Ac04i (CN) Mar20 LR

Corporate and Business Law (LW) (GLO)
Integrated Course Notes

For exams from 1 September 2020
to 31 August 2021
ISBN: 9781509786145
These materials are provided by BPP

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Corporate and Business Law (LW)(GLO)
Study Programme
Taught Phase Study Programme
Page
Introduction to the exam and the course........................................................................................... 4
1 Essential elements of legal systems: Economic political and legal ......................................... 27
Achievement Ladder Step 1 ......................................................................................................... 39
2 International trade and regulations ......................................................................................... 41
3 Essential elements of the legal system: Commercial arbitration ............................................. 51
4 International business transactions: Sale of goods ................................................................. 61
5 International business transactions: Obligation and risk ......................................................... 71
Achievement Ladder Step 2 ......................................................................................................... 81
6 International business transactions: Transport and payment.................................................. 83
7 Agency law .............................................................................................................................. 91
8 Partnerships ............................................................................................................................ 97
Achievement Ladder Step 3 ....................................................................................................... 103
9 Corporations and legal personality........................................................................................ 105
10 Company formations ............................................................................................................. 113
11 A company's constitution....................................................................................................... 123
12 Share capital.......................................................................................................................... 129
13 Loan capital ........................................................................................................................... 135
14 Capital maintenance and dividend law ................................................................................. 141
15 Company officers................................................................................................................... 147
16 Company meetings and resolutions ...................................................................................... 157
17 Insolvency.............................................................................................................................. 165
18 Fraudulent behaviour............................................................................................................. 173
19 Answers to Lecture Examples............................................................................................... 188
20 Appendix A: Glossary of terms.............................................................................................. 192
21 Appendix B: Revision summaries.......................................................................................... 194
Prepare for and book your CBE!

You should plan to sit your CBE within the next couple of weeks whilst the knowledge from this
course is still fresh in your mind. In preparation use the Learning Media Practice & Revision Kit and
i-Pass to test yourself on as many questions as you can, revising from the Course Notes and
Passcards any areas of the syllabus that cause you problems.
One of the criteria for Pass Assurance is that you book your CBE with BPP, so please contact your
local BPP centre as early as you can to book your CBE and good luck!
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INTRODUCTION
Introduction to Corporate and Business Law (LW) (GLO)
Overall aim of the syllabus

To develop knowledge and skills in the understanding of the general legal framework within which
international business takes place, and of specific legal areas relating to the business, recognising
the need to seek further specialist legal advice where necessary.
The syllabus
The broad syllabus headings are:
A Essentials elements of the legal system

B International business transactions
C International business forms
D The formation and constitution of joint stock companies
E Capital and the financing of companies
F Management, administration and regulation of companies
G Legal implications relating to insolvency law
H Corporate fraudulent and criminal behaviour
Main capabilities
On successful completion of this exam, candidates should be able to:
 Identify the essential elements of different legal systems including the main sources of law,
the relationship between the different branches of a state's constitution, and the need for
international legal regulation, and explain the roles of international organisations in the
promotion and regulation of international trade, and the role of international arbitration as an
alternative to court adjudication
 Recognise and apply the appropriate legal rules applicable under the UN Convention on
Contracts for the International Sale of Goods, and explain the various ways in which
international business transactions can be funded
 Recognise different types of international business forms
 Distinguish between the alternative forms and constitutions of business organisations
 Recognise and compare types of capital and the financing of companies
 Describe and explain how companies are managed, administered and regulated
 Recognise the legal implications relating to insolvency law
 Demonstrate an understanding of corporate and fraudulent behaviour

INTRODUCTION
Links with other exams
Strategic Business
Reporting (SBR)
Corporate & Financial Audit &

Business Law (LW) Reporting (FR) Assurance (AA)
This diagram shows where direct (solid line arrows) and indirect (dashed line arrows) links exist
between this exam and other exams that may precede or follow it.
The Corporate and Business Law syllabus assumes no prior knowledge of law; however the
elements of the syllabus relating to corporate governance and ethics are examinable in the
ACCA's financial reporting and auditing exams.
Assessment methods and format of the exam

Students must sit this exam as a computer-based exam. The last markets to offer the paper-based
exam withdrew this option from December 2017.
The exam is a two hour computer-based exam. Questions will assess all parts of the syllabus and
will test knowledge and some comprehension of application of this knowledge.
Format of the Exam Marks

Section A
25 questions worth 2 marks each 50
20 questions worth 1 mark each 20
Section B
5 questions worth 6 marks each 30
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INTRODUCTION
Taught Phase Aims
Achieving ACCA's Study Guide Outcomes
A Essential elements of legal systems
A1 Business, political & legal systems Chapter 1

A2 International trade, international legal regulation & conflict of laws Chapter 2
A3 Alternative dispute resolution mechanisms Chapter 3
B International business transactions
B1 Introduction to the UN Convention on Contracts for the International Sale of Chapter 4

Goods and ICC Incoterms
B2 Obligations of the seller and the buyer, and provisions common to both Chapter 5
C Transportation and payment of international business transactions
C1 Transportation documents and means of payment Chapter 6
D The formation and constitution of business organisations
D1 Agency law Chapter 7

D1 Partnerships Chapter 8
D2 Corporations and legal personality Chapter 9
D3 The formation and constitution of a company Chapters 10 &
11
E Capital and financing of companies
E1 Share capital Chapter 12

E2 Loan capital Chapter 13
E3 Capital maintenance and dividend law Chapter 14

INTRODUCTION
F Management, administration and regulation of companies
F1 Company directors Chapter 15

F2 Other company officers Chapter 15
F3 Company meetings and resolutions Chapter 16
G Insolvency law
G1 Insolvency and administration Chapter 17
H Corporate fraudulent and criminal behaviour
H1 Fraudulent and criminal behaviour Chapter 18

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INTRODUCTION
Analysis of the pilot exam

Please note that the ACCA will not publish past exams for the Knowledge modules. The analysis
of the Pilot Exam should therefore be used as a guide to both the areas that will be examined and
the mix between knowledge and scenario based questions.
Knowledge
Scenario
Essential elements of the legal system
Business, political & legal systems 4
International trade, international legal regulation & conflict of laws 5
Alternative dispute resolution mechanisms 3
International Business Transactions

Introduction to the UN Convention on Contracts for the International Sale of
14
Goods and ICC Incoterms
Obligations of the seller and the buyer, and provisions common to both 4 6
International Business Forms

Transportation documents and means of payment 14
The formation and constitution of joint stock companies

Agency law 1
Partnerships 3 6
Corporations and legal personality 1
The formation and constitution of a company 1
Capital and the financing of companies

Share capital 4 2
Loan capital 4
Capital maintenance and dividend law 2
Management, administration and the regulation of companies

Company directors 6
Other company officers
Company meetings and resolutions 4

INTRODUCTION
Knowledge
Scenario
Insolvency law
Insolvency and administration 6
Corporate fraudulent and criminal behaviour

Fraudulent and criminal behaviour 4 6

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INTRODUCTION
10

Skills bank
This section explains and demonstrates the key skills

required to enable you to maximise your chance of
exam success. Knowledge of the syllabus is insufficient
on its own. Through question practice you will develop a
set of skills that will enable you to pass this exam.
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Key skills required to pass

Our analysis of the examining team's comments on past exams, together with our experience of preparing students for
this type of exam, suggests that to pass Corporate and Business Law (GLO) you will need to develop a number of key
skills.
1 Learning law
4 Tackling multi-task
questions
2 Time management
3 Tackling objective
test questions
Each of these key skills is analysed on the following pages. Example(s) from past exam questions are included
to illustrate the importance of these skills and how these skills should be applied.
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Skill 1 – Learning law

Corporate and Business Law is a predominantly knowledge-based examination. A lack of knowledge will be a
significant barrier to success in this exam, and is a long held problem identified over successive sittings by the
examining team:
From ACCA Examining Team Report

'…there were also many poor performances, which indicated a lack, and in some cases a total lack, of legal
knowledge.'
'…some could cite the case of Dunlop v Selfridge to explain it, their knowledge of the exceptions to the rule left
much to be desired. A surprising number knew very little.'
Practical advice on how to learn law is detailed below. Note. Whilst a number of the following examples are taken from
the English variant of the Corporate and Business Law exam the skills, principles and illustrations are equally valid for
Global exam.
1 Mind maps
An effective memory technique is to create your own mind maps because the human brain is better at remembering
patterns than lists. An example is given below in respect of termination of offer.
Counter-offer
Hyde v Wrench
Rejection
Terminate offer
Lapse of time
Revocation
 Communicated
Routledge v Grant Death
 Received Express Implied
Byrne v Van Tienhoven Ramsgate Hotel v Montefiore
 Reliable 3rd party
Dickinson v Dodds
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2 Pictures/Diagrams
Pictures are another excellent memory tool. Often a simple picture can act as aid in recalling the name or outcome of a
particular case. This is usually something connected with the facts of the case itself. Some examples are given below:
Salomon v Salomon & Co Separate legal personality (Mr Salomon was a boot maker)
Cutter v Powell Consideration must be exact and complete (Cutter was a

seaman who died at sea)
Central London Properties Promissory Estoppel (Based in World War II London)

v
High Trees
Erlanger v New Sombrero Promoters' fiduciary duties

Phosphate Co
3 Examinability of cases
It is entirely possible to pass Corporate and Business Law without learning any case law. However, by doing so you are
in effect just reading legal principles without seeing how it is applied in practice. For instance in the exam you will be
confronted with some 'problem' questions that have short scenarios and require you to give advice. By having an
awareness of relevant cases you should be able to more clearly see how the law you have learnt will be applied by
judges, and hence you should quickly be able to see the correct approach from the choices given.
In view of this it's a good idea to learn as much case law as you can. Within your BPP notes there is a case law
summary at the end of each chapter. In terms of what you should be doing with these there are two practical steps you
can take:
1. Add them to your mind maps (see Key skill 1 for an example)
2. Think of items/drawings/words you can associate with the cases to make them more memorable (see Key
skill 2 for examples)
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4 Exam context
Consider the following question from the Corporate and Business Law English Specimen exam:
Ann got trapped in a public toilet due to the lock being faulty. Rather
than wait for help, she tried to climb out of the window but fell and
broke her leg.
Which of the following is this an example of?
A Res ipsa loquitur

Q 21
B Volenti non fit injuria
C Novus actus interveniens
D Contributory negligence
In this instance the question facts are the same as the case of Sayers v
Harlow where a woman's faulty actions in trying to escape from a toilet
cubicle were deemed to constitute Contributory negligence – answer D.
Skills practice
For each chapter in your revision notes try to create your own mind maps. Creating your own mind
map is much more effective than trying to memorise other peoples. The activity of creating and thinking
about your mind maps will help you memorise their content.
Try and build associations between cases and little sketches. The more humorous and abstract these
are the more likely you are to remember them.
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Skill 2 – Time management
It is important that you use your time wisely in the exam to gain maximum marks.
Time management
 What you SHOULD NOT do
Panic! You have two hours to answer 45 objective test questions (worth 1–2 marks each) in Section A and 6 multi-task
questions (worth 5 marks each) in Section B. This equates to 1.2 minutes a mark. This means that you have
approximately 1.9 minutes on average to answer each objective test question, and 7.2 minutes to answer each
multi-task question. In total, you should complete Section A in 84 minutes and Section B in 36 minutes. For many
questions you will get the answer straight away and so you are likely to have a bit more time to think about some of the
others. Therefore don't worry about your timing on each individual question, just keep track over a few.
 What you SHOULD do

It is important to start the exam positively.
Firstly:
Make a note of the finishing time for each of Sections A and B
Section A (45 objective test questions) should take approximately 84 minutes. Make a note of what
time you should finish Section A at.
Section B (5 multi-task questions) should take approximately 36 minutes. Make a note of what time
you should finish Section A at and more specifically the finishing time for each of the 5 multi-task
questions. Given the longer scenarios in Section B you must ensure you do not start this section with
less than 36 minutes of the exam remaining.
Secondly:
Work through questions systematically
Start at question 1 and begin answering from there working through questions in order.
If you find a question that you don't know the answer to and want to come back to it later then put an
answer in for the moment, make a note of it and go onto the next question.
Try not to jump around questions otherwise you may leave some unanswered by the end.
Then:
Check your solutions before the end of the exam
Having answered all of the questions you should look through your answers to make sure:
1. You are happy with the options selected; and
2. You have answered all questions
If you have taken this logical and systematic approach you should have given yourself the best chance of doing well in
the exam.
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Practical advice for computer-based exams

STEP Before the exam
1 Make sure that you are registered with the ACCA and that your exam centre has your exam
booking. This is important because you can not sit the exam if you are not a registered student.
Practice at least one mock exam using the computer so that you are familiar with navigating through
questions and not being able to annotate the question.
STEP At the beginning of the exam

2 You want to make the start of the exam as stress free as possible so make sure that you have the
following available:
 Photo identification and your student number
 Paper supplied by your exam centre, pens and a calculator
 Details of which exam you are planning to sit
STEP Starting the exam

3 To start the exam you will need to do the following:
 Login – enter your ACCA student number and your date of birth – make sure that you have
both to hand
 Select the exam – the system will ask you which exam you want to do and then you
<Confirm> that selection
 Instructions – the next three screens are instructions – read these carefully so that you know
what you have to do to complete the exam
 Launch the exam – please don't click this screen until you have been advised to by your
invigilator AND you are ready because this starts the exam and starts the timer.
STEP Answering the questions

4 The exam will start at question 1. You can progress through the questions by clicking <Next> but you
can also go back by clicking <Previous>. When you answer the questions you must follow the
following procedure:
 Enter your answer
 Click on <Submit> – you must do this otherwise as soon as you click <Next> to move to the
next question your entry will be lost and you will have to re-enter
 If you click <Next> and have not submitted your answer to a question then you will get a
reminder – clicking <OK> on the reminder does not submit your answer – you must go back
and re-enter your answer and then <Submit>
 If you are unsure of an answer then just put an answer in for now, make a note of it, and revisit
it later
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You can see that it is very important to submit your answers as you go and to keep track of what you have done. It is
probably a good idea therefore to use your pad of paper to do two things:
1. Make any notes you want to help you answer the questions; and
2. Keep a record of the status of each question.
For example:
Question Status
1 
2 ?
3 
4 X
Where
 means that the question has been answered and I am reasonably confident of the answer
? means that the question has been answered but I want to check the answer
X means that the question has not been answered and I need to go back to it
It would be most efficient to set this up at the beginning of the exam. In this way you will have a tally of which questions
really need to be checked over at the end of the exam and it reduces the chances that you will leave a question
unanswered.
STEP At the end of the exam time

5 At the end of the exam you should check your answers and ensure that you have submitted an
answer for every question as well as double checking any answers you were not sure of.
You have two ways of navigating the questions:
1. Clicking <Previous> to work back through the questions one by one; or
2. Using the drop down menu which shows all the questions 1–50 (questions 1 to 45 being the
objective test questions in Section A; questions 46 to 50 being the 5 multi-task questions)
indicating whether an answer has been submitted or not; clicking on the question number will
take you directly to that question
Remember that if you choose to change a previously submitted answer you must <Submit> the
new one otherwise your original answer will be retained instead!
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STEP Closing your exam session

6 Once you are satisfied that you are happy with your answers, if you have time left in the exam then
you have a couple of options to finish your exam session (subject to any advice you get from the
invigilators in your exam centre).
1. Let the time on the on screen clock run down to zero and the exam session will end
automatically; or
2. Click <Exit> – you will be asked to <Confirm> this so you cannot accidentally end your session
early
In either case the next thing you will see will be the Results Screen that shows your mark and
whether you have passed or not.
It is important that you don't <Exit> at this stage since you have no proof of your result!
Your invigilator will ask you to <Print> two copies and will instruct you to <Exit> once these have been
printed off.
You have now finished your exam.
Final tips on timing

 Make use of the paper to make notes or to work out the answers to questions.
 If you find a particularly difficult question, move on and come back to it later in the remaining time – it is
important that you do not run out of time leaving easier questions later in the exam unanswered.
 Keep an eye on the clock so that you can pace yourself.
 Be well prepared for the exam day so that you can concentrate on doing the exam rather than the administration
around it.
 Get to your exam venue in plenty of time so that you are relaxed when you get into the exam room.
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Skill 3 – Tackling objective test questions
Technique for multiple choice questions

There are questions were one of the four options is correct.
Narrative questions
1 What to do if you know the answer to the question

If you know the answer to a narrative question you should:
1. Read the requirement
2. Locate the correct answer
3. Check the other answers
4. Read the requirement again to ensure you're answering the correct question
5. Confirm that you have the correct answer
This systematic check will ensure that you do not throw away marks when you really do know the answer.
2 What to do if more than one answer appears plausible

Sometimes more than one option can seem to answer the question. In this case you have to firstly ensure you've read
the requirement carefully, as questions may be phrased in ways that are not what you're expecting. If you still identify
more than one likely option, select the 'most correct' answer. The approach adopted above is useful here too but this
time you have to think through the alternatives a bit more.
For example, Q34 on the Corporate and Business Law English Pilot Exam asks:
Ho subscribed for some partly paid-up shares in Io Ltd. The company has
not been successful and Ho has been told that when Io Ltd is liquidated,
he will have to pay the amount remaining unpaid on his shares. However, he
is not sure to whom such payment should be made.
In limited liability companies, shareholders are liable to which party for
any unpaid capital?
A Creditors
B The directors
C The company
D The liquidator
If you don't know the answer you can adopt a step by step approach as follows:
Here are some steps to follow:
STEP Read the requirement carefully

1 Shareholders can be liable to either the company or the liquidator; this depends upon the
circumstances.
STEP Read each option carefully and eliminate any obviously wrong answers
2 As stated above there are two possible correct answers – we can therefore immediately eliminate
answers A and B.
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STEP Assess the remaining answers

3 We now need to consider which of the answers is correct. Both are feasible, depending on the
circumstances...
STEP Read the question again…

4 Finally, we should re-read the requirement before submitting the question to ensure we are answering
the correct question. In this example the company is solvent. If there was an insolvency then unpaid
capital would be collected by the liquidator. In this case there is no mention of insolvency therefore the
most likely answer therefore seems to be C – the company.
This systematic approach helps you to break a question down and work through to find the correct answer logically.
What to do if you still don't know the answer…

If you have been through the above 4 steps and can't identify a preferred answer then you have to guess!
 What you SHOULD NOT do

Two main things to avoid:
1. Waste excessive time – time spent dithering over a single question could leave you with insufficient time for the
rest of the exam.
2. Not answering – this is a common yet serious error – even if you make a wild guess you start with a 25%
chance of success. Your chance of getting the 2 marks if you don't offer an answer is zero!
 What you SHOULD do

Having used the step by step approaches above to narrow down your possible answers, go with the one that feels
right. And move on.
If you have a flash of inspiration later in the exam go back and revisit it – but only if you are sure.
Technique for other types of question in computer-based exam

The above systematic approach for multiple choice questions can be applied to any objective test questions that you
come across in the exam. These question types include:
 Multiple response matching (match answers via a grid)
 Multiple response (where there are 2 correct answers)
 Multiple choice with 3 or 4 answers presented, for 1 and 2 marks respectively
When you get these types of questions make sure you read the question carefully including the format of the answer so
that you can complete the question correctly.
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Skills practice
1. Practise keeping track of the questions you have answered when doing questions from the
Practice & Revision Kit
2. Always check your answers through (if you would have time in the exam) before looking at the
solutions in the back of the book
3. Practise as many objective test questions as possible.
4. If you don't know the answer to a question – don't just go to the answer at the back or just guess –
use the step by step approach described above.
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Skill 4 – Tackling multi-task questions

In Section B of the exam, there will be five 6-mark multi-task questions. The breakdown of marks and tasks per
question can and will vary.
You should note that solutions from one part of a long question will not be required for the subsequent parts. This
means that you can attempt the parts in any order.
You should use the same approach as in the OT questions, ensuring that you read the question carefully and do not
run out of time. It is not always necessary to answer each question in task by task order. In some cases you may find
that some later tasks are based on fact recall and would be best done first.
You should approach each task one at a time as if each one were a separate question.
Q1 from Section B of the from the English pilot exam reads:
Az Ltd operates a shipbuilding business which specialises in constructing

and modifying ships to order. In 2011, Az Ltd entered into an agreement
with Bob to completely rebuild a ship to Bob’s specification for a total
contract price of £7 million. However, after completion, Bob informed Az
Ltd that, due to the downturn in the world economy, he no longer needed
the ship. Az Ltd had already expended £5 million on altering the ship, and
immediately started an action against Bob for breach of contract.
However, in the week before the case was to be decided in the court, Az
Ltd sold the ship for the same amount of money which they would have
received from Bob.
Task 1 2 marks
Which TWO of the following statements explain the purposes of awarding

damages for breach of contract?
 They compensate the injured party for any financial loss
 They put the parties in the position they were in before the contract
was formed
 They are a punishment for the party in breach
 They put the parties in the position they would have been in had the
contract been performed
Requirement (b) 2 marks

Which TWO of the following statements in relation to the duty to mitigate
losses are correct the duty to mitigate losses?
 It lies with the party in breach of contract

 It results in an increase of damages
 It lies with the party who suffers the breach
 It reduces damages
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Requirement (c) 2 marks

What level of damages Az Ltd can claim for breach of contract?
 £0
 £5m
 £2m
 £7m
In this instance there are two marks available for each requirement, and these questions are independent of each
other, by this we mean that it doesn't matter if you get any of them wrong, this does not impact on your ability to answer
the other questions correctly.
When approaching questions of this type just remember:
(a) To allow a little more time to read the scenario.
(b) To expect a higher degree of application – as this is where the examining team can require to show that you can
apply the law to a particular set of circumstances. Here your knowledge of case law will help, as cases show us
how legal principles will be applied.
(c) Any type and combination of OT questions can be presented here, so for instance you could get a 2-mark OT
question, followed by a 4-mark MRQ – multiple response question – where you could be asked to mix-and-
match answers.
Skills practice
1. Practice all the multi-task questions from the Pilot Exam and the Extra Bank of MTQs and as
many as possible from the Practice and Revision Kit making sure you attempt a good spread
across the three syllabus areas.
2. Read the question carefully, remembering where there are many tasks, to treat them as a group
of objective test questions but being careful not to overrun on time.
3. Rework any questions that you struggle with.
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26

Essential elements of
legal systems: Economic,
political and legal
Syllabus Guide Detailed Outcomes

Having studied this chapter you will be able to:
 Explain the inter-relationship of economic and political and legal systems
 Explain the doctrine of the separation of powers and its impact on the legal system
 Explain the distinction between criminal and civil law
 Outline the operation of the following legal systems:
(i) Common law
(ii) Civil law
(iii) Sharia law
Exam Context
Having studied this chapter you will have an understanding of the differences in the operation between the main legal
systems throughout the world. Within this you will see how the courts sit alongside governments and parliaments in a
democracy.
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1: ESSENTIAL ELEMENTS OF LEGAL SYSTEMS: ECONOMIC, POLITICAL AND LEGAL
Overview
Economic, political and legal

systems
Economic Political systems Types of law

Rule of law and
separation of powers
Legal systems
Common law Civil law Sharia law
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1 Introduction
Each nation has different economic, political and legal systems.
Economics
1.1 Introduction
Economics can be described as 'the ways in which society decides what to produce,
how to produce it and who to produce it for'.
There are various types of economic systems that might exist in a country.
Planned economy
1.2 This is where the decisions and choices about resource allocation such as labour, finance
and entrepreneurship are made by the government.
The price of goods does not reflect the market forces of supply and demand.
Although individuals may be allowed to own some personal possessions, collective wealth
is held by central government.
Market economy
1.3 The decisions and choices about resource allocation are left to the market forces of supply
and demand, and the workings of the price mechanism.
In a market economy, most wealth is owned by individuals, with a minimum being
collectively owned by the government.
Mixed economy
1.4 This is where the decisions and choices on resource allocation are made partly by the
free-market forces of supply and demand, and partly by government on expenditure like
defence.
Economic wealth is divided between private and public sectors. In practice all modern
economies are mixed economies.
2 Political systems: Rule of law and separation of

powers
Rule of law
2.1 This is a set of rules that govern a country and so to some degree regulates an individual's
behaviour. This government can exist by consent in a democracy or by compulsion in a
dictatorship.
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Separation of powers
2.2 The concept of the rule of law is closely linked with the separation of powers. Most
'consensual' democratic nations have power held in different places, so that no part of the
political process has too much influence. They usually have:
(a) An elected legislature, a body which decides on what laws should be passed
(b) An elected executive, or government body, makes decisions that put laws into action
(c) A judiciary which may or may not be elected that rules on any legal disputes
In some nations such as the US the legislature, the executive and the judiciary are
completely separate, so that each is accountable to, and can operate as a check and
balance on, the others.
In the UK, there is a complex relationship between the three sets of powers, so that a
balance is struck between control and accountability on the one hand, and getting things
done on the other.
3 Types of law
Introduction
3.1 Legal disputes can be between the government and the people, known as criminal law, or
between individuals, known as civil law.
Civil law
3.2 This is the form of private law used by individuals to assert their rights against other
individuals, the aim being to provide compensatory remedies, not punish them. Cases are
usually cited in the form of Brown v Black.
Criminal law
3.3 This is an aspect of public law seeking to regulate behaviour not approved by the State, the
aim being to enforce the law, and punish offenders. Crimes are offences committed
against the law of the land and cases are usually cited in the form of R v Brown.
Distinction between civil and criminal law
Feature Civil Criminal

Who brings action? Claimant Prosecution
Standard of proof Balance of probabilities Beyond reasonable doubt
Decisions Liable/not liable (Judge) Guilty/not guilty (Jury)
Aims Compensation Punishment
Remedies Damages Prison/fines
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4 Legal systems
There are three main legal systems: common law, civil law and Sharia law.
Common law
4.1 Introduction
Common law is a system of law developed in England after 1066 AD but has been exported
globally to the British Empire and Commonwealth and is the basis of the American (US)
legal system.
4.2 Common law is based on judge made law that is common to the nation but which
historically had a number of defects:
(a) The need for a Writ
(b) The only remedy was damages, financial compensation
(c) Didn't recognise Trusts
4.3 To overcome these disadvantages common law was and is still supplemented by equity:
judgements based on fairness.
4.4 Equity is seen as a gloss to the common law system as equitable remedies such as
performance and injunctions will only be awarded at the judge's discretion.
4.5 Common law is applied using the principles of judicial precedent.
5 Judicial precedent
5.1 Case law operates upon the basis of stare decisis (to stand by a decision), whereby judges
are bound by the previous decisions of judgements made by the courts above them in the
hierarchy. In England and Wales it is as follows:
 Supreme Court – binds all lower courts, but not itself
 Court of Appeal – binds all lower courts, and itself
 High Court – binds all lower courts, and usually itself
 Crown/Magistrates/County Courts cannot create precedent
5.2 The nature of precedent itself operates through the interpretation of judges' decisions,
requiring each decision to be separated into:
(a) Ratio decidendi (the reason for the decision) – this is the binding element of the
judgement
(b) Obiter dicta (statements made by the way) – this is not binding, but merely of
persuasive authority and can be taken into consideration in later cases
5.3 Established precedents will not be binding in the following circumstances:

(a) Overruling – the procedure whereby a court higher in the legal hierarchy sets aside a
legal ruling established in a previous case. As this is a direct challenge to the basis of
stare decisis the judiciary are reluctant to overrule precedent.
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(b) Reversing – a procedure whereby a court higher in the hierarchy reverses the
decision of a lower court in the same case.
(c) Distinguishing – a precedent is avoided by demonstrating that the material facts of
two cases are not the same.
5.4 There are numerous perceived advantages of the application of stare decisis, including:
(a) Consistency – like for like cases will have the same outcomes
(b) Efficiency – case outcomes can be predicted in advance avoiding unnecessary
litigation
(c) Flexibility – new cases result in new precedents, whereby the law keeps pace with
changes in society
(d) Bulk – there is a vast library of cases to refer to
5.5 The disadvantages of stare decisis are also well documented:

(a) Uncertainty – there are many ways in which precedents can be avoided
(b) Fixity – many outdated laws may remain effective until such times as they are
challenged in courts and overruled or reversed
(c) Unconstitutional – the judiciary are not an elected body; there is a risk they may
overstep their authority
(d) Bulk – the vast array of law available can lead to uncertainty as to which cases are
binding in any given circumstance
6 Statute
6.1 Statute law is law made by a parliament. It can be in the form of primary legislation (a
completed act) or secondary legislation (law making delegated to third parties such as
government ministers).
6.2 Until the UK entered the European Union in 1973 the UK Parliament was completely
sovereign. Its law making powers were unfettered and overrode common law and custom.
6.3 EU laws in the form of regulations and directives take precedent over an EU member
state's national law and so have eroded UK sovereignty over time.
6.4 The UK tradition is to draft statutes in comprehensive detail to attempt to cover all
eventualities that the statute is designed to cover.
6.5 In the UK an accepted role of judges is to interpret enacted statute law. This is not the
case in other legal systems such as civil or Sharia law where in theory the judge's role is not
to interpret but merely to apply the law.
Statutory interpretation
6.6 There are various aids available to assist a common law judge in their interpretation of
statutes.
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The Canons of Statutory Interpretation

6.7 The following may be presumed when reading acts, though any may be expressly
rebutted:
(a) Does not alter the common law (or existing law)
(b) There is no retrospective effect
(c) An individual will not be denied liberty, property or rights
(d) The Crown is not bound
(e) International laws will be not be broken
(f) Strict liability will not be imposed
(g) Ejusdem generis rule – when a general list of words follows a specific example, the
list will be interpreted in the light of the specific example Powell v Kempton Park
Racecourse (1)
Rules of interpretation
6.8 (a) Literal rule – words will be given their ordinary dictionary meaning Whiteley v
Chappell (2).
(b) Golden rule – where the application of the literal rule results in a manifest absurdity it
may be disregarded Re Sigsworth (3).
(c) Mischief rule – this enables the judge to interpret a statute in line with its intention
when the wording of an act is ambiguous DPP v Bull (4). This is similar to the
purposive rule which looks at the context and purpose of the legislation (see Study
Text).
Intrinsic aids
6.9 Found within the act itself the following may be used by a judge to aid interpretation:
(a) The title – long or short (consider the Dangerous Dogs Act 1991)
(b) The preamble
(c) Schedules of the act
Extrinsic aids
6.10 Found outside of the act itself the following may be used by a judge to aid interpretation:
(a) The Interpretation Act 1978 – defines words found commonly within statute
(b) Hansard – per the case of Pepper v Hart (5)
(c) A dictionary
(d) Reports of commissions – such as Law Commission reports
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Lecture example 1 Preparation example
Required
What does the 'Golden Rule' of statutory interpretation mean?
A Words should be given their ordinary grammatical meaning.
B The meaning of the words can be gathered from their context.
C Words should be given the meaning which is likely to give effect to the purpose or reform
which the statute intended.
D Words should be given their ordinary grammatical meaning unless the result is manifestly
absurd.
Solution
Lecture example 2 Preparation example
A man is prosecuted for erecting a hidden video camera in a tent used as a changing room at a
market stall. An act has been brought in to rectify a common law problem and makes a criminal
offence of the activity of secret filming of persons in circumstances likely to cause distress on
premises. The court must decide if premises includes the tent.
Required
Which statutory rule of interpretation would they use?
A The Ejusdem Generis Rule
B The Mischief Rule
C The Golden Rule
D The Interpretation Rule
Solution
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7 Civil law
7.1 Introduction
Most civil systems are systems of codified law where the legislator produces a set of
general principles and some specific codes, such as a civil or criminal code.
7.2 The rules in the specific codes are applied where relevant by the judges to the facts of the
case. If there are no specific rules available, then the judge applies general principles
from the codes.
7.3 Civil law is applied in France and Germany.
Principles
7.4 There are two important principles of civil law; they are certainty and comprehensibility.
(a) The statutory codes are comprehensive so they can be applied to all legal situations.
(b) A judge's role is purely to apply the codes of law, rather than make law as in a
common law system.
7.5 This means that the codes are not continually interpreted and developed and as such are
finite; this gives certainty to law.
Statutory application
7.6 Some general principles on how judges should apply statutory codes have been developed:
(a) Where the meaning of the law is clear, it must be followed.
(b) Where the statute is obscure or ambiguous, the judge should apply the spirit of the
law rather than the letter of the law (ie use principle of the law).
(c) If there is a gap in the law, judges must resort to custom and equity.
Judicial review
7.7 A system of judicial review has grown in certain civil law countries to establish whether
statutory law has been correctly applied by a judge in accordance with the country's
constitution.
7.8 In France the court of cassation will quash any court decisions where the law has been
incorrectly interpreted.
7.9 In Germany, special constitutional courts have been set up to determine whether
legislation is in line with the constitution.
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8 Sharia law
Principles of Sharia law
8.1 Sharia is the Arabic word for 'a way to a watering place'.
8.2 A vitally important principle of Sharia law is that it is divine law (God given) ordained by
Allah for determining the way for mankind to live.
8.3 This has various implications for Sharia law in practice. First, it means that it is a legal
system that comprises more than an individual's public life, but it also sets down rules for an
individual's moral, ethical and religious obligations in a way that both common and civil
law systems do not.
8.4 Second, it means that the law has been set by a higher authority than mortals and is
therefore not continually developed by enacting further law in the way that the common
and civil law are.
Role of judges
8.5 Judges in Sharia are required to apply the law, not create it. In this way they are more
comparable to civil law judges than common law ones. In strict Sharia tradition, judges are
required to be either clerics or Imam.
Primary sources of law

8.6 In applying the law, which is primarily sourced from the Quran, a Sharia judge may turn to
the Sunnah to see how the law should be applied in practice. The Sunnah is based on
records of what the Prophet Muhammad said, and how he himself interpreted the Quran.
Secondary sources of law

8.7 The Sharia judge may also use secondary sources of law to determine how to apply the law;
these secondary sources are based on the schools and writings of five major jurists. These
schools are Shia, Hanafi, Maliki, Hanbali and Shafii.
8.8 These secondary sources of interpretation known as ijtihad are allowed because of a story
recorded in the Sunnah about the Prophet questioning a cleric on how he would decide legal
cases.
Further interpretation
8.9 There is controversy in the Muslim world as to whether further interpretation of the law is
required. Strongly orthodox Muslims adhere to the theory of taqlid, that no further
interpretation by judges or legal scholars is required.
36

Ijma and qiyas

8.10 However, for those who do not adhere to taqlid, ijtihad are still available as interpretation
tools. The two key methods of interpretation open to judges are ijma and qiyas.
Ijma is a consensus of opinion between suitable legal scholars or judges.
Qiyas is analogical deduction, that is, a comparison of two similar things such as the
prohibition on alcohol extending to recreational drugs.
A rule in Sharia law that has a significant impact on commerce and trade and therefore will
be relevant in our syllabus is the rule against usury, known in Sharia as riba. Riba is the
Islamic concept of unlawful gain, usually translated as interest on loans, which is strictly
forbidden by the Quran.
9 Case summaries
1 Powell v Kempton Park Racecourse
A clause referring to a 'house, office, room or other place' excluded a ring at a racecourse.
2 Whiteley v Chappell
In this case the defendant was charged under a section that made it an offence to
impersonate 'any person entitled to vote'. D (Chappell) had pretended to be a person whose
name was on the voter's list, but had died. The Court held that he was not guilty since a
dead person is not, in the literal meaning of the words, 'entitled to vote'.
3 Re Sigsworth
A son had murdered his mother. The mother had not made a will, but in accord with rules
set out in the Administration of Justice Act 1925 her next of kin would inherit (who was the
son). There was no ambiguity in the wording of the Act, but the court was not prepared to let
a murderer benefit from his crime. So it was held that the literal rule should not apply, the
golden rule being used to prevent a repugnant situation.
4 DPP v Bull
The defendant was charged that he, being a common prostitute did loiter in a street or public
place for the purpose of prostitution, contrary to s 1(1) of the Street Offences Act 1959. At
the conclusion of the prosecution case the stipendiary magistrate upheld a submission by
defence counsel that there was no case to answer on the basis that s 1(1) applied only to
female prostitutes. In effect the 1959 Act referred to a mischief that could only be committed
by a woman.
5 Pepper v Hart
The Supreme Court (House of Lords) accepted that the courts can refer to Hansard where
legislation is (a) ambiguous (b) statements are made by a minister or promoter of the Bill (c)
the statements relied on are clear.
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END OF CHAPTER
38

Achievement Ladder Step 1
You have now covered the Topics that will be assessed in Step 1 of your Achievement Ladder.
It is vital in terms of your progress towards 'exam readiness' that you attempt this Step in the near future.
You will receive feedback on your performance, and you can use the wide range of online resources and
ongoing BPP support to help address any improvement areas. This will help you to tailor your learning
exactly to your own individual requirements.
Course Notes
Topic name Subtopic/Chapter name
chapter
Essential elements of legal systems:
Legal Systems 1
Economic political and legal
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Achievement Ladder
40

International trade and
regulations

 Explain the need for international legal regulation in the context of conflict of laws
 Explain the function of international treaties, conventions and model codes
 Explain the roles of international organisations, such as the UN, the ICC, the WTO, the OECD,
UNIDROIT, UNCITRAL and courts in the promotion and regulation of international trade
Exam Context
Having studied this chapter you will be able to identify the main sources of international law, and who arbitrates on
international trade disputes.
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2: INTERNATIONAL TRADE AND REGULATIONS
Overview
International organisations
UN UNCITRAL The International

Chamber of Commerce
World Trade The Council of Europe UNIDROIT

Organization
International adjudication
International Court of International Court of

Justice Arbitration
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1 Public and private international law

1.1 International law is the system regulating the interrelationship of sovereign states and their
rights and duties as regards one another. This can be broken down into:
(a) Public international law which consists of rules and principles that apply in general
to the conduct of sovereign states including matters such as war crimes and human
rights abuses.
(b) Private international law also known as conflict of laws – which regulates cases
where individuals or corporations from different states contract. This can cause
conflict as both parties operate under different rules of law and it is necessary to
determine the law which applies to the contract.
1.2 Countries have sought solutions to this conflict of laws by coming to agreements with one
another and by enacting various conventions and treaties between nations to regulate
international practice. For example:
(a) Rome Convention 1980 states that if the parties express a written preference for a
certain law to govern their proceedings, this agreement must be followed.
(b) The New York Convention 1958 sets out all the rules on agreements that refer
international disputes to arbitration.
(c) The United Nations has also developed model laws that countries may adopt into
their own national law, to aid uniformity.
2 Role of international organisations in trade

2.1 The important bodies associated with regulation of international law include the following:
(a) The European Union (EU)
(b) The United Nations (UN)
(c) The International Chamber of Commerce (ICC)
(d) The World Trade Organization (WTO)
(e) The Council of Europe (CoE)
(f) The Organisation for Economic Co-operation and Development (OECD)
(g) The International Institute for the Unification of Private Law (UNIDROIT)
3 The European Union (EU)

3.1 The EU was formed in 1957 by the Treaty of Rome and now has 27 member states.
3.2 The EU is a common market which means:
(a) A free trade area exists, there is no restriction on the movement of goods and
services and labour between member states
(b) Harmonisation of government economic policies
(c) That the EU is working towards establishing a closer political confederation
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3.3 Its primary aim is to eliminate trade restrictions in areas such as the following:
(a) Physical barriers (eg customs inspection) on goods and services.
(b) Technical standards (eg for quality and safety) should be harmonised.
(c) Governments should not discriminate between EU companies in awarding public
works contracts.
(d) Telecommunications should be subject to greater competition.
(e) It should be possible to provide financial services in any country.
(f) There should be free movement of capital within the community.
(g) Professional qualifications awarded in one member state should be recognised in
the others.
(h) The EU is taking a co-ordinated stand on matters related to consumer protection.
3.4 It would be wrong to assume, however, that there is now a completely 'level playing field'.
There are still many areas where harmonisation is a long way from being achieved,
including the following:
(a) Company taxation
(b) Indirect taxation
(c) Differences in prosperity
(d) Differences in workforce skills
(e) Infrastructure
4 The United Nations (UN)

4.1 The UN was set up in 1945 after World War II when the then members ratified the UN
Charter. Almost every independent state in the world is a member of the UN. The UN has
four main purposes:
(a) Maintain peace and security
(b) Develop friendly relations among nations
(c) Co-operate in solving economic, social, cultural and humanitarian problems
(d) Promote respect for human rights and international freedoms
4.2 One of the ways the UN achieves its aims is by promoting international law. The UN has
various legal departments within it, including:
(a) International Court of Justice, which provides legal advice and settles disputes
(b) International Law Commission and UN Commission on International Trade Law
(UNCITRAL). These two law makers produce a large body of conventions and
treaties which countries may adopt into their domestic legal systems.
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5 UN Commission on International Trade Law

(UNCITRAL)
5.1 UNCITRAL is the core legal body within the UN in the field of international trade law. It was
established in 1966. A total of 60 member states are elected by the UN General Assembly
to form UNCITRAL. It is structured so as to be representative of the world's various
geographical regions, economic and legal systems.
5.2 The Commission carries out its work at annual sessions, held in alternate years at the UN
Headquarters in New York and Vienna. Members of the Commission are elected for terms
of six years with half the member's terms expiring every three years.
5.3 UNCITRAL attempts to overcome the barriers that arise from the fact that different nations
have different national laws relating to trade, sale of goods, arbitration and electronic
commerce.
5.4 It achieves this task of harmonising and unifying the law on international trade by:
(a) Co-ordinating the work of organisations active in the field, and encouraging
co-operation among them
(b) Promoting wider participation in existing international conventions and wider
acceptance of existing model and uniform laws
(c) Preparing or promoting the adoption of new international conventions, model laws
and uniform laws
(d) Promoting the codification and wider acceptance of international trade terms,
provisions, customs and practices, in collaboration with other organisations operating
in the field
(e) Promoting ways and means of ensuring a uniform interpretation and application of
international conventions and uniform laws in the field of international trade
(f) Collecting and disseminating information on national legislation and modern legal
developments, including case law, in the field of international trade law
(g) Establishing and maintaining close collaboration with the United Nations
Conference on Trade and Development
(h) Maintaining liaison with other UN organs and specialised agencies concerned with
international trade
(i) Taking any other action it may deem useful to fulfil its functions
5.5 It also aims to 'oil the wheels' of international trading itself, in the form of its Hamburg rules
on the carriage of goods by sea, its convention on international bills of exchange, and its
rules on cross-border insolvency.
5.6 As well as drafting laws, UNCITRAL hopes to widen their uptake by member states, to
ensure that laws are interpreted consistently, and to monitor the need for further
modernisation.
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6 The International Chamber of Commerce (ICC)

6.1 The ICC was formed in 1919. Its purpose is to serve world business in promoting trade,
investment and open markets based on free and fair competition among business
enterprises.
6.2 It also aims to help foster economic growth in both developed and developing countries,
and to help counter international commercial crime via the ICC Commercial Crime Service.
6.3 It is a worldwide organisation with thousands of member companies and associations from
over 130 states.
6.4 As part of its aim of promoting trade, the ICC is concerned with the legal processes that
support trade, namely:
(a) Agreements between parties: the ICC makes representations to governments and
other international bodies such as the UN
It also promotes non-statutory codes of practice for adoption by businesses.
(b) Settlement of disputes: the ICC set up the International Court of Arbitration (ICA)
(see Section 12)
6.5 The ICC produces and promotes standard trade definitions relating to carriage and the
passage of risk, called Incoterms, that can be used in contracts.
It also produces guidance on the use of documentary credits, called the Uniform Customs
and Practice for Documentary Credits (UCP 600).
7 The World Trade Organization (WTO)

7.1 The WTO is an international organisation. Its main guidelines on international trade are
contained in GATT, last updated in 1995 following the Uruguay round of negotiations and
known as the WTO Agreements.
7.2 It has more than 150 members and is devoted to the promotion of international free
trade, in goods and also in intellectual property such as software, music and services.
It does this by:
(a) Attempting to remove or overcome the various obstacles to free trade represented
by tariffs, customs and import controls
(b) Acting as a forum for the creation of trade agreements and then administers these
when they are formed
(c) Reviewing national trade policies
(d) Assisting developing economies with the formulating of their national trade policies
offering special concessions for these developing economies
(e) Helping to resolve international trade disputes through its Dispute Settlement Body
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8 The Council of Europe (CoE)

8.1 Any European state can join the CoE. Its aims are to:
(a) Protect human rights, pluralist democracy and the rule of law
(b) Promote awareness and encourage the development of Europe's cultural identity
and diversity
(c) Seek solutions to problems facing European society (discrimination against
minorities, xenophobia, intolerance, environmental protection, human cloning, AIDS,
drugs, organised crime etc)
(d) Help consolidate democratic stability in Europe by backing political, legislative, and
constitutional reform
8.2 The CoE produces conventions which, when adopted by member states, are legally
binding. Conventions issued to date cover:
(a) Extradition
(b) Confiscation of the proceeds of crime
(c) Protection of wildlife and natural habitats
(d) Doping in sport
(e) Bioethics and cloning
(f) Nationality
(g) Corruption
8.3 It also issues recommendations, which act as guidelines for states to follow.
9 The Organisation for Economic Co-operation and

Development (OECD)
9.1 The OECD is an organisation set up to be a forum to discuss, develop and refine economic
and social policies.
9.2 It developed in 1961 out of an organisation set up to administer North American aid to
Europe after WWII, and now has members from most continents, including countries such
as Japan, Australia and Mexico.
9.3 The OECD invites non-member countries to subscribe to its agreements and is therefore
involved in many other countries such as China, Russia, Brazil and a number of African
countries.
9.4 It has created both legally binding agreements (for instance in relation to bribery) and also
non-binding agreements (such as guidelines for multinational enterprises).
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10 International Institute for the Unification of Private

Law (UNIDROIT)
10.1 UNIDROIT is based in Rome and has operated since 1926. Membership of UNIDROIT is
restricted to 63 states which have signed up to the UNIDROIT Statute.
10.2 It is an independent intergovernmental organisation which studies the need for and how to
modernise, harmonise and co-ordinate private international law.
10.3 This need for change is usually driven by new technologies and commercial practices,
or by states specifically asking for new solutions to internal and cross-border problems.
10.4 UNIDROIT is structured as follows:

(a) The Secretariat is responsible for the day to day running of UNIDROIT's work
programme.
There is a Secretary-General plus a staff of international civil servants and various
ancillary staff.
(b) The Governing Council supervises UNIDROIT's policy. It draws up the work
programme and supervises how the Secretariat carries this out. It comprises the
President of the Institute and 25 elected members, typically eminent judges,
practitioners, academics and civil servants.
(c) The General Assembly is the ultimate decision-making organ of UNIDROIT,
approving the annual budget, approving the work programme and electing the
Governing Council. Each member Government has one representative.
10.5 Because UNIDROIT is an intergovernmental structure, its rules have traditionally tended to
take the form of conventions which apply automatically in preference to a state's national
law upon implementation.
10.6 States often drag their heels when implementing conventions, so UNIDROIT has more
recently favoured alternatives such as:
(a) Model laws to be taken into consideration when drafting domestic legislation on the
subject covered
(b) General principles addressed directly to judges, arbitrators and contracting parties
who are then left free to decide whether to use them or not
(c) Legal guides, typically on new business techniques, on new types of transaction or
on the framework for the organisation of markets at both the domestic and the
international level
10.7 UNIDROIT has over the years prepared over 70 studies and drafts, many of which have
been the basis for international instruments produced by themselves and other international
organisations such as UNCITRAL.
48

11 International adjudicators
International Court of Justice (ICJ)
11.1 The International Court of Justice (ICJ) is an organ of the UN. It has two roles:
(a) Settle disputes put before it in accordance with international law
(b) Provide advice on legal issues put before it by international organisations
11.2 Individuals may not take cases to the ICJ.
11.3 The Court hears disputes over matters such as frontiers and territorial sovereignty,
diplomatic relations, nationality, asylum and other international issues. It reaches
decisions in accordance with international treaties and conventions, custom, the general
principles of international law and judicial decisions.
11.4 The Court sits in The Hague (Netherlands) and its official languages are English and
French. There are 15 judges, elected by the UN General Assembly and Security Council for
nine-year terms. There may not be more than one judge of any nationality, although
judges are charged to act independently and not merely to be representatives of their
governments.
11.5 A state involved in a case may appoint a national judge for the purpose of that case, where
there is not a previously elected judge from that state. Currently the judges are from China,
Madagascar, France, Sierra Leone, Russian Federation, the UK, Venezuela, the
Netherlands, Brazil, Jordan, the US, Egypt, Japan, Germany and Slovakia.
11.6 There are three methods by which states agree to the jurisdiction of the Court:
(a) Specific agreement to submit disputes to the Court
(b) Jurisdictional clauses in a treaty to which the states are a party
(c) The reciprocal effect of declarations made by them under the Statute (whereby each
accepts the jurisdiction of the Court in disputes with other states signing the
declaration)
If there is any doubt as to whether the ICJ has jurisdiction in the dispute, the Court itself
decides.
11.7 The procedures for the hearing is defined by statute and the Rules of Court include:
(a) A written phase, where pleadings are filed and exchanged
(b) An oral phase, where there are public hearings
11.8 The judges deliberate then issue their verdict at a public sitting.
There is no appeal.
If states do not comply with rulings, the injured party may have recourse to the UN Security
Council for action.
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12 International Court of Arbitration (ICA)

12.1 This is not a 'court' but rather an arbitration body set up by the ICC. The ICC is the leading
organisation in the field of international commercial dispute resolution.
12.2 The ICA was set up in 1923 and has been at the forefront of promoting the settlement of
international commercial disputes by arbitration, rather than in courts.
12.3 This is beneficial to people dealing commercially in countries where the legal systems
differ markedly from their own and solutions provided by national laws might not seem fair.
12.4 The ICA offers a place where international disputes can be solved by arbitration,
providing all the customary benefits of arbitration; reduction in cost, privacy, speed and also
the right to choose arbitrators and place of arbitration, even the language of proceedings.
12.5 The ICA oversees the whole process of arbitration, confirmation of the arbitrators chosen
by the parties, deciding on matters when the choice of arbitrator is challenged, approving
awards and fixing arbitrators' fees. The member nations of the ICC have national selection
committees maintaining details of potential arbitrators.
12.6 The ICA was also the initiator of the New York Convention 1958, the most important
multilateral treaty on the recognition and enforcement of international arbitral awards.
It sets out two key principles for arbitration:
(a) It requires courts of each contracting state to recognise arbitration agreements in
writing and to refuse to try such agreements in courts.
(b) It also requires domestic courts to recognise and enforce arbitral awards.
END OF CHAPTER
50

Essential elements of the
legal system:
Commercial arbitration

 Explain the operation, and evaluate the distinct merits, of court-based adjudication and alternative dispute
resolution mechanisms
 Explain the role of the international courts of trade including the International Court of Arbitration
 Explain and apply the provisions of the UNCITRAL Model Law on International Commercial Arbitration
 Describe the arbitral tribunal
 Explain arbitral awards
Exam Context
Having studied this chapter you will be able to understand how international trade disputes are settled via arbitration,
and the nature of the awards available to the successful claimant.
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3: ESSENTIAL ELEMENTS OF THE LEGAL SYSTEM: COMMERCIAL ARBITRATION
Overview
International arbitration
Arbitration must be
international and Receipt of written
commercial communication
Model law
Agreement Tribunal composition Arbitrator
Conduct
Procedures Claims and defence Hearings
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Award & set aside
Award Set aside
Other arbitration points
Sharia law and

Comparison with courts
arbitration
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1 UNCITRAL Model Law on International Commercial

Arbitration
1.1 The United Nations Commission on International Trade Law adopted the Model Law on
International Commercial Arbitration in 1994. Arbitration is settlement of a dispute by an
independent person usually chosen by the parties themselves.
1.2 The Model Law defines what makes arbitration both international and commercial in
character:
(a) Arbitration is international if:
(i) The parties to the arbitration agreement have their places of business in
different states;
(ii) The parties' places of business are in the same state, or, the place
designated for arbitration is in a different state;
(iii) The obligations of the commercial relationship are to be performed in a
different state; or
(iv) The parties have expressly agreed that the subject matter of the arbitration
agreement relates to more than one country.
(b) Arbitration is commercial if it covers matters arising from all relationships relating to
trade whether there is a contract or not.
1.3 If a party has more than one place of business, the relevant place of business for the
purpose of the arbitration agreement is the place with the closest relationship to the
arbitration agreement.
1.4 The Model Law sets out a general rule about receipt of written communications that
states:
Any written communication is deemed to have been received if:
(a) It is delivered to the addressee personally;
(b) It is delivered at his place of business, habitual residence or mailing address; or
(c) If none of these can be found after making a reasonable inquiry, a written
communication is deemed to have been received if it is sent to the addressee's
last-known place of business, habitual residence or mailing address.
(d) By registered letter or any other means which provide a record of the attempt to
deliver it. The communication is deemed to have been received on the day it is so
delivered.
1.5 The Model Law specifies that courts shall not intervene in matters governed by the Model
Law, except where stated within the Model Law.
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2 Arbitration agreement
2.1 The UN's Model Law on International Commercial Arbitration sets out that arbitration
agreements must be in writing; this would include telex, telegram or other means of
telecommunication.
An arbitration clause is said to be in writing, if it was contained:
(a) In a document signed by the parties
(b) In an exchange of documents giving a record of the agreement
(c) In an exchange of documents relating to legal proceedings
(d) As a reference in another written contract between the parties
2.2 Arbitral proceedings may be commenced where a matter is subject to arbitration, even if
court proceedings have been initiated and are continuing in respect of the agreement: UN
Case 57 (1).
3 Composition of the tribunal

3.1 Under the UNCITRAL Model Law on arbitration, the composition of the arbitral tribunal
depends on what the parties have agreed.
3.2 If they have agreed on having a sole arbitrator, the Model Law states that the parties shall
agree on who that is to be. If they can't agree, then the parties will have to refer their
dispute to a nominated national court or tribunal to decide.
3.3 If the parties have not agreed how the tribunal shall be composed, the Model Law states
that there shall be three arbitrators, one chosen by each of the parties, and the other
chosen by the two arbitrators chosen by the parties.
3.4 Each party shall choose their arbitrator within 30 days of being made aware of the need to
do so, and the third arbitrator shall be chosen within 30 days of the other two having been
chosen.
3.5 If the parties do not select their arbitrators in the given timescale, the matter can be referred
to a nominated national court which will then make the appointment. Appointment by this
court or tribunal is not subject to appeal.
4 Person of the arbitrator

4.1 No one can be stopped from being an arbitrator solely on the grounds of their nationality.
4.2 The qualifications the parties require will be set out in the arbitration agreement, for
example, if they are required to be an expert in a particular product or area of law. If there is
no specification in the agreement, no special qualifications are required.
4.3 However, arbitrators are required to be independent and impartial of the parties and their
dispute. When someone is asked to be an arbitrator, they must disclose any relevant
facts.
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4.4 If any relevant circumstances arise that affect these matters during the arbitration process,
these should also be disclosed.
4.5 If it becomes impossible for an appointed arbitrator to act, they can withdraw or the parties
can agree that the appointment is terminated. If a party does not feel that an arbitrator
meets the requirements of independence or impartiality, they may challenge that arbitrator.
5 Challenge procedure
5.1 Either party may challenge the appointment of an arbitrator if the arbitrator is not thought
to be independent or impartial, or does not possess the qualifications required in the
agreement.
5.2 However, no party may make this challenge on the basis of information that they
possessed at the time the arbitrator was appointed.
5.3 The parties may agree on the challenge procedure. In the absence of this the Model Law
procedure applies as follows:
(a) The challenger must send a written statement of challenge to the tribunal within
15 days of becoming aware of grounds for a challenge or of becoming aware of the
arbitral tribunal's composition.
(b) At this point, the challenged arbitrator may withdraw voluntarily, or the other party
may agree the challenge so the arbitrator has to withdraw.
(c) If there is no withdrawal the arbitral tribunal must decide on the challenge.
(d) If the challenge is not successful the challenger has 30 days to apply to the court to
decide it.
(e) Once the court has decided on a challenge there is no further right of appeal.
5.4 While any challenge is being decided the original arbitral tribunal, including the challenged
arbitrator, may continue its proceedings and make an award.
6 Conduct of proceedings
6.1 There are three general principles in the Model Law with regard to the nature of arbitral
proceedings:
(a) Parties will be treated with equality, and both parties given a full opportunity to
present their case.
(b) The parties are free to agree on a procedure, subject to the requirements of the
Model Law.
(c) If the parties do not agree a procedure, the tribunal will proceed as it sees fit.
6.2 The claimant will make a statement of claim, setting out the facts supporting their claim,
the points at issue and any remedy claimed. The defendant will set out a statement of
defence, answering these points. The parties may also include additional documents which
are relevant.
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6.3 The tribunal will decide whether proceedings will be conducted orally or in writing, but
they shall be conducted orally if requested by either party. The tribunal, or one of the parties
with the tribunal's consent, may request assistance in taking evidence from a competent
court.
6.4 The parties will be given full access to all documents presented by the other parties. If
either party fails to present their statement or fails to provide evidence required, the tribunal
will continue on the basis of evidence available to it. The tribunal may make use of expert
witnesses, if they choose.
6.5 The parties will decide upon practical issues such as where proceedings are to take place,
when and in what language. If they do not agree, the tribunal shall decide. The tribunal
proceedings end either by order of the tribunal or when an award is made.
7 Award enforcement
7.1 The award by the tribunal shall be made in writing, state the reasons behind the award
and the place of the award, be dated, be signed by a majority of the arbitrators and be sent
to both parties.
7.2 The parties may have recourse in respect of the award through their nominated national
court or tribunal to have the award set aside if:
(a) A party to the arbitration was incapacitated when the agreement was formed or
the agreement is not valid under the law to which the parties have subjected it.
(b) A party was not given proper notice of the appointment of the arbitrator or of the
proceedings.
(c) The award deals with a matter not falling into the contemplation of the parties
so not covered by the original arbitration agreement.
(d) The composition of the tribunal was incorrect.
(e) The subject matter of the dispute is not capable of being dealt with by arbitration
under the law of the State.
(f) The award conflicts with public policy in that state.
7.3 An application for setting aside may not be made later than three months after the date on
which the party making the application received the award.
7.4 When asked to set aside an award, the court may, where appropriate and if requested by a
party, suspend the setting aside proceedings for a period of time determined by it in order
to give the tribunal an opportunity to resume the proceedings, or to take such other action as
will eliminate the grounds for setting aside.
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8 Arbitration in Sharia law

