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F4

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ACCA QUALIFICATIONCOURSE NOTES

JUNE 2012 EXAMINATIONS

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F1 Accountant in Business / FAB Foundations in Accountancy

F2 Management Accounting / FMA Foundations in Accountancy

F3 Financial Accounting / FFA Foundations in Accountancy

F4 Corporate & Business Law (English & Global)

F5 Performance Management

F6 Taxation (UK)

F7 Financial Reporting

F8 Audit and Assurance

F9 Financial Management

P1 Governance, Risk & Ethics

P2 Corporate Reporting

P3 Business Analysis

P4 Advanced Financial Management

P5 Advanced Performance Management

P6 Advanced Taxation (UK)

P7 Advanced Audit & Assurance

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June 2012 Examinations Paper F4 GLO

1 Sharia law 1

2 Market, planned and mixed economies 5

3 International organisations 7

4 International Court of Arbitration 17

5 UNCISG 25

6 International Sale Of Goods Contracts – The Seller’s Obligations 33

7 Rights and obligations of the buyer and the seller 39

8 When does risk pass from the seller to the buyer? 47

9 Documents found in international trade 51

10 Agency Law 59

11 Partnership Law 65

12 Company Law 73

13 Company Law: Directors and Officers 93

14 Company Law: Meetings and Resolutions 107

15 Company Law: Loan Capital 115

16 Company Law: Liquidations 119

17 Company Law: Corporate Governance 125

18 Company Law: Illegalities 133

19 Capital Maintenance 141

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Paper F4 Global




Chapter 1

Sharia law

• Sharia - awaytoawateringplace

• Quran - primarysourceofSharialaw

• Sunnah - whathascometobeacceptedconduct

• Shia,Hanafi,Maliki,Hanbali,Shafii

• thefiveschoolsoflaw

• theyprovidefurtherdetails/interpretationofacceptableconductandapplicationofthelaw

• aShariajudgemayrefertothesesecondaryschoolstodeterminehowtoapplythelaw

• ljithad - methodsofinterpretingthelaw

• taqlid - thebeliefthatnofurtherinterpretationisrequired

• ijma - oneoftwomethodsofinterpretationopentoajudgewhoisnotafollowerofthetaqlidthinking

- ijmaisaconsensusofopinionoflegalscholarsorjudges

• qiyas - theShariaequivalentofjudicialprecedent

- involvesthecomparisonoftwosimilarsituationsandtheapplicationofacceptedlawinthefirstsituationtothesecond

1June 2012 Examinations Paper F4 GlO


Judicial precedent

• inUKcommonlaw,judgesareboundtofollowdecisionsfromearliersimilarcases

• thisconceptdoesnothaveanytrueequivalentinSharialaw,thenearestequivalentisqiyas

• judges,intheUK,mayavoidtheearlierdecisionandthereforeavoidhavingtofollowtheprecedentdecision:

• ifearlierdecisionwasmadeperincuriam(withoutcare)

• iftooobscure

• ifinconflictwithbasisprincipleoflaw

• iftoowide

• (inEurope)ifinconflictwithEuropeanlaw

• iffactsarenotmateriallysimilar

• rulesforapplyingaprecedent

• mustbebasedonapointoflaw,notapointoffact

• mustbepartoftheratiodecidendiinthepreviouscase

• materialfactsshouldbesufficientlysimilar

• priorcourtmusthavesuperiorstatusinthehierarchyofthecourts

June 2012 Examinations Paper F4 GlO

Sharia law Chapter 1 2


Separation of powers and the rule of law

• ruleoflawreflectsthesituationwhichexistswhenmembersofasocietyabide/obeyasetofrulesgoverningbehaviour

• separationofpowers

• theprocessofmakinglawsisseparatedintothreedistinctareas:

- the legislature–anelectedbodywhichdecideswhich lawsneedtobepassedtosatisfythenation’swishes(forexample,health,defence)

- theexecutive–anelectedbodywhichmakesthedecisionswhichputthelawintoaction(forexampleintheUK,theelectedgovernment)

- thejudiciary–anon-electedbodywhichrulesondisputesaboutlaw

- thesedisputesmaybebetweengovernmentandindividuals(criminallaw)

- orbetweenindividualandindividual(civillaw)

3June 2012 Examinations Paper F4 GlO

Sharia law Chapter 1


June 2012 Examinations Paper F4 GlO

Sharia law Chapter 1 4


Chapter 2

Market, planned and Mixed eConoMies

• Market

• allocationofresourceisdeterminedbytheforcesofsupplyanddemand

• marketforcesdictatequantityofproductionandconsumption

• priceisdependentuponsupplyanddemand

• wealthisheldindividuallyratherthancollectively

• Planned

• allocationofresourceisdeterminedcentrallybygovernment

• pricesarefixedcentrallyforbothresourcesandproduction

• pricesarenotthereforetheresultoftheforcesofsupplyanddemand

• individualsownitemsofpersonalpropertybut…

• ...realwealthisheldbygovernment(centralorregional)

• Mixed

• asthenamesuggests,itincorporateselementsofbothmarketandplannedeconomies

• resourceallocationandproductionaredeterminedbyamixtureoffactors

• governmentdecisions(bothdirectandindirect)

• privatesectordecisions

• pricesareaffectedbysupplyanddemand

• butarealsoaffectedbygovernmentactionssuchastaxationandsubsidies

• wealthissplitbetweentheindividualsinsocietyandthegovernment

5June 2012 Examinations paper F4 Glo


June 2012 Examinations paper F4 Glo

MarkEt, plannEd and MixEd EconoMiEs chapter 2 6


Chapter 3

InternatIonal organIsatIons

• UN–UnitedNations

• generalpurposes:

• maintenanceofpeaceandsecurity

• developmentoffriendlyrelationsamongnations

• promotionofcooperationinsolvingeconomic,social,culturalandhumanitarianproblems

• promotionofrespectforhumanrightsandinternationalfreedoms

7June 2012 Examinations Paper F4 glo


UNCITRAL United Nations Commission on International Trade Law

• one of two bodies actively involved in drafting international law ( the other is the International LawCommission)

• concentratesonthedevelopmentandcodificationofinternationallaw

• triestoovercomethepracticalproblemscreatedbydifferentnationshavingdifferentlawsrelatingtotrade

• lookstostandardiseinternationallawinareassuchas:

• saleofgoods

• e-commerce

• disputeresolution

• alsoattemptstoincreaseinternationaltradebyintroducingtheHamburgrulescovering

• carriageofgoodsbysea

• internationalbillsofexchange

• cross-borderinsolvency

• encouragescountriestoadoptUNCITRALprinciples

June 2012 Examinations Paper F4 glo

IntErnatIonal organIsatIons Chapter 3 8


UNCITRAL United Nations Commission on International Trade Law

• UNCITRAL–specificwaysinwhichUNCITRALtriestoharmoniseandunifyinternationaltrade

• coordinatingtheworkofthevariousinterestedorganisations

• encouraginginter-organisationalcooperation

• promotingwideracceptanceandparticipationinexistinginternationalconventions

• preparingnewinternationalconventions,modellawsanduniformlaws

• promotingwaysofensuringconsistencyintheinterpretationandapplicationofconventionsandlaws

• collectinganddisseminatinginformationonlegaldevelopmentsandnationallegislation

• maintainingcloseliaisonandcollaborationwiththeUNConferenceonTradeandDevelopment

• maintainingcontactandliaisingwithotherUNelementsconcernedwithinternationaltrade


IntErnatIonal organIsatIons Chapter 3


WTO World Trade Organisation

• formedin1995

• basedontheprinciplesoftheGeneralAgreementonTariffsandTrade(GATT)

• devotedtothepromotionofinternationalfreetradeingoods,servicesandintellectualproperty

• inordertoachievethis,itworksactivelytoremoveobstaclestofreetrade

• tariffs

• importcontrols

• customs

• bureaucracy

• actsasaforumforthecreationoftradeagreementsandthen…

• ...administersthemwhentheyareformed

• continuouslyreviewsthetradepoliciesofdifferentnations

• assistsdevelopingnationstodesigntheirownnationaltradepolicies

• assistsininternationaltradedisputeresolution




ICC – International Chamber of Commerce

• purposeistoserveworldbusinessbypromoting

• trade

• investment

• openmarkets

• advocatesfreeandfaircompetitionamongbusinesses

• encourageseconomicgrowthinbothdevelopedanddevelopingcountries

• activeinitsattemptstofightinternationalcommercialcriminalactivities

• concernedwiththelegalprocesseswhichunderpintradingactivitysuchastradeagreementsanddisputeresolutionarrangements

• developedINCOTERMS




INCOTERMS

• producedandpromotedbyInternationalChamberofCommerce

• ideaistoaddressthemainissuesinvolvedininternationaltrade

• inparticular,thetermsaddress

• theextenttowhichthecostsofcarriageareincludedwithinthecontractprice

• whichpartyshouldbeartheriskintheeventofgoodsbeingdamagedduringthedeliveryofthosegoods

• atwhatmomentdoesownershipofthegoods,andthereforealsorisk,pass

• theextenttowhichcustomsdutiesareincludedwithinthecontractprice

• theresponsibilityforcustomsclearancedocumentation

• theseINCOTERMSincorporatedintoacontractestablishtheextentoftheserviceandtheriskacceptedbyeachofthecontractingparties,andwillbereflectedinthenegotiatedpriceofthecontract




INCOTERMS ( these MUST be learned! )

• thereusedtobe4categories

• now,witheffectfrom2010,therearejust2

• rulesforuseinrelationto“anymode/modesoftransport”

• rulesfortransportbyseaorinlandwaterway

• “anymodeoftransport”rules

• maybeusedwheneitherseatransportisnotinvolvedor….

