Professional Documents
Culture Documents
PARTNERSHIP 49
COMPANY FORMATION 58
CONSTITUTION OF A COMPANY 63
SHARE CAPITAL 68
Economic systems are the means by which countries and governments distribute resources and trade
goods and services.
POLITICAL SYSTEMS
LEGAL SYSTEMS
Legal system refers to a procedure or process for interpreting and enforcing the law.
Law is a system of rules that govern a society with the intention of maintaining social order, upholding
justice and preventing harm to individuals and property.
International Law: Body of legal rules governing interaction between sovereign states and the
rights and duties of the citizens of sovereign states towards the citizens of other sovereign states.
National Law: Domestic law, which can also be called national law or municipal law, come from
legislature and customs and regulates rights and duties between individuals and the state.
Conflict of Laws: A specialized branch of law which resolves cases which have an element of
conflicting foreign law.
Common Law: Common law system developed in England. It arose out of traditional customs
and practices which latter turned out to be very rigid and unfair. Common law is based upon
amalgamating local customary laws into law of the land. Remedies under common law are
monetary such as damages.
Sharia Law: It is the code of law derived from the Quran and from the teachings and examples
of Mohammed (P.B.U.H).
Criminal Law: Criminal law involves penal consequences which may result in conviction
resulting in capital punishments or a specified time in prison. In criminal law the burden of proof
rests with the prosecution which must prove its case beyond reasonable doubt. In jurisdiction
of UK the criminal case is referred to as R vs Smith in which R represents the Crown and “R”
signifies Regina the Queen.
Civil Law: Civil law governs private disputes between two or more persons. It does not entail any
penal consequences; rather liability is discharged by way of payment of damages or other
appropriate remedy. In civil law the case must be proved on the balance of probabilities. Civil
cases are referred to by the names of the parties involved in the dispute, for example, Smith v
Jones. In civil law, a claimant sues (or ‘brings a claim against’) a defendant.
COMMON LAW
The common law is the body of law formed through court decisions, as opposed to law formed
through statutes or written legislation. A common law system is the system of jurisprudence
that is based on the doctrine of judicial precedent, the principle under which the lower courts
must follow the decisions of the higher courts, rather than on statutory laws.
The common law legal system originated in England, was later adopted in the United States and
Canada and is in place in most Commonwealth countries. While the English common law
system has its roots in the 11th century, the present system has evolved over the past 350 years,
with judges basing their decisions on those made by predecessors.
a. Common Law & Equity: Common law is based upon merging local customary laws into law of
the land. Remedies under common law are monetary such as damages. The concepts of equity
developed in later years which were based on fairness. Equity steps in whenever monetary
compensation is not an adequate remedy. Specific Performance, Injunction, rescission are the
main equitable remedies. Whenever there is a conflict between common law and equity then
equitable principles would prevail.
b. Statute: This is law produced through the Parliamentary system. It upholds the doctrine of
parliamentary sovereignty within the United Kingdom means that Parliament is the ultimate
source of law and, at least in theory, it can make whatever laws it wishes.
c. Customs: Local customs also act as a source of law.
d. European Union Law: Since joining the European Community, now the European Union, the
United Kingdom and its citizens have become subject to European Union law. In areas where it is
applicable, European law supersedes any existing United Kingdom law to the contrary
Case law is judge made law which consists of decisions of the courts. Once a legal principle is
decided it is known as a Judicial Precedent.
Doctrine of Judicial Precedent: This means that the judge is bound to apply a decision from an
earlier case to the facts before him. This doctrine is known as stare decisis.
Judicial Present can only be considered as a binding precedent if:
a. It is a Ratio Decidendi. The ratio decidendi of a case may be understood as the statement of
the law applied in deciding the legal problem raised by the facts before a judge.
b. The material facts are similar
c. Decision must have been by a superior court
STATUTORY INTERPRETATION:
It is the process of interpreting and applying legislation. In most cases, there is some ambiguity or
vagueness in the words of the statute that must be resolved by the judge. To find the meanings of statutes,
judges use various tools and methods of statutory interpretation.
Literal Rule: Is a type of statutory interpretation, which dictates that Acts are to be interpreted
using the ordinary meaning of the language of the Act.
Purpose Approach: Is a theory of statutory interpretation that suggests that courts should
interpret legislation in light of the purpose behind the legislation keeping in view the ordinary,
literal and grammatical sense of the words.
Contextual Rule: Words in statute should be interpreted keeping in view their context.
The civil law system is a codified system of law. It takes its origins from Roman law. Features of a civil
law system include:
There is generally a written constitution based on specific codes (e.g., civil code, codes
covering corporate law, administrative law, tax law and constitutional law) protecting basic rights
and duties; administrative law is however usually less codified and administrative court judges
tend to behave more like common law judges.
Only legislative enactments are considered binding for all. There is little scope for judge-made
law in civil, criminal and commercial courts, although in practice judges tend to follow previous
judicial decisions; constitutional and administrative courts can nullify laws and regulations and
their decisions in such cases are binding for all.
In some civil law systems, e.g., Germany, writings of legal scholars have significant influence on
the courts.
A civil law system is generally more prescriptive than a common law system. However, a government will
still need to consider whether specific legislation is required to either limit the scope of a certain
restriction to allow a successful infrastructure project, or may require specific legislation for a sector.
As regards civil law systems, the main source of law is the various codes which provide the law relating to
particular areas of activity. Such codes differ from United Kingdom legislation in that they are written in
broad terms in the pursuit of general principles and the implicit power of the courts to make, or change,
the law is reduced.
Such systems also tend to operate with written constitutions, which provide a fundamental basis for legal
activity and allows the courts to challenge any legislation that they decide is contrary to the constitution.
It is the code of law derived from the Quran and from the teachings and examples of Mohammed
(P.B.U.H).
The main source of Sharia law is the Quran, which is accepted as the revealed dictate of Allah as revealed
to his prophet Muhammad (P.B.U.H). In addition the Sunnah, which is derived from the sayings of the
Prophet (the Ahadith), is also a primary source of law in Sharia systems
As secondary sources of law, Sharia systems refer to the Madhab, which is the opinions of leading early
jurists on the meaning and effect of Sharia law. Such systems also have written constitutions and these
specifically subordinate law to the religious rules.
After the Prophet’s death, there was a need to develop a system of jurisprudence that would serve
the dual purpose of safeguarding the system of Islam and to deal with previously unprecedented
matters, not dealt with directly in the Quran or the Hadith texts. This necessary process gave rise
to the development of the science of understanding and interpreting legal rulings known as fiqh.
Fiqh in Arabic means ‘knowledge’, ‘understanding’ or ‘comprehension’.
The scholars of fiqh generated a body of additional rulings. The tools involved in giving life to this
third body of rules were:
a. Ijma’ (consensus)
The universal consensus on religious issues of the scholars of the Muslim community as a
whole can be regarded as conclusive Ijma.
b. Istihsan (legal extrapolation)
Istihsan is a method of exercising personal opinion (ray) in order to avoid any rigidity and
unfairness that might result from literal application of law. Istihsan as a concept is close to
equity in western law.
c. Ijtihad (interpretation)
Ijtehaad is the process where the scholars of Islam strive to find a solution to an issue on
which the Quran and Sunnah are silent.
d. Qiyas (analogy)
Qiyaas is a process whereby a clear ruling of the permissibility or impermissibility of an act or
thing is applied to an issue closest related to it.
a. Maslahah Mursalah
Maslaha Al Mursalah is a concept in traditional Islamic Law. The world Maslaha is taken from
the root word “Saluha” or “Salaha” which means to be good or to repair or to do good. Istislah
on the other hand refers to the methods used by Muslim jurists to solve problems (a good deed)
especially when there are no explicit guidance from the Qur’an and the Sunnah on such
matters.
b. Urf
ʿUrf is an Arabic Islamic term referring to the custom, or 'knowledge', of a given society. To be
recognized in an Islamic society, ʿurf must be compatible with the Sharia law. When applied,
it can lead to the deprecation or inoperability of a certain aspect of fiqh.
c. Istishab
This term refers to a situation in Islamic jurisprudence where the jurist presumes that the
situation or a fact continues or discontinues to hold applicable until the contrary is proven. A
scholar can use the concept of istishab in deducing a ruling if other proofs are absent.
Ijtihad:
Pre-requisits to be a Mutahid:
a. Practicing Muslim
b. Honest and reliable person
c. Knowledge of Quran
d. Knowledge of Sunnah of Prophet (P.B.U.H)
Taqlid
Doctrine of Taqlid, requires the adherence to the legal principles established by the legal scholars
of the second and third centuries of Islam and the refusal to further develop through the use of
itjihad.
International law is the term commonly used for referring to laws that govern the conduct of independent
nations in their relationships with one another.
International trade is the exchange of capital, goods, and services across international borders or
territories. In most countries, such trade represents a significant share of gross domestic product
(GDP). However, countries enact laws to protect their domestic market and/or industry. These
laws sometimes act as a barrier to the free international trade.
The countries laws act as a barrier to free international trade in order to protect their domestic market.
The most common barriers to trade to protect their domestic market from foreign competition are tariffs,
quotas, and nontariff barriers.
a. Tariffs
A tax imposed on imported goods and services. Tariffs are used to restrict trade, as they increase
the price of imported goods and services, making them more expensive to consumers
b. Quotas
A quota is a government-imposed trade restriction that limits the number, or monetary value, of
goods that can be imported or exported during a particular time period. Quotas are used in
international trade to help regulate the volume of trade between countries
c. Non-Tariff Barriers
A nontariff barrier is a form of restrictive trade where barriers to trade are set up and take a form
other than a tariff. Nontariff barriers include quotas, embargoes, sanctions, levies and other
restrictions and are frequently used by large and developed economies.
The rules of Private International law are the outcome of different state laws which are enacted by their
legislatures. The countries in order to overcome these differences enter into treaties and conventions to
regulate their matters. For example Rome Convention1980
UNITED NATIONS
The following are some of the most important outcomes of the work conducted by
UNCITRAL:
The World Trade Organization (WTO) deals with the global rules of trade between nations. Its main
function is to ensure that trade flows as smoothly, predictably and freely as possible. The World Trade
Organisation (WTO) was set up to continue to implement the General Agreement on Tariffs and Trade
(GATT), and its main aims are to reduce the barriers to international trade. It has 164 members.
The WTO encourages free trade by applying the most favoured nation principle between its members,
where reduction in tariffs offered to one country by another should be offered to all members.
The World Trade Organization is ‘member-driven’, with decisions taken by General agreement among all
member of governments and it deals with the rules of trade between nations at a global or near-global
level.
Key objectives
Structure
Ministerial Conference
Composed of all members of the WTO, which is to meet at least once every two years
Top level decision-making body
General Council
Between sessions of the Ministerial Conference, its functions are exercised by the General
Council, made up of the full membership of the WTO
Two additional specific tasks: Dispute Settlement Body and as the Trade Policy Review
Body
Countries bring disputes to the WTO if they think their rights under the agreements are being
infringed.
Judgments by specially appointed independent panel of experts are based on interpretations of
the agreemen
Ts and individual countries’ commitments.
The system encourages countries to settle their differences through consultation. Failing that,
they can follow a carefully mapped out, stage-by-stage procedure that includes the possibility of
the ruling by a panel of experts and the chance to appeal the ruling on legal grounds.
Consensus is required for DSB’s rejection of panel’s report or appeal.
Secretariat
The International Institute for the Unification of Private Law (UNIDROIT) is an independent
intergovernmental organization established in 1926 based in Rome.
Its purpose is to study needs and methods for modernizing, harmonizing and co-ordinating
private and, in particular, commercial law as between States and groups of States.
Membership of UNIDROIT is restricted to States complying with the UNIDROIT Statute. It has
63 Member States.
UNIDROIT’s basic statutory objective is to prepare modern, and where appropriate harmonised,
uniform rules of private law understood in a broad sense.
Uniform rules prepared by UNIDROIT are concerned with substantive law rules. The rules
produced by UNIDROIT assume one of three types:
(i) Conventions These documents are designed to apply automatically in preference to a
State’s municipal law upon the completion of all the formal requirements of that State’s
domestic law for their entry into force.
(ii) Model laws These documents are designed to allow states to adopt or adapt them, when
drafting domestic legislation on the subject covered by the model law.
(iii) General principles This form is addressed directly to judges, arbitrators and
contracting parties who are, however, left free to decide whether to use them or not.
Structure of UNIDROIT:
A. Secretariat: Mainly responsible for the daily functioning and work of the organization.
B. Governing Council: Its main task is to supervise the policy of UNIDROIT and the work of the
secretariat. It has 25 elected members and a president.
C. General Assembly: It is the main decision making organ. It is responsible for
approving budge, work program and electing the governing council. The governing
council has one member representative.
Adjudication (settlement) is carried out in various forms, but most commonly occurs in the court system.
Adjudication by courts involves several different functions: the establishment of the facts in
controversy, the definition and interpretation of relevant rules of law.
Adjudication in courts starts from the court of first instance and then the appellate court (a
higher court of appeal) if the decision by the lower court is contested.
Countries have different court adjudication methods. Some countries have different courts for
criminal and civil proceedings. Some countries have a judge only system but some countries
follow the jury system like in the United Kingdom.
The court based adjudication in the United Kingdom shall be analyzed for reference purposes.
The system of courts differ according to the nature of the claim (whether a claim is civil or criminal in
nature) and also on the value of the claim (in civil cases).
a. Magistrates Court: hears minor offences. Appeal is to the Crown Court or QBD of High Court
‘by way of case stated’ on a point of law or that the magistrates went beyond their proper powers
b. Crown Court: Conducts trial of offences. Trials are conducted in the presence of jury. Appeals
can be heard by criminal division of Court of Appeal and on the point of law be heard by QBD of
High Court.
c. High Court (Queens Bench Division): Hear appeals from Crown Court/Magistrate Court
d. Court of Appeal Criminal Division: Hear appeals from the Crown Court and High Court.
e. House of Lords/Supreme Court: Hear appeals from Court of Appeal.
The essential criminal trial courts are the magistrates’ courts and Crown Courts. In serious
offences, known as indictable offences, the defendant is tried by a jury in a Crown Court. For less
serious offences, known as summary offences, the defendant is tried by magistrates; and for
Pros:
Court orders and rulings can be effective than arbitration in certain circumstances
Establishment of judicial Precedent
Cons:
INTERNATIONAL COURT:
International Courts play an important role in resolving the matters relating to conflicts of law
and enforcement of settlements.
The two main important Courts are:
The term "alternative dispute resolution" or "ADR" is often used to describe a wide variety of
dispute resolution mechanisms that are alternative to full-scale court processes.
Arbitration
Islamic Arbitration
Mediation and conciliation systems are very similar in that they interject a third party between
the disputants to mediate a specific dispute
Decisions are not legally binding
In Islam mediation is called wasta and conciliation is called soth.
The Model Law on international commercial arbitration was adopted by United Nations
Commission on International Trade Law in 1994.
Article 3 states that communication will be deemed to be delivered if it is sent to the addressee
personally or at his business or mailing address.
If the above are not possible then written communication sent at the addressee last known place
of business would be deemed to be valid.
Article 5 states that in matters governed by this Law, no court shall intervene except where so
provided in this Law.
Article 6 states that the states which adopt the law should specify the court competent to perform
functions such as of appointment of arbitrators etc.
Article 8 states that a matter which is subject to arbitration in terms of arbitration agreement is
brought before the court, the court shall refer the same for arbitration unless the arbitration
clause is null and void.
Article 8(2) arbitral proceedings can be commenced and award can be granted even if the court
proceedings have been initiated. (UN CASE 57)
The parties are free to agree on a procedure of appointing the arbitrator or arbitrators; however,
the same is subject to the following provisions of Article 11.
a. Nationality is not a bar to be an arbitrator
b. Upon failure of the parties to appoint an arbitrator court can be requested to do the same by
any party.
c. If an arbitrator fails to fulfill his duties any party can apply to the court to take action.
d. The actions taken by court in relation to b and c shall not be appealable.
e. The arbitrator appointed shall be independent and impartial arbitrator.
a. The party seeking to challenge appointment must send within 15 days a written statement of
grounds of challenge to the arbitral tribunal.
If the arbitrator withdraws from his office or if the parties agree on the termination.
If the arbitrator vacates office then a substitute arbitrator can be appointed.
The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the
existence or validity of the arbitration agreement.
An arbitration clause which forms part of a contract shall be treated as an agreement independent
of the other terms of the contract.
A decision by the arbitral tribunal that the contract is null and void shall not cause the invalidity
of the arbitration clause.
