1 F4 Notes-Compressed

LAW/F4 CORPORATE
& BUSINESS LAW

F4 – Corporate & Business Law
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Index
Topic Name Page Number
1 English Legal System 3 – 11 (9 pages) 8

2 Law of Tort 12 – 16 (5 pages) 27
3 Law of Contract 17 – 31 (15 pages)

38
4 Law of Agency 32 – 33 (2 pages) 7 3
5 Law of Employment 34 – 39 (6 pages)
76
6 Law of Partnership 40 – 43 (4 pages)
89
7 Company Law 44 – 72 (29 pages)
93
8 Exam Kit Questions 73 – End
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English Legal System
It is a system which operates with an objective to ensure that law is being followed in society
such that the society operates in a smooth manner and rights of people are protected.
Law is a social limitation imposed through concept of punishment, objective of which is to limit
the acts of people.
Types of Law
Public Law: Any law which deals with relation between general public and government. It applies
on all people irrespective of their position. Example Theft act, murder etc.
Private Law: It deals with relation between people. Example Contract law, Employment law etc.
Criminal Law & Civil Law
Criminal Law Civil Law

Objective is to ensure that law and order Objective is to ensure that rights of people
situation is maintained are protected in private relations
Court orders a punishment i.e. penalize the Court orders a remedy i.e. compensation is
culprit irrespective of loss to victim given to victim according to his loss
Case is filed by State and is known as Case is filed by Private Individual and is
prosecution known as Litigation
Limitation Act do not apply on Criminal Law Limitation Act applies i.e. case cannot be filed
i.e. Case can filed up till infinite time after certain time i.e. rights are expired
Decision is based on 100% evidence i.e. Decision is based on 51% evidence i.e.
beyond reasonable doubt balance of probability
Parties are known as Prosecutor & Defendant / Parties are known as Claimant / Plaintiff &
Accused Defendant
Sources of Law
In times of Kingdom there were two major sources of Law:
1. Common Law: This source developed through decisions given by the representatives of
King. In common Law common and better decisions of representatives were compiled to
form a source of Law. In common law only remedy awarded was damages. Common Law
was developed mainly in time of Norman Kingdom.
2. Equity Law: This system operated alongside with Common Law and it was under direct
supervision of King and people not satisfied with the decisions of common law files a case
under Equity law directly to King. In Equity law all remedies were awarded i.e. Specific
Performance and Injunction along with Damages.
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Common Law & Equity Law were both informal sources as no proper record keeping was
maintained. In case of clash between common and equity law, equity law prevails.
In Modern times following two formal sources of Law are followed:
1. Case Law: According to this source of law court is bound to follow its own past decisions
i.e. any decisions given by court become part of Case law. Decision of court is divided in
following three parts:
a) Actual Decision: This includes name of parties
b) Ratio Decendi: This includes the reason behind decision i.e. It includes the law
which was applied behind the decision
c) Obiter Dicta: This includes hypothetical scenarios defined by Court for better
understanding of decision
In case law ratio decindi is binding for future cases
2. Legislation: Legislation is law made by parliament. It is also known as “Act”.
Legislation is of following kinds
1. New Legislation: It is law made on a new issue

2. Codified Legislation: It converts case law into an Act
3. Co t merg
onsolidating Legislation: It g es sm
m allll Act
t s to form a ne
eww ccAt e.g. Company Act 2006
Process of Formation of Legislation
Pre−Parliamentary Procedure:
1. In first step issue is raised by a normal person to relevant department

2. This issue is considered by relevant department and then along with possible solution, a
green paper is issued which is kept open for public comment.
3. After considering public comment on green paper, a white paper is issued by government
department which is again kept open for public comment.
4. After considering public comment on white paper, a bill is prepared which is then
presented in Parliament
Parliamentary Procedure
1. FFiirrsstt rreeaaddiinngg: In this stage Bill is read in parliament for the first time and voting is done
whether to proceed or not.
2. Se econ n d readiing g : Detailed debate and commentary on each clause of bill is made in this
stage. At the end of second reading again vote is casted on whether to proceed or not.
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3. Committee stage: A Committee of le aal experrts and parliamentarians is made whose

objective is to frame a law according to instructions of parliament such that all loop−holes
are covered in proposed legislation
4. Report stage: In this stage Committee reports its changes to the parliament and get them
approved.
5. Third reading: In this stage complete proposed legislation is read in Parliament again and
debate is done on major issues only
After all these stages in proposed legislation, it is then presented to second house and has to pass
through all stages
Once passed from both houses of Parliament Proposed Legislation is signed by King
It is to note that law can be initiated from any house of parliament.
Advantages of Legislation
1. It is made by the representative of public and therefore focuses on general public issues
2. It is made with the high standard of care
3. It is a proactive approach of law making
Disadvantages of Legislation
1. Legislation making process is very slow and therefore costly also

2. Parliamentarian may not be technically competent
3. Legislation may be difficult to interpret
Delegated Legislation
It is law made by bodies to whom parliament has delegated its authority of law making because:
1. Parliament lacks technical competency of making certain laws

2. Parliament faces a time constraint
Delegated Bodies
1. Statutory instruments: This includes Government departments have delegated authority

to make their own law
2. Professional bodies have authority to make their own laws
3. Privy council / Orders in Council: This body has delegated authority to makes laws in time
of emergency
4. Local bodies have authority to make their own laws
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Control over Delegated Legislation
Controls are imposed over delegated bodies so as to ensure that such laws are not made which
are against public interest.
1. Control by Court:
If the delegated body exceeds its authority OR law is unfair then the court has power to cancel
delegated legislation through judicial review.
2. Control by Parliament:
Parliament imposes following 3 controls over delegated legislation:
1. Parliament requires positive resolution for some delegated legislation

2. Parliament requires negative resolution for some delegated legislation i.e. if the
proposed law is not rejected by parliament within 40 days then it will be considered
as valid
3. Parliament has a scrutiny committee which appraises laws made by delegated bodies
Advantages of Delegated Legislation
1. Technical laws are made through delegated legislation

2. Laws are made through speedy process which may be required in case of emergency
3. Delegated legislation is more flexible and up to date as compared to parliamentary
legislation
Disadvantages of Delegated Legislation
1. Law is not made by public representatives therefore may be against public interest
2. Delegated legislation is difficult to interpret because of its technical nature.
Statutory Interpretation
As Legislation is Law made by Parliament therefore Court of law has to face interpretation
problems and for that it adopts following tools:
Interpretation Rules
Court of Law has following two set of rules for Interpretations
1. Literal Approach: This approach focusses on actual words of Law. This approach includes
following two rules
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a. Literal Rule: In this rule court of law interprets legislation through literal meaning
(i.e. actual / dictionary meaning) of words used in law.
b. Golder Rule: This rule also considers literal meaning of words of law but if this
makes law absurd (meaningless) then court has power to adopt a different
meaning of that word (if available) OR may also change the meaning of that word
2. Purposive Approach: According to this approach, law is interpreted after considering the
objective of law rather than actual words. In this approach there are following two rules:
a. Mischief Rule: In this rule court of law interprets law by considering the issue
which was targeted by law.
b. CONTEXTUAL REULE: In this rule court of law resolves the case according to the
context of particular case.
Aids
There are two type of Aids (helps) which are used in interpreting the law:
a) Intrinsic Aid: These aids are part of law but are not included in main body of law. E.g.
 Title of law
 Objective of law
 Pre−face
 Appendix
 Side notes
b) Extrinsic Aid: These aids are not part of that particular law i.e. this include External helps
E.g.
 Case law
 International laws
 Constitution of Country
 Minutes of parliament
 law articles e.g. Hansard
Presumption: There are general assumptions of court which apply if the law is silent on a
particular issue. This also helps in interpreting the law. E.g.
 law cannot apply retrospectively

 law is not applied on King
 law is not applied in domestic relation
 International law is not binding
These assumptions may be change if the law states otherwise
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Courts
Magistrate Court: It is the inferior most court of UK and has limited jurisdiction, they deal with
following cases:
 small family cases

 wine license cases
 recovery cases
 summary offenses
County Court: It is a civil court and acts both as court of first instance for the following matters
and appeal court for civil cases of magistrate court
 contract cases
 tort cases
 property cases
 intestacy cases
 bankruptcy cases
County court has a tracking system for resolving cases efficiently:
a) Small track: This is for cases below 10 thousand pounds

b) Fast track: This is for cases between 10 thousand and 25 thousand pounds
c) Multi track: This is for case above 25 thousand pounds
CROWN COURT: It is on same level as county court is, only exception is crown court deals with
criminal cases. Crown court acts both as court of first instance and appeal court for criminal cases
of magistrate court. Criminal offensive are of two types:
 Summary offence: small crimes

 Indictable offence: major crimes
HIGH COURT: It is divided in following 3 divisions:
1) QUEENS BENCH DIVISION: It deals with following cases
 contract cases
 tort cases
 prerogative orders: instruction to inferior courts to operate effectively
2) FAMILY DIVISION: It acts as appellate court on decisions of magistrate court and first instance
court for major family issues. E.g. child custody, divorce, distribution of wealth.
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3) CHANCERY DIVISION: It is deals with following cases:
 mortgage cases
 company law’s cases
 copyright cases
 Partnership issues
 trust issues
COURT OF APPEAL: It deals with appeals of both criminal and civil cases.
SUPREME COURT: It was created after 2009 when it was separated from House of Lords. It is the
top most court of UK and is an appellate court.
LEAP FROG PROCEDURE: In this procedure a person can make appeal from high court to Supreme
Court but requirement for it is:
 High court judge give an approval

 Supreme court accept that direct appeal
EUROPEAN COURT OF JUSTICE: It is an international court of European Union. UK is not bound

to follow its decisions but due to treaties of European Union UK usually accept the decisions.
DOCTRINE OF BINDING PRECEDENT: According to this doctrine court of law is bound to follow
its own past decisions
DOCTRINE OF PERSUASIVE PRECEDENT: According to this doctrine court of law may follow past
decisions as a guidelines but it is not bound to do so e.g. decisions of inferior court OR
international Court decisions
BINDING PRECEDENT
COURTS BINDING ON BOUND BY
Supreme court
Magistrate Court of appeal
No one not even itself
court High court
European court of justice
Supreme court
County / Court of appeal
No one not even itself
Crown court High court
European court of justice
Magistrate court Supreme court
High court
County court Court of appeal
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Crown court European court of justice

Magistrate court
Supreme court
County court
Court of Court of appeal
Crown court
appeal European court of justice
High court
Court of appeal
Magistrate court
County court
Supreme European court of justice
Crown court
court
High court
Court of appeal
European
court of Everyone except it self No one not even it self
justice
If decision is given by Jury then it is binding on standalone judge. This rule applies on High Court,
Court of Appeal and Supreme Court.
ASSESMENT OF BINDING PRECEDENT
Court of law determines whether a precedent is binding or not by considering following issues:
 Distinguishing: In this process court of law distinguishes i.e. finds difference between the
precedent case and current case. If the court finds difference in facts then the precedent
will not apply.
 Court of law asses that whether this doctrine is not over ruled by any new statute.
 Court of law asses that whether this doctrine is not over ruled by any superior court.
 Court of law asses that the precedent has not ignored any point of law.
ADVANTAGES OF DOCTRINE OF PRECEDENT
 Time of court proceeding is saved.

 Law become predictable, which prohibits a person from doing any wrong act in future.
 Case law is easy to understand because it is related to practical scenarios.
 Law is update because every new case updates precedent.
DISADVANTAGES OF DOCTRINE OF PRECEDENT
 Case law is specific to the case in which it is form.

 Case law is reactive law and formed after case.
 Due to application of precedent judge may not be able to use his skills and judgement and
wrong decisions of past may prevail
 Distinguishing is a subjective procedure.
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 Separation of ratio decindi is a difficult task because the decision of court is in continuity
which merges ratio decindi and obiter dicta.
REVERSING & OVERRULLING: In reversing court of law changes the decision of lower court in
appeal of same case.
Whereas over ruling is made in a different case but it changes the precedent.
TRIBUNALS: Tribunals are expert courts which consist of jury which includes two technical experts
and one legal expert. Case is initially heard in first trial tribunals and then appeal is made in upper
tribunal. Upper tribunal can then be challenged in court of appeal.
ADVANTAGES
 Technical issues can resolved

 Time is saved as tribunals deal with limited cases so they can resolve cases in speedy
manner
 A person can file his owned case even without a lawyer
 Tribunals are flexible as no binding precedent for them
HUMAN RIGHTS ACT
In 1951 European convention of human right was introduced by European Union, under which
human rights laws and European court of human rights was formed.
In 1998 UK made its own human right act which covered following issues:
 Right to life
 Right to freedom
 Right to express religion
 Right to express an opinion
 Right of privacy
 Right of free trial
IMPACT OF HUMAN RIGHTS ACT

Due to HRA:
 All new statutes must be made according to HRA clause.
 All existing legislation must be modified in order to abide by HRA
 Court of law must consider HRA in all of its decisions
The Final Court for Human rights issues is European Court of Human Rights formed under
European Conventions.
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LAW OF TORT
Tort means any act away from right path. It is a residual category of law that applies on all cases
where no specific law is available. It covers both criminal and civil wrong acts but normally it
applies on cciivviill ca
a se
ess Tort cases are independent of contract and deal with legal rights rather
than contractual rights.
According to Law of tort case must be filed within 6 years for normal tort claims and in case of
personal injury this period is reduced to 3 years.
Types of tort:
1. TRESPASS TO LAND
Trespass refer to a situation when a person performs any of the following act without permission:
 To enter someone’s property

