 Scientific and historic research organisations.
Exemption means that the data protection principles and the data subject’s rights do
not apply to the data.
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Chapter 13

Only a company can be a data controller:
True/False

Which of the following is not one of the data protection principles?
A Personal data shall be accurate
B Personal data shall not be kept for longer than 6 years
C Personal data shall be adequate, relevant and not excessive

and compliance.
428
Intellectual property
Intellectual property (IP) is a type of intangible asset created by businesses through

the use of the skills and knowledge of their employees.
2.1 Protection of intellectual property
Digital IP in particular is quite easily stolen and sold on. For that reason, there are a
number of mechanisms available to businesses to protect their IP which are
discussed below.
Copyright
 This is automatic protection given to written IP in the form of film, music, art or
internet content. Copyright lasts for:
25 years – layout of published editions of written works (from when first
published)
50 years – broadcasts (from when first broadcast)
70 years – written, dramatic, musical and artistic work (from the author’s
death)
– sound and music recording (from when first published)
– films (from the death of the director, screenplay author or
composer).
Design right
Automatic protection is given to an object’s design which lasts until the earlier of
fifteen years from when it was created, or ten years from when it was sold.
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Trademark
This protection is only available if applied for and granted for product names, logos
and jingles. It lasts for ten years.
Registered design
This protection is only available if applied for and granted. It relates to the design of
a product and lasts for 25 years.
Patent
A patent can be applied for in relation to inventions and products. If granted it lasts
for 20 years.
430
2.2 Intellectual property related offences
A number of pieces of legislation deal with abuse of IP rights, the most important of
which are discussed below.
Trade Mark Act 1994
It is an offence to use a trade mark without authorisation, and to make a gain, or

cause another a loss through unauthorised use of a trade mark.
Copyright, Designs and Patent Act 1988
It is an offence to:
 make, deal with, or use illicit recordings
 sell, hire or exhibit copyrighted material without the copyright holder’s

permission.
Registered Design Act 1949
This Act created an offence of unauthorised copying of registered designs in the

course of a business, and also creating a new product which is the same, or
materially similar to one a register is held on.
Fraud Act 2006
As seen previously the Fraud Act created three offences. The most relevant here is
the offence of fraud by false representation. If an individual makes a false
representation about a product, for example by claiming it to be one product when it
is in fact another, and they make a gain due to this, or cause a loss to another, this
can lead to prosecution under this Act.
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Sofiya is developing a new social media website which is expected to be very
popular with university students. She has thought of a name for the site and
developed a logo for it
Which of the following could Sofiya use to protect the name and logo for
her website?
A Patent
B Copyright
C Trademark
D Design right

awareness.
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area.

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Chapter 13

False

B
The principle is that data should not be kept for longer than is necessary for
the purpose for which it is processed.

C
Trademarks provide protection for product names, jingles and logos.
434
Summary notes
summarise the key areas of Law.
1
Contents
Page
Legal principles and international law 3
Contract formation 6
Termination of contract 10
Negligence 13
Agency 16
Types of trade 18
Companies: consequences of incorporation 21
Companies: ownership and management 25
Companies: finance 30
Companies: summary of key resolutions 33
Insolvency 35
Criminal law 38
Employment law 43
Data protection and intellectual property law 48
These notes provide a summary of the key points. They are not exhaustive and they
should not be relied on to contain everything required to pass the exam.
2
Summary notes

Types of law
Criminal law
 Relates to conduct of which state disapproves and seeks to control with threat of
punishment.
 State must prove guilt beyond reasonable doubt.

Civil law
 Relates to relationship between individuals and provides remedies (e.g. financial

compensation) to settle disputes.
 Individual must show liability on balance of probabilities.

Sources of law
Statute law
 Direct legislation (Acts of parliament): to become law a Bill (proposed law) must
pass through House of Commons, House of Lords, and receive Royal Assent.
 Indirect legislation (delegated legislation), includes