8.1 Arbitration is recognised by Islamic (Sharia) law and is a recommended route of dispute
resolution. The arbitration process is called Takhim.
8.2 An arbitrator (Hakam) must be male, just, learned in Sharia and free from any defects that
could affect his ability to arbitrate.
8.3 Another Islamic solution to dispute resolution is mediation (solh) or conciliation (wasta).
Here an independent third party assists the parties in dispute to come to a solution.
However, unlike arbitration these solutions are not legally binding.
8.4 In the exam always assume that questions on arbitration relate to the UNCITRAL Model
Law unless you are specifically asked to consider Sharia law.
9 Arbitration in general
9.1 In the exam you may be asked to compare arbitration with the courts as a dispute resolution
process. You can do this by looking at the advantages and disadvantages of arbitration.
Advantages:
 Usually cheaper than the courts
 Privacy (most court proceedings are public)
 Specialist arbitrator (judges may not be technical experts)
 Less formal procedures
 Decision is final and binding
Disadvantages:
 Lack of publicity
 No legal rules on evidence, which can lead to lengthy and expensive proceedings
 Limited remedies and enforcement (compared to the courts)
 Lack of legal expertise in settling disputes
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10 Case summaries
1 UN Case 57
A Hong Kong company which was a subsidiary of a Korean company (Company A) had an
agreement with another Hong Kong company (Company B). The contract contained an
arbitration clause providing for arbitration in a third country under the rules of that third
country and in accordance with the rules of the International Commercial Arbitration
Association. Company B sued for damages in the Hong Kong courts under the contract,
claiming that the arbitration clause was null and void because it referred by mistake to an
unspecified third country, or inoperative because it referred to a non-existent organisation
and non-existent rules.
The court found that the clause sufficiently indicated the parties' intention to arbitrate. The
references did not make it impossible to perform, because it could be performed in any
country other than where the parties had their place of business and under the law of
arbitration of that place.
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END OF CHAPTER
60

International business
transactions: Sale of
goods

 Explain the sphere of application and general provisions of the Convention
 Explain and be able to apply the rules for creating contractual relations under the Convention
 Explain the meaning and effect of the ICC Incoterms
Exam Context
Having studied this chapter you will be able to understand how contracts of sale are regulated across national
boundaries. In particular you will become familiar with the standardised terminology created by the ICC Incoterms.
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4: INTERNATIONAL BUSINESS TRANSACTIONS: SALE OF GOODS
Overview
International sale of goods
Definition Applies Does not apply
Contract formation
Offer Termination of offer Acceptance
Incoterms
Rules for use in relation Rules for sea and

General to any mode or modes inland waterway
of transport transport
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1 Introduction
1.1 The UN Convention on Contracts for the International Sale of Goods (UNCISG) applies to
contracts of sales of goods between parties whose places of business are in different
states, and these contracting states have ratified (accepted) the Convention or both parties
to the contract agree that the Convention shall apply.
1.2 The Convention refers to place of business, not nationality.
1.3 If either of the parties to the contract has more than one place of business and these
places of business are in different states, the relevant place of business will be the one
most closely connected to the contract.
1.4 If either of the parties does not have a place of business, the relevant place will be the
party's habitual residence.
1.5 Sales of goods can be defined as a contract by which the seller transfers, or agrees to
transfer, the property in goods to a buyer in exchange for monetary compensation,
called the price.
1.6 The Convention does not apply to sale of goods relating to:
(a) Goods bought for personal, family or household use
(b) Goods at auction
(c) Goods acquired on execution of/by authority of law
(d) Stocks, shares, investment securities, negotiable instruments or money
(e) Ships, vessels, hovercraft or aircraft
(f) Electricity
1.7 The Convention does not apply to the supply of services, or contracts where the main
obligation of one of the parties is the provision of labour. It also does not apply to
contracts of manufacture where the buyer provides the substantial part of the materials
UN Case 105 (1).
2 Contract
2.1 A contract is a legally binding agreement made up of both offer and acceptance and
enforceable in law.
2.2 There are no other requirements as to the form of the contract; the agreement can be
verbal or in writing, unless some formality is required by one of the contracting parties'
own national law.
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3 Offer
3.1 An offer is a sufficiently definite proposal for concluding a contract, addressed to one or
more specific persons but not the world at large and which indicates the intention to be
legally bound.
3.2 An offer is sufficiently definite when it indicates the goods in question, and it makes
provisions for quantity and price UN Case 53 (2).
3.3 Anything else that purports to be an offer but does not meet the Convention's conditions is
an invitation to treat; an inducement to make an offer, and as such does not create a
legally binding contract.
3.4 The offer becomes effective when it reaches the offeree. An offer 'reaches' the offeree
when:
(a) It is made orally to them
(b) It is delivered to them personally at their business or mailing address
(c) If there is no business or mailing address, it is delivered to them personally at their
habitual residence
These are sometimes called the 'reaching rules' and also apply to communication of
acceptance, withdrawal of an offer and revocation of an offer.
3.5 An offer is only capable of being accepted while it is open. The following actions would
bring an offer to an end:
(a) Rejection – saying no is effective when the rejection reaches the offeror.
(b) Withdrawal – of the offer as long as it reaches the offeree before or at the same time
as the offer – irrevocable offers can be withdrawn.
(c) Revocation – is the withdrawal of an offer once the offer has reached the offeree
but before acceptance is despatched. Not possible where an offer is irrevocable
by means of it stating a fixed time for acceptance.
(d) Counter-offer – purported acceptance which varies the terms of the original offer in a
material way is called a counter-offer, is not a valid means of acceptance and
terminates the original offer.
(e) Acceptance – brings an offer to an end as now a contract has been formed.
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4 Acceptance
4.1 A contract under UNCISG is formed when a valid offer is accepted.
4.2 Acceptance can be defined as a statement or other conduct made by the offeree that
indicates assent (agreement) to the offer. Silence or inactivity does not constitute
acceptance unless implied by past dealings UN Case 95 (3).
4.3 Acceptance becomes effective from the moment that the indication of assent reaches the
offeror (reaching rule as explained above).
Unless:
(a) Acceptance has not reached the offeror within a fixed timescale eg as specified in
the terms of the offer
(b) Acceptance has not reached the offeror within reasonable time
4.4 When considering reasonable time for acceptance, it is measured from:

(a) The moment the telegram containing the offer is handed in
(b) The date shown in the letter containing the offer or on the envelope
(c) When the offer contained in instantaneous communication reaches the offeree
Oral offers usually need to be accepted immediately; offers by post have a longer period for
acceptance.
4.5 Acceptance may be withdrawn if the withdrawal of acceptance reaches the offeror before
or at the same time as the acceptance.
5 Counter-offer
5.1 A counter-offer is a reply to an offer which purports to be acceptance but which contains
material additions, limitations or other modifications to the terms of the offer such as
attempts to vary the price, quantity of goods or delivery. These variations are not effective
acceptance but a new offer that the other party can accept or reject. They also terminate the
original offer.
5.2 Non-material variations constitute acceptance and these new terms will form part of the
contract unless the offeror objects to the new terms, without undue delay, either orally or
by notice. An example is where the offeror mistakenly included an out of date price in their
original offer which has been amended by the offeree in their acceptance letter. This would
be valid acceptance unless the offeror objected.
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6 ICC Incoterms
6.1 The International Chamber of Commerce (ICC) has developed 'Incoterms', which are
standard trade definitions commonly used in domestic and international sales contracts.
6.2 The ICC's hope is that use of the Incoterms will reduce confusion in such contracts on
matters such as control and insurance of goods during shipping. The Incoterms currently
used in this exam are the Incoterms 2010.
6.3 Incoterms were developed to address key points on which buyer and seller need to have
agreed if the contract is to be performed effectively such as:
(a) How far carriage costs are included in the contract price
(b) Who bears the risk of damage or loss to the goods at any particular point in time
(c) How far insurance costs are included in the contract price
(d) The time at which risk and property (ownership) in the goods pass
(e) How far customs costs are included in the contract price
(f) Who has responsibility for raising customs documentation
It should be noted that Incoterms determine responsibilities rather than stipulate the
amount of the contract price.
6.4 The terms are divided into two categories:

(a) Rules for use in relation to any mode or modes of transport
These rules are used where maritime transport (transport by ship) is not used for
carriage of the goods – or where such transport is only used for part of the journey.
(b) Rules for sea and inland waterway transport
These rules apply where the point of delivery and the place to which the goods are
carried to the buyer are both ports – ie the carriage of the goods takes place using
maritime transport (transport by ship) only.
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6.5 The following tables summarise the 11 Incoterms – you need to learn the abbreviation and
meaning of each Incoterm as this is a commonly examined area.
Rules for use in relation to any mode or modes of transport
(transport by ship not used or used for only part of the journey)
Incoterm Meaning
Ex Works
Seller has minimum obligations with respect to delivery.
EXW
Seller makes goods available to buyer at seller's own place of business
(works).
Free Carrier
FCA Seller must clear goods for export and hand over to the carrier named by
the buyer at a named point.
Carriage Paid To
Seller pays for carriage to a named location.
CPT
Risk for the goods passes from seller to buyer when the goods reach that
location.
Carriage and Insurance Paid To
CIP Carriage and insurance are paid by the seller up to a named destination.
Thereafter buyer pays costs, such as import duties and other taxes.
Delivered At Terminal
Seller pays for carriage costs to a named terminal and for unloading goods
at terminal and placing the goods at the buyer's disposal.
Terminal could be a quay, warehouse, container yard, or road, rail or air
DAT cargo terminal. It does not have to be called a terminal in the contract.
Seller bears all risks in delivering and unloading the goods at the terminal
and pays all export clearance tasks.
Buyer bears obligation to clear the goods for import and import customs
formalities and pay any import duty.
Delivered At Place
Seller has liability for risk until goods are ready for unloading at a named
DAP
destination.
Buyer has responsibility for import clearance.
Delivered Duty Paid
DDP Seller bears all risks – has to deliver goods to named place in country of
import and pay all import duties.
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Rules for sea and inland waterway transport

(carriage of the goods takes place using maritime transport only)
Incoterm Meaning
Free Alongside Ship
Seller discharges his obligations to deliver the goods when goods have
been placed alongside the ship at a named port of shipment in the country
FAS
of export.
Buyer bears all the risk from that moment. (Incoterm should not be used if
the buyer is not capable of carrying out export formalities.)
Free On Board
Buyer makes arrangements for shipping and the seller discharges his
obligation for carriage/insurance by putting the goods on board the ship.
FOB Seller must provide any export licence or other authorisation required at his
own expense and bear risk and expense of the goods until they are on
board the vessel.
Buyer is then responsible for risk of goods once on board and obtaining any
import licences required.
Cost and Freight
Seller pays for all costs and freight (carriage) to take the goods to a named
port of destination in the country of import. Seller must clear goods for
CFR
export.
Buyer assumes risk for the goods once on board the vessel in the exporting
country port – buyer must arrange and pay for any marine insurance.
Cost, Insurance and Freight
Seller required to bear the cost of insurance and freight (carriage) on usual
terms for the goods to a named port in country of import via the usual
shipping route and method.
CIF
Seller must obtain insurance that enables the buyer to claim directly from
the insurers in the event of a loss with an insurance company of good
repute. The minimum insurance cover should be that which is stated in the
contract plus 10%.
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7 Case summaries
1 UN Case 105
An Austrian company ordered brushes and brooms from a company in the former
Yugoslavia but provided the materials for the production.
The Convention was not applicable because the Yugoslav company was predominantly
providing labour under the contract.
2 UN Case 53
A US company carried out extensive negotiations with a Hungarian company to
manufacture aircraft engines. The US company made two alternative offers and did not
quote an exact price.
The court of first instance decided that a valid contract had been concluded. However, on
appeal, the US Supreme Court found that the offer and acceptance were both vague. They
didn't explicitly, or by implication, fix the price or make provision for that price to be
determined. The acceptance was merely an expression of the intention of the Hungarian
company to conclude a contract. Thus no valid contract had been formed.
3 UN Case 95
A Swiss buyer sent an order to an Austrian seller. The seller had sent the buyer a written
confirmation. The buyer failed to react. When the seller sued for the price, it argued that a
contract had been concluded.
The court decided that the letter of confirmation constituted acceptance under both Swiss
and Austrian law, and the parties should have known that. The exchange of confirmations
was also consistent with how the parties had dealt with each other in the past. Acceptance
was therefore valid, and a contract had been concluded and the seller was entitled to
payment.
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END OF CHAPTER
70

71
transactions: Obligation
and risk

 Explain and be able to apply the rules relating to the obligations of the seller under the Convention:
(i) Delivery of goods and handing over documents
(ii) Conformity of the goods and third party claims
(iii) Remedies for breach of contract by the seller
 Explain and be able to apply the rules relating to the obligations of the buyer under the Convention:
(i) Payment of the price
(ii) Taking delivery
(iii) Remedies for breach of contract by the buyer
 Explain and be able to apply the rules relating to the provisions common to both the seller and the buyer under
the Convention:
(i) Anticipatory breach and instalment contracts
(ii) Damages
(iii) Interest
(iv) Exemptions
(v) Effects of avoidance
(vi) Preservation of the goods
 Explain and be able to apply the rules relating to the passing of risk under the Convention
Exam Context
Having studied this chapter you will be able to identify at what point legal ownership of goods sold internationally
transfers from the seller to the buyer. If any problems arise during transit of the goods you should be able to identify who
bears the risk, and what remedies may be available to the injured party.
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5: INTERNATIONAL BUSINESS TRANSACTIONS: OBLIGATION AND RISK
Overview
Obligations of the seller (S)
Delivery Quality Breach
Obligations of the buyer
Payment Take delivery Breach
Impediment Passing of risk
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1 Obligations of the seller

The key areas for the rules involve delivery and quality.
1.1 Delivery
1.2 The terms of the contract between the buyer and seller may specify a place where the
goods are to be delivered. If so, the goods must be delivered to that place.
1.3 If the contract does not specify the place, the UN Convention on Contracts for the
International Sale of Goods implies the following terms into the contract:
(a) Contract including carriage – A contract involving carriage is one where the goods
have to be transported to the buyer as part of the contract. The seller discharges their
obligation to deliver the goods by handing the goods over to the first carrier.
Note. If the goods in carriage are not clearly identified to the contract, the seller must
give the buyer notice of the consignment, specifying the goods. The goods could be
identified to the contract by marking on the goods, shipping documents or otherwise.
The means of transport chosen by the seller must be reasonable in the circumstances
and according to the usual terms of transportation for such goods. The parties will
determine which of them should insure the goods while in transit; if the responsibility
is the buyer's, then the seller is obliged to provide them with all relevant information to
facilitate the insurance.
(b) Identified goods drawn from specific stock – If the parties know that the goods are
in a particular place at the time the contract is made, then the seller discharges their
obligations by placing the goods at the buyer's disposal at that place.
(c) Other instances – If the contract does not fall into the categories of (a) or (b) then the
seller discharges their obligation of delivery if they place the goods at the buyer's
disposal at the place where the seller had their business at the time the contract was
formed.
1.4 Delivery should take place on the date, or within the period, specified in the contract.
1.5 If no date or time period is specified in the contract, delivery should take place within
reasonable time of the contract being formed – what is reasonable depends on the nature
of the goods.
1.6 If the contract also requires documents to be handed over to the buyer by the seller (for
example, shipping documents), these should be handed over at the time and place specified
by the contract.
2 Quality and conformity

2.1 The seller must deliver goods which match the description, quantity and quality agreed by
the parties in contract and they should be packaged in the correct manner for protection.
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2.2 If the parties have made no such agreement then the goods should meet the following
requirements:
(a) The goods should be fit for the purpose for which goods of the same description
would ordinarily be used.
(b) The goods are fit for the purpose expressly or impliedly made known to the seller
at the formation of the contract, except where circumstances show that the buyer did
not rely, or that it was unreasonable to rely, on the seller's skill and judgement.
(c) The goods possess the same qualities of any sample.
(d) The goods are contained or packaged in the manner usual for such goods, or
where there is no such manner, in a manner adequate to preserve and protect the
goods.
2.3 The seller is not obliged to sell goods which conform to all statutory or other public
provisions in force in the buyer's state (eg health and safety regulations) UN Case 84 (1)
unless either:
(a) The same provisions apply in the seller's state;
(b) The buyer told the seller about the provisions and then relied on the seller's expert
knowledge; or
(c) The seller knew of the provisions due to special circumstances.
2.4 The seller is not liable for a lack of conformity in the goods if, at the time of forming the
contract, the buyer knew of the defect.
2.5 But the seller is liable for any lack of conformity:

(a) Which exists at the time when the risk passes to the buyer, even though the lack of
conformity becomes apparent only after that time
(b) Which occurs after risk passed and which is due to a breach of any of their
obligations, including any guarantees
2.6 When the seller has delivered goods before the date for delivery but there is a shortfall of
quantity or some other non-conformity, they may deliver any missing part or make up any
deficiency up until the agreed date of delivery, provided this does not cause the buyer
unreasonable expense or inconvenience. In such cases (eg of unreasonable expense)
the buyer may still seek damages.
2.7 The buyer must examine the goods to ensure conformity as soon as possible after delivery.
If the contract involves carriage, they should examine the goods as soon as possible
after their arrival. If the goods are being despatched immediately by the buyer and the seller
knows that, the goods may be examined on arrival at their next destination.
2.8 The buyer loses the right to rely on a lack of conformity of the goods if they do not give
notice to the seller specifying the lack of conformity within a reasonable time after they
have discovered it or ought to have discovered it. UN Case 48 (2).
2.9 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.
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2.10 Where the goods to be supplied are subject to trademark, patent or copyright, the seller
must agree that the goods are received subject to such claims.
3 Buyer's remedies for breach of contract by the seller

3.1 Breach of contract is where a party fails to perform their contractual obligations.
3.2 Fundamental breach of contract is where the breach will substantially deprive the injured
party of the expected benefits under the contract.
3.3 If the seller breaches the contract the buyer can claim damages in all circumstances and
they have specific rights under the Convention:
(a) Right to require performance – supplier must deliver substitute goods or repair the
goods if the lack of conformity is slight
(b) Right to declare the contract avoided (terminated) – for fundamental breach such as
non-delivery only
(c) Right to a reduction in price in proportion to the lack of conformity, unless the seller
corrects within the time period: UN Case 56 (3).
3.4 If the seller delivers the goods early, the buyer may accept or reject them.
3.5 If the seller delivers more than was ordered, the buyer may accept all or some of the
excess, or none at all. If he does accept additional goods, however, he must pay for them at
the agreed contract price.
4 Obligations of the buyer

4.1 The buyer must pay the price for the goods and take delivery of them as required by the
contract and the Convention.
5 Payment
5.1 The following provisions also apply:
(a) Price not agreed in the contract – then use the price generally charged at the time
the contract was formed
(b) Price determined according to weight – if in doubt, the price is to be determined by
net weight
5.2 The contract may specify where the price is to be paid. If it does not, the buyer must pay it:
(a) At the seller's place of business; or
(b) At the place where goods or documents are handed over.
5.3 The contract may specify when the price is to be paid. If it does not, the buyer must pay the
price when the seller places the goods and/or documents at the buyer's disposal.
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5.4 If a fixed date for payment has been set, the buyer must pay the price without the seller
needing to request that he does so.
6 Taking delivery
6.1 The buyer's obligation to take delivery consists of him:
(a) Doing all acts which could reasonably be expected of him in order to enable the
seller to make delivery
(b) Taking over the goods
7 Seller's remedies for breach of contract by the buyer

7.1 If the buyer breaches their contractual obligations the seller has the right to claim damages
and has other specific rights under the Convention:
(a) Right to require payment and acceptance of goods
(b) Right to declare the contract avoided (terminated) for fundamental breach such as
non-payment only
7.2 Where the buyer pays for the goods, the seller loses the right to declare it avoided,
unless the payment is late, or the buyer has committed another breach.
8 Damages
8.1 Damages is a key remedy, and the injured party is always entitled to claim damages,
regardless of any other claims they make under the Convention.
8.2 Damages is a monetary sum equal to the loss (including loss of profit) suffered by the
injured party as a consequence of the breach.
8.3 The amount of damages may not be greater than the loss which the party in breach
foresaw (or should have foreseen) at the time of the contract.
8.4 If the buyer has bought replacement goods they may claim the value of these as damages.
8.5 If the seller has sold the goods to another party, the proceeds of this sale should be
deducted from any damages awarded.
8.6 The injured party must take reasonable measures to mitigate the loss, including loss of
profit Payzu v Saunders (4).
9 Anticipatory breach
9.1 Anticipatory breach occurs when it is clear that a party will not be able to perform all or
a substantial part of the contract when the time of performance arrives.
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9.2 Anticipatory breach may arise because:

(a) One party has a serious deficiency in their ability to perform;
(b) Of one party's creditworthiness; or
(c) One party's conduct or lack of indicates that they will not be able to perform.
9.3 The injured party may then choose to suspend their own performance OR wait and see.
They must give immediate notice of suspension to the other party. If the latter then gives
adequate assurance that their obligations will in fact be performed then the contract must
continue and suspension must cease.
9.4 If the anticipatory breach is fundamental, the injured party may avoid (terminate) the
contract and claim damages. Notice of avoidance is required if anticipatory breach was not
expressly stated.
9.5 If the consequences of breach were not foreseeable by either party then this is not a
fundamental breach.
9.6 Failure with regard to delivery of one instalment in a instalment contract may constitute a
fundamental breach, and the injured party may then avoid with respect to this instalment
alone. The injured party should then seek assurance for future deliveries before they avoid
the whole contract.
10 Impediment beyond the parties' control

10.1 A party to the contract is not liable for breach if they can prove that the failure was due to
an impediment beyond their control.
10.2 They must also prove that they could not reasonably be expected to take the impediment
into account at the conclusion of the contract, or to have avoided or overcome the
impediment.
10.3 This exemption from breach only applies for the period during which the impediment exists.
10.4 The impediment may be due to a failure by a third party whom had been engaged as a
sub-contractor. If this is the case the first party to the contract is only exempt from liability if
the impediments were beyond both their control.
10.5 The party who wishes to benefit from this exemption must give reasonable notice to the
injured party otherwise they will be liable for damages relating to the non-receipt of notice.
11 Interest
11.1 Interest can be charged on payments in arrears and non-payment of debt.
12 Preservation of the goods

12.1 Both parties to a contract for the international sale of goods are under a duty to 'preserve
the goods'.
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12.2 What this means is that when the goods are in that person's possession, even in the event
of breach by the other party, that person must take reasonable means to ensure that the
goods remain in good condition.
12.3 In some cases, the only reasonable means of preserving the goods might be to sell them to
a third party to minimise losses caused by breach, particularly if the goods are perishable.
12.4 The duty falls particularly heavily on the parties in the following circumstances:
(a) The seller must take reasonable steps to preserve the goods if the buyer refuses to
accept delivery.
(b) The seller must also take such steps if delivery and payment were to be
concurrent but payment has not been received.
(c) The buyer must take reasonable steps to preserve the goods if they have accepted
delivery but intend to reject the goods.
(d) Equally the buyer must take such steps if the goods have been dispatched to them
and they intend to reject the goods.
13 Passing of risk
13.1 Generally when the risk for loss of or damage to goods passes from the seller to the buyer,
so too does the need to preserve and insure them and so the point when risk passes is
critical.
13.2 The UNCISG Convention will apply if the parties fail to include an express term in the
contract about the passage of risk, which may be in the form of an Incoterm (Chapter 4).
13.3 Under the UNCISG risk passes from seller to buyer when the latter takes over the
goods, or when the goods are placed at the buyer's disposal and they commit a breach
of contract by failing to take delivery of them.
13.4 If the contract involves carriage of goods and there is a particular place stated in the
contract for the seller to hand the goods to a transport company for onward passage to the
buyer, risk passes at that place.
13.5 If the seller is not bound to hand them over at a particular place, the risk passes from the
seller to the buyer when the goods are handed over to the first carrier by the seller in
accordance with the contract, for onward transport to the buyer.
13.6 Risk cannot pass from the seller to the buyer until the goods are clearly identified as
being the ones that are part of the contract, whether by markings, shipping documents or
notice to the buyer. Otherwise the buyer would have to assume risk in unidentified goods.
13.7 Sometimes goods which are already in transit may be sold. In this case risk usually
passes from seller to buyer when the contract is concluded.
This does not apply if the seller already knew (or should have known) that the goods were
lost or damaged at that point and did not inform the buyer.
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14 Case summaries
1 UN Case 84
The seller, a Swiss company, sold New Zealand mussels to the buyer, a German company.
The buyer refused to pay because the mussels had been found by the Federal Health Office
to be generally not safe because they contained a cadmium concentration in excess of the
statutory limit.
The supply of mussels with higher cadmium composition did not constitute a fundamental
breach of contract justifying avoidance of the contract and a refusal of the buyer to pay the
purchase price, since the high cadmium composition did not constitute a lack of conformity
of the mussels with contract specifications under CISG 35(2), and the mussels were still fit
for eating. It was also held that, even if the buyer had established faulty packaging of the
goods as it had tried to do, the contract could not be avoided. In order to justify avoidance of
the contract in these circumstances, faulty packaging must be a fundamental breach of
contract, and such a breach must be easily detectable. This would enable the buyer to
declare avoidance of the contract within a reasonable time after receiving delivery. The
buyer was ordered to pay the purchase price plus interest.
2 UN Case 48
A German buyer of fresh cucumbers wanted to obtain a reduction of the price because the
goods did not conform to the contract specification.
The court of first instance dismissed the application because the buyer had inspected the
goods at the place of delivery in Turkey and had found them to be in good order. The
appellate court found that the UN Convention was applicable as part of German law and it
upheld the decision of the first court, as the buyers had lost the right to rely on
non-conformity because they waited seven days, until the goods arrived in Germany to give
notice of the non-conformity.
3 UN Case 56
A held that as the buyer had resold some of the goods without notifying the seller in time
about that resale, the buyer had lost its right to rely on the non-conformity of those goods.
However, with regard to the rest of the goods, the buyer was granted a reduction in the price
as he had notified the seller of the defects promptly and the seller had refused to remedy
them. The seller offered to pay the repair costs instead, but the court held that the intention
of the Model Law was not to cover repair costs but to reduce the purchase price in relation
to what value the delivered goods had in comparison to the value that conforming goods
would have had.
4 Payzu v Saunders
Parties had entered into a contract to supply goods to be paid in instalments. P failed to pay
for the first instalment and consequently S refused to make any further deliveries unless P
paid in cash in advance of the delivery. P refused to accept delivery on S's terms.
Court held S had no right to repudiate the contract, but also that P should have mitigated
their loss by paying cash in advance. Damages were limited to the amount of loss if P had
paid in advance.
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END OF CHAPTER
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You have now covered the Topics that will be assessed in Step 2 of your Achievement Ladder. This
mainly focuses on the shaded topics below but will also include some recap questions on earlier
topics.
Course Notes
chapter
Legal Systems 1
International trade and regulations 2
International Trade Essential elements of the legal system:
Commercial arbitration 3
International business transactions: 4

