My

Notes

Corporate and Business

Law

Max Lino Payyampallil

Corporate and Business Law
Contents

1. Business, political and legal systems.

2. International trade, legal regulation and conflict of laws.
3. Court-based adjudication and relative dispute resolution
mechanisms.
4. Contracts for the international sale of goods.
5. Obligations and risk in contracts for international sales.
6. Transportation documents and means of payment.
7. Agency law.
8. Partnerships.
9. Corporations and legal personality.
10. Company formation.
11. Constitution of a company.
12. Share capital.
13. Loan capital.
14. Capital maintenance and dividend law.
15. Company directors.
16. Other company officers.
17. Company meetings and resolutions.
18. Insolvency and administration.
19. Fraudulent and criminal behaviour.
Chapter 1

Business, political and legal systems

Economic systems

➢ What to produce
➢ How to produce
➢ Who to produce it for

Planned economy – the decisions and choices about resource allocation are made by the
government.

Market economy – the decisions and choices about resource allocation are left to market forces of
supply and demand.

Mixed economy – decisions and choices are made partly by free market forces of supply and
demand, and partly by government decisions.

Political systems : separation of powers

The rule of law

➢ Dictatorial system
• Tends to be emphasis on state or government regulation and control of resources.
• Individual freedom is heavily subject to the rule of state-made law.
• The behaviour of individuals is dictated by the state by means of law.
➢ Democratic or laissez-faire political system
• The emphasis is on the law being a means of sorting problems out where they arise.
• Individuals act within the letter and spirit of the law.
• They are free to choose for themselves how they regulate their lives and how they
relate to other people and groups.

Separation of powers

➢ Executive – suggest the laws needed. Also, enforcement of laws.

➢ Legislature – draft the law – new law, cancel law and amend law.
➢ Judiciary – oversee that the laws are properly followed.
• Criminal law : between the government and individuals.
• Civil law : between individuals.

Parliamentary sovereignty – the legislature can make and repeal laws, as well as overrule or modify
case law created by the judiciary.
Legal systems

Components of legal system

• Laws.
• Legislature.
• Judiciary.
• Prosecution system.
• Police.
• Prison system.

Sources of international law

• Conventions (signed by a country and an international organisation) and treaties (signed

between two countries).
• International customs.
• The general principles of laws recognised by civilised nations.

Criminal law

• Crime : a conduct that is prohibited by law.

• Usually punished by the government, which prosecutes the case, by the means of fines or
imprisonment.
• In a criminal trial, the burden of proof to convict the accused rests with the prosecution. The
prosecution must meet the standard of proof, which means proving its case beyond
reasonable doubt.
• Heavy burden of proof.

Civil law

• To regulate disputes about the rights and obligations of persons when dealing with each
other.
• The state is not party to a civil case.
• There is a lighter burden of proof.
• In civil proceedings, the standard of proof means that the claimant must prove their case on
the balance of probability.

Common law systems

• Common law is the body of legal rules, common to the whole country, which is embodied in
judicial decisions.
• Common law builds up over time, added by legislature (statutes are presumed to add to, not
alter, the existing law) and by judicial precedent
• In English law, principles of law do not become inoperative through the lapse of time.
• The doctrine of judicial precedent means that a judge is bound to apply a decision from an
earlier case to the facts of the case before him, provided, among other conditions, from that
there is no material difference between the cases.
Sources of law in common law systems

• Common law.
• Equity – based on case law.
• Statute.
• Custom.
• European union law.

Equitable principles

• Supplement and improve the common law by introducing the concept of fairness.
• It is based on fair dealings between the parties. Developed by the Court of Chancery.

The interaction of equity and common law – benefits

• New rights – equity recognised and protected rights for which the common law gave no
safeguards.
• Better procedure – it is more effective than common law in resolving a disputed matter.
• Better remedies :
- The defendant must do what he had agreed to do (specific performance).
- The defendant must abstain from wrongdoing (injunction).
- Alteration of a document to reflect the parties’ true intensions (rectification).
- Restoration of the pre-contract status quo (rescission).

Where equitable rules conflict with common law rules, then equitable rules will prevail.

American constitution – ultimate source of law in the US.

Role of judges in common law systems

➢ Setting and applying judicial precedent

3 elements of judicial precedent:
• Reports – there are comprehensive law reports of earlier decisions.
• Rules – there must be rules for extracting a legal principle from a previous set of
facts and applying it to current facts.
• Classification – precedents must be classified into those that are binding and those
which are merely persuasive (decisions of lower courts are never binding).
4 rules to be considered when examining a precedent before it can be applied to a case :
• A decision must be based on a proposition of law before it can be considered as a
precedent. It may not be a decision on a question of fact.
• It must form part of the ratio decidendi of the case (the reason for their decision).
• The material facts of each case must be the same.
• The preceding court must have had a superior (or in some cases, equal) status to the
latter court.
➢ Interpreting statutes
Presumptions of statutory interpretation :
• Statutes do not override existing law.
• A statute does not alter the existing common law.
• If a statute deprives a person of their property (say, by nationalisation), they are to
be compensated for its value.
• A statute is not intended to deprive a person of their liberty.
 • A statute does not have retrospective effect to a date earlier than its becoming law.
• A statute does not bind the Crown.
• A UK statute has effect only in the UK.
• A statute cannot impose criminal liability without proof of guilty intension.
• A statute does not repeal other statutes.
• Any point on which the statute leaves a gap or omission is outside its scope.
Rules of statutory interpretation :
• Literal rule – plain, ordinary or literal meaning.
• Purposive rule – not only in literal sense, but also with the reference to the context
and purpose of the legislation.
• Contextual rule – a word should be interpreted in its context.
• Eiusdem generis rule – listing a number of specific things and end the list with more
general words.
• Expressio unius est exclusio alterius rule – to express one thing, by implication, to
exclude anything else (example : talking about ‘goat’, excluding ‘sheep’).
• Noscitur a sociis rule – a word draws meaning from the other words around it
(example : children’s park, children’s toys, children’s books, etc.)
• In pari materia rule – if the statute forms part of a series which deals with similar
subject matter, the court may look to the interpretation of previous statutes, on the
assumption that parliament intended the same thing.
➢ Judicial review in common law systems
• Originalism – the constitution should be interpreted according to the original intent
of its authors.
• Constructivism – the constitution should be interpreted looking the original intent
of its authors.

Civil law systems

Two key principles in civil law :

• Comprehensibility.
• Certainty.

Sources of civil law:

• Constitution.
• ED law.
• Statutes.
• Administrative regulations.
• Customs.

Role of judges in civil law : they do not make law by the way of judicial precedent, although they may
perform judicial review.

Statutory interpretation in civil law :

• Where the meaning of the law is clear, it must be followed.

 • Where the statute is obscure or ambiguous, one should construe it in accordance with the
spirit (know the purpose of it instead of the literal understanding).
• If there is a gap in the law, judges must resort to custom and equity.

Alternative methods :

• Teleological method – looking at the social purpose of the law.

• Historical method – the judge looks at the intension of the legislator and then tries to
envisage what the intention would be if the law was being drafted in modern times. The
judge then applies that intention.

Sharia law systems

• Based on the religion of Islam.

• Sourced directly from Allah.
• Has a significant impact on how it is interpreted by judges.

Main sources of sharia law : Quran and Sunnah.

Secondary sources of law : Madhab.

In Muslim countries, there will be written constitution that upholds the role of sharia law in that
country.

Sunnah – how the Quran is interpreted by the Prophet :

• Confirm the law in Quran.

• Explains matters mentioned in the Quran in general terms.
• Clarify verses in the Quran that may seem ambiguous.
• Introduce a rule where the Quran is silent.

Schools of sharia law

• Those that believe more development is needed have developed a science of understanding
and interpreting legal rules, known as Fiqh, through the techniques of ijtihad.
• Ijtihad are the processes for ascertaining the law. It is the use of intellectual exertion by a
jurist to derive an answer to a legal question.
• The theory that no more interpretation is needed is known as Taqlid, which is the process of
strict adherence to established doctrine.
• Orthodox Muslims adhere to Taqlid.

Ijma’ – a consensus of opinion. It should be based on consultation between jurists.

Qiyas – an analogical deduction. In other words, it is a comparison of two things with a view to
evaluating one in the light of the other.

Istihsan – the concept of equity, or of fairness. However in sharia, the exercise is clearly only
permissible within the bounds of the sharia (as it is integral part of the system).

The rule against usury

Riba – Islamic concept of unlawful gain, usually translated as interest, which is strictly forbidden by
the Quran.
Chapter 2

International trade, legal regulation and conflict of laws

➢ Public international law – consists of rules and principles which apply in general to the
conduct of sovereign and international organisations and the relationships between them.
➢ Private international law – regulates cases which involve the national laws of two or more
states where a different result will ensue depending on which state’s law is applied.

Barriers to international trade

• Tariffs or customs duties : taxed on imported goods.

• Import quotas : restrictions on the quantity of a product that is allowed to be imported into
the country.
• Embargo : the total ban or in other words, zero quota.
• Hidden export subsidies and import restriction.
• Difference in law : a contract is something defined by the law, and so, as the law varies from
country to country, may be one thing in one country and a different thing in the other. It
may have different legal consequences in different parts of the world.

International conventions, treaties and model laws.

Rome convention

• Set out policy on what law should govern the validity of international contracts and was
introduced into law.
• It sets down the general principle that if the parties have a written contract and have
expressed preference for a particular law in that written contract, that law should govern
the contract. This is known as choices of laws.

New York convention

Set out the agreement of countries relating to referring cases to arbitration.

Role of international organisations in trade

➢ The United Nations (UN)

Almost every independent state in the world is a member of the UN.
The purposes of the UN are :
• Maintain peace and security.
• Develop friendly relations among nations.
• Co-operate in solving economic, social, cultural and humanitarian problems.
• Promote respect for human rights and international freedoms.
There are two bodies in the UN involved in drafting international law : The International
Law Commission and the UN Commission on International Trade Law (UNCITRAL).
➢ UN Commission on International Trade Law (UNCITRAL).
It was given the task of harmonising and unifying the law of international trade by:
• Co-ordinating the work of organisations active in the field and encouraging their co-
operation.
• Promoting wider participation in existing international conventions and wider
acceptance of existing model and uniform laws.
• Preparing or promoting the adoption of new international conventions, model laws
and uniform laws.
• Promoting ways and means of ensuring a uniform interpretation and application of
international conventions and uniform laws in the field of international trade.
• Collecting and disseminating information on national legislation and modern legal
developments, including case law, in the field of international trade law.
• Establishing and maintaining a close collaboration with the United Conference on
Trade and Development.
• Maintaining liaison with other UN organs and other agencies concerned with
international trade.
• Taking any other action it may deem useful to fulfil its functions.
➢ International Chamber of Commerce (ICC)
• To serve world business by promoting trade and investment, open markets for
goods and services, and the free flow of capital.
• It makes representations to governments on issue related to international trade.
• It also develops codes of practice to encourage businesses to operate with a
minimum government intervention.
• It co-operates with, and advises, the UN and provides practical services to
businesses and seeks to combat commercial crime.
• ICC has set up the International Court of Arbitration.
➢ World Trade Organisation (WTO)
• The WTO represents 97% of international trade.
• The organisation seeks to promote the free flow to trade by removing obstacles to
trade, and make sure that individuals, companies and governments know what
these rules are.
• Administers trade agreements.
• Is a forum for trade agreements.
• Settles trade disputes.
• Reviews national trade policies.
• Assists developing countries in trade policy issues (training/technical assistance).
• Co-operates with other international organisations.
• The WTO agreements contain the principles of liberalisation of free trade.
• The Secretariat’s role is to supply technical support for the various councils and
committees and the ministerial conferences.
• The Ministerial Conferences is the WTO’s top-level decision-making body, meeting
at least once every two years.
• The General Council meets several times a year, sometimes as the Trade Policy
Review Body and the Dispute Settlement Body.
• Special Councils such as Goods Council, Service Council and Intellectual Property
Council report to the General Council.
 • Committees, working groups and working parties deal with the individual
agreements and other areas such as environment, development, membership
applications and regional trade agreements.
• Through Dispute Settlement Body, the WTO operates a dispute settlement
procedure for resolving trade quarrels between member countries.
➢ Organisation for Economic Co-operation and Development (OECD)
• Its purpose is to be ‘a forum to discuss, develop and refine economic and social
policies’.
• It has created both legally binding agreements (example: in relation to bribery) and
also non-binding agreements (such as guidelines for multinational enterprises).
➢ International Institute for the Unification of Private Law (UNIDROIT)
• An independent intergovernmental organisation which studies the need for, and
how to modernise, harmonise and co-ordinate, private international law, and in
particular trade law.
• The Secretariat is responsible for the day to day running of UNIDROIT’s work
programme.
• The Governing Council supervises UNIDROIT’s policy.
• The General Assembly is the ultimate decision-making organ of UNIDROIT.
Chapter 3

Court-based adjudication and alternative dispute resolution

mechanisms
Court-based adjudication

It depends on a system of courts which settle disputes.

Court of first instance : the court where a case is heard for the first time.

Appellate court/court of appeal : the higher court where the previous decision of a lower court can
be re-heard.

Civil and criminal cases tend to have different court structures and procedures.

English system of courts

Highest court within England : Supreme court.

Highest court of appeal in UK : European Court of Justice.

➢ Civil court structure

• County court : only has civil jurisdiction. It deals with almost every type of civil case
at a local level.
• High court : deals with the major cases at first instance. Sometimes, it is the court of
appeal from the country court.
• Court of appeal : the major appeal court in civil matters.

▪ Circuit judges – County court.

▪ Puisne judges – High court.
▪ Lord Justice of Appeal – Court of Appeal.
 ➢ Criminal court structure

• Magistrates’ court and Crown court : local courts hearing the bulk of criminal cases.
• The court of appeal : cases appealed from the Crown court.
• Crown court : hears cases at first instances and is an appeal court from the
Magistrate’s court.

▪ Indictable offences – more serious offences that can only be heard in a Crown court.
▪ Summary offences – minor crimes, only triable summarily in Magistrate’s court.

Advantages and disadvantages of court-based adjudication

Usually more expensive.

Time scale (disadvantage).
The waiting period before a case comes to trial (disadvantage).
Going to court can provide helpful legal solutions and settlements.
As judicial precedent establishes legal rules for the future, similar future cases may be
resolved before legal action is required, saving future generations the time and expense of
going to court.

Role of international courts

➢ European Court of Justice

• It is the part of the legal system of EU’s member states.
• It is the highest court in the EU.
➢ International Court of Arbitration
• Set up by the ICC.
• Arbitration is a useful tool for settling international commercial disputes, when
people trade in states where the legal system is very different from their own and
legal decisions may not seem fair.
 • The ICA does not get involved in the actual process of arbitration, instead it oversees
all aspects of the arbitration process, such as:
- Appointment of arbitrators.
- Confirmation of appointment of arbitrators.
- Deciding on challenges to arbitrators.
- Approving arbitral awards.
- Fixing arbitrators’ fees.

Alternative dispute resolution

• It is any type of procedure or combination of procedures voluntarily used to resolve

differences, other than court-based adjudication.
• ADR procedures may include, but are not limited to, conciliation, facilitation, mediation,
early neutral evaluation, adjudication and arbitration.

Arbitration

• Arbitration – settlement of a dispute by an independent person, usually chosen by the

parties themselves.
• Islamic arbitration : takhim.
• Islamic arbitrator : hakam.

Mediation and conciliation

• Involve the use of an independent 3rd party to assist the parties in coming to their own
solution of the problem.
• Islamic conciliation : solh.
• Islamic mediation : wasta.