There should be equality of treatment and full opportunity to present the case.
There is a freedom to adopt procedure of arbitration subject to law of arbitration
If there is a failure of agreement on procedure of arbitration then the tribunal shall conduct the
proceedings.
Article 20: Parties can choose place of arbitration otherwise the tribunal shall select the place
Article 21:Parties can agree on commencement of proceedings or the proceedings shall start when
the referral notice is received by the respondent
Article 22: Language of proceedings can be agreed between the parties
Article 26: Arbitral tribunal can appoint experts
Article 27: Court assistance in matters of evidence can be requested
Statement of claim is made by the claimant and statement in defence shall be made by the
defendant. These statements shall be made in accordance with the time frame agreed between the
parties or as stipulated by the arbitral tribunal.
If the claimant fails to submit statement of claim within the time frame then the arbitral tribunal
shall terminate the proceedings. If the defendant defaults in submitting the statement of defence
than this shall not be treated as admission of guilt by the tribunal and will continue the
proceedings.
Subject to any contrary agreement by the parties, the arbitral tribunal shall decide whether to
hold oral hearings for the presentation of evidence or whether the proceedings shall be conducted
on the basis of documents and other material.
Plea by a party to challenge jurisdiction of tribunal shall be raised before the submission of
statement of defence.
The decision of the arbitral tribunal on its jurisdiction can be challenged within 30 days before
the court.
The arbitral proceedings are terminated by the final award or by an order of the arbitral tribunal.
The arbitral proceedings can be terminated by the order of arbitral tribunal if:
a. Claimant withdraws his claim
b. Parties mutually agree to terminate proceedings
c. Arbitration has become unnecessary
The arbitral tribunal may, at the request of a party, order any party to take such interim measure
of protection as the arbitral tribunal may consider necessary in respect of the subject matter in
dispute.
Making of Award
Article 28: Decision of the tribunal shall be based upon the rules of law chosen by parties
Article 28: If rules not chosen by parties then the tribunal shall apply law it sees fit
Article 29: Decision shall be reached by majority of the arbitrators
Settlement
Article 30: If, during arbitral proceedings, the parties settle the dispute, the arbitral tribunal
shall terminate the proceedings.
The award shall be made in writing and shall be signed by the arbitrator or arbitrators. In arbitral
proceedings with more than one arbitrator, the signatures of the majority of the members of the
arbitral tribunal shall suffice.
Article 33: Additional award may also be requested by the party within 30 days of the receipt of
the award which has not been mentioned in the award.
An arbitral award may be set aside by the court specified in article 6 only if:
a) The party making the application can prove that:
i. A party to the arbitration agreement was under some incapacity; or the said agreement is not
valid under the law to which the parties have subjected it
ii. The party making the application was not given proper notice of the appointment of an
arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
iii. The award deals with a dispute not expected by or not falling within the terms of the
submission to arbitration
iv. The composition of the arbitral tribunal was incorrect
v. The subject-matter of the dispute is not capable of settlement by arbitration under the law of
this State
vi. The award is in conflict with the public policy of this State
An arbitral award, irrespective of the country in which it was made, shall be recognized as
binding. (Article 35)
In order to enforce the award the party will have to make application to the court.(Article 36)
The court may refuse enforcement of award if:
a. Party to the arbitration agreement referred to in article 7 was under some incapacity; or the
said agreement is not valid under the law to which the parties have subjected it or, failing any
indication thereon, under the law of the country where the award was made.
b. The party against whom the award is invoked was not given proper notice of the appointment
of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case.
c. The award deals with a dispute not contemplated by or not falling within the terms of the
submission to arbitration, it contains decisions on matters beyond the scope of the
submission to arbitration, provided that, if the decisions on matters submitted to arbitration
can be separated from those not so submitted, that part of the award which contains decisions
on matters submitted to arbitration may be recognized and enforced.
d. The composition of the arbitral tribunal or the arbitral procedure was not in accordance with
the agreement of the parties or, failing such agreement, was not in accordance with the law of
the country where the arbitration took place.
e. The award has not yet become binding on the parties or has been set aside or suspended by a
court of the country in which, or under the law of which, that award was made.
This Convention applies to contracts of sale of goods between
parties whose places of business are in different States (Article 1):
a. when the States are Contracting States; or
b. when the rules of private international law lead to the application
of the law of a Contracting State
This Convention does not apply to the liability of the seller for death or
personal injury caused by the goods to any person (Article 5)
Article 6: Under this article parties have the option to exclude the application of this Convention
Convention is based upon the basic principle that it is international, uniform and based on good
faith.
According to Article 9 the parties are bound by the customs or the practices of trade.
Sales of Goods:
A contract of sale of goods is a contract by which the seller transfers or agrees to transfer the
property in goods to the buyer for a money consideration, called the price.
Article 2: This Convention does not apply to sales:
a. of goods bought for personal, family or household use, unless the
seller, at any time before or at the conclusion of the contract, neither knew
nor ought to have known that the goods were bought for any such use;
b. by auction;
c. on execution or otherwise by authority of law;
d. of stocks, shares, investment securities, negotiable instruments or money;
e. of ships, vessels, hovercraft or aircraft;
f. of electricity.
Therefore the convention does not apply to sales of commodities for personal use.
The Convention will not be applicable to the supply of services or where the essential obligation of
one of the parties in the contract would be provision of labour. (Article 3) (UN Case 105)
The Convention will not be applicable when the buyer supplies substantial part of the materials
for manufacture or production. (Article 3)
Article 4: This Convention governs only the formation of the contract of sale and the rights
and obligations of the seller and the buyer arising from such a
contract. In particular, except as otherwise expressly provided in this Convention,
it is not concerned with the contract’s validity or usage, nor with the effect of the contract on the
property in goods sold.
Convention Ratification
The member states must ratify (approve) the convention; however, they can also declare to be not
bound by parts of convention but this declaration will make them a non-contracting state.
Two or more contracting states which have the same or closely related legal rules on matters governed
by this Convention may at any time opt out of the convention in relation to each other or in relation to
persons whose place of business is in each other’s states. (Article 94)
Contracting States whose national legislation requires contracts of sale to be concluded or evidenced
in writing may at any time disapply the convention which allows the contracts not to be in writing.
OFFER
Article 14(1) of the UN Convention on Contracts for the International Sale of Goods provides that:
‘A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is
sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A
proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes
provision for determining the quantity and the price.’
Termination of Offer:
Offers may be terminated before acceptance and the consequent formation of a binding agreement, in
one of three distinct ways:
a. Withdrawal: Article 15(2), which simply states that an offeror may withdraw their offer as long as
the withdrawal reaches the offeree before or at the same time as the offer.
b. Rejection: The offeree may reject the offer, in which case it comes to an end and cannot be
subsequently reactivated and accepted by the offeree.
c. Revocation: Offers may be revoked as long as any revocation reaches the offeree before he has
dispatched an acceptance. However, an offer cannot be revoked if:
It indicates that it is irrevocable, which it may do by stating a fixed time for acceptance or otherwise.
ACCEPTANCE
Article 18 of the UN Convention on Contracts for the International Sale of Goods provides that
acceptance takes place where the recipient of the offer indicates their agreement to its terms.
Acceptance may occur in a number of ways:
a. By conduct
b. By words
Counter-offer:
(1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other
modifications is a rejection of the offer and constitutes a counter-offer.
(2) However, a reply to an offer which purports to be an acceptance but contains additional or different
terms which do not materially alter the terms of the offer constitutes an acceptance, unless the
offeror, without undue delay, objects orally.
Communication of Acceptance:
Where a time period has been fixed, acceptance must reach the offeror within that period of time. If
no time period is fixed, then the acceptance must reach the offeror within a reasonable time.
If the offeree can accept the offer by performing an act, without notice to the offeror, the acceptance is
effective at the moment the act is performed, provided it is done within any period of time laid down
by the offeror.
Where the offeror has fixed a period of time for acceptance in either a telegram or a letter, that period
begins to run from the moment the telegram is handed in for dispatch or from the date shown on the
letter. If no date is shown on the letter, the time runs from the date shown on the envelope. A period
of time for acceptance fixed by the offeror by telephone, telex or other means of instantaneous
communication, begins to run from the moment that the offer reaches the offeree.
Withdrawal of Acceptance:
ICC Incoterms:
a. EX WORKS (EXW) ‘Ex works’ means that the seller fulfils his obligation to deliver when he
has made the goods available at his premises (i.e. works, factory, warehouse, etc) to the buyer.
This means that the seller is not responsible for loading the goods on to the buyer’s vehicle or
for clearing the goods for export, unless otherwise agreed.
b. Free Carrier (FCA) means that the seller delivers the goods to the carrier or another person
nominated by the buyer at the seller’s premises or another named place. The parties are well
advised to specify as clearly as possible the point within the named place of delivery, as the risk
passes to the buyer at that point.
c. Carriage Paid To (CPT) means that the seller delivers the goods to the carrier or another
person nominated by the seller at an agreed place (if any such place is agreed between parties)
and that the seller must contract for and pay the costs of carriage necessary to bring the goods
to the named place of destination.
d. Carriage and Insurance Paid to (CIP) means that the seller delivers the goods to the
carrier or another person nominated by the seller at an agreed place (if any such place is agreed
between parties) and that the seller must contract for and pay the costs of carriage necessary to
bring the goods to the named place of destination.
e. Delivered at Terminal (DAT) means that the seller delivers when the goods, once unloaded
from the arriving means of transport, are placed at the disposal of the buyer at a named
terminal at the named port or place of destination. “Terminal” includes a place, whether
covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal.
The seller bears all risks involved in bringing the goods to and unloading them at the terminal
at the named port or place of destination, including payment of any import duty or customs
charges.
f. Delivered at Place (DAP) means that the seller delivers when the goods are placed at the
disposal of the buyer on the arriving means of transport ready for unloading at the named place
of destination. The seller bears all risks involved in bringing the goods to the named place.
g. Delivered Duty Paid (DDP) means that the seller delivers the goods when the goods are
placed at the disposal of the buyer, cleared for import on the arriving means of transport ready
for unloading at the named place of destination. The seller bears all the costs and risks involved
in bringing the goods to the place of destination and has an obligation to clear the goods not
only for export but also for import, to pay any duty for both export and import and to carry out
all customs formalities.
Free Alongside Ship (FAS) means that the seller delivers when the goods are placed alongside the
ship nominated by the buyer at the named port of shipment. The risk of loss of or damage to the
goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment
onwards.
Free On Board (FOB) means that the seller delivers the goods on board the ship nominated by the
buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or
damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs
from that moment onwards.
Cost and Freight (CFR) means that the seller delivers the goods on board the vessel (ship). The
risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must
Article 35(1) states that, in general, the seller must deliver goods that are of the quantity, quality
and description required by the contract and that are contained or packaged in the manner
required by the contract.
Delivery Obligations:
If the seller is not bound to deliver the goods at any other particular place, his obligation to
deliver consists of following:
a. If the contract of sale involves carriage of the goods—in handing
the goods over to the first carrier for transmission to the buyer;
b. If the parties are aware that goods would be in a particular place then the seller discharges
the obligation by placing the good at the buyer’s disposal at that place.
c. If the above situations do not apply then the seller discharges his duty of delivery by placing
the goods at the place where the seller had their business at the time contract was concluded.
If the seller hands over the goods to the carrier and if the same are not identifiable then the
identification of goods can be done by markings on them and by the shipping documents.
The mode of transportation of goods selected by the seller must be reasonable and in accordance
with the usual terms.
If the seller is not bound to insure the goods then he must at the buyer’s request provide all the
information to the buyer to enable him to insure the goods.
The seller must deliver the goods on the date fixed and determined by contract.
If a date is to be determined from a period in the contract then at any time within that period or if
it is to be determined by the buyer then the date so determined by him.
If no date or time is stated in contract then within reasonable time.
Seller must hand over documents at the time and place as required in contract.
The seller must deliver goods which are of the quantity, quality and description required by the
contract and which are contained or packaged in the manner required by the contract.
The goods do not conform with the contract unless they:
a. are fit for the purposes for which goods of the same description would ordinarily be used;
b. are fit for any particular purpose expressly or impliedly made known to the seller at the
time of the conclusion of the contract, except where the circumstances show that the buyer
did not rely, or that it was unreasonable for him to rely, on the seller's skill and judgment;
c. possess the qualities of goods which the seller has held out to the buyer as a sample or
model;
d. are contained or packaged in the manner usual for such goods or, where there is no such
manner, in a manner adequate to preserve and protect the goods
The seller is not liable under above paragraphs a-d for any lack of conformity of the goods if at
the time of the conclusion of the contract the buyer knew or could not have been unaware of such
lack of conformity.
There is no obligation on the seller to sell goods in conformity with all the provisions in force
in the buyer’s state unless:
The seller is liable for any lack of conformity which exists at the time when the risk passes to the
buyer, even though the lack of conformity becomes apparent only after that time.
The seller is also liable for any lack of conformity which occurs after the time indicated in the
preceding paragraph and which is due to a breach of any of his obligations.
The buyer must examine the goods, or cause them to be examined, within as short a period as is
practicable in the circumstances.
If the contract involves carriage of the goods, examination may be deferred until after the goods
have arrived at their destination.
If goods have to be dispatched immediately by the buyer then the same can be examined at the
next destination.
The seller must deliver goods which are free from any right or claim of a third party, unless the
buyer agreed to take the goods subject to that right or claim. However, if such right or claim is
based on industrial property or other intellectual property, the seller's obligation is governed by
article 42.
Intellectual property is any product of the human intellect that the law protects from
unauthorized use by others.
Intellectual property is traditionally comprised of three categories: patent, copyright and
trademark.
The seller has the obligation of delivering the goods to the buyer which are free from any claim of
a third party based on industrial or intellectual property. However, if the goods are subject to such
claim then the buyer must have agreed to receive such goods. (Article 42)
Breach of Contract:
The seller may, even after the date for delivery, remedy at his own expense any failure to perform
his obligations, if he can do so without unreasonable delay and without causing the buyer
unreasonable inconvenience or uncertainty. However, the buyer retains any right to claim
damages as provided for in this Convention.
The seller can do the above by sending notice to the buyer as a request to let him know whether
late performance would be acceptable.
If the seller delivers the goods before the date fixed, the buyer may take delivery or refuse to take
delivery.
If the seller delivers a quantity of goods greater than that provided for in the contract, the buyer
may take delivery or refuse to take delivery of the excess quantity.
Reduction of Price:
Obligation of Buyer:
The buyer must pay the price for the goods and take delivery of them as required by the contract.
(Article 53)
The buyer's obligation to pay the price includes taking such steps and complying with such
formalities as may be required under the contract. (Article 54)
If parties concluded the contract without determining the price then the parties are deemed to
have concluded the price which is generally charged at the time of conclusion of contract. (Article
55)
If the price is fixed according to the weight of the goods, in case of doubt it is to be determined by
the net weight.(Article 56)
If the place of payment of price has not been specified in the contract then:
a. Price will be paid at seller’s place of business or
b. If the payment is to be made at the time of handing over the goods and documents then the
place and time when goods and documents are handed over.
If the buyer fails to perform any of his obligations then seller may:
a. Require the buyer to make payment, take delivery or perform their obligations (Article 62)
b. Seller may grant additional time in which buyer can fulfill his obligations (Article 63)
c. Declaration of avoidance of the contract if:
I. The buyer has committed fundamental breach
II. Buyer has failed to make payment or accept goods in the additional time provided
III. Buyer has declared not to accept the goods or make payment in the time
The right of avoidance will be lost if the buyer paid for the goods.
If under the contract the buyer is to specify the form, measurement or other features of the goods
and he fails to make such specification the seller may, make the specification himself in
accordance with the requirements of the buyer that may be known to him.
Damages:
Damages for breach of contract by one party consist of a sum equal to the loss, including loss of
profit, suffered by the other party as a consequence of the breach. (Article 74)
Damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at
the time of the conclusion of the contract, in the light of the facts known.
If the contract is avoided and if, within a reasonable time after avoidance, the buyer has bought
goods in replacement or the seller has resold the goods, the party claiming damages may recover
the difference between the contract price and the price in the substitute transaction as well as any
further damages recoverable.
If, however, the party claiming damages has avoided the contract after taking over the goods, the
current price at the time of such taking over shall be applied instead of the current price at the
time of avoidance.
A party who relies on a breach of contract must take such measures as are reasonable in the
circumstances to mitigate the loss. (Payzu Ltd vs Saunders 1919)
If the party fails to mitigate the loss, the party in breach may claim a reduction in the damages in
the amount by which the loss should have been mitigated.