– statutory instruments: made by Government Ministers
– bye-laws: made by local authorities
– Orders in Council: made by the Privy Council in the name of the Monarch
on the advice of the Prime Minister.
Case law
 Law which has been developed over time by judges when deciding the outcome
of cases brought before the courts.
 Statute law takes precedence over case law.
3
Law
International Law
Parties entering cross border contracts may agree in advance which country’s laws will
apply (‘choice of laws’).
Alternatively, the United Nations (UN) and the International Chamber of Commerce
(ICC) have created rules of their own which parties can choose to use.
UN Convention on Contracts for the International Sale of Goods (UNCISG)
Sets out rules on:
 the obligations of the buyer and seller
 the point of the passage of risk from seller to buyer for loss or damage to the
goods.
Applies only to the commercial sale of goods where the buyer and seller of the
goods have their places of business in different countries.
Does not apply to the following types of sale:
 where the supply of labour is a major part of the contract
 where the buyer provides most of the materials for the goods
 where the goods are bought for personal or household use
 where the goods are sold by auction
 where the sale relates to certain specific restricted products such as electricity,
aircrafts and investments.
ICC Incoterms
 standard terms of trade which parties can use in cross border contracts
 the terms set out rules in connection with paying for things such as delivery,
import and export duties, insurance and freight costs.
Islamic finance
The rule against Usury
 Belief that you shouldn’t make money from money which means avoiding paying
or receiving interest.
 Generating and sharing profits allowed and therefore necessary to structure

contracts along profit sharing lines.
4
Summary notes
 For savings accounts contract structured so that customer is investor, and bank is
fund/asset manager not borrower. At end of investment period, customer’s money
returned with profit earned, less management fee payable to bank.
 For loans contract structured so bank purchases relevant asset (e.g. property) on
behalf of customer and then sells asset at profit to customer. Customer pays bank
in instalments, and bank owns asset until final payment made.
UK law supporting principles of sustainability
Sustainability principle Legislation introduced
Environment Environment Act 2021
New powers to set binding targets,

including for air quality, water, biodiversity,
and waste reduction.
Social Equality Act 2010
Governance Bribery Act 2010
Proceeds of Crime Act 2002
Money Laundering Regulations 2017
Data Protection Act 2018
5
Law
Contract Formation
Types of contract
Void Voidable Unenforceable

No contract at all Can be set aside Valid contract but can’t be
enforced
 Illegal contract  Lack of capacity  Contract not in correct form
 Lack of free will
 Contract made due
to misrepresentation
It will be important to apply judgement in ascertaining whether a contract

is unenforceable. Making the wrong decision could lead to a breach of
contract claim.
Elements of a
contract
Agreement Consideration Intention
Offer
Acceptance
Offer
 Definite promise to be bound on specific terms
 Made by an offeror to an offeree
– Offeree can be one person, group of people, or the whole world
 Not an offer
– Invitation to treat (an invitation to someone to make an offer)
– Statement of intention
– Request for information
6
Summary notes
Termination
of an offer
Counter- Failure of
Rejection Lapse Revocation
offer condition
Acceptance
 Unqualified agreement to all terms of the offer
 Can be verbal, in writing or inferred by conduct
 Offeror cannot dictate that silence will be acceptance
 Acceptance must be communicated unless offeror dispenses with that

requirement.
Intention to create legal relations
 Presumption based on type of relationship
– Social/domestic – presume no intention
– Commercial – presume intention
 Presumption may be rebutted if clear evidence to the contrary
Consideration
 What each party gives/agrees to give
 Good consideration
– Executed – act performed at time of agreement
– Executory – promise to do something in the future
– Sufficient not adequate – as long as has value, doesn’t matter if isn’t equal
– Forbearance/waiver of existing rights
7
Law
 Not good consideration
– Past – already performed at time of agreement
– Performance of an existing statutory duty – unless exceeded
– Performance of an existing contractual duty; unless
Exceeded
New contract with third party
– Waiver of existing debt (part payment) unless
Alternative consideration
Bargain between creditors
Third party part payment
Terms
Implied
Express
– By custom
– Specifically agreed
– By statute
– Must be clear
– By the courts
Understanding how gaps in express terms can be filled in with implied

terms is an important professional skill under the area of Structuring
problems and solutions.
Privity of contract
 Only the parties to the contract can enforce/be sued under it
 Exceptions
– Agency law
– Contract (Rights of Third parties) Act
8
Summary notes
9
Law
Discharge of contract
 By performance
– Fulfilling contractual duties
– Should be complete and exact
– Courts may accept substantial performance
 By frustration
– Forces outside the contract make performance impossible
 By breach
– Contractual duties not properly performed
– Actual breach – at time of contract
– Anticipatory breach – before time performance is due
Remedies
 Damages – available as a right
Unliquidated Courts to detemine
Genuine attempt to
value
Liquidated
Types of damages
Amount enforceable
Excessive/arbitrary
Penalty clause
amount not normally
awarded*
* amount in penalty clause may be awarded if felt excess in proportion to losses