Advantages and disadvantages of ADR

They can gain the service of an expert in the particular commercial field that they are in.
ADR is cheaper than court action (it can be the opposite too).
ADR is usually private, unless the parties want the proceedings to be public (helpful for
commercially sensitive cases).
ADR is informal and quicker than court proceedings.

UNCITRAL Model Law on International Commercial Arbitration

International commercial arbitration

Arbitration is said to be international if :

• The parties to the arbitration agreement have their places of business in different states.
• The parties’ places of business are in the same state but the place designated for arbitration
is in a different state, or the obligations of the commercial relationship are to be performed
in a different state.
• The parties have expressly agreed that the subject matter of the arbitration agreements
relates to more than one country.
Written communications

• Any written communication is deemed to have been received if it is delivered to the

addressee personally or if it is delivered at his place of business, habitual residence or
mailing address.
• 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 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.

Role of courts

Courts shall not intervene in matters governed by the Model Law, except where stated within the
Model Law.

Arbitration agreement

• It is an agreement by the parties to submit to arbitration all or certain disputes which have
arisen or which may arise or which may arise between them in respect of a defined legal
relationship, whether contractual or not.
• It may be in the form of an arbitration clause or of a separate agreement.
• It must be in writing.

Court proceedings

• If an action is brought before a court in relation to a matter which is subject to an arbitration

agreement, the court should refer the matter to arbitration, unless they find that the clause
is null and void.
• 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.

Arbitral tribunal

Composition of the arbitral tribunal

Agreed by parties, otherwise minimum of 3.

Appointment of the arbitrator

• Each party to the agreement will appoint one arbitrator. Should be done within 30 days of
the request to do so.
• The two appointed arbitrators appoint the third one. Should be done within 30 days of
appointment of first two arbitrators.

Arbitration with sole arbitrator

• Both parties may agree on who that arbitrator will be.

• If not agreed, either any party can request that relevant authority or court specified in their
national law shall appoint the arbitrator.
Independent and impartial arbitrators

A party may challenge the appointment of the arbitrator if he feels the arbitrator :

• Is not independent and impartial.

• Does not possess the qualifications required by the arbitration agreement.

Challenge the appointment of an arbitrator

• Challenge the arbitral tribunal within 15 days of becoming aware of the grounds for a
challenge.
• The challenged arbitrator may withdraw from office as the result of the challenge.
• The other party too must agree the challenge, if not, the arbitral tribunal must decide on the
challenge.
• The challenger has a further 30 days to ask the court to decide on the challenge.
• Once decided by the court, no further appeal may be made.
• While the challenge is proceeding, the challenged arbitrator may continue the arbitral
proceedings and make an award.

Arbitrator unable to act

• If it becomes impossible for the arbitrator to act, his appointment is terminated if he

withdraws from office or if the parties agree that it is terminated.
• If there is any controversy about whether an arbitrator is still validly appointed, any party
may refer the matter to the relevant authority or court.

Jurisdiction of the arbitral tribunal

• If the arbitral tribunal concludes that the contract is null and void, this does not affect the
arbitration clause, and therefore the fact that the dispute should be settled in arbitration.
• The arbitral tribunal may rule on anything in its jurisdiction, including on whether an
agreement contains an arbitration agreement.

Conduct of arbitral proceedings

Place, Commencement, Language, Experts and Court assistance : may agreed by the parties, or else
by the tribunal.

Statements of claim and in defence

The claimant shall state :

• The facts supporting his claim.

• The points at issue.
• Any remedy sought.

The defendant shall state their defence in respect of these particulars.

• Timing : the statements of both claim and in defence shall be made within the period of
time agreed by the parties. If they have not come to an agreement on when the statements
shall be made, the arbitral tribunal may decide.
• Other documents: the parties may include documents that they consider to be relevant with
their claims.
 • Failure to provide written statements :
- If the claimant fails to provide a statement of claim within the time period, the
arbitral tribunal shall terminate the proceedings.
- If the defendant fails to provide a statement of defence, it will not treat him as guilty,
but will continue proceedings.

Hearings and written proceedings

Unless the parties have made any agreements to the contrary, the arbitral tribunal shall decide :

• To hold oral hearing for the presentation of evidence.

• To conduct proceedings on the basis of documents.

Challenging the jurisdiction of the arbitral tribunal

• If a party want to do so, such a plea must be raised before the statement of defence is
submitted.
• Any party can challenge, regardless of whether they have participated in appointing an
arbitrator.
• If the arbitral tribunal concludes that it is done have jurisdiction, any party may apply to the
relevant authority or court to decide whether their decision is valid.
• It must do so within 30 days of hearing the tribunal’s decision concerning its jurisdiction.

Termination of proceedings

The proceedings are terminated :

• An award is made.
• An order of the tribunal is made to terminate proceedings, when :
-The claimant withdraws their claim.
-The parties agree to terminate proceedings.
-The arbitration has become unnecessary or impossible.

Award enforcement

Interim measures of protection may be ordered from either party while the arbitration proceeds.

The decision shall be concluded by a majority of the arbitrators.

Form and content of the arbitral award

• Be in writing.
• Be signed by the arbitrators (or majority of them).
• State the reasons behind the award.
• State the date of the award and the place of arbitration.
• Be copied and these copies sent to each party.

Additional award

• A party may request that the tribunal make an additional award that has been referred to
during proceedings, but not included within the final award.
• This must also be requested within 30 days of the receipt of the award.
 • The tribunal may make the additional award within 60 days, if it considers the request to be
justified.

Setting aside/ recourse against arbitral award

• A party to the arbitration agreement was under some incapacity or the agreement is not
valid under the laws to which the parties have subjected it.
• A party was not given proper notice of an arbitrator’s appointment or of the proceedings or
that party was otherwise unable to present his case.
• The award deals with a matter not contemplated by the parties or not falling within the
terms of the arbitration agreement.
• The composition of the tribunal was incorrect.
• The subject matter of the dispute is not capable of being settled by arbitration under the law
of the state.
• The award conflicts with public policy in the state.

Recognition/enforcement of an arbitral award

Regardless of which country an arbitral award was made in, it shall be recognised as binding.

To enforce an award, a party should make written application to the court.

The court may only refuse an application for recognition or enforcement if :

• The party was in incapacity.

• Not given proper notice.
• The award deals with a dispute not contemplated by or not falling within the terms.
• The composition of arbitral tribunal or the arbitral procedure was not in accordance with the
agreement of the parties.
• The award has not yet become binding on the parties.
• If the court finds that :
- The subject matter of the dispute is not capable of settlement by arbitration under
the law of the state.
- The recognition or enforcement of the award would be contrary to the public policy
of the state.
Chapter 4

Contracts for the international sale of goods

UN Convention on Contracts for the International Sale of Goods

Unless excluded by the parties, the UNCISG applies to contracts of sales of goods between parties
whose places of business are in different states :

• When the states are contracting states.

• When the rules of private international law lead to the application of the law of a
contracting state.

Its basic principles : international, uniform and based on good faith.

Sales of goods : 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.

Property : legal title.

The convention does not apply to sales of goods bought for personal, family or household use.

Also:

• Goods bought by auction.

• Goods bought on execution of/by authority of law.
• Stocks, shares, investment securities, negotiable instruments or money.
• Ships, vessels, hovercraft or aircraft.
• Electricity.

The convention does not apply to the supply of services.

Place of business

• Convention refers to place of business, not nationality.

• If any party has more than one place of business and they are on different states: relevant
place of business – most closely connected to the contract and its performance.
• If no party has place of business – relevant place – habitual residence.

Ratification of the convention

The UNCISG has to be ratified, accepted or approved by member states.

Formation of a contract for international sale of goods

• A contract for the international sale of goods is concluded when acceptance of an offer
becomes effective.
• A contract does not have to be in or evidenced by writing. It can be proved by any means,
including witness.
• This may be disapplied if one of the parties is in a contracting state which requires writing.
• Writing includes telegram and telex.
Offer

An offer is a proposal for concluding a contract addressed to one or more specific persons that is
sufficiently definite and that indicates the intentions of the offeror to be bound by acceptance.

An invitation to treat/to make offer is any other proposal, unless the person making it clearly
indicates to the contrary (example: the dress put on display in a textile showroom).

Sufficiently definite

When :

• It indicates the goods in the question.

• It makes provisions for price and quantity of the goods.

Commencement of an offer

The offer becomes effective when it reaches the offeree. When :

• It is made orally to him.

• It is delivered by other means to him personally, at his place of business or mailing address.
• If there is no business or mailing address, it is delivered to him personally at his habitual
residence.

End of an offer

Withdrawal – cancelling the contract before it is being conveyed.

Revocation – cancelling the contract before it is being accepted.

Rejection – cancelling the contract while it is being conveyed.

• Even an irrevocable offer may be withdrawn if the withdrawal reaches the offeree before or
at the time as the offer.
• An offer may be revoked if the revocation reaches the offeree before acceptance is
despatched.
• An irrevocable offer is one that indicates that it is, whether by means of it stating a fixed
time for acceptance or otherwise.

Acceptance

• Acceptance is a statement made by the offeree, or other conduct of the offeree, that
indicates assent to an offer.
• Under the convention, acceptance must be a statement or an act, such as the despatch of
goods or payment of an agreed price.
• Silence or inactivity does not constitute acceptance.

Commencement of acceptance

Acceptance become effective at the moment that the indication of assent reaches the offeror.

Acceptance is not effective when :

• Acceptance has not reached the offeror within a fixed timescale.

• Acceptance has not reached the offeror within a reasonable time.
Reasonable time

• It will be judged in relation to the method of communication that was used by the offeror.
• An oral offer must be accepted immediately unless the circumstances indicate otherwise.

Acceptance by an act

Acceptance is effective as soon as the act is performed.

Counter offer

It is a reply to an offer which purports to be acceptance but which contains additions, limitations or
other modifications to the terms of the offer.

Communication of acceptance

An acceptance is only valid if it reaches the offeror in reasonable time or within a time fixed by the
contract. The period of time commences :

• From the moment the telegram containing the offer is handed in.
• From the date shown in the letter containing the offer or on the envelop.
• When an offer contained in instantaneous communication reaches the offeree.

Official holidays and non-business days are included within the time period. If the last day of
acceptance is on these days, an extra business day is given to effect delivery.

Late acceptance can be valid, if the offeror orally accepts it without delay or dispatches a notice to
that effect.

Acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as
the acceptance would have become effective.

Modification or termination of the contract

A contract that is not in writing may be modified or terminated by the mere agreement of the
parties.

ICC Incoterms

ICC – International Chamber of Commerce.

Incoterm – International Commercial Terms : standard terms of trade commonly incorporated in

international trading contracts.

Seller and buyer may include an Incoterm in their contract, defining the risks and responsibilities
borne by the parties in getting goods from one part of the world to another or from one part of a
country or trading bloc to another.
Terms relevant to any mode(s) of transport

➢ Ex works (EXW)
• The seller has minimum obligations with respect to delivery.
• Make the goods available to the buyer at the seller’s own place of business.
➢ Free carrier (FCA)
Seller fulfils their obligations when the goods have been cleared for export and handed over
to the carrier named by the buyer at the named point.
➢ Carriage paid to (CPT)
The risk for the goods passes from seller to buyer when the goods are handed over to the
first carrier.
➢ Carriage and insurance paid to (CIP)
This is where carriage and insurance are paid by the seller up to the named destination;
thereafter, the buyer assumes costs, such as import duties and other taxes.
➢ Delivered at terminal (DAT)
o The seller pays for carriage costs to a named terminal at a named destination, and
for unloading from the arriving means of transport and placing the goods at the
buyer’s disposal.
o The seller bears all the risks in delivering to and unloading the goods at the terminal,
and undertakes and pays all export clearance tasks.
o Pay any import duty or carry out any import customs formalities is the buyer’s
obligation.
➢ Delivered at place (DAP)
The seller discharges their responsibilities and is no longer liable for any risks only once the
goods are ready for unloading by the buyer at the agreed destination.
➢ Delivered duty paid (DDP)
o Opposite of Ex works.
o The seller bears all the risk and is obliged to deliver goods to a named place in the
country the goods are being imported to, with all duties relating to that importation
paid.

Terms relevant to maritime transport only

➢ Free alongside ship (FAS)

The seller discharges their obligations when the goods have been placed alongside the ship
at a named port of shipment in the country of export.
➢ Free on board (FOB)
The buyer makes arrangements for shipping and the seller discharges their duty by putting
the goods on board the ship in the country of export.
➢ Cost and freight (CFR)
The seller pays for all costs and freight (carriage) to take the goods to a named port of
destination in the country of import, but once the goods are on board the vessel in the
exporting country port, the goods become the risk of the buyer.
➢ Cost, insurance and freight (CIF)
o The seller is required to bear the cost of insurance and freight (carriage) for the
goods.
o They must contract for carriage on the usual terms for the goods to the named port
of destination.
o The minimum insurance cover should be that which is stated in the contract plus
10%.
Chapter 5

Obligations and risk in contracts for international sales

Obligations of the seller

➢ Delivery
• The seller is required to deliver the goods in accordance with the contract or, if no
specifications are made, in accordance with the convention.
• The seller must deliver the goods, handover any documents relating to them and
transfer the property in the goods as required by the contract and this convention.
➢ Place of delivery
Specified in the terms of the contract.
If not specified, the convention implies the following terms into the contract :
➢ Contract involving carriage
The seller discharges their obligation to deliver the goods by handling the
goods over the first carrier for transmission to the buyer.
➢ Specified goods/identified goods drawn from specific stock
• The seller discharges their obligations by placing the goods at the
buyer’s disposal at that place.
• Specified goods : those which are identified as the goods to be sold
at the time when the contract is made.
• Identified goods from specific stock : goods which are not specific
but are part of a layer, specific stock of goods.
➢ Other instances
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 concluded.
➢ Contract involving carriage
• 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 markings on the goods,
shipping documents or other.
➢ Time of delivery
o Delivery should take place on the date, or within the period, specified in the
contract.
o The buyer is entitled to determine the delivery date, delivery should take place on
the date which the buyer determines.
o If no date or time period is specified in the contract, delivery should take place
within reasonable time of the contract being formed.
o Handing over documents : as specified by the contract.
➢ Quality and conformity
The seller must deliver goods which are of the quantity, quality and description required by
the contract and that are contained or packed in the manner required by the contract.
Conformity requirements:
o The goods are fit for the purpose for which goods of same description would
ordinarily used.
o The goods are fit for any particular purpose expressed or impliedly made known to
the seller at the time of forming the contract. This is unless circumstances show that
 the buyer did not rely on, or that it was unreasonable to rely on, the seller’s skill and
judgement.
o The goods possess the qualities of any sample or model held out by the seller to the
buyer.
o 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.
The seller is not liable for the lack of conformity in the goods if, at the time of forming the
contract, the buyer knew, or could not have been unaware, that the goods did not conform.
The seller is liable for any lack of conformity which exists at the time when risk passes to the
buyer, even though the lack of conformity becomes apparent only after that time.
The seller is also liable for any lack of conformity which occurs after risk passed and which is
due to a breach of any of their obligations. This includes a breach of any guarantee that for a
period of time the goods will remain fit for their ordinary purpose or for some particular
purpose, or will retain specified qualities or characteristics.
When the seller has delivered goods before the date of 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.
Buyers duty to examine the goods
o The buyer must examine the goods to ensure conformity as soon as possible after
delivery.
o If the contract involves carriage, the buyer should examine the goods as soon as
possible after their arrival.
o If the goods are being despatched immediately by the buyer and the seller knows
that, the goods may be examined on their arrival at the next destination.
o If the buyer do not inform the seller within 2 years of goods being handed over
(within reasonable time) their right is usually lost.
➢ 3rd party rights
o The seller must deliver goods which are free from any right or claim of a 3rd party,
unless the buyer agreed to take the goods subject to that right or claim.
o However, if such a right or claim is based on industrial property or other intellectual
property, the seller’s obligation is governed by Article 42.