Breach of Contract:
One party's failure to fulfill any of its contractual obligations is known as a "breach" of the
contract.
In Anticipatory Breach one party informs in advance that he will not be able to perform his side of
the contract, the injured party may treat this as repudiation and claim damages or only claim
damages and continue with a revised schedule of performance.
A party may suspend the performance of his obligations if, after the conclusion of the contract, it
becomes apparent that the other party will not perform a substantial part of his obligations due to
a serious deficiency in their ability to perform or creditworthiness and their conduct in preparing
to perform the contract.
A party suspending performance, whether before or after dispatch of the goods, must immediately
give notice of the suspension to the other party and must continue with performance if the other
party provides adequate assurance of his performance.
If the seller has already dispatched the goods but has an indication that buyer does not wish to
fulfill his obligations he may prevent the handing over of the goods to the buyer even if he holds
title documents.
A fundamental breach is a breach of contract where the offending party fails to complete a
contractual term that was so fundamental (hence the name of the breach) to the contract that
another party was prevented from fulfilling their own responsibilities.
If prior to the date for performance of the contract it is clear that one of the parties will commit a
fundamental breach of contract, the other party may declare the contract avoided.
Installment Contract:
If the failure of one party to perform any of his obligations in respect of any installment
constitutes a fundamental breach of contract the other party may declare the contract avoided
with respect to that installment.
If one party's failure to perform any of his obligations in respect of any installment gives the other
party good grounds to conclude that a fundamental breach of contract will occur with respect to
future installments, he may declare the contract avoided for the future.
A buyer who declares the contract avoided in respect of any delivery may, at the same time,
declare it avoided in respect of deliveries already made or of future deliveries if, by reason of their
interdependence.
Interest:
If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to
interest on it.
A party is not liable for a failure to perform any of his obligations if he proves that the failure was
due to an impediment beyond his control and that he could not reasonably be expected to have
taken the impediment into account at the time of the conclusion of the contract or to have avoided
or overcome it or its consequences.
If the party's failure is due to the failure by a third person whom he has engaged to perform the
whole or a part of the contract, that party is exempt from liability only if:
a. he is exempt under article 79(1); and
b. the person whom he has so engaged would be so exempt if the provisions of that paragraph
were applied to him.
The party who fails to perform must give notice to the other party of the impediment and its effect
on his ability to perform. If the notice is not received by the other party within a reasonable time
after the party who fails to perform knew or ought to have known of the impediment, he is liable
for damages resulting from such non-receipt.
Nothing in this article prevents either party from exercising any right under this Convention other
than to claim damages.
Avoidance of the contract releases both parties from their obligations under it, subject to any
damages which may be due. Avoidance does not affect any provision of the contract for the
settlement of disputes or any other provision of the contract governing the rights and obligations
of the parties consequent upon the avoidance of the contract.
Avoidance does not affect the right of a party to claim restitution from the other party of whatever
the first party has supplied or paid under the contract.
The buyer loses the right to declare the contract avoided if it is impossible for him to make
restitution of the goods. (Article 82)
A party which has possession of the goods belonging to the other party, it is under a duty to
preserve them.
Following are the situations in which the duty to preserve the goods arises:
a. If the buyer has delayed in taking the delivery of the goods or, where payment of the price
and delivery of the goods are to be made concurrently, if he fails to pay the price, and the
seller is either in possession of the goods or otherwise able to control their disposition, the
seller must take such steps as are reasonable in the circumstances to preserve them. He is
entitled to retain them until he has been reimbursed his reasonable expenses by the buyer.
(Article 85)
b. If the buyer has received the goods and intends to exercise any right under the contract or this
Convention to reject them, he must take such steps to preserve them as are reasonable in the
circumstances. He is entitled to retain them until he has been reimbursed his reasonable
expenses by the seller. (Article 86)
c. If goods dispatched to the buyer have been placed at his disposal at their destination and he
exercises the right to reject them, he must take possession of them on behalf of the seller.
d. A party who is bound to take steps to preserve the goods may deposit them in a warehouse of
a third person at the expense of the other party provided that the expense incurred is not
unreasonable. (Article 87)
e. A party who is bound to preserve the goods in accordance with article 85 or 86 may sell them
by any appropriate means if there has been an unreasonable delay by the other party in taking
possession of the goods or in taking them back or in paying the price or the cost of
preservation, provided that reasonable notice of the intention to sell has been given to the
other party.
f. If the goods are subject to rapid deterioration or their preservation would involve
unreasonable expense, a party who is bound to preserve the goods must take reasonable
measures to sell them. To the extent possible he must give notice to the other party of his
intention to sell.
PASSING OF RISK:
Loss of or damage to the goods after the risk has passed to the buyer does not discharge him from
his obligation to pay the price, unless the loss or damage is due to an act or omission of the seller.(
Article 66)
If the contract of sale involves carriage of the goods the risk passes to the buyer when the goods
are handed over to the first carrier for transmission to the buyer in accordance with the contract
of sale.
If the seller is bound to hand the goods over to a carrier at a particular place, the risk does not
pass to the buyer until the goods are handed over to the carrier at that place.
The risk does not pass to the buyer until the goods are clearly identified to the contract, whether
by markings on the goods, by shipping documents, by notice given to the buyer.
The risk in respect of goods sold in transit passes to the buyer from the time of the conclusion of
the contract. However, if the circumstances so indicate, the risk is assumed by the buyer from the
time the goods were handed over to the carrier who issued the documents expressing the contract
of carriage.
If at the time of the conclusion of the contract of sale the seller knew or ought to have known that
the goods had been lost or damaged and did not disclose this to the buyer, the loss or damage is at
the risk of the seller.
The risk passes to the buyer when he takes over the goods or, if he does not do so in due time,
from the time when the goods are placed at his disposal and he commits a breach of contract by
failing to take delivery.
If the buyer is bound to take over the goods at a place other than a place of business of the seller,
the risk passes when delivery is due and the buyer is aware of the fact that the goods are placed at
his disposal at that place.
The seller is liable in accordance with the contract and this Convention for any lack of conformity
which exists at the time when the risk passes to the buyer, even though the lack of conformity
becomes apparent only after that time.
A bill of lading is a document which is issued by a carrier to the shipper acknowledging that they
have received the shipment of goods and that they have been placed on board a particular vessel
which is bound for a particular destination.
The document states the terms on which the goods are to be carried. Separate bills of lading are
issued for domestic transportation and ocean or air transportation, although a through bill of
lading can be issued covering all modes of transport to the destination.
There are four types of bills of lading:
a. Inland Bill of Lading – refers to a contract for transporting goods overland to an exporter’s
international carrier.
b. Ocean Bill of Lading – refers to a contract for transporting goods from an exporter to a
specified foreign market overseas
c. Through Bill of Lading – refers to a contract for transporting goods covering both the
domestic and international transport of export goods between specified points.
d. Air Waybill – refers to a contract for transporting goods by way of domestic and international
flights to a specified destination. The air waybill is a non-negotiable document and only serves as
a receipt for the shipper.
A bill of lading has a threefold purpose:
a. Formal receipt by the ship-owner for goods;
b. Evidence of the contract of carriage; and
c. Document of title to goods.
Bills of lading can be either negotiable or non-negotiable.
In relation to negotiable bills of lading, ownership to the goods and the right to re-route the
shipment are with the person who has legal ownership of the bill of lading properly issued or
negotiated to it. Negotiable bills of lading are issued to shipper’s order, rather than to a specific,
named consignee. If the bill of lading is in negotiable form, the carrier will hold the goods until it
receives an original bill of lading that has been endorsed by the shipper (seller). The exporter
must endorse the bill of lading and deliver it to the bank in order to receive payment.
As regards non-negotiable bills of lading, the carrier is required to deliver the goods only to
the consignee named in the bill of lading. The person to whom the goods are being sent normally
needs to show the bill of lading in order to obtain the release of the goods
MODES OF PAYMENT:
International sales payments are made by International Bank Transfers, Bills Of Exchange and
Letters of Credit.
International Bank Transfers: Buyer directs his bank in his country to transfer funds to the
seller’s bank in another country. This is done electronically.
This law applies to credit transfers where any sending bank and its receiving bank are in different
States.
"Credit transfer" means the series of operations, beginning with the originator's payment order,
made for the purpose of placing funds at the disposal of a beneficiary. The term includes any
payment order issued by the originator's bank or any intermediary bank intended to carry out the
originator's payment order. A payment order issued for the purpose of effecting payment for such
an order is considered to be part of a different credit transfer.
When an instruction is not a payment order because it is subject to a condition but a bank that
has received the instruction executes it by issuing an unconditional payment order, it then
becomes a full credit transfer.
According to Article 4 the applicability of the Model law in relation to the rights and obligations of
parties in relation to credit transfers may be varied by their agreement. Therefore the application
of Model Law is not mandatory.
A sender becomes obligated to pay the receiving bank for the payment order when the receiving
bank accepts it, but payment is not due until the beginning of the execution period.
The UNCITRAL model law allocates responsibility for unauthorized payment between sender and
receiving bank differently depending on the circumstances of the case.
Article 5 of the model law makes it clear that the sender is bound by a payment order if they, or
some other person who had their authority to bind them, issued it. However, the issue arises as to
liability where the person who issues the payment order is neither the sender, nor has the
sender’s authority to do so.
In such a situation, responsibility depends on whether authentication is by way of signature or a
process such as encryption or the use of a code or some other process.
Article 5.2 of the model law provides that where a payment order is subject to authentication,
other than by means of comparing signatures, then the sender will be bound by the payment
order, if
I. the authentication is in the circumstances a commercially reasonable method of security
against unauthorized payment orders; and
II. the receiving bank complied with the authentication.
It is important to emphasize that the form of authentication must be commercially reasonable in
the circumstances. The determination of what is commercially reasonable will vary from time to
time and from place to place depending on the technology available,
Payment of the sender's obligation under article 5(6) to pay the receiving bank occurs by making
debit to the account of the sender held by the receiving bank.
In another case an account of the sender bank is maintained by the receiving bank and the
payment can be made by the sending bank by crediting the receiving bank account.
Receiving bank can also net the obligations of the sending bank with other obligations. This can
be done by a bilateral netting agreement between the receiver and the sender bank.
A receiving bank that accepts a payment order is obligated under that payment order to issue a
payment order, within the time required by article 11, either to the beneficiary's bank or to an
intermediary bank, that is consistent with the contents of the payment order. (Article 8(2))
The beneficiary's bank is, upon acceptance of a payment order, obligated to place the funds at the
disposal of the beneficiary, or otherwise to apply the credit, in accordance with the payment
order. Article 10(1)
Payment order may be accepted by the receiving bank in some other way before it executes it:
a) The payment order is accepted when it is received by the receiving bank.
b) The receiving bank upon accepting the payment order will debit the account of the sender.
A receiving bank that is obligated to execute a payment order is obligated to do so on the banking
day it is received. If it does not, it shall do so on the banking day after the order is received.
(Article 11).
Until the credit transfer is completed, each receiving bank is requested to assist the originator and
each subsequent sending bank, and to seek the assistance of the next receiving bank, in
completing the banking procedures of the credit transfer. (Article 13)
If the credit transfer is not completed, the originator's bank is obligated to refund to the
originator any payment received from it, with interest from the day of payment to the day of
refund. The originator's bank and each subsequent receiving bank is entitled to the return of any
funds it has paid to its receiving bank, with interest from the day of payment to the day of refund.
Chain of responsibility is at the bank which has failed to complete the credit transfer.
A credit transfer is completed when the beneficiary's bank accepts a payment order for the benefit
of the beneficiary. When the credit transfer is completed, the beneficiary's bank becomes indebted
to the beneficiary to the extent of the payment order accepted by it.
BILLS OF EXCHANGE:
A bill of exchange is an order in writing by one person to another to pay a specified sum to a specified
person or bearer on a particular date. A bill of exchange is a substitute for money. Consequently, a bill of
exchange can be understood as a form of commercial credit instrument, or IOU, used in international
trade. A bill of exchange may be stated to be payable on demand or at a given time on presentation. A
cheque is a bill of exchange drawn on a banker, payable on demand.
a. The person making the order or drawing the bill is known as the drawer.
b. The person to whom the bill is addressed is the drawee (for example a bank).
c. The person to whom the bill is payable is the payee.
d. The person to whom a bill is transferred by indorsement is called the indorsee.
e. The generic term ‘holder’ includes any person in possession of a bill who holds it either as payee,
endorsee or bearer.
f. A bill which in its origin is payable to order becomes payable to bearer if it is indorsed in blank
If the drawee assents to the order, he is then called the acceptor. An acceptance must be in writing
and must be signed by the drawee.
The mere signature of the drawee is sufficient. By the acceptance of a bill, the drawee becomes the
principal debtor on the instrument and the party primarily liable to pay it.
Acceptance may be either general or qualified.
As a qualified acceptance is so far a disregard of the drawer’s order, the holder is not obliged to
take it; and if he chooses to take it, he must give notice to antecedent parties, acting at his own
risk if they dissent.
Article 2 of the Convention provides that a bill of exchange is international if it specifies at least
two of the following places and indicates that they are situated in different States:
a. The place where the bill is drawn;
b. The place indicated next to the signature of the drawer;
c. The place indicated next to the name of the drawee;
d. The place indicated next to the name of the payee;
e. the place of payment.
However, to comply, the place where the bill is drawn or the place of payment must be situated in
a contracting State.
Article 3 defines a bill of exchange as a written instrument which:
It is important to note that Article 7 of the Convention provides that the sum payable is deemed to
be a definite sum, although the instrument states that it is to be paid:
a. with interest, which may be paid at a fixed or variable rate (Article 8);
b. by installments at successive dates;
c. by installments at successive dates when the unpaid balance becomes due upon default in
payment of any installment;
d. According to a rate of exchange indicated in the instrument or to be determined as directed by the
instrument; or
e. In a currency other than the currency in which the sum is expressed in the instrument.
It should be noted that the Convention does not apply to international cheques.
If there exists an error in the amount to payable in words or in figures then the one expressed in
words is deemed to payable by instrument. (Article 8(1))
If the bill states that interest is to be paid with sum and the exact date of the payment of interest is
not mentioned then the interest is to be paid from the date of the bill. (Article 8(4))
Payment of Bill:
a. Payee: A person to whom the drawer has instructed to make payment. Bill may be payable to two
or more persons.
b. Drawer: Person who instructs to make payment.
The Drawer is liable on the bill once he signs it. However signatures if forged bear no liability.
If the bill gets dishonored the drawer agrees to pay it to the holder or endorser.
Drawer can also limit his liability on the payment of bill if another party becomes liable.
c. Drawee and Acceptor:
Drawee is the bank which has the drawer's checking account from which a check is to be paid.
The drawee is not liable on the bill until he accepts it (Article 40(1))
The acceptor engages that he will pay the bill in accordance to the terms of his acceptance to the
holder, or to any party who takes up and pays the bill.
Article 41: An acceptance must be written on the bill on its front and back and may be effected:
a. By the signature of the drawee accompanied by the word "accepted" or by similar words; or
b. By the signature alone of the drawee.
(a) If the drawer has stipulated in the bill that it must be presented for acceptance;
(c) If the bill is payable elsewhere than at the residence or place of business of the drawee, unless it is
payable on demand.
A bill is duly presented for acceptance if it is presented in accordance with the following rules
(Article 51):
(a) The holder must present the bill to the drawee on a business day at a reasonable hour;
(b) Presentment for acceptance may be made to a person or authority other than the drawee if that
person or authority is entitled under the applicable law to accept the bill;
(c) If a bill is payable on a fixed date, presentment for acceptance must be made before or on that
date;
(d) A bill payable on demand or at a fixed period after sight must be presented for acceptance within
one year of its date;
(e) A bill in which the drawer has stated a date or time-limit for presentment for acceptance must be
presented on the stated date or within the stated time-limit.
If a bill which must be presented for acceptance is not so presented, the drawer, the
endorsers and their guarantors are not liable on the bill.(Article 53(1))
Failure to present a bill for acceptance does not discharge the guarantor of the drawee of
liability on the bill. (Article 53(2))
Article 54: A bill is considered to be dishonoured by non-acceptance:
(a) If the drawee, upon due presentment, expressly refuses to accept the bill or acceptance
cannot be obtained with reasonable diligence or if the holder cannot obtain the acceptance
to which he is entitled under this Convention.