 To stay on that property
 To modify that property
Trespass occurs when a person performs these acts intentionally, negligently or forcefully. In case
of forcefully the person forcing will be liable for tort.
Tort occurs on the land, beneath the land and above the land.
2. NUISANCE
If a person uses his property in such a way that other people are effected then it is known as
nuisance. If limited people are effected then it is a civil case and case can be initiated by those
who are effected. E.g. sound, smell, vibration
If the effected people are unlimited then it is a criminal case and can be initiated by anyone e.g.
pollution, disposing factory waste in fresh source of water.
3. DEFAMATION
In defamation a person makes an act due to which other people laugh or dislike other person.
Defamation is a civil offense and known as “slander” if its affect is temporary such as verbal or
non−verbal act.
If defamation is non−transitional i.e. permanent then it is a criminal offense and is known as

“libel” E.g. written statement or pictures.
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4. DECIET AND INJURIOUS FALSEHOOD
Tort of deceit occurs when a person intentionally defrauds other party so as to cause loss to that
person
Whereas in injurious falsehood intention is to create loss towards third party E.g. Infringement
of copy rights is an example of injurious falsehood.
Tort of Passing off is an example of Tort of injurious falsehood where a business uses a name
similar to other business so as to mislead the customers OR to damage the goodwill of other
business. In this case claim can be filed to Company’s Name Adjudicator who may order a change
in name to new business.
5. ASSAULT
In assault a person is threatened in such a way that he considers himself in an immediate threat.
It is to note that actual loss is not necessary.
6. BATTERY
In battery a person performs an offensive act which may cause harm. It is to note that causation
of actual loss and an intention to harm are not−relevant factors.
7. FALSE IMPRISIONMENT
It occurs when a person is imprisoned without any legal right to do so.
8. NEGLIGENCE
In this tort a person breaches his duty of care and as a result other party suffers loss. For tort of
negligence act may be unintentional but following conditions are satisfied:
 Person oow
weess duty of care
 He has breached d his duty of care
 And as a result loss issccaauussed
u d
To whom
m we owe a duty of care:
1. NEIGHBOUR PRINCIPLE:
According to this principle a person owes a duty of care towards his neighbor. Where
neighbor is referred to be a person who is affected by our acts or anyone whom we can
reasonably contemplate that he will be affected by our acts.
Two major flaws of neighbor principle are:
 It failed to considered impact of social benefits on duty of care

 It failed to considered the impact of foreseeability of loss
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2. ANN’S TEST / TWO STAGE TEST
According to this approach a person owes duty of care if:
 If sufficient proximity or relation exists.

 Loss is foreseeable
 It is fair, just & reasonable to impose duty of care i.e. other relevant factors should be
considered e.g. social benefit
urre EEccoonnoom
According to Ann’s test compensation for loss of market value i.e. Pu miicc Loss is allowed.
However according to Caparo criteria loss of market value (Pure Economic Loss) is not awarded
because it is in not measureable, as market value is a subjective matter. Pure Economic Loss is
defined as one which is not a physical loss to Property i.e. damage rather it relates to loss of
Market Value. Caparo Criteria has over−ruled Ann’s Approach. Caparo criteria and Ann’s test are
same in relation to other matters.
PROFESSIONAL NEGLIGENCE
When a person breaches special relationship it is known as professional negligence.
SPECIAL RELATIONSHIP: In this relationship a person makes a statement while having knowledge
that other person will rely on his statement and other person also relies in reality.
This concept applies for all professionals such as doctors, auditors, lawyers, etc.
Auditor’s liability is towards Company OR shareholders collectively as an owner of Company

because audit report is for shareholders only. Where Shareholder is role whose function is to
take decisions of the company. It is to note that auditor is not liable towards investors, lenders
or any other stakeholders as Auditor has special relationship only with Shareholders. However if
report is towards any other stakeholder then liability may arise towards that stakeholder also
such as in case of takeover liability may arise towards investor OR investee.
It is to note that professional negligence is up till a reasonable limits i.e. professionals are only
required to act reasonably.
STANDARD OF CARE
According to this issue duty of care of a person changes due to several factors. Duty of care is
influenced due to following:
1. Age
2. Competency / Skill i.e. a person’s standard of care increases with his experience. But it is
to note that everyone owes m miinniim m level standard of care according to rule of ““RReess−
muum
isp l i a o
pa liquator” in which case court requires culprit to prove that he was not negligent as
apparently his negligence can be proved.
3. Seriousness of injury: If risk of injury is serious then standard of care is also high.
According to Egg−Shell skull rule standard of care is high when dealing with people who
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are sensitive OR already injured as a loss caused to them may result in serious losses. For
example in case of takeovers liability of Auditor is higher as compared to Normal Audit as
greater amounts are involved and injury will be more serious.
4. Probability / Likelihood of injury: If the chances of injury are high then standard of care
also increases.
5. Common practice: If a person acts according to common practices of the society then his
standard of care is assumed to be satisfied. However if common practice is itself negligent
then this rule will not apply.
6. Cost of safety measures / Precautions: If the cost of safety measure is very high then
standard of care is determined after considering cost benefit analysis.
7. Social benefits: Standard of care is reduced if a person performs an act which has high
social benefits.
CAUSATION
Causation means to establish a cause or relation between the wrong act and loss cost.
1. BUT FOR TEST
According to this approach causal link exist if the loss would not have occurred, had the wrong
act not been performed. However if the loss would have occurred irrespective of wrong act then
causal link does not exist.
This test fails in case of a scenario where multiple reasons of loss exist because according to “but
for test” no one will be liable as none of the re sson is 100%
% responsible for loss.
2. MULTIPLE FACTOR TEST
According to this approach a person is liable even if he is one of the reason of loss.
NOVUS ACTUS INTERVEINUS
According to this rule if causal link is broken due to intervening act then the defendant will not
be responsible for any loss caused after intervention. Intervention can be made by:
 Nature i.e. if due to Natural disaster loss is increased then defendant is not responsible
for that increased loss
 Claimant i.e. if due to act of victim loss is increased then defendant is not responsible for
that increased loss
 Third party i.e. if due to act of 3rd Party loss is increased then defendant is not responsible
for that increased loss
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DEFENCES
If defendant i.e. culprit can prove a defense then remedy payable will be reduced. Valid defenses
include:
1. Contributory negligence: If the victim himself is also responsible for the loss, then remedy
payable by claimant will be reduced up−till maximum 100% depending on victim’s
contribution in loss.
2. Act of God vis major: If the loss is caused due to un−controllable events then no one will
be responsible to pay any remedy.
3. Volenti not fit injuria: If victim himself has given consent for loss, then he will not be
entitled to file a case if loss is caused in reality i.e. culprit will not be liable to pay remedy.
Consent for loss can be given either expressly (oral or written) or by conduct (i.e. by not
following health & safety rules).
REMOTENESS OF DAMAGE
Court of law before awarding remedy assess that whether the loss is remote or not i.e. whether
it has occurred due to wrong act OR not. If the loss is remote then remedy will not be awarded.
While assessing remoteness court has following two approaches:
1. Direct Consequence Approach: According to this approach culprit has to pay remedy for
every loss which occurred as a direct consequence of his wrong act.
2. Foreseeability Approach: According to this approach remedy is payable for the loss which
was reasonably foreseeable at the time of wrong act i.e. any loss which was not
reasonably foreseeable at the time to wrong act will not be compensated. For Remedy to
be awarded only type of loss needs to be foreseeable i.e. actual amount of loss and
pattern of loss needs not to be foreseeable
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LAW OF CONTRACT
AGREEMENT
An agreement is formed when two parties have agreed over certain terms and conditions.
OFFER + ACCEPTANCE = AGREEMENT

If this agreement is enforceable by law then it is known contract as formed. For enforceability
agreement must fulfill ff llowing condition:
11 Act must be legal
22 MMutual understandiinng i.e. Parties must not be in any pressure which includes:
a. Physical pressure
b. Emotional pressure
3. Capacity i.e. Person must have following capacities for contract:
a. Must be major (greater than 18 years)
b. Must not be intoxicated
c. Must not be professionally incapable
d. Must not be mentally disabled
4. Form i.e. some contract must be formed in a specified manner in order to get enforceable.
5. Genuine consent: This means consideration paid must be legal and free from any fraud.
Enforceability means that law will interfere when a strong party misuses its position unfairly.
According to law of contract case must be filed within 6 years.
TYPES OF CONTRACT
1. VOID CONTRACT: This contract has no legal existence E.g. illegal contract
2. VOIDABLE CONTRACT: These contracts are at discretion of victim that he can cancel or
continue the contract E.g. Contracts done without Mutual Understanding.
3. UN−ENFORCEABLE CONTRACT: These contracts are not enforceable due to lack of
evidence.
4. EXPRESS CONTRACT: These contracts are made either orally OR in written form.
Registered contracts (Specialty Contracts) made through deed (e.g. Purchase of property)
are also example of Express contract. Specialty contracts have a limitation period of 12
years.
5. IMPLIED CONTRACT: These contracts are made through conduct or past practice of
parties.
6. STANDARD FORM CONTRACT: These are ready−made contracts available on take it or
leave it basis. In standard form contracts No negotiation is made and objective of these
contract is to saves time. E.g. Bank account opening form
7. BI−LETRAL CONTRACT: In these contract both parties make a promise for performance i.e.
Bi−lateral contract includes two promises. E.g. sale of goods
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8. UNI−LETRAL CONTRACT: In Unilateral contract “offeror” makes a promise where−as

offeree gives performance for acceptance i.e. In Unilateral contracts there is only one
promise. E.g. reward cases.
9. CO−LETRAL CONTRACT: In Collateral contract a third party who is not contracting party is
a reason of contract between two parties therefore in Co−lateral contract a third party
has same right to claim as a normal contracting party has.
10. EXECUTORY AND EXECUTED CONTRACTS: Contracts are formed when promises are made
and if the performance is completed then it is known as executed contract and if
performance is outstanding then it is known as executory contract.
OFFER
It is a statement made with an intention to form contractual relationship if accepted i.e. if an

offer is accepted a person will be bound by it.
OFFERER: One who has made an offer.
OFFEREE: One who has right to accept.
Offer is a certain and clear statement made with an intention to get bound by it. Therefore
provisions and request for information are not regarded an offer.
KINDS OF OFFER
1. EXPRESS OFFER: It is either in oral or written form.

2. IMPLIED OFFER: It is neither made orally nor in written but rather it is made through
conduct OR past practice.
3. GENERAL OFFER: In this offer number of offerees are unlimited.
4. SPECIFIC OFFER: In this offer number of offerees are limited.
5. COUNTER OFFER: It is an offer made against an offer having different terms as compared
to previous offer. Legal impact of counter offer is that it cancels original offer. In counter
offer only last offer is valid because all others are cancelled.
6. CCRROOSSSS OOFFFFEERR:: It is an offer made against an offer having same subject matter, same terms
and conditions and made simultaneously. Legal impact of cross offer is that both offers
are cancelled. Cross offers usually occurs as a co−incidence when post is used as it is a
slow means of communication.
7. OPEN OFFER: In this offer offeree has a right to accept offer over a certain period of time
but it is to note that offeror will only be bound to keep offer open if offeree has paid ssoom mee
consideration for it.
VIITA
INV O N TO OF
ATIO F FE
ERR
It is a statement made with an objective to invite other parties to make an offer. Invitation to
offer cannot be accepted rather an offer is made in response to it. It is a vague statement
therefore cannot be regarded as an offer.
Following acts may be regarded as an invitation to offer:
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 Display of goods for sale

 Invitation for tender
 Invitation for auction sales is regarded as an invitation to offer and bidding is regarded as
an offer which is subsequently accepted by strike of hammer
 Advertisement
However display of goods and advertisement may be regarded as an offer, if they are certain and
clear.
TERMINATION OF OFFER
If an offer is terminated then it cannot be cannot be accepted nor rejected.
METHODS OF TERMINATION
1. REJECTION
2. COUNTER OFFER
3. LAPES OF TIME: After a particular time period an offer is terminated where the time
period can be
a. specified in offer
b. If no time period is specified then offer will be terminated after reasonable time.
Reasonable time period depends on
i. Speed of mean of communication
ii. Sensitivity of subject matter
4. DEATH
a. In case of death of offeree offer is always terminated because he had the right to
accept
b. In case of death of offeror offer is terminated if:
i. If offer is of personal services
ii. If offer is of non−personal services then a factor is considered that whether
offeree knew about death of offeror before accepting OR not. If he has the
knowledge of death then offer is terminated otherwise successors will be
bound to pay for that offer from dead person inheritance
5. FAILUER OF CONDITION ATTACHED IN AN OFFER: i.e. if a condition attached to an offer is
failed then that offer will be treated as terminated.
6. DESTRUCTION OF SUBJECT MATTER
7. REVOCATION OF OFFER BY OFFEROR i.e. Offeror reverses his offer. For revocation
following points must be considered:
a. Offer must be revoked before it is accepted.
b. Revocation will be completed when it is reasonably received by offeree.
c. Revocation can also be done through a third party which is reliably known to both
parties.
d. In case of general offer revocation must be done through same means of
communication as that of offer.
19 | P a g e
e. In case of unilateral offer revocation is not possible until reasonable time period
has lapsed as in unilateral offer other party has started performance.
ACCEPTANCE
n conditional agreement to the terms of offer. If any ccoondition is attached then it will be
It is an un
treated as a counter off rr. Acceptance must be a mirror image of offer.
TYPES OF ACCEPTANCE
 EExxppre
esss Acceptance is one which is made either ora
a lllyy OR in w
wrrit
ttteenn form
 Immplied Acceptance is one which is neither made orally nor in written form rather it is
made through conduct or past practice of parties
RULES OF ACCEPTANCE
CEEPPTTAANNCCEE IN
1) ACC N CCAASSEE OOFF SILENCE
Normally silence do not means acceptance, however if a person has given consent that his silence
should be treated as acceptance then acceptance in case of silence is valid.
Unn Solicited Goods Acc t was introduced to counter a marketing technique in which unsolicited
goods were sent on a condition that if they are not returned then they will be treated as sold i.e.
Silence will be treated as acceptance. According to this Act these goods should be treated as gift
and in case of demand of payment court case should be filed.
P EC
3) SP C IF
F IE
EDD M
MEETTHHOODD OF AACCCCEEPPTTAANNCCE
If method acceptance is specified then either that specified method should be used or if different
method is used then that method should not be slow then specified method and it should not be
disadvantageous to offeror.
4) ACCEPTANCE SUBJECT TO CONTRACT