Buyer’s remedies for seller’s breach of contract

Breach of contract is where a party fails to perform their obligations under the contract.

Fundamental breach of contract is where a breach results in such detriment to the other party so as
to substantially deprive them of what they are entitled to expect under the contract.

Specific rights of the buyer under the convention:

• Right to require performance.

• Right to declare the contract avoided.
• Right to reduce price in relation to non-conformity of goods.
➢ Performance
•The buyer may require performance of the contract by the seller.
•The buyer may not require the seller to perform if they have already resorted to
remedy that is inconsistent with performance.
 Lack of conformity of the goods
The buyer may require the seller to:
•Deliver substitute goods.
•Repair the goods.
Early delivery
If the seller delivers the goods early, the buyer may take delivery or refuse to take delivery at
that time.
Excess delivery
If the seller delivers more than was ordered, the buyer may take delivery of some or all of
the excess or not, as they choose.
➢ Reduction of the price
If the goods do not conform to the requirements of the contract the buyer is entitled to
reduce the price in proportion to the lack of conformity.

Obligations of the buyer

The buyer has obligations in respect of taking delivery of the goods and making payments.

➢ Payment
Price not concluded : where the contract has been formed without reference to the price,
the buyer and seller are deemed to have, by implication, made reference to the price
generally charged at the time the contract was formed.
Price determined accorded to weight : where the price is to be fixed according to weight, if
there is doubt, the price is to be determined by net weight.
Where price is to be paid :
o Specified in the contract.
o Seller’s place of business.
o At the place where the goods or documents are handed over.
When the price is to be paid :
o The buyer is not obliged to pay until they have examined the goods.
o The seller may make payment a condition of handling over the goods.
o If the contract includes carriage, the seller may despatch the goods on the condition
that they will not be released unless the payment is made.
➢ Taking delivery
The buyer’s obligation to take delivery consists of the buyer :
o Doing all acts which could reasonably be expected of them in order to enable the
seller to make delivery.
o Taking over the goods.

Seller’s remedies for buyer’s breach of contract

➢ Specific rights under the convention

o Right to require payment and acceptance of goods:
- Unless they have resorted to a remedy which is incompatible with this.
- The seller may fix additional time period within which the buyer should
perform their obligations. This should be of reasonable length.
o Right to declare the contract avoided.
 ➢ Buyer’s failure to specify
o The contract may state that the buyer is to specify the form, measurement or other
features of the goods.
o If they fail to do so, the seller may ,make the specification, taking into account the
buyer’s known requirements.
o They must inform the buyer of this and fix a reasonable time by which the buyer can
make amendments.
o Further failure by the buyer to act means that the seller’s specification is binding.

Damages

• Damages is a monetary sum equal to the loss (including loss of profit) suffered by the injured
party as a consequence of the breach.
• 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 being formed, in the light of known
facts then.
• If the buyer has avoided the contract for the seller’s breach and has bought replacement
goods they may claim the value of these as damages.
• If the seller has avoided the contract for the buyer’s breach and has sold the goods to
another party, the proceeds of this sale should be deducted from any damages awarded.

Mitigation of loss

• An injured party can take reasonable measures to mitigate the loss, including loss of profit,
resulting from the breach.
• If a party fails to mitigate their loss, damages may be reduced by the amount in which the
loss should have been mitigated.

Breach of contract and avoidance

Anticipatory breach : suspension of performance

A party may suspend performance if, after the contract starts, it becomes apparent that the other
party will not perform a substantial part of their obligations due to :

• A serious deficiency in their ability to perform, or their creditworthiness.

• Their conduct is preparing to perform/performing the contract.

In order to suspend performance, the person suspending performance must give the other party
notice of their actions. If the other party gives adequate assurance that they are going to perform
the contract, then the suspending party must not suspend performance, but must carry on with it.

Avoidance by the buyer

• The buyer may declare the contract avoided if a failure by the seller to perform is a
fundamental breach of contract.
• They may also do so, in case of non-delivery, if the seller does not deliver in the additional
time period fixed by the buyer, or declares that they will not be able to deliver in a fixed
time period.
• A declaration of avoidance if effective only if made by notice to the other party.
Avoidance by seller

If:

• The buyer’s failure to perform is a fundamental breach.

• The buyer does not accept the goods and/or pay for them in the additional time period
allowed by the seller.
• The buyer declares that they will not accept the goods and pay for them.

Effects of avoidance

Does not effect :

• The parties’ rights to make a claim for damages.

• Any provisions in relation to the settlement of disputes.
• Any other provisions in the contract governing the parties’ rights and obligations in the
event of avoidance.
• The right to claim restitution of the goods by a party who has performed the contract wholly
or in part.

The right to avoid contract is lost if restitution of the goods cannot take place. But the buyer can still
claim damages.

Instalment contracts

• It may be that the contract is set up to be in instalments (of delivery or payment).

• They may declare the contract avoided with respect to that instalment or in respect of the
whole contract.

Interest

If a party fails to pay the price or any sum that is in arrears, the other party is entitled to receive
interest on that overdue sum.

Exemptions – Unexpected impediment to performance

• A party to an international contract is not liable to pay damages for a failure to perform any
of their obligations if they can prove that the failure was due to an impediment beyond their
control.
• Where a party who fails to perform because of an impediment wishes to benefit from
exemption under Article 79, they must give notice of the impediment to the other party and
its effect on their ability to perform.
• Article 79 affects only the parties’ rights in respect of damages under the convention. Any
other right available under the convention, such as reduction of price, is unaffected by
article 79.
Preservation of goods

Where goods are subject to rapid deterioration, on their preservation would involve unreasonable
expense, the party must take reasonable measures to sell them, and give notice of this to the other
party if possible.

Any party selling goods in these circumstances can retain amounts from the proceeds of sales to
cover preservation and selling expenses, but must account for the balance to the other party.

Passage of risk

➢ Contract including carriage

• The contract may specify the place at which risk passes to the buyer.
• Risk passes to the buyer when the goods are transferred to the carrier at that place
(even if the seller is authorised to retain documentation at that time).
➢ Contract for goods sold in transit
The risk in goods sold in transit passes to the buyer from the time the contract is concluded.
➢ Contracts not including carriage
Risk passes to the buyer when they take over the goods, or the goods are placed at their
disposal and they commit breach by not taking delivery of them.
➢ Risk and non-conformity of goods
If the goods do not conform to the required standards of quality, quantity and description
and this is not discovered until after risk has passed to the buyer, the seller is liable for this
lack of conformity if it is due to a breach of their obligation.
Chapter 6

Transportation documents and means of payment

Bill of lading

Carriage is an important feature of international contracts for the sale of goods.

A bill of lading is a document which is issued by the carrier to the shipper, acknowledging that the
carrier has received the shipment of goods and that they have been placed on board a particular
vessel, bound for a particular destination.

• 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).
• It either provides evidence of, it contains within it, the contract of carriage and the terms on
which the goods are to be carried.
• It can be a document of title to the goods being shipped.

Types of bill of lading

• Inland – relates to a contract for transporting goods over land to the seller’s international
carrier.
• Ocean – relates to a contract for carriage of goods from a seller in one country to a specified
port in another country.
• Through – combines the contracts for inland and marine carriage.
• Airway – relates to a contract for carriage of goods by air (both domestic and international)
from one point to another.
▪ Negotiable bill of lading – the person who legally owns the bill of lading owns the goods and
has the right to re-route them.
▪ Non-negotiable bill of lading – (which includes airway bills), the bills of lading names a
recipient to whom the carrier must deliver the goods.

International bank transfers

• The buyer orders their bank (in country A) to transfer money to a receiving bank (in country
B).
• The transfer is carried out electronically.
• UNCITRAL has set out a Model Law on international credit transfers.
Advantages :

• Straight forward.
• Carried out electronically.
• Do not require reliance on any other systems, such as the postal system.

Disadvantages:

• Scope for fraudulent payments.

• There is not the same cancellation period (as compared to bills of exchange).

UNCITRAL Model Law on International Credit Transfers

• It sets out the terms on which funds are transferred from a buyer to a seller through the
international banking system, and the rights and liabilities that ensue.
• Originator – issuer of the first payment.
• Sender – the person who issues a payment order, including the originator and the sending
bank.
• A payment order can simply direct the beneficiary’s bank to hold the funds.
• If an instruction to pay is made subject to a condition but the bank executes it by issuing an
unconditional payment order, it thereafter becomes a full credit transfer.

Categories of transactions covered by the Model Law

• The Model Law applies to international credit transfer, not debit transfers.
• Therefore, the definition of a credit transfer includes :
‘the entire series of operations, beginning with the originator’s payment order, made for the
purpose of placing funds at the disposal of a beneficiary, not just to the payment order that
passed from a bank in one country to a bank in another country’.
Scope of the Model Law

Except as otherwise provided in this Law, the rights and obligations of parties to a credit transfer
may be varied by their agreement.

Obligations of the sender of a payment order

The sender of a payment order is the buyer of the goods.

The real obligation of the sender : to pay the receiving bank for the payment order when the
receiving bank accepts it.

Liability for payment of unauthorised payment orders

➢ A sender is bound by a payment order… if it was issued by the sender or any other person
who had the authority to bind the sender.
➢ When a payment order…is subject to authentication (by agreement between the sender and
the receiving bank), a purported sender…is….bound if :
• The authentication is in the circumstances a commercially reasonable method of
security against unauthorised payment offers, and
• The receiving bank complied with the authentication.
➢ The sender or the receiving bank is responsible for any unauthorised payment order that
could be shown to have been sent as a result of the fault of that party.

How does the sender make payment to the receiving bank ?

• An originator may not have an account with the originator’s bank and may therefore pay the
amount of the credit transfer, plus the applicable fees, to the originator’s bank in cash.
• In any such case, payment to the receiving bank will normally be made by a debit to the
account of the sender held by the receiving bank.

Obligations of the receiving bank

➢ Obligations to execute a payment order

• The obligation of the receiving bank other than the beneficiary’s bank is to issue a
payment order that will properly implement the payment order received.
• The obligation of the beneficiary’s bank is to place the funds at the disposal of the
beneficiary.
➢ Obligations of the receiving bank when something goes wrong
If the credit transfer is not completed, the originator’s bank is obliged to refund to the
originator and any payment received from it, with interest from the day of payment to the
day of refund.

Liability of any bank delaying payment

The liability of a bank in a chain for causing delay is to pay interest.

Completion of credit transfer and its consequences

A credit transfer is completed when the beneficiary’s bank accepts a payment order for the benefit
of the beneficiary.
Bills of exchange

It is a written instrument which:

• Contains an unconditional order whereby the drawer directs the drawee to pay a definite
sum of money to the payee or to their order.
• Is payable on demand or at a definite time.
• Is dated.
• Is signed by the drawer.

Drawee – a person (usually a bank) on whom a bill is drawn and who has not accepted it.

Drawer – the person(s) making the payment (the buyer)

Payee – the person(s) in whose favour the drawer has directed payments (the seller).

UN Convention on International Bills of Exchange and International Promissory Notes

An international bill of exchange is a bill of exchange (not a cheque) which specifies at least two of
the following places and indicates that any two so specified are situated in different states :

• The place where the bill is drawn.

• The place indicated next to the signature of the drawer.
• The place indicated next to the name of the drawee.
• The place indicated next to the name of the payee.
• The place of payment.

How much the bill is for

The sum payable on a bill is deemed to be a definite sum. This is even if the bill states that it is to be
paid :

• With interest.
• By instalments.
• According to a rate of exchange indicated in the bill.
• To be determined as directed by the bill.
• In a currency other than the currency in which the sum is expressed in the bill.

If the bill states that the sum is to be paid with interest, without specifying the date from which
interest is to run, interest runs from the date of the bill.

When the amount is payable

• A bill is payable on demand if it states that it is payable at sight or on demand or on

presentation, or if no time of payment is expressed.
• A bill which is payable at a definite time and which is accepted or endorsed or guaranteed
after maturity is a bill payable on demand as regards the acceptor, the endorser or the
guarantor.

The guarantor

Payment of a bill, whether or not it has been accepted, may be guaranteed, as to the whole or part
of its amount, for the account of a party or the drawee.

Liability of a guarantor : same nature of that of the drawee.

Transferring an international bill of exchange

• Endorsement
An endorsement must be written on the instrument or on a slip affixed thereto (allonge).
It must be signed.
It may be :
▪ 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 a person in possession of it.
▪ Special, that is, by a signature accompanied by an indication of the person to whom
the bill is payable.
If the drawer has 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 except
for purposes of collection.
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 any damage
that he may have suffered because of the forgery against :
▪ The forger
▪ The person to whom the instrument was directly transferred by the forge.
▪ A party or the drawee who paid the instrument to the forge directly or through one
or more endorsees for collection.
• Liability of the endorser
Endorsers agree that upon dishonour of the bill by non-acceptance or by non-payment, and
upon any necessary protest, they will pay the bill to the holder, or to any subsequent
endorser or any endorser’s guarantor who will takes up and pays the bill.
• The holder of a bill
A person is a holder if they are :
▪ The payee in possession of the bill, or
▪ In possession of a bill which has been endorsed to them, or on which the last
endorsement is in blank, and on which there appears an uninterrupted series of
endorsements. This is even if any endorsement was forged or was signed by an
agent without authority.

Presenting bill for payment

To obtain payment of the bill, it must be duly presented for the payment.

A bill which is payable on demand must be presented for payment within one year of its date.

A bill must be presented for payment :

• At the place of payment specified in it.

• If no place of payment is specified, at the address of the drawee or the acceptor indicated on
it.
• If that too is not indicated, at the principal place of business or habitual residence of the
drawee or the acceptor.

A bill is dishonoured for non-payment :

• If the payment is refused upon due presentation or if the holder cannot obtain the payment
to which they are entitled.
• If presentation for payment is dispensed with and the instrument is unpaid at maturity.
Protesting the bill for dishonour

A protest is a statement of dishonour drawn up at the place where the bill has been dishonoured
and signed and dated by a person authorised in that respect by the law of that place.

The statement of dishonour must specify :

• The person at whose request the bill is protested.

• The place of protest.
• The demand made and the answer given, if any, or the fact that the drawee or the acceptor
could not be found. A protest may be made on the instrument or ‘allonge’, or as a separate
document.

Protest for dishonour must be made on the day on which the bill is dishonoured or on one of the 4
business days which follow.

How much is payable by the liable party ?

• At maturity the amount payable to the holder is the amount of the instrument with interest,
if interest has been stipulated.
• A court may award damages or compensation for additional loss caused to the holder by
reason of delay in payment.

Advantages of international bills of exchange

• Convenient method of collecting payments.

• Immediate finance.
• Evidence of payment.
• 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.
• The buyer’s bank might add its name to a bill to indicate that it guarantees payment at
maturity.

Letter of credit

• Risk free method of obtaining payment.

• The seller receives immediate payment of the amount due to them, less any discount,
instead of having to wait until the end of the credit period for payment. To obtain payment,
the seller must present documents which comply strictly with the terms of the letter of
credit.
• The buyer is able to get a period of credit before having to pay for the imports.