suffered.
10
Summary notes
Valuing Unliquidated Damages
 Remoteness
– Only award for losses which are natural or in both parties’ contemplation
 Measure of loss
– Expectation interest – what position did the claimant expect to be in?
– Reliance interest – what has the claimant lost out on by relying on the
contract being performed?
– Parties have a duty to mitigate their losses
 Equitable remedies – available at discretion of court
– Specific performance
– Rescission
– Injunction
 Types of injunction
– Mandatory
– Prohibitory
– Asset freezing
Exclusion clauses
 Limit/exempt liability
 Must be incorporated
– By signature
– By bringing to other party’s attention at/before time of agreement
 Wording will be interpreted against person trying to rely on them
 Must fulfil conditions of legislation
– Unfair Contract Terms Act – in all contracts between businesses except those
specifically excluded
– Consumer Rights Act – in contracts where one party is a consumer
11
Law
Under the professional skill of Applying judgement when considering

whether an exclusion clause has been validly incorporated into a contract, it
is important to consider only the information that is relevant to the decision.
12
Summary notes
Negligence
Claimant needs to prove:
 Duty of care owed
 Breach of duty
 Breach caused the damage suffered by claimant
Duty of care
Owed to
 Neighbour
– Person claimant would reasonably foresee as affected by their actions
Reasonably
foreseeable
Public Sufficient
policy Tests proximity
Fair, just and

reasonable
In determining whether a party owes another a duty of care, applying the

four tests above is a good way to apply the professional skill of
Structuring problems and solutions.
13
Law
Breach of duty
Judged as a ‘reasonable person’:
 If have particular skill, reasonable man with that skill
 Level of skill not important
 Judged against current practice at the time
 Courts will consider advantage and risk
 In emergency lower care may be accepted
 Higher care required for more vulnerable claimant
Usually up to claimant to prove breach unless ‘res ipsa loquitur’ applies.
Loss caused by breach (causation)
 Harm cause to claimant was caused by defendant’s breach
 Courts use ‘but for’ test (but for defendant’s actions would claimant have suffered
the harm)
 No claim if loss is too remote
Professional advice
 Can claim for purely financial losses if there is a ‘special relationship’ between
parties
– Defendant in business of giving professional advice
– Advice given in business context
– Knows, or should know, claimant would rely on it
Remedies for damages
 Damages to put claimant in position would be in if negligence hadn’t happened.
 Damages usually available for
– Physical damage
– Financial loss due to physical damage
– Purely financial losses only if a special relationship exists between the

defendant and the claimant
14
Summary notes
Defences
 Contributory negligence
– Claimant partly responsible for losses suffered
– Damages reduced.
 Volenti non fit injuria
– Claimant freely consented to risk of harm
– No damages awarded
 Exclusion clauses
– Can limit/exclude liability
– Must pass legal tests for exclusion clauses.
Vicarious liability
One person can be liable for another’s actions.
Examples:
– Employer for employee acting in course of business
– Principal for agent acting within limits of his/her authority
– Partnership for partners acting in course of business
15
Law
Agency
Creation of
agency
Agreement Estoppel Necessity Ratification
Express
Implied
The professional skill of Assimilating and using information asserts the

importance of considering business context, in particular what is more
relevant as modern technology develops.
Duties of an agent
 Accountability
 No conflict of interest
 Performance
 Obedience
 Skill
 Personal performance
 Confidence
Rights of an agent
 Indemnity
 Remuneration
 Lien
16
Summary notes
Authority of an agent
 Actual express
 Actual implied
 Ostensible/apparent
Liability
 Disclosed principal – principal is liable unless it is clear that the parties intended
otherwise.
 Undisclosed principal – agent is liable unless the third party becomes aware of the
principal’s existence, in which case they can choose who to sue.
17
Law
Types of trade
Sole trader
 Single person owns and runs the business
 All profits and losses belong to him/her.
 Fully liable for the debts of the business
General partnership
 Two or more persons
 Carrying on a business
 View to a profit
Partnership Agreement
 Choice of the business
 If have agreement acts as contract between partners
 If not follow rules of PA1890
– Profits shared equally
– All partners involved in management of business
– Change in business must be unanimous
– New partners must be agreed by unanimous decision
– Partners are expelled by majority decision
Authority
All partners are agents of the firm and can bind all the partners in contract if they are
acting within their authority.
18
Summary notes
Liability
 General
– All partners are jointly and severally liable for debts
 New partners
– Liable for debts incurred since they became partner
 Retiring partners
– Liable for debts incurred until retired
– Must give notice of retirement
– Can enter into indemnity agreement with remaining partners
19
Law
Limited liability partnerships
 Must be registered with Registrar
– Submit Incorporation document
 Separate legal entity
– All partners can be involved in the running of the business
– All partners have limited liability (to capital contribution)
– All partners can be agents of the firm (unless right is excluded)
– If want to dissolve must pass agreement to do so
– Must publish annual accounts and file confirmation statement
20
Summary notes
Companies: consequences of incorporation
Veil of incorporation
Meaning
 Company is a separate legal person
Consequences of the veil
Company has Owns Seperation of