Acceptance subject to contract means that a legal contract formation will make the acceptance
binding. It is done to gain some time for legal verifications.
5) ACCEPTANCE IN IIGNORANCE
E OF OFFER
If a person accepts an offer such that he does not have knowledge of offer then it will not be a
valid contract. However it is to note that if a person have knowledge
e of offer then he is entitled
for reward respective of his in
ntention.
20 | P a g e
COMMUNICATION OF ACCEPTANCE
GENERAL RULE: Acceptance is communicated i.e. completed when it reasonably received by

offeror.
EXCEPTIONS OF GENERAL RULE i.e. Acceptance can also get communicated without being
received by offeror:
1. In Unilateral contract an un−communicated acceptance is also sufficient as for acceptance

in Unilateral contract only performance is required
2. Acceptance in case of silence with consent of other party
3. If Postal rule is applied then un−communicated acceptance will suffice as according to
postal rule acceptance will be completed when letter is properly posted (stamped and
addressed) by offeree irrespective of receipt by offeror. Postal Rule applies when post is
a reasonable means of communication. Post is regarded as reasonable means of
communication when:
a. Offeror requires acceptance through post OR
b. Offeror is silent on means of communication but has made offer through post.
It is to note that if post is not a reasonable means of communication then postal rule will
not apply and general rule will apply i.e. acceptance will be completed when letter is
received by offeror.
Postal rule can be excluded by offeror despite of requiring acceptance through post if he
has specifically states the exclusion in offer.
Intention TO
INTENTION to Create
CREATELegal
LEGALRelationship
RELATIONSHIP
There are two types of relations under which contracts are formed:
1. legal relation: which will be enforced through court

2. Trust relation: which is based on mutual understanding
Court of law only enforces those cases which are formed with an intention to create legal
relation. Burden to proof that there was no intention to form legal relation is on the party seeking
to escape liability.
Intentions at the time of dispute are not important because both parties lie at that time. Court
of law considers Intention at the time of formation of contract. While determining Intention at
r ta
the time of formation of contract Court of law takes cer aiinn aassssuum
mppttiioonnss that in:
1. Domestic and social relationship intention is of trust relation

2. Business and commercial arrangement intention is of legal relation
These assumptions can be rebutted / reversed based on a factor that if parties have bargained
keenly as if the parties are bargaining keenly it gives an indication of lack of trust.
Examples of Domestic Arrangement are:
21 | P a g e
1. Dealing between husband and wife

2. Dealing between parents and children
3. Dealing between relatives
Examples of Rebuttal are:
1. Business between parents and children

2. Divorce
3. When parties have high reliance factor on each other
Whereas in Business and Commercial arrangements assumption of court is that parties have an
intention to form legal relation. However this assumption is rrev
veerrssed
d in following cases:
1. Honor clause e It is a clause which states that the dealing is domestic arrangement
therefore contract is not enforceable
2. Collective bargaining agreements are not enforceable in court as they may be concluded
in pressure
3. Acceptance subject to contract is not enforceable by law until a legal contract is formed
ettter of com
4. Le mffoort: It is a letter in which one party expresses an opinion that other party
will be able to settle its own obligations. It is not regarded as guarantee letter rather it is
just a letter of opinion therefore has no legal existence.
CONSIDERATION:
It is sacrifice made by one party for purchasing promise of other party where sacrifice includes:
1. Sacrifice of resources
2. Sacrifice of right
3. Acceptance of obligation
Consideration is what a party sacrifices.
RULES OF CONSIDERATION:
1. It must be legal.
2. It must be possible act.
3. Must pass from contracting parties i.e. Promisor and Promisee
4. Must be ssuf iicie
ent nee noo to be adequate, so that transaction is not regarded as gift
because gifts are not enforceable according to UK law unless done through gift deed.
According to this rule Court will not interfere in case of bad bargain as consideration is
acceptable if sufficient (have some economic value)
Performance of existing obligation towards same party as a consideration for a new contract is:
− Not a valid consideration according to Old rules unless some extra service is provided
− But according to New Rules existing obligation can be a valid consideration for a new
contract if no pressure was exerted and benefit of practical nature was conferred on other
22 | P a g e
party and it has agreed with Mutual Understanding. New Rule is also known as Practical
Benefit Rule.
Performance of an existing obligation is always a valid consideration towards third party. E.g.
Teacher teaching in class is performing single obligation towards multiple parties, Public
Transport also performs the same obligation towards the multiple parties
Waiver of existing rights:
If a person sacrifices his rights, then he must get considerations against those sacrifice of rights
otherwise it will be regarded as gift because sacrifice of rights is a consideration by one party and
in normal circumstances gift is not enforceable under UK law. Sacrifice of rights is valid:
1. If a person gets a thing for which he was entitled in right

2. If a person gets Alternative consideration for which he agrees and it is sufficient (need
not to be adequate)
3. If a person gets some third party benefit for which he agrees and it is sufficient (need
not to be adequate)
4. If a person waives off his right willfully according to doctrine of Promissory Estoppel
then he cannot get his rights back. However it is to note that concept of Promissory
Estoppel is a shield not a sword i.e. promissory estoppel can stop other party from
claiming back his waived rights but it cannot force someone to waive his rights in
future also.
Past consideration:
Contract is formed through promise and any consideration agreed at the time of formation of
contract is valid. If a person performs any consideration without having contract for it than that
consideration is known as Past consideration to contract and it is not valid.
However Past Consideration can become valid consideration if
1. Act was performed on previous request of other party OR

2. It is in reasonable assumption of parties that the act will be paid
BILL OF EXCHANGE: It is written undertaking of obligation to pay. Normally it is issued in credit

sale and it act as right to receive for seller. Bill of exchange is a valid consideration for receipt
TIME BARRED DEBT: According to limitation ‘Act’ if right is not claimed in particular time then it
gets expired / Time Barred. However if written agreement is made after expiry then debt gets
refreshed i.e. Limitation Act period is restarted. Time Barred Debt if refreshed through written
agreement is a valid consideration in case of receipt of amount against expired debt.
PRIVITY OF CONTRACT:
23 | P a g e
F4 – Corpora
a te & Businesss Law
As per principle of Privity of Contract only the Contracting parties have the right to claim benefits
and obligation to pay losses of contract as they are the one who have paid consideration for
contract. However if exxceptions apply then third party also gets right to claim:
1. Collateral contract: Third Party has right to claim because that third party is the reason
of contract
2. Law of agency: According to this law all contracts are made by agent whereas liability
is of principle
3. Valid assignment: Through an express clause of contract third party can be made
entitled for the benefits of contract. Example of valid assignment is Life Insurance
4. Rules of intestacy: when a person dies all of his contracts can be enforced by
successors who are third parties to the original contract
5. Covenant contract (restrictive contacts): in covenant contract third party also has a
right to enforce the covenant i.e. to enforce the restriction clause. However it is to
note that third party cannot claim any other remedy. E.g. when land is purchased from
the government it is under a covenant clause that it can only be used for a specific
purpose. This covenant can be enforced by government and by third Parties such as
neighbors also.
6. Contract right of Third party Act: According to this Act Third party will also get some
rights as contracting parties have which include:
a. Same rights for claiming benefit
b. Same rights for approval before variation in contract
c. Same remedies for breach of contract
According to this Act Third party can be un−identified or non−existent body also such as
unborn child.
This act is usually used in Trust contracts where Trust is a body created for the benefit of
beneficiary, managed by trustees and assets donated by donor. It may be created for
small children.
STATEMENTS OF CONTRACT:
Statements made in a contract are divided in two heads:
1. Term: It is defined as a major clause of a contract and if it is breached then contract is

treated as ceased and no party is further bound. Term is regarded as a reason of contract.
2. Representation: It is defined as minor terms of the contract and if it is breached then
contract continues as before with minor compensations. Representations are usually
defined as inducing statements made prior to formation of contract.
While determining that whether a clause is a term OR representation court of law considers
following factors:
 Importance given to a clause by parties can make it a term

 Any clause which is written in an oral contract can be regarded as term
24 | P a g e
 Any clause which is not written when whole contract is reduced in to writing indicates
that it is of low importance and can be regarded as representation
 Any clause which is repeated again and again indicates its importance and can be
regarded as term
 Special Knowledge: As per law if maker of statement has Extra knowledge than all of
his statements will be regarded as term. Whereas if receiver of statement has extra
knowledge than his statements will be regarded as representation. This rule is based
on a fact that a person having extra knowledge can deceive other party but cannot be
deceived by someone due to his extra knowledge
 If a maker of statement invites other party for verification then it will be regarded as
representation irrespective of actual verification. On contrary if a party restricts other
party from making verification than all clauses will be regarded as term. This rule is
based on a fact that by inviting for verification maker of statement has indicated that
it is not hiding any fact.
Classification of Term
Classification of Term and Representation is made by parties which may result in extreme
decisions as parties usually classify all clauses as term. In order to counter this Court of Law
further classifies a Term in to Condition and Warranty.
CONDITION
Conditions are the major terms and if condition is breached then contract will end. It represent
the major reason / basic objective of contract.
WARRANTY:
Warranties are minor term of contract and if warranty is breached then contract will continue
but with compensations payable to injured party. It is a term but not reason of contract.
Classification of term in condition and warranty:
1. Classification by Statute: Sometimes the statues defines that whether a clause is

condition or warranty. Statue classifies Terms in order to protect rights of parties and
to avoid disputes.
2. Classification by parties: If parties make classification of condition and warranty then
Court of law considers it but this classification is not conclusive.
3. Classification by court: Court of law also makes classification of conditions and warranty
based on importance of that factor at the time of formation of contract.
Innominate term approach
According to this approach classification of clauses will be done by court based on resulting
circumstances, if results are serious then it will be regarded as condition and if results are minor
then it will be regarded as representation.
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Sources of terms
Terms are incorporated in following manner in a contract:
1. Express terms:
Terms which are agreed between parties in any way i.e. orally, written, through conduct OR
through past practice.
2. Implied terms:
These Terms are not agreed between parties but are still part of contract as they are inherited in
Contract through Statute, Customs OR Court.
a) Terms implied by statute:
Terms are implied in a contract through statute. E.g. Employment Act: Implies a term that
employee must be paid salary.
b) Terms implied by custom:
Terms are implied in a contract through Customs i.e. general practices if they are not in
clash with statute or any express clause of contract.
c) Terms implied by court
If court of law discovers that contract among parties is incomplete then court of law
implies terms through statute, if statute is not available then court of law implies terms
through customs and if customs are also not available then court itself imply certain
terms. Court of law can only imply terms in following cases:
 If it is a part of case law

 If it is an obvious clause and satisfy officious bystander test i.e. that clause is so
obvious that it can be identified even by a bystander.
 If clause is of technical nature but it satisfies business efficiency test i.e. without
that clause contract is not practicable
Court of law’s authority to imply terms in contract is limited because court has limited
time and it is considered as bad governance if court is involved in formation of contract
for example court cannot simply imply term based on fairness.
Exclusion / Exemption Clause
Exemption cla ause is a term to contract which excludes liability of one party i.e. liability of other
party is increased.
Benefit of exemption clause is that it saves litigation cost in case of dispute as liabilities of parties
is already defined. But the major disadvantage of exemption clause is that liabilities are allocated
unfairly.
26 | P a g e
CONTROLS OVER EXEMPTION CLAUSE
In order to restrict use of exemption clause two types of controls are applied:
COMMON LAW CONTROL
Common law has imposed following two controls over exemption clause:
1. Incorporation control
2. Interpretation control
Incorporation control: Exemption clause must be incorporated in such a manner that other party
gets notice of it. Example methods of incorporating an exemption clause are:
 By giving written notice of it

 By signed agreement
 By contractual document if it is a ticket
 By past practice
If a clause is very unusual / onerous then it must be incorporated in an unusual manner i.e. it is
specifically highlighted and brought to attention of other party
For exclusion of liability in case of deliberate act court of law regards this clause as an unusual
clause and requires incorporation in an unusual manner.
Interpretation control: While interpreting exemption clause court of law consider following
rules:
 Contra Profentum rule: According to this rule court of law follows strict approach and if
an exemption clause is found to be vague / misrepresented then court of law interprets
it against the party who incorporated it i.e. treats it as void. Liabilities for deliberate acts
and negligence must be excluded specifically otherwise that clause will be void
 Main Purpose rule: According to this rule an exemption clause that affects the main
purpose / objective of contract will not be enforceable
STATUTORY CONTROL
According to Common law controls an exemption clause is valid if it is validly incorporated and is
clear. This approach may result in unfair clauses being enforceable as party in strong bargaining
position may easily by pass these controls.
In order to resolve this issue following two statutes are made:
1. Unfair Contractual Terms Act (UCTA)