Procedure

• The buyer and the seller first of all agree a contract for the sale of the goods, which provides
for payment through a letter of credit.
• The buyer (applicant) then requests a bank in his country to issue a letter of credit in favour
of the seller. This bank which issues the letter of credit is known as the issuing bank.
• The issuing bank, by issuing its letter of credit, guarantees payment to the seller (the
beneficiary/payee), providing the seller complies with the requirements as to
documentation. Banks are involved in the credits, not in the underlying contracts.
 • The issuing bank asks the seller’s bank in the seller’s country to advise the credit to the
seller.
• The advising bank establishes the authenticity of, and agrees to handle, the credit (on terms
arranged with the issuing bank).
• The advising bank (in the seller’s country) might be required by the issuing bank to add its
own confirmation to the credit. The advising bank would then be adding its own guarantee
of payment to the guarantee already provided by the issuing bank.
• A letter of credit arrangement must be made between the seller, the buyer and participating
banks before the sale takes place.

Types of letter of credit

• Confirmed : even if the issuing bank or buyer fails to reimburse the payment, the advising
bank confirms the payment.
• Unconfirmed : the advising bank does not guarantee payment even in the event of default
by the issuing bank, but confirms that the letter of credit is authentic.
• Revocable : can be amended or cancelled.
• Irrevocable : cannot be amended or called without agreement of all parties.
• Standby : if the other method fails then the seller can claim payment under the standby.
• Revolving : keep a letter of credit open at all times.
▪ Time revolving : it is reinstated after use for the next regular shipment, until the
amount of the credit has been used up.
▪ Value revolving : once its value has been used it can be reinstated in the same
amount, for further shipments.
• Transferable : allows the seller to transfer the right to receive payment to another person,
who was not party to the original contract.
• Back-to-back : allows the seller to use the buyer’s letter of credit as security to issue a
second letter of credit from him as buyer to the original supplier or seller.

Letter of comfort

• A letter of comfort is a letter issued to 3rd party lender by a parent company.

• The letter acknowledges the parent company’s approval of a subsidiary company’s attempt
at raising finance.
• It does not guarantee the loan given to the subsidiary company. It merely gives reassurance
to the lender that the parent company is aware of, and approves of the situation.
• Importance : when the subsidiary is/almost insolvent.
Chapter 7

Agency law

Formation of agency

➢ Agency with consent

❖ Express agreement
• Expressly appointed by the principal.
• Oral or written.
❖ Implied agreement
Implied by their ‘relationship’ or by their’conduct’.
❖ Agency by ractification
• Normal scenario: initally agency relationship and substantially contractual
relationship.
• Here: initially contractual relationship and sunstantially agency relationship.
Conditions:
• Principal must have existed.
• Legal capacity (for the principal).
• Should be done within ‘reasonable’ time.
• Ractify the contract in its ‘entirely’.
• Communicate ‘sufficiently’ and ‘clearly’.
➢ Agency without consent
❖ Implied agreement
More implied authority than the principal has given over the agent.
❖ Agent by estoppel
• Principle ‘holds out’ to the third parties that a person is their agent.
• Even though they do not need to agree that relationship.
❖ Agency by necessity
• Agent take action in respect of someone else’s goods in an emergency
situation.
• Example: taking a wounded kid to a hospital on the behalf of their parents.
Authority of an agent

➢ Actual authority
Actual authority = express authority + implied authority.
❖ Express authority
• Explicitly given by principal to agent.
• Oral or written.
❖ Implied authority
Authority that is been customary (natural).
➢ Apparent/ ostensible authority
Actual authority of an agent by holding out.
It is usually arises when:
• The agent is been appointed by holding out.
• The principal has cancelled the agent’s authority, but since the 3rd party didn’t been
informed, there is an authority(but by holding out).
The extend of apparent authority – till how much authority does the agent have.

Representations creating ostensible authority

Only the principal can hold out the authority of the agency (the agent cannot do that).

Reliance on representations

Principal cannot be liable for any losses incurred by the actions of the 3rd party, if the principle
haven’t given authority to make such transactions.

Alteration of position following a representation

If the 3rd party is not interested in trading with tye 3rd party, then:

• The 3rd party can cancel the contract. Or,

• The 3rd party can seek the principal to change the agent (to minimise loss).

Revocation of authority

If the principal has represnted the agent to the 3rd party, the principal will be liable for any losses
incurred to the 3rd party by the transactions with the agent.

Opposite concept of ‘reliance on representations.

Termination of an agency

By:

➢ Mutual agreement.
➢ Law.
If the principal:
• Dies.
• Became insolvent.
• Became bankrupt.
Relationship between principal, agent and 3rd party

• The principle will be liable for any losses incurred within the contractual relationship with
the 3rd party.
• Agent will be liable only when:
- Agent himself undertake the liablility.
- It’s a usual business.
- When the agents act to te 3rd party on their own behalf.

Warranty of authority

When the agent works before the 3rd party, the 3rd party feels that the agent is acting on the behalf
of the principal.

Breach of warranty of authority

• The breaching of the above discussed concept.

• The 3rd party feels the same, but actually, the agent is not actually doing so.
• Agent will be liable to both the principal and the 3rd party (if Actual Authority).
• Agent will be liable only to the 3rd party and not to the principal (if Apparent Authority).
Chapter 8

Partnership

“Partnership is the relationship between two or more persons who have agreed to share the profits
of a business carried on by all or one of them acting for all.”

• Persons can be natural person or artificial persons(example: a registered company)

• The ‘intension’ of any partnership must be to earn profit. Even when at the times they
‘suffer losses’, they are still in partnership because their ‘intension’ was to ‘make profit’.
• If the intension is to ‘gain experience’ or any others rather than profit making, it is not
partnership.
• Partnership business can be of any trade, occupation or profession, but there must be:
- Business must be a ‘form of activity’.
- Atleast there must be a single transaction.
- Business must have a beginning and an end.
- The business must be of legal character. (‘joining hands to supply illegal drugs’
cannot be considered as partnership).
• The ‘firm’ term is used only in partnership business.
• The liability of the partners is unlimited (partners have to use even their personal assets to
cover the firm’s liability).
• There is no need to have a written agreement to start a partnership.
• A partnership is formed when two or more people ‘agree’ to run a business together.
Example:
1st Jan : “let’s join hands to start a business” At this point the partnership begins.
th
10 Jan : preperation of the partnership agreement.
15th Jan : beginning of the business.
• Advantages of having partnership agreement/deed :
- Fills the details(gaps) which the law would not imply.
- Serves to overide terms (example: partners sharing profit on the proportion of their
investment, rather than sharing equally).
- Additional clauses can be developed (example: how are the process to expell a
partner).

Events causing termination:

• Passing of time (if the deed was for fixed time).

• Termination of the venture (if the business was for a single venture).
• Death.
• Bankruptcy.
• Subsequent illegality (example : car, initially used as taxi, now used to transport drugs).
• Notice given by a partner (if the partner is of indefinite duration).
• Order of court ‘granted’ to the partner.
• Agreement between the partners.
Realisation of assets and using the proceeds, while at the time of termination of the partnership:

• Paying of external debts.

• Repaying to the partner’s any loans or advances.
• Repaying the partner’s capital contribution.
• The leftover proceeds are shared among the partners in their profit sharing ratio.

If we give an additional clause that ‘when a partner died or became bankrupt, the partnership will
not be terminated’, then the partnership will not be terminated.

Authority of a partner

• Every partner are the agents of the firm. All partners will be liable for every transactions
done by any partners. If it souldn’t be so, the firm must inform the 3rd party that there is no
relationship between the partner.
• If the transaction doesn’t be of an usual business activity, all partners will be liable for such
transaction, if the autority of the patner to do so is been informed by the firm to the 3rd
party.
• If the firm put restrictions on a partner’s authority and the partner does a transactions
beyond the scope of the restriction, any losses incurred will be liable by that partner only.

Type of partner His liability duration (The partner is liable____________)

New partner From the date of joining.
Existing(retiring) partner Till the date the firm gives notice to the 3rd party about the
partner’s retirement.
Limited liabilty partnership

• Corporate body (registered organisation)

• Has separate legal personality from its members.
• Main advantage over traditional partnership : LLP will be liable for its own debts rather than
the partner, All contracts with 3rd party will be with LLP.
 • Disadvantage: there are legal requirements.

Formation of LLP

• Send an incorporation document and statement of compliance to the Registrar of

companies.
• These documents must be signed and stated the following:
- Name of the LLP.
- Location (country) of the LLP.
- Address.
- Name and address of the partners.
- Who all are the designated partners (has signing authority).
• Pay a registration fees.

Internal regulation of LLP

• No board of directors needed.

• Rights and duties of partners are stated in the partnership deed. In the absence of the deed,
rights and duties are set out in the regulations under the Act.

Duties of the designated partners

• Filing certain notices with the registrar.

• Signing and filing accounts.
• Appointing auditors if needed (auditing is not mandatory).

External relationships

• Every partner in LLP are the agents of the firm. So, the LLP will be bound by the acts of the
member.
- LLP will not be lable for the act of the member under the following:
- Member has no authority anf the 3rd party knew that fact.
- LLP has ceased the member and the 3rd party knew that fact.

Dissolution of LLP

• LLP doesn’t dissolve when a member leaves. But the member ceases to be a member and
the LLP continues to exist.
• Dissolution will be completed only when the wound up is being informed to the Registrar of
companies (common winding up proceedures).

Limited partnership

• Atleast one partner(the general partner) must have full, unlimited liability.
• Other partners have limited liability. But they may not allowed to:
- Withdraw their capital.
- Take part in the management of the partnership.
- Bind the partnership in a contract with 3rd party. If he does so, from that time he
would have unlimited liability.
• The partnership must be registered with Companies House.
Chapter 9
Corporations and legal personality

Sole traders

One person owns and runs a business.

Legal status of a sole trader

• No formal procedures required.

• Independence and self accountability.
• Personal supervision.
• All profits of the business are for the sole proprietor himself.

Disadvantages of a sole trader

• Using personal wealth.

• Using profits for the future operations (ploughing back the profits).
• High dependence on the individual.
• Death of the sole proprietor – need to sell that business.
• The individual may have only one skill.
• Lack of diversification.
• Absence of economies of scale (as the production increases, the cost of production
decreases).
• Problems of raising finance.

Companies

A company is an entity registered as under the Companies Act 2006.

Legal personality

• Separate legal personality – a person possess legal rights and is subject to legal obligations.
• Natural person – individual human being – example: sole trader.
• Artificial person – separate legal personality – example: companies and limited partnership
(unlimited partnerships are not artificial person).

Corporate personality

• Common law principal.

• Grants a company a legal identity.
• Company is separate from the members who comprise it.
• Property of the belongs to the company.
• Company’s debts are cleared using company’s assets.
• Company has perpetual succession until wound up (company will be still there till its formal
end even though all the members leave the company).
Limited liability of members

➢ Protection for members against creditors

• Limited liability is a benefit for the members.
• Creditors of the company cannot demand payment of the company’s debts from the
members of the company.
➢ Protection from business failure
• Company may be unable to pay its own debts.
• Member are not liable.
➢ Members asked to contribute identifiable amounts
• There are some amounts that members are required to pay in the event of a
winding up.
• Company limited by shares – any outstanding amount. If fully paid, members do not
have to contribute anything in the event of winding up.
• Company limited by guarantee – the amount they guaranteed to pay in that event.
➢ Liability of the company for tort and crime
Members are not liable.

Types of companies

• Corporations sole – an official position which is filled by one person who is replaced from
time to time. Example: public trustee, treasury solicitor.
• Chartered corporations – usually charities or bodies, formed by the Royal charter. Example:
ACCA.
• Statutory corporations – formed by special acts of parliament. Example ICAI.
• Registered companies – registered under the Companies Act.
• Community interest companies – mainly for social welfare rather than profit maximisation.

Constitution of the company

• Articles of association – rule book of the company – alternative of partnership deed.

• Resolution – passing out decisions through voting.
- Ordinary: > 50%
- Special: >75%
• Agreements – terms agreed by the shareholders.

Public company : a company whose constitution states that it is public and that it has complied with
the registration procedures for such a company.

Private company : any company other than public company.

Capital structure

• Share capital – share of capital.

• Authorised share capital – maximum limit od share capital.
• Issued share capital – the share capital issued for subscription.
• Allotted share capital – the share capital allotted while subscription.
• Called up share capital – the share capital that was called by the company to pay.
• Paid up share capital – the share capital paid by the shareholder.
Conditions for being a public company

➢ Registrar’s trading certificate

Conditions:
• Name of the company – ‘public limited company’ or ‘plc’ or other equivalents (like
‘ccc’ in Wales).
• Constitution of the company must state that ‘the company is a public company’.
• Allotted share capital – at least £ 50000.
• It should be a company limited by shares. Minimum one member and two directors
➢ Minimum membership and directors

Public company Private company

Min. No. of members 1 1
Min. No. of directors 2 1

Differences between private and public companies

➢ Capital
• Minimum amount £50000 for a public company, no minimum amount for private
company.
• Can be raised through public (for public company), private company is prohibited
from doing so.
• Both companies generally offer the shares to the existing members first. However
private company may permanently disapply this rule.
➢ Accounts
• Public company has 6 months from the end of the accounting period wherein to
submit its statutory audited accounts whereas private companies have 9 months.
• Private company has partial exemption from various accounting provisions.
• Listed public company must publish its full accounts and reports on its website.
• Public companies must lay their accounts and reports before a GM annually (private
companies – not required).
➢ Commencement of business
• Private – as soon as incorporated.
• Public – must obtain a trading certificate from the Registrar.
➢ General meeting
• Private – not required.
• Public – within 6 months of their of their financial year.
➢ Names and identification
• Public – ‘public limited company’ or ‘plc’.
• Private – ‘limited’ or ‘Ltd’.
➢ In constitution
• Public – ‘the company is a public company’
• Private – ‘the company is a private company’
➢ Disclosure requirements
• Public – needed.
• Private – not needed.
Parent (holding) and subsidiary companies

Parent company

holds a share of

Subsidiary company

Parent company:

• Holds a majority of the voting rights of the subsidiary company.

• Has right to appoint or remove a majority of its board of directors.
• Has right to exercise a dominant influence over the subsidiary company by virtue of:
• Provisions contained in the subsidiary’s articles.
• Control contract.
• It is a member of the subsidiary and controls alone, under an agreement with other
members, a majority of the voting rights in the company.
• It has the power to exercise, or actually exercises, a dominant influence or control over the
subsidiary. And both companies are managed on a unified basis.
• A parent company can be the parent of the subsidiaries of its subsidiaries.

Conditions for the relationship:

• Parent company must prepare consolidated accounts.

• Subsidiary company may not have share investment in the parent company.
• Rules, regulations and articles of parent company must be also applicable to the subsidiary
company.

Quoted companies

• Listed companies
• Their shares are quoted publicly.

Small companies regime

Conditions (any two must be satisfied):

• Balance sheet total – not more than £5.1 million.

• Turnover – not more than £10.2 million.
• 50 employees or fewer on average.

Exemptions:

• Filing to Registrar.
• Auditing (but the first two conditions must be met).
Micro-entities regime

Here, only accounts to be prepared : SOPL and balance sheet (no need of SOFP, CF and NTA)

Conditions (any two must be satisfied):

• Annual turnover - not more than £632000.

• Balance sheet total – not more than £316000.
• Average number of employees – not more than 10.

Multi-national companies

A company that produces and markets its products in more than one country.

Effect of legal personality – veil of incorporation

• Members are veiled(covered/hidden) from the company.

• The principle of ‘separate legal entity’ works here.

Ignoring separate personality

How?

• Identify the company with its members and/or directors.

• Treat a group of companies as a single commercial entity (if the company is owned by other
entities).

When?

➢ To enforce the law

• Liability for trading without certificate.
• Fraudulent and wrongful trading.
• Disqualified directors.
• Abuse of company names.
➢ To prevent evasion of obligations
• Public interest.
• Evasion of liabilities.
• Evasion of taxation.
• Quasi-partnership (it is a registered company but it is running as a partnership).
➢ Group situations
• Subsidiary acting as agent for the holding company.
• The group is to be treated as a single economic entity.
• The corporate structure is being used as a façade to conceal the truth.