(b) If a bill is dishonoured by non-acceptance the holder may exercise an immediate right of
recourse against the drawer, the endorsers and their guarantors, (Article 54)
(c) If a bill payable on demand is presented for acceptance, but acceptance is refused, it is not
considered to be dishonoured by non-acceptance.(Article 54(3))
The Guarantor:
1. Payment of an instrument, whether or not it has been accepted, may be guaranteed, as
to the whole or part of its amount, for the account of a party or the drawee. A guarantee
may be given by any person, who may or may not already be a party. (Article 46(1))
2. A guarantee must be written on the instrument or on a slip affixed thereto ("allonge").
(Article 46(2))
3. A guarantor may specify the person for whom he has become guarantor. In the absence
of such specification, the person for whom he has become guarantor is the acceptor or
the drawee in the case of a bill, and the maker in the case of a note. Article 46(5)
Endorsement:
Endorsement relates to the way in which international bills of exchange are transferred and in
effect it allows the original payee of the instrument to transfer the benefit of it to some other party
by signing it.
Article 13 of the UN Convention on International Bills of Exchange and International Promissory
Notes provides a bill of exchange is transferred either by:
(a) Endorsement and delivery of the instrument by the endorser to the endorsee; or
(b) Mere delivery of the instrument if the last endorsement is in blank.
By virtue of Article 14, an endorsement must be written on the instrument attached to it. Any such
endorsement may be:
(a) In blank, that is, by a signature alone or by a signature accompanied by a statement to the
effect that the instrument is payable to a person in possession of it;
(b) Special, that is, by a signature accompanied by an indication of the person to whom the
instrument is payable.
A signature alone, other than that of the drawee, is an endorsement only if placed on the back of
the instrument.
An endorsement must be unconditional and in the light of any conditional endorsement, the bill
of exchange will still be transferred whether or not the condition is fulfilled (Article 18).
An endorsement must relate to the entire sum of the bills or it is ineffective (Article 19). If there
are two or more endorsements, it is presumed, unless the contrary is proved, that each
endorsement was made in the order in which it appears on the instrument (Article 20).
An instrument may be transferred in accordance with Article 13 after maturity, except by the
drawee, the acceptor or the maker (Article 23).
Under Article 17(1), a bill cannot be transferred if the bill or an endorsement on the bill contains
words such as not negotiable/not transferable/not to order/pay x only.
Under Article 25, if an endorsement is forged, the person whose endorsement is forged, or a party
who signed the instrument before the forgery, has the right to recover compensation for any
damage which they may have suffered because of the forgery.
This right may be exercised against: (a) the person who forged the endorsement; (b) the person to
whom the instrument was directly transferred by the forger; (c) a party or the drawee who paid
the instrument to the forger directly or through one or more endorsees for collection.
However, an endorsee for collection is not liable if they have no knowledge of the forgery:
a. At the time they pay the principal or advises them of the receipt of payment; or
b. At the time they receive payment, if this is later, unless their lack of knowledge is due to their
failure to act in good faith or to exercise reasonable care.
Article 44: The endorser engages that upon dishonour of the instrument by non-acceptance or by
non-payment, and upon any necessary protest, he will pay the instrument to the holder, or to any
subsequent endorser or any endorser's guarantor who takes up and pays the instrument.
Article 45(1): Unless otherwise agreed, a person who transfers an instrument, by endorsement
and delivery or by mere delivery, represents to the holder to whom he transfers the instrument
that:
(a) The instrument does not bear any forged or unauthorized signature;
(b) The instrument has not been materially altered;
(c) At the time of transfer, he has no knowledge of any fact which would impair the right of the
transferee to payment of the instrument against the acceptor of a bill or, in the case of an
unaccepted bill, the drawer, or against the maker of a note.
Holder: The holder of a bill of exchange, promissory note, or check is the person who has legally
acquired the possession of the same, from a person capable of transferring it, by indorsement or delivery,
and who is entitled to receive payment of the instrument from the party or parties liable to meet it.
(Article 16)The holder of an instrument on which the last endorsement is in blank may:
(a) Further endorse it either by an endorsement in blank or by a special endorsement;
(b) Convert the blank endorsement into a special endorsement by indicating in the endorsement
that the instrument is payable to himself or to some other specified person; or
(c) Transfer the instrument by delivery: Article 13(b)
Rights of holder:
The holder of an instrument has all the rights conferred on him by this Convention against the
parties to the instrument.
The holder may transfer the rights in accordance with article 13.
Article 31: The transfer of an instrument by a protected holder vests in any subsequent holder the
rights to and on the instrument which the protected holder had.
The holder must present the instrument for payment to the drawee or to the acceptor or to the
maker on a business day at a reasonable hour (Article 55)
The presentment of bill for payment can be (Article 55):
i. At the place of payment specified on the instrument;
ii. If no place of payment is specified, at the address of the drawee or the acceptor or the maker
indicated in the instrument; or
iii. If no place of payment is specified and the address of the drawee or the acceptor or the maker is
not indicated, at the principal place of business or habitual residence of the drawee or the
acceptor or the maker;
Protest:
Article 60:A protest is a statement of dishonour drawn up at the place where the instrument has been
dishonoured and signed and dated by a person authorized in that respect by the law of that place. The
statement must specify:
Article 68: If a person who is required to give notice of dishonour fails to give it to a party who is
entitled to receive it, he is liable for any damages which that party may suffer from such failure.
Amount payable
Article 69(1). The holder may exercise his rights on the instrument against any one party, or several or
all parties, liable on it and is not obliged to observe the order in which the parties have become bound.
Any party who takes up and pays the instrument may exercise his rights in the same manner against
parties liable to him.
Article 70: After maturity the amount payable to holder of the instrument is the amount with interest,
if interest has been stipulated for, to the date of maturity at the rate stipulated for plus any interest
expenses of protest.
The bill which on which the amount is paid before maturity often entails discount from the date
payment was made to the date of maturity.
Article 71: A party who pays an instrument and is thereby discharged in whole or in part of his liability
on the instrument may recover from the parties liable to him:
Article 75: An instrument must be paid in the currency in which the sum payable is expressed.
Article 72: A party is discharged of liability on the instrument when he pays the holder, or a party
subsequent to himself who has paid the instrument and is in possession of it, the amount due:
LETTERS OF CREDIT
A revocable letter of credit can be amended or cancelled at any time by the importer without the
exporter’s agreement.
Irrevocable:
An irrevocable letter of credit cannot be amended or cancelled without the agreement of all
parties to the credit.
Unconfirmed
An unconfirmed letter of credit is forwarded by the advising bank directly to the exporter without
adding its own undertaking to make payment or accept responsibility for payment at a future
date, but confirming its authenticity.
Confirmed
A confirmed letter of credit is one in which the advising bank, on the instructions of the issuing
bank, has added a confirmation that payment will be made as long as compliant documents are
presented, even if the issuing bank or the buyer fails to make payment.
It is used as support where an alternative, less secure, method of payment has been agreed. Thus,
should the exporter fail to receive payment from the importer he may claim under the standby
letter of credit.
This type of letter of credit is used where there are regular shipments of the same commodity to
the same importer and is used to avoid the need to be continually opening or amending letters of
credit.
A transferable letter of credit is one in which the exporter has the right to request the paying, or
negotiating, bank to make either all or part of the payment due to a third party who was not a
party to the original contract, for example the actual supplier of the goods that are the subject of
the international contract.
A back-to-back letter of credit can be used as an alternative to the transferable letter of credit.
Rather than transferring the original letter of credit to the supplier, once the letter of credit is
received by the exporter from the opening bank, that letter of credit is used as security to establish
a second letter of credit drawn on the exporter in favour of his supplier.
A parent company may be unable or unwilling to guarantee the borrowings of its subsidiary but it
might be prepared to issue a “comfort letter” to the lenders.
A comfort letter is normally a letter given by a parent company to a lender whereby the parent
company undertakes certain limited responsibilities but it falls short of being a guarantee.
Sometimes comfort letters specifically provide that they are not intended to be legally binding.
However absent such a provision, in a commercial context there will normally be little doubt that
a comfort letter is intended to create legal relations. Accordingly, in establishing what avenues of
recourse are available to the lenders in the event of a breach of the undertaking in the comfort
letter by the parent, the question will normally be one of interpretation as to what the comfort
letter means.
A asks B to get car repaired. B acts as A’s agent in making a contract between A and the garage person.
Types of Agent:
Relationship is formed between principle and agent by mutual consent. It comes usually by
express agreement; however it may be implied agreement due to the relationship or conduct of
the parties.
Express Agreement: By writing or orally
Implied Agreement: It may be implied by reason of their relationship and conduct.
An agency relationship may be created without express consent. This happens by the principal of
estoppels.
Agreement binding only if the agent acts within the limits of his authority.
Three kinds of Agent’s Authority:
i) Express Authority:
Express actual authority means an agent has been expressly told he or she may act on behalf
of a principal.
ii) Implied Authority:
Implied actual authority, also called "usual authority", is authority an agent has by virtue of
being reasonably necessary to carry out his express authority. As such, it can be inferred by
virtue of a position held by an agent. For example, partners have authority to bind the other
partners in the firm, their liability being joint and several.
Watteau v Fenwick
The manager, bought cigars from a third party who later sued the owners for payment as the
manager’s principal. It was held that the purchase of cigars was within the usual authority of a
manager of such an establishment and that for a limitation on such usual authority to be
effective it must be communicated to any third party
iii) Apparent/ostensible authority
Apparent/ostensible authority refers to a situation where a reasonable person would
understand that an agent had authority to act.
This means a principal is bound by the agent's actions, even though the agent had no actual
authority, whether express or implied.
It raises an estoppel because the third party is given an assurance, which he relies on and
would be inequitable for the principal to deny the authority given.
a) Where the principal has represented the agent as having authority even though he has not
actually been appointed.
b) Where the principal has revoked the agent’s authority but the third party has not had
notice of this: Willis Faber & co v Joyce.
It was held in this case that although there had been no actual delegation to Kapoor, the company had by
its action led the claimants to believe that Kapoor was an authorized agent and the claimants had relied
on it. The company was bound by the contract made by Kapoor under the principle of holding out or
estoppels. The company was stopped from denying that Kapoor was its agent.
The authority of an agent to bind his principal may cease by revocation of that authority by the principal.
However, the revocation of authority will only be valid if the principal has informed the third parties
regarding the revocation of an agent’s authority.
“It is the relation which subsists between persons carrying on business in common with a view of
profit.”
Partners are jointly liable for all the partnership debts that result from the contracts made by
other partners which bind the firm. Each Partner is agent of the firm and partners are jointly
liable for the acts of their fellow partners so far as they bind the firm unless the partner so acting
i) Has no authority to act for the firm
ii) The third party knows that he has no authority
Furthermore the act specifically states that where the partner of the firm specifically pledges the
credit of the firm for a purpose which has no connection with the firm’s ordinary business, the
firm will not bound unless he has express authority to do so.
If authority of the partner is terminated, it will only be effective if the third party has had notice of
it.
Authority of the partner mostly depends upon the perception of the third party.
New partner is only liable for the debts of the firm incurred after his inclusion.
A retiring partner remains liable for the debts of the firm even after he has retired.
The partnership assets are realized and proceeds are applied in this order:
a. Paying off external debts
b. Repayment of loans to partners which they had made to the partnership firm
c. Repayment of capital contribution to partners
d. Any leftover proceeds are distributed amongst partners in accordance to their profit
sharing ratio.
Partner’s Liability:
a. New Partners: Partner is only liable for the debts of the partnership firm which are incurred
after his date of admission as a partner.
b. Retired partners: A retiring partner is only liable for debts which were incurred while he was a
partner.
Partnership Charge:
Partnership cannot grant floating charge but I can grant fixed charge or mortgage.
A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type
of business entity that is owned and run by one individual and in which there is no legal
distinction between the owner and the business.
Has limited resources. Banks are reluctant to grant loans to single proprietorship considering its
small assets and high mortality rate.
Unlimited liability for business debts. The single owner is responsible for paying all debts and
damages of his business.
If the firm fails, creditors may force the sale of the proprietor's personal property as well as his
business property to satisfy their claim.
Legal personality (also artificial personality, juridical personality, and juristic personality) is the
characteristic of a non-living entity regarded by law to have the status of personhood.
A legal person (Latin: persona ficta) (also artificial person, juridical person, juristic person, and
body corporate) has a legal name and has rights, protections, privileges, responsibilities, and
liabilities under law, just as natural persons (humans) do. The concept of a legal person is a
fundamental legal fiction.
Liability of the members to contribute to the debts of the entity is significantly limited.
Definition; Company is an entity registered under the Company’s Act 2006.
Company is distinct from its members and its members have limited liability.
It is a protection offered to members of certain types of company.
Limited liability prevents the creditors from demanding the company’s debts from members of
the company.
Limited liability only becomes an issue in the event of a business failure when the company is
unable to pay its own debts. Result is winding up which enables the creditors to be paid from the
proceeds of any assets remaining in the company.
Types of Corporations:
I. Corporation Sole:
Public office (created usually by an act of parliament) or ecclesiastical office (usually the
owner of church land) that has a separate and continuing legal existence, and only one
member (the sole officeholder).
II. Chartered Corporations:
These are charities or bodies formed by the Royal Charter.
III. Statutory Corporations:
The statutory companies are also known as statutory corporations or public corporations,
these are actually public bodies established and operated by Statute.
IV. Registered Companies:
Companies formed under the Companies Act 2006.
V. Community Interest Companies:
These are formed by social enterprises for the benefit of the community. These are
established by the Companies (Audit, Investigations and Community Enterprise) Act
2004 and regulated by The Community Interest Company Regulations 2005.
Types of Companies:
A public company is a company whose constitution states that it is public and that it has
complied with the registration procedures for such a company.
A private company is a company which may not offer its securities to public.
A public company must hold a Registrars trading certificate and must have a minimum capital of
50,000 pounds.
Private company which is converted into a public company will not be permitted to trade until it
has a allotted minimum share capital of 50,000 pounds out of which only a quarter of its nominal
has to be paid and whole of its premium.
Public company must have a minimum of one member and same is the case with private
company. However minimum of two directors are required for public company and one for
private company.
i) Capital:
a) Minimum of 50,000 pounds capital for public company and no minimum for private.
b) Public company may offer shares to public but private is prohibited to do so.
c) Public and Private Companies must generally first offer its existing members any ordinary shares it
issues for cash. This is also known as pre-emption right. Private company may permanently disapply this
rule.
Public company can obtain listing for its shares on the stock exchange.
iii) Accounts:
a) Pubic company has six months to produce its statutory audited accounts and private company has
nine months.
b) Listed public company must publish its full accounts and reports on website.
c) Public companies must lay their accounts before the general meeting annually but no such
requirement for private company.
iv) Commencement of business: Public Company can only commence business one it has obtained
the trading certificate from the registrar, however private company can commence business as soon as it
is incorporated.
Private companies are not required to hold annual general meetings but public companies must hold one
within six months from its financial year end.
Words limited or Ltd must appear. Company should be identified as public or private company.
Salmon v Salmon
The Claimant S had carried on his business. He decieded to form a limited company to purchase the
business so he and six other members of his family each subscribed for shares of the company. The
limited company then purchased Claimants business for 38,782 pounds. The Claimant was paid 8,782
pounds in cash by the company. Further, 1 pound of 20,000 shares were issued to him and debentures of
10,000 pounds were also issued. The company did not prosper and its liabilities exceeded its assets. The
liquidator stated that company’s business was still in actual claimants and he himself should bear the
liabilities of the debts and payments of debentures to him should be postponed until the company’s
creditors are paid.
House of lords held that the business was owned by and its debts were liabilities of the company. The
claimant was under no liability to the company or its creditors, his debentures were validly issued and the
security created by them over the company’s assets was effective. This was because company was a legal
entity separate and distinct from S.
As a result of the Salmon’s case a veil of incorporation is said to be drawn between the members
and the company separating them for the purposes of liability and identification.
i) Failure to obtain a trading certificate from the Registrar leads to personal liability.
ii) Fraudulent and wrongful trading
Fraudulent Trading is committed when affairs of the company are carried out with the intent to
defraud the creditors. It is a criminal offence under sec 993 of the companies act 2006 and any
person guilty of it is liable for a fine or imprisonment upto 10 years. It is also a civil offence under
the Insolvency Act 1986.
Under UK insolvency law, wrongful trading occurs when the directors of a company have continued to
trade a company past the point when they:
a. "knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent
liquidation"; and
b. They did not take "every step with a view to minimising the potential loss to the company’s
creditors".
Wrongful trading is an action that can be taken only by a company's liquidator, once it has gone
into insolvent liquidation. (This may be either a voluntary liquidation - known as Creditors
Voluntary Liquidation, or compulsory liquidation). It is not available to the directors of a
company while it continues in existence, or to other insolvency office-holders such as an
administrator. Court may order such directors to make a contribution to the company’s assets sec
214 of the Insolvency Act 1986.