2. Unfair Terms in Consumer Contract Regulation (UTCCR)
Unfair Contractual Terms Act (UCTA)
27 | P a g e
According to this act all exemption clause are void unless they are reasonable.
This act provides special supports to Consumers where Consumer is defined as one who do not
perform business of that commodity and has not purchased that commodity from auction.
UCTA has defined following circumstances specifically:
1. Liability for negligence: According to UCTA any exemption clause which excludes liability
for negligence is void unless reasonable
2. Liability for non-performance: According to UCTA any exemption clause which excludes
liability for negligence is void unless reasonable
3. Liability for misrepresentation: Any exemption clause which excludes liability for
misrepresentations are void
4. Exclusion of liability in guarantee: Any exemption clause which excludes statutory rights
of any one is void
5. Limitation of liability in guarantee: Any exemption clause which limits liability in
guarantee clause is void unless reasonable.
Test of reasonableness:
While determining whether an exemption clause is Reasonable or not, UCTA considers that none
of the party is under pressure. Following factors are also considered:
1. If exemption clause is introduced by a party in stronger bargaining position then it may

be treated as void.
2. If any inducement or benefit is given against an exemption clause then that clause may
be treated as valid
3. If both parties are aware of exemption clause then it may be treated as valid
4. Any exemption clause which becomes applicable due to act of victim may be treated as
valid
5. Any exemption clause which relates to special order goods may be treated as valid
Unfair Terms in Consumer Contract Regulations (UTCCR)
This Act deals with unfair terms in Consumer Contract where Consumer is defined as one who is
not performing business of that commodity. Unfair term is defined as a term which is not defined
in clear language i.e. it is vague and it creates a significant imbalance among parties. For example
Seller has right to change terms without consent of other party is an unfair term according to
UTCCR.
End of Contract
Contract may due to following reasons:
− Performance
− Frustration i.e. War
− Loss of capacity of one party i.e. cancellation of legal license
28 | P a g e
− Mutual Understanding
− Breach of Contract
Breach of Contract
If any clause of contract is breached then it is regarded as breach of contract and injured party
gets the right to file a case within reasonable time period. However if injured party wants then it
can continue the contract without any claim.
But if condition of a contract is breached, then it will be regarded as repudiatory breach and
contract will end.
t icipat
Ant toorryy breach of contract
Breach of contract occurs when a clause in contract is breached and clause can only be breached
on performance day. Therefore any breach before performance day / date is not valid and is
treated as an offer to breach which can be accepted or rejected by other party. This is known as
anticipatory breach OR renunciation of contract. If anticipatory breach is accepted then contract
will end immediately and if it is rejected then contract will continue as normal contract like
before.
Anticipatory breach + Acceptance = Breach of Contract
Remedies for breach of contract
In case of breach of contract following remedies are awarded:
1. Damages – Common Law Remedy as Monetary Compensation

2. Quantum Meruit – Common Law Remedy as Monetary Compensation
3. Specific Performance – Equitable Law Remedy as Non − Monetary Compensation
4. Injunction – Equitable Law Remedy as Non − Monetary Compensation
5. Recession – Equitable Law Remedy as Non − Monetary Compensation
Damages
Damages are Monetary Compensation for the loss and court of law usually try to award damages
as remedy. Damages are non−punitive i.e. they just compensate for the loss caused.
Damages are not awarded for non−financial losses unless the subject matter of contract itself is
non−financial
Kind of damages
29 | P a g e
General damages: General damages are the compensation for direct loss occurred as a result of
breach, where direct loss is defined as one which occurred directly due to wrong act. Court of
law awards general damages easily.
Special damages: It is remedy for indirect loss where indirect loss is one which occurred due to
other events dependent on wrong act.
Remoteness of damages
Special damages will only be awarded if they are in reasonable contemplation of parties
otherwise they are regarded as Remote and are not enforceable.
Loss is treated to be in reasonable contemplation if it is a normal scenario and if it is not a normal

scenario then it must be specifically notified
Measure damages
Expectation interest
According to this approach parties are awarded what they expect from contract i.e. if actual
results are less than expected then remedy is awarded in order to compensate for the deficit. If
actual results are greater than expected then no remedy is awarded.
If the objective of contract is achieved but expectation of parties is not satisfied then court may
consider cost benefit analysis. If objective of contract is not achieved then cost benefit analysis
is not ordered.
Reliance interest: In this approach court of law awards remedy equal to the value of expenses
incurred in reliance of the contract i.e. injured party is brought in to a position in which it would
have been had there been no reliance
Mitigation of loss: According to this rule it is the duty of victim to mitigate (reduce) his loss up−
till maximum possible extent. If the victim fails to mitigate the loss then no remedy will be
awarded for the loss which could have been be mitigated.
Nominal Damages: These damages are awarded in case of breach of contract not because the
victim has suffered any loss but rather it is remedy for breach of rights. Nominal damages are of
small amount.
Liquidated damages and penalty clause
Normally remedy is determined after breach of contract because remedy is compensation for
loss occurred due to breach of contract.
But in some cases remedy is pre−defined in contract i.e. remedy payable in case of breach is
already defined in contract
30 | P a g e
However it is to note that if amount payable to victim is greater than loss then it will be treated
as penalty
If the predefine remedy in contract is a genuine pre−estimate of loss i.e. clause has following
characteristics then it will be regarded as Liquidated Damages
 Claused amount must not be greater than contract price

 Claused amount must not determine a single remedy for all kinds of losses
If Liquidated damages are regarded as genuine then they will be enforceable irrespective of the
actual amount of loss.
Specific Performance
Specific performance is enforcement of positive clause whereas positive clause is one which
requires performance of certain act in contract.
Specific performance is only awarded if damages are insufficient / inadequate to resolve the
dispute
In case of personal service specific performance is not awarded because due to dispute parties
became incompatible and now if court will order specific performance it will increase dispute
further. Therefore in case of personal services court order damages.
If due to specific performance any party has to face serious hardships then specific performance
is not awarded and court orders damages.
Injunction
Injunction is enforcement of negative clause where negative clause is one which restricts
someone to perform a certain act in contract. If court orders Injunction then a party to contract
will not be able to perform a certain act for which it was already restricted through contract.
Quantum merit
Quantum merit is not about compensating for loss rather it is about rights of particular person
i.e. in case of breach of contract a person will be paid for the work he has already completed. It
is based on principle restitution i.e.to pay a person for which he is entitled.
Recession
In recession parties end contract with their mutual consent i.e. no one is injured party. It is to
note that due to recession rights of 3rd party must not be affected.
31 | P a g e
Law of Agency
This law governs the relation between principal and agent, whereas principal is one who
delegates authority and agent is one to whom the authority is delegated. E.g. Partners are agent
of firm, Directors are agent of Company. Objective of agency is to enable agent to form contracts
on his behalf irrespective of his (Principal) presence.
Formation of Agency
Express Agency
Normally agency is formed through an express agreement (oral or written) known as power of
attorney.
Agency by Implied Agreement
In this case agency is formed neither orally nor in written form rather it is formed due to conduct
of parties or past practice. E.g. a person acting as a middle man in a deal is implied to be an agent.
Agency by Necessity
This agency is formed due to necessity of circumstances and a person is deemed (assumed) to be
an agent and is required to act in a reasonable manner.
For agency by necessity it is mandatory for a person to make a maximum possible attempt to
contact other party.
Agency by Holding out / Agency by Estoppel / Apparent Agency / Ostensible Agency
In this case a person is not an agent in reality but the principal has given an impression to third
party that the person is an agent. In such a case irrespective of actual agency agreement, a person
will be deemed to be an agent and the principal will be liable.
Agency by Ratification
In agency by ratification the person is not an agent but he acts on behalf of principal and later
principal ratifies (accepts) those acts by communicating it to 3rd Party. For ratification following
conditions must be met:
 Act must be legal.

 Whole act must be ratified by principal
 Principal must be in legal existence at the time of formation of contract. E.g. unformed
company cannot ratify acts of promoters
 Ratification must be done within reasonable time period.
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Authority of Agent
If an agent acts with in his authority then principal will be liable otherwise agent will be personally
liable. Agent has following authorities:
1. Express Authority
This is actual authority of agent granted either orally or in written form.
2. Implied Authority
This is also actual authority of agent gained due to his position irrespective of oral or written
agreement.
This authority is determined through common practices / culture / customs in that

circumstances.
Implied authority can only be withdrawn if an express clause is stated along with a third party
notification for restriction on implied authority.
If third party notification is not made then the principal will be liable towards third party, however
he can recover the amount from urgent later as an internal settlement.
3. Apparent Authority / Ostensible Authority
Apparent authority is granted when a principal represents a person as his agent towards third
party, then the principal will be bound by the acts of agent (represented person) irrespective of
whether that represented person is agent or not. It is usually not an actual authority.
PERSONAL LIABILITY OF AGENT
Agent will be personally liable for his acts in following cases:
 When an agent exceeds his authority.

 When agent performs Illegal acts.
 When an agent is involved in misrepresentation or fraud.
 When agent keeps principal undisclosed.
 When principal is non−existence at the time of formation of contract.
 Agency coupled with interest i.e. when agent has his personal interest attached in the act.
 When it is a usual practice that agent will be liable and no express clause is made against
it.
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Law of Employment
Types of Worker
Workers are divided in following two heads
Employee
Employee is defined as worker who is bound under co onntr

raacctt of sseervicces and is required to follow
all legal orders of his employer. Employee must be provided with an employment contract which
includes express and implied terms.
Self-Employed
Self−Employed is an independent worker who is bound under con ntt act

t for
r serrvicce and is not
required to follow directions of his employer in relation to how to do work.
Privileges of an Employee
 Income tax of employee is paid by employer

 Employer makes national insurance contribution on behalf of employee.
 For all wrong acts of employee, employer is responsible
 Employee is not required to register himself for value added taxes
 Employee is given protection under health and safety law
 Whenever a company is dissolved, employees are paid as preferential debt
 Employee is not required to register for VAT i.e. no need to maintain records
How to determine the status of a worker
Contracts under which services are provided, acts as an evidence in determining of the status of
a worker. However in some cases, contracts are manipulated with an objective of tax avoidance,
therefore court has defined the following approaches for determination of status:
1. Control test
According to this test a person is an employee of organization who teaches him how to do work.
This test is fail in case of highly qualifies professionals because they are never guided about how
to do work.
2. Integration test:
According to this test, workers who are dependent on organization’s goodwill, are treated as an
integral part of organization and are therefore treated as an employee. Whereas workers who
are dependent on their own goodwill and are skilled enough that they cannot be controlled in
performance of duties then they are treated as an accessory of organization and therefore
treated as self−employed. This test is vague and practically it is difficult to apply as it is a
subjective approach.
34 | P a g e
3. Multiple factor/ economic reality test:
According to this test one single factor can never be used for determination of status of worker.
Therefore according to this approach following factors are considered:
 Working hours are fixed or variable

 Who pays tax
 Tools are provided by employer or not
 Whether worker can use helper or not
 Whether worker can provide substitute
 Whether worker has his own management
 Whether worker bears financial risk
 Whether worker is controlled or not
 Whether worker uses his own premises or not
Casual workers:
Casual workers are defined as those who do not work as permanent staff of organization rather
they are on−call workers. Casual workers are treated as employee of organization if mutuality of
obligation is exist i.e. both employer and employee are bound to accept and provide certain level
of work.
Duties of employer
 Duty to provide healthy and safe work environment and equipment

 Duty to pay wages un nlles
sss Employer breaches contract OR employer himself is not able to
earn
 Duty to indemnify (reimburse) all expenses incurred by employee during his job
 Duty to provide work. This duty is increased in case of peace meal workers as in their
salary is dependent on work. This is to note that employer is bound to provide work even
if employee is on fixed salary as due to non−provision of work skills of employee may be
affected.
 Duty to pay minimum wages at least
 Duty to provide employment contract (written statement of employment terms) to
employee within 60 days and itemized pay slips
 Duty to provide maternity and paternity leaves
 Duty of mutual respect and co−operation. Employment Act requires employer to give
serious consideration to allow flexible working hours to workers who have children of age
less than 17 years and in case of disabled children of age less than 18 years.
 Duty to follow working time regulation act i.e. Working hours should not be more than
48 hours a week average, One day off per week should be given and four weeks paid
leaves should be granted in a year.
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Common Law duties of employee
 Duty of obedience i.e. to follow all legal orders which do not raise health and safety
concern
 Duty to not to compete with employer
 Duty not to make secret profits
 Duty to maintain confidentiality during employment and even after leaving job
 Duty of whistle blowing OR protected disclosure
 Duty to exercise due diligence and reasonable care while performing his work
 Duty of mutual co−operation
REDUNDANCY
In redundancy the function of employee is ceased. Redundancy is impersonal and re−hiring is not
allowed because the function is no more in existence. Redundancy occurs in following cases:
 When organization is closed

 When a particular location is closed
 When a function is closed
 When a function is closed in particular location
Any employee involved in that function is treated as redundant irrespective of mobility clause.
Mobility clause gives employer a power to transfer employee to other location.
If the job requirements have changed then also an employee may be treated as redundant.
In case of Redundancy employer must do consultation with employees before redundancy, if not
consulted then it will be regarded as unfair dismissal. If employer is making 20 OR more
employees redundant in one place of work then at−least 90 days before redundancy he must
notify the Department for Business, Innovation and Skills. If more than 20 employees are being
made redundant then along with notice to Department for Business and Innovation, employer
must do consultation with employees at−least 30 days before first redundancy. If more than 100
employees are being made redundant then consultation must start at−least 45 days before first
redundancy.
In case of Redundancy, Redundancy pay is granted which is:
Gross week pay X Years of service X Age factor
Maximum Gross Week pay is £489.
Maximum years of service are 20
Age Factor is 0.5 if age is 18 to 21; 1 if age is 22 to 40; 1.5 of age is 41 or more
Following workers are not awarded redundancy pay despite the fact that they are made
redundant:
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 They have rejected an equivalent job offer, where equivalent job means equal in status,
function, salary, and privileges
 Their employment period is less than two years
 They have made claim for redundancy after six months OR more
 They could have been dismissed due to any other fairground such as misconduct,
negligence
Lay off and short time
Lay off is when an employee has not earned any amount in a particular week.
Short time is when an employee earns less than half of his normal week salary
If an employee remains lay off or short time for four consecutive weeks or for six weeks out of
last thirteen weeks then employee will be treated as redundant automatically.
DISMISSAL
Dismissal is of personal nature in which an employee is fired with or without legitimate reason.
Dismissal can be made in following ways:
 Actual dismissal, which is either oral or written

 Expiry of employment contract without renewal
 Constructive dismissal is defined as a situation when an employee resigns due to breach
of contract of employment by employer, such that it is not practically possible to continue
job. Example events include:
o Change in Work timings
o Change in nature of job
o Health & Safety issues
In Constructive Dismissal Employee must prove the breach of contract done by Employer.
Intention of Employer is not a relevant factor
Notice of dismissal
An employee must be given a notice before dismissal at least of statutory period where statutory
period is:
Continuous Employment Notice

1 month to 2 years 1 week
2 years to 12 years 1 week per completed year
12 years + 12 weeks
If no notice is given then this is known as summary dismissal
Employee must give his employer notice of at least 1 week before leaving job if his continuous
employment is of 4 weeks.
Greater notice period may be required if contract states so.