Perpetual Limited
contractual property in management
succession liability
capacity own name & control
Lifting the veil
Case law examples
 Group of companies where subsidiary acts as agent of parent
 To reveal national identity
 Sham companies
 Quasi-partnerships
Statutory examples
 Disqualified directors
 Fraudulent trading
 Wrongful trading
Under the professional skill of Applying judgement, in the assessment

you may need to apply the rules of lifting the veil of incorporation to
decide whether or not any of the situations are where the veil can be
lifted.
21
Law
Types of company
Companies
Private Public
Limited by
Unlimited Limited
shares
By shares
By guarantee
Formation
 Documents to send on registration are:
1 Memorandum of association
2 Application
3 Statement of capital and initial shareholdings
Or
4 Statement of guarantee
5 Statement of proposed officers
6 Statement of compliance
 Registrar checks documents and issues Certificate of Incorporation.
 Company exists from the date on this. Public companies must also gain trading
certificate before commencing trade.
22
Summary notes
Pre-incorporation contracts
 Contract made on behalf of company before registration
 Company is not liable, promoter is
 Company cannot ratify
 Promoter can avoid issue in number of ways
– postpone finalisation
– buying off-the-shelf company
– entering into agreement of novation/indemnity
 Promoter owes fiduciary duty to the company
Articles of association
 Company can use own articles or model articles
 Legal effect
– bind company to shareholders and vice versa
– outsiders cannot enforce rights given in articles
 Changing
– special resolution
– unless entrenched (set rules given for changing)
Secretary
 Requirement for public companies
 Chief administrative officer
 Must be qualified
 Can bind company in administrative contracts
23
Law
Accounting
records
Strategic Annual
report accounts
Record keeping
Confirmation Directors
statement report
Auditors
report
 In quoted companies must also provide directors remuneration report.
 Under the Companies (Miscellaneous Reporting) Regulations

Disclosures companies must report on
– Engagement with key stakeholders
– How directors have considered impact of business on

stakeholders when carrying out their duty to promote the success
of the company
– Corporate governance arrangements during the year
– Additional information on directors’ remuneration.
24
Summary notes
Companies: ownership and Management
Directors
 Types of director
– De facto
– De jure
– Shadow
– Alternate
– Executive
– Non-executive
– Chairman
– Managing director
– Chief executive officer
 Appointment
– Shareholders by ordinary resolution
– Directors on casual basis
– On incorporation
 Vacation of office
– Death/winding up
– Removal by shareholders (ordinary resolution with special notice)
– Resignation
– Required by articles
– Disqualification
25
Law
Automatic
Possible disqualification disqualification
Up to 15 years Up to 5 years 2 to 15 years
– Conviction of a serious
offence
– Wrongful trading
– Fraudulent trading Persistant breach Found unfit to be a
– In public interest of CA06 director
– Breach of competition
law
Authority of directors
Express Implied Ostensible
Given in articles/ Board act as if has

Due to position
meeting power to bind
 Duties (set down in Companies Act)
– Act within powers and use powers for purpose given
– Promote success of the company (acting in good faith for benefit of the
members as a whole)
– Exercise independent judgment
– Exercise reasonable care, skill and diligence
– Avoid conflict of interest
– Not accept benefits from third parties
– Declare an interest in a proposed transaction
26
Summary notes
 Duties owed to the company as a whole. Up to the company to bring an action for
breach.
 Consequences of breach:
– Director may have to make good losses
– Company may be able to recover property transferred due to the breach
– Injunction may be granted to stop breach
Fraudulent v wrongful trading
 Fraudulent
– Trading with the intention to defraud
– Criminal offence (whether company solvent or not) and civil liability (only if
company is insolvent)
 Wrongful
– Trading when directors should have known there was no reasonable

prospect of avoiding insolvency.
– Judged as a reasonably diligent director
– Civil liability only
27
Law
Members
 Rights:
– Receive a copy of annual accounts
– To requisition a general meeting
– To appoint a proxy
 Powers
Members must approve the following:
– Service contracts for two years or more
– Substantial property transactions (more than £100,000 or more than £5,000