When members are itself the directors – the members become personally liable for the company’s
debts due to their actions as a director.
Unlimited liability companies

Member’s liability is unlimited.

Exemptions:

• Unlimited company can only be a private company (public company is always limited).
• No need to file annual accounts to the Registrar.

But, the below are some examples when accounts must be filed:

• Either the parent or the subsidiary company is a limited liability company.

• When two or more companies exercise rights over another company and when the two or
more companies’ shares are equivalent to the share of a subsidiary.

Comparison : company and traditional partnership

Chapter 10

Company formation

A promoter is one who undertakes to form a company with reference to a given project and to set it
going and who undertakes the necessary steps to accomplish that purpose.

A person who acts merely in a professional capacity in a company formation is not a promoter
(example: advocates, solicitors, accountants, etc.)

Promoter – anyone who makes business preparations for the company.

Duties of a promoter

• Exercise reasonable skill and care.

• There should not be conflict of interest.
• Fiduciary duties (duties that occur automatically):
• Promoter must account for any benefits obtained through acting as a promoter.
• Promoter does not make a situation for the conflict of interest.
• Promoter must provide full information on their transactions and account all monies
arising from them.

Profits of promoters

• Legitimate profit – the profits to be earned by the promoter is disclosed by himself.

• Wrongful profit – the profit earned personally, but not disclosed to the company.

Disclosure of legitimate profits : through listing particulars or a prospectus.

Remedies for breach of promoter’s fiduciary duty

• Rescind the contract and recover its money.

• Only recover the wrongful profit, when it is too late that it is unable to rescind (example:
construction company).
• If the promoter provides untrue or misleading statements or omissions in the prospectus
offer (brochure of the company), any financial loss incurred through it should be liable by
the promoter itself.

Pre-incorporation expenses

• Promoters have no right over the automatic recovery of pre-incorporation expenses.

• The promoters must submit the details and evidences of the pre-incorporation expenses
incurred to the company. Only when the directors verify it, the promoters are paid with
reasonable amounts.

Pre-incorporation contracts

• A contract purported to be made by a company or its agent at a time before the company
has been formed.
• In agency law, principal can ratify the agent retrospectively. But here, principal (company)
can never do it, because there was not a company existed during that contract.

Liability of promoters for pre-incorporation contracts

Promoter is liable for all contracts to which they are deemed to be a party.
Ways of avoiding liability as a promoter for pre-incorporation contracts

• Remain the contracts as a draft (unsigned) until the company is formed.

• Novation clause – ‘the personal liability of promoters is to cease if the company, when
formed, enters a new contract on the same or similar terms’.
• Buying a company ‘off the shelf’ – even if a person contracts on behalf of the new company
before it is bought, the company can ratify the contract since the principal was existed.

Companies ‘off the shelf’

Advantages:

The following documents are not needed for filing:

- Memorandum and articles (unless articles are not model articles).
- Application for registration.
- Statement of proposed officers.
- Statement of compliance.
- Statement of capital and initial shareholdings.
- Fee.
No risk of potential liability

Disadvantages:

These companies are likely to have model articles. The directors may wish to amend these.
The directors may want to change the name of the company.
The subscriber shares will need to be transferred and the transfer is needed to be recorded
in the register of members.

Application for registration

The application must contain:

• Company’s proposed name.

• Location of the registered office.
• The liability of members is to be limited by shares or guarantee?
• Is the company to be private or public?
• Intended address of the registered office.

Documents to be delivered :

• Memorandum of association.
• Articles of association.
• Statement of proposed officers.
• Statement of compliance.
• Statement of capital and initial shareholdings.
• Registration fee.
Certificate of incorporation

• Identify the company by its name and registered number.

• States that it is limited and whether it is a private or public company.
• States the registered office location.
• States the date of incorporation.
• Signed by the Registrar, or authenticated by the registrar’s official seal.

It is the conclusive evidence that:

• All requirements of the Companies Act have been followed.

• The company is a company authorised to be registered and has been duly registered.
• The company is a public company (if stated).

Reregistration procedures

Reregistering as a public company Reregistering as a private company

Resolution • Shareholders must agree. • Shareholders must agree.
• Convene a GM. • Convene a GM.
• Pass a special resolution. • Pass a special resolution.
Application • Send application to the • Send application to the
Registrar Registrar
• Send additional information, • Send additional
including: information, including:
- Copy of the special - Copy of the special
resolution resolution
- Copy of proposed - Copy of the altered
new public company new private
articles company articles
- Statement of - Statement of
company’s proposed compliance
name on - Statement of the
reregistration company’s
- Statement of proposed name on
proposed company reregistration
secretary
- Balance sheet and
auditor’s statement
- Statement of
compliance
- Valuation report
regarding allotment
of shares for non-
cash consideration
since the balance
sheet date
 Approval Registrar accepts the registration
requirements and issues the
certificate.
Compulsory re- If the share capital of the public
registration company falls down below £50000.
Registrar accepts the registration
requirements and issues the
certificate.
No such compulsion.

Limited company to unlimited company reregistration

100% approval from its members is compulsory.

The company has not previously reregistered as an unlimited company.

Unlimited company to limited company reregistration

Pass special resolution.

The company has not previously reregistered as a limited company.

Commencement of business – rules

➢ Public companies
A public company starts – after getting the trading certificate.
Application of the trading certificate:
• States the nominal value of the allotted share capital is not less than £50000.
• States the particulars of preliminary expenses and payments or benefits to
promoters.
• Must be accompanied by a statement of compliance.
Any transaction done before the issue of the trading certificate is subjected to a fine.
A court may wind-up a public company which does not obtain.
➢ Private companies
Starts business – from the date of incorporation.
Things to do soon after registration:
• First meeting should be held. Chairman, secretary and auditors of the company are
to be selected.
• A return of allotments should be made to the registrar.
• Must give notice about the accounting reference date. If not, the last day of the
month in which the anniversary of incorporation falls is taken as the year end date.

Statutory books and records

Basic sources of information on UK companies:

• Companies House (the Registrar).

• Registers and other documents.
• The London gazette.
• Company’s letterheads.
Registrar of companies

Officer in the Companies House (Registrar’s department – government ministry – to register

companies).

Statutory books

Documents must be kept at its registered office or a single alternative inspection location (SAIL).

Register/copies of records:

• Register of members.
• Register of people with significant control (shareholders having 25% of voting rights).
• Register of directors (and secretaries).
• Register of directors’ residential addresses.
• Records of director’s service contracts and indemnities.
• Records of resolutions and meetings of the company.
• Register of debenture holders.
• Register of disclosed interest in shares (public company only).

Accounting records

Specific records required by the act:

• Daily entries of sums paid and received.

• A record of assets and liabilities.
• Statement of stock held at the end of the year.
• Statement of stocktaking. Apply only for businesses involved in dealing of goods
• Statement of good bought and sold

Accounting records must be kept

• For 3 years (private companies) and for 6 years (public companies).

• At the registered office or SAIL.

Annual accounts

• The account can either be in Companies Act format or prepared in accordance with
International Accounting Standards.
• The company’s BODs must approve the annual accounts.
• A public company is required to lay its accounts and the director’s report, before members
in GM.
• A quoted company may also lay director’s remuneration report.
• The time period between the accounting year end and the filing of accounts : 6 months
(public companies), 9 months (private companies).
• Accounts must be audited (exemptions for small and dormant companies).
 • Each member and debenture holder is entitled to be sent a copy of the annual accounts
along with director’s and auditor’s report. (public company : at least 21 days prior the GM)
(private company : same time when the documents are filed).
• Anyone else is entitled to get notice of the GM and also to receive a copy (free of cost –
within 7 days).
• All companies may prepare summary financial statements.
• Quoted companies – must publish their accounts in their website.

Confirmation statement

Every 12 months a company must send a confirmation statement to the Registrar.

Purpose : keep the Registrar informed about certain changes to the company.
Chapter 11

Constitution of a company

Memorandum of association

• Its essence has been retained, although it is now a very simple historical document which
states that the subscriber:
• Wish to form a company
• Wish to be the members of the company by taking at least one share each.
• Must be in prescribed form.
• Must be signed by each subscriber.

Constitution of a company

➢ Articles of association
• Consists of internal rules that relate to the management and administration of the
company.
• It is a single document which is divided by numbered paragraphs.

➢ Resolutions
• Decisions passed by members that directly affect the company’s constitution
• They are used to introduce, amend or remove provisions in the articles.
➢ Agreements
• Those terms agreed by the members.
• Can be used as a substitute for resolution.

Copies of resolution and agreements must be sent to the Registrar within 15 days of being passed or
agreed (if there was any amendment or removal). If the company fail to do so, it would be a
punishable offence by fine.

Model articles

• It is a sample or standard article used as a reference while making the article of association
of the company.
• Companies are allowed to use any of the model articles.
• If no articles are registered then the company will be automatically incorporated with the
default model articles which are relevant to type of company being formed.
• Safety net : allowing the directors and members to take decisions if the company has failed
to include suitable provisions in its registered articles, or registered no articles at all.
Alteration of the articles

• By special resolution
• Private companies have the facility to take written resolution. Here, a ballot paper is sent to
home and the member votes it at his home and resends it back (it must be special
resolution).
• Altered article’s copy – must be submitted within 15 days of the amendment came into
effect.

Making the company’s constitution unalterable

• Giving additional votes to the members.

• Setting a quorum (min. number of members to be present at the GM).
• By putting entrench provisions (additional criteria rather than special resolution).

If the company state any article that it is unalterable, then it is void.

Restrictions on alterations

• The alteration is void if it conflicts with the Companies Act or general law.
• The court may order that an alteration be made or, alternatively, that an existing article shall
not be altered (to protect the minority).
• An existing member cannot be compelled by the alterations of the articles unless they have
given their consent (examples: to subscribe for additional shares or to accept increased
liability).
• An alteration of the articles which varies the rights attached to a class of shares may only be
made if the correct rights variation procedure has been followed to obtain the consent of
the class. If a 15% of the minority apply to the court, that alteration will be cancelled.
• A 3rd party cannot obtain an injection to prevent the articles being altered (if the article
related to contract is altered). But they are entitled to damages for the breach of contract.
Alteration cannot take away rights already acquired by performing the contract.
• If the alteration made is making benefit for the majority instead of the company, then the
alteration will be void.

Expulsion of minorities

• Expulsions cases are concerned with the alterations of the articles:

• For the purpose of removing a director from office.
• To permit a majority of members to enforce a transfer to themselves of the shareholding of
a minority.

Interaction of statute and articles

If a company’s articles restrict on activity that the Companies Act allows, then the company must
alter the articles to remove the restriction before it may exercise the statutory power.

Companies Act will override articles:

• If it prohibits something.
• If something is permitted only by a special procedure (example: special resolution).
Objects

• Aims and purposes of a company.

• Not mandatory to state in the article (so, there is no problem if you change objective, if it is
not specified in the article).
• If done, it cannot be altered, unless there is a matter of special resolution.

Ultra vires

• A company exceeds its objects and acts outside its capacity.

• Companies having unrestricted objects are highly unlikely to act ultra vires since their
constitution permits them to do anything.
• Companies having restricted objects – breaching the restrictions – ultra vires.
• ‘The validity of an act done by a company shall not be called into question on the ground of
lack of capacity by reason of anything in the company’s constitution.’
• ‘In favour of a person dealing with a company in good faith, the power of the directors to
bind the company, or authorise others to do so, shall be deemed to be free of any limitation
under the company’s constitution.’

Transactions with directors

• Directors or any persons connected with such directors.

• Contracts with these people are voidable by the company if they act outside their capacity.
• Any profit or losses incurred – they are liable.

The constitution as a contract

The constitution constitute a contract between:

• Company and members

• Members and the company
• Members and members

Do not constitute:

• Company and 3rd parties.

• Members in a capacity other than as members.

Constitution as a contract between members

Companies Act gives to the constitution contractual effect between:

• Company
• Its members individually
Constitution as a supplement to contracts

If an outsider makes a separate contract with the company and that contract contains no specific
terms on a particular point but the constitution does, then the contract is deemed to incorporate the
constitution to that extend.

Shareholders’ agreement

• Concerned with the running of the company.

• Sometimes supplement a company’s constitution.

Company name

• Must end with:

- Public limited company or plc.
- Limited company or Ltd.
- Any Welsh equivalents.
• The name must not be same as any other company appearing in the statutory index at
Companies House.
• Should not be offensive or sensitive.
• Should not be suggesting a connection with the government or local authority.

Omission of the word ‘limited’

Any charity companies are allowed to omit the term after satisfying these conditions:

• It must be for the promotion of either commerce, art, science, education, religion, charity or
any profession.
• The memorandum of articles must specifically state that any profits incurred are shared
among the company itself. When the company winds up, all the assets of the company must
be transfer to a similar company, free of cost.

Change of name

By special resolution

By any other means specified by the constitution.

Passing of action

• A company can be prevented by an injection issued by the court in a passing-off (stay order)
action from using its registered name if, in doing so, it causes its goods to be confused with
those of the claimant.
• A company’s name is too similar to your company’s name, you can file an appeal to the
Company Names Adjudicator. The Adjudicator will review the case and within 90 days, will
make a decision and provide the reasons for it in public.
Publication of the company’s name

• Outside the registered office and all places of business.

• On all business letters, order forms, notices and official publications.
• On all receipts and invoices issued on the company’s behalf.
• On all bills of exchange, letters of credit, promissory notes, cheques and orders for money or
goods purporting to be signed by, or on behalf, of the company.
• On its website.

Business names other than the corporate name

• State its name, registered number, registered address on all business letters, invoices
receipts, written orders for goods or services.
• Display its name and address in a prominent position in any business premises
• On request of any person – give notice of its name and address.

Registered office

A company may change its registered office (but not its domicile).
Chapter 12

Share capital

A member of a company is a person who has agreed to be a member and whose name has been
entered in the register of members.

Subscription of shares

• By applying for and being allotted.

• By transfer of shares.
• By applying as personal representative or trustee of either deceased member or bankrupt
member.

Ceasing a member

• When shares are transferred to another person.

• When he dies.
• When he becomes bankrupt.
• If he is a minor.
• The trustee of a bankrupt member disclaims their shares (when trustee acts as a member).
• The company forfeits the shares.
• When the member surrender the shares.
• When the company sells them in exercise of a lien.
• When the company is dissolved and ceases to exist.

Share

It is the interest of a shareholder in the company measured by a sum of money.

Things you get from shares:

• Liability (shares must be paid).

• Interest (dividends, votes, return of capital).
• Mutual covenants (agreements with shareholders).