• ….ifitis,,whenseatransportisonlyforpartofthejourney

• 7rules/abbreviationsapply

• EXW “exworks”

- minimumobligationsforthesellerconcerningdeliveryofthegoods

- buyerisresponsibleforallcostsincurredindeliveryfromseller’spremises

• FCA “freecarrier(namedplace)”

- seller completesobligationswhen thegoodshavebeencleared for export andcustodyhasbeentransferredtoanamedcarrierataspecifiedplace

• CIP “carriageandinsurancepaidto”

- thesellerisresponsibleforcarriageandinsuranceuptoaspecifiedlocation

- thereafter,thebuyerisresponsible

• CPT “carriagepaidto”

- thesellerpaysthecostsofdeliverytoastatedlocation

- onceatthatlocation,thebuyerassumesresponsibility




• DAT“deliveredatterminal”

- requiresthesellertopayforcarriagetotheterminalandthecostsassociateduptothetimethegoodsareunloadedattheterminal

- doesNOTincludecostsofimportclearance–thesecostsaretheresponsibilityofthebuyer

- effectively, therefore, the goods are“delivered”when they are unloaded at the terminal andplacedatthebuyer’sdisposal

- theterminalisthe“namedterminalinthecontractatthenamedportorplaceofdestination”

• DAP“deliveredatplace”

- thesellerbearsallcosts(except importclearancecosts) involvedindeliveringgoodstothenameddestination–the“place”

- thismeansallcostsuptothepointwherethegoodsarereadytobeunloadedbythebuyerattheagreeddestination

• DDP “delivereddutypaid”

- sellercompletesobligationswhenthegoodshavebeendeliveredtothebuyerataspecifiedlocationinthebuyer’scountry

- sellerpaysallcostsofdeliverytothatlocationincludingallimporttaxes,customsdutiesandanyotherofficialchargesintheimportingcountry

• “seaorinlandwaterwaytransport”rules

• theserulesapplywhengoodsarebeingtransportedfromoneporttoanother

• 4rules/abbreviationsapply

• FAS “freealongsideship”

- onlyapplieswheregoodsaretransportedbyship

- seller’sresponsibilities/obligationsceasewhenthegoodsareplacedonthequayalongsidetheship

• buyershouldhavearrangedforexportformalities

• FOB “freeonboard”

- buyerarrangesforshipment

- sellercompletesobligationswhengoodsareloadedontotheship

- sellerprovidesexportdocumentation,buyerprovidesimportdocumentation




• CFR “costandfreight”

- onlyapplicabletogoodsbeingdeliveredbyship

- sellerpaysallcostsuntilthegoodshave“passedtheship’srail”intheexportcountry’sport

- afterthatpoint,thebuyerassumesresponsibility

- thusthebuyerarrangesformarineinsuranceandforcustomscosts

• CIF “cost,insuranceandfreight”

- allthreecostsshallbetheresponsibilityoftheseller

- insuranceissuchthatthebuyerhastherighttorecoverfromtheinsurer

- minimuminsurancecoveriscontractpriceplus10%

• termsapplytodomesticcarriageofgoodsaswellasinternational(previouslytheserulesonlyappliedtointernationalcarriage)

• goodssoldwhilstintransit?

• onlytheoriginalseller“ships”thegoods

• sosubsequentpurchasersnowhaveanobligationto“procuregoodsshipped”

• buyersandsellersmustcooperateinprovidingsufficientinformationtoeachothertomakeeasiertheimport/exportofthegoods

• handlingcosts

• the2010termstrytoremoveanawkwardsituationwhichusedtoexistunderthe2000terms

• 2010termsclearlyallocateresponsibilityforthehandlingcostsatthedestinationterminal







Chapter 4

InternatIonal Court of arbItratIon

ICA International Court of Arbitration

• setupbytheInternationalChamberofCommercenearly100yearsago

• promotestheuseofarbitrationproceduresincommercialdisputes

• overseesallelementsofarbitrationprocess:

• maintainslistsofprospectivearbitrators

• confirmsappointmentofarbitrators

• makesdecisionsaboutchallengestoarbitrators

• approvesarbitrators’awards

• fixesarbitrators’fees

17June 2012 Examinations Paper f4 Glo


UNCITRAL Arbitration

• involvesthesettlementofadisputedcontractbyanindependentthirdparty,thearbitrator,orarbiter

• ofteninvolvescompromise

• thetwodisputingpartiesmayormaynotbelegallyrepresented

• thedecisionofthearbitratorisbinding....

• ...althoughthereisnormallyarightofappealtothecourts

• advantages

• cost

- nocourtcosts

- nocostsoflegalrepresentatives

• speed

- generallymuchquickerdecisionthantakingthedisputetocourt

- flexibilityoftheprocessgenerallyleadstoquickerdecisions

• privacy

- courtproceedingsareamatterofpublicrecord

- arbitrationisaprivate,unpublicisedmatter

• informality

- courtproceedingscanbeextremelystressful

- theinformalityofthearbitrationprocessismuchlessstressful

• expertise

- thearbitratorshouldbeanacknowledgedexpertincontractlawareaunderdispute

- ajudgeisanexpertinlawwithpossiblynoexperienceinthedisputedmatter

• decisions

- becausearbitrationisnotboundbyprecedent,decisionsofanarbitratorarelikelytobemoreinnovative

June 2012 Examinations Paper f4 Glo

IntErnatIonal Court of arbItratIon Chapter 4 18


UNCITRAL – arbitration

• therequirementofqualificationsforanarbitratorshouldbeestablishedwithinthearbitrationagreement

• ifnoqualificationrequirementhasbeenagreed,thenanyonemaybeselected

• nooneshouldbepreventedfromservingasanarbitratoronthegroundsoftheirnationalityalone

• anarbitratorshouldbeindependentandunbiased

• anynominatedarbitratorshoulddiscloseanyrelevantfactswhichmaybeseentoimpairtheirindependence

• similarly, if it becomes the case that independence is threatened, an arbitrator should disclose thecircumstances

• if it becomes impossible for an appointedarbitrator to continue to act, they shouldwithdraw from theposition,or

• bothpartiesmayagreethattheappointmentshouldbeterminated,or

• eitherpartymaychallengethearbitratorconcerningindependence


IntErnatIonal Court of arbItratIon Chapter 4



• for a dispute to be submitted to arbitration, under the UN’s Model Law on International CommercialArbitrationtheagreementtoturntoarbitrationmustbeinwriting

• thereshouldthereforebyan“arbitrationclause”agreement

• toqualifyas“beinginwriting”oneofthefollowingrequirementsshouldbeappropriate

• itshouldbecontainedin:

• adocument,signedbybothparties

• anexchangeofdocumentsclearlyreferringtosuchanagreement/clause

• anexchangeofdocumentsofalegalnatureclearlyreferringtosuchanagreement/clause

• anotherwrittencontractbetweenthepartiesreferringtothearbitrationagreement/clause

• thearbitrationtribunal

• if theparties have agreed tohave a sole arbitrator, the twoparties should agreeon thatperson’sidentity

• ifthepartiescannotagree,theywillneedtoreferthemattertoanominatedcourtortribunalforthemtodecidetheidentityofthearbitrator

• ifthepartieshavenotagreedonasolearbitrator,theModelLawstatesthatthereshouldbethreearbitrators

- onechosenbyeachofthetwodisputingparties,and

- onechosenbythetwoarbitrators





• disadvantages

• privacy!

- onepartyinthedisputemayactuallywantthepublicity

• applicationofthelaw

- independentarbitratorsdonotnecessarilyhaveexpertiseintheinterpretationandapplicationofthelaw,whereas

- judgesincourtsareexpertsinthisfield

• predictability

- arbitratorsarenotboundbyprecedentsomaybeinconsistentwhencomparedwithdecisionsinsimilardisputes,whereas

- judgesareboundtofollowtheprinciplesofprecedentsodisputeresolutionmaybeseenaspredictable

• precedent

- resolutionunderarbitrationcreatesnoprecedentsofuturesimilardisputeresolutioncoulddifferfromtheearlierarbitrationdecision,whereas

- whereadisputeliesbeyondthescopeofestablishedprecedent,acourtdecisioncouldbeseentocreateanewprecedentuponwhichlatersimilardisputeresolutionwillbebased




UNCITRAL – arbitration – application to have an arbitration award set aside / cancelled

• incapacity

• occurswhenonepartyinthedisputeissufferingunderanincapacitywhenthetribunalhearingtookplace

• notice

• occurswheninsufficientnoticehasbeengivenofeither

- theappointmentofanarbitrator,or

- thedateoftheproceedings

• invalidityoftheagreement

• ifthetribunaldecisionisinvalidunderthelawgoverningthedisputecontract

• publicpolicy

• whereadecisionfromatribunalisclaimedtobeagainstthepublicpolicyoftheclaimant’sstate

• subjectmatter

• tribunals are restricted tomaking awards only onmatters includedwithin the agreement to seekarbitration

• compositionofthepanelofarbitrators

• iftheproperrequirementsofpanelselectionhavenotbeenfollowed(normallythreearbitrators)




UNIDROIT – International Institute for the Unification of Private Law

• independentinter-governmentalorganisation

• studies the need for and how tomodernise, harmonise, standardise and co-ordinate private law in aninternationalcontext

• ofparticularconcernisinternationaltradelaw

• threetierstructure

• secretariat

- responsibleforday-to-dayrunning

• governingcouncil

- supervisespolicy

- drawsupaworkprogramme

- superviseshowthesecretariatcarryouttheprogram

• generalassembly

- theultimatedecisionmakingbody

- approvesthebudget

- approvestheworkprogramme

- electsthegoverningcouncil







Chapter 5

UNCISG

UNCISG – United Nations Convention on Contracts for the International Sale of Goods

• appliestocontractswherebuyerandsellerareindifferentstates

• twopossibilities

• wherebothstateshaveacceptedtheconvention(contractingstates)

• whereonlyoneofthestateshasacceptedtheconvention

• in this latter situation, both parties have agreed that the contract should be subject to the law of theacceptingstate

• nationalityofthepartiesisnotrelevant

• locationofparties’businessisimportant

25June 2012 Examinations Paper F4 GLO


Contracts not covered by UNCISG

• acontractforthesaleofgoodsisoneinwhich

• theselleragreestotransfertitle(ownership)ofthegoods

• tothebuyer

• inexchangeforamoneyconsideration(theprice)

• soUncisgdoesnotapplytocontracts:

• forthesupplyofservices

• fortheexchangeofgoods

• whereoneofthepartieshasthemainobligationtosupplylabour

• formanufacture,wherethebuyerprovidesallthematerial(ormost)

• wheregoodsarepurchasedforpersonal,familyorhouseholduse…

• ....unlessthesellerkneworoughttohaveknownabouttheproposeduse

• wheregoodsareboughtatauction

• wheregoodsareboughtbylegalauthority

• forpurchaseofstocksandshares

• forpurchaseofshipsoraircraft

• forpurchaseofelectricity


UNCISG Chapter 5 26


UN CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS

• contractsareagreements

• anagreementconsistsofanofferandanacceptance

• theagreementshouldbesupportedbyconsiderationand....