and more than 10% of company’s net assets)
– Loans to directors
– Ex gratia payments for loss of office
Majority rule and minority protection
General rule in company law
 If company suffers harm it is up to company to bring an action
But
 Any member can bring a derivative action on behalf of the company in respect of
negligence, breach of duty or breach of trust by a director.
Member must prove:
– acting in good faith to promote the success of the company
– if not court will not grant right to bring the claim.
 Any member can bring a claim for unfairly prejudicial conduct.
Member must prove
– actions of company were negatively affecting rights of members.
– court may grant such remedy as they see fit.
 Any member can bring an action for just and equitable winding up.
– court will only grant if no other remedy possible
28
Summary notes
Meetings and resolutions

Annual General Meeting General meeting Class meeting
Public companies must hold Held when requisition Meeting of holders of
once a year in 6 months after received from person with class of shares
year end right to do so
No requirement for private Public companies must
companies. hold if ‘serious loss of
capital’
21 days’ notice required 14 days’ notice required 14 days’ notice required
unless all members agree to unless 90% agree to less
less
Normal business includes Business set by person Held to discuss variation
approving accounts, declaring requesting meeting of class rights
dividend, appointing auditors
and directors
Resolutions
Special Ordinary Written
(private companies only)
>= 75% >50% Same % as would require if
taken in meeting
Used when required by Used when special not Can be used for any decision
legislation or articles required except
– Removal of auditor
– Removal of director
29
Law
Companies: finance
Shares
Classes
 Ordinary
– Equity shares
– Full voting rights
– Only receive dividend if declared by directors
– Usually last repaid on liquidation but share in surplus assets
 Preference
– Cumulative dividends normally paid first

– Dividend at fixed rate
– Usually issued with priority rights which allow capital to be repaid before
ordinary shareholders on liquidation
 Redeemable
– Include a term for company to buy back on fixed date

 Class rights
– Need special resolution to change (unless entrenched then follow set

procedure)
– Courts may cancel change if ‘unfairly prejudicial’ and 15% of shareholders
appeal
Issue/Allotment
 Directors require authority by
– Articles or
– Ordinary resolution
 Pre-emption rights
– Rights of shareholders to be offered new shares first
– Statutory right if new equity shares are issued for cash
– Articles can disapply these rights.
30
Summary notes
Issue at
Discount Premium
treat as partly premium is a non-

disallowed allowed distributable
paid shares reserve
Under the professional skill of Assimilating and using information it

would be important to understand whether a client would make use of a
share premium account in the future.
 Payment
– Cash or non-cash consideration
In public company
 Subscribers must pay cash
 Can’t pay by way of work or services
 Nominal value must be 25% paid-up plus all of share premium
 Non-cash consideration must be independently valued and received within five
years
Reduction of share capital
 Procedure
Public Company Private Company
Special resolution
Court confirmation Solvency statement
If nominal value below £50,000 must
re-register as private
New statement of capital
Resolution, confirmation and statement of Resolution, solvency statement and
capital to be filed statement of capital to be filed
31
Law
Purchase and redemption of own shares

Redemption Purchase
If redeemable shares If non-redeemable
Funding from distributable profits
(private companies can make up the balance using a PCP)
Financial assistance for purchase of own shares
 Can only be given if:
– A permitted transaction (e.g. money-lending company in course of business,
employees share scheme, loan to employee in good faith)
– Main purpose of transaction is not to provide funds for purchase of shares
Dividends
 Must be paid out of distributable profits
– Accumulated realised profits less
– Accumulated realised losses
Loan Capital
 Debenture
– Written acknowledgement of debt
– Creates a creditor
– Contractual right to interest
 Charges
– Security given with debt
Types of charges
Fixed Floating
On specific No freedom to On class of Free to sell until