Directors who are disqualified under the Directors disqualification Act 1986 and still participate
in the affairs of the company’s management will be jointly liable along with the company for the
company’s debts.
How can Directors be held liable for abusing the Company Names:
It is a criminal offence under the Insolvency Act sec 217 and directors are held personally liable
where; they are a director of a company that goes into solvent liquidation and they become
involved with the directing, managing or promoting of a business which has an identical name to
the original company or a name similar enough to suggest a connection.
EB Horne was formerly a managing director of the Gilford Motor Co Ltd. His employment contract
stipulated (clause 9) not to solicit customers of the company if he were to leave employment of Gilford
Motor Co. Mr. Horne was fired, thereafter he set up his own business and undercut Gilford Motor Co's
prices. He received legal advice saying that he was probably acting in breach of contract. So he set up a
company, JM Horne & Co Ltd, in which his wife and a friend called Mr Howard were the sole
shareholders and directors. They took over Horne’s business and continued it. Mr. Horne sent out fliers
saying,
“ Spares and service for all models of Gilford vehicles. 170 Hornsey Lane, Highgate, N. 6. Opposite
Crouch End Lane... No connection with any other firm. ”
The company had no such agreement with Gilford Motor about not competing, however Gilford Motor
brought an action alleging that the company was used as an instrument of fraud to conceal Mr Horne's
illegitimate actions.
Held. An injunction requiring observance of the covenant would be made both against the defendant and
the company which he had formed as a mere cloak or sham.
Avoidance of Tax:
Held the companies were resident in the UK and liable to uk tax. The Kenyan connection was a sham, the
question being not where they ought to have been managed but where they were actually managed.
Pubic Interest:
If in times of war with the enemy the court may life the viel of incorporation to determine if the company
is being controlled by aliens.
Quasi Partnership:
Many small companies are regarded by the law as 'quasi-partnerships' - in other words, they are, in effect,
small partnerships of a limited number of individuals which, although operating as a limited company,
are in practical terms run as if they were a partnership between those individuals at the helm.
Some of the major distinction between partnership and a company are as follows:
1. Regulating Act: A company is regulated by Companies Act, 2006, while a partnership firm is
governed by the Partnership Act, 1890.
2. Registration: A company cannot come into existence unless it is registered, whereas for a
partnership firm registration is not compulsory.
3. Liability: In case of company the liability of shareholders is limited (except in case of unlimited
companies) to the extent of face value of shares or to the extent of guarantee, whereas, in case of
partnership the liability of partners is unlimited.
4. Management: The affairs of a company are managed by its directors. Its members have no right
to take part in the day to day management. On the other hand every partner of a firm has a right
to participate in the management of the business unless the partnership deed provides otherwise.
5. Capital: The share capital of a company can be increased or decreased only in accordance with
the provisions of the Companies Act, whereas partners can alter the amount of their capital by
mutual agreement.
6. Legal Status: A company has a separate legal status distinct from its shareholders, while a
partnership firm has no legal existence distinct from its partners.
7. Transfer of Interest: Shares in a public company are freely transferable from one person to
another person. In private company the right to transfer shares is restricted, while a partner
cannot transfer his interest to others without the consent of other partners.
8. Insolvency/Death: Insolvency or death of a shareholder does not affect the existence of a
company. On the other hand a partnership ceases to exist if any partner retires, dies or is declared
insolvent.
9. Winding up: A company comes to an end only when it is wound up according to the provisions
of the Companies Act. A firm is dissolved by an agreement or by the order of court. It is also
automatically dissolved on the insolvency of a partner.
10. Books: The provisions of Companies Act, 2006 have their bearing on the preparation of accounts
books of a company but in case of firm there is no specific legal direction to this effect.
11. Audit: Audit of accounts of a company is compulsory whereas it is generally, discretionary in
case of a firm.
12. Authority of Members: A shareholder is not an agent of a company and has no power to bind
the company by his acts. A partner is an agent of a firm. He can enter into contracts with
outsiders and incur liabilities so long as he acts in the ordinary course of firm’s business.
13. Commencement of Business: A company has to comply with various legal formalities and has
to file various documents with the Registrar of Companies before the commencement of business
while a firm is not required to fulfill legal formalities.
Person who forms a company is called a promoter. It includes anyone who makes business preparations
for the company.
a) Legitimate profit is when before promoting a company they sell the property to the promoted
company, provided they disclose it.
b) Wrongful profit is when the promoter enters into and makes a profit personally in a contract as a
promoter. Promoters are in breach of their fiduciary duty if they make wrongful profit.
The expenses in preparations such as drafting and legal documents cannot be obtained as an
automatic right but they may agree with company that it shall reimburse them.
Pre-incorporation contract cannot be ratified by the company as a company cannot ratify a
contract made on its behalf before it was incorporated.
Promoter as an agent is liable for the pre-incorporation contracts made on behalf of the
company.
Company is formed and registered when is it issued with the certificate of incorporation and
when persons subscribe to the memorandum of association and comply with the
requirements regarding registration.
Documents to be delivered for registration of company are memorandum of association,
articles of association, statement of proposed officers, statement of capital and initial
shareholdings. Once the documents are submitted a registration fee is payable for company
registration.
The system of streamlined company registration is an online process which allows businesses
to apply for multiple business and tax registrations in the same place. It is simple to use and
means that businesses no longer need to contact multiple agencies to register. For example, in
UK a new company may be registered at Companies House and HMRC (Tax authorities) for
VAT, Corporation tax and PAYE at the same time. The service is mostly available for small
and medium sized enterprises.
Concept of an Off the Shelf Company and its Advantages and Disadvantages
It is a company which was created and left with no activity - metaphorically put on the "shelf" to
"age". The company can then be sold to a person or group of persons who wish to start a company
without going through all the procedures of creating a new one.
The following documents need not be filed with the Registrar by the purchase:
Disadvantages:
A private company may be able to re-register as public company if its allotted share capital
requirement of 50,000 pounds is met. Quarter of it must be paid plus the whole of any premium.
I) Special resolution is required of 75 percent to alter the constitution and a general meeting.
II) Additional documents are required for re-registration purposes.
III) If the share capital of a public company falls below 50,000 pounds then it must re-register as
a private company.
Public companies must obtain a registrar’s trading certificate before commencement of business.
Private company can commence its business immediately after obtaining certificate of
incorporation.
Statutory Records
Company is identified by its name and serial number which is always mentioned on every
document sent to Companies House for filing.
On incorporation of company its files includes its certificate of incorporation and the original
documents presented to secure its incorporation.
Statutory Books
Some documents including the constitution, register of members, charges and directors must be kept
at its registered office or at single alternative inspection location.
Under the UK corporate legislation, the register that records all charges (judgments, liens,
mortgages) on an incorporated or registered firm's assets, and which must be kept at the
registered office of the firm
It must contain:
i) Details of fixed or floating charges
ii) Description of property charged
iii) Amount of charge
iv) Name of person entitled to charge
Register of members
Register of members is available for inspection by members. Separate index must be maintained in
case of more than 50 members
All companies (pvt or plc) are required to keep a register of PSC containing information on
individuals who own or control over 25% of a company’s shares or voting rights, or who exercise
control over the company and its management in other ways (e.g. through the ability to remove or
appoint directors)
Information required includes the individual’s name, date of birth, nationality and service
address and details of their interest in the company.
This information is updated and checked annually upon the submission of the company’s
confirmation statement and is available for public inspection.
Failure to comply with this requirement amounts to an offence.
Confirmation Statement
A corporate director is not a natural or real person, instead it is a company. Note that all companies
must have at least one natural director (i.e. a real person) to ensure that the company has an
individual that can be held responsible and accountable for the actions of the company.
The company should keep copies or written memoranda of all service contracts for its directors,
including contracts for services which are not performed in the capacity of director. Members are
entitled to view these copies for free or request a copy on payment of a set fee.
This director's service contract is to be used for executive directors - i.e. company
directors who are also employees of the company. The template has a dual purpose:
it sets out the basis for the director's employment by the company, and regulates his
role as a director. Examples of common executive director posts, in respect of which this
director service contract template may be suitable for use, include finance directors, operations
directors and managing directors.
Company is required to keep accounting records sufficient to show and explain the company’s
transactions. At any time it should be possible to disclose the companies financial position within
six months and for directors to ensure that any accounts required to be prepared comply with the
Act.
Accounting records to be kept for 3 years in case of private company and six years in case of
public company.
Accounting records should be kept at company’s registered office.
Annual Accounts
Public companies must file their annual accounts with six months of their financial year end and the
period for private companies is nine months.
It is a simple document which states that the subscribers wish to form a company and become
members of it.
After the Company’s Act 2006 the essence of the memorandum has been retained and it mainly
includes that the subscribers :
i) Wish to form a company
ii) Agree to become members of the company and to take at least one share each if the company
is to have share capital.
Memorandum must be signed by each subscriber.
Articles of Association
The Articles of Association is a document that contains the purpose of the company as well as
the duties and responsibilities of its members defined and recorded clearly. It is an important
document which needs to be filed with the Registrar of companies.
Models of Articles
The Secretary of State provides its own model articles which can be incorporated provided a
company fails to register its own articles. Different models are available for different types of
company; most companies would adopt model private or public companies articles.
The amendment is the articles can only be allowed if it is for the benefit of the company as a
whole.
The articles may be amended by a special resolution i.e 75 percent. Copies of the amended
articles must be sent to the Registrar within 15 days of the amendment taking
effect.
Following are the methods through which the provisions of the company’s constitution can be made
unalterable:
a) The articles may give a member additional votes so that he can block a resolution to alter articles.
Bushell v Faith: Three members each had 100 shares. Article 9 of the company constitution
said that under a resolution to remove a director, that directors’ shares would carry three votes
each. When the two sisters tried to remove him, Mr Faith recorded 300 votes and the other two,
200 votes together. The House of Lords held that the provision was valid.
b) Articles may provide that when meeting is held the quorum present must include the member
concerned. They can then deny the meeting quorum by absenting themselves.
i) Majority are entitled to alter even if minority considers alteration is prejudicial to its
interests.
ii) Minority is entitled to protection against an alteration which is intended to benefit the
majority rather than the company and which is unjustifiable discrimination against the
minority.
Expulsion of Minorities
Any alteration made to the articles the copy of altered articles must be delivered to the Registrar
within 15 days together with the signed copy of the special resolution making the alteration.
a) Companies act will permit the company to take an action if articles authorize and on the other
hand if it does not the company must alter them
b) The companies act will over-ride the articles if the companies act prohibits something and if
something permitted by the Act only by a special resolution.
Objects: Under 2006 Act company’s objects completely unrestricted. Unless where company itself
wishes to restrict it under sec 31.
Alteration of Objects: Objects can be altered by special resolution under section 21.
If directors permit an act which is restricted by the company’s objects then the act is ultra vires.
Ashbury Railway Carriage & Iron co ltd v Riche Held: Constructing a railway was not within the
company’s objects so the company did not have the capacity to enter into the contract.
This section provides that the validity of a company’s acts is not to be questioned on the ground of
lack of capacity because of anything in a company’s constitution. It replaces the present section 35(1)
and (4) of the 1985 Act, which made similar provision for restrictions of capacity contained in the
memorandum.
This section provides safeguards for a person dealing with a company in good faith and restates
section 35A and 35B of the 1985 Act. The power of the directors to bind the company, or authorise
others to do so, is deemed not to be constrained by the company’s constitution. This means that a
third party dealing with a company in good faith need not concern itself about whether a company is
acting within its constitution.
This section restates section 322A of the 1985 Act. It applies to a transaction if, or to the extent
that, its validity depends on section 40 and provides that where the party to a transaction with a
company is an “insider” (for example, a director of the company or person connected to such a
Whether or not the contract is avoided, the party and any authorizing director is liable to repay
any profit they made or make good any losses that result from such a contract.
i) Member to company
ii) Company to Members
iii) Members to Members
But not to third parties.
In England and Wales and Northern Ireland it is of the nature of an ordinary contract debt.
Company name:
i) Passing a resolution
ii) By any other means provided in the articles
A company can be prevented by an injunction issued by the court in a passing-off action from
using its registered name.
Ewing v Butter Cup Margarine: Claimant traded as The Butter Cup Dairy Co and the Defendant as
Buttercup Margarine Co ltd. It was held that an injunction would be granted to restrain the
defendants from the use of its name since the Claimant had an established connection under the
Buttercup name.
If two companies business is different confusion is not likely to occur. Injunction will not be
granted.( Dunlop Pnemumatic Tyre Co ltd v Dunlop Motor Co Ltd)
Adjudicator can review a case if the name of a company is similar to that of the existing and must
decide within 90 days. He can also determine the new name.
A member is a person who has subscribed to the memorandum of association and every other
person who has agreed in writing to become a member and whose name is entered in the register
of members.
A person may become a member of a company by an application for shares subject to the formal
acceptance by the company.
The ordinary law of contracts applies to the agreement to take shares in a company. An
application for share may be absolute or conditional.
If it is absolute, a simple allotment and notice thereof to the applicant will constitute the
agreement.
If it is conditional, the allotment must be on the basis of the conditions specified. A person may
also subscribe to the shares of the company as a trustee of the deceased or bankrupt member of
the company.
Public and Private companies must have a minimum of one member. Where the issue is regarding
a single member company then the quorum required for general meetings is also one.
Share:
It is value of the Share as indicated on the Share Certificate. This is also called face value. No
share can be issued at a value less than its nominal value. The nominal value of the shares held
represents the maximum liability of a shareholder in a limited liability company.
Once established, the nominal value of the share remains fixed and does not normally change.
The concept of ‘capital’ refers to the financial resources raised by companies to finance their
operation. The essential distinction in company law is between share capital, that is provided by
the members of the company, and loan capital, which the company borrows from outsiders.
Allotted or issued capital represents the shares that have been applied for and the company has
issued. It represents the nominal value of the shares actually issued by the company and public
companies must have a minimum issued capital of £50,000 or the prescribed euro equivalent
(s.763 CA 2006).
The shares which the company retains are called the unissued share capital.
When the shares are issued payment is usually required in full but not always. Sometimes the
company will 'call up' only part of the amount due. This effectively splits the issued capital into
two parts - the 'called up' and ' uncalled' parts. These two should, of course, add up to the issued
figure. The uncalled part may be demanded later when the company needs more working capital.
Paid up share capital is the amount which share holders have actually paid on the shares issued
and called. On allotment public companies must receive at least one quarter of the
nominal value of the shares paid up plus the whole of any premium.
Capital generated through borrowing is called loan capital. It comprises of debentures and other
long term loans.
It is the current quoted price at which investors buy or sell a share of common stock or a bond at a
given time. It is also known as "market price. The Market Value can be either higher or lower than
the Nominal Value, depending on the performance of the company or the economic
circumstances of the day.
Types of Shares
If constitution of the company states that there are no different shares, then they are all presumed to be
ordinary shares.
Ordinary Shares
This term is used to refer to the shares which are not given any special rights. If the company issues shares
which all enjoy uniform rights, they will be ordinary shares.
These are not preferred shares and do not have any predetermined dividend amounts. An
ordinary share represents equity ownership in a company and entitles the owner to a vote in
matters put before shareholders in proportion to their percentage ownership in the company.
Ordinary shares are also called equity shares.
Ordinary shareholders are entitled to receive dividends if any are available after dividends on
preferred shares are paid. They are also entitled to their share of the residual economic value of
Class Rights
The right which is enjoyed by a particular type of shareholder is a class right. Different special
rights with respect to shares are: Dividends (Return on Capital Employed), redemption of capital,
voting and the right to appoint or remove a director.
Variation of class rights is a change in the rights entitled to shareholders in their capacity as equity
holders of the company.
Class rights can be varied by passing a special resolution by at least three quarters majority of that
class.
It is not a variation of class rights to issue shares to new members, to subdivide shares or to create
a new class of preference shareholders.
Greenhalgh vs Arderne Cinemas ltd: It was held by the court that by dividing the 50p
shares in five 10p shares did not vary the rights of original 10p shares since they still had one vote
per share as before.
A minority not in favor of the variation, holding at least 15 percent or more of the issued shares,
can apply to the court within 21 days to have the variation cancelled.
Preference Shares
Preference shares represent a more secure form of investment than the ordinary shares. The
reason for this is that preference shares receive a fixed rate of dividend before any payment is
made to the ordinary shareholders and usually they enjoy priority over ordinary shares with
regard to repayment of capital (in case of liquidation). The actual rights enjoyed by the preference
will be stated in the company’s articles of association.