• ....madewithintentiontocreatelegalrelations

• anofferisasufficientlydefiniteproposalforconcludingacontractwhich

• isaddressedtooneormorepersons

• indicatestheintentionandwillingnessoftheofferortobebounduponacceptanceoftheoffer

• indicatesthegoods involved, thequantityandthepriceandthereforequalifies for thedescription“sufficientlydefinite”

• offersmustbedistinguishedfrominvitations

• aninvitationisnotcapableofacceptance

• aninvitationisinvitinganotherpersontomakeanoffer


UNCISG Chapter 5


UN CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS

• forexample:

• goodsinasupermarketareinvitations

• goodsinashopwindowareinvitations

• advertsarenormallyinvitations

• but,veryoccasionally,advertsmaybetakentobeoffers

• mailcataloguesareinvitations

• theprocessofanauctionsaleconstitutestheauctioneersinvitingaseriesofoffers


UNCISG Chapter 5 28


Offers

• halfoftheagreement

• anexpressionofwillingnesstobeboundonspecificterms

• mustbecertain

• muststillexistwhen“accepted”

• mustbedistinguishedfrominvitations

• mustbedistinguishedfromstatementsofintent

• aresponsetoarequestforinformationisnotanoffer

• arequestforinformationisnotacounteroffer

• revocationofanoffermustbecommunicatedtotheofferee

• anofferiseffectivefromthemomentitisreceivedbytheoffereewhether

- orally

- bymail

- bypersonaldelivery

• anofferwillceasetobecapableofacceptanceif

- withdrawn

- revoked

- rejected


UNCISG Chapter 5


• withdrawal

• iswhere theofferor communicates to theofferee the intention towithdraw theofferbefore theoffereehasreceivedit

• revocation

• ( effectively,withdrawal after theoffereehas received it )maybe effected at any timebefore theoffereehasacceptedit

• ifanofferisstatedasbeing“irrevocable”thentheofferorcannotrelyuponrevocation

• rejection

• occurswhentheoffereesays“no”

• butmayalsooccurwhentheofferee’s“acceptance”isnotcompleteandunconditional

• anymaterialalterationtothetermsstatedintheofferor,indeed,anyadditionaltermsintroducedwithinthe“acceptance”willhavetheeffectofrejectingtheofferandreplacingitwithacounteroffer

• animmaterialalterationisnotrejectionandcounteroffer

• thecontractisvalidincorporatingtheimmaterialalterations


UNCISG Chapter 5 30


Acceptance

• theotherhalfoftheagreement

• mustbecompleteandunconditional…

• ...subjecttoallowingimmaterialalterationstotheoffer

• theoffermuststillbe“open”atthetimeofacceptance

• acceptancemustbecommunicatedtotheofferor,buttheofferormaywaivethisrightofcommunication

• communicationmaybebyareliablethirdparty

• silencecannotbeacceptance

• acceptancemaybebyconduct

• oncetheactsofacceptancehavestarted,theofferorcannotrevoketheoffer

• ifacceptanceisbyletter,itiseffectivefromthedateshownintheletter

• acceptanceshouldbewithinareasonabletimeoftheoffer

- oraloffer?immediateacceptance

- emailedoffer?twoorthreedays

- surfacemailoffer?a“few”days

- telegrammedoffer? reasonable time commences from the date the telegrammedofferwashandedinfordelivery


UNCISG Chapter 5



UNCISG Chapter 5 32


Chapter 6

InternatIonal Sale of GoodS ContraCtS – the Seller’S oblIGatIonS

• contractsinvolvingcarriage

• if thegoodsarenot specific i.e. theyareunidentifiedgoods from inventory, the sellermustnotifythebuyerabout thedetailsof theconsignmentgivingclear indicationabout theparticulargoodsallocatedtothebuyer’scontract

• inaddition,thechoiceoftransportshouldbeappropriatetotheparticulargoods

- inanimateornon-perishablegoods,noproblem

- butperishablegoodsshouldbeplacedinthehandsofanappropriatecarrier

• timingofthedelivery

• deliveryshouldbeeffectedonthedatespecifiedinthecontract(orwithinaspecifiedperiod)

• ifnodateorperiodisspecified,thesellershoulddeliverwithinareasonabletimeoftheformationofthecontract

• specificgoods–thoseparticularunits/itemswhicharetobesoldi.e.“thisparticularpairoftrousers”

• unidentified goods drawn from inventory – not individually identifiable, rather they are part of generalinventoryi.e“apacketofbiscuits”ratherthan“thatpacketofbiscuits”



Contracts involving carriage

• twomainareas

• delivery

• quality

• delivery

• thesellerisobligedtodeliverthegoods,handoveranydocumentsrelatingtothegoodsandtransfertitletothegoodsasrequiredbythecontract

• ifaplacefordeliveryisspecifiedwithinthecontract,thenthegoodsmustbedeliveredtothatspecifiedplace

• ifnoplaceisspecified,impliedtermsapply

• ifcarriageofthegoodsisinvolvedinthecontract,theseller’sobligationceaseswhenthegoodsaredeliveredtothecarrier(orfirstcarrierifmorethanoneisinvolved)

• ifunidentifiedgoodsareintheseller’sinventory,theseller’sobligationsarecompleteuponplacingthegoodsatthebuyer’sdisposal

• ifspecificgoodsareinvolved,again,theseller’sobligationsarecompleteuponplacingthegoodsatthebuyer’sdisposal.

• ifnoneoftheabovethree“place”situationsisapparent,theseller’sobligationsceasewhenthegoodsareplacedatthedisposalofthebuyerattheseller’splaceofbusiness


IntErnatIonal SalE of GoodS ContraCtS – thE SEllEr’S oblIGatIonS Chapter 6 34


Quality

• thesellermustdelivergoodswhichareofthequantity,qualityanddescriptionrequiredbythecontract,and...

• ...whicharecontainedorpackagedinthemannerrequiredbythecontract

• however,ifthecontractfailstospecifyquantityandqualityandthereisnodescriptionwithinthecontract,thesellermustneverthelessmeet“conformityrequirements”

• goodsdeliveredshouldbefitforanypurposewhichhasbeenspecified

• ifnopurposehasbeenspecified,thegoodsdeliveredshouldbefitforthepurposeforwhichgoodsofthatdescriptionwouldnormallybeused

• ifasampleisofferedbythesellerforinspectionbythebuyer,thegoodsdeliveredmustbeexactlythesamequalityasthesampleoffered.Itisirrelevantwhetherthebuyerdoesinfactinspectthesample

• ifnosampleisoffered,thegoodsdeliveredmustbeexactlyinaccordancewithanydescriptiongiven

• thegoodsshouldbepackagedinthemannerwhichisnormalforgoodsofthatdescription


IntErnatIonal SalE of GoodS ContraCtS – thE SEllEr’S oblIGatIonS Chapter 6


• there isnoobligationontheseller toensurethatthegoodscomplywith legislation inthebuyer’sstateunless

• thatsamelegislationappliesintheseller’sstate,or

• thebuyermadethesellerawareofthelegislation,or

• thesellerknewtherequirementsimposedbythelegislation

• thesellerwillnotbeliableforbreachoftheconformityrequirementsinthesituationwherethebuyerknewthatthegoodswouldnotconform

• thesellerwillbeliableifthenon-conformityexistedatthedatethetitle/risktothegoodspassedtothebuyer

• thisissoevenifthefailuretoconformbecameapparentonlyafterthedatethetitle/riskpassed

• inaddition,thesellerisliableevenaftertitle/riskhaspassedwherethesellerisinbreachofobligations

• forexample,wherethereisaguaranteethatthegoodswillremainfitforthepurposeforaperiodoftimeafterdelivery

• finally,ifthequantitydeliveredislessthanthequantityorderedbutdeliveryisbeforethecontractdatefordelivery,thesellerisabletomakegoodtheshort-fallatanytimeuptothecontractdateofdeliverywithnopenalty

• theonlyexceptioniswhere,asaresultofthereducedquantity,thebuyerincursunreasonableexpenseorinconvenience.Inthatsituation,thebuyermayseekcompensationintheformofdamages




The buyer’s duty to examine the goods

• assoonaspossibleafterdelivery,thebuyershouldexaminethegoods

• whenthebuyerisgoingtodespatchthegoodsimmediatelyonreceipt,andthesellerisawareofthatfact,thebuyermayinspectthegoodsuponreceiptatthatnextdestination

• noticeofnon-conformityshouldbegiventothesellerwithinareasonabletimeafterthenon-conformitywasdiscovered

• failuretogivenoticewithinthatreasonabletimewilllosethebuyertherighttosueforbreach

• ifnon-conformitynoticeisnotgivenwithintwoyearsofdelivery,thebuyerwilllosetherightofcompensation

• however, if thesellerknewof thenon-conformity,and failed todisclose this to thebuyer, thesellerwillremainresponsible


IntErnatIonal SalE of GoodS ContraCtS – thE SEllEr’S oblIGatIonS Chapter 6


Third party rights

• thesellermustdelivergoodswhicharefreefromanythirdpartyrightorclaim…

• ...unlessthebuyeragreestoacceptthosegoodssubjecttotherightorclaimofthethirdparty

• specialprovisionsrelatetothesituationwheretherightorclaimisbasedonintellectualpropertyorindustrialproperty