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If notice is less than statutory requirement then it is known as wrongful dismissal which is a
common law concept.
Salary for notice period should be paid if short notice is given. Case must be filed within 6 years
for claim.
 In following cases employee can be dismissed without any notice:

1. Involvement in fraud
2. Involvement in criminal activity
3. Gross misconduct
4. Permanent incapacity
5. Dishonesty
6. Gross negligence
7. Drunk during job timings
Employee is under a duty to mitigate his loss in case of Wrongful Dismissal i.e. should find an
alternative job.
Claim for Wrongful dismissal can be bought either in County Court, High Court OR Employment
Tribunal
Unfair dismissal
It is a Statue and compensate for both:
1. Reason for dismissal

2. Procedure for dismissal
This act applies if:
 An employee must have continuous employment of two years except for in case of
dismissal due to maternity leaves in which case this requirement does not applies
 Files a case of dismissal within 3 months to an employment tribunal
Procedure of dismissal
Along with statutory requirement of notice period employer is required to follow the given
procedure while dismissing an employee:
 An employee must be given a written notice which includes charges on him along with an
invitation for meeting
 Employee must be given a right to justify his position before taking decision in meeting
 Employee must be a given right to appeal
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Reasonableness of Employer
This act requires employer to always act with reasonableness before dismissal i.e. to consider
other options such as
 Training
 Consultation with employee
 Rotation
Ground for Fair dismissal
 Fraudulent activity
 Any incapacity / incapability
 Competition with employer
 Gross misconduct
 Redundancy
 Unlawful act
 Other substantial reasons
Ground for unfair dismissal
 Dismissal on the basis of color, cast and religion

 Dismissal due to employee claiming his statutory rights
 Trade union reasons
 Dismissal due to employee exercising his maternity rights
 Employee makes protected disclosure / whistle blowing
Remedies
 Re-instalment: that is employee will be restored to his old position retrospectively

 Re-engagement: that is employee will be awarded an equivalent position
 Damages: that is monetary compensation
1. Basic Award: Same as redundancy pay
2. Compensation award: if employee proves that his dismissal is unfair then he can
also claim for expenses incurred in proving the case
3. Additional Award: if employer don’t want to reinstate or re−engage then he has to
pay compensation to employee which is decided by court
If damages are awarded then first basic award is given and then other awards are ordered.
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LAW OF PARTNERSHIP
Definition of partnership
According to law, Partnership is formed if:
 Relation is formed with an intention to earn profit i.e. objective is to do business. For
business starting of operations is not required rather only intention to earn profit must
be present.
 Major activities must be carried out in common i.e. Major risk and reward must be shared
by partners. It is to note that Sharing of single activity is not regarded as partnership
 Sharing of profits: It is a secondary condition for partnership i.e. its presence or absence
will not affect existence of partnership materially
Partnership can be formed between individuals OR corporate personalities i.e. a partner can be
an individual or a company.
Partnership can be formed through oral OR written agreement.
Partnership act 1890
According to this act all partners are general partners i.e. liability is unlimited and are required to
take part in all decisions of company. There is no concept of Limited partner in this act.
Duties of partner:
 Duty to contribute in losses

 Duty to perform his contractual obligations
 Duty of disclosure to other partners
 Duty to account for to other partners for all transactions
 Duty not to make secret profits
 Duty not to compete with firm
 Duty to act in good faith of firm and to avoid conflict of interest
Rights of partners:
 Right to share profits

 Right to access book of account
 Right to get reimbursement for expenses incurred on behalf of firm
 Right to take part in decision
 Right not to be expelled from firm unless reasonable
Authority of partner:
If a partner acts within his authority then the firm will be liable however if partner exceeds his
authority then partner himself will be liable. A Partner have following authorities:
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 Express Authority: This authority is granted to a partner either orally or in written form
 Implied Authority: This authority is given to a partner due to his position i.e. this authority
is attached with position based on the basis of common practices and culture.
If implied authority is to be reversed then an express clause must be started in partnership
agreement along with a third party notification of restriction on authority.
If third party notification is not given then the firm will be liable however as a matter of
internal settlement amount can be recovered by other partners from partner exceeding
authority.
Settlement of accounts
Whenever partnership firm is dissolved its assets are distributed in following manner:
 All assets will be disposed

 External debts will be repaid if the assets are insufficient to repay this amount then each
partner will be personally liable
 Internal debts are repaid
 Capital investment of each partner will be repaid
 Any residual remaining will be distributed among partners
Partnership by Estoppel / Holding out / Apparent Partnership / Ostensible Partnership
If a person gives an impression to third party that other person is his partner then irrespective of
reality the person will be held liable for the acts of represented partner.
Partner’s liability
1. Existing partner: Is liable unlimitedly for decision taken during the period in which he is
partner
2. Neew partner: New partner is unlimitedly liable for the decision taken after joining his firm
3. Retiring partner: Retiring partner is unlimitedly liable for the decisions taken up−till his
retirement. However his liability will cease if he gives third party notification for
resignation along with notice to other partners.
If third party notification is not given then retiring partner will continue to be liable
towards third party, however as internal settlement he can recover the amount from
other partners.
If a Novation agreement is signed then retiring partner liability will be restricted and new
partners will be liable for the effects of the decision taken before retirement but
consequences arising after retirement.
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Dissolution of firm
Partnership agreement is of personal nature and if any of the partner exits from the firm then
whole agreement needs to be re−constituted i.e. old firm is dissolved and then new firm is
formed.
How a firm is dissolved??
 Death of a partner: As per law if any partner will die then whole firm will be dissolved
however an express clause in Partnership agreement may avoid dissolution of firm in
which case only dead partner is excluded from firm
 Illegal activity of the firm
 Bankruptcy of firm
 Expiry of a time clause: if time period is lapsed for which firm was established then firm
will be converted in to Partnership at Will i.e. Firm can be dissolved by notice of any
partner
 Accomplishment of objective: If Objective of Partnership firm is achieved then firm will
be converted in to Partnership at Will i.e. can be dissolved by notice of any partner
 Mutual understanding of Partners
 Firm can also dissolved through court order. Court orders dissolution in following cases
o Any partner becomes insane
o Any partner has suffered a permanent incapacity which is effecting business of
firm
o Prejudicial conduct: A partner of firm acts in such a way that it adversely effects
the business of firm
o Firm is in perpetual losses
o Any other issues which may adversely affect the business of firm
o If any partner is doing persistent breaches of partnership agreement such that
working with him is not possible
LIMITED PARTNERSHIP ACT 1907
According to Partnership Act 1907 all partners are general partners and their liability is unlimited
because general partners have a right to take part in all decisions of firm.
Partnership act 1907 introduced concept of Limited Partner i.e. Partner whose liability is limited
up−till his investment only. But for Limited Partnership following conditions must be fulfilled:
o Firm must be registered

o Limited partner must not take part in decisions of firm
o Limited partner must not be involved in management of Firm
o At−least one partner of the firm must be a general partner
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LIMITED LIABILITY PARTNERSHIP ACT 2000
According to this Act liability of all partners is limited except a partner who has made default. LLP
is just like a Company and is an incorporated body. Conditions for LLP are:
o It must be registered and incorporated

o At−least 2 partners must be designated partners, where designated partner is one who is
responsible for fulfillment of legal requirements of Firm. If no partners are designated
then all partners will be assumed to be designated
o Partnership must have the registered office
LLP is an incorporated body and therefore independent from its owners and has perpetual
succession. However from tax perspective LLP is treated as a normal firm and all partners pay
their tax separately.
In case of Liquidation LLP will pay its own debts however Court can order members to return the
amount withdrawn from firm in last two years if it is proved that firm was already insolvent at
the time of withdrawal.
LLP also has to face Fraudulent and Wrongful trading laws as a normal Company does.
43 | P a g e
COMPANY LAW
Limited Liability / Corporate Personality / Veil of Incorporation/ Doctrine of Separate

Personality
According to this doctrine Company has its own separate legal existence i.e. Company is
independent from its shareholders, from its directors, from its creditors and other stakeholders.
Company itself is liable for its debt and no other party is liable unless veil of incorporation is lifted.
Characteristics OR Consequences of separate personality
 Limited liability: A Company is liable to pay its debts and liability of Owners is limited up−
till their investment.
 Perpetual succession: A Company will survive irrespective of its Shareholders and
Directors as Company is a separate legal entity
 Property: Company can own property on its own name
 Company can sue or can be sued for all legal claims against it. Company files its own cases
through directors who get approval from majority shareholders, however in exceptional
cases if majority shareholders itself are culprit then minority shareholders can also file a
case
 Company can do contracts on its own name
ngg the veil of incorporation

Liftin
If Veil of Incorporation is lifted the liability of shareholders or directors will become unlimited for
the debts of Company
1. Fraudulent trad
ding
Fraudulent Trading is defined as an activity when a Company is operating for a fraudulent
objective. In case of Fraudulent Trading Company will be penalized along with officers of the
company who are in that activity. It is a both civil and criminal offence. Following penalties may
be imposed
o Unlimited fines
o Unlimited liability for the debts of the company
o 10 years imprisonment
o Disqualification for 15 years
2. Wrongful trading
If director is found guilty for wasting resources of a company by:
o Not saving a company where he could have saved

o Making an attempt to save a company where it was not possible
It is a cciivill offence. Iffddiirreeccttoorr is found to be guilty then penalty will be:
44 | P a g e
o Unlimited fines
o 15 years of disqualification
o Unlimited liability for the debts of the company
If the director can prove that his decision was the best in that scenario then he will not be liable.
In fraudulent trading only those people who were involved whereas in wrongful trading all
directors of the company will be liable.
3. Tax issues
Veil of incorporation may be lifted due to tax laws as in some cases nationality of Company is
determined through nationality of shareholders.
4. Public interest
In times of war, Court of law may lift the veil of incorporation to determine the nationality of
company by considering nationality of its shareholders
5. Trading certificate
If a public company operates without trading certificates then its directors will be personally
liable for all the transactions made during that period.
Trading certificate is a certificate issued to Public Company by Registrar of Companies after its
incorporation when:
o Public Co. has raised its share capital to 50,000

o Promoters of the Company have get their pre−incorporation expenses from
Shareholders of the Company
6. When a Company is used to evade contractual obligation
If an individual uses the structure of a Company to avoid his contractual obligation then court of
law has power to lift the veil of incorporation in order to prove that individual and his Company
are a single entity.
7. Disqualified Director
If a Director is disqualified then he cannot become director of any Company up−till defined period.
A director is disqualified if he is:
− Involved in Wrongful Trading

− Involved in Fraudulent Trading
− When Director becomes bankrupt
− When Registrar finds Directors to be reason unfit for management of Company
− When Director is involved in Criminal offence
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If a director is disqualified and he still holds position of directorship then his liability will be
unlimited.
Partnership Act 1890 versus Limited Company
Partnership Act 1890 Company

Requirement of trading No Yes
certificate
Incorporation No Yes
Liability Unlimited Limited
Maximum owners 20 Unlimited
Minimum owners 2 1
Succession Limited Perpetual
Property Cannot own property Can own property
Audit Not required Must
Annual Accounts Not required Must
Directors Not required Must
Offer Ownership to public Cannot offer shares to Can offer shares to public
public
Dissolution Informal Formal
Tax Individual taxes are paid Corporation tax
Legal capacity No Yes
Watchdogs / Regulators No regulators Yes – Highly Regulated
Listing Not possible Possible (Listed Company)
Minimum investment No For public company
required minimum 50,000 share
capital is required
Company secretary Not required Must
General meetings Not Required Must
Resolutions for Decision Not Required Required for all decisions
Making
Formal regulation Very limited regulation High regulations
(Informal)
Charges Only fixed charges Both fixed and floating
charges are available
Types of Companies
Limited company: In Limited Company, Liability of Shareholder is limited up−till the amount of
their investment or their guaranty. Limited company must write word limited after their name,
otherwise directors will be unlimitedly liable. Limited Companies are of following two types:
Limited by shares: In this type of Company the liability of shareholders is limited up−till the value
of their shares owned.
46 | P a g e
Limited by guaranty: In this type of Company liability of shareholder is limited up−till their
guaranty given by them. In this Company ownership is determined through value of guarantee.
Unlimited Company: In this type of Company the liability of shareholder is unlimited in case of
dissolution and therefore no requirement to write word “limited” after the name of Company.
Unlimited company is formed to avail all other benefits of company E.g. Unlimited owners,
perpetual succession, legal capacity etc.
Unlimited Company is able to access greater funds because it is supported by personal liability of
shareholders also. It cannot be a public Company
Subsidiary company: Which are controlled by some other company
Corporation sole: They can have only one director E.g. Church
Corporation aggregation: They can have multiple directors in board
Registered Company: This type of Company is registered under Company Act 2006. Registered
Company can either be:
 Register a new Company

 Buy an off the shelf company
Off the shelf company
These are readymade Companies incorporated by lawyers and can start functioning immediately.
Off the shelf Company has a general article of association and can start functioning after
obtaining trading certificate if it is a Public Company
Public and Private company
Public Company Private Company