Sale of goods
International Transactions I
International business transactions:
Obligation and risk 5
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Achievement Ladder
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transactions: Transport
and payment

 Define and explain the operation of bills of lading
 Explain the operation of bank transfers
 Explain and be able to apply the rules of UNCITRAL Model Law on International Credit Transfer
 Explain and be able to apply the rules of the UN Convention on International Bills of Exchange and International
Promissory Notes
 Explain the operation of letters of credit and letters of comfort
Exam Context
Having studied this chapter you will be able to identify the various methods by which international payments may be
made.
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6: INTERNATIONAL BUSINESS TRANSACTIONS: TRANSPORT AND PAYMENT
Overview
Transportation
Bill of lading
Payment
International bank and Bills of exchange

Letters
credit transfers
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1 Bills of lading
1.1 Goods will usually be transported to the buyer by a third party who may deliver the goods
themselves or subcontract on (the shipper responsible for delivery may subcontract to a
carrier).
1.2 A bill of lading is a document issued by the actual carrier of the goods to the person
(shipper) with whom he has contracted to transport the goods.
1.3 The bill of lading does three things:

(a) It provides evidence that the goods described in it have been received by the
carrier (and, if it is a shipped bill of lading, that they have been shipped).
(b) It either provides evidence of, or contains within it, the contract for carriage.
(c) It can be a document of title to the goods being passed.
1.4 The bill of lading is evidence of when the goods have passed to the first carrier and
therefore risk has passed to the buyer, unless the parties have agreed otherwise.
1.5 A bill of lading may be one of four types:

(a) An inland bill of lading relates to a contract for transporting goods overland to the
seller's international carrier (say from the factory to the port).
(b) An ocean bill of lading relates to a contract for carriage of goods from a seller in one
country to a specified port in another country.
(c) A through bill of lading combines the contracts for inland and marine carriage; it
covers transport from one specified point to another.
(d) An airway bill relates to a contract for carriage of goods by air (both domestic and
international) from one point to another.
1.6 A distinction between types of bills of lading is between those that are negotiable and
non-negotiable:
(a) Where the bill is negotiable, it is addressed to the seller's order rather than to a
specific person. It gives title to the goods and the right to re-route to the holder.
(b) With a non-negotiable bill of lading (which includes all airway bills), the bill of lading
names a recipient to whom the carrier must deliver the goods.
2 Means of payment include:

(a) International bank transfers
(b) Bills of exchange
(c) Letters of credit
(d) Letters of comfort
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3 International bank transfers

3.1 A common and straightforward method of making an international payment is to carry out an
international bank transfer.
3.2 Advantages
Bank transfers are straightforward to arrange and carry out. They are contained within the
systems of the bank as they are carried out electronically and do not require reliance on any
other systems, such as the postal system.
3.3 Disadvantages
As bank transfers do not have to be arranged in person, there is scope for fraudulent
payments being made if a person comes into possession of the authentication procedures
for the transfers.
4 UN Model Law on International Credit Transfers

4.1 The Model Law sets out the terms on which funds are transferred from a buyer to a seller
via credit transfer and applies when the sending and receiving bank branches are in
different states and the parties agree to be bound by the Model Law.
4.2 Credit transfer

This means a series of operations beginning with the originator's payment order, made for
the purpose of placing funds at the disposal of the beneficiary.
4.3 Terminology
Originator is the issuer of the first payment order.
Sender is the person who issues the payment order including both the originator and the
sending bank.
Payment order means an unconditional instruction in any form by a sender to a
receiving bank to place funds at the beneficiary's disposal and will be put into action as long
as:
(a) The receiving bank is reimbursed by debiting the sender account
(b) The instruction does not provide for payment to be at the beneficiary's request
4.4 Obligations
The sender is obligated to pay the receiving bank on acceptance.
The receiving bank is obligated to execute the payment order on acceptance unless
execution is not possible due to insufficient or inconsistent payment details. In this latter
case the bank should seek assistance to try to complete the payment order then refund with
interest any monies it has received but cannot forward.
4.5 The remedy for delayed payment when it is the fault of any bank in the chain is interest.
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4.6 If an unauthorised person acted as sender:

Step 1 Sender bank is only bound by payment orders issued by someone with the
authority to bind the sender.
Step 2 Receiving bank bears the risk of unauthorised payment orders if the order is
accepted after application of own authentication procedures and the procedures
are not commercially reasonable (otherwise sender bank liable).
Step 3 Both are responsible for their own negligence.
5 Bills of exchange
5.1 An international bill of exchange is a written instrument which states that it is such and:
(a) Contains an unconditional order whereby the drawer directs the drawee to pay a
definite sum of money to the payee or to their order;
(b) Is payable on demand or at a definite time;
(c) Is dated; and
(d) Is signed by the drawer.
5.2 A cheque is a common example of a bill of exchange, defined as a bill of exchange drawn
on a banker and payable on demand, but international bills of exchange must be used in
international situations.
5.3 An international bill of exchange is a bill of exchange which specifies at least two of the
following places and indicates that any two so specified 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
5.4 Instead of presenting the bill for payment, a payee may choose to transfer the right to
receive payment to another person, for example, a person whom they in turn owe money to.
Such a transfer is effected by the process of endorsement. The payee becomes the
endorser and the person they are transferring the bill to becomes the endorsee.
5.5 Under the UN Convention on International Bills of Exchange and International Promissory
Notes, a bill is transferred by:
(a) Endorsement and delivery of the bill by the endorser to the endorsee; or
(b) Delivery of the instrument if the last endorsement is in blank.
5.6 An endorsement must be written either on the instrument or on a slip affixed to it and be
signed.
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5.7 The endorsee on the 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 bill is payable to the bearer
(b) Special, that is, by a signature accompanied by an indication of the person to whom
the bill is payable
5.8 A signature, other than that of the drawee, is an endorsement only if placed on the back of
the bill.
5.9 If the drawer inserted in the instrument such words as 'not negotiable', 'not transferable',
'not to order', 'pay (x) only', or similar, the bill may not be transferred.
5.10 If an endorsement is forged, the person whose endorsement is forged, or a party who
signed the bill before the forgery, has the right to recover compensation for losses against:
(a) The forger
(b) The beneficiary to whom the instrument was directly transferred by the forger
(c) A party or drawee who paid the instruments to the forger directly or indirectly that had
knowledge of the forgery, exercised unreasonable skill and care or acted in bad faith
5.11 Advantages of bills of exchange

(a) They provide a convenient method of collecting payments from buyers in a
different state.
(b) The seller can seek immediate finance, using term bills of exchange, instead of
having to wait until the maturity of the bill.
(c) On payment, the foreign buyer keeps the bill as evidence of payment, so that a bill
of exchange also serves as a receipt.
(d) If a bill of exchange is dishonoured, it may be used by the drawer to pursue payment
by means of legal action in the drawee's country.
(e) The buyer's bank might add its name to a term bill, to indicate that it guarantees
payment at maturity; in Europe, this procedure is known as 'avalising' bills of
exchange.
6 Letters of credit
6.1 Letters of credit provide a method of payment in international trade which gives the seller a
risk-free method of obtaining payment, and which ensures for the buyer that the seller
complies to the letter with the terms of the underlying sales contract.
6.2 The process works by means of a system of guarantees between the seller and the
seller's bank, and the buyer and the buyer's bank. These arrangements need to be made
before the contract of sale is entered into; the banks are not party to the underlying contract
as such.
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6.3 The procedure is as follows:

(a) The buyer requests their bank to issue a letter of credit in favour of the seller (this
bank is called the issuing bank as a result).
(b) By issuing the letter of credit the issuing bank guarantees that the seller (the
beneficiary) will be paid.
(c) The issuing bank asks a bank in the seller's country (the advising bank) to advise
the letter of credit to the seller/beneficiary.
(d) The advising bank agrees to handle the credit on terms arranged with the issuing
bank; this may or may not include a stipulation that the advising bank should add its
own 'confirmation' or guarantee of payment to the credit.
(e) After examining the requisite documents relating to the transfer of goods and other
matters (invoice, shipping documents etc) the advising bank pays the seller and
forwards the documents to the issuing bank.
(f) The issuing bank double checks the documents and then reimburses the advising
bank.
(g) The buyer's account with the issuing bank is debited with the payment, and the
documents are handed over to the buyer so goods can be released by the carrier.
6.4 Advantages
(a) The seller receives immediate payment of the amount due to them, less any
discount, instead of having to wait for payment until the end of the credit period
allowed to the buyer.
(b) The buyer is able to get a period of credit before having to pay for the imports.
6.5 Disadvantages
(a) Letters of credit are slow to arrange and administratively cumbersome. However,
they are usually essential where the risk of non-payment is high, or when dealing for
the first time with an unknown buyer.
7 Letters of comfort
7.1 A letter of comfort is a letter issued to a third-party lender by a parent company.
7.2 The letter acknowledges the parent company's approval of a subsidiary company's attempt
at raising finance.
7.3 They only give assurance to the lender and are not legally binding on the parent
company. (Re Augustus Barnett & Son Ltd (1) and Kleinwort Benson Ltd v Malaysia
Mining Corporation Berhad (2)).
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8 Case summaries
1 Re Augustus Barnett & Son Ltd
An action for fraudulent trading in an insolvency was brought against a company and
against its parent company. The court refused to lift the corporate veil and identify the
insolvent subsidiary with its parent company, which had issued and frequently confirmed
letters of comfort to the subsidiary's creditors.
In this case the subsidiary's directors had not been fraudulent and also the parent's directors
had not been involved in management, so the action failed. However, it raised the
suggestion that the veil of incorporation could be lifted if the parent's conduct indicated an
assumption of liability.
2 Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad

Kleinworts lent £5 million to a Malaysian mining company and requested a letter of comfort
from the borrower's parent company. The parent wrote: '… It is our policy to ensure that the
business of (the borrower) is conducted in such a way that (it) is at all times in a position to
meet its liabilities to you …', and Kleinworts evidently placed reliance on this when
advancing funds. There was a subsequent liquidity crisis in the tin industry and Kleinworts
made a demand on the parent based on the letter of comfort.
The Court of Appeal reasoned that the statement as to 'ensuring' the subsidiary's ability to
meet its obligations did not constitute a promise to maintain the parent's supportive policy in
the future, and there was no express promise to pay. There is some debate over this
decision and certainly the wording in letters of comfort has to be very precisely phrased if
the parent is to avoid liability.
END OF CHAPTER
90

Agency law

 Define the role of the agent and give examples of such relationships paying particular regard to partners and
company directors
 Explain the formation of the agency relationship
 Define the authority of the agent
 Explain the potential liability of both principal and agent
Exam Context
The agency relationship is important in a number of contexts. Aside from people who earn their living as agents eg
estate agents and football agents the laws of agency will apply to those people that run businesses ie partners in
ordinary partnerships, and LLPs, as well as directors of companies.
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7: AGENCY LAW
Overview
Formation of agency
Definitions Formation methods Partners and directors
Authority
Liability
Rights Duties Liability
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1 Formation of agency
1.1 The agency relationship consists of three parties:
Principal
Agent
Third party
1.2 The principal is the person who has legally empowered the agent to enter into contractual
relations with a third party. The contract itself though is between the principal and the third
party. Two specific examples of agency relationships noted on the Corporate and Business
Law (GLO) syllabus are:
(a) Partners – per the Partnership Act 1890 all partners are deemed to be agents of the
firm and are hence able to bind all co-partners and make them jointly and severally
liable for business transactions.
(b) Company directors – the board of directors is deemed to be the agent of the
company (though not the shareholders) and can therefore bind the company without
personal liability. Individual directors do not have the power to bind the company
unless they have derived any of the powers of agency per Section 2.1 below.
1.3 Agency relationships can be formed in the following ways:

(a) Express agreement – between the agent and principal
(b) Ratification – where although the purported agent acted without authority the
principal retrospectively ratifies the contract
(c) Implication – the position that someone holds may imply they have the power to
bind, such as partners in a partnership
(d) Necessity – in instances of genuine emergency, where it is not possible to contact
the principal, an agent may appoint themselves where they have acted bona fide in
the interest of the principal
(e) Estoppel – where a person 'holds themselves out' they acquire apparent authority,
which the purported principal may be estopped from denying due to their
'acquiescence' per Freeman and Lockyer v Buckhurst Park Properties (1)
1.4 The agency arrangement may be terminated in the following ways:

(a) Expiry of agreement
(b) Mutual agreement
(c) Death, insanity, or bankruptcy of either party
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2 Authority of agents
2.1 Where an agent's authority has been agreed with the principal, verbally or in writing, then
their authority is said to be actual express authority.
2.2 In the absence of express authority the agent's power to bind may be implied in the
following ways:
(a) Actual implied authority – as implied by the position held. For example, the
managing director and company secretary are assumed to have the power to bind the
company in all commercial and administrative contracts respectively.
(b) Apparent authority – created either through the rules of estoppel or where a
principal has previously informed a third party that the agent has the power to bind.
3 Duties and liability

3.1 The rights of any agent are:
(a) To claim remuneration for services performed
(b) To be indemnified by the principal for expenses incurred
(c) To exercise lien over property owned by the principal
3.2 In return agents owe their principals the following duties:

(a) To perform their duties in line with the instructions of the principal
(b) To exercise due care and skill
(c) To act in person
(d) To be accountable for all transactions
(e) To avoid a conflict of interest
(f) Not to make a secret profit
(g) Not to accept bribes
3.3 Generally speaking, when the agency relationship is formed there is no liability falling upon
the agent where they conform to the duties placed upon them. There are, however,
exceptions to this general rule as detailed below:
(a) The principal's existence is disclosed under the following circumstances:
 At the insistence of the third party where the agent has admitted liability
 By implication where the agent has signed the contract in their own name
without reference to their role as an agent
 In relation with bills of exchange
 When a deed is executed
 Where no principal actually exists
(b) Where the principal's existence is not disclosed:
 Action can be taken against the agent, though they in turn may recover against
the principal (principal would usually intervene)
 Where the agent acts outside their authority
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3.4 An agent acting with no authority, actual or apparent, is liable for breach of warrant of
authority, and in these circumstances the agent has personal responsibility for contractual
relations entered into.
4 Case summaries
1 Freeman and Lockyer v Buckhurst Park Properties
The defendant company allowed one of its directors to act as the managing director and to
give instructions to the claimant to do work on its behalf. It was held that the fact that he had
never been formally appointed as managing director was of no consequence. The other
directors knew the facts, the company had effectively held out that individual as having the
powers of the managing director, and the fact that he may have gone outside his actual
authority did not affect the fact that he had apparent (or ostensible) authority to do what he
did, and the company was bound.
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7: AGENCY LAW
END OF CHAPTER
96

Partnerships

 Demonstrate a knowledge of the legislation governing the partnership, both limited and unlimited
 Discuss the formation of partnerships
 Explain the authority of partners in relation to partnership activity
 Analyse the liability of various partners for partnership debts
 Explain the termination of a partnership, and partners' subsequent rights and liabilities
Exam Context
There are an estimated 434,000 partnerships in the UK (Federation of Small Business, 2013) of which around 58,000
are LLPs (Companies House, December 2013). These business types employ millions of people and hence an
appreciation of the operation of these business forms is essential for any accountant/auditor.
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8: PARTNERSHIPS
Overview
Partnerships
Standard partnership Limited partnership Limited liability partnership
PA 1890 PA 1907 LLP Act 2000

Formation/termination Restrictions Key features
Rules for partners
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8: PARTNERSHIPS
1 Standard partnership
1.1 Standard partnerships are those governed by the Partnership Act 1890 (PA 1890). This
is defined by the Act as being:
'the relationship that subsists between persons carrying on a business in common
with a view to profit'.
1.2 The importance of this definition is that any trading relationship that fits this description will
be treated by the courts as a partnership, irrespective of the way it is classified by its
owners. As such it is clear that the standard partnership is not a separate legal entity and
its partners therefore have full personal liability for the debts of the partnership.
Partnership agreement
1.3 These partnerships may be governed by a private partnership agreement drawn up between
the partners themselves. Any aspect of the partnership not covered by such an agreement
will be governed by the PA 1890. Some of the main rights accruing to partners per the PA
1890 are:
(a) To share equally in the capital and profits of the business
(b) To be indemnified by the firm for any liabilities
(c) To take part in the management of the business
(d) To have access to the firm's books
(e) To prevent admission of a new partner or a change in partnership nature
1.4 There are no specific requirements to create a standard partnership. Indeed where a
business relationship is deemed by the courts to fit the definition given in Section 1.1 the
courts will imply the formation of a standard partnership.
Dissolution
1.5 Standard partnerships will be dissolved in many ways, including the following:
(a) Expiry of a fixed period for which the partnership was formed
(b) Completion of the express purpose for which the partnership was formed
(c) Activity of the partnership becomes illegal
(d) Partner gives notice to leave (subject to PA 1890)
(e) Death or bankruptcy of a partner (subject to PA 1890)
Duties
1.6 The relationship between the partners is a fiduciary one of 'utmost good faith'. In addition
to these general fiduciary duties there are specific statutory duties:
(a) The duty to disclose – all partners must render true accounts and full information in
matters relating to the partnership
(b) The duty to account – partners must account for all benefits obtained from any
transaction related to the partnership
(c) The duty not to compete – a partner who competes against the partnership without
consent will be liable for all such profits made
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8: PARTNERSHIPS
Partnership property
1.7 Property can either be the property of an individual partner, or owned by the partnership as
a whole, and in this case is known as partnership property. It is important to distinguish the
nature of ownership for the following reasons:
(a) Partnership property must be used exclusively for partnership business.
(b) Partnership property is used to pay partners' debts upon dissolution.
(c) The increase in value of property passes to the owner, either the partnership or the
individual depending on the nature of its ownership.
Authority
1.8 As discussed in the previous topic of agency, partners are deemed to be agents of the firm,
and as such have implied actual authority to bind the firm in ordinary trading transactions.
However, the partnership agreement can be used to expressly widen or restrict these
powers.
1.9 The power of partners to bind the partnership in contract with third parties is illustrated
below:
The firm (that is, all the individual partners) is liable under the contract
YES YES YES NO YES
Did the Would a Did the other Did the other

Did the
transaction partner in party know, or party know or
partner have
relate to the such a firm have reason to believe that
actual
business usually have know, that the the 'partner'
authority?
carried on authority to partner had was a
by the firm? do this? no partner?
authority?
NO NO NO YES NO
The individual partner only is liable
1.10 As well as personal liability for the trading debts of the firm the partners may be liable for
torts committed by other partners. In such cases the partners are said to be joint and
severally liable allowing the claimant to sue either the partner responsible or the firm.
Where an individual is sued they may claim contributions from the other partners in line with
the profit sharing agreement.
1.11 A partner's liability usually extends to the periods for which they were actually a partner of
the firm, as such partners who join or leave would expect not to be liable for torts committed
in the periods before they joined or left.
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1.12 In such circumstances however where it can be proved that an individual was being held
out as a partner at the time of the tort, liability will be extended to them. It is important
therefore that new/retiring partners advertise their change in circumstances widely eg using
the London Gazette.
2 Limited partnerships
2.1 An increasingly rare business form is the limited partnership as defined by the Limited
Partnership Act 1907 (LPA 1907).
2.2 This Act allowed for the creation of a trading entity that allowed some of its partners to limit
their liability in the event of a liquidation, subject to the following restrictions:
(a) The partnership must be registered with the Companies Registry.
(b) One or more of the partners must retain full, unlimited liability.
(c) Partners with limited liability may not take part in the management of the business,
and cannot usually bind the business in contract.
(d) Limited partners cannot, in the ordinary course of business, withdraw their capital.
3 Limited liability partnerships (LLP)

3.1 The Limited Liability Partnership Act 2000 (LLPA 2000) allowed the formation of a new
type of legal trading entity, the Limited Liability Partnership (LLP). Despite the name,
LLPs have much more in common with companies than standard partnerships.
3.2 The key features of an LLP include:

(a) Must be registered with the Registrar of Companies, with formation documents signed
by at least two members
(b) The name of the partnership must end with LLP
(c) Partners are known as members, of which there must be at least two (no upper limit
applies)
(d) The partnership must file annual returns and accounts; where applicable an audit is
also required
(e) The LLP is a separate legal entity with all of the associated features this entails (see
Chapter 13)
(f) Members are agents of the LLP, and can bind in the same way as partners in a
standard partnership
(g) Members' liability is limited to an amount stated in the partnership document (no
lower limit exists)
(h) Designated members are responsible for administration and filing
(i) The LLP is not subject to corporation tax; the members therefore enjoy the same
taxable status as partners of a standard partnership
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Lecture example 1 Exam standard question
Required
Which of the following is NOT a characteristic of a partnership?
A Partners can by mutual agreement withdraw capital if they wish.
B A partnership must be governed by a written partnership agreement.
C Partners jointly own partnership property.
D Partners are agents of the partnership.
Solution
Required
Which of the following rules does NOT apply to partnerships under the Partnership Act 1890?
A No partner is entitled to remuneration such as salary for acting in the partnership business.
B The partnership agreement may be varied with the consent of all the partners.
C Partners share profits in the ratio of the amounts of capital that they originally contributed to
the firm.
D No interest is paid on capital.
Solution
END OF CHAPTER
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topics.
Course Notes
chapter
Legal Systems 1

Sale of goods

International Transactions II 6
Transport and payment
Agency law 7
Agency & Partnerships
Partnerships 8
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Achievement Ladder
104

Corporations and legal
personality

 Distinguish between sole traders, partnerships and companies
 Explain the meaning and effect of limited liability
 Analyse the different types of companies especially private and public companies
 Illustrate the effect of separate personality and the veil of incorporation
 Recognise instances where separate personality will be ignored (lifting the veil of incorporation liabilities)
Exam Context
There are an estimated 2.7 million active companies in England and Wales, of which around 6,500 are plcs (Companies
House, December 2013). In this chapter you will learn the main reasons why these business forms are preferred to
partnerships seen in the last chapter.
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9: CORPORATIONS AND LEGAL PERSONALITY
Overview
Corporations and legal

personality
Incorporation Legal personality Lifting the veil
Unincorporated entities Salomon v Salomon Case law

Company types Consequences Statute
Public v private companies
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1 Incorporation
1.1 A company is an example of an incorporated trading entity. The term 'incorporation'
means that an entity has been created in its own right and is thus known as a 'corporation',
and is therefore separated in law from its owners. Standard partnerships and sole traders
are not corporations and as such do not require formal creation.
1.2 In order to confer limited liability upon its members a company or LLP requires
incorporation; however, it is important to appreciate that incorporation itself does not
guarantee limited liability in every circumstance as discussed below in Section 3.
1.3
1.4 Unlimited companies share all of the features of separate legal personality as limited
companies, save for the limited liability afforded to its members. In return however they do
not have to file their accounts or make their accounts available for public inspection.
1.5 Companies limited by guarantee are those that limit the liability of its members to an
agreed amount, often being a nominal figure for the protection of the guarantor(s). Certain
non-trading entities such as charities and educational establishments may adopt this
company form as it allows them to drop the suffix 'Ltd' from most of the company's
documents.
1.6 Private limited companies account for 99% of all registered companies in the UK. These
are companies that limit the liability of their members to any amounts unpaid on their share
capital.
1.7 Public limited companies are similar to private limited companies in that they limit the
liability of their members via the use of shares. However, in a plc its shares or debentures
may be advertised for sale to the general public, and a stock market listing may be applied
for. It is important to note however that not all plcs are listed on a stock market.
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1.8 It is a common exam requirement to distinguish between the features of a plc and Ltd
company. The main differences are summarised below:
Features Ltd Plc

Minimum number of directors 1 2
Minimum number of members 1 1
Minimum share capital One share £50,000
Advertise shares/debentures to public No Yes
Time to hold accounting records 3 years 6 years
Annual general meeting Optional Compulsory
Company secretary Optional Compulsory
File accounts after year end 9 months 6 months
2 Legal personality
2.1 The concept of separate legal personality was permitted to be applied to private companies
in the case of Salomon v Salomon & Co (1). In essence it was established that the
members of a company were separate legal persons to the company itself, separated by the
'veil of incorporation' as seen below:
2.2
Company
Business
Members
Veil of incorporation Third parties have to sue

the company for the debts
of the business
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2.3 The consequences of separate legal personality for the company are as follows:
(a) Members' liability is limited
(b) Perpetual succession arises as the company will need to be formally wound up
(c) The company itself can own property
(d) The company can sue, and be sued in its own name
3 Lifting the veil

3.1 It has been recognised that in a number of circumstances the operation of the veil of
incorporation would allow people to evade their legal obligations, or use companies to
commit frauds. As such there are common law and statutory exceptions to the general rule
in Salomon v Salomon. Under these exceptions the veil is lifted meaning that the members
or directors of a company can be held personally liable for the debts of the company.
3.2 The common law exceptions are:

(a) Where a company is being used to evade legal duties – Gilford Motor Co v
Horne (2)
(b) To recognise the alien enemy character of a company – Daimler Co Ltd v
Continental Tyre and Rubber Co (GB) Ltd (3)
(c) To identify the controlling mind of a company in cases of corporate manslaughter –
R v OLL Ltd (4)
(d) Recognising the breakdown of a quasi-partnership relationship – Ebrahimi v
Westbourne Galleries (5)
(e) Where a group of companies is operating as 'a single economic entity' – DHN v
Tower Hamlets (6) (Note. This is an exception to the general rule for group
companies per Adams v Cape Industries (7).)
3.3 Statute provides for the lifting of the veil in the following circumstances:
(a) Failing to correctly disclose the company's full name on company documents
(b) Fraudulent trading – continuing to trade a company with intent to defraud creditors, or
any other fraudulent purpose
(c) Wrongful trading – continuing to trade an insolvent company without taking all
reasonable steps to minimise the potential losses to creditors
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Required
Tom has transferred his business to Tom Ltd, a company limited by shares. Which of the following
statements is correct?
A Tom Ltd is fully liable for all debts and liabilities of the business incurred after the date of
transfer.
B Tom is fully liable for all debts and liabilities of the business incurred after the date of
transfer.
C Tom and Tom Ltd are jointly liable for all debts and liabilities of the business incurred after
the date of transfer.
D Tom Ltd and its shareholders are fully liable for all debts and liabilities incurred after the date
of transfer.
Solution
Required
Which of the following is not an example of an artificial legal person?
A A company limited by guarantee
B A private company with only one member
C A partner in a partnership
D The Archbishop of Canterbury in his official capacity
Solution
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4 Case summaries
1 Salomon v Salomon & Co
S transferred his business as a sole trader into a company legally incorporated with the
correct number of shareholders. Sale of assets to the company meant S was owed money
by S & Co, which was secured by a debenture. On subsequent liquidation this took priority
over unsecured trade creditors who argued it was invalid as the creditor – S – and the
debtor – S & Co – were technically one and the same. It was held that this was incorrect.
The company, being validly constituted, was a separate legal entity to S and the debt was
upheld.
2 Gilford Motor Co v Horne

H was a car salesman, and left G. His contract stated that he wasn't allowed to sell to G's
customers for a period after leaving. H set up a company which then approached his former
customers; H argued that firstly his company was approaching the customers, not him, and
secondly, if there was wrongdoing, his company was liable and not him. The courts held that
the company was sham, and granted an injunction against his company as well as him.
3 Daimler Co Ltd v Continental Tyre and Rubber Co (GB) Ltd