• in thesesituations thesellermustdelivergoodswhichare free fromtheseproperty rightsprovided therightsexistinthelawof

• thestatewherethegoodswillberesoldorused,or

• thestatewherethebuyerhasaplaceofbusiness

• intellectualpropertyincludes

• trademarks

• patents

• copyrights

• suchacontractwherethesethirdpartypropertyrightsareaffectedmustinvolvethebuyer’sawarenessandacceptancethattherightsexistandwillberespected




Chapter 7

Rights and obligations of the buyeR and the selleR

• Thebuyer’sremediesarisingfromtheseller’sbreachofcontract

• requireproperperformance

• avoidthecontract

• proportionallyreducethecontractprice

• seekdamages

• damagesmaybeclaimedbythebuyerevenwhenanyofthefirstthreeremediesisalsoclaimed

• properperformance

• thebuyermayrequirethesellertohonourthecontract

• thisright is lost ifthebuyerhasalreadytakenactionwhichis inconsistentwiththerequirementofperformance,forexample,thebuyerhastreatedthecontractasavoided

• thebuyermayextendthetimeperiodforperformance

• anorderbythecourtofspecificperformancewillonlybeawardedifthatisconsistentwiththeexistinglocallaw

• ifabreachbytheselleriswithreferencetonon-conformanceofthedeliveredgoodsthebuyermayrequirethesellerto

- repairthegoodswherenon-conformanceisminor,or

- replacethegoodswherenon-conformanceisfundamental

• thesellermayseektoremedythefailuretoperformif

- thereisnounreasonabledelay,and

- thebuyerisnotunreasonablyinconvenienced

• forthistoapply,thesellermustgivenoticetothebuyeroftheintentiontoremedy,and

• thebuyershouldcontactthesellershowingacceptanceoflateperformance

39June 2012 Examinations Paper f4 glo


• note,thebuyermustactuallyreceivethenotificationfromtheseller

• wherethebuyerfailstoreplytotheseller’snotice,thesellerisentitledtoassumethatthebuyerhasacceptedlateperformance

• wheregoodsaredeliveredbeforetheduedate,thebuyer

• mayacceptdelivery,or

• refusedeliveryuntilthecontracteddate

• whereexcessgoodsaredelivered,thebuyer

• mayacceptallthegoods,or

• someoftheexcess,or

• justthosegoodsasperthecontract

• ifthebuyeracceptssomeoralloftheexcess,thebuyermustpayforthatexcess


• thebuyermayavoidthecontractwherethesellerisinfundamentalbreach

• mayalsoavoidinthesituationwheretheseller

- failstodeliver,or

- givesnoticethatdeliverywillnotbepossibleonthecontractdate(oranyextensiontothatdate)

• suchadeclarationofavoidanceiseffectiveonlyifitismadebynoticefromthebuyertotheseller

• proportionallyreducethecontractprice

• fornon-conformitybreachthebuyermayreducethecontractpriceinproportiontothedegreeofnon-conformity

• ifthesellercorrectsthenon-conformity,thebuyercannotreducetheprice

• ifthirdpartyrightsareinvolvedandthebuyercouldnotreasonablyhaveknownthen,onsubsequentdiscovery,thebuyermayreducethecontractprice

June 2012 Examinations Paper f4 glo

Rights and obligations of thE buyER and thE sEllER Chapter 7 40


Obligations of the buyer

• thebuyermusttakedeliveryofthegoodsasspecifiedwithinthecontractandmustpaytheagreedpriceforthosegoods

• ifapriceisnotspecifiedwithinthecontractitisassumedthatthebuyerandsellerhaveanagreementtosetthepricewhichprevailedatthedateofthecontract

• ifthepriceisdeterminedbytheweightofgoodsdelivered,thevalueiscalculatedbasedonthenetweight

• placeofpayment,ifnotspecifiedwithinthecontract,shallbe

• attheseller’splaceofbusiness,or

• ifpayablewhengoods/documentsaredeliveredtothebuyer,attheplacewherethatdeliverytakesplace

• timingofpayment,ifnotspecifiedwithinthecontract,shallbe

• ondeliveryofthegoods/documents…

• ...butonlyafterthebuyerhasexaminedthegoods

• thesellermayincludeacontracttermwhichstatesthattitletothegoodsshallnotpassuntilpaymenthasbeenmade.Thisiscalleda“RomalpaClause”

• inaddition,wherecarriageisinvolved,thesellermaystatethatthegoodsshallnotbereleasedtothebuyeruntilpaymentismade

• wherethereisanagreeddateofpayment,thebuyershouldpayonthatdatewithoutthesellerhavingtorequestpayment

• thebuyerisobligedtotakedeliveryofthegoods,and

• takeallsuchreasonablestepstoenablethesellertoeffectdelivery


Rights and obligations of thE buyER and thE sEllER Chapter 7


• Theseller’sremediesarisingfromthebuyer’sbreachofcontract

• requireacceptanceofthegoods

• requirepaymentforthegoods


• seekdamages

• acceptanceandpayment

• thesellermayenforcethecontractualtermswithreferencetoacceptanceandpaymentunless...

• ...thesellerhastakenstepsincompatiblewiththatright,forexample,thesellerhasnotifiedthebuyerthatthecontractisbeingtreatedasavoided

• itispossibleforthesellertoextendthetimeperiodforthebuyertomeetobligations…

• ...butsuchextensionshouldbeofreasonablelength


• ifthebuyer’sbreachisfundamental,or

• thebuyerrefusestoacceptthegoods,or

• thebuyerfailstopayaccordingtothecontract

• ifthebuyerhaspaid,thesellerlosestherighttoavoidunless...

• ...itisinrespectoflateperformancebythebuyer,or

• ....itisinrespectofanyotherbreachbythebuyer




Damages

• maybeclaimedbyeitherpartyinadditiontoanyotherremedyclaimede.g.avoidance

• isamonetaryamountclaimedincompensationforthelosssufferedbytheinjuredparty

• theamountofdamagesawardedislimitedtothatamountwhichcouldhavebeenreasonablyforeseeablebythebreachingparty

• theinjuredpartyshouldseektomitigatethelosssufferedasaresultofthebreach,forexample:

• bysellinggoodswhichhavebeenrejectedbythebuyerandclaimingonlythedifferencebetweencontractpriceandsaleproceeds

• bybuyingreplacementgoodsandclaimingonlytheamountpaidinexcessofthecontractprice




Breach of contract

• definedas“thefailureofonepartytoperformtheirobligationsunderthecontract”

• twotypes

• anticipatorybreach,and

• breachduringperformance

• anticipatorybreachisabreachinadvanceoftheduedateforcommencementofperformance

• ifitbecomesapparentthattheotherpartywillnotperformamaterialpartoftheirobligationsbecause

- thereisaseriousindicationoftheirinabilitytoperform

- creditworthinessisindoubt

- indicationsarisingfromtheotherparty’spreparationtoperform

• in these situations, one party may suspend their own performance, even if the due date forcommencementhasnotyetbeenreached

• butmustgivenoticeoftheintentiontosuspend

• whensuchnotice is received, if theotherpartygivesassurancethateverything isfine, thenotifiercannotsuspendperformance

• whengoodshavealreadybeendespatchedbeforethepotentialbreachbecomesknown,thesellercanpreventdeliveryofthosegoods,eventhoughthebuyermayalreadyholdthetitledocuments




Breach during performance

• remediesavailabletotheinjuredpartyhavealreadybeencoveredinthesenotes

• possiblethatthebreachmaybeclassedas“fundamental”

• thisisamajorbreach,forexample,onepartygivingnoticethattheywillnotcontinuewiththecontract

• inthissituation,theinjuredpartymaydeclarethatthecontractisavoidedand…

• ...claimdamages

• instalmentcontracts

• wheredeliveryofthegoodsisbyinstalmentstherightsoftheinjuredpartydependonthetimingofthebreach

- in(say)ateninstalmentcontract,thefirstinstalmentisinbreach(e.g.poorquality)thebuyermaytreatthewholecontractasavoided

- butifthefirstseveninstalmentsareacceptedandtheeighthisinbreach,thebuyerwilllikelyonlybeabletorejecttheeighthinstalmentandclaimdamagesorrequirereplacement




Effects of avoidance

• whereacontractisavoided,bothpartiesarereleasedfromtheirobligations

• but,ofcourse,remediesmustthenbeavailabletotheinjuredparty

• claimdamages

• resorttoatribunal

• exerciseanyrightsspecifiedinthecontractinanticipationofavoidance

• claimrecoveryofanygoodsdelivered(restitution)

• butnote,restitutionisonlyavailableifnothirdpartyrightswillbeadverselyaffectedandfullrestitutionispossible(restitutioinintegrum)




Chapter 8

When does risk pass from the seller to the buyer?

• whendoesriskpassfromthesellertothebuyer?