Types of capital

• Authorised share capital : the maximum share capital that the company can issue.
• Issued and allotted share capital : the type, class, number and amount of the shares issued
and allotted to specific shareholders, including shares taken on formation by the subscribers
to the memorandum.
• Called up share capital : the amount which the company has required shareholders to pay
now or in the future on the shares issued.
• Paid up capital : the amount which shareholders have actually paid on the shares issued and
called up.
• Loan capital : comprises debentures and other long-term loans to a business.
Types of shares

➢ Ordinary shares (equity)

- Equity - residual interest in the assets of the company after deducting all its
liabilities.
- Equity share capital - company’s issued share capital less preference share capital.
- Ordinary shares – shares which are entitled to the holders of the remaining divisible
profits.
➢ Class rights
Rights which are attached to particular types of shares by the company’s constitution.
Special rights for:
• Dividends.
• Return of capital.
• Voting.
• To appoint or remove a director.
Variation of class rights : any alteration for the above rights.
➢ Preference shares
• Shares carrying one or more rights (fixed rate of dividend, preferential claim to any
company profits available for distribution).
• They do not have the right to compel the company to pay the dividend.
• They have the right to receive dividend in cumulative basis unless the contrary is
stated.
• When arrears of cumulative dividend are paid, the holders of the shares at the time
when the dividend is declared are entitled to the whole of it, even though they did
not hold the shares in the year to wish the arrears relate.
• If the company goes to liquidation, any unpaid cumulative dividends will not be
received, unless:
- Dividend has been declared but not yet paid.
- Payment of dividend is stated in the articles.
• They have no entitlement to participate in any additional dividend over and above
their specific rate. If there is so, they are called ‘participating preference shares’.
(summary of the concept: they have fixed % dividend).
Advantages:
• Greater security of income.
• Greater security of capital.
Drawbacks:
Loss of arrear (if the company winds up).
➢ Redeemable shares
Shares issued on terms that they may be bought back by a company, either at a future
specific date or at the shareholder’s or company’s option.
➢ Treasury shares
• Created when the plc or Ltd legitimately purchases its own shares out of cash or
distributable profits.
• These shares do not have voting rights.
Variation of class rights – its procedures
• Need special resolution (need 100% resolution in some cases).
• Or procedures stated in the article.
 Minority appeals to the court for unfair prejudice
The objectors together must:
• Hold not less than 15% of the issued shares of the class in question.
• Not themselves have consented to or voted in favour of the variation.
• Apply to court within 21 days of the consent being given by the class.
➢ Statement of capital and initial shareholdings
• The total number of shares of the company.
• The aggregate nominal value of the shares.
• For each class of share:
- The prescribed particulars of any rights attached.
- The total number of shares in the class.
- The aggregate nominal value of shares in the class.
• The aggregate unpaid amount (on the total number of shares).
• Information about the subscribers in the memorandum of association.
• Number, nominal value and class of shares taken by them on the formation and the
amount to be paid up.

Allotment of shares

• Issue and allocation to a person of a certain number of shares under a contract of allotment.
• Once it is done, their name is entered in the register og members, from now on they are the
members of the company.
• A share certificate is issued.
➢ Public company allotment of shares
• Public offer.
• Offer for sales (based on the information in a prospectus).
• Placing (buying large ‘blocks’ of shares – at predominant price – by a person
previously agreed).
➢ Private company allotment of shares
• An application must be made to the directors directly.
• After that, shares are allotted and issued and a return of allotment made to the
Registrar.
Director’s power to allot shares
• Private company + only one class of share – have right.
• Public company or private company + more than one class of shares – no right – if
done, issues would be valid. But if any losses incurred, directors are liable.
➢ Pre-emption rights
Rights of existing ordinary shareholders to be offered new shares issued by the company
pro-rata to their existing holding of that class of shares.
➢ Rights issue
Issue of shares below market value (similar to pre-emption rights but the before stated is its
difference).
➢ Bonus issue
Issue of shares at free of costs (similar to pre-emption rights but the before stated is its
difference).
 ➢ Scrip issue
Issue of shares by giving shares (main benefit: tax exemptions (for shareholders) and
reduced use of cash (for the company). (similar to pre-emption rights but the before stated
is its difference).

Issue of share at premium or at a discount

- Partly paid share: the amount of share is paid partly only.

- Money’s worth : the price for the share may be paid in money or money’s worth.
- Underwriting fees: if it’s written in articles, we can consider the cost which is incurred for
the issue of share.
➢ Private companies
• May allot shares for inadequate consideration by acceptance of goods and services
at an over value.
• Only for private companies.
➢ Public companies
• Must receive the 1/4th of the total nominal value and the full premium at the time
allotment
• Non-cash consideration should be valued independently.
• Non-cash consideration should not be accepted, performed more than 5 years after
allotment.
• A service which can be rendered on future cannot be considered as non-cash
consideration.
• Within two years of receiving its trading certificate, company may not receive a
transfer of non- cash assets from a subscriber unless its vote is less than 10% of
nominal value.
Valuation of non-cash assets
• The valuation report must be made to the company within the 6 months before the
allotment.
• The independent valuation rules does not apply in case of takeover bid.

Allotment of shares at premium

• Share premium is the excess received over the nominal value.

• Share premium are not allowed to be used for the distribution of the dividend.
• The permitted usage of share premium account:
- Fully paid shares under a bonus issue.
- Issue expenses and commission in respect of a new share issue.
- To redeem redeemable shares.
Chapter 13

Loan capital

Borrowing

• All companies under Companies Act 2006, have an implied power to borrow for purposes
incidental to their trade or business.
• A contract for repay borrowed money may in principle be unenforceable if either (cannot
buy back the loan from the company, but can make the directors liable):
- It is money borrowed for a restricted purpose, and it is known by the lender.
- Directors exceed their borrowing powers or have no power to borrow.

Loan capital

• Comprises all long-term borrowing of a company.

• It is different from share capital by the fact that borrowings must be repaid.

Debentures

• It is a document which contains the terms and conditions of the debts.

• May be secured on some or all assets of the company or its shareholders.

Types of debentures

• Single debenture : getting a single amount and we give debenture.

• Series of debenture : getting different amounts from different lenders and we give different
debentures.
• Debenture stock: the issue of debenture stock subscribed to buy a large number of lenders.

Debenture trust deed

• Appointment of prospective debenture holder (trustee – a mediator of debenture holders

and company).
• The nominal amount of the debenture.
• The deed creates a charge(/s).
• Enforce the security.
• Various covenants/ conditions.
• Transfer of stock and meetings of debenture stockholders.

Advantages of debenture trust deed for debenture stock

• Trustee with appropriate powers can intervene promptly, in case of default.

• Security can be given to a single trustee.
• Company can contact a representative of the debenture holders (company can talk to the
trustee for negotiation).
• Meeting of debenture holders (trustee can consult them).
• Debenture holders will be able to enjoy the benefit of a legal mortgage.
 Shareholder Debenture holder
Role Owner Creditor
Voting rights Can vote Cannot vote
Return Dividend Interest
Redemption Can’t redeem Can redeem
Consideration Last paid First paid
Cost of issue Not issued at discount Can be issued at discount

Charge

• The security amount offered to an asset to secure it, the right on the asset.
• Here, the creditor(who accepts the charge) is known as charge.

Fixed charge

• Is a form of protection given to secured creditors to specific asset.

• Comparatively the interest rate will be lower. No charge can be made.
• Example: charge only the ‘white’ laptop and not any other assets.

Floating charge

• Here, it is charged to a group or pool of assets.

• So, the interest rate will be high.
• Changes can be made in the assets without the consent of the creditor.
• Example: charging ‘furniture in a particular plot’.

Identification of charges as fixed or floating

The general rule is that a charge over assets will not be registered as fixed, if it envisages that the
company will be able to deal with the charged assets without reference to the charge.

Charges over receivables

Normally floating charge.

Creating a floating charge

• It is often created by express words.

• Company gives retaining freedom to deal with them in the ordinary course of business.

Crystallisation of charges

• Crystallisation of a floating charge occur when it is converted into a fixed charge, i.e., a fixed
charge on the assets owned by the company at the time of crystallisation.
• Example: charge was the furniture in a plot – when the holder counts the furniture, at that
moment, the charge crystallise.
Events causing crystallisation

• Liquidation.
• Cessation of the business.
• Active intervention by the charge.
• Charge contract so provides.
• Crystallisation of another floating charge (and if that causes the company to cease the
business) (Example: two floating charges – the packing sector and the manufacturing sector
– if the manufacturing sector gets crystallised, then there would be no business in the
company and hence, the packing sector too must be crystallised).

Comparison of fixed and floating charge (disadvantages of floating charge)

Holder of a floating charge cannot be certain, until the charge crystallises, which assets will
form their security.
A judgement of creditor or landlord (example: Logic and Bismi – assets of Logic are sold to
repay rent to Bismi).
Preferential debts (example : some assets may be need to sell to pay the employment salary.
Only the residual amount will be repaid to the holder).
Holder of a fixed charge (if the same asset is set as a fixed charge to another holder, then the
priority would turn to that fixed charge holder).
A creditor may have sold goods and delivered them to the company on condition that they
are to retain legal ownership until they have been paid. (example: setting a floating charge
on a phone purchased on EMI).
If the company goes to liquidation within one year after setting a floating charge, that
charge will be considered invalid.

Advantages and disadvantages of debentures

Advantages:
Easily traded.
Terms clear and specific.
Assets subject to a floating charge may
be traded.
Popular due to guaranteed income.
Interest tax deductible.
No restrictions on issue or purchase by
a company.
Disadvantages:
May have to pay high interest rates to
make them attractive.
Interest payments are mandatory.
Interest payments may upset
shareholders if dividends fall.
Crystallisation of a floating charge.

Priority of charges

• Two fixed charges – order of its creation.

• Two floating charges – order of its creation.
• Fixed and floating charges – fixed charge.
• Floating and fixed charges – fixed charges.
• A floating charge (later crystallised) and a fixed charge – order of creation of the fixed
charge.
Negative pledge clause

A floating charge holder may seek to protect themselves against losing their priority by including in
the terms of their floating charge a prohibition against the company creating a fixed charge over the
same property.

Sale of charged assets

• The charge with a fixed charge still has recourse to the property in the hands of the 3rd party
– the charge is automatically transferred with the property.
• Property only remains charged by a floating charge if the 3rd party had notice of it when they
acquired the property.

Registration of charges

• Charge created by the company should be registered within 21 days with the Registrar by
either the company or a person interested in it (trustee).
• Company is responsible for registering the charge.
• If registered late, fine is imposed.

Late delivery of particulars

A charge can only be registered late if, does not prejudice the creditors or shareholders of the
company.

Rights of unsecured debenture holders

• Sue the company for debt and seize the property.

• Present a petition to the court for compulsory liquidation.
• Administration order.

Rights of secured debenture holders

• Possession of the asset.

• Sell it.
• Transfer the ownership.
• Administration order.
Chapter 14

Capital maintenance and dividend law

Capital maintenance is a fundamental principle of Company law that Ltd companies should not be
allowed to make payments out of capital to the detriment of company creditors.

Reduction of share capital

A limited company is permitted without restriction to conceal unissued shares as that change does
not alter its financial position.

To reduce issued share capital:

• Must be stated in the article.

• Pass a special resolution.
• Obtain confirmation from the court.

Solvency statement

• A private company need not apply to the court if it supports its special resolution with a
solvency statement.
• It is a declaration by directors, submitted with 15 days in advance of the meeting for the
special resolution, stating that the company is capable for paying off any liability occurred in
the next 12 months.
• If it becomes contrary – it will turn as director’s personal liability.

Why reduce share capital

• When the value of assets decreases, it must be reflected in the capital (as assets = liabilities
+ capital).
• Company wishes to extinguish the interest of some members entirely.
• Part of a complicated arrangement, replacing share capital with loan capital.

Methods of reducing share capital

• Extinguish or reduce liability or partly paid shares.

• Selling surplus assets of the company and the revenue is used to pay back the capital of the
shareholders.
• Cancel paid-up share capital which has been lost or which is no longer represented by
available assets.
Role of the court in reduction of share capital

Concerns:

• The effect of the reduction on the company’s ability to pay its debts, i.e., are creditors
protected ?
• Where there is more than one class of shares, whether the reduction is fair in its effect on
different classes of shareholders.
• Reduction should not confuse or mislead people who may deal with the company in future.

Confirmation by the court:

A copy of the court order and a statement of capital, approved by the courts, should be delivered to
the Registrar, in order to issue the certificate of registration.

Dividend

The amount payable to shareholders from profits or other distributable reserves.

Rules related to the power to declare dividend:

• Declare dividend at the GM.

• No amount that exceeds director’s recommendation, is not allowed to get as dividend
(shareholders cannot demand).
• Directors can declare interim dividend.
• Dividends are payable on the paid-up amount of share capital.
• Dividends may be paid otherwise than in cash.
• May be paid by cheque or warrant.

A dividend becomes debts – when it is declared and due for payment.

If the articles refer to ‘payment’ of dividends, this means payment in cash.

Scrip dividends : dividends paid by the issue of additional shares.

No dividend may be paid except out of profits distributable by law.

Distributable profit

Accumulated realised profits (which have not been distribution or capitalised) less accumulated
realised losses (not previously written off).

Dividends of public companies

It should satisfy the criteria that:

Net assets > aggregate called-up share capital + undistributable reserves.

Undistributable reserves = share premium, capital redemption reserve, revaluation reserve and any
other reserves that are restricted by the article.
Relevant accounts

Generally – annual accounts.

For interim dividend payment – interim accounts.

Infringement of dividend rules

The directors are liable if:

• They declare a dividend which they know is paid out of capital.

• Without preparing proper accounts, they declare or recommend a dividend which proves to
be paid out of capital.
• They make some misinterpretation on law or the constitution which lends them to
recommend or declare an unlawful dividend.

The position of members:

• A member may obtain an injunction to restrain a company from paying an unlawful

dividend.
• Members cannot authorise the payment of an unlawful dividend.
• The company can recover from members and unlawful dividend if the member knew or had
reasonable grounds to believe that it was unlawful.
• If the directors have to make good to the company an unlawful dividend they may claim
indemnity from members who at the time of receipt knew of the irregularity.
• Members knowingly receiving an unlawful dividend may not bring an action against the
directors.
Chapter 15

Company directors

De jure director – formally appointed by the company.

De facto director – not formally appointed, anyone who is held out by a company has ostensible
authority.

Shadow director – not formally appointed director, may be a major shareholder, who has power and
influence the company.

Similarity between the De facto director and Shadow director : both are not formally appointed.

Differences between the De facto director and Shadow director :

• De facto – known to the public.

• Shadow – not known to the public.

Alternative director – a person who attends the meeting and cast vote on the shareholder’s behalf in
their absence.

Executive director – performs specific role – regular basis – involvement in management activities.

Non-executive director – no involvement in management activities – involved in its governance.

CEO – commonly known as MD – carry out overall day to day management functions.

Number of directors:

• Public – 2
• Private – 1

BOD - elected representatives of shareholders, acting collectively in the management of company’s

affairs.

The Chair(man) – responsible for leading the BOD and ensuring its effectiveness.
Each director’s powers must be stated in ‘Articles of Association’.

Appointment of directors

First directors

The application for registration delivered to the Registrar to form a company includes particulars of
the first directors with their consent. On the formation of the company, these persons are the first
directors.

Subsequent directors

Through:

• As per article.
• Ordinary resolution of the shareholders.
• Decision by the directors

Publicity: if appointed as director, must be informed to Registrar within 14 days.

Age Limit : minimum- 16 years.

Remuneration of directors

As stated in the articles.

Director’s expenses

• Directors are entitled to reimbursement of reasonable expenses incurred whilst carrying out
their duties or functions as directors.
• Maximum time period for a director (contract period) : 2 years.
• To extend the period : pass ordinary resolution.

Compensation for loss of office

• Contracted director – covenanted payment – already approved compensation. So, no need

of any resolution (example : director of 5 years but terminating him at the 3rd year, pay him
the remuneration of his residual period).
• Non contracted director – uncovenanted payment – need to pass ordinary resolution.

Directors remuneration report

If quoted/listed companies – must be attached with the annual report and must be audited.

It must cover:

• Individual director’s remuneration package.

• Remuneration policy.
• Role of remuneration committee and board in deciding the remuneration of directors.
Inspection of director’s service agreement

Contracts must be retained for one year after expiry and must be available either at the registered
office or SAIL.

Vacation of office

• Resignation (director’s own initiative).

• Not offering themselves for re-election when their term of office ends.
• Death.
• Dissolution of the company.
• Being removed from office.
• Being disqualified.

Retirement of directors

• At 1st AGM : all directors should retire.