asset sell assets crystallisation
Priority of charges
 Fixed before floating
 Registered before unregistered (must register within 21 days)
 If equal, earliest first
32
Summary notes
Companies: summary of key resolutions
For your exam it is important that you learn the resolutions required in a company for
shareholders to approve various decisions. The summary below is designed to help
you with this.
Ordinary resolution required for:
 Appointment of the auditor
 Appointment of directors
 Ratification of breach of duty by directors
 New issue of shares
 Subdivision or consolidation of shares
 Redemption of redeemable shares
 Voluntary liquidation if so provided for in the articles
 Application for appointment of an administrator
 Approval of a CVA by members (special resolution is required by creditors)
Special resolution required for:
 Re-registration of an unlimited company to a limited company
 Change of company name
 Change of the articles of association (unless entrenched)
 Voluntary liquidation if not provided for in the articles
 Change of class rights (needs 75% of that class!)
 Disapplication of statutory pre-emption rights
 Reduction of share capital
 Use of permissible capital payment
33
Law
Ordinary resolution with special notice required for:
 Removal of a director
 Removal of an auditor
100% approval required for:
 Re-registration of limited company to unlimited
34
Summary notes
Insolvency
Corporate Insolvency
Administration
 Aim to rescue company as a going concern.
 Administrator can be appointed by
– Company
– Directors
– Qualifying floating charge holder (QFCH)
– Court on receipt of application from company, directors or one or more
creditors
 Consequences of being in administration
– Administrator takes over powers of directors
– Company continues to trade
– Moratorium in place
– Assets subject to floating charge can be sold
– Assets on fixed charge can be sold with approval of the court
– Contracts of employment can be terminated
Receivership
 Secured creditor with a charge over land usually has the right to appoint a
receiver
 Receiver can sell the charged asset to pay off the creditor’s debt
Company Voluntary Arrangements
 Alternative to winding up
 CVA is an agreement between company and its creditors setting on which debts
are to be paid, and in what proportion
 Proposed CVA must be approved by
– Members by simple majority
– Creditors by deemed consent/other approval method
 If approved CVA is binding on all unsecured creditors
 When directors wish to propose a CVA they can apply for a short moratorium to
allow time to prepare.
– This initially lasts for 28 days, though can be extended to two months.
Liquidation
35
Law
Voluntary Compulsory
Resolution to wind up Court order to wind up
Court appoints Official

Members Creditors
receiver
Solvent company Insolvent company Replaced at later date
Liquidator reports to
Statement of solvency Statement of affairs
the court
Liquidator reports to Liquidator reports to

members creditors & members
In a scenario question you may need to apply the professional skill of

Structuring problems and solutions and recommend the most
appropriate solution to the situation in hand.
Personal insolvency
Individual voluntary arrangements
IVA is an alternative to bankruptcy, whereby an individual makes an agreement with

their creditors
 Individual appoints a nominee
 Nominee must gain creditor approval
 Creditors accept or reject proposals
 If accepted supervisor appointed
 Upon completion of IVA all liabilities within are discharged
36
Summary notes
Bankruptcy
 Petition is received online
 If the adjudicator is happy that the individual cannot pay their debts, they will pass
a bankruptcy order
 Once order passed individual becomes an un-discharged bankrupt
 Trustee is appointed who is appointed to administer the bankruptcy
 The trustee must require the creditors to prove their debts and he will rank them
according to the prescribed order
Deemed consent
 Creditor approval for most actions under insolvency law is now usually gained by
the deemed consent process:
– Directors/nominees write to creditors with proposals
– Unless 10% object the proposals are deemed to be accepted
37
Law
Criminal law
Whistleblowing
Workers are protected from dismissal/suffering a detriment if they make:
 A qualifying disclosure of information
 In the public interest
 To the appropriate person
If disclosure not made in good faith any compensation can be reduced by up to 25%.
Fraud
 Involves dishonesty and intention to make a gain/cause a loss to another.
Offences
Fraud by failure to
Fraud by false Fraud by abuse of
disclose
representation position
information
 It is also an offence to possess, make or supply any article used in fraud.
– This includes any program or data held in electronic form.
38
Summary notes
Phishing
Webcam
Ad clicker
manager
Cyber
crime
Screenshot
File hijacker
manager
Keylogging
 Computer Misuse Act 1990 creates offences of
– Unauthorised access to computer material
– Unauthorised access with the intent to commit/facilitate further offences
– Unauthorised access with the intention to impair performance of computer.
– Unauthorised access causing damage, or risk of damage to computer

systems
– Making, supplying or obtaining any articles for use in any of the above
offences.
Insider dealing
 Requirements:
– Insider – employee/officer or someone who gets the information from one of

these
– Inside information – information relating to specific shares which is not yet

public but if it was would affect the price of shares
39
Law
 Offences:
– Dealing in shares or securities in which have inside information
– Encouraging others to deal in securities on which you have inside

information
– Disclosure of inside information other than in proper performance of