• threepossiblesituations

- contractsinvolvingcarriage

- contractsforgoodssoldwhilstintransit

- contractsnotinvolvingcarriage

• contractsinvolvingcarriage,specificgoods

• ifthecontractspecifiestheevent,timeorplacewhenriskistopass,thenriskpassesaccordingtothecontractterm

• ifnosuchtermiswithinthecontract,riskpasseswhenthegoodsareputintothehandsofthecarrier,orfirstcarrierifmorethanoneisinvolved

• contractsforgoodssoldwhilstintransit

• whengoodshavebeenputinthehandsofacarrier,forexample,todelivertoadistributioncentre,andthosegoodsaresoldwhilstintransit,riskpassestothebuyeratthetimethecontractisenteredinto

• theeffectofthisisthatthebuyerassumesresponsibilityand,therefore,riskasatthedatethegoodsareputintothehandsofthecarrier

• exceptionally,ifthesellerknewatthetimeofthecontractthatthegoodsweredamagedorhadbeenlost,thesellerremainsliable

• contractsnotinvolvingcarriage

• riskpassesfromthetimethegoodsareputatthedisposalofthebuyerandthebuyerisawareofthatfact

• finally,whengoodsdonotconformtorequiredstandards,andthisisnotdiscovereduntilafterriskhaspassed,thesellerisliableforbreachofobligationsconcerningnon-conformity

47June 2012 Examinations paper f4 Glo


Preservation of goods• bothpartieshaveadutytopreservethegoods(ptg)

• so,whoeverhaspossessionmustptgeventhoughownershiphaspassedtotheother

• ifabuyerrefusestoacceptdelivery,thesellerstillhasanobligationtoptg

• whenabuyerisobligedtopayforgoodsondelivery,butthenfailstodoso,thesellermustthenptg,butneednotdeliver

• whenabuyerintendstorejectthegoods,butneitherthesellernoragentisavailabletoacceptthisrejection,thebuyerisobligedtoptg

• thislatterpointappliesunlessitwouldbeunreasonablyexpensiveorinconvenient

• thepartywhoispreservingthegoodscanrecoverreasonableexpensesfromtheotherparty…

• ...andmayevenstoretheminthepremisesofathirdparty(atreasonableexpense)

• ifthegoodsareperishable,itisavailablefortheoneinpossessiontosellthematthebestavailablepricebeforetheybecomeworthless

June 2012 Examinations paper f4 Glo

WhEn doEs risk pass from thE sEllEr to thE buyEr? Chapter 8 48


Impediment

• ifapartyfailstoperformtheirobligationsunderacontract,thenormalpositionisthattheotherpartymayavoidthecontractandclaimdamages

• however,ifthebreachingpartycanprovethattheirfailuretoperformwasduetoanimpedimentbeyondtheircontrol,theywillnotbeliabletopaydamages

• theimpedimentshouldbesuchthatitwasnotreasonablyforeseeableatthetimethecontractwasenteredinto

• oncetheimpedingeventceasestopreventperformance,thecontractshouldgoaheadasplanned

• ifathirdparty’sfailuretoperformisthecauseofcontractfailure,thebreachingpartyisexemptfromliabilityonlyiftheycanprovethatboththemselvesandthethirdpartywouldbeexemptbecauseofcircumstancesbeyondtheircontrol

• iffailuretoperformisbecauseofanimpediment,theimpededpartymustgivenoticetotheotherpartywithinareasonabletimeafterfirstknowingoftheimpediment

49June 2012 Examinations paper f4 Glo

WhEn doEs risk pass from thE sEllEr to thE buyEr? Chapter 8


June 2012 Examinations paper f4 Glo

WhEn doEs risk pass from thE sEllEr to thE buyEr? Chapter 8 50


Chapter 9

DoCuments founD in international traDe

International Bills of exchange

• abillofexchangeis

• anunconditionalorder

• inwriting

• addressedbyoneperson(drawer)toanother(drawee)

• signedbythepersongivingit

• requiringthepersontowhomitisaddressed

• topay

• ondemand,orofafixedordeterminablefuturetime

• asumcertaininmoney

• to,ortotheorderof

• aspecifiedperson(payee)

• ortobearer



• forabillofexchangetobeclassedas“aninternationalbillofexchange”,itmustidentifyatleasttwoofthefollowingfiveplacesofwhichatleasttwoareindifferentstates

• theplacewherethebillisdrawn

• theplacewherethedrawersigned

• theplacenexttothedrawee’sname

• theplacenexttothepayee’sname

• theplacewhereitistobepaid

• inaddition,thewords“InternationalBillofExchange”mustbeshown(UncitralConvention)

• thebillwillbesentbythedrawertothedrawee(typicallythedrawee’sbank)

• thedraweewillsignitandthusacceptliability

• bythatsignature,thedraweebecomestheacceptor

• theacceptedbillwillthenbedeliveredtothepayee(thedrawer’screditor)

• inturnthepayee,iftheywantthemoneynowinsteadofat“somefixedordeterminablefuturetime”,cansignthebillandthusbecomestheindorser

• theindorsementmaybeinfavourofaspecifiedperson(theindorsee)ormaybesignedinblank

• anindorseeofanindorsedbillcanthemselvesindorseitinfavourofanother....

• andthat“other”canindorseitinfavourofanotherwhocan,inturn,indorseitinfavourof.......

• ifsignedinblank,thebillbecomesabearerbillandthepersonwhohaspossessionofthatbearerbillisthepersonentitledtoclaimthemoneyrepresentedbythebill


DocumEnts founD in intErnational traDE chapter 9 52


• thebearerofabearerbillcansettleadebtmerelybypassingthebilltotheircreditorwho,inturn,becomesthebearer

• liability?If,onfinalpresentationtotheacceptor(originallycalledthedrawee)theacceptorrefusestopay,thebillisclassedasdishonoured

• inthissituation,allpriorpartieswhohavesignedthebillbeforeitcameintothehandsoftheholder(aswellasthepersonwhopassedabearerbilltotheholder)willbeliable

• itispossibletohaveyetanotherpartytoabill–aguarantorincaseofneed

• suchapersonwhoguaranteesabillispresumedtobeguaranteeingthatthedraweewillpaythebillonfinalpresentation.


DocumEnts founD in intErnational traDE chapter 9


Parties

• drawer owesmoneytothepayee

• drawee typically,thedrawer’sbank

• payee thecreditorofthedrawer

• acceptor thedraweewhosignsas“accepted”

• indorser thepayeewhosignsthebillontothepayee’sowncreditor

• indorsee thecreditoroftheindorser

• guarantor apersonwhoguaranteesthatthebillwillbehonoured

• holder apersonwhohastakenthebillthroughtheprocessofnegotiation/indorsement,orthebearerofabearerbill




Bills of lading

• documentswhichareissuedbyacarriertoaseller(oragent)acknowledgingthatthecarrierhasreceivedthegoodsandthattheyhavebeenplacedonboardaparticularvesselboundforaparticularlocation

• evidencesthetimingofthepassingofgoodstothecarrier

• normally,therefore,alsothepassingofrisktothebuyer...

• ...unlessthepartieshaveseparatelyagreedthetimingofthepassingofrisk

• billofladingmaybe:

• negotiableornon-negotiable

• inland,oceanorthrough

• airway

• negotiable

• thepersonwhoownsthebillofladingalso,therefore,ownsthegoods

• thebillsismadeoutinfavouroftheseller

• thecarrierthereforeholdsthegoodsonbehalfoftheseller

• thesellerwillpresentthebilltoabanktoobtainpayment…

• ...andthenindorsethebillbysigningit(negotiateit),therebytransferringtitletothegoods

• non-negotiable

• thebillismadeoutinfavourofthebuyertowhomthecarriermustdeliverthegoods

• allairwaybillsarenon-negotiable




• inlandbill

• relatestoacontractforcarriageoverlandtotheinternationaldeparturepoint

• forexample,frompointofmanufacturetotheshippingport

• oceanbill

• relatestoacontractforcarriagefromaportintheseller’sstatetoaspecifiedportinanotherstate

• throughbill

• relatestoacontractforcarriagewhicheffectivelycombines“inland”with“ocean”

• soacontracttotransportgoodsfrompointofmanufacturetospecifiedportinbuyer’sstate

• airwaybill

• relatestoacontractforcarriageofgoodsbyair

• appliesbothtodomesticflightsaswellasinternationalflights




Letters of credit

• areameanswherebyasellercangetimmediatepaymentforgoodssold....

• ...butthebuyerstillenjoysaperiodofcreditbeforepaymentismade

• lettersofcreditshouldbearrangedbeforethecontractisenteredinto

• mechanism(Bisbuyer,BBisbuyer’sbankortheissuingbank,Sisseller,SBisseller’sbankortheadvisingbank)

1BasksBBtoissuealetterofcreditinfavourofS

2bytheissue,BBisguaranteeingthatSwillbepaid

3BBasksSBtoadviseSthataletterofcredithasbeenissued

4SBagreestohandletheirendoftheprocess

5SproducestoSBproofofdelivery/transferofthegoods

6SBpaysS,andforwardsthedocumentstoBB

7BBchecksthedocuments,andpaysSB

8BBdebitsB’saccount,andhandsthedocumentsovertoB

• aletterofcreditmaybeconfirmedorunconfirmed

• confirmediswhere,atstep4above,SBaddsitsownguarantee

• unconfirmed–SBdoesnotadditsownconfirmation/guaranteethatSwillbepaid

• lettersofcreditmayberevocableorirrevocable

• revocable–abuyermaychangethedetailswithoutnotifyingtheseller

• irrevocable–muchpreferable froma seller’s pointof view– thebuyer cannot amend thedetailswithoutnotifyingtheseller




Letters of comfort

• applytosituationsinvolvingagroupofcompanies

• typically,aletterofcomfortwillbewrittenbyaparent/holdingcompanyindicatingitsintentiontocontinuetosupportitssubsidiary

• mostcommonlyapplicablewherethesubsidiaryisinsolventoristryingtoraisefinance

• but(normally)itisjustacomfort

• rarelydoes sucha letterbind theparent so, if the subsidiary in factdoesbecome insolvent, there isnoliabilityfortheparenttosettlethesubsidiary’sobligations




Chapter 10

AgenCy LAw

Agency – creation

• anagencyrelationshipexistsbetweenaprincipalandanagentinwhichtheroleoftheagentistobringtheprincipalintocontractualpositionswiththirdparties

• thisrelationshipmaybeestablishedinanumberofways

• byagreement,express

• usuallyinwriting,theprincipalwillappointtheagent,typicallywithspecificauthority

• iftheagenthasunrestrictedpowertoactonbehalfoftheprincipal,thisisapowerofattorneyandmustbeinwriting

• byagreement,implied

• asaresultoftheconductofthetwoparties,thecourtsmayimplyanagencyrelationship

• byratification

• anagencyrelationshipmaybecreatedretrospectively!