C sued D for debts owing. C was a UK company; however, all shareholders but one were
German. D argued that they should not pay the debt to German individuals to prevent
money going towards Germany's war effort. The court held that C was German.
4 R v OLL Ltd
On 8 December 1994, OLL Ltd became the first company in English legal history to be
convicted of corporate manslaughter. Peter Kite, 45, its Managing Director, also became the
first director to be given an immediate custodial sentence for a manslaughter conviction
arising from the operation of a business. Both defendants were found guilty on four counts
of manslaughter arising from the death of four teenagers who drowned off Lyme Regis while
on a canoe trip, on 22 March 1993, organised by the defendant OLL Ltd.
Mr. Kite was sentenced to three years' imprisonment and the company was fined £60,000.
An appalling catalogue of errors led to the deaths of the four teenagers who drowned having
been in the sea for over four hours after their canoes capsized. According to those familiar
with canoeing the trip should never have taken place. Prior to the trip, the teenagers had
received only one hour of tuition in a swimming pool by unqualified staff. The weather
forecast on the day of the trip had not been checked properly, distress flares were not
provided by the company, and the only safety equipment possessed by the instructors was
a whistle. The students' canoes did not have 'spray decks' to keep out water. Nine months
before the disaster two instructors had left the company because they were not satisfied
with its safety policy. One wrote a letter to the Managing Director, urging him to take a
'careful look' at safety otherwise he might find himself explaining 'why someone's son or
daughter will not be coming home'.
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5 Ebrahimi v Westbourne Galleries

E and friend N set up a gallery in Holland Park. Initially it was a partnership and then N
suggested setting up a limited company to attain limited liability. Shares were allocated on a
50/50 basis with equal management rights.
N then introduced his son to the company, effectively reducing E's shares to 49%. N and his
son passed an ordinary resolution sacking E as a director and then paid bonuses to the
directors and declared nil dividend. E applied to court for just and equitable winding up. It
was held that the company was in legal effect a partnership based on a relationship of
mutual trust and confidence which had clearly broken down. The court wound the company
up.
6 DHN Food Distributors v Tower Hamlets LBC

Veil was lifted to recognise that subsidiaries of a company which were in occupation of
premises which were the subject of a CPO were one and the same as the holding company.
As a result the money could be paid to the holding company because the group of
companies was viewed as 'one economic entity'.
This case was subsequently held to be applicable only in specific circumstances. The
general rule is the one followed in Adams v Cape Industries below.
7 Adams v Cape Industries

Cape, an English company, was head of a group including wholly owned subsidiaries.
In the US claimants had been awarded damages for asbestosis against a marketing
company, NAAC, a subsidiary of Cape.
The Court of Appeal held that the judgement could not be enforced against Cape, as the
subsidiary was to be treated as a 'separate legal entity with all the rights and liabilities which
would normally attach to separate legal entities ...'.
END OF CHAPTER
112

Company formations

 Describe the procedure for registering companies, both public and private
 Explain the controls over the names that companies may or may not use
 Explain the tort of 'passing off'
 Explain the role and duties of company promoters, and the breach of those duties and remedies available to the
company
 Explain the meaning of, and the rules relating to, pre-incorporation contracts
 Describe the statutory books, records and returns that companies must keep or make
Exam Context
Having seen why you may want to form a company in previous chapters you will now see how to form a company. Much
of the administration is easily done online today, though many people still prefer to skip this and purchase a ready made
company 'off the shelf' from a formation agent.
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10: COMPANY FORMATIONS
Overview
Company formations
Formation Promoters Statutory books
Registration procedure Definition Records required

Additional rules for plcs Duties
Pre-incorporation contracts
Objects
Name
Registered office
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1 Formation
1.1 In order to form a company in the UK the following documents must be lodged with the
Registrar of Companies House in either Cardiff or Edinburgh; this may be via an online
submission or hard copy:
Document Description
Memorandum of Association Historic record of initial subscribers
Application for registration Name, address, members' liability and company type
Section 9 documents Share capital and initial shareholdings
Statement of compliance Statutory declaration of compliance
£20 Registration fee
Section 9 Documents
1.2 Where a company is formed to be limited by shares the following information must be
provided on a statement of capital and initial shareholdings:
(a) The total number of shares (minimum of one) taken by the subscribers
(b) The aggregate nominal value of those shares
(c) For each separate class of share their rights and aggregate values
(d) The amounts paid up on each class of share
1.3 Additionally all companies must provide residential and service addresses for each natural
director and secretary as well as the company's postal address.
1.4 Should a company wish to draft its own articles then these will also need to be submitted.
Public companies
1.5 In order to form a plc there is an additional requirement to apply for a trading certificate
which requires submission of the following evidence:
(a) Allotted share capital is at least £50,000
(b) At least one-quarter of the nominal value of the allotted share capital has been paid
up (minimum £12,500)
(c) Details of promoters' expenses
(d) A statement of compliance in respect of payment of nominal values and share
premium
1.6 The consequences of a plc trading without the necessary documentation are that any
transactions are valid; however, the company and its directors are punishable by a fine.
After 12 months the company may be compulsorily wound up and the veil of incorporation
lifted.
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Certificate of incorporation
1.7 Once all of the documentation has been lodged the registrar will issue a certificate of
incorporation, which is final and conclusive proof of the effective birth date of the company,
before which it may not trade – Jubilee Cotton Mills v Lewis (1). Additionally the registrar
will advertise the formation in the Gazette.
2 Promoters
2.1 A promoter is anyone who has involvement in the facilitation of the formation of a
company. There is no narrow statutory definition of a promoter as the law aims to capture
as many people as possible under this description.
2.2 Given that a company only acts under the instruction of its majority shareholders, promoters
are therefore in a potentially powerful position as they may subscribe to all of the company's
initial share capital. They are in effect the first agents of a company.
2.3 In order to control promoters there are a number of duties they fall under:
(a) General duty to exercise reasonable skill and care
(b) Fiduciary duties as an agent:
 Duty to account
 Avoid a conflict of interest
 Duty to disclose
 Not to make a secret profit
2.4 Any breach of duty allows the company to rescind any contracts and recover any monies
lost from the promoter – Erlanger v New Sombrero Phosphate Co (2).
2.5 The most problematic areas for promoters are:

(a) Pre-incorporation expenses – a promoter has no automatic right to be reimbursed
the costs associated with formation. These have to be expressly agreed with the
subsequent directors of the company.
(b) Pre-incorporation contracts – any contracts signed by, or on behalf of, the company
before the date on the certificate of incorporation fall upon the promoter. In order
to avoid liability under these contracts the promoter could:
 Attempt to novate the contract
 Form such contracts in draft
 Purchase a company 'off the shelf'
2.6 When forming a company the promoter will need to consider the rules governing the
following:
 Company's objects
 Company's name
 Company's registered office
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3 Objects
3.1 Historically, a company was required to state the scope of its lawful activities in a measure
designed to protect the interests of shareholders. However, this was eroded by the
introduction of the 'general commercial company' clause in the Companies Act 1989
allowing a company to enter into any lawful commercial contract.
3.2 Per the Companies Act 2006 all companies will have unrestricted objects, unless the
Articles of Association are expressly altered to restrict them.
3.3 Any restriction of the objects will be binding on the company and its directors only, meaning
that third parties are usually protected. For example, if the company were to enter into a
transaction beyond the scope of its restricted articles the following could occur:
(a) If the transaction is completed – the company may then take action against the
directors for breach of duty in respect of not complying with the company's
constitution. The contract with the third party will be valid; or
(b) If the transaction is not completed – the members may seek an injunction bringing
into doubt the validity of the third-party contract.
4 Name
4.1 The name of the company must end in the words 'Limited' or 'public limited company' (or
abbreviations 'Ltd'/'plc') and be approved by the registrar, who may refuse to register any
name on the following grounds:
(a) The name is already in existence
(b) Its use would constitute a criminal offence
(c) It would be offensive
(d) It requires the permission of the Secretary of State (words such as king, royal)
4.2 The full name of the company must be disclosed outside all places of business and on all
business documents. Failure to comply with this renders the company secretary personally
liable for default and constitutes a criminal offence.
4.3 The name of the company can be changed by special resolution. In addition to forwarding
a copy of the resolution the registrar must separately receive notice of the change of name.
4.4 The company may be forced to change its name by order of the Secretary of State if
misleading information has been supplied or if the name adopted is deemed to be too
similar to an existing company.
4.5 The Companies Name Adjudicator will hear appeals from individuals and companies over
similar names. Their findings will be published within 90 days and they have the power to
order the change of name. In such cases the adjudicator will presume the name has been
legitimately registered. Alternatively an action may be brought under the common law per
the tort of passing off.
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4.6 In an action for 'passing off' one party is accused of misrepresenting themselves to the
public in a calculated manner designed to allow them to benefit from the defendant's
goodwill. These actions are most commonly associated with trademarks and company
names per Stringfellow v McCain (3) and HFC Bank v Midland Bank (4).
4.7 Where it can be proved in passing-off cases that there is a chance of 'genuine public
confusion' all lost trading profits can be awarded to the injured party in addition to an
injunction over the use of names.
5 Registered office
5.1 The registered office clause states the country in which the company is domiciled. The
domicile can only be changed by an Act of Parliament. As well as being the home of many
of the company's statutory books (Section 6) the registered office is where legal notice can
be served on the company. The actual address must fall within the domicile of the company
(England or Wales).
5.2 The registered office address can be changed upon notice to the registrar. The new address
must fall within the company domicile and is only effective upon receipt of notice by the
registrar. The old address remains a valid postal address for 14 days after receipt of notice.
5.3 Certain records must be kept available for inspection at the registered office as detailed
below.
6 Statutory books
6.1 The following registers must be kept by the company, though the CA 2006 allows for many
of them to be stored electronically as long as soft copies can be generated:
Register
Register of members
Register of people with significant control
Records of directors (and secretaries)
Register of directors' residential addresses
Records of directors' service contracts and indemnities
Records of resolutions and meetings of the company
Register of disclosed interests in shares (public
companies only)
6.2 A company must submit the following annually to the registrar:

(a) Accounts within six or nine months of year end for plcs and Ltd companies respectively
(b) An annual confirmation statement – keeping the registrar informed about changes to
the company such as changes to membership and share capital
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Required
If a contract is entered into by promoters before the incorporation of a company, which of the
following is incorrect?
A The company may adopt the contract as soon as it receives its certificate of incorporation.
B Subject to agreement to the contrary, the promoters may be held personally liable on the
contract.
C The company cannot enforce the contract prior to its incorporation.
D The company cannot be held liable even if it has adopted the contract after receiving its
certificate of incorporation.
Solution
Required
How can a promoter ensure that the expenses they incur in setting up a company will be
recoverable?
A By making it clear in all transactions that they are acting as agent for the company
B By entering into a contract with the company after its incorporation for reimbursement of
expenses by the company
C He has no automatic right but, by drafting the articles of the company, they can provide for
the reimbursement of expenses
D By the promoter declaring in all transactions that they are a trustee for the company
Solution
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Required
If a transaction falls outside of activities defined by a company's objects clause what is its status?
A Valid as against third parties
B Void as being ultra vires
C Voidable by the third party
D Voidable by the company
Solution
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7 Case summaries
1 Jubilee Cotton Mills v Lewis
The date on a company's certificate of incorporation is conclusive evidence of the
company's existence.
2 Erlanger v New Sombrero Phosphate Co

Erlanger, the promoter, acquired on his own account but in the name of another (a
'nominee') the lease of a phosphate mine in the West Indies for £55,000. He then proceeded
to sell the mining rights to the newly formed company for £110,000. The purchase was
approved by the board of directors of the company, which had been appointed by Erlanger
and were either under his influence or, as in the case of one of the directors, who was the
Lord Mayor of London, simply did not have time to give to the enterprise. The prospectus
that offered the company's shares to the public did not disclose the promoter's profit. When
the original board of directors was replaced, the new directors, on discovering the swindle,
sued Erlanger to have the contract for the sale of the mining rights rescinded.
It was held that the contract should be rescinded because the profit made by Erlanger had
not been properly disclosed (in this case to an independent board) and therefore could not
be kept by him.
3 Stringfellow v McCain
The owner of the famous 'Stringfellows' nightclubs failed to prevent a manufacturer of long,
thin oven chips calling their product by the same name.
4 HFC Bank v Midland Bank

When Midland Bank in the UK rebranded as HSBC it was subject to a passing-off claim from
the long-established HFC Bank. The case failed on the grounds of insufficient chance of
public confusion.
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END OF CHAPTER
122

A company's constitution

 Analyse the effect of a company's constitutional documents
 Describe the contents of model articles of association
 Explain how the articles of association can be changed
Exam Context
Like any organisation a company will need rules and regulations. In this chapter you will explore in detail how the articles
of a company bind the company and its members, as well as how they can be altered.
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11: A COMPANY'S CONSTITUTION
Overview
A company's
constitution
Memorandum Articles of Association
Binding power Alteration

Entrenchment
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1 Memorandum
1.1 The Memorandum of Association (MoA) is a largely historic document that, once
submitted to the registrar is unalterable. It merely serves as a record of the initial
shareholders upon formation of the company.
2 Articles
2.1 The Articles of Association (AoA) are the working part of the constitution that has now
absorbed much of the content that used to be the preserve of the MoA.
2.2 The AoA provide the rules by which a company is run and primarily govern the following
areas:
(a) Directors' powers and responsibilities
(b) Decision making by directors
(c) Appointment of directors
(d) Organisation and conduct of general meetings
(e) Issue and transference of shares
(f) Payment of dividends
(g) Exercise of members' rights
3 Binding power of the AoA

3.1 The AoA have the following binding powers:
3.2 Members to the company
Co
Member
The company is able to compel the members to obey the AoA – Hickman v Kent or
Romney Marsh Sheep Breeders' Association (1).
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3.3 Company to the members
Co
Member
The members are able to compel the company to obey the AoA – Pender v
Lushington (2).
3.4 Members to the members
Member Member
The members are able to compel each other to obey the AoA – Rayfield v Hands (3).
3.5 In summary only the following parties are bound by the AoA:
Co
Member Member
3.6 It was established in the case of Eley v Positive Life Co (4) that third parties cannot
enforce the AoA.
4 Altering the AoA

4.1 The Government has published model AoA for the various types of company forms (private
limited by share/guarantee, public) that can be adopted upon incorporation. However, these
models can be altered by:
(a) Passing a special resolution; and
(b) Providing the alteration has been made 'bona fide in the interest of the company
as a whole' per Greenhalgh v Arderne Cinemas (5).
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4.2 The courts are deeply suspicious of any attempt to alter the AoA in any way that allows for
the expulsion of a member. Such alterations will only be permitted in the following
circumstances:
(a) Member is defrauding the company
(b) Member is competing against the company
Entrenchment
4.3 It is not possible to declare part or the whole of the AoA unalterable (entrenchment);
however, partial entrenchment is possible upon incorporation by notifying the registrar.
4.4 Conditional entrenchment may require that certain sections of the AoA require a majority in
excess of a special resolution in order to be changed/repealed. However, it is not possible to
prevent alteration where there is unanimous agreement in favour of change.
Required
Answer the following questions.
1 The MoA and AoA of a company must be signed by:
A All the directors and the company secretary
B One director only
C The subscribers and the company secretary
D The subscribers
2 AoA bind which of the following?
A The company and its directors
B The company and its members
C The directors and members inter se
D The company members only
Solution
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5 Case summaries
1 Hickman v Kent or Romney Marsh Sheep Breeders' Association

The articles provided that disputes between members and the association be resolved by
arbitration. Hickman brought an action against the company in the courts. It was held that
the association was entitled to have the action stayed as the articles constituted a contract
between Hickman and the association in respect of their rights as members.
2 Pender v Lushington
AoA stated maximum votes to be attached to shareholdings. P transferred shares to
nominee companies in order to increase his votes. The Chairman of the company at a
general meeting disallowed these votes. It was held that this was improper. P could enforce
this provision against the company.
3 Rayfield v Hands
The directors of a company were forced to abide by the AoA, which required them to
purchase the shares of any members who wished to transfer their shares.
4 Eley v Positive Life Co

E, a solicitor, drafted the original articles and included a provision that the company must
always employ him as its solicitor. E became a member of the company some months after
its incorporation. He later sued the company for breach of contract in not employing him as
a solicitor. It was held that E could not rely on the article since it was a contract between the
company and its members and he was not asserting any claim as a member.
5 Greenhalgh v Arderne Cinemas

An alteration of the AoA to remove pre-emption rights, whilst depriving G of his individual
shareholder rights, was held to be for the benefit of the company as a whole.
END OF CHAPTER
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Share capital

 Examine the different types of capital
 Illustrate the difference between the various classes of shares, including treasury shares and the procedure for
altering class rights
 Explain allotment of shares and distinguish between rights issue and bonus issue of shares
 Examine the effect of issuing shares at either a discount, or at a premium
Exam Context
A company has two main sources of finance, shares or loans. In this chapter you will see the different types of shares
that can be issued, how they are paid for and the rights attaching to them.
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Overview
Share capital
Types of shares Issuing shares Payment for shares Class rights
Define capital Private Co Private Co Define

Classifications Public Co Public Co Alteration
Ordinary v Preference Share premium Minority protection
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1 Types of shares
1.1 The strict definition of a share consists of three elements, encompassing:
(a) Interest in the company – the member is entitled to a share of the profits generated
by the assets owned by the company
(b) Limited liability – the liability of the member is limited to the amount they have
agreed to pay for their shares
(c) Mutual covenants – as defined in the previous chapter on the Articles of Association
(AoA), members are bound together – Rayfield v Hands
1.2 The word 'capital' can have many different meanings in relation to shares:
Name Definition
Issued/allotted The nominal value of shares currently in issue
Called up The amount of money requested by the company in payment
for shares issued
Paid up The amount of money received by the company for shares
issued
Reserve Capital only to be called up upon liquidation
1.3 It is apparent from the definitions of called-up and paid-up share capital that shares can be
issued either partly or fully paid. Where a share is issued partly paid the company may call
up the remaining unpaid amounts at any time. Alternatively the liquidator may demand this
upon winding up a company.
1.4 When a plc issues shares partly paid the following payment rules apply:
(a) At least 25% of the nominal value must be received
(b) 100% of any share premium must be received
1.5 A company can issue shares of differing types, each having differing values and rights
attaching to them. There are four categories you should be aware of:
(a) Ordinary shares – see Section 1.6.
(b) Preference shares – see Section 1.6.
(c) Redeemable shares – being shares that the company may repurchase. A company
must have some irredeemable shares in issue at all times.
(d) Deferred shares – a rare form of capital that postpones the rights of a holder to
receive a dividend until the ordinary shareholders have received a fixed return.
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1.6 The key distinctions between ordinary and preference shares are summarised below:
Feature Ordinary Preference

Dividends Variable Fixed – usually cumulative
Voting rights Yes Restricted
General meetings May attend and vote Restricted
Liquidation Rank last Rank above ordinary shares
Entitled to capital and share of Entitled to repayment of
surplus capital only
2 Issuing shares
2.1 When a company wishes to increase the number of shares it has in issue it needs to ensure
the following rules have been observed:
Private company with a single class of shares

2.2 In these companies directors need not seek authority to allot new shares unless directed by
their AoA.
Public companies and private companies with multiple classes of shares

2.3 In order to allot new shares the directors require authority, which is derived from passing
an ordinary resolution. Once passed the ordinary resolution is effective for up to five
years.
2.4 Allotments are subject to the following rules:

(a) Where shares are issued wholly for cash pre-emption rights are granted, imposing
these additional restrictions:
 Offer those shares to existing company shareholders pro rata to their existing
holding
 Shareholders are notified in writing
 The offer must be open for at least 21 days
(b) Any company may exclude pre-emption rights by special resolution and with court
approval
(c) Directors must issue shares for a 'proper purpose'
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3 Payment for shares

3.1 The rules governing the methods of payment for shares in both private and public
companies are:
(a) Private companies may accept payment for shares in the form of:
 Money
 Goods
 Services
(b) Public companies may only issue shares in exchange for:
 Money – subject to the rules in Section 1.4
 Goods – these must be independently valued six months before allotment, and
received within five years of allotment
3.2 Shares may not be issued at a discount (below their nominal value). Where this happens
the shareholder is liable to the company for the unpaid amount plus interest.
3.3 Where shares are issued at a premium ie in excess of nominal value, whether for cash or
otherwise, an amount equal to the premium must be transferred to a share premium
account.
3.4 It is common for a company to issue its shares at a premium to the nominal value. There are
however a number of restrictions as to the use of the resulting share premium reserve,
being:
(a) To write off the expenses of issuing shares
(b) To write off any commission paid on the issue of shares
(c) The issue of fully paid bonus shares
3.5 In order to raise additional finance a company may offer fresh shares to existing
shareholders. This is known as a rights issue, and the new shares are typically offered at a
discount to current market price to incentivise shareholders to subscribe.
3.6 In the event that a company has insufficient cash to finance a dividend it may instead
choose to offer fresh shares in lieu of cash. These bonus shares can be funded from the
share premium account. This is sometimes referred to as a scrip dividend.
4 Class rights
4.1 It is not uncommon for a company to have different types of shares in issue per Section 1.
Indeed a company may even have many different classes of the same types of shares such
as Ordinary A, Ordinary B, Ordinary C shares etc. Each of these may well have different
rights attaching to them, such as the power to vote, or preference over dividends, and these
are known collectively as class rights.
4.2 It is possible for a company to alter the rights attaching to classes of shares as defined by
the Companies Act 2006:
(a) The articles must allow for variation.
(b) Agreement of 75% of that class of shareholder is usually required.
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4.3 Such variations may be challenged by minority interests. Objections must be lodged with
the courts within 21 days of the vote, by at least 15% of the class of members that voted
against the alteration. The courts may confirm or cancel the alteration as they see fit.
4.4 Alteration of class rights is a contentious area and it is often the role of courts to distinguish
between:
(a) Variation of class rights – such as removing/reducing the rights of a class of shares to
vote or receive dividends
(b) Varying the enjoyment of class rights – this is not a variation in itself, for example
sub-dividing 50p shares with one vote each, into five 10p shares, with one vote each
does not constitute the variation of the rights of other classes of shares in the same
company.
Required
Answer the following questions.
1 Which of the following statements about preference shares is untrue?
A They rank before ordinary in a distribution following liquidation.
B They generally do not have voting rights attached.
C They always accumulate dividends when a company cannot make a distribution.
D They allow the holder to receive a repayment of capital only upon liquidation.
2 Which of the following amounts to a variation of class rights?
A The issue of shares of the same class to allottees who are not already members of
that class
B The return of capital to the holders of preference shares
C The creation and issue of a new class of preference share with priority over an
existing class of preference shares
D An alteration to the prescribed procedure for a variation of class rights
Solution
END OF CHAPTER
134

Loan capital

 Define companies' borrowing powers
 Explain the meaning of loan capital and debenture
 Distinguish loan capital from share capital, and explain the different rights held by shareholders and debenture
holders
 Explain the concept of a company charge and distinguish between fixed and floating charges
 Describe the need and procedure for registering company charges
Exam Context
Having learnt about share finance in the last chapter you will now examine debt as a source of finance. Unlike shares,
loans, in the form of debentures, can be secured via fixed and floating charges making them a potentially much less
risky form of investment.
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Overview
Loan capital
Debentures Charges
Define Fixed v Floating

Debentures v Shares Registration
Receivers
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1 Debentures
1.1 The power to borrow money is usually expressly stated in the company's constitution; where
this is not the case it can usually be implied from the trading activities of the company.
1.2 Debentures are a form of loan capital a company can use to raise finance. In strict legal
term they are known as 'a written acknowledgement of indebtedness'.
1.3 Debentures may be issued in a number of ways:

(a) Single debentures – issued to a single provider, this document sets out the terms of
the loan.
(b) Debentures issued in series – the loan is raised from several providers, each
ranking equally (pari passu).
(c) Debenture stock – finance is raised from the public, each owning a proportion of the
debt via a certificate, in much the same way as owning shares. The details of the
overall loan are set out in a debenture trust deed document.
1.4 Debentures may be either redeemable or irredeemable.
1.5 The main differences between shares and debentures are summarised below:
Feature Shares Debentures

Status Member Creditor
Returns Dividends – variable Interest – fixed
Issued Never at a discount Discounted/Par/Premium
Security None Fixed/Floating charges
Liquidation Rank last Rank first
2 Charges
2.1 As noted above a key distinction of debentures is the ability to secure the investment via
charges. Security means that, in the event of a company being wound up, the creditor with a
secured debt will receive a priority as regards payment over unsecured creditors and
shareholders. There are two types of charges available to debentureholders.
2.2 Fixed charges have the following properties:

(a) They attach to specific assets upon creation (subject to registration).
(b) The charged asset may not be disposed of by the company.
(c) Default on the loan by the company enables the charge holder to sell the asset and
recover monies owed.
(d) Upon liquidation fixed charge holders rank first.
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2.3 Floating charges have the following properties:

(a) They do not attach to specific assets upon creation, merely 'hovering' over classes of
assets.
(b) Upon a 'crystallising event' the charge attaches itself to the remaining assets within
the charged class(es). Such events may include:
 Company is unable to pay its debts
 A receiver is appointed
 Company ceases business
 Company goes into liquidation
(c) The company is free to deal in charged assets up to the point of crystallisation.
(d) Upon liquidation the floating charge holders rank behind fixed charge holders, the
liquidator, and other secured creditors.
2.4 Any amounts of monies owed to any charge holders not settled by the sale of charged
assets become unsecured. Without court approval the fixed charge holders may appoint a
receiver to take control of the charged asset. Floating charge holders may appoint an
administrative receiver in the event of a crystallising event, but whose powers are limited
by the Enterprise Act 2003.
2.5 Charges must be registered with the registrar within 21 days of their creation; else they
become void, rendering the debt unsecured. Assuming this deadline is met, the charges
become effective from date of creation – not registration. Charges that are delivered late
will only be registered to the extent that they do not prejudice the rights of other charge
holders.
2.6 The strict priority of charges is that fixed charges always rank above floating charges.
For example a fixed charge created and registered on a factory in May would rank before a
floating charge created and registered over 'all of the companies' assets' in January of the
same year.
2.7 Should a floating charge holder wish to prevent themselves being overtaken by a
subsequent fixed charge over the same asset then they can create a Negative Pledge
Clause (NPC). As long as the creditor has provided some form of additional consideration,
and all subsequent charge holders are informed of the presence of the NPC, it cannot be
overtaken by subsequent fixed charges granted over the asset(s).
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The following charged debentures were issued by a company against overlapping asset(s):
1 March – fixed charge debenture to A, registered on 14 March
12 March – floating charge debenture to B, registered on 16 March
24 March – floating charge with NPC to C, registered on 31 March
28 March – fixed charge to X, registered on 31 March
1 April – floating charge to Y, registered on 16 April
7 April – floating charge to Z, registered on 12 April
Required
What is the order in which these debentures will be repaid assuming the company goes into
liquidation?
Solution
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END OF CHAPTER
140

Capital maintenance and
dividend law

 Explain the doctrine of capital maintenance and capital reduction
 Illustrate the difference between the various classes of shares, including treasury shares and the procedure for
altering class rights
 Explain the rules governing the distribution of dividends in both public and private companies
Exam Context
Capital maintenance is a tricky topic; don't be surprised if you find questions in this area harder than others. In this
chapter you will see an array of rules that exist as a counter-balance to limited liability that shareholders in companies
enjoy ie in exchange for protection from creditors upon a liquidation, there are restrictions on how shareholders can take
money out of a company via share buy-backs and dividends.
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14: CAPITAL MAINTENANCE AND DIVIDEND LAW
Overview
Capital maintenance
and dividend law
Capital reduction Dividends
Acquisition of own shares Distribution rules

Share repurchase Unlawful dividends
PCP
Treasury shares
Financial assistance
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1 Capital maintenance
1.1 The single greatest advantage of trading through a company is the limited liability afforded
to its members. In order to secure this companies face additional disclosure requirements,
and have to follow the rules on capital maintenance, which prevent the members
withdrawing their capital without restriction.
1.2 The doctrine of capital maintenance operates through the maintenance of the creditors'
buffer. In essence this is a collection of undistributable reserves that must be maintained by
the company, thereby restricting the ability of a company to return capital to its members via
dividends and share repurchases.
1.3 Maintaining a buffer ensures that some of the value of a company is 'locked in' at the
reserves section of the balance sheet, which in turn requires that there be some assets left
in the top section of the balance sheet. This has the effect of providing some insurance for
creditors. An illustration of the creditors' buffer is given below:
COMPANY Y BALANCE SHEET AT 31 DECEMBER 200X
$m
Net assets 1,000
Share capital 100