employment
 Defences
– Didn’t expect to lead to a profit
– Thought information was widely disclosed
– Would have done it anyway
 Market Abuse
– Similar to Insider dealing but cases heard under civil rather than criminal law
– Lower standard of proof i.e. ‘on balance of probabilities’ rather than ‘beyond
reasonable doubt’
– Wider ranging than insider dealing
– Covers any situation where individual has failed to observe standard of

behaviour that could reasonably be expected of a person in their position in
relation to the market
Bribery
 Offences for an individual
– Giving/offering a bribe to induce a person to perform a relevant function

improperly
– Requesting/receiving a bribe to perform a relevant function improperly
– Bribing a foreign official to gain a business advantage
If found guilty can be subject to ten years’ imprisonment and/or fine.
 There is also corporate liability if a company fails to prevent bribery.
– If found liable company/LLP can be fined
– Can avoid if show put adequate procedures in place to mitigate risk
40
Summary notes
Money laundering
The process by which criminal property is concealed within a legitimate business
 Laundering – being involved in concealing criminal property within a legitimate

business.
 Inciting another person to launder
 Failure to report (relevant persons only) – not making a report to National Crime
Agency or firm’s Money Laundering Reporting officer when have a reasonable
suspicion of money laundering
 Making a disclosure which may prejudice a money laundering investigation

Under the Money Laundering Regulations (MLR) 2017 relevant persons must carry out
Customer Due Diligence (CDD) measures when they:
 Establish a business relationship
 Carry out an occasional transaction
 Suspect money laundering or terrorist financing
 Doubt the veracity or accuracy of information obtained
Failure to comply with the MLR is a criminal offence punishable by up to two years’
imprisonment and an unlimited fine.
When coming to a conclusion on whether money laundering is happening
you need apply the professional skill of to step back and use all of your
experience and the available evidence under the professional skill of
Concluding, recommending and communicating.
Law and Ethics
If a potential criminal activity is suggested a student should consider:
1 Consulting with/reporting to any person where there is a legal requirement
2 Referring to guidance from ICAEW
3 Obtaining legal advice
4 Having discussions with work senior
5 Seeking advice from ICAEW Ethics Advisory Service
41
Law
Integrity
Confidentiality Objectivity
Ethical
principles
Professional Professional
behaviour competence
42
Summary notes
Employment law
Employment status
Employee Self employed
Contract of service Contract for services
Multiple test
Personal service Freedom to delegate
Control Provides own tools
Mutuality of obligations More financial risk
Wears uniform Able to work for more than one employer
Paid net of tax Paid gross
 Implications of being employed rather than self-employed:
– Can claim for wrongful dismissal
– Granted statutory protection (redundancy pay, protection from unfair

dismissal, health and safety)
– Preferential creditor on insolvency
– Implied terms in contract
– Employer has vicarious liability for worker’s actions
– Payment of class 1 NICs by employee and employer
In the examination you may need to decide whether someone is an

employee or independent contractor by applying the professional skill of
Assimilating and using information.
Workers
 Fall short of being recognised as employees, but provide work for an organisation,
so they do not fall into the independent contractor category either.
 Law provides some protection to workers (e.g. payment of at least minimum

wage) but not all benefits given to employees (e.g. protection against unfair
dismissal).
43
Law
Employment contract
 Employee is entitled to written statement of particulars on or before the first day of

employment.
 This isn’t necessarily the contract, though is evidence of what is in it.
 Contract is made up of express and implied terms.

Implied terms from common law
Employee’s duties Employer’s duties
Faithful service Pay reasonable remuneration
Obey lawful and reasonable orders Indemnify employees
Not to misuse confidential information Take reasonable care for health and
safety
Exercise reasonable care and skill Provide work if wages dependent on this
Give personal service Provide an accurate reference if one is
provided
Mutual trust Not abuse confidential information
Mutual trust
Implied terms from legislation
Pay equal pay to both genders
Ensure good health and safety of
employees
Equality Act 2010 - not discriminate
against an employee because of a
protected characteristic (e.g. age,
disability, sex, race)
Comply with social security and work-life
balance laws
Notice
Minimum legal notice periods required by employer (contract may specify more)
Continuous employment Minimum notice
1 month 1 week
2 years 2 weeks
Every extra complete year until 12 years + 1 week
Over 12 years 12 weeks
44
Summary notes
Unfair Dismissal
Employee must prove
Two years
Dismissed
service
Employer ended
contract
Constructive
dismissal
 Employer must prove:
– Fair reason
Capability or qualifications
Misconduct
Redundancy
Statutory restriction
Some other substantial reason
– Acted reasonably in dismissal procedure
If not award may be increased by up to 25%
Automatically unfair dismissal
 If employee dismissed for automatically unfair reason for dismissal no need for
two years’ service. These are:
– Pregnancy/maternity/paternity leave
– Spent conviction
– Trade union membership
– Transfer of an undertaking
45
Law
– Taking steps to protect himself/others from danger
– Seeking to enforce statutory rights
– Making a protected disclosure
Remedies
Reinstatement Re-engagement Compensation
Order to give old job back Order to give new Made up of three elements
comparable job
Usually only granted if practical and employee wants it  Basic award
 Compensatory award
 Additional award
Wrongful Dismissal
 Employer dismisses employee in breach of employment contract
 Usual remedy is damages
Summary Dismissal
 Dismissal without sufficient notice
 Usually wrongful unless fundamental breach of contract by employee or employee