Can offer its shares to public Cannot offers its share to public
Can only be limited by shares Can be of any kind
Must write word plc OR public limited Must write word Ltd. OR Limited after its
company after its name name
Must file annual accounts within 6 months of Must file annual accounts within 9 months of
year end year end
Can be listed Cannot be listed
General meeting is must at−least Annually Not necessary
Must have minimum Share Capital of 50,000 No such requirement
Must have trading certificate before starting No such requirement
trade
Minimum directors are two Minimum director is one
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Must get its accounts audited Audit not required if turnover less than £6.5
million
Cannot pass Written Resolutions Can pass Written Resolutions
Must have company secretary Not mandatory
Must keep Accounting records for at−least 6 Must keep Accounting records for at−least 3
years years
Chartered company: They do not follow CA 2006 because they have their own rules approved by
King
Statutory company: They do not follow CA 2006 because they have their own rules passed by
parliament
Holding company: Which control other companies
Registration of a Company
A Company can be registered in following procedure:
1. Application for registration will be submitted to registrar of companies, which contains

o Proposed Name of Company
o Address of Registered head office
o Public or Private Company
o Limited by shares or Limited by Guarantee or Unlimited Co.
2. Memorandum of Association n:
It is a document which contains an undertaking by First Shareholders / Promoters /
Subscribers of the Company that they agree to become first shareholder of the Company.
Before CA 2006 it was Constitution of Company but after CA 2006 Article of Association
is the constitutional document of Company.
3. Artticles of Ass s ociiation
It contains constitution of the Company. AOA is a running document and will remain valid
throughout the life of Company. If no AOA is submitted then Model AOA will apply
4. SSttaatteem ntt of complliianc
men cee: It includes undertaking by promoters of Company that they
have fulfilled all requirements of CA 2006.
5. Sta ate ement of caapitaal and initial shareholding: This document is submitted to registrar of
company along with registration application. It contains breakups of share capital of
Company
o Class of shares a company has
o No. of shares in each class
o Value of shares in each class OR aggregate nominal value of shares in that class
o Any new class of shares created during year
o Any new share issued during year
o Paid up capital of each class
This statement is submitted every year also
S t a t
6. Statement of Proposed Offficers: It contains detail about the proposed officers of the
company i.e. who will join as the First director and first Company Secretary
48 | P a g e
7. Registration fees of £20

8. Statement of Guarantee is also submitted in case of Company Limited by Guarantee. It
replaces Statement of Capital and Initial Shareholding
Certificate of incorporation
Once Registrar of companies is satisfied, he issues Certificate of Incorporation which is a

conclusive evidence of incorporation of company, it contains following:
 Name of Company
 Date of incorporation
 Registration No.
 Address of registered head office
 Company type
 Signature and seal of registrar
Article of association
Articles of Association is the constitution of the Company and it Gives guidelines about how the
company will operate throughout its life. It is made at the time of registration of the company
and is updated with passage of time according to the needs. Example matters included in AOA
are:
− Method for Appointment and Removal of Directors

− Powers and Duties of Directors
− Dividend Rules
− Method for Issuing shares
Model article of association
This article of association is ready made and available with registrar of Companies. Model AOA
describes issues relating to how a company is to be managed or administered such as clauses on:
− Rights of Members
− Communication with Members by directors
− Method for transferring shares
− Payment of Dividend
− Appointment of directors
Promoter of a Company has following three options
o Make his own AOA

o Adopt model AOA
o Adopt Model AOA with modifications according to needs
If AOA of a company is incomplete in any perspective then it is deemed to adopt model AOA for
that issue, therefore no clauses are mandatory in AOA.
49 | P a g e
Alteration of AOA
AOA can normally be amended through special resolution (75%). Registrar of Companies must
be given copy of alteration within 15 days of alteration.
However restriction above special resolution can also be imposed through Entrenchment clause.
Entrenchment clause is defined as a clause which increases the requirement of alteration on
particular clause of AOA above 75%.
In order to impose Entrenchment on a clause 100% vote is required along with specific
notification to registrar.
Restriction on alteration of AOA
Alteration of AOA can be restricted through following methods:
1. Restrictions that can be imposed by Members

o Introducing Entrenchment clause
o Allotment of Jumbo Shares i.e. Shares having greater voting powers
o Inclusion of Name in quorum
2. Restrictions that are imposed by Law
o Any amendment which clashes with CA 2006 is void
o Any amendment which will clashes with case law is also void
o Any amendment which alters the right of a particular class of shares without their
approval is void
o Any alteration which increase liability of a shareholder without their approval is void
i.e. requirement to pay extra amount without consent
o Any alteration which is not in the best interest of company is void and can be
challenged by Minority Shareholders or Registrar of company
Interaction of AOA and CA 2006
AOA can impose greater requirement as compared to Company Act 2006 and this will be known
as good governance. However it is not possible to reduce the requirements of CA 2006 because
than it will be regarded as illegal.
Contractual effect of AOA
AOA acts as a contract between Company, Shareholder and its directors in their respective
capacities only i.e. any issue out of their scope will not be resolved through AOA. Any clause
stated in AOA must be followed by Shareholders and Company as it is a normal contractual
clause.
Further AOA defines the contractual capacity of Company i.e. if any contracts is made by directors
on behalf of the Company which exceeds AOA then the directors will be personally liable
50 | P a g e
Promoters
Promoter is a person who incorporates a company and fulfills all registration requirements of a
company.
Promoters are under a general duty to act with reasonable skill and care and to avoid any
potential conflict of interest and in case of conflict he should promote interest of company.
Promoter is bound to disclose all transaction done with a company and get them approved from
n d ppendent sha
first In a eholdd ers and DDiirectors
s of the Company. This requirement exists
irrespective of whether any profits made by promoters.
If promoter has not disclosed the transaction then company can:
1. Disregard that transaction i.e. Rescind the contract, but if 3rd party rights are affected
then it is not possible OR
2. Can recover secret profits made by promoter OR
3. Can claim damages for the loss caused to company
In order to recover pre−incorporation expenses from the company, promoter can include a clause
in article of association regarding approval of those expenses.
Pre-incorporation contracts
Pre−incorporation contracts are those which were made prior to formation of the Company and
are done on name of Promoters.
Company cannot ratify those contracts because company was not in existence at the time of
formation of contract, therefore promoter is personally liable for them towards the third party.
In order to avoid liability promoter:
− Avoid making pre−incorporation Contact and wait up−till incorporation of company

− Use off the shelf company
− Promoter should make agreement subject to formation of a company i.e. agreement
should be in form of novation agreement.
Company Names
As per Company Act 2006, Company can keep any name as far as following rules are satisfied:
− Name must end with word d ““lliim

miitteedd”” in case of Private Company and “plc” in case of
Public Company
− Name must not be the one whic chh iiss alr
reead
dyy pre
essen nt in Company Name Register held by
Company Name adjudicator
− Name must not be illegal i.e. offensiv vee or se
e ns
siittiivvee to a particular class
51 | P a g e
− Name must not give in nddic

caattio
onn off ccon
n ne
e ct
tiion
n w tth loca all OORR go ovveern
nm
meennttaall bboodies. If any
such word is to be used then approval is required from Secretary of State
− Name must not be one which requires pprroofes s siioonnaal liicceennsse to operate for e.g. Audit
firm, optician, doctor
Company name is included in its AOA and therefore can be amended through special resolution
but it requires notification to registrar of Companies who after approving it issues a new
certificate of incorporation.
Company Name Adjudicator may order change of name in yss if name is alleged to be similar
n 90 day
to other Company name and is misleading for customers according to Passing off action.
If a Company is using a different name for Business purposes then it must state its registered
name along with it also.
Loan Capital
Debentures / loan note:
If a company wants to take loan capital it has following options:
 Borrow from bbanks oorr finan ncial institutions

 Issue a ss ngle loan note to one e ppar
rtty against loan amount
 Issue llooaan stock to Public. Loan Stock is defined as a series of loan notes having similar
characteristics.
Loan notes can be redeemable or irredeemable where redeemable means that loan note will be
bought back by the company after particular time where as in irredeemable loan note buy back
date is on company’s discretion.
Debenture / Loan note is a document which contains terms of loan such as par value, repayment
date, secured OR not, etc.
Par value / nominal value / face value is value that appears on face of loan note and is used for
following purpose
o Interest is paid according to par value

o Redemption is made according to par value
o Financial statements of company shows par value
Par Value is fixed and is stated in AOA of the Company
Market value is an amount prevailing in market for buying and selling. It changes due to following
factors:
o Financial health of company
52 | P a g e
o Demand and supply

o Market interest rate
Loan note may be secured or unsecured. In case of bad debt secured loan notes are repaid at
priority from the value of mortgaged assets.
Debenture is created using debenture trust deed which contains detail of mortgage. Through
debenture trust deed several debenture holders appoint their representative who ensures that
company follows the loan agreement i.e. secured assets are not sold OR not destroyed. One of
the benefit of this deed is that now Company has to negotiate with one representative rather
than all debenture holders.
Advantages of Debentures as Compared to Shares
− Usually Board of Directors have authority to issue Loan Notes without specific approval
of Shareholders. This is not possible in case of share issue
− Loan Notes does not carry any voting rights
− Interest Expenses gives tax benefit
− Loan is a cheaper source of finance
− Loan notes can be issued at discount OR premium without any restriction
Disadvantages of Loan Notes
− It increases fixed cost of the company as interest must be paid irrespective of profits
− In case of non−payment, company may have to face liquidation
Charges
Charges are used to give security to loan note holder that if his loan is not repaid he can enforce
his loan by selling the charged asset. Charges are of following two types:
FIXED CHARGE: In fixed charge specific asset is mortgaged and it cannot be sold by borrower
however he can use that asset.
FLOATING CHARGES: In floating charge whole system is mortgaged and borrower can sell and
buy any asset within that system but he is not allowed to extract funds from agreed system.
Floating charge gets frozen i.e. converts into fixed charge if:
 The borrower fails in repayment

 Borrower breaches the loan agreement
 Business / system is ceased
Only Companies can create floating charges. If Floating charge agreement is breached then an
official receiver is appointed for recovering the charge.
Priority of charges
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 If an asset has multiple fixed charges then priority will be based on first come first basis.
If all charges were created on same time then equal distribution will be followed i.e. pari
passu basis
 If a system has multiple floating charges then also same rules will apply
 If an asset has both fixed and floating charges then priority will be given to fixed charges
irrespective of charge creation date. However if floating charge was created early and an
express clause for its priority (known as negative pledge clause) was included then
floating charge will be given priority over fixed charge.
Advantages of floating charges
 Company can sell charged assets

 Floating charge gives greater accessibility of funds to company
 Floating charge is favorable for charge holder because it is high liquid asset, therefore
easily saleable.
Disadvantages of floating charges
 Fixed charge has priority over floating charges if created on same asset
 It is difficult for charge holder to locate his asset because floating charge is not on a
specific asset rather it is on a system
 In case of dissolution, liquidator can challenge fixed charges created in last 6 months and
floating charges created in last 12 months of dissolution if he feels that charge was
created to give unfair priority to some charge holders
Registration of charges
Every charged holder must get his charge registered within 21 days otherwise the charge will not
be valid. If charge is invalid then loan will be treated as unsecured
Priority of charges is determined through registration date.
If charge is not registered on time then the Company and its officers who created charge will be
liable for a fine.
Register of Charges
Every company must maintain register of charges which will be open for public inspection it is
kept on registered head office of company and states:
o Detail of charges
o Detail of charged holder
o Amount of loan
o Date of loan
Every charge holder must inspect this register before creating new charge. Any error in this
register will result in personal liabilities of directors
54 | P a g e
MEMBERS / SHAREHOLDERS
Share capital of company is divided in following heads
− Authorized Share Capital represents the Maximum Number of shares a company can
issue but this limit has been removed by Company Act 2006
 Unissued d share capital: It represents the un used Authorized Share Capital
of the Capital
 Issued sshare capital: It represents the actual shares issued by company
 Paiid up: It represents actual amount paid from Issued share Capital.
In public company at least 1/4th must be paid
 Unpaid
o Ca a llleed uup: Amount of which demand is raised by Company
but is still un paid
o Un calledcalled: Amount which is outstanding and demand is not
yet raised by the company
TYPES OF SHARES
Ordinary Shares: These shares have following characteristics:
o Have voting rights on overall decisions of company

o Must be issued on registration date
o Return is not fixed
o Return is mandatory
o Last priority in distribution in case of dissolution of company
o Normally not redeemable
Preference shares: These shares have following characteristics
o Return is fixed
o Cannot take part in overall decisions of Company. However they take part in
decisions specific to their class
o They have preference over ordinary shareholders in distribution
o Whenever divided will be declared preference shareholder will be given priority.
If no dividend is declared and company goes in to liquidation then there rights will
be wasted.
Preference shares are further divided in following classes
o Redeemable: Buy back date is fixed

o Irredeemable: Buy back date is on company’s discretion
o Cumulative: Dividend rights are carried forward if not paid in particular year
o Non−cumulative: Dividend rights are lapsed if dividend not paid
o Participating: These preference share get their fixed return along with participation in
residual profit when distribution to ordinary share holders
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o Non participating: These preference shares only get fixed amount of dividend
Class Rights
These rights relate to that class specifically such as Dividend rights, Par Value of shares & Rights
in relation to dissolution.
Class Rights can only be varied after Special resolution from that class as Class Rights are specified
in AOA of the Company. However if Minority shareholders feel that variation is affecting their
rights adversely they can challenge variation within 21 days if they have at least 15% voting rights.
However it is to note that issue of new shares of that class is not regarded as Variation in Rights
as existing shareholders are not affected due to it as far as they were offered shares at priority.
Treasury shares
Treasury shares represent shares purchased by company from distributable profit of itself for
temporary period of time i.e. Treasury shares are not cancelled by Company and can be re−issued
without any legal formalities.
Company buy’s treasury shares in order to support market value of its shares. Any gain or loss on
treasury shares is booked in equity. Max 10% of share capital can purchased as treasury shares.
Company must notify Registrar within 28 days of disposal of Treasury shares.
Par value / Face value / Nominal value: This value is fixed in AOA of company and can be
amended through special resolutions. Usually this value is kept low because company cannot
issue shares below par value. It is used for following purposes:
− Shares capital in financial statements is shown at Par Value