• Every subsequent AGMs : directors appointed by other directors since the last AGM should
retire.
• Directors who were not appointed or re-elected at one of the following two AGMs should
retire.

Removal of directors

• A person can propose a removal of a director, he must give a special notice to the company.
• The company must pass an ordinary resolution for the approval of the special notice.
• At the time between, a copy of special notice must be given to that director.
• That director will have the rights to have a memorandum of reasonable length and right to
address the meeting.

Shareholding qualification to call a meeting (to Shareholder(/s) having :

call a GM only for the purpose of removal of a
director).
Shareholding qualification to request a
resolution (to make the removal of director as
one among other agenda for the GM).
• 10% of the paid-up share capital, or
• 10% of the voting rights.
• Either 100 members holding a average
£100 of share capital, or
• Shareholder(/s) holding £10000 share
capital.

Weighted voting rights

If the director himself is a major/significant shareholder, he can automatically defeat any motion to
remove him as a director.

Class right agreement

If the GM has a quorum, that director can take leave on the day of GM and hence not achieving the
quorum, automatically that motion of removal would be defeated.
Disqualification of directors

➢ Under model articles

• By the provision of the Companies Act 2006.
• Bankruptcy order against him.
• A composition is made with that person’s creditors generally in satisfaction of that
person’s debts.
• A registered medical practitioner writes a written opinion – he is not physically or
mentally capable to act as director.
• Notification received by the company that he himself resigns.
➢ Under statute (CDDA 1986)
• Where a person is convicted an indicatable offense in connection with the
promotion, formation, management or liquidation of a company or with the
receivership or management of a company’s property.
- Indictable offense(big) – 15 years disqualify.
- Summary offense(small) – 5 years.
• A person has been persistently in default in relation to provisions of company
legislation.
- Persistently in default : three defaults in five years.
- 5 years disqualify.
• A person has been guilty of fraudulent trading.
15 years disqualify.
• When a director was involved in certain competition violations.
15 years disqualify.
• When a director of an insolvent company has made wrongful trading
15 years disqualify.
• Where the Secretary of State, acting on a report made by the inspectors
(administrator, receiver or liquidator) or from information or documents obtained
under the Companies Act, applies to the court for an order believing it to be
expedient in the public interest.
15 years disqualify.

Disqualification periods (minimum)

• Small offense : 2-5 years.

• Medium offense : 6-10 years.
• Big offense : 10 years.

Mitigation of disqualification (imposing a lower period of disqualification)

• Lack of dishonesty.
• Loss of director’s own money in the company.
• Absence of personal gain.
• Efforts to mitigate the situation.
• Likelihood of reoffending is low.
• Director’s time have already utilised for the proceedings.
A commercial misjudgement by the director : cannot disqualify him.

Acts of the director whilst the director is been disqualified : all losses of the company incurred in
such act is liable by the director.

A lack of commercial probity, or gross negligence or total incompetence – can disqualify him.

Powers of a director

Defined by articles

Restrictions on directors’ powers

• Statutory restrictions
By passing special resolution.
• Imposed by articles
- Articles set the maximum limit for director’s borrowing.
- If they wish to exceed, they should seek authority from a GM.
• Members’ control of directors
- They can appoint or remove a director.
- They can alter articles.
- They can pass special resolution ordering the directors to act on a particular way.
• Control by law
All powers must be exercised bona fide for the benefit of the company.

Power of the CEO/MD

• Directors are agents of the company (not of members).

• Both individual directors and MD will have actual authority and ostensible authority.
However, the authorities of individual director is comparatively lower than that of a MD.

Duties of directors

Fiduciary duties – a duty imposed upon certain persons because of the position of trust and
confidence in which they stand, in relation to another.

Who are the duties owed to : only to the company and not to the members.

Who are the duties owed by : all directors.

Statutory/principle duties of a director

➢ Act within powers

• Act according to the company’s constitution.
• For the best interest of the company.
• Use power for what it is provided.
➢ Promote the success of the company
Enlightened shareholder value (directors must give importance for the long-term profits
rather than short term profits. Also, they must increase the value of each ‘stakeholder’ of
the company).
➢ Exercise independent judgement
• They should not delegate their power of decision making.
• They should not be swayed by the influence of others.
➢ Exercise reasonable skill, care and diligence
Reasonableness test:
• Objective test – did the director act in a manner reasonably expected of a person
performing the same role?
• Subjective test – did the director act in accordance with the skill, knowledge and
experience that they have?
➢ Avoid conflict of interest
Directors will not be liable for a breach of this duty if:
• The members has authorised their actions.
• Their actions are authorised by other directors.
• The situation cannot reasonably be regarded as likely to give rise to a conflict of
interest.
• The company explicitly rejected the opportunity they took up.
➢ Not to accept the benefits from 3rd parties
• Directors should not do that.
• If the directors need so, members must have to authorise it (cannot be authorised
by other directors).
➢ Declare an interest in a proposed transaction or arrangement
3 ways:
• Written notice.
• General notice.
• Verbally at a board meeting.
➢ Consequences of breach of duty
• Any damages incurred must be paid personally.
• Restoration of the company property.
• Repayment of any profit made by the director.
• Cancelling that contract.
➢ Declaration of an interest in an existing transaction or arrangement
• Directors must disclose it.
• Same as the ‘declare an interest in a proposed……’. The main highlight is the director
is declaring his interest after/when the transaction occurred.
➢ Other controls over directors
118 Contracts exceedingly more than 2 years – need approval.
190 If a director need a non-cash asset,
If it’s >£5000 or > 10% of company’s asset value – need approval.
All sales >£100000 – need approval
197 Any loan given to directors – if the guarantees provide as security for
loan is the company – if the loan is for >£10000 – need approval.
198 Prevent unapproved quasi loans (loan taken by the director and repaid
by the company) – > £10000.
201 Prevent unapproved credit transactions by the company for the benefit
of a director of over £15000.
204 Loans taken by the company from the director - > £50000 – need
approval
217 Non-contractual payments – need approval.
➢ Directors’ liability for the acts of other directors
• Not liable for acts of other directors.
• Will be liable for their own negligence in what they allow to happen and not directly
for the misconduct of the other directors.
➢ Directors’ personal liability
When:
• By lifting the veil of incorporation.
• By articles or by special resolution.
• In certain circumstances (example: ultra vires).
• In cases of fraudulent and wrongful trading.
Chapter 16

Other company officers

The company secretary

• One of the officers, maybe a director.

• Public companies need a CS but private companies do not need.
• But a sole(only) director of the private company cannot become CS. But can have two or
more joint secretaries.

Appointment as a CS

• Employed as plc’s CS for 3 out of 5 years.

• Membership is one of a list of qualifying bodies.
• Qualification as a solicitor, barrister or advocate.
• If the directors give an opinion about the qualification of the CS, those eligible can be a CS.

Duties of a CS

• Establishing and maintaining the company’s statutory registers.

• Filing accurate returns with the Registrar on time.
• Organising and minuting company and board meetings.
• Ensuring that accounting records meet statutory requirements .
• Monitoring statutory requirements of the company.
• Signing company documents.

Under UK Corporate Governance guidelines:

• Ensure good information flows within the board and its committees.
• Facilitate induction of board members and assist with professional development.
• Advise the chairman and the board on all governance issues.

Powers and authority of a company secretary

• They may be able to act as agents to exercise apparent authority.

• They may enter the company into contracts connected with the administrative side of the
company.

Auditing

• An independent examination of the financial statements of an entity in order to express an

opinion on the financial statements.
• An auditor expresses an opinion on whether the financial statements show a true and fair
view.
The company auditor

Appointment

By members • Usually appoints by ordinary resolution.

• To fill the casual vacancy.
By directors • To appoint the first ever auditors.
• To fill the casual vacancy.
By Secretary of State • When the member fail to appoint the
auditor.
• Company must notify the Secretary of
State within 28 days of the GM where
the accounts are laid.
Eligibility

• Membership of a registered supervisory body.

• Hold an appropriate qualification.

Ineligibility

• An officer or employee of the company being audited.

• A partner or employee of such a person.
• A partnership in which such a person is a partner.
• The above three when applied if the company is either a parent or a subsidiary to another
company.

Effect of lack of independence or ineligibility

• No person may act as auditor if they lack independence or become ineligible.

• If during the term of office, an auditor losses their independence or eligibility, they must
resign with immediate effect and notify their client the reason for the resignation.
• If lost independence and become ineligible – auditor is liable to a fine.

Reappointing an auditor of a private company

Auditors of private company are deemed automatically reappointed unless one of the following
circumstances apply:

• The auditors was appointed by the directors (example: 1st auditor).

• Articles require formal reappointment.
• Members holding 5% of the voting rights serve notice that the auditor should not be
appointed.
• A resolution (written or otherwise) has been passed that prevents reappointed.
• The directors have resolved that auditors should not be appointed for the forthcoming year
as the company is likely to be exempt from audit.

Auditor remuneration

• Given by whoever appoints the auditor.

• Remuneration must be disclosed in a notes to accounts.
Exemptions from audit

• Auditing is exceptional for small and micro companies.

• Exception do not apply to public company, banking and insurance companies.
• Non-commercial and NPOs – audited by public sector auditor.
• Members holding 10% or more of capital can veto (cancel) the exemption.
• Dormant companies are exempted.

Duties of an auditor

• Check whether the accounts give a true and fair view.

• Check that accounts have been properly prepared in accordance to Companies Act.
• Check that whether director’s report and accounts are consistent.
• Quoted companies – director’s remuneration report must be audited.
• Must be signed by the auditor with their name and date.

Rights of an auditor

• Access to records.
• Information and explanations.
• Attendance at/notices of GM.
• Right to speak at GM.
• Rights in relation to written resolutions.

Auditors liability

• Under the Companies Act, any agreement between an auditor and a company that seeks to
indemnity the auditor for their own negligence, default or breach of duty or trust is void.
• But an agreement can be made which limits the auditor’s liability to the company.
• Liability limitation agreements can only stand for one financial year. So, it must be renewed
annually.

Termination of auditor’s appointment

• Auditors themselves resign their appointment.

• Auditors may decline reappointment.
• Auditors may be removed from office.
• Auditors may be ready for reappointment but members do not allow.

Resignation of an auditor

Registrar

Auditor statement of circumstances + resignation letter Company Shareholders

Debenture holders
Rights of a resigned auditor

• Circulate a statement of reasonable length to the members.

• Tell their reasons in the GM.
• Attend and speak in the GM for appointing next auditor.

Removal of an auditor

A resolution should be proposed either to :

• Remove the auditor before their term of office expires.

• Change auditor when their term of office expires.

The company must:

• Notify members in the notice of the meeting of the representations.

• Send a copy of the representations in the notice.
• If not send, the auditors can require it is read at the meeting.

The auditors can attend the meeting of:

• Their removal as auditor.

• Appointing next auditor.

The auditor must give the statement of circumstances as the auditors have to explain their part for
the removal as auditor.
Chapter 17

Company meetings and resolutions

The importance of GM

➢ Control over director

• Under normal procedure – one third of directors retire, so the vacancy must be
filled.
• If the director wish to :
- Exceed their delegated power.
- Allot shares.
- Make a substantial contract.
- To grant a long-service agreement.
• Appoint and remove auditors.
➢ Resolution of differences among members.

General meetings

➢ Annual general meetings

Rules for directors calling an AGM :
• Public companies must hold an AGM within 6 months of their year-end.
• Must be in writing and in accordance of articles.
• May be in hard, electronic form or upload in website.
• At least 21 days’ notice – all members should agree.
• Must specify date, time and place.
• If given in website – must be retained from the day it was uploaded till that date of
AGM.
➢ General meetings on other times

Directors Whenever they see fit.

Members Rules for requisitioning a GM :
Shareholding – at least 5% of paid up capital
holding voting rights.
Requisition – must deposit a signed form. Must
state the resolutions proposed.

Date:

Notice given within 21 days company must circulate the notice among the members.

Within 21 days Company must convene a meeting within 28 days

If not, member can convene the meeting.

Quorum : if not achieved, the meeting is adjourned.

➢ Court order
➢ Auditor requisition
 ➢ Loss of capital by public company : if the net assets fall to half or less of the amount of its
called-up share capital.

Types of resolutions

Ordinary • For most business.

• 50% and above.
• 14 days notice.
Special • For major changes.
• 75% and above.
• 14 days notice.
Written • Only for private companies.
• Both special and ordinary.
• Except for removal of director and
auditor before their term of office
expires.
Difference between ordinary and special resolution

• The text of special resolutions must be sett out in full in the notice convening the meeting.
• A signed copy of every special resolution must be sent to the Registrar. Some ordinary
resolutions do not need this requirement.

Major changes (for taking special resolution)

• A change of name.
• Restriction of the objects or other alteration of the articles.
• Reduction of share capital.
• Winding up of the company.
• Presenting a petition by the company for an order for a compulsory winding up.

Written resolutions

➢ Proposed by directors
• How to signify their agreement.
• Date of resolution must be passed (last date to submit).
➢ Proposed by members
• Members holding 5% of voting rights.
• Should be effective.
• Should not be defamatory, frivolous or vexatious.
➢ Agreement
• Either through hard copy or electronically.
• By default (if the last date of submission is not specified) – 28 days.

Calling a meeting

• Given 14 days in advance of the meeting.

• Should contain adequate information about the meeting.
• May given by means of a website and in electronic form.
 • Shorter notice:
- AGM – all members in public company must agree.
- GM - 90% shareholding of Ltd must agree and 95% of plc must agree.
• Special notice of a resolution
- Given by members to company.
- Notice within 28 days.
- Intention to:
- Remove or appoint a director.
- Remove or appoint an auditor.
• Members requisitioning a resolution
- Rules for members requisitioning a resolution at the AGM:
- 5% of the voting rights.
- 100 members holding average paid up value of £100.
- Must be in hard copy or electronic form.
- Delivered at least 6 weeks (one and the half months) before the AGM.
- Statement must be less than 1000 words.
• Contents of notices
- Date, time, place.
- AGM/ special resolution.
- Other sufficient details to enable members to understand what will be done in a
meeting.
• Routine business
- Declaration of dividends.
- Election of directors.
- Appointment of auditors and fixing of their remuneration.

Proceedings at meetings

How a meeting proceeds

Criteria :

• It has been properly convened by notice.

• A quorum is present.
• A chairman presides.
• The business is properly transacted and resolutions are put to the vote.

The chair

• Leads the board.

• Do not have voting rights.
• Rights:
- May dissolve or adjourn the meeting if it has become disorderly or if the members
present agree.
- Must adjourn if the meeting instructs them to do so.
Quorum

• The minimum number of person required to be present at a particular type of meeting.

• Usually two (only then we can call it as a meeting) in person or by proxy.
• Proxies : a person appointed by a shareholder to vote on behalf of that shareholder.
• There must be 2 physical people to attend the meeting.

Rules for appointing proxies

Basic rules:

• Any member may appoint a proxy

• The proxy does not have to be a member.
• Proxies can speak in the meeting.
• Members can appoint more than one proxy (for different class of shares holding by
themselves.

Voting:

• Proxies can vote by poll or show off hands.

• Proxies can demand poll.
• Companies provide two-way proxy cards (member instructs a proxy how to vote).

Notice:

• Each notice must state member’s rights to appoint a proxy.

• Member must notify about proxy appointment within 48 hours prior the meeting.

Voting and polls

Voting on a show off hands – each member has one vote irrespective of the number of shares held,
in contrast to a poll vote.

Voting on a poll – allows a member to use as many votes as their shareholding grants them.

A poll may be demanded by:

• Not less than 5 members.

• Members(s) representing not less than 10% of either total voting rights or the paid-up
capital.

Results of a vote : number of votes cast determines the result.