accepts less
Redundancy
 Employee dismissed because no longer work available
 Employee entitled to redundancy payment. To claim must prove
– He or she is an employee
– Continuous employment of two years
– Dismissed by virtue of redundancy
 There is no entitlement to a payment if the employee
– Is guilty of misconduct
– Refuses a reasonable offer to renew contract
– Unreasonably refuses an offer of suitable alternative employment
46
Summary notes
47
Law
Data protection
 Data subject
– Individual to whom personal data relates
 Data controller
– Individuals, partnerships or companies who determine the purpose and
means of processing data
 Data processor
– responsible for processing personal data on behalf of a data controller.
 Data must be processed in line with the data protection principles
– Lawfulness, fairness and transparency
– Purpose limitation
– Data minimisation
– Accuracy
– Storage limitation
– Integrity and confidentiality
 Data subjects have certain rights regarding their data:

– To be informed
– Access
– Rectification
– To erasure
– To restrict processing
– To data portability
– To object
– Automated decision making
48
Summary notes
49
Law
Intellectual property (IP)
Protection of IP
Registered
Copyright Design rights Trademark Patents
design
Automatic Automatic If granted If granted If granted
Lasts 25-70 Lasts 15 Lasts 10 Lasts 25 Lasts 20

years years years years years
50

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Paper background P.4

Specification grid P.4

L4 Professional accounting or taxation technician apprenticeship

L7 Accountancy or taxation professional apprenticeship standard 3

Chapter 1 Legal principles and international law 5

Chapter 2 Contract formation 21

Chapter 3 Termination of contract 65

Chapter 5 Agency 135

Chapter 6 Types of trade 159

Chapter 7 Companies: The consequences of incorporation 183

Chapter 8 Companies: Ownership and management 231

Chapter 9 Companies: Finance 271

Chapter 10 Insolvency law: Corporate and personal 313

Chapter 11 Criminal law 349

Chapter 12 Employment law 381

Chapter 13 Data protection and Intellectual property law 421

Specification grid for Law

Each chapter contains:

 Test your understandings

Important topic areas, key to your success in the examination.

Test your understanding

Exam technique point

Knowledge What is required?

Business Financial information is an outcome of an organisation’s

Skills What is required?

Communication Effectively communicate relevant information across the

Behaviours What is required?

Professional Demonstrates an attitude that includes a questioning mind,

Knowledge What is required?

Business Demonstrate knowledge of key business objectives and

Legislation Understand, interpret and apply the legislation, standards and

Skills What is required?

Business insight Influence the impact of business decisions on relevant and

Problem solving Evaluate information quickly and draw accurate conclusions.

Communication Communicate in a clear, articulate and appropriate manner.

Ethics and Identify ethical dilemmas, understand the implications and

Behaviours What is required?

Adds value Anticipate an individual’s organisations future needs and

Continuous Take responsibility for their own professional development by

Flexibility Adapt approach to assist organisations and individuals to

Professional Apply a questioning mind to conditions which may indicate a

Chapter learning objectives

Upon completion of this chapter you will be able to:

Criminal law versus civil law

Scope International law Obligations

Environment Sustainability Governance

1.1 Criminal law versus civil law

Purpose – the enforcement of Purpose – to settle disputes between

Object – to regulate society by the Object – usually financial compensation to

Test your understanding 1

B The aim of the criminal law is to punish offenders.

C The aim of the criminal law is to provide a means whereby injured

This question allows you to demonstrate your knowledge of regulation

1.2 Sources of law

There are two main sources of law in England and Wales:

 Statute law – laws made by Parliament through direct legislation

Statute law (i.e. legislation) takes precedence over case law.

Doctrine of judicial precedent

Test your understanding 2