Preference shareholders cannot insist on receiving a dividend payment, but as their dividend
rights are usually cumulative, any failure to pay the dividend in one year has to be made good in
subsequent years, subject to the company’s profitability.
Company law enforces the strict rule that dividends, whether on ordinary or preference shares,
cannot be paid out of the company’s capital. In case of liquidation, the company has no obligation
to pay previously accrued cumulative preference dividend. The exceptions to this are that the
dividend has been declared but not yet paid or when the articles explicitly state otherwise.
These are shares issued on terms that they may be bought back by the company in future.
Treasury Shares
Treasury shares or reacquired stock are the shares which are bought back by the issuing
company, reducing the amount of outstanding capital in the open market.
Plc can purchase its own shares listed on the stock exchange.
Allotment of shares
Pre-emption rights refer to the rights of existing shareholders to be offered any new issue of
shares before those shares can be offered to non-shareholders.
The purpose of pre-emption rights is to ensure that existing shareholders have an opportunity to
maintain their interest in their company by preventing their percentage holding being watered
down by the issue of shares to new members. There is, of course, no compulsion on the part of the
shareholder to take the shares if they do not wish to.
Currently, by virtue of s.561 Companies Act (CA) 2006, a company cannot offer new shares for
cash unless the existing shareholders have been offered the chance to buy the shares in
proportion to their existing holding. Section 565 specifically exempts pre-emption rights where
non-cash consideration is involved.
As it is not always cost effective to offer new shares to all existing members, pre-emption rights
can be waived by provision in the articles of association or by a special resolution of shareholders.
Pre-emption rights may also be included in a company’s articles of association.
Private Company can exclude the statutory right of first refusal.
Any company can exclude the pre-emption rights by passing a special resolution.
A rights issue is the procedure through which a company raises new capital by offering new shares
to its existing members. As the shares are offered to the existing shareholders in proportion to
their existing holding, it can be seen as respecting and giving effect to the shareholders’ pre-
emption rights.
Once again there is no compulsion to participate in the rights issue and often the rights to
participate in the allotment of new shares are usually tradeable securities in themselves.
Consequently shareholders who do not want to buy the new shares themselves may sell the rights
to a third party.
The offer of rights issue should specify a period of not less than 21 days for the offer to be
accepted.
A bonus issue of shares, sometimes referred to as a scrip issue or more accurately a capitalisation
issue is similar to a rights issue in that existing members receive new shares in proportion to their
existing holdings, but it differs in one essential point: the individuals who receive the new shares
usually do not have to pay anything for them; they are received free.
Bonus issues must never be funded from a company’s ordinary capital.
Every share has a nominal value and a premium value (market value).
A company must not issue shares at a price lower than the nominal value of the share or at a
discount to that.
Ooregum Gold Mining Co of India v Roper [1892] Held: A company while allotting shares can
give discount in the premium value of shares but cannot give discount in the nominal value of the
shares.
Sec 588 of the Companies Act 2006 states that if shares are allotted to the allotee at a discount to
their nominal value, the allottee will still be bound to pay the remaining nominal value of the
share to the company.
Payment for shares in a private company can be in a variety of ways including cash, goods, services,
property or even shares in another company.
Payment for shares in a public company must, in most instances, be for cash. However, if shares are
allotted in a public company for a non- cash consideration, the consideration for the shares is subject to
an independent valuation in most cases.
At least 25% of the nominal value and the whole of any premium on shares in a public company
must be paid on allotment,
A public company cannot accept an undertaking to do work or perform services as consideration
for the allotment of shares.
Within two years of receiving its trading certificate, a public company may not receive a transfer
of non-cash asset.
A public company should not accept non-cash consideration for the payment of shares if it
contains an undertaking that such consideration may be performed later than 5 years after the
allotment.
Sec 610 (1) states that if a company issues shares at a premium, whether for cash or otherwise, a
sum equal to the aggregate amount or value of the premiums on those shares must be transferred
to an account called “the share premium account”.
Section 9 of the CA 2006 removes the concept of ‘authorised capital’ and replaces it with the
requirement to submit a ‘statement of capital and initial shareholdings’ to the registrar in the
application to register the company.
The statement of capital and initial shareholdings is essentially a ‘snapshot’ of a company's share
capital at the point of registration.
Section 10 CA 2006 requires the statement of capital and initial shareholdings to contain the
following information:
The total number of shares of the company to be taken on formation by the subscribers to the
memorandum;
The aggregate nominal value of those shares;
For each class of shares: prescribed particulars of the rights attached to those shares, the total
number of shares of that class and the aggregate nominal value of shares of that class; and
The amount to be paid up and the amount (if any) to be unpaid on each share (whether on
account of the nominal value of the shares or by way of premium).
The statement must contain such information as may be required to identify the subscribers to
the memorandum of association. With regard to such subscribers it must state:
The number, nominal value (of each share) and class of shares to be taken by them on formation;
and
The amount to be paid up and the amount (if any) to be unpaid on each share.
Where a subscriber takes shares of more than one class of share, the above information is
required for each class.
Since the inception of the concept of the separate legal entity some lenders in order to secure their
lending require directors and/or members to agree to repay a loan out of their personal wealth if
the company default’s to pay its debt.
Personal guarantee is the tool to protect the lender from the members hiding behind the
protection of limited liability.
What is a Debenture?
Debentures are documents that acknowledge a company’s borrowing, although the term has been
extended to cover the loan itself.
As debenture holders lend money to the company they are its creditors, they are not members.
As creditors they are entitled to receive interest, whether the company is profitable or not. It may
even be necessary to use the company’s capital to pay the debenture interest.
Three types of debentures;
i) Single Debenture: To create charge and giving the bank various safeguards for the loan.
ii) Debentures issued as a series and registered: It is the number of debentures issued to
different lenders who provide different amounts and each lender receives a debenture in
identical form in respect of his loan. Registered debenture is one which is registered in the
name of a holder in the books of the company. It is transferable in the same way as a share.
iii) Debenture Stock: Public companies usually use this method to offer its debentures to the
public. Public companies usually issues number of debentures at one time through this
method. Only this form requires a debenture trust deed.
A company must maintain a register of all debenture holders and register an allotment within
2 months.
It is a formal legal document/contract that outlines the terms of the debenture issue
between issuer and holders.
It states the maturity date, interest rate, interest payment , protective provisions and
any other terms & conditions between issuer & holders.
1) The appointment of trustee for prospective debenture stock holders. Trustee can be bank,
company or individual.
2) Trustee is authorized to enforce the security in case of default and in particular to appoint
a receiver with suitable powers of management.
3) Provisions for transfer of stock and meetings of debenture stockholders.
Advantages:
i) The Trustee will deal with all correspondence regarding your debt.
ii) Trustee has powers to intervene in case the borrow defaults.
iii) Security for the debenture stock in the form of charges over property can be given to a single
trustee.
iv) Trustee has the power to call the meeting of the debenture holders and obtain a decision
acceptable to all.
Common:
Differences:
Definition of Charges
The term used to describe any right established over a borrower's property to secure a debt or
performance of an obligation.
Fixed Charges:
In this situation a specific asset of the company is made subject to a charge in order to secure a
debt. Once the asset is subject to the fixed charge the company cannot dispose of it without the
consent of the debenture holders.
The asset most commonly subject to fixed charges is land, although any other long-term capital
asset may also be charged.
It would not be appropriate, however, to give a fixed charge against stock-in-trade, as the
company would be prevented from freely dealing with it without the prior approval of the
Floating Charges:
The floating charge is most commonly made in relation to the ‘undertaking and assets’ of a
company and does not attach to any specific property whilst the company is meeting its
requirements as stated in the debenture document.
The security is provided by all the property owned by the company, some of which may be
continuously changing, such as stock-in-trade. Thus, in contrast to the fixed charge, the use of the
floating charge permits the company to deal with its property without the need to seek the
approval of the debenture holders. However, if the company commits some act of default, such as
not meeting its interest payments, or going into liquidation, the floating charge is said to
crystallize.
The company would be prevented from freely dealing with the property having a fixed charge on
it it without the prior approval of the debenture holders.
Floating charge permits the company to deal with its property without the need to seek the
approval of the debenture holders. However, charge over assets will not be registered as fixed if it
allows the company to deal with the charges assets without obtaining pripor consent of the
chargee.
Bank had a fixed charge over the property and specific mortgage charge. A term allowed the company to
making sales until notified in writing by the bank to stop doing so. Held the charge was created as floating
not a fixed charge.
i) Liquidation of company
ii) Cessation of company’s business
iii) Intervention by chargee via a receiver
iv) If charge contract so provides, when notice is given by the charges that the charge is
converted into a fixed charge.
v) Crystallization of another floating charge if it causes the company to cease business.
Fixed charge is a better form of security as it grants confers immediate rights over identified
assets.
Floating charge may automatically become invalid if the company creates the charge to secure an
existing debt and goes into liquidation within a year thereafter sec 245IA. This period is only six
months with a fixed charge.
Charges which are created over the current and future book debts of the company.
If the money is received by the company and it deals with it without the consent of the chargee
then the charge will be categorized as floating charge.
If the money is received by the chargee and the company has no control over it then the charge
will be categorized as fixed charge.
As per the general rule all fixed charges have priority over the floating charge irrespective of their
time of creation.
Fixed charges take priority against each other in order of their time of creation.
Floating charges take priority according to their time of creation.
A floating charge will only take priority over the fixed charge if the latter had notice that the
former will take priority charge.
Floating charge holder can include a negative pledge clause in his agreement with the
company which prohibits the company from creating a fixed charge over the same property.
If the above agreement is breached the fixed charge holder will only obtain priority if he did
not have knowledge about the prohibition created over the property.
All charges, including both fixed and floating, have to be registered with the Companies Registry
within 21 days of their creation.
Failure to register the charge as required has the effect of making the charge void, i.e. ineffective,
against any other creditor, or the liquidator of the company.
The charge, however, remains valid against the company, which means in effect that the holder of
the charge loses their priority as against other company creditors.
Can sue the company and seize property if judgment for debt unsatisfied.
Can present a petition to the court for compulsory liquidation of the company
Can apply to the court for administrative order.
Every company is required to maintain capital for the protection of its creditors.
As shareholders in limited companies, by definition, have the significant protection of limited
liability the courts have always seen it as the duty of the law to ensure that this privilege is not
abused at the expense of the company’s creditors. To that end they developed the doctrine of
capital maintenance, the specific rules of which are now given expression in the Companies Act
(CA) 2006.
There are a number of specific controls over how companies can use their capital, but perhaps the
two most important are the rules relating to capital reduction and company distributions.
A reduction of share capital occurs when any money paid to a company in respect of a member's
share is returned to the member.
Section 641 sets out three particular ways in which the capital can be reduced by:
(a) Removing or reducing liability for any capital remaining as yet unpaid. In effect the company is
deciding that it will not need to call on that unpaid capital in the future.
(b) Cancelling any paid up capital which has been lost through trading or is unrepresented by in the
current assets. This effectively brings the balance sheet into balance at a lower level by reducing the
capital liabilities in recognition of a loss of assets.
(c) Repayment to members of some part of the paid-up value of their shares in excess of the company’s
requirements. This means that the company actually returns some of its capital to its members on the
basis that it does not actually need that level of capitalisation to carry on its business.
Limited companies can without restriction cancel unissued shares.
It may do so if:
The procedures through which a company can reduce its capital are laid down by ss.641–653
Companies Act 2006.
Section 641 states that, subject to any provision in the articles to the contrary, a company may
reduce its capital in any way by passing a special resolution to that effect. In the case of a public
company any such resolution must be confirmed by the court. In the case of a private company,
however, it is also possible to reduce capital without court approval as long as the directors
issue a statement as to the company’s present and continued solvency for the
following 12 months (ss.642 & 643). It is also called declaration of solvency.
The special resolution, a copy of the solvency statement, a statement of compliance by the
directors confirming that the solvency statement was made not more than 15 days before the date
on which the resolution was passed, and a statement of capital must be delivered to the registrar
within 15 days of the date of passing the special resolution. The methods of reduction of share
capital have been discussed above.
Under s.648 the court may make an order confirming the reduction of capital on such terms as it
thinks fit. In reaching its decision the court is required to consider the position of creditors of the
company.
The court also takes into account the interests of the general public. In any case the court has a
general discretion as to what should be done. If the company has more than one class of shares,
the court will also consider whether the reduction is fair between classes.
When a copy of the court order together with a statement of capital is delivered to the registrar of
companies a certificate of registration is issued (s.649).
A company can address the creditors concerns regarding the reduction of its share capital by
adopting one of the following approaches:
a) Paying back all the loans taken from the creditors
b) By giving the court a bank guarantee
Share Capital can be reduced by the company for any of the below mentioned grounds:
i) To bring the value of assets in line with the capital, if the assets had suffered any impairment
loss.
ii) The company makes a complex arrangement to change its financial structure by replacing
share capital with loan capital.
iii) The company plans to completely extinguish a particular class of shares.
Rules of Dividends
Paying a dividend is the usual way for a company to distribute a share of its profits among the
shareholders. There are detailed statutory rules as to distributions in CA 2006, sec829 to sec853.
Dividends are the return received by shareholders in respect of their investment in a company. Subject to
any restriction in the articles of association, every company has the implied power to apply its profits in
the distribution of dividend payments to its shareholders. The long-standing common law rule is that
dividends must not be paid out of capital (Flitcroft’s case 1882). The current rules relating to the payment
of dividends are to be found in part 23 Companies Act (CA) 2006. The Act governs, and imposes
restrictions on distributions made by all companies, both public and private. Section 829 defines
distribution as any payment, cash or otherwise, of a company’s assets to its members, except for the
categories stated in the section, which include the issue of bonus shares, the redemption of shares,
authorised reductions of share capital, and the distribution of assets on winding up.
Dividend Declaration
Distributable Profit
Section 830 goes on to provide the basic condition for distribution, applying to all companies,
which, in essence, is that they must have ‘profits available for that purpose’. This term is defined
in the section as accumulated realised profits less accumulated realised losses, with profit or loss
being either revenue or capital in origin.
It is important to note that the use of the term accumulated means that any previous years’ losses
must be included in determining the distributable surplus, and that the requirement that profits
be realised prevents payment from purely paper profit resulting from the mere revaluation of
assets. Section 841 provides that all losses are to be treated as realised except where a general
revaluation of all fixed assets has taken place.
The foregoing realised profits test applies to both private and public companies, but public
companies face an additional test in relation to distributions, in that s.831 requires that any
distribution of dividend must not reduce the value of the company’s net assets below the
aggregate of its total called up share capital and undistributable reserves (share premium, capital
redemption reserve, unrealized profits’ reserve or any other capital reserve).
The effect of this rule is that public companies have to account for changes in the value of their
fixed assets, and are required to apply an essentially balance sheet approach to the determination
of profits.
Under the rule in Flitcroft’s case any directors of a company who breached the distribution
rules, and knowingly paid dividends out of capital, were held jointly and severally liable to the
company to replace any such payments made. The fact that the shareholders might have approved
the distribution did not validate the illegal payment (Aveling Barford Ltd v Perion Ltd
(1989)).
Directors are held responsible since they either recommend to members in a general meeting that
a dividend should be declared or they declare interim dividends.
a) The payment of dividend out of capital was done in the complete knowledge of directors.
b) The dividend was declared without the complete preparation of financial statements and
subsequently resulted in payment out of capital.
c) Declaration of unlawful dividend by misinterpretation or wrongful application of law and
constitution.
Responsibilities of members:
i) If members have knowledge of unlawful dividend, they can obtain an injunction to stop the
company from making the payment.
ii) Members cannot knowingly approve payment of an unlawful dividend at AGM.
i) Section 847 Companies Act 2006 restates the common law rule, providing that shareholders,
who either know or have reasonable grounds for knowing that any dividend was paid from
capital (unlawful dividend), shall be liable to repay any such money received to the company.
ii) The shareholders may have the option to indemnify the directors for payments they might
have already received it (Moxham v Grant (1900)).
iii) To the extent that the distribution is made in excess of the distributable profits as determined
by properly prepared accounts, any liability of the director extends to the repayment of part
which is unlawful. Similarly, any shareholder who either knew or had reasonable grounds for
knowing that the dividends were improperly paid will have to recompense the company to the
extent that their dividends were overpaid.
Section 250 of the Companies Act 2006, defines a director as including ‘any person occupying the position
of a director, by whatever name called.’