• whereanunauthorisedpersonactsinawaywhichsuggeststheyareanagent,thepersononwhosebehalftheyclaimedtobeactingmayadopt/ratifythecontract

• ratificationisnotpossibleif,atthetimethe“agent”enteredintotheagreement,the“principal”didnotexist

• ratificationmustapplytotheentire“contract”andmustbenotifiedtothethirdpartywhomusthaveknownthattheagentwasnotactingontheirownbehalf

59June 2012 Examinations Paper F4 gLO


• byestoppel

• agencyrelationshipcreated,possiblywithouteitherexpressorimpliedagreementoftheprincipal

• wheretheprincipalholdsouttothirdpartiesthatsomebodyistheiragentthen...

• ...theycannotdeny(theyareestoppedfromdenying)thatthe“somebody”istheiragent

• bynecessity

• where there isanemergencysituationand thegoods’ownercannotbecontacted,a thirdpersonactingingoodfaithmaytakeactionconcerningtheowner’sgoods

• thataction-takingthirdpartybecomesanagentbynecessity

June 2012 Examinations Paper F4 gLO

AgEncy LAw chapter 10 60


Authority of the agent

• authorityofanagentmaybeexpress,impliedorapparent

• expressauthorityiswheretheprincipalexpresslyauthorisestheagentinrelationtoaspecificcontract

• thisauthoritymaybewrittenor

• maybeoral

• whereanagentactsbeyondthelimitsoftheexpressauthoritytheagentwillbeliableforbreachofwarrantyto

• theprincipaland

• thethirdparty

• impliedauthorityariseswheretheagentactsinaccordancewithwhatis“normal”inthecircumstance

• forexample,anagentactingasthepurchasingofficerofanentitymaybeseentohavetheimpliedauthoritytoenterintopurchasing/procurementcontractsontheentity’sbehalf

• theentitywillthereforebeliabletothethirdparty,but…

• ...theentitywillhaveaclaimagainsttheagent

• apparentauthority,sometimescalled“ostensible”authoritymaybegreaterthanactualauthority

• thissituationarisesforexamplewhenanentityallowstheagenttoactasthoughtheyhaveauthorityeventhoughsuchauthoritydoesnotinfactexist

• whereathirdpartycontractswiththisagent,andisnotawareofanyrestrictionontheagent’spower,theentitywillbeliabletotheinnocentthirdparty

• thisapparentorostensibleauthorityisnotlimitedtowhatisnormalforanagent


AgEncy LAw chapter 10


• itcouldbemuchwider,andwillbesoif:

• theentityitself(andnotjustthedirector)representstheagentashavingwiderauthority

• suchrepresentationshouldbeoneoffact,notoneoflaw

• therepresentationmustbemadedirecttothethirdpartyandnot,therefore,tosomeoneelse

• thethirdpartymustshowthattheyrelieduponthisrepresentationand…

• ...musthaveacteduponthatrepresentation

Termination of agency relationship

• anagencyagreementmaybeterminatedby

• agreementor

• operationoflaw

• itisautomaticallyterminatedby

• deathoftheagentortheprincipal

• insanityoftheagentortheprincipal

• bankruptcyoftheprincipal




Liability of the agent

• solongasanagentactswithinthelimitsoftheirauthority,theagent

• incursnoliabilityunderthecontract

• cannotenforcethecontract

• butanagentmaybeheldpersonallyliablewhere

• theagententersintoacontractwithoutdisclosingtheexistenceofaprincipal

• theagentactsonownbehalfeventhoughclaimingtoactonbehalfofaprincipal

• normaltradecustomhasestablishedliabilityontheagent


AgEncy LAw chapter 10





Chapter 11

PartnershiP Law

• apartnershipisdefinedinUKlawas“therelationshipwhichsubsistsbetweentwoormorepeoplecarryingonbusinessincommonwithaviewtoprofit”

• muchofpresent-daypartnershiplawiscontainedinthePartnershipAct1890

• partnersmayagreeamongstthemselveshowtheirfirmistooperate,solongastheirarrangementislegal

• thebusinessmustbebeing“carriedon“.Itshouldbemorethanaone-offtransaction,andmustbecontinuing

• itmustbe“withaviewtoprofit”andismorethanthesimplesharingofgrossrevenues

• ifabusiness relationshipsatisfies thedefinition, thecourtsmaywelldeterminethatapartnershipexists,regardlessofanywrittendocumentation(orintentionoftheparties)tothecontrary

• asageneralrule,partnersinafirmarejointlyandseverallyliableforpartnershipdebts

• everypartnerisanagentofthefirmandtheotherpartnersforthepurposeofthebusinessofthefirm

• theactsofeverypartnerdoneinthecourseofthefirm’sbusinessbindthefirmandthepartnersunlessthepartnerwasexceedinghisauthorityand……

• ...theotherpartyknewthatfact,orwasnotawarethatthepersonwasapartner



The Agreement

• partnershipsareformedbyagreement,andtheinternalarrangementsareamatterforagreementamongstthepartners

• partnerscanagreetodoanything-solongasit’slegal

• becauseapartnershipisformedbyagreement,itisalsocapableofbeingamendedbyagreement....

• andterminatedbyagreement

• typicalmatterstobeagreeduponinclude:-

• -accountsandaudit

• -divisionofprofitsand,therefore,alsosharingoflosses

• -drawingsallowedtobetakeninadvanceofbeingcreditedwithashareofprofits

• -capitalofthefirmandrespectivecontributionsofeachpartner

• -interestpayableoncapitalcontributionsorchargeableonoverdrawncurrentaccounts

• -salariesofpartnersbeforeprofitsareshared

• -currentaccountsaswellasfixedcapitalaccounts,orjustonecombinedaccountforeachpartner

• -goodwillcomputationbasis

• -timeperiodforwhichthepartnershipistolast.Ifnotimeperiodisspecified,thisisa“partnershipatwill”


PartnErshiP Law Chapter 11 66


1890 Actin the event that partners fail tomake an arrangement about somematterwhich is later disputed, then thePartnershipAct1890establisheswhatshouldhappen.Themainprovisionsare:-(medicsinbed)

• managemententitlementforallpartners

• equalityofprofitshare

• derivedbenefit,withoutconsentoftheotherpartners,shouldbepaidbackintothefirm

• indemnitybyotherpartnerswhereonepartnerincursapersonalliabilitywhendoinganythingnecessarytoprotectthefirmoritsproperty

• competingbusinessprofits,gainedwithoutconsent,shouldbepaidbackintothefirm

• salaries-noautomaticentitlement

• interestoncapitalnotpayable,butinterestattherateof5%perannumispayableonloansandadvances

• madetothefirmoverandaboveagreedfixedcapital

• nonewpersonmaybeintroducedintothefirmasapartner

• booksofaccountshallbeavailableforinspectionbyanypartneratanytime

• expulsionofapartnerrequiresunanimousconsent

• disputesconcerningthebusinessofthefirmaresettledbymajorityvotebutnochangeinthenatureofthefirm’sbusinessmaybemadewithoutunanimousconsent


PartnErshiP Law Chapter 11


Dissolution Grounds – Automatic and by Court Order ( dissolutions )

• deathofapartner

• insolvencyofapartner

• sendingnoticeinapartnershipatwill

• sharepledgedbypartnertosettleprivatedebts

• objectofajointventureiscomplete

• lapseoftimewherepartnershipformedforaspecificperiod

• unabletocarryoutone’sobligationscreatedbythepartnershipagreement

• terminationbytheCourtundertheprinciplesof“justandequitable”

• insanityofapartner

• onlyabletocarryonthebusinessataloss

• naughtyconductcalculatedtoaffectthecarryingonofthefirmprejudicially

• shirtyconduct-persistentbreachesofthepartnershipagreement

• thefirstsixareallobjectivemattersoffact,whereas

• thelastsixhavetobeprovedinaCourtandthedissolutionisasaresultoftheCourt’ssubjectivedecision




LPA 1907 and LLPA 2000

• LimitedPartnershipsAct1907mainfeaturesare:-

• atleastonegeneralpartner(withunlimitedliability)andonelimitedpartner(withlimitedliability)

• mustberegisteredwiththeregistrarofcompanies

• limitedpartnershouldtakenopartinthemanagementofthefirm

• ifthefirmbecomesbankrupt,onlythegeneralpartnersareliableforthefirm’sdebts

• LimitedLiabilityPartnershipsAct2000mainfeaturesare:-

• combinationoftheadvantagesofapartnershipwiththoseofalimitedcompany

• mustberegisteredwiththeregistrarofcompanies

• mustfilefinancialstatementsandbeaudited

• asaseparatelegalentity,thepartnersarenotliableforthefirm’sdebts,therebyprotectingthemselvesfrompersonaldisasters.However,theprovisionsrelatingtowrongfulandfraudulenttradingapply.




International partnerships

• Frenchlawdoesnotrecognisepartnerships

• instead,Frenchlawlookstodeterminewhetherapersonorgroupofpeopleareactingforcommerce

• ifthis“actingforcommerce”isestablishedasafact,theaffectedpersonorpeoplearerequiredto

• maintainproperaccountingrecords

• recordparticularsinthe“commercialregister”

• wheretwoormorepeopleareinvolvedinactingforcommercetheyareknownasa“Societé”

• aSocietéisthereforetheFrenchequivalentofaUKpartnership

• aSocietémaybe

- societéennomcollectif,or

- societéencommanditesimple

• ennomcollectifissimilartoatraditionalUKpartnership

• encommanditesimpleissimilartoalimitedpartnershipinthatoneormoreoftheparticipantshaslimitedliability




International partnerships

• Muslimlawrecognisesthreetypesofprofit-sharingoperations

• Musharakah

• Mudaraba

• Shirkahal-Inan

• MusharakahisverysimilartoatraditionalUKpartnership

• participantspoolresourcestoinvestinacommercialventure

• decisiontakingisshared

• profitsandlossesareshared

• MudarabaissimilartoaUKpartnershipwhereone(ormore)ofthepartnerstakesnoactivepart

• thisdormantorsleepingpartnerinvestsinthefirmandsharesinthefirm’sprofits

• theinvestmenthastheappearanceofaloanbutunderMuslimlawthepaymentofinterestisforbidden

• ...butareturnbywayofprofit-sharingisnotforbidden

• Shirkahal-InanhastheappearanceofatraditionalUKpartnership

• participantsinvestmoneyorothervalueand

• shareprofits

• butpartnersarenotliableforthedebtsoftheotherpartnersand

• canonlysueoncontractswhichtheythemselvesenteredinto.