Share premium 150 Creditors' buffer (capital and
Revaluation reserve 200 undistributable reserves)
Capital redemption reserve 100
Retained earnings 450 (Distributable reserve)
Shareholders’ funds 1,000
2 Capital reduction
2.1 The procedures under which a company may reduce its capital are stated in the
Companies Act (CA) 2006, allowing for three ways in which this can be achieved:
(a) Removing liability for unpaid calls on issued share capital
(b) Paying back excess capital to shareholders, on fully paid shares
(c) Cancelling paid-up share capital that has been lost
2.2 Per the CA 2006 private companies may reduce capital without court approval by
following the procedures below:
(a) A special resolution is passed.
(b) A statement of solvency is produced within 15 days of the resolution.
(c) A copy of the solvency statement and a statement of capital are sent to the registrar
within 15 days of the resolution.
2.3 Public companies must continue to follow the established procedure which requires court
approval for any reduction of capital and allows any member or creditor to object.
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3 Acquisition of own shares

3.1 A common method of returning funds to shareholders is a share repurchase. The CA 2006
allows for a company to purchase its own shares (they must be cancelled once bought) in
the following ways:
(a) A market purchase – via a recognised stock exchange, requiring an ordinary
resolution
(b) Off-market purchase – any other method of purchase, requiring a special resolution
3.2 Public companies are forbidden from repurchasing shares out of capital (creditors' buffer);
however, the rules for private companies are relaxed, allowing for purchases out of capital,
known as Permissible Capital Payments (PCPs).
3.3 The rules for PCPs are extremely rigorous, and any payment by a private company out of
capital will be unlawful unless:
(a) Directors produce a statutory declaration of solvency
(b) The declaration is audited
(c) Company passes a special resolution within one week of the declaration
(d) Within one week of the resolution the company advertises the PCP (Gazette)
3.4 The courts are very keen to protect the interests of affected parties during PCPs, therefore
any member who opposed the special resolution, or any creditor, can object in court,
applications being made within five weeks of the resolution. The courts will do as they see
fit.
3.5 The PCP itself operates by allowing the company to repurchase its own shares to a value
that is in excess of its own retained earnings, thereby creating a shortfall that results in a
reduction of the creditors' buffer as illustrated below:
COMPANY Z BALANCE SHEET AT 31 DECEMBER 200X
(REPURCHASE OF $200m OF SHARES AT PAR)
Before Repurchase After
$m
Net assets 1,000 (200) (less $200m 800
cash)
Share capital 300 (200) 100

Share premium 250 $850m $800m 250
Revaluation reserve 200 200
Capital redemption
reserve 100 150 250
Retained earnings 150 (150) –
Shareholder's funds 1,000 (200) 800

The net effect of the above transaction has been a reduction in the creditors' buffer, or PCP,
of $50 million.
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3.6 In a plc the maximum value of a repurchase above would be $150 million, limited to the
value of retained earnings, as a PCP is not permissible.
3.7 Treasury shares are shares that a listed company buys in itself and does not cancel. They
are then held as an investment with the following limitations:
(a) No dividend or pre-emption rights received
(b) No voting rights exercisable
(c) No participation in a distribution of company assets upon liquidation
4 Dividends
4.1 The payment of dividends is another area of capital maintenance regulated by the CA 2006,
with differing rules applying to private and public companies. The maximum amount these
companies can distribute as a dividend is restricted as follows:
Private Public
Accumulated realised profits Accumulated realised profits
less less
Accumulated realised losses Accumulated realised losses
less
Accumulated unrealised losses
4.2 In essence, therefore, a private company may only pay out its retained earnings as a
dividend; a public company must further deduct any losses it has made, but has yet to
realise, such as negative revaluation reserves.
4.3 Should a company make a distribution in excess of that allowed by the rules above (ie out of
capital) the dividend is deemed unlawful.
4.4 Should directors have knowingly authorised an unlawful dividend they will be liable to
replace any such dividends personally. Where a shareholder ought to have reasonably
known the dividend they received was unlawful they will be similarly liable.
4.5 Should the company's auditors have advised on an unlawful dividend policy they may be
liable for professional negligence.
5 Financial assistance
5.1 The CA 2006 expressly forbids the provision of financial assistance by the company to a
third party in order to allow them to purchase shares in a public company. Such assistance
could take the form of:
(a) Loaning money
(b) Acting as a guarantor on a loan
(c) Purchasing assets at over-value
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5.2 However, there are some statutory exceptions to the general rule of prohibition being:
(a) If acquiring the shares is not the principal purpose of the transaction (company buys
goods from a supplier, who then buys share in the company)
(b) If the assistance is not the main purpose of a much larger transaction (management
buy-out)
(c) If the company is a money lending organisation (a bank)
(d) If it is for the benefit of genuine employees (employee share save schemes)
5.3 The punishments for any breach of the financial assistance rules are:
(a) The assistance is void
(b) Officers responsible may be criminally liable
(c) Officers responsible are liable to account to the company for any losses suffered
END OF CHAPTER
146

Company officers

 Explain the role of directors in the operation of a company, and the different types of directors such as executive,
non-executive directors or de jure and de facto directors
 Discuss the ways in which directors are appointed, can lose their office and the disqualification of directors
 Distinguish between the powers of the board of directors, the managing director/chief executive and the
individual directors to bind the company
 Explain the duties that directors owe to their companies
 Discuss the appointment procedure relating to, and the duties and powers of, a company secretary
 Discuss the appointment procedure relating to, and the duties and powers of a company auditor. And their
subsequent removal or resignation
Exam Context
Company directors is a massively examinable area and you should expect several objective test questions as well as a
question in Section B of your exam. In terms of directors, secretaries and auditors you will need to be able to understand
how they are appointed and removed and the duties they owe during their engagement to the company.
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Overview
Company officers
Company directors Company secretary Auditors
Types Appointment Appointment

Appoint/remove/disqualify Duties Duties
Powers/duties Power Power
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1 Company directors – appointment and removal

1.1 The directors of a company are responsible for day to day management, whilst not
necessarily being the owners. In this respect there is a separation between the control and
ownership of a company.
1.2 A company may have several different types of directors, each of which are subject to the
duties and obligations outlined later in this chapter. The types of director are:
(a) Executive director – someone employed to be a member of the company's board,
involving themselves in the management of the business
(b) Non-executive director – a part-time board member, with no management
responsibility; they attend board meetings only
(c) Managing director (MD) – a company may optionally appoint one or more MDs who
have the implied actual authority to enter into any commercial contracts on behalf of
the company
(d) Shadow director – a person whose instructions the board is accustomed to follow
(though this does not extend to professional advisers such as auditors)
(e) Alternate director – a person who acts in place of another director
(f) De facto director – anyone who holds themselves out as a director
Child directors
1.3 There is now a minimum age of 16 years for company directors. The position of underage
directors became void upon introduction of the Companies Act (CA) 2006. It is a further
requirement of the CA 2006 that all companies have at least one director who is a natural
person.
Appointment
1.4 Although there are no formal qualifications required to be a company director in the UK,
there are a limited number of ways in which directors can be appointed:
(a) Signing Section 9 documents upon registration of a new company
(b) Appointed by ordinary resolution at an annual general meeting (AGM)
(c) Casual vacancy appointed by the board
Removal
1.5 Directors can be removed in the following ways:
(a) Removal – by ordinary resolution, with special notice (28 days)
(b) Resignation – which must be in writing
(c) Retirement – not standing for re-election at the end of their term
(d) Termination per the articles – failure to comply with any given requirement of the
company's articles ie not participating in majority decisions
(e) Disqualification – under the conditions laid out by the Company Directors
Disqualification Act 1986 (CDDA 86)
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Disqualification
1.6 The CDDA 86 allows the court to disqualify anyone from being not only a director but also a
liquidator, administrator, receiver, or manager of a company. Disqualification orders last for
periods ranging from 2 to 15 years.
1.7 There are three categories of disqualification:
(a) General misconduct in connection with running a company
 Conviction for an indictable offence in connection with promoting, forming or
running a company
 Persistent breaches of company legislation
 Fraud in connection with a winding up
(b) Disqualification for unfitness
 As declared by a court following a company insolvency
 After an investigation of the company
(c) Other cases for disqualification
 Participation in fraudulent or wrongful trading
 Undischarged bankrupts acting as directors
 Failure to pay under a county court administration order
1.8 Breaching a disqualification order is a criminal offence carrying a maximum sentence of up
to two years' imprisonment and/or a fine.
2 Directors' powers
2.1 Directors' powers are derived from the Articles of Association (AoA) of the company, and
the laws of agency (Chapter 11). The board of directors may exercise 'all the powers of
the company', though this power is given to the board, not individual directors.
2.2 Individual directors only have the power to bind the company if they have:
(a) Express actual authority – per their service contract, the articles, or delegated by the
board
(b) Implied actual authority – from the position held, such as the MD
(c) Apparent authority – where the director holds themselves out – Freeman and
Lockyer v Buckhurst Park Properties
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3 Directors' general duties

3.1 The CA 2006 has codified directors' duties into a set of seven general duties.
Company's constitution
3.2 Directors have a duty to act in accordance with the company's constitution, and to exercise
their powers for the purposes conferred.
3.3 What constitutes proper purpose is defined by the circumstances under consideration, with
a good example being the allotment of new shares. In these instances directors must
exercise their powers for a proper purpose per:
 Not to facilitate a takeover – Howard Smith v Ampol Petroleum (1)
 Not to prevent a prospective takeover – Hogg v Cramphorn (2)
 Though such breaches may be retrospectively ratified – Bamford v Bamford (3)
Promote the success of the company

3.4 A director has a duty to act in a way they consider, in good faith, would be most likely 'to
promote the success of the company for the benefit of its members as a whole'.
3.5 Unfortunately the CA 2006 does not define what 'promote the success' means and although
it is felt to relate to improving the long-term returns to shareholders it is only in time via case
law that a true definition will emerge.
3.6 In exercising this duty directors must have regard to the following factors:
(a) The likely consequences of any decision in the long term;
(b) The interests of the company's employees;
(c) The need to foster the company's business relationships with suppliers, customers
and others;
(d) The impact of the company's operations on the community and the environment;
(e) The desirability of the company maintaining a reputation for high standards of
business conduct; and
(f) The need to act fairly as between members of the company.
Independent judgement
3.7 Directors must exercise their powers independently; however, they are allowed to delegate
their functions (though not their powers) to a third party.
3.8 The draft model articles forbid delegation to anyone but a fellow director in matters
connected with:
(a) The taking of decisions by directors
(b) The appointment or termination of a director
(c) The declaration of a dividend
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Reasonable skill, care and diligence

3.9 A director has a duty to their company to exercise reasonable skill, care and diligence and
this is judged by two 'tests':
(a) Have they exercised the knowledge, skill and experience reasonably expected of a
director in that position; and
(b) The knowledge, skill and experience of that particular director.
3.10 In essence therefore a director is firstly expected to act as a reasonable person would,
though if they possess any particular skills or experience they will be expected to exercise
those per Dorchester Finance v Stebbing (4).
Avoid conflicts of interest

3.11 Directors had traditionally faced a very strong fiduciary duty not to benefit personally from
any commercial opportunities that came their way as a result of their directorship. In such
cases the directors would have required permission of shareholders before proceeding:
 IDC v Cooley (5) – director acts dishonestly
 Regal (Hastings) Ltd v Gulliver (6) – failure to gain permission of the company
 Peso Silver Mines Ltd v Cropper (7) – company declined the opportunity
3.12 The impact of the CA 2006 on private companies is that independent directors may now
authorise such transactions unless the AoA prohibit such authorisation.
3.13 For public companies such authorisation by independent directors must be expressly
permitted by the AoA.
Benefits from third parties

3.14 Directors are forbidden from accepting benefits from third parties, including bribes. This duty
cannot be overridden by board authorisation as per conflict transactions above.
Interest in a transaction
3.15 At any point a director becomes aware that they have any interest in a contract with the
company this must be disclosed to the full board at the next board meeting.
4 Directors' specific duties

4.1 In addition to the seven general duties directors owe the following specific duties to the
company:
Substantial property transactions

4.2 Approval by resolution is required should a director wish to transfer or acquire property of
the company subject to the following limits:
(a) The lower of – assets exceed £100,000 or 10% of net assets
(b) There is a de minimis value of £5,000
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Loans and quasi loans

4.3 Private companies may make loans to directors without restriction subject to member
approval.
4.4 Relevant companies (public companies and private companies owned by public
companies) also require member approval for loans and quasi loans to directors.
4.5 In respect of all types of companies the following loans may be made without member
approval:
(a) Loans up to £10,000
(b) Loans up to £50,000 made to assist directors in the performance of their duties
(c) Loans and quasi loans made by a money lending business in the ordinary course of
business
Service contracts
4.6 The company must keep available for inspection copies of all directors' service contracts
both during their service and for at least one year after they have expired.
Consequences of a breach of duty

4.7 Should any breach of duty (general or specific) occur the directors may be liable in the
following ways:
(a) Fined – failure to comply can be a criminal offence
(b) Removed from office – for breach of their service contract
(c) Indemnify the company – for any losses suffered as a result of breach of duty
5 Company secretary
5.1 Effective from 6 April 2008 private companies may dispense with a company secretary by
simply allowing the incumbent to resign. In such cases the duties normally performed by the
company secretary can be performed by any director of the company, or any person to
whom they delegate those duties.
5.2 Public companies must still appoint a company secretary, who must be qualified by virtue
of being any of the following:
(a) Qualified accountant
(b) A solicitor or barrister
(c) Qualified chartered company secretary
(d) Someone who was a company secretary on 22 December 1980
(e) Someone who has been a company secretary of a plc for three of the last five years
(f) Anyone else deemed fit to hold the post by virtue of any other position held
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5.3 The actual duties of the company secretary are set by the board of directors, and as such
vary. Some of the common duties undertaken by secretaries include:
(a) Maintenance of statutory registers
(b) Ensure all annual returns to the registrar submitted on time
(c) Organise and attend board and general meetings
(d) Ensure statutory compliance
(e) Sign such documents as required by the CA 2006
5.4 As discussed in Chapter 11 the company secretary has the power to bind the company in
all transactions of an administrative nature via 'actual implied authority' per Panorama
Developments v Fidelis Furnishing (8).
6 Auditors
6.1 All UK companies are required to appoint an auditor unless they qualify for an exemption by
virtue of being a 'small company', as defined by meeting at least two of the following criteria:
(a) Annual turnover must be £10.2 million or less
(b) The balance sheet total must be £5.1 million or less
(c) The average number of employees must be 50 or fewer
6.2 Auditors are appointed annually at the AGM by ordinary resolution, except for private
companies that have dispensed with the AGM. In such cases the auditors will be deemed to
have been reappointed unless the company takes action to end their appointment.
6.3 The duties of an auditor are:

(a) To make a report to the company's members as to whether or not the accounts have
been properly prepared, and whether the directors' report is consistent with the
accounts
(b) To give an opinion on the truth and fairness of the accounts
(c) To make the necessary investigations in order to be able to deliver their opinions
(d) To report on the consistency of any summary financial statements circularised by the
board
6.4 The powers of the auditor can be surmised as the right to:
(a) Access, at all times, the company's books and accounts
(b) Compel the officers to provide such information and explanations as they consider
necessary
(c) Receive copies of all proposed resolutions
(d) Attend general meetings
(e) Resign at any time
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Lecture example 1 Preparation question
Required
Answer true or false to the following statements:
1 Directors have a broad duty to be honest and not seek personal advantage and also show
reasonable competence.
2 Directors must never contract with the company.
3 Directors must have regard for the interests of employees.
4 Directors must use their powers for what they believe to be the best interests of the
company.
5 Directors must avoid conflicts of interest.
Solution
1
2
3
4
5
7 Case summaries
1 Howard Smith v Ampol Petroleum
Directors issued new shares to a person seeking to launch a takeover bid to help it succeed.
Even though the directors honestly thought that the takeover was in the best interests of the
company it was held to be unconstitutional to issue shares for this purpose.
2 Hogg v Cramphorn
An honest belief that directors should seek to maintain their office for the good of the
company did not prevent the motive for issuing additional shares to prevent a takeover from
being an improper motive.
3 Bamford v Bamford
The improper issue of 500,000 shares by the directors to defend a takeover bid could be
ratified by the shareholders and therefore no challenge could be made to the directors'
actions.
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4 Dorchester Finance Co v Stebbing

A money lending company had three directors: S, Parsons and Hamilton. S worked full time;
P and H paid little attention to the company and came to the premises rarely. H and P were
in the habit of signing blank cheques at S's request. No board meetings were held and S
used the cheques to make illegal loans. All these were held liable to make good the
company's losses on grounds (amongst others) that H and P were experienced in
accountancy and signing blank cheques was negligent.
5 IDC v Cooley
C was MD of IDC who provided consultancy to gas boards. A gas board declined to give a
contract to IDC but C realised he could obtain it personally. C resigned from IDC faking ill
health and then obtained the contract himself. It was held that C was accountable to IDC for
the profit.
6 Regal (Hastings) Ltd v Gulliver

Opportunity arose for the company to acquire two more cinemas through a subsidiary.
Company could not proceed alone because it had insufficient funds. The directors
subscribed for new shares in the subsidiary and the shares in the two companies were sold
on at a profit. The new controlling shareholder sued the directors to recover the profit. It was
held that, whilst the directors had no ulterior motive, they were still liable to account for the
profit made.
7 Peso Silver Mines v Cropper

A Canadian company voting through its board of directors rejected an opportunity to take a
prospecting claim. A syndicate comprising some of the directors took the claim themselves.
It was held that they were not liable to account for any profit to the company, which had
rejected the opportunity bona fide.
8 Panorama Development v Fidelis Furnishing

Fidelis's company secretary, Mr Bayne, hired cars from Panorama Development's
business, Belgravia Executive Car Rental. Bayne used Fidelis's paper and represented that
he wished to hire a number of Rolls-Royces and Jaguars for the business while his
managing director was away. He was lying and he used them himself. Bayne was
prosecuted and imprisoned, but Belgravia had outstanding £570 for the hired cars. Fidelis
claimed that it was not bound to the hire contracts, because Bayne never had the authority
to enter them. It was held that Fidelis was nevertheless bound on the contract to Panorama.
Mr Bayne, as company secretary, had ostensible, or apparent, authority to enter such
agreements.
END OF CHAPTER
156

Company meetings and
resolutions

 Distinguish between types of meetings: ordinary general meetings and annual general meetings
 Distinguish between types of resolutions: ordinary, special, and written
 Explain the procedure for calling and conducting company meetings
Exam Context
This is a very factual chapter, and you should focus on memorising the notice periods and voting majorities required to
hold the different types of meetings and pass the various types of resolutions.
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Overview
Company meetings and

resolutions
Meetings Resolutions
Types Types
Calling Written
Conducting
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1 Meetings
1.1 A company may call any of the following three types of meeting:
(a) Annual general meeting (AGM) – called by the company's directors
(i) Private companies – no longer required to hold an AGM
(ii) Public companies – must be held within six months of the year end
(b) General meeting (GM) – called as and when required, and may be called by the
directors, or members owning 5% of the share capital.
(c) Class meeting – called at 14 days' notice and held for the benefit of the members of
a particular class of shares, often in response to a variation of class rights (Chapter
12). Only matters relating to their class of shares may be discussed at a meeting.
1.2 The key distinctions between AGMs and GMs are summarised below:
Feature AGM – public companies GM – all companies

Notice period (clear days) 21 14
Frequency Annual As required
Called by Directors Directors or members
Business Routine Exceptional – insolvency
Short notice majority 100% 95% – public or 90% – private
1.3 There are strict rules relating to the calling of general meetings, and the company
secretary is responsible for compliance with the following:
(a) Sufficient notice must be given (see table above).
(b) Notices should contain details of time, location, and sufficient detail to allow members,
or their proxies, to decide whether or not they need attend.
(c) An agenda should be circulated.
(d) The company's auditor should be invited.
Members' rights
1.4 Members have the following rights in respect of general meetings:
(a) To call a GM requiring 5% of share capital. The directors must call a meeting within
21 days of receiving the request. The meeting must be held within 28 days of the
directors calling for it ie the meeting itself must be held within seven weeks of the
members' request.
(b) To place an item on the agenda of a meeting – requiring 5%, or 100 members
holding an average £100 of shares each
(c) To vote – subject to the rights attaching to their class of shares per the Articles of
Association (AoA)
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1.5 There are a number of sundry points to be aware of in respect of the conduct of
meetings:
(a) Voting – this is usually by a show of hands, with the principle of 'one member one
vote'. Alternatively a poll can be called by:
(i) Not less than five members
(ii) Members with ≥10% of the total voting rights
(iii) Members with ≥10% of the paid-up share capital
In a quoted company members holding 5% of the voting rights may call for the
appointment of an independent assessor to oversee the conduct of a meeting.
(b) Proxies – these may be appointed by any member unable to attend a meeting. The
proxy may attend, speak and vote at meetings.
(c) Chairman – any member may act as the chair; they are under a duty to act bona fide.
(d) Quorum – this is the minimum number of people who must be present at a meeting
for its business to have legal effect. The model articles set the quorum at one for
single member companies, and two for all others.
(e) Minutes – all meetings must be minuted, and these made available for public
inspection and kept for a minimum of ten years.
(f) Special notice – in order to propose a resolution to remove a director or auditor,
the shareholders must give 28 days' notice to the company. The directors must
then send notice of this proposed ordinary resolution to all of the members and to the
relevant director or auditor.
Electronic communication
1.6 Much of the communication between shareholders and companies may now be performed
electronically where the members agree. Such electronic media include email and
notification on the company's website.
1.7 Examples of electronic communication include:

(a) Notice of meetings to shareholders
(b) Members' requests for resolutions/meetings
(c) Hosting board meetings where directors are in different locations
(d) Public companies displaying the results of polls on their website
(e) Members giving consent to a written resolution
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2 Resolutions
2.1 Any company may pass the following resolutions:
Features Ordinary Special

Notice 14 days Per meeting notice
Votes cast at a meeting >50% 75%
File with registrar? Only for changes to directors Yes
and auditors
Uses Authority to allot shares Liquidations
Approve auditors' liability Change AoA
Appoint/remove directors Change co name
Written resolutions
2.2 Private companies only may substitute a written resolution in lieu of any other type of
resolution, which is consistent with them not having to call annual meetings.
2.3 A written resolution is one that is signed by the members. Historically these required the
signature of all of the members, but per the Companies Act 2006 this has been changed as
follows:
(a) Act usually performed by ordinary resolution – >50% of members must consent
(b) Act usually performed by special resolution – 75% of members must consent
2.4 An exception to the use of written resolutions is the removal of directors and auditors. As
this requires special notice a written resolution is not effective in either case.
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Required
1 To dismiss a director requires:
A An ordinary resolution with 14 days' notice to the company
B A special resolution with 14 days' notice to the company
C An ordinary resolution with 28 days' notice to the company
D A special resolution with 28 days' notice to the company
2 To enable a public company to call a general meeting by giving 'short notice':
A Shareholders holding not less than 95% of all the company's shares must agree
B Shareholders holding 95% of the shares represented at the meeting must agree
C 95% of all the shareholders must agree
D 95% of all the shareholders present at the meeting must agree
3 Which of the following cannot be achieved by ordinary resolution?
A Granting directors in a public company the authority to allot shares
B The dismissal of a director
C An alteration of a company's AoA to restrict a company's objects
D The dismissal of an auditor
Solution
END OF CHAPTER
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topics.
Course Notes
chapter
Legal Systems 1

Sale of goods

Agency law 7
Partnerships 8
Company Formation Company formations 10
A company's constitution 11
Share capital 12
Finance & Capital Loan capital 13
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Achievement Ladder
Course Notes
chapter
Company officers 15
Company Management
164

Insolvency

 Explain the meaning of and procedure involved in voluntary liquidation, including members' and creditors'
voluntary liquidation
 Examine the meaning of, the grounds for, and the procedure involved in compulsory liquidation
 Explain the order in which company debts will be paid off on liquidation
 Explain administration as an alternative to winding up
 Explain the way in which an administrator my be appointed, the effects of such appointment, and the powers and
duties of an administrator
Exam Context
In the first quarter of 2017 there were:
 836 compulsory liquidations
 2,693 creditors' voluntary liquidations
 357 administrations
Throughout this chapter you will examine the differences between these procedures, and in particular look at how
administration acts as an alternative to liquidation.
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Overview
Insolvency
Voluntary liquidation Compulsory liquidation Administration
Members' Official receiver/liquidator Administration order

Creditors' Payment order Administrator's function
Distinction Just and equitable Administrator's powers
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1 Voluntary liquidation
1.1 As discussed in Chapter 13, one of the consequences of the separate legal personality is
that a company's life must be brought to a formal end. There are three ways in which this
can occur: members' and creditors' voluntary liquidations, and compulsory liquidation.
1.2 A members' voluntary liquidation is initiated by the directors of a company when, in their
opinion, the company is solvent. In order to wind up the company the following procedures
must take place:
(a) Special resolution be passed, which marks the commencement of the winding-up
process
(b) A liquidator is appointed by the company
(c) The directors make a sworn statutory declaration of solvency, delivered to the
registrar within 15 days
(d) The liquidator convenes a meeting within three months from the commencement of
the winding up to report on their transactions
(e) A final meeting is called upon completion of the liquidation, with the laying of the
liquidator's final accounts
1.3 Due to the solvency of the company there is a presumption that creditors will be paid, hence
they have no involvement in the process, other than to attend meetings. However, at any
time it becomes apparent that the company is insolvent the process may be converted into a
creditors' voluntary liquidation.
1.4 The procedure for a creditors' voluntary liquidation is as follows:

(a) A special resolution is passed by the members – this requires either a 75% vote in
favour, or, in a private company a written resolution can be used
(b) The members then nominate a liquidator to act, and a liquidation committee is
formed. The committee consists of at least three, but no more than five of the
company's creditors
(c) Creditor approval is then sought for the appointment of the liquidator. This is
obtained either through the deemed consent procedure (where less than 10% of
creditors object to the nominee), or, by a hosting a virtual (online) meeting for a vote.
1.5 The key differences between members' and creditors' voluntary liquidations are shown
below:
Feature Members' Creditors'

Company's financial position Solvent Insolvent
Choice of liquidator Members Creditors' prevail
Approval of liquidator's actions Members Creditors
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2 Compulsory liquidation
2.1 A compulsory liquidation can be called on seven grounds, the most common of which is
an inability of a company to pay its debts. Any creditor that demands payment of a debt of at
least £750, which is not paid within 21 days, will be able to petition the courts for a
compulsory winding up, resulting in the following process:
(a) The official receiver is appointed by the courts
(b) Liquidation is deemed to have commenced from the date the petition was presented
(c) A statement of the company's affairs will be produced
(d) A meeting of the company's members and creditors is called to appoint a
liquidator, and form a liquidation committee
(e) A final meeting of creditors is called at which the liquidator presents their accounts
2.2 The functions of the liquidator are to ensure that the assets of the company are got in,
realised and distributed to the company's creditors and, if there is a surplus, to the persons
entitled to it.
2.3 The order of payment of the company's debts is as follows:

(a) Secured creditors holding fixed charges
(b) Liquidator's expenses
(c) Preferential creditors – all ranking equally
(d) Secured creditors holding floating charges
(e) Ordinary unsecured creditors
(f) Deferred debts – such as dividends declared, but not paid
(g) Members' capital
(h) Any surplus is returned to members in line with the Articles of Association
2.4 The courts will allow for rare circumstances where a company will be wound up where it is
'just and equitable'. There are three common law examples of when this may be permitted:
(a) Deadlock in management – Yenidje Tobacco Co Ltd (1)
(b) Breakdown in a quasi-partnership relationship – Re Westbourne Galleries (2)
(c) Failure of substratum – Re German Date Coffee Co Ltd (3)
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3 Administration
3.1 An alternative to liquidation is administration. The process aims to save the company from
liquidation by taking the company out of the hands of the directors, and placing it in the
hands of an administrator. In essence the company is granted breathing space in which to
trade its way out of difficulty. The administration may last up to 12 months, and when the
administrator feels their business is complete they will resign.
3.2 Administration orders can be sought by the company's directors or any of its creditors,
and once granted by the courts the following occurs:
(a) Winding-up petitions are dismissed/refused.
(b) Assets cannot be reclaimed by secured charge holders.
(c) Assets held under hire purchase agreements cannot be repossessed.
3.3 The function of the administrator is to:

(a) Rescue the company as a going concern
(b) Achieve a better result for creditors as a whole than under a winding up
(c) Where it is in the best interests of the creditors, to realise the assets and make
distributions to secured or preferential creditors
3.4 To assist in the process the administrator has the following powers:
(a) Manage the company as the administrator requires
(b) Remove/appoint directors
(c) Pay monies to secured/preferential creditors without court approval
(d) Pay monies to unsecured creditors with court approval
(e) Take custody of all company property
(f) Dispose of company property
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Required
Which of the following statements are correct?
(i) A company can be wound up if there is deadlock in the management of its affairs.
(ii) A company can be wound up if, in a quasi-partnership situation, the understandings
between members or directors that were the basis of association have been unfairly
breached.
(iii) A company can be wound up if the directors deliberately withhold information.
(iv) A members' voluntary liquidation cannot be converted into a creditors' voluntary liquidation.
A (i), (ii), (iii) and (iv)
B (i), (ii) and (iii)
C (ii), (iii) and (iv)
D (ii), (iii) and (iv)
Solution
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4 Case summaries
1 Yenidje Tobacco Co Ltd
Two persons with separate businesses decided to amalgamate. For this purpose a company
was formed with each person a director and equal shareholder. The company made
considerable profits but the two members became bitterly hostile and were unable to
communicate with each other. The articles did not provide for a casting vote. A provision
referring disputes to arbitration proved impractical as there were continuous disputes. The
court allowed a winding up on the ground that it was just and equitable to do so.
2 Re Westbourne Galleries
E and friend N set up a gallery in Holland Park. Initially it was a partnership and then N
suggested setting up a limited company to attain limited liability. Shares were allocated on a
50/50 basis with equal management rights.
N then introduced his son to the company, effectively reducing E's shares to 49%. N and his
son passed an ordinary resolution sacking E as a director and then paid bonuses to the
directors and declared nil dividend. E applied to court for just and equitable winding up. It
was held that the company was in legal effect a partnership based on a relationship of
mutual trust and confidence which had clearly broken down. The court wound the company
up.
3 Re German Date Coffee Co Ltd

This case concerned a company which was incorporated for the purpose of acquiring a
German patent for the manufacture of coffee from dates. The company failed to acquire the
patent and, when the company tried to obtain a similar Swedish patent, a minority
shareholder petitioned successfully for winding up on the ground that the company had
been formed for a particular purpose which was not capable of being attained.
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END OF CHAPTER
172

Fraudulent behaviour

 Recognise the nature and legal control over insider dealing
 Recognise the nature and legal control over market abuse
 Recognise the nature and legal control over money laundering including the following policies, procedures and
controls:
(i) Risk management practices
(ii) Internal controls
(iii) Customer due diligence
(iv) Reliance and record keeping
(v) The monitoring and management of compliance with, and the internal communication of, such policies,
controls and procedures
 Recognise the nature and legal control over bribery
 Discuss potential criminal activity in the operation, management and liquidation of companies, including the
failure to prevent the facilitation of tax evasion and the meaning of relevant body
 Recognise the nature and legal control over fraudulent and wrongful trading
Exam Context
As discussed in the last chapter insolvency is a risk for all companies. As you will see in this chapter this also represents
a danger to directors who may face criminal prosecution for fraudulent trading. Aside from this offence there are a
number of other offences that they may commit whilst a company is a going concern, such as money laundering, bribery
and insider dealing.
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Overview
Fraudulent behaviour
Insider dealing Money laundering Other offences
Criminal Justice Act 1993 The process Criminal activities

Defences The offences Fraudulent trading
Maximum sentences Penalties Wrongful trading
Market abuse Bribery
Tax evasion
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1 Insider dealing
1.1 Insider dealing has been defined as a criminal offence by the Criminal Justice Act 1993
(CJA 93). In essence it is using unpublished information to buy/sell securities in order to
make a gain or avoid making a loss.
1.2 In order to understand the offence fully the following terms must be defined:
(a) Insider – anyone who is in receipt of 'inside information', including:
 Directors, employees, or shareholders
 Anyone else who has access to inside information via their office or profession
(auditors)
 Anyone who gains information from any of the above
(b) Inside information – information that is price sensitive, being:
 Related to specific securities
 Specific or precise
 Not been made public
 Likely to have a significant effect on the price of the securities
(c) Dealing – the defendant either:
 Was an insider who dealt using inside information in price-affected securities
 Encouraged other(s) to deal
 Disclosed the inside information to anyone else
1.3 There are a number of defences available for those accused of insider dealing:
(a) Market makers acting in good faith
(b) The defendant did not expect the dealing to result in profit, or the avoidance of a loss
(c) The defendant reasonably believed the information was publicly available
(d) The defendant would have dealt anyway, even if they did not have the information
1.4 As insider dealing is deemed a criminal offence per the CJA 93, it is up to the prosecution
to prove the defendant is 'guilty beyond reasonable doubt'. Given the range of defences
available it is in fact very difficult to successfully secure a conviction.
1.5 For those found guilty the maximum sentence is seven years in prison, and an unlimited
fine.
1.6 Market abuse refers to a range of offences including insider dealing regulated by the
Market Abuse Directive. Aside from insider dealing it is also an offence to:
(a) Manipulate transactions ie attempting to artificially inflate a share price
(b) Disseminate untrue or misleading information
(c) Behave in any manner that is likely to distort the market in a particular investment
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2 Money laundering
2.1 Money laundering is the process by which the proceeds of crime, which have illegitimate
origins, are converted into assets that appear to be legitimate. The process usually
comprises of three distinct phases:
(a) Placement – the disposal of the proceeds of crime into an apparently legitimate
business property or activity
(b) Layering – the transfer of money from place to place, in order to conceal its criminal
origins
(c) Integration – the culmination of placement and layering, giving the money the
appearance of being from a legitimate source
2.2 Money laundering was first made a criminal offence in the UK under the Drug Trafficking
Offences Act 1986, but is now regulated by the Proceeds of Crime Act 2002 (PCA 02)
amongst others.
2.3 The PCA 02 has defined three categories of offence, being:

(a) Laundering – being the offences of concealing, disguising, converting, transferring,
or removing criminal property from the UK.
(b) Failure to report – it is an offence for someone who knows or suspects that another
person is engaged in money laundering not to report that fact to the appropriate
authority. This offence only relates to individuals working in a regulated industry,
ie accountants.
(c) Tipping off – it is an offence to make a disclosure likely to prejudice a money
laundering offence already being undertaken, or which may be undertaken.
2.4 The penalties for those found guilty of money laundering are:
(a) Laundering – a maximum 14 year prison sentence is possible, and/or a fine.
Additionally the police may seize the illegitimate assets.
(b) Failure to report – punishable by a maximum five year sentence, and/or a fine.
(c) Tipping off – punishable by a maximum two year sentence, and/or a fine.
2.5 The Money Laundering Regulations 2017 (TSO, 2017) require organisations to
establish internal systems and procedures which are designed to deter criminals from
using the organisation to launder money or finance terrorism. Such systems also assist in
detecting the crime and prosecuting the perpetrators.
2.6 These regulations apply to all 'relevant persons', a term which covers a wide range of
organisations, including banking and investment businesses, accountants and auditors, tax
advisers, lawyers, estate agents and casinos. They set out a prescriptive approach in the
form of a firm-wide written risk assessment that includes a number of factors that must be
taken into account.
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2.7 As each organisation is different, systems should be designed which are appropriate and
tailored to each business.
These include:
(a) Risk management practices
The business should take a 'whole firm' approach to assessing the money laundering
risks faced by the business. The business should also assess the risk of clients being
involved in money laundering or terrorist financing.
(b) Internal controls
Businesses are required to have a number of internal controls in place. These should
include:
 Appointing a Money Laundering Compliance Principal (MLCP) who must sit on
the board of directors.
 Appointing a nominated officer to receive internal reports of suspected money
laundering and, where appropriate, to report them to the NCA.
 Assessing the skills, knowledge, conduct and integrity of employees
responsible for identifying, mitigating, preventing or detecting money laundering
and terrorist financing.
 Establishing an independent audit function whose role is to assess the
adequacy and effectiveness of anti-money laundering policies, controls and
procedures.
(c) Customer due diligence
Businesses are required to perform customer due diligence before establishing the
business relationship. There are two levels of due diligence, simplified and
enhanced.
Simplified due diligence is permitted where the risk assessment indicates that the
business relationship or transaction presents a low risk of money laundering or
terrorist financing.
Enhanced due diligence measures are required to be applied in a number of
circumstances. Such circumstances include where a transaction or business
relationship involves a person established in a 'high risk third country', if they are, or if
a family member is a 'politically exposed person' or is a known associate of one, and
any other situation that presents a higher risk of money laundering or terrorist
financing.
Examples of enhanced due diligence measures include:
 Understanding the background and purpose of transactions.
 Increased monitoring of the business relationship or transaction to determine
whether there is any reason to be suspicious about them.
 Obtaining additional independent, reliable verification of information provided
by the customer.
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 Taking additional measures to obtain satisfaction that customer transactions

are consistent with the purpose and nature of their business relationship.
 Placing transactions under greater scrutiny and increased monitoring of the
business relationship.
(d) Reliance and record-keeping procedures
Businesses should have policies, controls and procedures in place to prevent
activities related to money laundering and terrorist financing. A written record of these
procedures, as well as employee training on them (see below), must be maintained.
Such procedures may include, for example, retaining copies of customer identity
details such as passports. These procedures are important in proving compliance with
the regulations.
(e) Monitoring and management of compliance
Businesses should continuously monitor and manage compliance with the policies,
controls and procedures that they have in place, eg employees should receive
appropriate training concerning the law relating to money laundering and the
business's policies and procedures in dealing with it
2.8 Should a business fail to implement these measures a criminal offence, punishable with a
maximum sentence of two years' imprisonment and/or an unlimited fine, is committed
irrespective of whether money laundering has taken place.
3 Other offences
3.1 There are a number of ways in which the directors of a company can be personally liable
in the way in which they run a company.
3.2 Fraudulent trading

Where the directors have continued the business of a company with the intent to defraud
creditors, or any fraudulent purpose – R v Grantham (1). Proving intent to defraud
requires the following:
(a) The directors must have acted dishonestly ie doing something that a reasonable
person would consider to be dishonest; and
(b) The directors must have intended to make a gain for themselves, or inflict a loss upon
another.
The directors may face the following remedies:
(a) Criminal prosecution with a maximum sentence of ten years in prison and/or a fine.
(b) Civil action may be brought if the company is in insolvent liquidation. If found liable
the court may order the directors to 'make such contribution to the company's assets
as the court thinks proper'.
178

3.3 Wrongful trading

Where it is not possible to prove intention to defraud an action for wrongful trading may be
pursued instead. This occurs where the directors continued to trade a company when they
knew or should have known that there was no reasonable prospect of avoiding
insolvent liquidation, without taking all reasonable steps to avoid losses for creditors –
Re Produce Marketing (2).
This offence carries the civil remedy outlined above for fraudulent trading.
3.4 Bribery
Bribery offences are regulated by the Bribery Act 2010 which came into force on
1 July 2011. The Act created four classes of offence:
(a) Bribing another person
(b) Receiving a bribe from another
(c) Bribing a foreign public official
(d) Corporate failure to prevent bribery, where a company or partnership fails to put in
place 'adequate procedures' to prevent offences being committed by an employee,
agent or subsidiary
3.5 The Act makes it clear that bribery can be committed by both state- and privately employed
persons and that the scope extends to offences committed outside of the UK.
3.6 Specific defences are available to members of the armed forces and the secret services
when engaged on active duty.
3.7 The maximum penalty under the Act is ten years' imprisonment and/or unlimited fine.
3.8 Tax evasion
The Criminal Finances Act 2017 (TSO 2017) potentially makes 'relevant bodies' criminally
liable if 'associated persons' are involved in tax evasion. A relevant body is defined by the
Act as a company or partnership whether formed in the UK or elsewhere. An associated
person is anyone acting in the capacity of an employee, an agent, or any other person who
performs services on behalf of the relevant body.
3.9 Under the Act, an offence will be committed by a relevant body if the following three
stages occur:
(1) There is criminal tax evasion by a taxpayer or business under existing tax evasion
law.
(2) An associated person of the relevant body, facilitated the tax evasion under existing
aiding and abetting law.
(3) The relevant body failed to prevent the associated person from committing the aiding
and abetting offence.
3.10 Under the Act, a relevant body has a defence if it can demonstrate that it had reasonable
prevention procedures in place, or in the circumstances it was unreasonable or unrealistic
to have such procedures in place. It applies even if the business was not involved in the act
or had no knowledge of it. The maximum penalty under the Act is a conviction and unlimited
fine.
179

VL2020
Arabella visits her brother, Henry, who is a director of a large public company. After dinner, he
shows her the draft accounts for the company, and mentions that he is delighted that profits have
soared and that the share price is bound to rise dramatically when the accounts are published the
following week. The next day Arabella persuades her friend Tom to contract to sell her £50,000
worth of his shares in the company.
Required
Has she committed an offence?
A Yes. The information is obtained from a person connected with the company, and she has
dealt in order to obtain a profit. This is insider dealing.
B No. The shares were not dealt on a recognised regulated market.
C Yes. Although this was a private purchase, all public company share dealings are potentially
subject to the CJA 1993.
D No. Arabella is not herself connected with the company, and could only be liable if she had
deliberately obtained the information.
Solution
180

4 Case summaries
1 R v Grantham
The jury were directed that they could find dishonesty and intent to defraud if they thought
that Mr Grantham obtained credit when he knew there was no good reason for thinking that
his company would be able to repay the debt when it became due. Therefore intent to
defraud was established on proof of intention to dishonestly prejudice creditors in being
repaid.
2 Re Produce Marketing
The directors of the loss making and insolvent company, Produce Marketing, claimed that
they only became aware of the inevitable liquidation of the company when its annual
accounts were delivered six months late by its auditors in January 1987. The directors
continued to trade after this point, arguing they needed to sell the perishable goods they had
in cold store.
The court held that they should have concluded in July 1986 there was no reasonable
prospect of avoiding liquidation, and though they did not have the accounts until January
1987 they had an intimate knowledge of the business and must have known turnover was
well down on previous years. It did not matter that they may not have actually known about
the accounts; they ought to have known the results for the financial year 1985–6. The two
had not taken steps they should have under s 214(3). After February 1987, trading was not
limited to realising the fruit in cold store. Overall, s 214 was compensatory, not penal, and
the right amount to contribute was the amount caused to be depleted by the directors'
conduct.
181

VL2020
END OF CHAPTER
182

You have now covered the Topics that will be assessed in Step 5 in your Achievement Ladder. This
topics.
Course Notes
chapter
Legal Systems 1

Sale of goods

Agency law 7
Partnerships 8
183

VL2020
Achievement Ladder
Course Notes
chapter
Share capital 12
Company officers 15
Company Management
Insolvency Insolvency 17
Criminal Behaviour Fraudulent behaviour 18
184

In the final run up to your exam, you should attempt Step 6 as the final check that you are fully prepared
for your real CBA exam.
It covers all the Topics in your course. As ever, you will receive feedback on your performance, and you
can use the wide range of online resources to help address any final areas where you need to fine tune
your knowledge or technique.
Course Notes
chapter
Legal Systems 1

Sale of goods

Agency law 7
Partnerships 8
Share capital 12
185

VL2020
Achievement Ladder
Course Notes
chapter
Company officers 15
Company Management
Insolvency Insolvency 17
Criminal Behaviour Fraudulent behaviour 18
186

Answers to
Lecture Examples
187

VL2020
19: ANSWERS TO LECTURE EXAMPLES
Chapter 1
Answer to Lecture Example 1
The correct answer is D. A is the literal rule and C is the mischief or purposive rule.

The correct answer is B – the act was introduced to stop people being secretly filmed.
Chapter 2 to Chapter 7
No lecture examples
Chapter 8
The correct answer is B – a partnership must be governed by a written partnership agreement.
Partnerships are formed when persons trade together – a written document is not required.

The correct answer is C – profits are shared equally unless there is an agreement to the contrary.
Chapter 9
The correct answer is A – a company has a separate legal identity. Salomon v Salomon Ltd.

The correct answer is C – a partner in a partnership is not an artificial legal person. A company
limited by guarantee and a single member private company are legitimate artificial legal persons
(Options A and B). The Archbishop of Canterbury is an artificial person known as a corporation
sole (Option D).
Chapter 10
The correct answer is A – a company cannot adopt (ratify) a contract once it receives its certificate
of incorporation: it can only novate the contract. It is correct that a company cannot enforce a
contract before it comes into existence (Option C), and cannot be held liable even if it has adopted
a pre-incorporation contract (Option D). The promoters may be liable (Option B) for pre-
incorporation contracts.
188


It is hard for a promoter to ensure that pre-incorporation expenses are recoverable unless they get
agreement from the company. This agreement could only be given once the company is
incorporated therefore the correct answer is B. Option C is incorrect as the articles cannot be used
to enforce non-member rights (Eley v Positive Life Co – Chapter 11).

The correct answer is A.
Chapter 11
1 The correct answer is D – the subscribers are the initial shareholders.
2 The correct answer is B – this is the only true statement in the list.
Chapter 12
1 The correct answer is C – preference shares may be cumulative – but this is not always the
case.
2 The correct answer is D – a variation alters the benefits or duties attached to a class of
share. Only Option D affects a class of shares in that way.
Chapter 13
Lecture Example 1
1st Fixed charge to A 1 March
2nd Floating charge with NPC to C 24 March
3rd Fixed charge to X 28 March
4th Floating charge to B 12 March
5th Floating charge to Y 1 April
6th Floating charge to Z 7 April
189

VL2020
Chapter 14
No lecture examples
Chapter 15
1 True (duties of reasonable skill, care and diligence, avoid conflicts of interest)
2 False (they can declare interests in transactions and the board can approve them)
3 True (this is within the duty to promote the success of the company)
4 False (they must use powers for a proper purpose)
5 True
Chapter 16
1 The correct answer is C – special notice is required to remove directors and auditors – the
notice is to the company: which must then in turn give the appropriate days' notice to the
shareholders according to the type of meeting held.
2 The correct answer is A – shareholders holding at least 95% of the company's shares must
agree.
3 The correct answer is C – a special resolution is required to alter the articles.
Chapter 17
The correct answer is B – (iv) is incorrect because where it becomes apparent during a members'
voluntary liquidation that the company is insolvent the creditors may take over the process.
Chapter 18
The correct answer is B – s 52(3) Criminal Justice Act 1993. The definition of insider dealing given
in Option A is accurate as far as it goes but is not complete. Option C is untrue, and the reason
given in Option D is wrong; Arabella's lack of connection with the company is irrelevant, as she
obtained the information from a person who is connected with it.
END OF ANSWERS TO LECTURE EXAMPLES

190

Appendix A: Glossary
of terms
191

VL2020
APPENDIX A: GLOSSARY OF TERMS
Remedies A legal remedy is the means a court of law, usually in the exercise of civil
law jurisdiction, enforces a right, imposes a penalty, or makes some
other court order to impose its will
Judicial precedent The system whereby the facts of decided cases are used to determine
the outcome in future cases
Stare decisis 'To stand by a decision' – the system by which the court hierarchy
enforces the principle of judicial precedent
Ratio decidendi 'The reason for the decision' – forms the legally binding element of a
judgement
Obiter dicta 'Other facts by the way' – of persuasive precedent only
Legislation Law created by Parliament, or an 'enabled' body in respect of delegated
legislation
Ejusdem generis 'Others of the same kind' – a rule employed in the interpretation of statute
Derogation A partial revocation of the law
Fiduciary Someone who has undertaken to act for and on behalf of another in a
particular matter in circumstances which give rise to a relationship of trust
and confidence
Domicile The basis of the rule of law ie a company domiciled in England will be
subject to English law
Bona fide Good faith
Uberrimae fidei Utmost good faith – commonly seen in insurance contracts, whereby
both parties are required to act in utmost good faith making full disclosure
to each other
Pari passu 'Equally and without prejudice’ – practically this is applied to debentures
created in series where all are deemed to rank equally for repayment
Gazette An official government journal published daily in three forms, London,
Edinburgh and Belfast; it details amongst other things official notice of
company formations and liquidations
De facto Something that is 'in practice' but not ordained in law ie someone may be
deemed a 'de facto' director despite not being recorded as such at
Companies House
192

Appendix B: Revision
Summaries
193

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APPENDIX B: REVISION SUMMARIES
Chapter 1: Overview Summary
1 Economic, political and legal systems
Economic, political and legal

systems
Economic Political systems Types of law

Rule of law and
separation of powers
 Economics – what to  Rule of law – government  Legal disputes can be

produce, how, who for between:
– Can be by consent/
 Planned economy democracy – Government and people
– criminal law
– Resource allocation – – Or by compulsion/
government dictatorship – Individuals – civil law
– Wealth – central  Separation of powers:
government
– An elected legislature
 Market economy – An elected executive
– Resource allocation – – A judiciary
supply and demand
 Mixed economy
Distinction between civil and criminal law
– Resource allocation –
both Feature Civil Criminal
– Wealth is divided Who brings? Claimant Prosecution
– Modern economies are Balance of Beyond reasonable
Proof
mixed probabilities doubt
Liable/not liable
Decisions Guilty/not guilty (Jury)
(Judge)
Aims Compensation Punishment
Remedies Damages Prison/Fines
194

2 Legal systems
Legal systems
Common law Civil law Sharia law
 Developed in England, exported  Based on codified law –  Sharia means – 'a way to a
globally legislator produces a set of watering place'. Divine law
general principles and specific ordained by Allah
 Created by judges using judicial codes
precedent  Rules for an individual's legal,
 Judge's role is to apply the law moral, ethical and religious life
 Based on stare decisis to the facts of the case
 Rigid – higher authority therefore
– Ratio decidendi – binding  Civil law is applied in France no new laws
– Obiter dicta – persuasive and Germany
 Judges – apply the law, not create
 Avoid precedent by  Principles – certainty and it, required to be clerics, or Iman
overruling/reversing/ comprehensibility
distinguishing  Primary sources of law
 Statutory application
 Role of judges is to interpret – Quran
statute law – Where meaning is clear – – Sunnah – application of Quran
follow
 Statutory interpretation aids:  Secondary sources of law
– Ambiguous – spirit of the
(a) Canons (Presumptions) – Major jurists. Shia, Hanafi,
law
Maliki, Hanbali and Shafii. Use
(b) Rules of interpretation – Gap in the law – custom 'ijtihad', methods of interpreting
(i) Literal rule – dictionary and equity the law
meaning (Whiteley v  Judicial review  Further interpretation
Chappell)
– France the court of – No if orthodox Muslims – taqlid
(ii) Golden rule – absurdity (Re cassation
Sigsworth) – Yes if liberal – use ijithad such
– Germany, special as: ljma – a consensus of
(iii) Mischief rule – ambiguity constitutional courts opinion, Qiyas – analogical
(DPP v Bull) deduction
(c) Intrinsic – title/preamble/  Riba – unlawful gain
schedule
(d) Extrinsic – Interp. Act/
Hansard/dictionary/reports
195

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1 International organisations
UN UNCITRAL The International

Chamber of Commerce
 Set up in 1945  Core legal body in UN  Formed in 1919

 The UN has four main  Established in 1966 – 60  Purpose: promoting trade,
purposes: members investment and open markets
– Maintain peace and based on free and fair
 Based – New York and Vienna competition
security
– Develop friendly  Covers – trade, SoG,  Foster economic growth in
relations arbitration, and electronic both developed and
commerce developing countries
– Solving eco/social
problems  Aim – harmonising and  Counter international
unifying international trade law commercial crime
– Promote human rights
and international  Examples  Promote non-statutory codes
freedoms
– Hamburg rules – carriage of practice for adoption by
 Legal arm by sea business
– ICJ and UNCITRAL – Conventions – eg  Agreement between
international bills of contracting parties
exchange
 Settlement of disputes (ICA)
– Rules on cross-border
insolvency  Producing standard trade
definitions relating to carriage
 Widen uptake of international and the passage of risk, called
law by member states Incoterms
 Monitor the need for further
modernisation
196

2 International organisations
FAO A
World Trade The Council of Europe UNIDROIT
Organization
 Based on GATT  Aims: promotion of:  Independent inter-

 Over 150 members – Human rights governmental organisation
 Aim – promotion of – Cultural identity and  Modernise, harmonise,

international free trade in diversity co-ordinate – private
goods and also in – Non-discrimination of international law
intellectual property such minorities  Based in Rome since 1926
as software and music and – Democratic stability  Membership – 63 states
services  Conventions issued to  Structured as follows:
 It does this by: date cover:
– The Secretariat
– Removing obstacles to – Extradition – The Governing
free trade – Confiscation of criminal Council
– Acting as a forum proceeds – The General Assembly
– Reviewing national – Protection of natural  Rules have traditionally
trade policies habitats tended to take the form of
– Assisting developing – Doping in sport international conventions
economies – Bioethics and cloning
 Alternative rules:
– Nationality
– Resolving trade – Model laws
disputes – Corruption – General principles
 They also issue – Legal guides
recommendations
 UNCITRAL Convention on
Contracts for the
International Sale of
Goods
197

VL2020
3 International adjudication
International adjudication
International Court of International Court of

Justice Arbitration
 Two roles:  Arbitration body set up by the ICC in 1923

– Settle disputes  Promotes the settlement of international
– Provide advice on legal issues commercial disputes
 Individuals may not take cases to ICJ  Advantages: reduction in cost, privacy,
 Hears disputes over frontiers and territorial speed and also the right to choose
sovereignty, diplomatic relations, nationality, arbitrators and place of arbitration, even the
asylum and other international issues language
 Decisions based on treaties and  Oversees all of the process of arbitration,
conventions, custom, general principles and confirmation of arbitrators, deciding
judgements challenges, approving awards and fixing
arbitrators' fees
 The court sits in The Hague with 15 judges
 The ICA was also the initiator of the New
 Jurisdiction is agreed by specific York Convention 1958
agreement/clause in treaty/reciprocal effect
 ICA's two key principles for arbitration are:
 Any doubt as to whether the ICJ has
jurisdiction – the Court itself decides – It requires courts of each contracting
state to recognise arbitration agreements
 The procedure: in writing and to refuse to try such
– A written phase agreements in courts
– An oral phase – It also requires domestic courts to
 There is no appeal recognise and enforce arbitral awards
 Non-compliance – UN Security Council for
action
198

1 International arbitration
International arbitration
Arbitration must be Receipt of written

international and communication
commercial
 International if:  Received when sent to any of:

– Places of business in different states, or – The addressee personally
arbitration is in a different state, or – Place of business
obligations are performed in different
– Habitual residence
state
– Mailing address
– If party has more than one place of business
– choose the business with the closest – Last-known place of
relationship to the arbitration agreement business/habitual residence
– Parties expressly agree that the subject  By registered letter or any other
matter relates to more than one country means – provide a record
 Arbitration is commercial if it relates to trade
199

VL2020
2 Model law
Model law
Agreement Tribunal composition Arbitrator
 As agreed  Cannot object on grounds of

 In writing (inc telex and
nationality
telegram)  No agreement – ML
 Within the agreement states three arbitrators  Can object if non-performance/not
document  One chosen by each of qualified/impartial and fails to
the parties within 30 disclose
 Or referred to in another
contract days  Challenge procedure as agreed
 Or documents relating to  The third chosen by the
 Absence of agreed challenge
legal proceedings two arbitrators in
procedure – model law sets out
another 30 days
 Can go to arbitration even challenge procedure:
if court proceedings have – Only challenge – if unaware of
started fault when arbitrator (A)
selected
– Send statement to arbitration
tribunal (AT) < 15 days of
grounds
– A can choose to withdraw
otherwise AT decides
– If challenger loses they can
apply to the courts < 30 days
 No further right to appeal
200

3 Conduct of proceedings
Conduct
Procedures Claims and defence Hearings
 Parties treated equally  C makes a claim statement  Can be orally (mandatory if

 Parties free to agree – time,  D will set out statement of requested by parties)
place, and language defence  Or use documentary
 No agreement – AT does as  Parties given full access to evidence
sees fit documents
201

VL2020
4 Award
Award and set aside
Award Set aside
Award of tribunal may be set aside if:

 Award in writing and signed
 Party to the arbitration incapacitated
 State place and dated
 Agreement not valid under agreed law
 State reasons for the judgement
 Party not given proper notice of appointment
 Copied to both parties
of arbitrator or of proceedings
 Binding on the parties
 Award deals with matter not falling into the
Overview 3 contemplation of the parties
 Composition of the tribunal was incorrect
 Subject matter of dispute not capable of being
dealt with by arbitration under law of the State
 Award conflicts with public policy
202