Minutes of company meetings

• A record of the proceedings of meetings.

• Every company is required to keep it. (maintain for 10 years).
• Usually in a book form.
• The chair signs the minutes.
• Members have the right to inspect the minutes.

The assent principle

A unanimous decision of the members is often treated as a substitute for a formal decision in GM
properly convened and held and is equally binding.
Class meetings

Types of class meetings

• If the company has more than one class of share.

• Under a compromise or arrangement with creditors, the holders of shares of the same class
may nonetheless be divided into separate classes if the scheme proposed will affect each
groups differently.

Quorum for a class meeting

• Usually two but must cover one third of nominal value of the issued shares of the class.
• If not, the number of members covering one third of nominal value of the issued shares
constitute the quorum.

Single member private companies

• There are special rules for private companies with only one shareholder.
• Can have written resolution.
• Written resolutions cannot be used to remove a director or auditor from office, as those
resolutions require special notice (it can hinder the right of reasonable length and right to
attend meetings).
Chapter 18

Insolvency and administration

Liquidation

Solvent (Asset > Liability) Insolvent (Asset < Liability)

Members’ voluntary liquidation Creditors’ voluntary liquidation

Members Irrespective of solvent/insolvent Creditors

Compulsory liquidation

Court

What is liquidation ?

• The dissolution or winding up of a company.

• The company must dissolve and its affairs wound up or brought to an end.

Who decides to liquidate ?

• Directors.
• Creditors.
• Members.

If a company is trading even after the company became insolvent – wrongful trading.

Role of the liquidator

Must be an authorised, qualified insolvency practitioner.

Common features of liquidations

• No share dealings or changes in members are allowed.

• All company documents and the website must state the company is in liquidation.
• The director’s power to manage ceases.

Voluntary liquidation

Members’ voluntary liquidation Creditors’ voluntary liquidation

Appointment of a By members. Nominated by members,
liquidator approved by creditors.
Approval of liquidator’s GM of members. Liquidation committee.
acts
Liquidation committee None. Up to 5 representatives of
creditors
Members’ voluntary liquidation

• If the articles states the only need for ordinary resolution.

• Normally special resolution.
• Declaration of solvency : members’ voluntary liquidation can be done only when the
company submits the statement of solvency to the Registrar. It’s because creditors would be
known the fact whether the company is solvent or insolvent.

Creditors voluntary liquidation

• When there is no declaration of solvency (even if the company was solvent) there is a
creditors’ voluntary liquidation.
• Creditors tell directors to wind up the company. The company must pass a special
resolution, nominate a liquidator and a liquidation committee.
• Creditors must approve the liquidator.
• That approval must be received after 3 working days following delivery of the notice, but
within 14 working days of the resolution to wind up the company.

Centrebinding

• The assets are sold by an obliging liquidator to a new company formed by the members of
the insolvent company.
• The purpose is to defeat the claims of the creditors at minimum cost and enable the same
people to continue in business until the next insolvency supervenes.
• The powers of the member’s nominee as liquidator are now restricted to:
- Taking control of the company’s property.
- Disposing perishable assets immediately.
- Doing all other things necessary for the protection of the company’s assets.

Compulsory liquidation

Reasons:

• Company is unable to pay its debts.

• It is just to wind up the company.

Company is unable to pay its debts.

• A creditor owed more than £750 – fails to be paid or offer a security for it within 21 days.
• A creditor obtains judgement (charge) against the company for debt and attempts to
enforce the judgement. However they are unable to obtain payment because no assets of
the company have been found and seized.
• A creditor proves the court that the company is unable to pay its debts:
- Commercial insolvency test – showing proofs.
- Balance sheet test – Assets < Liabilities.

The just and equitable ground

A dissatisfied member may get the court to wind up.

Examples :

• If the company is not achieving its objective or diverted from it.

• If the company is doing illegal or fraudulent acts.
• There is a misunderstanding between company and members.

Other circumstances for a compulsory liquidation

• When the company passed a special resolution that wound up should be done by court.
• A public company, for more than a year could not issue a trading certificate.
• Old company (before 22 December 19800.
• Not began trading within a year or has suspended its trading for a whole year.
• A moratorium for a voluntary arrangement for the company has passed and no voluntary
arrangement is in place.

Effects of an order for compulsory liquidation

• Official receiver become the liquidator.

• The liquidation start at the point when the petition for it was presented to court.
• Any disposition of company’s property or transfer of share will be void.
• All employees will be automatically dismissed.
• Any legal proceedings in progress against the company will be paused.
• Any floating charge crystallises.
• Investigations by the official receiver:
- The cause of the failure of the company.
- The promotion, formation, business dealings and affairs of the company.
• Meeting of contributories (members): At winding up, members may have to make payments
to the company in respect of any unpaid share capital or guarantees.

Order of payments on liquation

• Liquidator’s remuneration.
• Preferential debts (employees’ wages, accrued holiday pay, contributions to pension funds).
• Debts secured by floating charges.
• Debts owed to unsecured ordinary creditors.
• Deferred debts (example : dividends declared but not paid).
• Members.

Differences between compulsory and voluntary liquidation

Compulsory liquidation Voluntary liquidation

Control Court. Member/creditors.
Timing Petition was presented in Resolution to wind up is
court. passed.
Liquidator Officer of the court . No role
Member/creditors select and
appoint liquidator.
Legal proceedings Automatic stay. No automatic stay.
Management and staff Automatic dismissal. Not automatic dismissal.
Saving a company – administration

Administration puts an insolvency practitioner in control of the company, with a defined programme
for rescuing the company from insolvency as going concern.

Its purpose is to insulate the company from its creditors while it seeks:

• To save itself as a going concern ; or failing that,

• To achieve a better result for creditors than immediate winding up would secure ; failing
that,
• To realise property so as to make a distribution to creditors.

Administration orders and liquidations are mutually exclusive. Once administration starts, the
company cannot be liquidated.

Appointment without a court order

• Floating charge holders (even if there is liquidation).

• Directors.
• Company.

Appointed with a court order

• Company.
• Directors.
• One or more creditors.
• Another court following non-payment of a fine imposed on the companies.

The effects of appointing an administrator

• A moratorium (temporary freezing) over the company’s debts.

• Court must give permission for:
- Security over company property to be enforced.
- Goods held under hire purchase to be repossessed.
- A landlord to conduct forfeiture by peaceable entry.
- Commencement/continuation of any legal process against the company.
• The power of directors ceases.
• All outstanding petitions are dismissed.
• Any administrative receiver in place must vacate office.

Duties of the administrator

• Send notice of appointment to the company.

• Public notice of appointment.
• Obtain a list of company creditors and send notice of appointment to each.
• Send notice to Registrar (within 7 days of appointment).
• Require certain relevant people to provide a statement of affairs of the company.
• Ensure that every business document of the company bears the identity of the administrator
and a statement that the affairs, business and property of the company are being managed
by him.
 • Consider the statement of affairs submitted to them and set out their proposals for
achieving the aim of administration. Send the proposals to the Registrar and the company’s
creditors and every member of the company, within 8 weeks.
• Whilst preparing their proposals, the administrator must manage the affairs of the company.

Statement of affairs – contents

• Details of the company’s property.

• Company’s debts and liabilities.
• Names and addresses of the company’s creditors.
• Details of any security held by the auditor.

Administrator’s proposal

Within 8 weeks.

• Set out their proposals for achieving the aim of administration ; or,
• Set out why it is reasonable and practicable that the company be rescued (also state how
the creditors would benefit from winding up).

Within 10 weeks (8+2), creditors must approve the proposal.

Administrator’s power

The same powers as those granted to directors.

• Remove or appoint a director.

• Call a meeting of members or creditors.
• Apply to court for directions regarding the carrying out of their function.
• Make payments to secured/ preferential creditors.
• With the permission of the court, make payments to unsecured creditors.

End of administration

• Administration was successful.

• When the time period of administration ends.
• An administrator or creditor applies to the court.
• An improper motive of the administrator is discovered.
Advantages of administration

➢ To the company
• Do not necessarily cease to exist at the end of the process.
• Temporary breathing space from creditors.
• Creditors cannot apply for compulsory liquidation.
• Past transactions are challenged.
➢ To the members
If the administration was successful, the share value will increase and thus their returns.
➢ To the creditors
• Should obtain a return in relation to their past debts from an administration.
• Unsecured creditors will benefit from asset realisations.
• Floating charge holders may appoint an administrator without reference to the
court, it may also be in the interests of the creditors to have a continued business
relationship with the company once the business has been turned around.
Chapter 19

Fraudulent and criminal behaviour

Financial crime : conduct prohibited by law.

International financial crime : between two different countries

Insider dealing

It is dealing in securities while in possession of inside information as an insider, the securities being
price affected by information.

To prove insider dealing :

• Dealt in price affected securities.

• Encouraged another to deal.
• Disclosed the information.

Dealing

Acquiring or displaying of, or agreeing to acquire or dispose of, relevant securities whether directly
or through an agent.

Encourage another to deal

Insider encourages another person to deal in price affected securities in relation to information.

It is irrelevant whether :

• Person lately realises that securities are price affected.

• Inside information is given.
• Any dealing takes place, the offence being committed at the time of management.

Securities covered by the act

Include shares and associated derivatives, debt securities and warranties.

Inside information

It is the ‘price-sensitive information’ relating to a particular issuer of securities that are price affected
and not to securities generally.

Insiders

Company Justice Act (CJA) – a person has information as an insider if it is insider information and if
they have it from an inside source :

• Directors, employees or shareholders.

• Access because of employment, office or profession.
General defences

Defence regarding dealing and encouraging other to deal:

• Do not expect to make profit or avoid loss.

• Reasonable grounds to believe the information has been disclosed widely.
• They would have done what they did even if they did not have the information.

Defence to disclosure of information by an individual:

• Did not expect any person to deal.

• Although dealing was expected, profit or avoidance of loss was not accepted.

Penalties

7 years imprisonment and/or an unlimited fine.

Territorial scope

• Must be in the UK at the time of offence.

• Problems with the laws on insider dealing

Problems with the laws on insider dealing

• The courts may have problems deciding whether information is specific or precise. The
statute states that information shall be treated as relating to an issuer of securities not only
when it is about the company but also where it may affect the business prospects of the
company.
• The requirement that price sensitive information has a significant effect on price limits the
application of the legislation to fundamental matters.

Market abuse

Connected with activities such as recklessly (unreasonably) making a statement or forecast that is
misleading, false or deceptive, or engaging in a misleading course of conduct for the purpose of
inducing another person to exercise, or refrain from exercising, rights in relation to investment.

Examples of market abuse:

• Misuse of information
• Manipulating transactions – interfering with the normal process of share prices.
• Manipulating devices – trading is followed by the creation of false statements.
• Market distortion – CEO and the executive team increases the activities of their business in
order to make the company appear busier than it actually is (so that price can be increased).
• Dissemination of information – creation of false or misleading information about supply and
demand or prices and values of investments and then leaking it into the public domain.

Money laundering

Make money from criminal activity appear legitimate.

Apparent source and ownership of money representing the proceeds of income are changed.
Categories of criminal offence

• Laundering – acquisition, possession or use of the proceeds of criminal conduct, or assisting

another to retain the proceeds of criminal conduct and concealing, disguising, converting,
transferring or removing criminal property.
• Failure to report by an individual – failure to disclose knowledge and suspicion of money
laundering.
• Tipping off – when a person from a money laundering office gives information to a person
who is doing money laundering which complaint against him is received.

Penalties

• Knowingly assisting – 14 years imprisonment and/or fine.

• Failure to report – 5 years imprisonment and/or fine.
• Tipping off – 5 years imprisonment and/or fine.

Money laundering process

• Placement – initial disposal of the proceeds of illegal money to a legitimate business.

• Layering – transfer of monies from business to business.
• Integration – having being layered.

Anti-laundering supervision

The office for professional body Anti-Laundering supervision was established as a regulator by the
UK government to strengthen the UK’s money laundering regime.

Money laundering regulations (TSO 2017)

Requires organisations to establish internal systems and procedures which are designed to deter
criminals from using the organisation to launder money or finance terrorism.

These include:

• Risk management practices.

• Internal controls :
- Appointing a Money Laundering Compliance Principal (MLCP), who ensures that the
regulations are followed.
- Report of Money Laundering Reporting Officer (MLRO), to whom cases of money
laundering must be reported.
• Customer due diligence – know your customer before doing business.
- Simplified due diligence : business relationships presents a low risk of money
laundering.
- Enhanced due diligence : business relationship involves a person established in a
high risk third party.
• Reliance and record keeping procedures – a written record of the transactions should be
maintained.
• Monitoring and management of compliance.

If a business fail to implement these measures, it would be a criminal offence, punishable with a
maximum of 2 years of imprisonment and/or unlimited fine.
Bribery

A serious offence which often relates to the offering and receiving of gifts or hospitality.

Bribery offences

• Bribing another person.

• Being bribed.
• Bribing a foreign public official.
• Corporate failure to prevent bribery.

Foreign Public Official (FPO) is any individual who holds a legislative, administrative or judicial
position of any kind outside the UK.

Defences and penalties for individual offences

If they can prove that their conduct was necessary for the proper exercise of any function of an
intelligence service or the proper exercise of any function of the armed forces when engaged on
active service.

Maximum penalty – 10 years imprisonment and/or unlimited fine.

Defence and penalties for corporate offences

• Proportionate procedures (chance of risk = level of control).

• Top-level commitment.
• Risk assessment.
• Due diligence.
• Communication.
• Monitoring and review.

Maximum penalty – unlimited fine – business will suffer – loss of reputation.

Bribery cases are mainly heard in Magistrates and Crown Courts and go largely unreported.

Criminal activities relating to companies

➢ Criminal offences in relation to winding up

Making a declaration of solvency without reasonable grounds and fraudulent trading.
➢ Declaration of solvency
It is a criminal offence punishable by fine or imprisonment for a director to make a
declaration of solvency without having reasonable grounds.
➢ Fraudulent trading
Where the company has traded with intent to defraud creditors or for any fraudulent
purpose.
➢ Wrongful trading
• Directors of the insolvent company knew, or should have known, that there was no
reasonable prospect that the company could have avoided insolvency.
• The directors did not take sufficient steps to minimise the potential loss to the
creditors.
Other offences in relation to winding up

➢ Acting as a director whilst disqualification

The Company Directors Disqualification Act 1986 (HMSO 1980) makes a person who acts as
a director while disqualified personally is liable for the company’s debts.
➢ Phoenix companies
Creates such a company within 5 years of the original company being liquidated.
➢ Fraud and deception
➢ Defrauding creditors
➢ Misconduct during liquidation
• Not identifying company property to liquidator.
• Not delivering requested books and papers to the liquidator.
• Not informing the liquidator if identified debts do not turn out to be debts.
➢ Falsification of company books
Destruction, mutilation, alteration or falsification of company books.
➢ Omissions – omit the material information.

Companies Act 2006 offences

• Company records.
• Accounting records.
• Trading records.
• Filing accounts.
• False information.

The Fraud Act 2006

• False representation.
• Failure to disclose information when there is a legal duty to do so.
• Abuse of position.

Criminal Finances Act 2017

Make relevant bodies criminally liable if associated person are involved in tax evasion.

• Relevant body : whether formed in UK or elsewhere.

• Associated person : any person who performs services on behalf of relevant body.

Offences :

• Criminal tax evasion by a taxpayer or business under existing tax evasion law.
• An associated person of relevant body, facilitated the tax evasion under existing aiding and
abetting law.
• Relevant body failed to prevent the associated person from committing.
Defence:

• Had reasonable prevention procedures in place.

• Was unreasonable or unrealised procedures.

Maximum penalty : conviction and unlimited fine.

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