Partnership compared with company ( learn fast rats )

Partnership Company

liability usuallyunlimitedforpartners usuallylimitedformember

existence noseparatelegalexistencesonoperpetualexistence

separatelegalentitysoenjoyperpetualexistence

accounts norequirementtofilewithgovernment requiredtofileannualaccounts

raisingcapital cannotsecuredebtsbywayoffloatingcharge

cansecuredebtbywayoffloatingcharge

number normallyalimitof20partners nolimitonthenumberofmembers

formality firmmaybecreatedbyinformaloralagreement

companymusthaveaformalconstitution

assets partnersownassetsjointly companyownsassets–membersowncompany

separateentity firmdoesnotexistasaseparateentity companydoeshaveseparatepersonality

transferofinterest partnerscannotwithoutunanimousconsent

memberscan

reductionofcapital easyforpartnerstowithdrawtheircapital

verydifficultforcompaniestoreducecapital

activeparticipation partnersareentitledtotakeanactivepartinmanagement

membersappointdirectorsasagentstomanagethecompany

taxation partnerstaxedonprofitshare companypaystaxonprofitsmemberspaytaxontheirdividendincome

secretary norequirementforpartnershipfirmtohaveasecretary

publiccompaniesmusthaveappropriatelyqualifiedsecretary




Chapter 12

Company Law

Types of Corporation and Ways of Formation

• corporationsole–apublicofficeoccupiedbyanaturalperson.Deathofthepersondoesnotaffectthecontinuingsurvivalofthecorporation.TheMayorofLondonisacorporationsole.

• corporationaggregate–acollectionoflike-mindedpeoplewhocombinetoformanartificialperson–thecorporationaggregate.Deathofindividualmembershasnoeffectontheexistenceofthecorporation.

• formationmaybebyanyof3ways

• RoyalCharter –egEastIndiaTeaCompany,manyUKuniversities

–veryrareinmoderntimes

• Statute –equally(ifnotmore)rare

–EgBritishWaterways

• Registration –byfarthemostcommonmethod

–EgTescoplc,Small&CoLtd.

• since2004anewformofcompany,theCommunityInterestCompany(CIC)isavailableinUKfororganisationscreatedforthebenefitofthecommunity/societyratherthanforthepursuitofprofit

73June 2012 Examinations paper F4 GLo


Types of Company

• publicquoted

• sharepricequotedonarecognisedstockexchange

• mustbelimitedbyshares

• publicunquoted

• againlimitedbyshares,butnotquoted

• private–unlimited

• private–limitedbyshares

• private–limitedbyguarantee,andhavingasharecapital

• private–limitedbyguaranteebutwithnosharecapital

• communityinterestcompanies

June 2012 Examinations paper F4 GLo

Company Law Chapter 12 74


Public Companies

• acompanyisapubliccompanyifitsatisfiesthedefinition

• itisacompanywhichislimitedbyshares

• hasatleast2members

• theconstitutionstatesthatitispublic

• thenameendswiththewords“publiclimitedcompany“or“plc”

• ithasanallottedsharecapitalnotlessthan£50,000…

• …ofwhichnotlessthan25%iscreditedaspaidup…..

• ….togetherwiththewholeofthesharepremium

• anycompanywhichdoesnotsatisfythedefinitionisaprivatecompany

• althoughapubliccompanyexistsfromthedateonitscertificateofincorporation,itcannotcommencetotradeuntilitacquiresatradingcertificate


Company Law Chapter 12


Trading Certificates

• publiccompaniescannotcommencetotradeuntilaftertheyhavereceivedatradingcertificate

• thisisissuedbytheregistrarfollowinganapplicationmadebythecompany

• theapplicationstates

• thatthenominalvalueofallottedsharesisnotlessthan£50,000

• thepreliminary/formationexpenses

• andtowhomthesehavebeenpaid(orarestillpayable)

• theapplicationmustbeaccompaniedbyastatementofcompliance

• ifapubliccompanydoesinfactcommencetradingbeforethereceiptofthetradingcertificate,aninnocentthirdpartyisprotected

• butthecompany,andanyofficerindefault,isliabletoafine

• if apubliccompany fails toobtaina tradingcertificatewithin12monthsof incorporation, thecourtonapplicationmaygrantaliquidationorderagainstthecompany




Advantages of Being a Company as Distinct From a Partnership

• separatelegalpersonality(SalomonvSalomon)(AdamsvCapeIndustries)

• limitedliability

• perpetualexistence

• raisingfinance

• offersharestothepublic

• secureborrowingbywayoffloatingcharge

• ownershipofproperty

• numberofmembers

• transferofinterest

• BUT there are disadvantages

• legalimplications

• expense

• publicityanddisclosure




Disadvantages ( Expanded )

• legalimplications

• formation

• audit

• shareissues

• meetingsandresolutions

• liquidation

• “properaccountingrecords“

• expense

• publicity

• detailsofdirectorsandtheirremuneration

• businessdetails




Lifting the Veil

• thecourtwill lookbehindtheveilof incorporationwhere justicerequires ittopreventfraud, illegalityoroppression:-

• GilfordMotorCovHorne

• DaimlervContinentalTyreandRubber

• EbrahimivWestbourneGalleries

• RvOll

• ReFGFilms

• theveilwillalsobeliftedundertheprovisionsofstatute:-

• fraudulenttrading

• wrongfultrading

• commencingtotradewithoutatradingcertificate

• abuseofcompanyname

• othersituations:-

• preparationofgroupaccounts

• taxlaw

• personalguarantees




International companies similar to UK companies

-France

-Sociétéanonyme(SA)

-Sociétéàresponsibilitélimitée(SaRL)

-SAissimilartoaUKpubliccompany

-musthavenotlessthan6members

-musthavenotlessthan3directors…

-...notmorethan12directors

-musthaveanauditor

-SaRLcomparablewithUKprivatecompany

-however,SaRLdoesnothaveasharecapital

-financingisdividedintopartswhichtheholderscannotselltothegeneralpublic

-commonlyusedforfamilycompanies

-Germany

-Aktiengesellschaft(AG)-similartoaUKpubliccompany

-GesellschaftmitbeschränkterHaftung(GmbH)-similartoaUKprivatecompany

-Muslimsocieties

-noseparatecorporateformisrecognisedbyMuslimlaw,unlikepartnershipswhicharerecognised

-Europeancompanies

-anorganisationwithoperationsinmorethanoneEUmemberstatecanincorporateanewtypeofcompany–theEuropeancompany

-aEuropeancompanyorSocietasEuropaea(SE)

-isapubliccompanywith

-limitedliabilityforthemembersand

-aminimumcapitalof€120,000and

-mustberegisteredinthememberstatewherethecompanyhasitsadministrativeheadquarters

-fourwaysofestablishingaEuropeancompanybycompaniesfromatleasttwoEUmemberstates

-bymerger

-byformationofanewholdingcompany




-byformationofanewsubsidiary

-bytransformingacompany(inoneEUmemberstate)whichhasownedasubsidiaryforatleasttwoyearsinanotherEUmemberstate




Formation

• formedbypromoters(seenext)

• preincorporationcontracts(KelnervBaxter)

• documentstobefiled:-

• applicationforregistration

• memorandum

• articles

• statementofcompliance

• statementofcapitalandinitialshareholders

• registrationfee

• certifiedtranslation




Formation - role and duties of promoters

• roles

• act,underinstruction,toformacompany

• thisinvolves:

- finding people who will sign the memorandum and articles of association, and act as thecompany’sfirstdirectors

- selectasuitablenameforthecompany

- determinetheformandamountofthecompany’ssharecapital

- determinetherightstobeattachedtothedifferentclassesofsharecapital

- preparetheconstitutionofthecompany

- submitallthenecessaryformstotheregistrarofcompanies

- payallthepreliminaryandformationexpensesofthecompany

• duties

• actwithreasonableskillandcare

• discloseanyprofitorpotentialconflictofinterest

- eithertothefirstindependentboardofdirectors,or

- tothecompany’sexistingorintendedshareholders

• breach of duty - ie non-disclosure - allows the company to rescind the contract and recover thepurchaseprice(ErlangervNewSombreroPhosphateMiningCo)

• the company may require the promoter to pay over to the company any undisclosed profits(GlucksteinvBarnes)(WhaleyBridgevGreen)

• thecompanymaysuethepromoterandclaimdamagesforbreachoffiduciaryduty(LeedsvHanley)




Formation ( continued )

• theapplicationforregistrationdetails:-

• proposedname

• registeredoffice(EnglandandWales)

• proposedpostaladdressofregisteredoffice

• limitationofmembersliability(sharesorguarantee)

• publicorprivate

• certificateofincorporation

• ifeverythingisinorder,registrarwillissueacertificateofincorporation

• thedateonthecertificateisconclusiveproof

• JubileeCottonMillsvLewes




Memorandum and the Constitution

• historicallythememorandumofassociationwasamajordocument

• since2006,nowjustamatterofrecord

• statesthatthesubscribers

• wishtoformacompany

• agreetobecomemembers

• agreetotakeatleastoneshareeach

• company’sconstitutioncomprises

• articles

• resolutions(affectingthearticles)

• agreements(affectingthearticles)




Articles – Contractual Force

• whenapersonbecomesamemberofacompany,itisasthoughtheyhaveseparatelyenteredacontractwiththecompanyandwithalltheothermembersindividually

• thetermsofthatcontractarecontainedwithinthearticles

• theeffectistobindthememberstothecompany

• HickmanvKentorRomneyMarshSheepbreedersAssociation

• …..andthecompanytothemembers

• PendervLushington

• ….andthememberstothemembers

• ClarkevDunraven

• butthearticlesdonotcreateacontractbetweenthecompanyandthirdparties

• EleyvPositiveGovernmentLifeAssuranceCo.