Kinds of Directors:
i) De Jure director
It is person who is formally and legally appointed or elected as a director in accordance with the
articles of association of the firm, and gives written consent to hold the office of a director. He or
she enjoys full rights and privileges of a director, and is held individually and collectively (with
other directors) liable for the acts and/or negligence of the firm.
ii) De-facto Director
Any person who is not legally appointed as a director but performs the functions of a director.
Whether or not such a person fulfills the qualifications of a director, or enjoys the rights and
privileges of a director, he or she is generally held liable as a de jure director.
iii) Shadow Director
The concept of a shadow director is introduced in s.251 CA 2006.
A shadow director is a person who, although not actually appointed to the board, instructs the
directors of a company as to how to act, using their power, say as a major shareholder, to
manipulate the acknowledged board of directors. It is a person’s function rather than their title
that defines them as a director. Such individuals are subject to all the rules applicable to ordinary
directors; they are directors for legal purposes. A person is not to be treated as a shadow director
if the advice is given in a purely professional capacity.
Thus, a business consultant or a company doctor (another title given to someone called in to give
advice to companies in trouble), would not be liable as a shadow director for the advice they
might give to their client company.
A shadow director would differ from a de facto director because the public and authorities are
rarely aware of their existence. A de facto director performs the everyday task a director would,
while a shadow director exerts their influence away from the day to day running of the business.
iv) Executive Director
Executive directors usually work on a full-time basis for the company and is employed through a
service contract.
Section 227 of the Companies Act 2006 defines a director’s service contract as a contract under
which a director of the company undertakes personally to perform services (as director or
otherwise) for the company. Section 228 requires a copy of every director’s service contract to be
kept available for inspection and under s.229 company members have the right to inspect and
request a copy of such contracts.
Additionally s.188 of the Companies Act 2006, relating to directors’ long-term service contracts,
requires that no such contract may be longer than two years, unless it has been approved by
resolution of the members of the company.
v) Non-Executive Director
Non-executive directors or outsider directors do not usually have a full-time relationship with the
company; they are not employees and only receive directors’ fees. The role of the non-executive
directors, at least in theory, is to bring outside experience and expertise to the board of directors.
They are also expected to exert a measure of control over the executive directors to ensure that the
latter do not run the company in their, rather than the company’s, best interests.
It is important to note that there is no distinction in law between executive and non-executive
directors and the latter are subject to the same controls and potential liabilities as are the former.
The UK Corporate Governance Code requires that there should be a clear division of
responsibilities at the head of a company between the running of the board of directors and the
executive responsibility for the running of the company’s business. It also requires that the roles
of chairman and chief executive should not be exercised by the same individual.
The Chairman of the Board (of Directors) of a company, is (or should be) the chief representative
of the shareholders. The CEO of the company, should be, by definition, the leader of the
managers.
Role of Chairman
Article 12 of the model articles of association for public limited companies provides for the board
of directors to appoint one of their members to chair their meetings. The UK Corporate
Governance Code explains that the chairman is responsible for leadership of the board and
ensuring its effectiveness on all aspects of its role. The chairman is responsible for setting the
board’s agenda and ensuring that adequate time is available for discussion of all agenda items, in
particular strategic issues.
The chairman should ensure effective communication with shareholders. In relation to general
meetings, although s.319 provides that any member may act as chair, this is subject to the
provision of the articles and Model Article 31 states that if the directors have appointed a
chairman, the chairman shall chair general meetings.
The chairman conducts the meeting and must preserve order and ensure that it complies with the
provisions of the companies’ legislation and the company’s articles. He or she is under a general
duty at all times to act bona fide in the interests of the company as a whole, and thus must use his
or her vote appropriately.
Under Article 5 of the model articles, the board of directors may delegate any of the powers,
which are conferred on them under the articles, to such person or committee as they think fit and
any such act of delegation may authorize further delegation of the directors’ powers by any person
to whom they are delegated.
In this way, the board may appoint one or more managing directors or chief executives who will
have the authority to exercise all the powers of the company and to further delegate those powers
as they see fit. Article 5 also makes provision for the board of directors to revoke any delegation in
whole or part, or alter the terms and conditions under which it may be operated.
There exists no upper age limit for the directors; however the minimum age requirement for a
director is 16.
Directors are normally appointed by an ordinary resolution.
Quoted companies are required to include a Director’s remuneration report as part of their annual report,
which is also audited. The report must cover the following:
The details of each individual directors’ remuneration package
The company’s remuneration policy
The role of the board and remuneration committee in deciding the remuneration of directors
i) In order for a shareholders to propose a resolution for directors removal they must either hold at
least 10% of the paid up share capital or 10% of the voting rights where the company does not
have shares.
ii) A director can also use his own voting rights (as a member) and can defeat a resolution of his
removal
iii) Class rights agreement can be drafted that each class must be present at a general meeting to
constitute a quorum.
Disqualification of Directors
The Company Directors Disqualification Act (CDDA) was introduced in an attempt to prevent the
misuse of the company form by unscrupulous individuals looking to hide behind the corporate personality
of the company to avoid personal liability for their actions. Directors can be disqualified on one of the
following grounds:
i) Bankrupt
ii) Unsound Mind
iii) Absent for board meetings for a period of three consecutive months without leave
iv) Convicted of an indictable offence
v) Person has been persistently in default of legislation
vi) Guilty of crime of fraud in the operation of company
vii) Liable for fraudulent trading
The period of disqualification depends upon the seriousness of the offense. The individual concerned
may be disqualified from acting as a company director for a maximum period of 15 years. Sec.13
makes it a criminal offence for anyone to act in contravention of a disqualification order. Any such
person is liable for the following penalties:
Imprisonment for up to two years and/or a fine, on conviction on indictment, and
Courts can impose a lower period of disqualification due to one or more of the following reasons:
a) Lack of Dishonesty
b) Loss of director’s own money
c) Absence of personal gain
d) Efforts to mitigate
e) Likelihood of re-offending
Powers of Directors
Director Duties
Directors have seven major duties under the companies act 2006:
i) Duty to act within the powers for the best interest of the company.
Section 171 CA replaces existing similar common law duties and requires directors to act in accordance
with the company’s constitution. Section 17 of the Act provides that a company’s constitution includes not
only the company’s articles of association but the resolutions and agreements specified in s.29, which
includes special resolutions passed by the company and any resolutions or agreements that have been
agreed to, or which otherwise bind classes of shareholders.
Directors are also required to use powers only for the purposes for which they were conferred. This is a
restatement of the long-standing ‘proper purposes doctrine’.
Howard Smith v Ampol Petroleum: It was held that the allotment of shares was invalid as directors had
breached their fiduciary duty (duty of trust) for the purpose of destroying an existing majority.
ii) Duty to promote the success of the company for the benefit of members as a whole
Section 175 CA 2006 reflects the long-standing common law rule that directors, as fiduciaries, must
respect the trust and confidence placed in them and should do nothing to undermine or abuse their
position as fiduciaries. The practical effect of the rule is that any conflict of interest must be authorized by
the members of the company, unless some alternative procedure is properly provided. In the case of a
private company, a conflict can be authorized by the other directors of the board unless the company’s
constitution provides to the contrary. The position is the same for public companies, except that the
constitution must expressly permit authorization by the board.
Regal Hastings v Gulliver: held that the defendants had made their profits “by reason of the fact that
they were directors of Regal and in the course of the execution of that office”. They therefore had to
account for their profits to the company.
Industrial Development Consultants v Cooley: Managing director was held liable as he had
diverted a corporate opportunity from the company towards himself.
vi) Directors have a duty not to accept benefit from the third parties which creates a
conflict of interest.
Under s.176, a director must not accept a benefit from a third party, which is conferred by reason of (a) his
being a director or (b) his doing (or not doing) anything as director. This duty is an aspect of the previous
general duty to avoid conflicts of interest, but it has been stated separately in order to ensure that the
obtaining of a benefit from a third party by a director can only be authorized by members of the company
rather than by the board.
vii) Directors have a duty to declare interest in any proposed or existing transaction
by written notice, general notice or verbally at a board meeting.
Under s.177 CA 2006 a director must declare to the other directors any situation in which they are in any
way, directly or indirectly, interested in a proposed transaction or arrangement with the company. Again
this further emphasizes the duty to avoid a conflict of interests by ensuring that directors are transparent
about personal interests, which could, even remotely, be seen as affecting their judgment.
Company can ratify a director’s breach of duty by passing a resolution or by altering its articles.
It is mandatory for a public company to have a company secretary but private companies are not
required to have one.
Every public company is required to have a secretary, who is one of the company’s officers for the
purposes of the Companies Act 2006 and who, in addition, may, or may not, be a director of the
company.
Private companies are no longer required to appoint company secretaries, although they still can do
so if they wish.
Appointment
Section 1173 Companies Act (CA) 2006 includes the company secretary amongst the officers of a
company. Every public company must have a company secretary and s.273 of the CA requires that the
directors of a public company must ensure that the company secretary has the requisite knowledge and
experience to discharge their functions. Section 273(2) & (3) sets out the following list of alternative
specific minimum qualifications, which a secretary to a public limited company must have:
They must have held office as a company secretary in a public company for three of the five years
preceding their appointment to their new position;
They must be a member of one of a list of recognized professional accountancy bodies, including
ACCA;
They must be a solicitor or barrister or advocate within the UK;
They must have held some other position, or be a member of such other body, as appears to the
directors of the company to make them capable of acting as company secretary.
Duties
The duties of company secretaries are set by the board of directors and therefore vary from company to
company, but as an officer of the company, they will be responsible for ensuring that the company
complies with its statutory obligations. The following are some of the most important duties undertaken
by company secretaries:
To ensure that the necessary registers required to be kept by the Companies Acts are established
and properly maintained;
To ensure that all returns required to be lodged with the Companies Registry are prepared and
filed within the appropriate time limits;
To organize and attend meetings of the shareholders and directors;
To ensure that the company’s books of accounts are kept in accordance with the Companies Acts
and that the annual accounts and reports are prepared in the form and at the time required by the
Acts;
To be aware of all the statutory requirements placed on the company’s activities and to ensure
that the company complies with them;
To sign such documents as require their signature under the Companies Acts.
Although old authorities, such as Houghton & Co v Northard Lowe & Wills (1928) suggest that
company secretaries have extremely limited authority to bind their company, later cases have recognized
the reality of the contemporary situation and have extended to company secretaries potentially extensive
powers to bind their companies. As an example consider Panorama Developments Ltd v Fidelis
Furnishing Fabrics Ltd (1971). In this case the Court of Appeal held that a company secretary was
entitled ‘to sign contracts connected with the administrative side of a company’s affairs, such as
employing staff and ordering cars and so forth. All such matters now come within the ostensible authority
of a company’s secretary.’
Company Auditor
The corporate governance structure specifies the distribution of rights and responsibilities among
different participants in the corporation, such as, the board, managers, shareholders and other
stakeholders, and spells out the rules and procedures for making decisions on corporate affairs.
Auditors have an extremely important role to play in that regard: they are appointed to ensure
that the interests of the shareholders in a company are being met.
Their key function is to produce independent and authoritative reports confirming, or otherwise,
that the accountancy information provided to shareholders is reliable.
Qualifications
The essential requirement for any person to act as a company auditor is that they are eligible
under the rules, and a member of, a recognized supervisory body. This in turn requires them to
hold a professional accountancy qualification.
‘Supervisory bodies’ are ones established in the UK to control the eligibility of potential company auditors
and the quality of their operation. The recognized supervisory bodies are:
(a) The Institute of Chartered Accountants in England and Wales;
(b) The Institute of Chartered Accountants of Scotland;
(c) The Institute of Chartered Accountants in Ireland;
(d) The Association of Chartered Certified Accountants; and
(e) The Association of Authorized Public Accountants.
The first four bodies mentioned above are also recognized as ‘qualifying bodies’, meaning that
accountancy qualifications awarded by them are recognized professional qualifications for auditing
purposes.
The auditors have the right of access at all times to the company’s books and accounts, and
officers of the company are required to provide such information and explanations as the auditors
consider necessary. It is a criminal offence to make false or reckless statements to auditors.
A company’s auditors are entitled to require from the company’s officers such information and
explanations as they think necessary for the performance of their duties as auditors. It is a
criminal offence for an officer of the company to provide misleading, false or deceptive
information or explanations. However, it is not an offence for them to fail to provide any
information or explanation that the auditors require of them.
Auditors are entitled to receive notices and other documents in connection with all general
meetings, to attend such meetings and to speak when the business affects their role as auditors.
Where a company operates on the basis of written resolutions rather than meetings, then the
auditor is entitled to receive copies of all such proposed resolutions as are to be sent to members.
Auditors are required to make a report on all annual accounts laid before the company in a
general meeting during their tenure of office. They are specifically required to report on certain
issues:
(a) Whether the accounts have been properly prepared in accordance with the Act; and
(b) whether the individual and group accounts show a true and fair view of the profit or loss and state of
affairs of the company and of the group, so far as concerns the members of the company;
(c) Whether the information in the Directors' Report is consistent with the accounts presented.
(a) Whether the company has kept proper accounting records and obtained proper accounting returns
from branches.
(b) Whether the accounts are in agreement with the records; and state:
(i) Whether they have obtained all the information and explanations that they considered necessary;
(ii) Whether the requirements concerning disclosure of information about directors and officers’
remuneration, loans and other transactions have been met; and rectify any such omissions.
Usually small companies are totally exempted from audit if its turnover is less than £6.5 million and
balance sheet is not more than £3.26 million having 50 or less employees.
This exemption does not apply to a public company, banking or insurance companies.
Members holding 10% or more capital of any company can veto the exemption
Indemnification of Auditors:
Any agreement between the auditor and the company which seeks to indemnify the auditor for
their negligence or breach of duty is void. However, auditor liability can be limited vide an
agreement.
The decision making power in the company mainly vests with the Members.
The decisions reached in the meetings are binding only if the meetings are convened in
accordance with the rules and procedures prescribed.
General Meetings:
Directors and the Members of the company have the power to call a general meeting
Directors have the power under the articles of association to call the general meeting
Members can make a requisition to the directors to call the general meeting under sec 303 of the
Company’s Act 2006.
Procedure of Notice:
i) 14 days clear notice must be given to the members in advance of the meeting
i) The members of companies must hold at least 5% of the paid up share capital holding voting
rights.
ii) A signed requisition stating the objects of meeting must be sent to the registered office of the
company.
iii) Directors should send a notice to convene a meeting within 21 days of the requisition
iv) The meeting must be held within 28 days of the notice
v) If the directors fail to call a meeting within 21 days then the members may convene the
meeting with 3 months from the date of the deposit of the requisition.
Role of Court:
Court upon an application of a director or a member can order to hold a meeting and can also rule
on the quorum
Kinds of Resolutions:
Under the provisions of the Companies Act (CA) 2006 there are three main types of resolutions: ordinary
resolutions, special resolutions and written resolutions.
Both of these procedures still require the calling of a general meeting of shareholders.
A written resolution may be proposed by the directors or the members of the private company (s.288 (3)).
Under s.291 in the case of a written resolution proposed by the directors, the company must send or
submit a copy of the resolution to every eligible member. This may be done as follows:
Either by sending copies to all eligible members in hard copy form, in electronic form or by means
of a website;
The copy of the resolution must be accompanied by a statement informing the members both how to
signify agreement to the resolution and the date by which the resolution must be passed if it is not to lapse
(s.291(4)). It is a criminal offence not to comply with the above procedure, although the validity of any
resolution passed is not affected.
Agreement to a proposed written resolution occurs when the company receives an authenticated
document, in either hard copy form or in electronic form, identifying the resolution and indicating
agreement to it. Once submitted, agreement cannot be revoked.
The resolution and accompanying documents must be sent to all members who would be entitled to vote
on the circulation date of the resolution. The company’s auditor should also receive such documentation
(s.502 CA 2006).
Timings of Notices
Members have the authority to waive the required notice period by the following method:
i) In public companies all members must consent in respect of AGM
ii) In other cases members holding 90% of the issued shares or voting rights must consent.
However, 95% is required by a public company
Special Notice:
The members of a private company may require the company to circulate a resolution:
If they control 5% of the voting rights (or a lower percentage if specified in the company’s
articles).
Resolution must be in hardcopy and should be sent at least 6 weeks before the AGM or General
meeting.
They can also require a statement of not more than 1,000 words to be circulated with the
resolution (s.292)
It is the number of members of a company required to be present to transact the business legally
Two members must be present to complete the quorum. However both the persons may not be
members. Proxies can also be appointed.
Definition: An agent legally authorized to act on behalf of another party. E.g. a person representing a
shareholder at company meetings.