5 Other points
Other arbitration points
Sharia law and Comparison with courts

arbitration
 Arbitration recommended  Advantages

method of dispute resolution – Cheap
 Terms: – Private
Arbitrator – Hakam – Use technical specialists
– Lack formality
Arbitration – Takhim
 Disadvantages
 Arbitrator must be male, just,
learned in Sharia, impartial – Lack publicity
– Can be lengthy =
expensive
– Limited remedies
– Lack legal expertise
203

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1 International Sale of Goods
International sale of goods
Definition Applies Does not apply
 A contract which the  States where the  Goods bought for personal,
seller transfers, or contracting parties: family or household use
agrees to transfer – Both ratified the  Goods at auction
 The property in goods convention  Goods acquired on
to a buyer in exchange – Or private execution of/by authority of
for monetary international law law
compensation called applies
the price  Stocks, shares, investment
securities, negotiable
instruments or money
 Ships, vessels, hovercraft or
aircraft
 Electricity
 Supply of services
 Main obligation – provision
of labour
 Contracts of manufacture –
buyer provides the
substantial part
204

2 Formation
Contract formation
Offer Termination of offer Acceptance
 Definition – sufficiently definite  Rejection  A contract is valid on acceptance

proposal/addressed to one or  Withdrawal – effective if  Definition – statement or conduct
more specific person/intention reaches before or at the that indicates assent to the offer
 Sufficiently definite to same time as the offer  Not by silence or inactivity but
description, quantity and price  Revocation – effective if can be implied by past dealings
 Anything else – invitation to treat 'reaches' before  Acceptance effective when
– an inducement not legally acceptance is reaches the offeror. Unless:
binding despatched (not
possible if offer – Fixed timescale
 Effective when it reaches the
irrevocable) – Unreasonable time lapse
offeree
 Counter-offer – Acceptance withdrawn
– Made orally to them
 Acceptance – A counter-offer – contains
– Delivered to business or
material changes
mailing address
– If none – habitual residence  Non-material variations become
a term unless offeror objects
without undue delay, either orally
or by notice
205

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3 ICC Incoterms
Incoterms
General Rules for use in relation Rules for sea and

to any mode or modes inland waterway
of transport transport
 Standard trade terms in  Maritime transport not used for  Maritime transport used for
international and/or carriage of the goods or only used whole of journey
domestic contracts for part of the journey  FAS = Free Alongside Ship
 Determine sellers' (S)  EXW = Ex Works S must place goods alongside
and buyers' (B) S makes goods available to B at S's ship in country of export. B bears
responsibilities for business all risk from that point including
matters such as carriage export formalities
 FCA = Free Carrier
costs, risk, insurance
and customs S clears goods for export and hands  FOB = Free On Board
requirements over to carrier B arranges shipping. S must put
 CPT = Carriage Paid To goods on board ship and provide
 Do not determine price
export licence and bear risk up to
S pays for carriage to named this point. B bears risk for goods
location risk passes at that location. once on board and import costs
 CIP = Carriage & Insurance Paid To  CFR = Cost and Freight
S pays for carriage and insurance to S pays all costs and carriage to
named location named port in country of import.
 DAT = Delivered At Terminal B bears risk of goods once on
S pays for carriage and unloading at board ship and must arrange and
named terminal. S bears all risk to pay for marine insurance
this point and pays export costs. B  CIF = Cost, Insurance and
bears import cost Freight
 DAP = Delivered At Place  A contract which the seller
S liable for risk until goods ready for transfers, or agrees to transfer
unloading at named destination. B  The property in goods to a buyer
responsible for import clearance in exchange for monetary
 DDP = Delivered Duty Paid compensation called the price
S bears all risk – delivers goods to  Named port in country of import.
place in country of import and pays Insurance must allow B to claim
all import costs directly – minimum cover =
contract + 10%
206

1 Obligations of the seller
Obligations of the seller (S)
Delivery Quality Breach
 Specify place – S must deliver  S must deliver quantity/quality/  Breach of contract = party fails to
to that place description/packaging as stated in perform their contractual
 Place not specified: contract obligations
(a) Contract including  If not stated in contract goods must be:  Fundamental breach – breach
carriage – S must hand to – Fit for ordinary purpose or will substantially deprive one
first carrier party of benefits under contract
– Fit for purpose B expressly makes
(b) Identified goods from known to S (unless B ignores S)  Remedies for all breaches are
specific stock in certain – Match any sample provided damages plus
place – S must place – Packaged in usual manner to preserve  Specific rights (under UNCISG):
goods at B's disposal at and protect goods
that place. – Performance
 S has no obligation to sell goods which Delivery of substitute goods
Other (not (a) or (b)) – S must
conform to all statutory provisions in the or
place goods at B's disposal at
buyer's state unless:
S's place of business. Repair of goods (minor faults)
– Same provisions in B and S's state
 Delivery date – Avoidance (fundamental
– B told S of statutory provisions
– Date specified in contract breach only)
– S aware of statutory provisions
– No date specified = Terminates contract
 S not liable for lack of conformity if B
reasonable time knew of defect – Right to reduction in price
 S must hand over documents  S is liable for lack of conformity:  Goods delivered early or greater
(eg shipping docs) as per quantity, B may accept or reject
– Which exists at time that risk passes
contract them at that time
– Which occurs after risk passes but is
due to a breach of S's other
obligations
 If S delivers goods before due date but
there is shortfall/non-conformity – S can
make good deficiency up to due date
 B must examine goods as soon as
possible. B must give S notice of any lack
of conformity within a reasonable time
 S must have good title
207

VL2020
2 Obligations of the buyer

Obligations of the buyer
Payment Take delivery Breach
 B must pay price for goods:  B must enable the seller to  If B breaches – S's remedy is
make delivery damages plus
– As agreed in contract
 B must take over the goods  Specific rights (under UNCISG):
– If priced by weight use net
weight – Right to payment
– If no price in contract use price – Right to acceptance of goods
generally charged at formation – Right to avoidance if
 B must pay at place specified in fundamental breach
contract (terminates contract)
– No place specified B pays at: – S can't avoid contract if B has
paid for goods
 S's place of business or
 B can be charged interest by S
 Where goods/docs handed for payments in arrears and
over non-payment
 B must pay on date specified in
contract
Impediment Passing of risk
– No date specified – B pays
when S places goods/docs at
B's disposal  Party not liable for breach if  When risk for loss/damage passes from
– If fixed date for payment B must can prove breach arose due S to B so does need to preserve and
pay without reminder to impediment beyond their insure goods
control
 Incoterms may specify when risk
 Must prove could not passes (Ch 4)
avoid/overcome impediment
 If no Incoterms: under UNCISG risk
and give notice
passes when:
 Impediment arises due to
– B takes over goods
failure by sub-contractor – first
party only exempt from liability – Goods placed at B's disposal (B fails
if impediment beyond first to take delivery)
party and sub-contractor's – Named place for S to hand over
control goods reached
– No place named – when S hands to
first carrier
– Goods must be clearly identified for
risk to pass
208

1 Transportation
Transportation
Bill of lading
 Document issued by carrier to the shipper.

Functions of bill of lading
– Evidence goods/risk have passed to first carrier
– Evidence of contract for carriage
– Can be document of title to goods
 Four types:
– Inland bill of lading (over land transport)
– Ocean bill of lading (port to port)
– Through bill of lading (one point to another – land and marine)
– Airway bill (carriage by air – domestic and international)
 Can be negotiable and non-negotiable:
– Negotiable – title to the goods and the right to re-route to holder
– Non-negotiable – carrier must deliver to named recipient
209

VL2020
2 Payment
Payment
International bank and Bills of exchange Letters

credit transfers
 Straightforward  Written instrument:  Letters of credit

– Contains an unconditional order to pay sum
 Advantages – electronic  Seller has risk-free method
of money to payee
payment ensures compliance
 Disadvantages – risk of fraud – Payable on demand/specific time
with contract
 UN Model Law on International Credit – Dated
– Signed by the drawer  System of guarantees
Transfers applies:
 Cheque = common example – Seller and seller's bank
– Funds transferred from buyer to seller
 International bill of exchange 2+ in different – Buyer and buyer's bank
via credit transfer
states:  Learn procedure
– Sending and receiving bank branches
– Where bill is drawn  Advantages
in different states
– Place next to signature of drawer
– Parties agree to be bound – S receives immediate
– Place next to name of the drawee
 Credit transfer – series of operations to payment
– Place next to name of the payee
transfer funds – Place of payment – B gets period of credit
 Originator – issuer of the first payment  Payee may transfer right to payment to another  Disadvantages
order (often buyer) = 'endorsement' – Slow to
 Sender – originator/bank who issues – Payee = endorser arrange/administratively
order – Receiver = endorsee cumbersome
 Payment order – unconditional instruction  UN Convention on International Bills of  Letters of comfort
Exchange bill transferred by:
 Sender obligated to pay receiving bank  Parent company's approval of
on acceptance – Endorsement and delivery to endorsee subsidiary company's attempt
– Delivery of instrument if last endorsement is at raising finance
 Receiving bank obligated to execute blank
unless not possible (should seek  Reassurance to the lender
– Endorsement must be written on bill or on
assistance then refund + interest)  Not legally binding on the
slip signed and affixed to bill
 Remedy: delayed payment = interest – The endorsee – in blank or named parent Re Augustus
 Endorsement can be: Barnett/Kleinwort Benson v
 Unauthorised person acted as sender:
Malaysia Mining Corp
Step 1 – Sender bank only bound by Blank – signature/statement bill is payable to
payment orders issued by someone with bearer (endorsee not named)
authority to bind Special – indicates name of endorsee
Step 2 – Receiving bank bears risk if  Cannot endorse bill if bill marked 'not
order passes own authentication negotiable'/'not transferable'/pay (x) only
procedures  Fraud: endorser can recover losses against:
Step 3 – Both banks responsible for their forger/beneficiary/any party who knowingly
own negligence showed unreasonable skill and care or acted in
bad faith
 Advantages: convenient/immediate finance/
evidence of payment/can be guaranteed by
bank/if bounces possible to pursue payment
210

1 Formation of agency
Formation of agency
Definitions Formation methods Partners and directors
 Principal  Express agreement  Partners bound by PA 1890

 Agent  Ratification  Board of directors are agents of the company
 Third party  Implication
 Necessity
 Estoppel
(Freeman & Lockyear v BPP)
 Terminated by:
– Expiry
– Mutual agreement
– Death/insanity/bankruptcy
2 Authority of agents
Authority
Actual Apparent (Ostensible)

 (Freeman & Lockyear v BPP)
Express Implied
 Company directors
 Company secretary
211

VL2020
3 Liability
Liability
Rights Duties Liability
 Claim remuneration  Duties in line with the  Breach of warrant of authority

 Be indemnified by the principal instructions
 Exercise lien over property  Exercise due care and skill
 Act in person
 Accountable for all transactions
 Avoid a conflict of interest
 Not to make a secret profit
 Not to accept bribes
212

1 Standard partnership
Standard partnership
PA 1890 Formation/termination Rules for partners
 Share profits equally  No formality to form  Fiduciary relationship

 Duty to disclose
 Partners indemnified  Dissolved by:  Duty to account
 Partake in management
– Expiry of fixed term  Duty not to compete
 Access the books
 Partnership property
 Prevent admission – Completion of project  Partner's authority
– Illegality  Liability:
– Joint and several
– Partner gives notice
– Joiners/leavers – held out
– Death/bankruptcy of
partner
2 Limited partnership
Limited partnerships
PA 1907 Restrictions
 Partners may limit their liability  Register with company's registry

 One or more partners remain unlimited
 Limited partners may not manage
 May not withdraw capital
213

VL2020
3 Limited liability partnership
Limited liability partnerships
LLP Act 2000 Key features
 Creation of separate legal entity

 Register with company's
registry
 Name ends with LLP
 Minimum two members
 File accounts and annual
returns
 Members are agents of the
firm
 Liability of members limited
 Designated members
 Not subject to corporation tax
214

1 Incorporation
1.1
Incorporation
Unincorporated entities Company types Public v private cos
 Sole trader  Unlimited company  See below

 Partnership  Limited by guarantee
 Limited by shares
1.2 Public v private companies
Features Ltd Plc

Minimum number of directors 1 2
Minimum number of members 1 1
Minimum share capital One share £50,000
Advertise shares/debentures to public No Yes
Time to hold accounting records 3 years 6 years
Annual general meeting Optional Compulsory
Company secretary Optional Compulsory
File accounts after year end 9 months 6 months
215

VL2020
2 Legal personality
Legal personality
Salomon v Salomon Consequences
 Members' liability limited

 Perpetual succession
 Company can own property
 Company can sue/be sued
3 Lifting the veil
Lifting the veil
Case law Statute
 Evade legal duties  Incorrect company name

(Gilford Motor Co v Horne) disclosed
 Fraudulent trading
 Alien enemy character
(Daimler v Continental)  Wrongful trading
 Controlling mind of a company

(R v OLL Ltd)
 Breakdown of quasi-partnership relationship
(Ebrahimi v Westbourne Galleries)
 Group acting as a single economic entity
(DHN v Tower Hamlets) but (Adams v Cape
Industries)
216

1 Formation
Formation
Registration procedure Additional rules for plc
 Documentation required:  Trading certificate required:

– Memorandum of Association – Proof of allotted share
– Application for registration capital
– Section 9 documents – Proof of payment for shares
– Statement of compliance – Promoter's expenses
– Articles of Association (own or model  Consequences:
version) – Fines
– Registration fee – Company wound up
 Certificate of incorporation issued
(Jubilee Cotton Mills v Lewis)
2 Promoters
Promoters
Definition Duties Pre-incorporation

contracts
 Involved in company  Exercise reasonable skill and  Liability avoided by:

formation care – Novation
 Fiduciary duties: – Form contracts in draft
– Purchase company off the
– Duty to account
shelf
– Avoid conflict of interest
– Duty to disclose
– Not to make secret profits
 Breach of duty:
(Erlanger v New Sombrero
Phosphate)
217

VL2020

3 Other rules
Other rules
Objects Name Registered office
 Objects clause  Name  Registered office

– CA 06 presumes – Must end in Ltd/plc – Domicile
'unrestricted articles' – Changed by special – Precise address
– Existing restricted objects resolution
are valid  Refusal to register
– Any restrictions not binding – Already exists
on third parties
– Criminal offence
– Ultra vires contracts
– Required permission
– If completed – action taken
– Offensive
against directors
– Can be changed by SR
– If not completed –
injunction may be granted – Appeals heard by Co Names
Adjudicator)
4 Statutory books
4.1 The following registers must be kept by the company.
Register
Register of members
Register of people with significant control (PSC)
Records of directors (and secretaries)
Register of directors' residential addresses
Records of directors' service contracts and indemnities
Records of resolutions and meetings of the company
Register of debentureholders
Register of disclosed interests in shares (public companies
only)
218

1 Memorandum
Memorandum
 Historic document recording the initial

subscribers
2 Articles
Articles of Association
Content Binding power Alterations AND

Entrenchment
 Directors' powers and  Members to the  Alteration;

responsibilities company  Via SR; and
 Decision making by directors (Hickman v Kent)
 'Benefits the company as a
 Company to the whole'
 Appointment of directors
members (Greenhalgh v Arderne)
 Organisation and conduct of (Pender v Lushington)
general meetings – Members defrauding
 Members to members – Members competing
 Issue and transference of (Rayfield v Hands)
shares  Entrenchment
 Not third parties
(Eley v Positive Life Co.) – Partial entrenchment
 Payment of dividends
possible
 Exercise of members' rights – Requires a vote > SR%
– Registrar must be
informed
219

VL2020
1 Types of shares
Types of shares
Define capital Classifications Ordinary v

Preference
 Interest in the  Issued/allotted  Dividends

company  Called-up
 Voting rights
 Paid-up
 Limited liability
 Reserve  General meetings
 Mutual covenants
 Liquidation
position
2 Issuing shares
Issuing shares
Private co Public co
 Directors may allot shares  Directors require or to allot new shares

without or if the AoA permit
 Or lasts for five years
 Pre-emption rights apply for 21 days
where shares issued wholly for cash
 Pre-emption rights can be disapplied
by SR
 Shares must be issued for 'proper
purpose' – see Chapter 19
220

3 Payment for shares

Payment for shares
Private co Share premium Public co
 Payment may be via:  Allowable uses of SP account:  Payment via:

– Money – Money (100% SP + 25%
– Issue fully paid bonus shares
– Goods NV)
– Services – W/off commission paid
– Goods received within
– W/off expenses of issuing five years
shares
 Rights issues offered to existing
SHs
 Bonus shares issued in lieu of
cash dividend
4 Class rights
Class rights
Define Alteration Minority

protection
 Altering the rights (not  Alteration method:  Minorities can object:

the enjoyment of rights) – Within 21 days
– Check AoA to see if
of different classes of
possible – Must hold 15%+ of affected
shares in the same
company – Vote of 75% of capital
shareholders in the
affected class needed
221

VL2020
1 Debentures
Debentures
Define Debentures v shares
 'Written acknowledgement of Feature Shares Debentures

debt' Status Member Creditor
 Single Returns Dividends – variable Interest – fixed
 Issued in series – pari passu Issued Never at a discount Discounted/par/premium
 Debenture stock Security None Fixed/floating charges
Liquidation Rank last Rank first
222


2 Charges
Charges
Fixed v floating Registration Receivers
 Fixed:  With registrar within 21  Appointed by charge holders

– Specific assets days  Powers
– Company cannot  Effective from date of  Enterprise Act 2003
dispose creation
– Rank first
 Impact of late registration:
– Receiver appointment
– Charge void, but
 Floating: – Courts may register
– Class of assets
– Company can
dispose
– Rank behind fixed
charges
– Crystallising events
 Negative Pledge
Clauses:
– Impact on later fixed
charges
223

VL2020
1 Capital reduction
1.1
Capital reduction
Creditors' buffer Capital reduction Share repurchase and

PCP
 Non-distributable reserves  Three methods:  On-market – Ordinary res

form the creditors' buffer – Remove liability for unpaid  Off-market – Special res
calls  PCP:
– Private companies only
– Return excess capital – Special resolution
Financial assistance – Cancel lost share capital – Declaration of solvency
– Declaration audited
 New procedure:
– Court approval
 Private companies – no A private company may – Advertise in Gazette
longer prohibited under proceed without court approval – Creditors may object
the CA 06
(a) Pass SR
 Public companies' forms
include: (b) Stmt of solvency produced
(c) Stmt sent to registrar – Treasury shares
– Loaning money
– Providing guarantees 15 days
 Listed companies only
– Purchasing assets  Old procedure:
 Purchase and hold own shares
 Assistance ok if: – AoA permits
(can change)  No dividends or pre-emption
– Not principal purpose
rights
– Part of larger – Special resolution
transaction  No voting rights
– Court approval granted
– Company is a bank  No participation on liquidation
– Change advertised
– Benefits genuine
employees
224

1.2 Illustration of a permissible capital payment

COMPANY Z BALANCE SHEET AT 31 DECEMBER 200X
(REPURCHASE OF $200m OF SHARES AT PAR)
Before Repurchase After
$m
Net assets 1,000 (200) (less $200m cash) 800
Share capital 300 (200) 100

Share premium 250 $850m $800m 250
Revaluation reserve 200 200
Capital redemption
reserve 100 150 250
Retained earnings 150 (150) –
Shareholders' funds 1,000 (200) 800

The net effect of the above transaction has been a reduction in the creditors' buffer, or PCP,
of $50 million.
225

VL2020
2 Dividends
2.1
Dividends
Distribution rules Unlawful dividends
 See below  Must be returned if:

– Recipient knew it was unlawful
– Directors have to indemnify co
2.2 Dividend payment rules:
Private Public
Accumulated realised profits Accumulated realised profits
less less
Accumulated realised losses Accumulated realised losses
less
Accumulated unrealised losses
226

1 Company directors
1.1 Company directors
Types Appoint/remove/ Powers/duties

disqualify
 Executive  Appoint:  Powers:

 Non-executive – By Section 9 documents – Board – 'all the powers of the company'
 Managing – By board – casual vacancies – Individual directors:
 Shadow – By or at general meeting – Express/implied/apparent
 Alternate
 Remove: (Freeman & Lockyer v BPP)
 De facto
 Child directors  7 general duties:
– Removal (or and special notice)
– Resignation in writing (1) Company's constitution – exercise powers
– Retirement for a proper purpose:
– Termination per AoA – (Howard Smith v Ampol Petroleum)
– (Hogg v Cramphorn)
 Disqualification: – (Bamford v Bamford)
– CDDA 86 (2) Promote the success of the company –
– Misconduct considering inter alia:
– Unfitness
– Long-term consequences
– Fraudulent/wrongful trading
– Interests of employees
– Bankruptcy – Impact on the community
– Insanity
– 2–15 year period (3) Independent judgement – though powers
may be delegated except for:
 Directors' general duties: – Appoint/terminate directors and dividends
(a) Substantial property (4) Reasonable skills, care and diligence – two
transactions: tests:
– Lower of £100k or 10% of net (i) Exercised the knowledge, skills and
assets experience reasonably expected of a director
in that position
– De minimis value of £5k
(ii) As above but in respect of that particular
(b) Loans and quasi loans: director (Dorchester Finance v Stebbing)
– Private companies – no (5) Avoid conflicts of interest – directors have a
restrictions strong fiduciary duty:
– (IDC v Cooley)
– Public companies – member
– (Regal Hastings v Gulliver)
approval generally required
– (Peso Silver Mines v Cropper)
(c) Service contracts: (6) Benefits from third parties – directors may not
– Kept available for inspection accept benefits or bribes from third parties
for one year after expiry (7) Interest in a transaction – must be disclosed at
the next full board meeting
227

VL2020
2 Other company officers

2.1
Company officers
Company secretary Auditors
 Private company – optional post  Appointment

from 6 April 2008
– By or at annual meeting
 Public company – compulsory – Company may be exempt if it meets two
post of the following:
 Appointment  Turnover < £10.2m
– In a plc must be 'qualified'  Net assets < £5.1m
 Duties:  Average number of employees < 50
– Maintain registers  Duties:

– File annual returns – Report to members on 'truth and fairness'
– Organise meetings – Make necessary investigations
– Ensure statutory compliance – Report on consistency of financial
 Powers: statements
– Report on whether accounts have been
– Implied actual authority properly prepared
 Powers:
– Inspect the books
– Request explanations
– Receive resolutions
– Attend company meetings
– Resign at any time
228

1 Meetings
1.1
Meetings
Types Calling Conducting
 Annual general  See below  Members' rights:

 General – Call GMs – 5% of votes
 Class – Agenda item – 5% of votes
– Or 100 members with £100
 Sundry items:
– Voting – show of hand/polls
– Proxies
– Chairman
– Quorum
– Minutes
– Special notice – directors/auditors
 Electronic communication:
– Includes email and company website
– Notice of meetings
– Members' requests
– Hosting board meetings
– Public co – poll results on website
1.2 The key distinctions between AGMs and GMs:
AGM – public
Feature companies GM – all companies
Notice period (clear days) 21 14
Frequency Annual – 6 months As required
from Y/E
Called by Directors Directors or members
Business Routine Exceptional – insolvency
Short notice majority 100% 95% public or 90% private
229

VL2020
2 Resolutions
2.1 Any company may pass the following resolutions:
Features Ordinary Special

Notice 14 days Per meeting notice
Votes cast at a >50% 75%
general
meeting
File with Only for changes to Yes
registrar? directors and auditors
Uses Authority to allot shares Liquidation
Approve auditors' liability Change AoA
Appoint/remove directors Change company name
230

1 Voluntary liquidation
Voluntary liquidation
Members' Creditors' Distinction
 Special resolution  Special resolution  Solvent v insolvent

 Co-appoint liquidator  Creditors' meeting (7 days)  Approval of liquidator's
actions
 Declaration of  Members' meeting held
solvency  Choice of liquidator
 Creditors' meeting held
 Meeting within
 Liquidation committee
3 months
formed
 Final meeting
 Liquidator's meeting
(3 months)
2 Compulsory liquidation
Compulsory liquidation
Official Payment order Just and equitable

receiver/liquidator
 Official receiver appointed  Liquidator's expenses  Management deadlock

(Yenidje Tobacco Co)
 Commence on petition  Preferential creditors
date  Quasi-partnerships
 Floating charge holders
(Re Westbourne Galleries)
 Statement of affairs
 Ordinary unsecured
produced Failure of substratum
creditors
(Re German Date Coffee)
 Meeting of
 Deferred debts
members/creditors
 Members' capital
 Final creditors' meeting
 Surplus to members
231

VL2020
3 Administration
Administration
Administration order Administrator's Administrator's powers

function
 Company given breathing  Rescue company as going  Manage company as

space concern required
 Lasts up to 12 months  Creditors' best interests  Remove/appoint directors
 Effect:  Realise assets if required  Pay creditors
– Petitions dismissed  Take custody of property
– Charged assets  Dispose of property
secured
– HP assets secured
232

1 Insider dealing
Insider dealing
Criminal Justice Act 1993 Defences Maximum sentences
 Insider  Market maker  Seven years in prison

– Directors/employers/shareholders  Did not expect to profit/  Unlimited fine
– Any other person avoid loss
– Gained info from above
 Believed info was public
 Inside information:
 Would have dealt anyway Market abuse
– Specific securities
– Precise/specific information  Manipulate
– Not made public transactions
– Price sensitive
 Disseminate
 Dealing: misleading
– Bought/sold securities information
– Encouraged others to deal  Behaviour that
– Disclosed inside information distorts the market
233

VL2020
2 Money laundering
Money laundering
The process The offences Penalties
 Proceeds of Crime Act 2002  Laundering  Laundering:

 Failure to report – 14 years and/or fine
– Placement
– Layering  Tipping off
 Failure to report:
– Integration
– 5 years and/or fine
Tipping off:
– 2 years and/or fine
234


3 Other offences
Other offences
Criminal activities Fraudulent trading Wrongful trading
 Breach of health and  Trading while insolvent  Trading while insolvent

safety
 'With intention to defraud'  Knew/ought to have known
 Corporate manslaughter no reasonable prospect of
or
avoiding insolvent liquidation
'any fraudulent purpose' without taking all steps
 Max ten years' prison  Re Produce Marketing
Bribery and/or fine
 Civil remedies only
 Bribery Act 2010  Civil action possible also
 Offering bribes  R v Grantham
 Accepting bribes
 Bribing foreign public officials
 Corporate failure to prevent
bribery – adequate Tax evasion
procedures defence
 Private and public employees
 Applies outside of the UK
 Defences to armed forces and
secret service
235

VL2020
236

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Corporate and Business Law (LW) (GLO)

Integrated Course Notes

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Improving study material and removing errors

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Prepare for and book your CBE!

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Introduction to Corporate and Business Law (LW) (GLO)

Overall aim of the syllabus

A Essentials elements of the legal system

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Links with other exams

Corporate & Financial Audit &

Assessment methods and format of the exam

Format of the Exam Marks

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Taught Phase Aims

Achieving ACCA's Study Guide Outcomes

A Essential elements of legal systems

A1 Business, political & legal systems Chapter 1

B International business transactions

B1 Introduction to the UN Convention on Contracts for the International Sale of Chapter 4

C Transportation and payment of international business transactions

C1 Transportation documents and means of payment Chapter 6

D The formation and constitution of business organisations

D1 Agency law Chapter 7

E Capital and financing of companies

E1 Share capital Chapter 12

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F Management, administration and regulation of companies

F1 Company directors Chapter 15

G1 Insolvency and administration Chapter 17

H Corporate fraudulent and criminal behaviour

H1 Fraudulent and criminal behaviour Chapter 18

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Analysis of the pilot exam

International Business Transactions

International Business Forms

The formation and constitution of joint stock companies

Capital and the financing of companies

Management, administration and the regulation of companies

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Corporate fraudulent and criminal behaviour

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This section explains and demonstrates the key skills

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Key skills required to pass

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Skill 1 – Learning law

From ACCA Examining Team Report

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Cutter v Powell Consideration must be exact and complete (Cutter was a

Central London Properties Promissory Estoppel (Based in World War II London)

Erlanger v New Sombrero Promoters' fiduciary duties

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Which of the following is this an example of?

A Res ipsa loquitur

B Volenti non fit injuria

C Novus actus interveniens

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Skill 2 – Time management