− Dividend is declared in relation to Par Value
− In case of dissolution, company redeems it shares at Par Value
Market value
Market value of shares is one prevailing in market which is dependent on various factors:
o political situation
o economic situations
o demand and supply rules
o performance of the company
o future prospects of the company
o market interest rate
o other investment opportunities
Allotment of shares:
This Concept applies when a Company issues shares. Usually directors need specific approval
from Shareholders before issuing shares, however prior authority may be given for 5 years in case
56 | P a g e
of public Company. In case of Private Company directors have authority to issue shares unless
prohibited by AOA.
Pre-emption Right / Right issue
According to this right a company must always offer its shares to existing shareholders and if
shares are not purchased by existing shareholders within 2211 day
yss then company may offer these
shares to public.
Underwriting
It is a phenomena in which a financial institution purchases shares from a company if shares are
rejected in public offer. Company gets underwriting in order to avoid risk of funds not being
raised due to rejection by general public.
Bonus issue
In bonus issue company gives free shares to existing shareholders as dividend.
Due to bonus issue share price of company is reduced due to increase in Number of shares
without increase in resources of Company. Objective of bonus issue is to increase marketability
of shares and to reward shareholders when Company does not have sufficient funds to pay Cash
Dividend.
Rules for Issuing Shares
Company can never issue shares at discount i.e. Issue below Par Value.
In case of Issue of shares at discount shareholders who purchased those shares will be bound to
pay remaining amount along with interest. However this concept does not apply on:
 Bonus issue
 Under writing
 Unpaid share capital
Shares can be issued at premium i.e. above par value. Premium is recorded in share premium
reserve and it can be used:
 to issue bonus shares

 to finance the cost of issuing share
 to finance the buyback of shares at premium
Non cash consideration for shares
If shares are issued against non−cash consideration then in private company it is allowed as far as
non cash consideration is reasonable i.e. shares may be issued at under / over valuation as far as
it is not unreasonable.
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In case of public company, independent valuation is required within 6 months of this transaction.
If non cash consideration is tangible asset than it must be received by company within 5 years of
allotment of shares. Whereas in case of services shares must be issued after performance of
services.
Capital maintenance
According to this concept company must not reduce its share capital i.e. should not return
amount to Shareholders. This concept is introduced to protect the rights of creditors who claim
that their amount must be paid in priority over Shareholders of the Company.
Share capital can be reduced in following manners:
o Buy back of shares

o Waiving of unpaid share capital
o To restructure the share capital: In capital restructuring company reduces its par value
and transfers the amount from share capital to reserves with an objective
o to bring par value below market value so that new shares can be issued and
o To bring reserves in positivity so that company can pay dividends.
Usually creditors do not raise objection on this transaction as funds remain in the
company
In order to reduce share capital procedure is:
 Private Company: If company has a right to reduce share capital in in AOA then following
steps will be followed:
 Special resolution is passed for reduction in share capital
 Directors must give a statement of solvency within 15 days of special resolution.
Statement of solvency describes position of company that it can pay its debts
despite of reduction in share capital. If this statement is false then directors will
be personally liable and it is a criminal offence
 Apply to registrar of company for reduction.
 Public company: if the company has right for reduction in share capital in AOA then
following steps will be followed:
o Special resolution for reduction in shares capital
o Court approval which is issued once court is satisfied that no creditor has
objection on reduction
o Apply to registrar for reduction
If Company does has not right to reduce share capital in AOA then AOA needs amendment first.
For Public Company Share Capital cannot be reduced below 50,000 otherwise it has to re−register
as Private Company
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DIVIDEND
A company can declare dividend either in form of cash or shares.
Dividend is approved / declared by shareholders but this must not exceed the amount
recommended by directors. Dividend paid during year is known as Interim Dividend and this does
not require approval from Shareholders i.e. it is approved by directors.
Once dividend is declared it becomes liability of Company.
Dividend must be paid from distributable profits which include realized profits only i.e.
revaluation reserve, share premium reserve and share Capital reserve must be ignored. This rule
does not apply in case of dividend issued in form of shares
Dividend must be restricted to amount such that net assets of company do not fall below sum of
Share Capital and un−distributable reserves.
If excess dividend is paid then directors will be liable for that amount. Shareholders may also
liable if they have approved the dividend despite of knowing that it is excess. Auditors may also
be liable if wrong dividend was declared due to misstated profit on which auditor has given
opinion of truth and fairness.
Dividend paid in form of shares is known as Scrip Dividend / Bonus Issue.
Winding up and Dissolution
Winding up is the process in which company is closed where−as dissolution is the situation where
company is closed. Winding up can be done in following manners:
1. Volunteer winding up
This winding up is done through resolution of shareholders and is done in following manner:
a) Special resolution of shareholders for winding up is passed

b) Statement of solvency is provided by directors in which they gives a declaration that
company will repay all of its debt within 12 months. If this statement is false then
directors will be personally liable.
c) Liquidator is appointed by members who performs following three tasks:
a. Ceases the business
b. Disposes all assets
c. Distributes the fund
d) On completion of liquidation liquidator calls a meeting of members to inform them
about distribution
e) After this liquidator files an application to registrar of company who formally
deregistered company within 3 months
This process is known as member volunteer winding up.
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If the directors deny to provide statement of solvency i.e. they feel that the company will not be
able to repay its debts in full then company has to go through Creditor Volunteer winding up.
In creditor volunteer winding up whole process is same except a creditor committee of 5 Creditor
representatives is formed within 14 days of Special resolution. Creditor Committee appoints
liquidator and oversee the liquidation process in order to ensure that their interest is not
affected.
2. Compulsory winding up/ liquidation:
Compulsory Liquidation is done due to Court order rather than through resolution of
Shareholders.
o This process starts with a peetitiioonn by a party in court

o Court of law appoints an offfic ciiaall rreecceeiivveerr who investigates the petition and
prepares a statement of affair verified by directors within 2211 ddays of court
appointment
o On the basis of statement of affairs court of law m maay order liqquuiiddaattiioonn
o Within 1122 weeks
s of court order m memb b er rss and credittoorr will appoint a liquidator
o At the end of liquidation, liquidator will convey a meeting of members and
creditors in order to present a summary
o At the end liquidator will file an application to registrar who will formally
deregister the company within 3 months
W
Whhoo ca
ann fillee petitio
onn
1. Creditor can file a petition for dissolution if following conditions are satisfied:
a) Debt should be £750 or greater
b) 21 days have passed after due date
c) Creditor has obtained a judgment for recovery of loan
If creditor satisfies court that company’s assets are less than liabilities i.e. company fails balance
sheet test then court may order liquidation even before due date.
Further if creditor satisfies court that company will not be able to repay its loan on due date
despite it is can repay today because of its losses i.e. company fails commercial insolvency test
then court may order liquidation even before due date. This test means that company is solvent
today but is highly predictable that it won’t be able to repay on due date because it will lose
assets due to losses in business.
2. Shareholders can file a case for compulsory liquidation.

3. Registrar of company can file case for compulsory dissolution in following cases:
a) If Company deviates from AOA
b) If Company is involved in illegal activity
c) If Public Company trades without trading certificates
d) If Public Company fails to obtain trading certificate within one year of incorporation
60 | P a g e
Distribution priorities:
In case of dissolution assets will be distributed in following priorities:
 Fixed charged holders

 Liquidation expenses
 Preferential debt i.e. employee salaries, bonus and pension funds
 Floating charges
 Unsecured creditors
 Deferred debts i.e. dividends which are declared but not paid. Preference Shareholders
are given priority in it
 Shares are redeemed at par value with priority given to preference shareholders
 Residual value is distributed among ordinary shareholders
ADMINISTRATION
 Administration is an activity in which a third party expert is appointed to :

o To Rescue the company as a going concern OR
o To bring the company in a better position as compared to current scenario i.e.
if company cannot be kept going concern then administrator next objective is
to produce better results for financers as compared to current situation
 As soon as administration is appointed:
o Board leaves its position and authorities
o All cases against company are paused
o No one can file case for dissolution
o Assets held by company under higher purchase cannot be reinforced
o Administrator can delay payments to creditors on their due dates but cannot
affects their charges. Administrator can pay secured creditors and employees
without court approval but cannot pay unsecured creditors before secured
otherwise it will affect charges of secured creditors.
Process of administration
− An administration is appointed by co
o ur
rtt of la
aw w on petition
− Administrator has to prepare a plan within 8 weeks to rescue the company and present it
to shareholders and creditors
− Once this plan is approved by shareholders, Court makes an order for administration and
require a report in court within maximum 12 months in which either administrator
announces conclusion of administrations or demands extension.
Duties of administrator
− To rescue the company

− To notify the registrar of companies within 7 days
− To write words “under administration” on every letter head and official communication
61 | P a g e
Who can appoint administration??
Following parties can appoint administrator with Court approval:
− Directors
− Shareholders
− Creditors
Whereas following can required administrator without requiring any approval:
− Floating charge holders

− Company itself
− Court
INSIDER DEALING
It is a criminal offense in which an insider performs any of the followings task:
1. deals in securities of entity of which he has inside information

2. discloses insider information to other party
3. encourages others to trade in those securities / shares without disclosing inside
information
Inside information is defined as price sensitive information which has not yet made to public.
Insider is anyone who has inside information. Insider can be Primary Insider if he gets information
from source OR he can be a Secondary Insider if he gets inside information through another
insider.
A person must have inside information in order to be guilty of insider dealing i.e. one who is
encouraged is not guilty of insider trading as he do not know any inside information.
If a person is proved to be guilty for insider dealing then he has to face
− Maximum Seven years imprisonment or

− Unlimited firm
If a person proves that he would have acted in same way as he did in reality irrespective of inside
information then he will not be guilty OR if he can prove that he didn’t expected that information
to be price sensitive.
Market abuse
Market abuse is a civil case in which a culprit is liable to pay remedies to victim for his loss.
Market abuse case is filed when a person causes damage to other parties due to
 Insider dealing
 Demand supply is diissttuurrbe
edd
 Intentionally false information is communicated in market
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MONEY LAUNDERING
It is an activity operated with an intention to hide the real source of income. Money laundering
involves following three stages:
 Placement: In this stage those amounts are invested in legitimate activity for the first time
 Layering: Multiple transactions are done in this stage to hide the real source of income
 Integration: Finally in this stage those amounts are merged with legitimate income, such
that it appears to be legitimate income.
According to this act following people are penalized
 One who perform transaction of laundering can be imprisoned for 1144 yyeears s along with
unlimited fine
 A person who fails to report money laundering transaction can imprisoned forr 5 yyeeaarrss
along with unlimited fine
 Tipping off: A person who creates hurdles in enquiry process or alerts the culprit is liable
for tipping off and may be imprisoned for 5 years along with unlimited fines
Money Laundering is a criminal offence and it should be reported to National Crime agency
How to minimize money laundering??
 Appropriate training to employees should be provided

 Requirement for records maintenance should be increased
 All companies should appoint a money laundering reporting officer
Bribery Act
Grease money: In it an extra benefit is given in order to get a legal work performed in speedy
manner
Extortion money: This amount is obtained by using undue influence on someone
Bribery: It is a form of corruption which involves an act involving money OR gift that alters the
behavior of recipient performing a relevant function OR activity. Bribery is given to get an illegal
work done.
A person who is bribing someone OR a person who is taking bribe has to face imprisonment of
10 years along with unlimited fines
According to bribery act UK nationals and foreign public officials will also be liable if they are
bribed in UK
Further organization will also be penalized if their employees are involved in bribery. This means
it is the responsibility of organization to develop environment in which bribery is discouraged
COM ANNY AU
MPA UDDITO
ORR
63 | P a g e
Auditor expresses an opinion on the financial statement of a Company that it presents true and
fair view in all material aspects. Auditor gives reasonable assurance. Audit is mandatory on every
company except if it is a small company i.e. a company having:
− Balance sheet of not more than £3.26 million

− Turnover of not more than £6.5
− Employees not more than 50
Appointment of auditor
 First auditor is appointed by directors

 Subsequent auditors are appointed by Shareholders in AGM through ordinary resolution
 If shareholders fail to appoint auditor in AGM then secretary of state appoints auditor. He
must be notified within 28 days of AGM.
 Casual vacancy of auditors is filled by directors
 In case of private company same auditor is re−elected as of previous year except in
following cases when no re−election is allowed:
o Auditor is appointed by directors
o If auditor is resigned
o If auditor is dismissed
o If AOA requires re−election each year
Eligibility for auditor:
Auditor must have professional recognition i.e. auditing certificate and must be independent
from the company
Duties of auditor
Duty of auditor is to express an opinion that financial statements present true and fair view and
while expressing this opinion auditor ensures:
 Accounting records are complete

 Accounting records match with reality
 Financial statements match accounting records
 All legal requirements have been fulfilled
In case of public company opinion on director’s remuneration requires that it is in accordance

with AOA.
Liability of auditor:
If it is proved that auditor has acted recklessly then it is a criminal offence and he may be
imprisonment or fined
Power of auditor:
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 To access records of company at all times

 To make enquiry related to transaction
 To access records of subsidiary
 To attend general meetings
 To get copy of every resolution which affects his opinion
Termination of auditors:
If an auditor is terminated abnormally i.e. without completion of his period then following rules
will apply:
 If auditor is resigning from his position then he must give statement of circumstances
defining the reason of resignation within 14 days
 If auditor is removed then company must send special notice to shareholders for general
meeting in which ordinary resolution for dismissal of auditor will be passed.
 Statement of circumstances is still required
Auditor can also require the company to call general meeting in which he will discuss his
statement of circumstances
Company secretory
Company Secretary is an officer required in public company to fulfill all legal requirements related
to company which includes:
1. Submission of annual Accounts