Rules of appointment
Methods of Voting:
i) Show of hands:
Show of hands is a method of voting in which every member has one vote irrespective of his number
of shares. Chairman has the authority to call the votes by show of hands unless the other method is
demanded.
It is a method of voting which allows members to use their votes in accordance to their shareholding
rights.
Minutes of meetings
Class meetings are held for either the shareholders holding shares in different classes or under
arrangement with creditors.
If the company has more than one class of share, it may be necessary to call a meeting of that class
to approve a proposed variation of the rights attached to their shares.
The Quorum for class meeting is fixed at two persons (holding at least one third of nominal value
of issued share capital) unless the class only consists of one person.
Winding up, or liquidation, is the process whereby the life of the company is brought to an end. It
is a formal and strictly regulated procedure through which the company’s assets are realized and
distributed to its creditors and members. The procedure is governed by the Insolvency Act (IA)
1986.
The directors, creditors or the members can initiate the process of liquidation.
Liquidator:
A liquidator is the officer appointed when a company goes into winding-up or liquidation who
has responsibility for collecting in all of the assets of the company and settling all claims against
the company before putting the company into dissolution.
Kinds of Liquidation:
i) Voluntary
ii) Compulsory
Voluntary Liquidation
1. Members’ voluntary winding-up can be resorted to by solvent companies and thus requires the filing of
Declaration of Solvency by the Directors of the company with the Registrar. Creditors’ winding-up, on the
other hand, is resorted to by insolvent companies or by application to court.
2. In members’ voluntary winding-up there is no need to have creditors’ meeting (as it is assumed that
their debts will be paid in full). But, in the case of creditors’ voluntary winding-up, a meeting of the
creditors must be called immediately after the meeting of the members.
3. Liquidator, in the case of members’ winding-up, is appointed by the members. But in the case of
creditors’ voluntary winding-up, if the members and creditors nominate two different persons as
liquidators, creditors’ nominee shall become the liquidator.
Liquidation can commence by an ordinary resolution (if articles permit) or by a special resolution.
The most essential element of this liquidation is the declaration of solvency by the directors of the
company.
Statutory Declaration:
A declaration of solvency is a statutory declaration made by the directors of the company, to the
Registrar, which lists the assets and liabilities of a firm, and seeks the voluntary bankruptcy to
show that the entity is capable of repaying what it owes within 12 months.
It is a criminal offence if a director makes a statutory declaration without having reasonable
grounds.
The declaration must be made not more than 5 weeks before the resolution to windup is passed
and it must be delivered to the registrar within 15 days after the meeting of the members in
which the resolution of winding up is passed.
The formal process of a Creditors Voluntary Liquidation means that an insolvent company can be
closed in an official and professional manner.
If the directors fail to make a statutory declaration of solvency then the winding up is converted
into the creditors’ voluntary winding up. Where a voluntary liquidation proceeds by way of
creditor's voluntary liquidation, a liquidation committee may be appointed.
Procedure:
Creditors can appoint a liquidator of their choice in their meeting and their choice will prevail over the
members’ choice. However, if the creditors decide not to appoint a liquidator then the members’
liquidator will continue in the office.
The members’ liquidator will be in office for the interim period before the creditors decide to make their
appointment. This interim period has been exploited by the members through their liquidator for the
purpose known as centrebinding.
Re CentreBinding ltd 1966: In this case the liquidator appointed by the members had disposed of the
assets before the creditors could make their appointment. The court held that the liquidator had the
power to act from when he was appointed until the creditors’ meeting and so could dispose of the
company's assets in the meantime.
However, the powers of the members’ liquidator in the creditor’s winding up have now been restricted to:
Compulsory Liquidation:
A compulsory winding up is a winding up ordered by the court under s.122 IA 1986 and has to be
distinguished from the voluntary winding up procedures, either a members’ voluntary winding up
or a creditors’ voluntary winding up, neither of which involve the court action to initiate them.
The seven grounds under which a registered company may be wound up by the court under s.122
Insolvency Act 1986 (IA), are as follows:
(i) The company has passed a special resolution that it be wound up by the court;
(ii) It is a public company which has not within a year since its registration obtained a trading
certificate with the share capital requirements;
(iii) It is an ‘old public company’ which has failed to re-register;
(iv) It has not commenced business within a year from its incorporation or has suspended its
business for a whole year;
(v) (except in the case of a private company limited by shares or by guarantee) the number of
members is reduced below two;
(vi) The company is unable to pay its debts;
(vii) The court is of the opinion that it is just and equitable that the company should be wound up.
The most common of these grounds are (vi) and (vii).
If for any reason the members of the company no longer wish to continue the business they will
use (i).
The creditor, in order to establish that the company is unable to pay its debts, must prove by one of the
following three ways mentioned under Section 123:
a) If a company with a debt exceeding £750 fails to pay it within 21 days of receiving a written
demand from the creditor and the company neglects it, then it is deemed unable to pay its
debts.
b) Court has passed a judgment in favor of the creditor and against the company and the
creditor is unable to enforce the judgment because the company has no assets to satisfy the
judgment.
c) If the creditor satisfies the court that the company’s assets are less than its liabilities and the
company is unable to pay its debts as they fall due.
Re German Date Coffee 1882: The Company was formed only with the objective to acquire German
patent for the production of coffee. Unfortunately the patent was not obtained and the company started to
manufacture coffee with substitutes. It was held that the company be wound up on just and equitable
grounds as the purpose for which the company was formed was no longer pursued.
i) The winding up is deemed to have started on the date the petition was presented.
ii) Any disposition of the company’s property and any transfer of its shares after that date is
void.
iii) After commencement of liquidation process all the existing legal proceedings against the
company are halted.
iv) Floating charge crystallizes into fixed charge.
v) The employees are also dismissed automatically.
vi) Management powers are vested with the liquidator.
vii) The official receiver becomes liquidator.
viii) The company’s property may not be seized by creditors;
ix) No action can be taken against the company or its property without leave of the court;
x) The directors are dismissed;
If he finds any irregularities, he can report the same to the court and he can:
The liquidator after liquidation follows the following order in distributing the assets of the company:
Note: Official receiver can also apply to the registrar for an early dissolution of the company, if its
realizable assets will not cover his expenses and no further investigation is required.
Administration, on the other hand, is a means of safeguarding the continued existence of business
enterprises in financial difficulties, rather than merely ensuring the payment of creditors.
Administration was first introduced in the IA 1986. The aim of the administration order is to save
the company, or at least the business, as a going concern, by taking control of the company out of
the hands of its directors and placing it in the hands of an administrator. Alternatively, the
procedure is aimed at maximizing the realized value of the business assets.
Once an administration order has been issued, it is no longer possible to commence winding up
proceedings against the company or enforce charges, retention of title clauses, or even hire-
purchase agreements against the company.
An application to the court for an administration order may be made by a company, the directors
of a company, or any of its creditors, but in addition the Enterprise Act allows the appointment of
an administrator without the need to apply to the court for approval.
Such ‘out of court’ applications can be made by the company or its directors, but may also be
made by any floating charge holder.
By virtue of the Enterprise Act 2002, which amends the previous provisions of the Insolvency Act
1986, floating charge holders no longer have the right to appoint administrative receivers, but must
now make use of the administration procedure as provided in that Act. As compensation for this loss
of power the holders of floating charges are given the right to appoint the administrator of their
choice.
Upon the expiry of two day notice period, the floating charge holder will have to submit a list of
documents in the court such as notice of appointment of administrator, his statement of consent and
statutory declaration that he qualifies for the appointment.
Company or its directors in order to appoint an administrator out of court must give a notice to the
floating charge holder having a right to appoint an administrator.
The following persons can apply to the court for an administrative order:
Consequences of Administration:
The administrator after his appointment has the following legal duties to perform:
The administrator must within 8 weeks set out his proposals for saving the company. He must call a
meeting of the creditors within 10 weeks of his appointment to approve the proposals.
During the administration process the administrator has the powers to:
do anything necessary for the management of the company
remove or appoint directors
pay out monies to secured or preferential creditors without the need to seek the approval of the
court
pay out monies to unsecured creditors with the approval of the court
take custody of all property belonging to the company
Dispose of company property. This power includes property which is subject to both fixed and
floating charges, which may be disposed of without the consent of the charge holder, although
they retain first call against any money realized by such a sale.
Tenure of Administrator
The administration period is usually 12 months, although this may be extended by six months
with the approval of the creditors, or longer with the approval of the court.
Following can also bring an end to the administrator’s tenure:
a) Purpose of administration has been achieved. A notice to this effect is sent to the creditors, the
court and the companies registry.
b) Period of 12 months has elapsed
c) Ulterior motive of the administration has been discovered
d) A creditor petition’s in the court to end the administration
e) If the administrator forms the opinion that none of the purposes of the administration can be
achieved, the court should be informed and it will consider ending the appointment.
Advantages of Administration
Definition:
Insider dealing is dealing in shares, on the basis of access to unpublished price sensitive information.
Such activity is unlawful and is governed by part V of the Criminal Justice Act 1993 (CJA).
Under s.52 of the Criminal Justice Act (CJA) 1993 an individual is guilty of insider dealing if
I) He encourages another person to deal in securities that are price-affected securities on a
regulated market OR
II) He deals in securities that are price-affected securities on the regulated market OR
III) He discloses the information, otherwise than in the proper performance of the functions of
his employment, office or profession, to another person.
Following is the explanation of the above mentioned elements:
Inside Information:
Who is an insider?
Section 57 states that a person has information as an insider only if they know it is inside information and
they have it from an inside source and covers those who get the inside information directly through either:
(i) being a director, employee or shareholder of an issuer of securities ( primary insider); or
(ii) having access to the information by virtue of their employment, office or profession.
If a person receives information either directly or indirectly from the primary insider, that person
is called a secondary insider.
On indictment the penalty is an unlimited fine and/or a maximum of seven years imprisonment.
Market abuse
In essence, market abuse may occur when investors have been unreasonably disadvantaged, directly or
indirectly, by others who:
have used information that is not publicly available to trade in financial instruments to
their advantage (insider dealing);
have distorted the price-setting mechanism of financial instruments; or
have disseminated false or misleading information
Directors can also be held personally liable for the public announcements made by them. (R v Bailey)
Money Laundering:
Money laundering refers to the attempt to disguise the origin of money acquired through criminal
activity in order to make it appear legitimate. The aim of the process is to disguise the source of
the property, in order to allow the holder to enjoy it free from suspicion as to its source.
Sec 3 of the Criminal Justice Act: defines criminal property as any property which the
person knows or has suspicion that it relates to a criminal conduct.
Money laundering was first made a criminal offence in the United Kingdom under the Drug
Trafficking Offences Act 1986 and is now regulated by the Proceeds of Crime Act 2002, and the
Money Laundering Regulations 2007 together with the specifically anti-terrorist legislation, such as
the Prevention of Terrorism Act 2005.
The Proceeds of Crime Act 2002 seeks to control money laundering by creating three categories of
criminal offences in relation to the activity.
i) Laundering:
The first category of principal money laundering offences relates to laundering the proceeds of crime
or assisting in that process and is contained in ss.327–329. Under s.327, it is an offence to conceal,
disguise, convert, transfer or remove criminal property from England and Wales, Scotland or
Northern Ireland. Concealing or disguising criminal property is widely defined to include concealing
or disguising its nature, source, location, disposition, movement or ownership or any rights connected
with it. These offences are punishable on conviction by a maximum of 14 years imprisonment and/or
a fine.
The second category of offence relates to failing to report a knowledge or suspicion of money
laundering and is contained in ss.330–332. Under s.330 it is an offence for a person who knows or
suspects that another person is engaged in money laundering not to report the fact to the appropriate
authority. However, the offence only relates to individuals, such as accountants, who are acting in the
The third category of offence relates to tipping off and is contained in s.333, which makes it an offence
to make a disclosure which is likely to prejudice any investigation under the Act. The offences set out
in these sections are punishable on conviction by a maximum of five years imprisonment and/or a
fine.
Every person who has knowledge of money or laundering or suspects the same must report it to the
Money Laundering Reporting Officer or to Serious Organized Crime Agency.
i) Placement is the initial disposal of the proceeds of criminal activity into apparently
legitimate business activity or property.
ii) Layering involves the transfer of money from business to business, or place to place in
order to conceal its initial source.
iii) Integration is the culmination of the previous procedures through which the money takes
on the appearance of coming from a legitimate source.
The main purpose of the money laundry regulations is that the organization should establish internal
systems to prevent the individuals from using the organizations to launder their money.
Need to have a risk assessment in place, and conduct their client due diligence on the basis of that
assessment including:
Simplified due diligence
Enhanced due diligence (including provisions regarding politically exposed persons
Need to identify the beneficial owner of a client
Are required to monitor, on an ongoing basis, their relationship with the client and have evidence
of identity in place for all clients, even those which have been on the books for many years.
Need to monitor their firm's compliance with the regulations
Bribery:
Bribery is defined as ‘giving someone a financial or other advantage to encourage that person to
perform their functions or activities improperly or to reward that person for having already done so.
So this could cover seeking to influence a decision-maker by giving some kind of extra benefit to that
decision-maker rather than by what can legitimately be offered as part of a tender process.’ (Ministry
of Justice Guide to the Bribery Act 2010)
It is an offence where a person receives or accepts a financial or other advantage to perform a relevant
function or activity improperly. ‘Relevant function or activity’ includes any function of a public nature,
any activity connected with a business, any activity performed in the course of a person’s
employment, and any activity performed by – or on behalf of a body of persons. The activity may be
performed in a country outside the UK.
It is an offence directly, or through a third party, to offer a financial or other advantage to a foreign
public official (FPO) to influence them in their capacity as a FPO, and to obtain relevant business, or
an advantage in the conduct of business. ‘FPO’ means an individual who holds a legislative,
administrative or judicial position of any kind outside the UK, or who exercises a public function
outside the UK, or is an official or agent of a public international organization.
While s.7 makes it an offence for a commercial organization to fail to prevent bribery, it also provides
a full defence against any such allegation. Thus, a commercial organization will have a defence if it can
show that adequate procedures have been put in place to prevent persons associated with it from
engaging in bribery. This defence also serves the purpose of ensuring that commercial organizations
have developed procedures to prevent bribery.
Although no definition of ‘adequate procedures’ is provided, Ministry of Justice guidance indicates six
principles which underpin the defence of adequate procedures.
The procedures taken by an organization should be proportionate to the risks it faces and the
nature, scale and complexity of its activities. A small organization would require different
procedures to a large multinational organization.
The top-level management should be committed to prevent bribery and foster a culture within the
organization in which bribery is unacceptable.
Organizations should assess the nature and extent of their exposure to risks of bribery, including
potential external and internal risks of bribery. For example, some industries are considered
higher risk than others, such as the extractive industries; some overseas markets may be higher
risk where there is an absence of anti-bribery legislation.
The organization should apply due diligence procedures in respect of persons who perform
services for – or on behalf of – the organization in order to mitigate bribery risks.
(v) Communication
The organization should ensure its bribery prevention policies and procedures are embedded and
understood throughout the organization through internal and external communication, including
training, proportionate to the risks it faces. Communication and training enhances awareness and
helps to deter bribery.
The organization should monitor and review procedures designed to prevent bribery and make
improvements where necessary. The risks an organization faces may change and, therefore, an
organization should evaluate the effectiveness of its anti-bribery procedures and adapt where
necessary. The question of whether an organization had adequate procedures in place to prevent
bribery is a matter that will be determined by the courts by taking into account the circumstances
of the case. The onus will, however, be on the organization to prove it had adequate procedures in
place. If an organization is charged with bribery it can raise the defence that it had adequate
procedures designed to prevent it.
a. False Accounting: A person who falsifies or conceals information required for an accounting
purpose knowing that the information is misleading may commit an offence of false accounting.
b. Accounting Record: The CA 2006, s 386 sets out the duties of a company to keep accounting
records. Section 387 makes it an offence for a company to fail to comply with any provision of
section 386 and in those circumstances the offence is committed by every officer of the company
who is in default. It is a defence for a person charged to show that he acted honestly and that in
the circumstances in which the company's business was carried on the default was excusable.
c. False Information: An offence is committed if a director's report containing the statutory
statement is approved but is false. Every director who either knew that the statement was false, or
was reckless to as to whether it was false and failed to take reasonable steps to prevent the report
from being approved commits the offence.
d. Filling of Accounts: If the company fails to file accounts after the end of its financial year then
it will be liable to fine.
e. Annual Return: Failure by the officers of the company to deliver the return on time will also be
an offence under the Company’s Act 2006.