2. Submission of annual returns
3. Minutes of board meetings etc.
In private companies these responsibilities are fulfilled by one of the directors.
Company secretory must be professionally qualified, lawyer or have 3 years of experience of

working with registrar.
Company secretory has an implied authority to make contracts on behalf of company which
relates to this functions.
Company Directors
Directors represent a body to whom shareholders have delegated their authority to take
decisions on the behalf of company.
Directors are employees of company and therefore owe statutory duties towards Company as a
whole rather than individual members. Directors derive their authority from AOA.
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Types of directors:
 Executive directors: They are involved in two roles, one as director of the company and
other as Employee of the Company i.e. day to day management of Company
 Non-Executive Directors: They are independent directors who just attend BOD meetings
and are not involved in operations of the Company. Benefits of NEDs are:
o Maintain a balance in board which help in maintaining risk balance
o Bring independence opinion in board decisions because of no personal interest
o Acts as a performance appraisal of BOD
 Shadow directors: This director doesn’t hold any legal capacity but in reality he controls
all of the directors. In case of any wrong act, shadow directors will equally be liable as
normal directors. Shadow directors are not involved in day to day operations of company.
 Chief executive Director / Managing director: CEO is one of the executive director of the
Company and acts as head of executive directors within operations of company.
CEO can take decisions regarding operations of the company and has following three
authorities:
1. Actual authority granted through AOA
2. Implied authority granted through his position
3. Apparent authority granted due to impression given by other directors of his
position
 Chairman: He is head of the board and is authorized to manage the meeting of boards
and maintaining the balance between EDs and NEDs.
Chairman has tie breaker vote.
It is recommended as good governance that chairman should be NED
 De Jure director: One who is appointed is a proper and legal manner
 De facto director: One who is not appointed in proper manner E.g. disqualified director,
director below age of 16 years OR director appointed through insufficient votes
Appointment of Directors
 First Directors are appointed through statement of proposed officer submitted at the time
of registration of company
 Subsequent directors are elected by shareholders through ordinary resolutions in every
AGM
 In case of any casual vacancy other Directors appoint temporary director
Termination of Director
 Death
 Bankruptcy
 Disqualification by court
 Insanity
 Retirement by rotation − every director retire once in every three years after which he
must get himself re−elected
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 Resignation: Any director can resign any time from company and he has the authority to
submit statement of circumstances to shareholders if he has any issue to discuss with
shareholders
Removal of directors
Directors can be removed through ordinary resolution along with special notice of general
meeting.
Director being dismissed has a right to submit statement of circumstances in which he can justify
his position.
In order to remove director ordinary resolution is required in general meeting of which special
notice must be raised. Special notice can only be raised by shareholders holding at−least 10%
shares.
Power of board of directors
BODs derive their power from AOA and are not bound to follow orders of individual share−
holders. However power of board is restricted in following manners:
 Resstr r iccttiioonn iimposed through AOA by SH Hss

 RReessttrriiccttiioonns imposed by CA 2006 i.e. directors cannot take certain decision e.g. to declare
dividend, to approve accounts, elect auditors
Remuneration of directors
It is determined by board of directors in accordance with AOA. As per good governance

remuneration of executive directors should be determined by Committee of Non−executive
directors know as Remuneration Committee. Remuneration of NEDs is fixed through AOA by
Shareholders in form of per meeting fee.
As per Company Law Remuneration contract of directors must not be greater than two years
otherwise specific approval from shareholders must be taken.
In listed companies disclosure on director remuneration is required in Financial Statements along

with an ordinary resolution each year. If the shareholders reject director remuneration then it
will have no legal impact as contract is already made, however it shows their dissatisfaction.
In listed companies audit is also required of director remunerations that whether it is in

ordinance with AOA or not
Duties of directors
Directors are under a duty of act in good faith of the company and for doing this CA 2006 has
defined following duties of directors:
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 To promote success of company:

It is the duty of director to promote success of a company.
Success of the Company is a subjective matter and it varies from situation to situation. It
is the duty of director to determine success of Company, however Company Act has
provided following guidelines for success:
o Decisions should be based on long term view
o Decisions should consider the society and environment
o Decisions should consider the welfare of employee
o Decisions should consider the reputation of company
o Decisions should consider the long term business relations
o Decision should be in best interest of the company
 Duty of disclosure complete information to shareholders
 Duty not to compete directly or indirectly with the company
 Duty to avoid conflict of interest
Directors should avoid any situations in which the conflict of interest can be created.
However if avoidance of such situation is not possible then business interest should be
given priority with appropriate disclosure.
Directors should never accept the business opportunities personally unless that
opportunity is rejected by company. It is to note that capacity of company to accept
opportunity is not a relevant factor as Company may create capacity if required.
 Duty to act within power
It is the duty of directors to act within powers and to use them in best interest of
company. If a director exceeds his powers then it is known as ultra vires and directors will
be personally liable for them. However company can ratify those acts through majority
vote. This ratification can challenged by minority shareholders if it is not in best interest
of company
 Duty to exercise independent judgment i.e. Irrespective of any pressure from majority
shareholders
 Duty to act with reasonable care and diligence: It is the duty of director to act with
reasonable care and diligence while taking decisions of company. Reasonable care is
determined by considering a fact that whether director has acted in a way what was
expected from a person in his position (i.e. objective test). If director holds special skills
and experience then court also considers it while assessing reasonableness of decision
(i.e. Subjective Test)
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Statutory Registers
As per Company Law a Company has to maintain certain Registers at its Registered Head Office
which should be kept open for inspection for free for Members and with Fees for Non−
Members.
Type of Register Contents

Register of Name, addresses, date became / ceased to be member, number of shares,
Members class of share and amount paid up.
Register of Directors Name, address, date of birth, occupation, residency, nationality,
and company directorships in any other companies within the last five years.
secretary Address of Directors gives address of Company (known as Service Address).
Separate Register is maintained for Directors Residential Address but it is
not open for public rather it is only provided to Registrar and certain
government bodies.
The register does not include detail about shadow directors as they are not
real directors.
Register of Record for Each Resolution and meeting must be kept for a minimum
Resolutions and period 0f 10 years
meetings
Requested for inspection must provide details about the person seeking the information, the
purpose of the request and whether the information will be disclosed to others. The company
may apply to the court for an order that it need not comply with the request.
Annual Return
The annual return must be filed and submitted to the registrar annually within 28 days of the
return date (which is the anniversary of the incorporation). The return must be signed by a
director or a secretary. It must include:
 The address of the company’s registered office

 The type of company
 The company’s principal business activities
 Details of directors and company secretary where applicable
 A statement of capital which states the total number of shares of the company, the
aggregate nominal value the shares and the amount paid up and unpaid on each
share.
 For each class of shares, the right of those shares, the total number of shares in the
class and their total nominal value.
 Details of the members of the company as the return date
 Details of the members who have cease to be members since the last return was
made
 Details of the number of shares of each class held by members at the return date.
69 | P a g e
Company only need to update the above details if any change has occurred in any of the
head.
Accounting Records
The company must keep the accounting records containing sufficient information to show and
explain the company’s transactions and is financial position.
At any time Company should be possible to disclose with reasonable accuracy the company’s
financial position at intervals of not more than six months according to Company Act and IFRS.
In the particular the records must show:
 Daily entries of all money received and spend

 A record of assets and liabilities
 Statement of stocks at end of the financial year
 Statements of stock−count to back up the above
 Statement of all goods sold and purchased, showing the goods and the buyers and
sellers
Annual Financial Statements
Companies are required to produce annual financial statements for each accounting reference
period. This includes a:
 Balance sheet / Statement of financial position and profit and loss account /
statement of comprehensive income showing true and fair view
 Director’s report stating the amount of any divided and likely future developments.
The annual financial statements must be approved and signed by the board of directors and a
copy filed with registrar.
AAnnnual General Meetiing
Timing Public companies must hold AGM within the ssixx mo onnth h following their
financiall year end d.
Failure to hold The company and every officer in default can be ffine edd iif an AGM is not held.
Private companies Priivatte companies are not required to hold an AGM
Notice 21 ddayss’ nnootice is required unless every member entitled to attend and vote
agrees to a shorter period
The notice must state that the meeting is an AGM, aaggeennddaa of meeting and
text of any resolution to be proposed. If any issue is not contained in Notice
then it cannot be discussed in meeting
70 | P a g e
Business (lssues) In AGM all kinds of businesses can be discussed.

Uss uall business includes:
 Approval of accounts
 Appointment of auditors
 Election of directors
 Declaration of dividends
−
Un−ussuuaal business include:
u
 Dismissal of Director
 Dismissal of Auditor
 Change of Company Name
 Close of Company
Resolutions Members holding at least 5% of the voting rights have the right to
propose a resolution for the AGM
If the members request is received after the ffiina
anncciiaall yyeeaarr end, the
member will be required to cover cost of circulating notice of
resolution.
General Meeting at other times
Timing Can be conducted at any time if any un−usual issue arises. For e.g. Public
Company must conduct General Meeting if there is serious loss and net
assets have fallen to less than half of the called up share capital.
Notice At least 14 days
Business / lssues Only Abnormal Businesses are discussed.
Who can call a meeting?
Directors Can call meeting any time

Members Members having at least 5% shares can require directors to call meeting within
21 days
If the directors do not call a meeting, the members who requested the meeting
may themselves call a meeting to take place within three months of the initial
request and recover their expenses from the company.
Resigning A resigning auditor may require the directors to convene a meeting so he can
auditor explain the reason for his resignation.
Court A court can call a meeting on the application of a director or member where it
would otherwise be impracticable e.g. to break a deadlock
Notice
Who must receive notice? Every member and every director

Failure to give notice Accidental failure to give notice to one or more persons does not
invalidate the meeting
Contents of notice Date, time and place of the meeting.
The general nature of the business to be transacted
The text of any resolution
Length of notice period AGM-21 days
71 | P a g e
Less days allowed if 11000% % sha a r hholders agree.

GM 1 d
M-14 daysa ys
Less days allowed if members holding at least 95% oo shares agree
b licc CCoo and 90
in Pub 0%
% aagrree in case of PPriiva
atte CCoompan
nyy
Special notice 28 Days’ Notice
Required for the removal of a director or auditor
Resolutions
Resolutions are the way in which companies take decision. It can be voted by Member himself
OR by a Proxy on his behalf
Type of Resolution Percentage Notification to registrar? Purpose of resolution

Required
Special Resolution 75% OR Must be notified to  Alter name
more Registrar within 15 days  Wind up company
of Resolution  Alter articles
 Reduce share
capital
Ordinary Resolution More than No Notice required For all matters other than
50% special resolution
Written Resolution
Written Resolution is a means of communication in case of Private Company as in Private

Company General Meeting is not required therefore resolutions are passed in form of Written
Resolution. In this text of Resolution is circulated to all members and they are required to
respond within 28 days of circulation. Decision is based on the votes casted. Written Resolution
can be Ordinary Resolution OR Special Resolution.
Quorum: is the minimum number of members that needs to be present at a meeting in order to
validate business. It is generally two persons who can be members or their proxies.
Voting is usually done in meeting by the show of hands initially i.e. one vote per shareholder
irrespective of their holding percentage. However if any shareholder demands Poll then voting is
done based on holding percentages. Poll can be demanded by shareholder having at−least 10%
shares. Quoted companies must publish the results of polls on their website.
Members have right to appoint a Proxy on their behalf if they fail to attend meeting. A proxy can
attend meetings, vote and speak on behalf of the member for whom he is acting.
72 | P a g e
Exam Kit Questions
73 | P a g e

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LAW/F4 CORPORATE

& BUSINESS LAW

F4 – Corporate & Business Law

Topic Name Page Number

1 English Legal System 3 – 11 (9 pages) 8

3 Law of Contract 17 – 31 (15 pages)

English Legal System

Criminal Law & Civil Law

Criminal Law Civil Law

In times of Kingdom there were two major sources of Law:

In Modern times following two formal sources of Law are followed:

In case law ratio decindi is binding for future cases

2. Legislation: Legislation is law made by parliament. It is also known as “Act”.

Legislation is of following kinds

1. New Legislation: It is law made on a new issue

Process of Formation of Legislation

1. In first step issue is raised by a normal person to relevant department

3. Committee stage: A Committee of le aal experrts and parliamentarians is made whose

It is to note that law can be initiated from any house of parliament.

1. Legislation making process is very slow and therefore costly also

1. Parliament lacks technical competency of making certain laws

1. Statutory instruments: This includes Government departments have delegated authority

Control over Delegated Legislation

Parliament imposes following 3 controls over delegated legislation:

1. Parliament requires positive resolution for some delegated legislation

Advantages of Delegated Legislation

1. Technical laws are made through delegated legislation

Disadvantages of Delegated Legislation

Court of Law has following two set of rules for Interpretations

 law cannot apply retrospectively

These assumptions may be change if the law states otherwise

 small family cases

County court has a tracking system for resolving cases efficiently:

a) Small track: This is for cases below 10 thousand pounds

 Summary offence: small crimes

HIGH COURT: It is divided in following 3 divisions:

1) QUEENS BENCH DIVISION: It deals with following cases

3) CHANCERY DIVISION: It is deals with following cases:

 High court judge give an approval

EUROPEAN COURT OF JUSTICE: It is an international court of European Union. UK is not bound

COURTS BINDING ON BOUND BY

Crown court European court of justice

ASSESMENT OF BINDING PRECEDENT

ADVANTAGES OF DOCTRINE OF PRECEDENT

 Time of court proceeding is saved.

DISADVANTAGES OF DOCTRINE OF PRECEDENT

 Case law is specific to the case in which it is form.

 Technical issues can resolved

HUMAN RIGHTS ACT

IMPACT OF HUMAN RIGHTS ACT

 To enter someone’s property

If defamation is non−transitional i.e. permanent then it is a criminal offense and is known as

4. DECIET AND INJURIOUS FALSEHOOD

It occurs when a person is imprisoned without any legal right to do so.

Two major flaws of neighbor principle are:

 It failed to considered impact of social benefits on duty of care

2. ANN’S TEST / TWO STAGE TEST

According to this approach a person owes duty of care if:

 If sufficient proximity or relation exists.

When a person breaches special relationship it is known as professional negligence.

Auditor’s liability is towards Company OR shareholders collectively as an owner of Company

1. BUT FOR TEST

2. MULTIPLE FACTOR TEST