Articles – Alterability

• basicrule–canonlyalterifforthebenefitofthecompanyasawhole

• individualhypotheticalmemberofthefuture

• GreenhalghvArderneCinemas

• nooutsidecontractshallpreventachange,butcompanymaybecomeliableforbreachofthatcontract(SouthernFoundriesvShirlaw)

• evenifproposedalterationadverselyaffectsonlyonemember,itmaystillbevalid(AllenvGoldReefsofWestAfrica)

• alterationsallowingcompulsorypurchaseofminority’sshareswillbe(normally)disallowed(DafenTinplatevLlanelliSteel)

• allowingexpulsionofdefraudingdirector–OK(ShuttleworthvCoxBrothers)

• allowingexpulsionofcompetingmembers–OK(SidebottomvKershawLeese)

• possibletopreventalterationbyweightedvotingrights

• BushellvFaith




Articles – Procedure for Alteration

• specialresolution

• 75%majority

• 14daysnotice

• copyofresolutiontoregistrarwithin15days

• copyofamendedarticlestoregistrar

• alterationisbindingonallmembers

• articlesmaysaythat,forameetingproposinganalteration,theaffectedmembermustbepresent

• soaffectedmembercanpreventalterationbynotattending

• articlesmayrequireagreatermajoritythan75%

• …butcanneverbedraftedtopreventamendment




Company Names

• basicrule–companycanhaveanynameselectedbypromoters

• buttherearerestrictions

• registrarmayrefusetoregisteracompanywithanamewhichismisleadingoroffensive

• connectionwithroyalty,banks…..

• namemayberestrictedbystatute

• ANZAC

• namewillnotbeallowedifthesameasanexistingcompany

• namemaybedisallowedasatort(passing-off)

• EwingvButtercupMargarine

• theword‘limited’(orplc)shallnotappearanywhereexceptattheendofthename




Name Change

• compulsoryorvoluntary

• mayberequiredtochangebyorderfromtheregistrar

• ….within12monthsifthecompanyhasbeen,bymistake,registeredwithanametoosimilartoanexistingcompany

• ….within5yearsifmisleadinginformationwassupplied

• atanytimeiftheuseofthenameislikelytocauseharmtothepublic


• 75%majority

• 14daysnotice

• copyofresolutionandamendedconstitutiontoregistrarwithin15days

• registrarissuesnewcertificateofincorporation




Objects

• companycandoanythingsolongasitislegal

• sosince2006,onlyreasontomentionobjectsinthearticlesisrestrictively

• ifcompanytriestoignoretherestriction,ultravires

• membercanobject(AshburyRailwayvRiche)

• “thevalidityofatransactionshallnotbecalledintoquestiononthegroundsoflackofcapacity”

• “in favourofa thirdpartyacting ingood faith, thepowerof thedirectors tobindthecompanyshallbedeemedtobefreeofanylimitationunderthecompany’sconstitution”

• theseapplyonlytothirdparties,nottomembers

• goodfaith–butthisispresumedunlessshownotherwise

• norequirementforthirdpartytomakeenquiries

• sothirdpartiesareprotected,butcompanycannotsuetoenforceanultravirestransaction







Chapter 13

Company Law: DireCtors anD offiCers

General Points

• adirectorisanyonewhooccupiesthepositionof...

• ashadowdirectorisapersoninaccordancewithwhoseinstructionsthedirectorsareaccustomedtoact

• defactodirector–apersonwhopurportstoactasthoughtheywereadirector

• alternatedirector–apersonappointedbyadirectorwhoisunabletoattendaboardmeeting

• executivedirectors–moreonthesenext

• non–executivedirectors

• integralelementofcorporategovernance

• bringanindependentview

• helpinprovidingeffectiveleadership

• helptoestablishandmaintainfinancialprobity

• keepawatchfuleyeontheeffectivenessoftheexecutivedirectors

93June 2012 Examinations paper f4 GLo


Number and Eligibility

• privatecompany–atleastone

• publiccompany–atleasttwo

• anyonemaybeadirector(butsomerestrictions)

• mustbeover16

• maybeanon-naturalperson

• mustnotbedisqualifiedunderCDDA(seelater)

• mustnotbebankrupt

• mustnotbeofunsoundmind

• shouldnotbeabsent,withoutpermission,fromboardmeetingsforaperiodinexcessof6months

June 2012 Examinations paper f4 GLo

Company Law: DirECtors anD offiCErs Chapter 13 94


Company Directors Disqualification Act

• onapplicationtotheCourt,adirectormaybedisqualifiedbycourtorderonanumberofgrounds:

• for an offence committed in the promotion, formation,management, liquidation or striking off acompany

• wherepersistentlyindefault(3offencesin5years)offilingreturns

• whenfoundguiltyoffraudulentorwrongfultrading

• wheninvolvedinacompanyinsolventliquidation

• followingaDepartmentofTradeinvestigation

• ingeneral,thedisqualificationperiodis“upto15years”

• breakingthedisqualificationorder upto2yearsinprison


Company Law: DirECtors anD offiCErs Chapter 13


Directors Appointment

• firstdirectors–namedindocumentssenttoregistrarbeforeincorporation

• subsequentdirectorsmaybeappointedby:-

• membersingeneralmeeting

• otherdirectors–tofillacasualvacancy

• thecourt(rare)

• alender(ifpartoftheloanagreement)

• administrator–underanadministrationorder

• 1/3rotationprocedure

• FTSEtop350company?Alldirectorsretireeveryyear

• appointedbyordinaryresolution

• registrarnotified




Directors Removal

• ordinaryresolution

• specialnotice

• 28daysnoticetocompany

• 21daysnoticetomembers

• opportunitytomakewrittenrepresentationsofreasonablelengthandnotdefamatoryinnature

• reasonablelength

• mustalsosatisfylegalrestrictions–100membersholding≥£100sharecapitalonaverage

• noticetoregistrar

• weightedvotingrightscanmakeremovalimpossible

• BushellvFaith

• companymayhavetopaysubstantialcompensationtoaremoveddirector(SouthernFoundriesvShirlaw)




Directors - Statutory Duties

• 2006Actputintostatutemanyoftheestablishedcommonlawprinciples

• 7duties

• actwithintheirpowers

• performtheirdutieswithreasonableskill,careanddiligence

• promotesuccessofcompany(seenext)

• independentjudgement

• avoidconflictsofinterest

• nobenefitsfromthirdparties

• declareinterestintransactions/contracts

• commonlawcaseswhichthecourtswillfollowininterpretingthesestatutorydutiesfollow




Directors’ Duties – Common Law Cases

• ReCityEquitableFireInsurance

• DorchesterFinanceCovStebbing

• CookvDeeks

• IDCvCooley

• Regal(Hastings)vGulliver

• HowardSmithvAmpolPetroleum

• BamfordvBamford

• HoggvCramphorn




Directors – Promoting Success

• statutetryingtoencouragelong-termapproachbydirectors

• directorstohaveregardforallstake-holders

• non-exhaustivelistofmattersfordirectorstoconsider:

• long-termconsequencesoftheirdecisions

• employees’interests

• goodrelationshipswithcustomersandsuppliers

• localcommunityandenvironmentalimpact

• highstandardsofbusinessconduct

• goodreputation

• fairtreatmentforallmembers




Directors – Remedies

• makethemaccountforpersonalgain(Regal(Hastings)vGulliver)

• makethemindemnifythecompanyagainstlosscausedbytheirnegligence(seebelow)

• rescindthecontractwheredirectorhasaconflictofinterest

• askthecourttodeclareatransactionisultravires

• directorsarenotliablefortheactsofotherdirectors

• maybeheldliablebythecourtlookingbehindtheveilofincorporation

• maybeheldliablebythecourtforfraudulentorwrongfultrading

• liablefornegligence?

• notifhonest(PavlidesvJensen)

• butifnegligenceresultsinpersonalbenefit?(DanielsvDaniels)




Company Secretary

• everypubliccompanymusthaveone

• shouldbeappropriatelyqualified

• duties, determined by the directors, are administrative in nature ( Panorama Developments v FidelisFurnishingFabrics)

• maintainingcompany’sstatutoryrecords(seelater)

• filingreturnswiththeregistrar

• takingminutesofmeetings

• ensuringthecompanycomplieswithstatutoryrequirements

• signingdocumentsasrequiredbylaw

• underprinciplesofcorporategovernanceshouldalso:-

• advisetheboardongovernancematters

• arrangetheinductionprocessfornewneds

• enableeffectivecommunicationbetweenboardanditsvarioussub-committees




Company Secretary: Statutory books

• everycompanymustmaintaincertainrecordsrequiredbystatute–“thestatutorybooks”

• theserecordsmustbekeptatthecompany’sregisteredoffice,unless...

• ...theregisterofmembersismaintainedbyanindependentorganisation–thecompany’sregistrars

• inthissituation,certainotherbooksmaybekeptalsoattheofficesofthecompany’sregistrars

• registersinclude:

• members

• directors

• secretary

• mortgagesandcharges

• debentureholders

• directors’interests

• substantialshareholders




Auditors

• required(unless‘small’)

• appointedby:-

• directors(firstandcasualvacancies)

• members(subsequentandcasualvacancies)

• secretaryofstate(ifno-oneelsedoes)

• mustbeappropriatelyqualified

• cannotbe:-

• directororemployeeofthecompany

• partneroremployeeoftheabove

• undischargedbankrupt

• professionallypreventedfrom

• owningbeneficialinterest

• beingcloserelativeofcompanyofficersoremployees




Auditors – Rights and Duties

• rights

• accesstocompanyrecords

• informationandexplanations

• noticeofandattendanceatcompanygeneralmeetings

• writtenrepresentations(whenproposedforremoval)

• receivecopiesofproposedwrittenresolutions

• duties

• expressanopinionontruthandfairness(andproperpreparation)

• reportifdirectors’reportisinconsistentormisleading

• (forquotedcompanies)reportoncertainelementsofthedirectors’remunerationreport

• auditorsshouldsignanddatetheauditreport

• report,byexception,ifproperaccountingrecordsnotkept







Chapter 14

Company Law: meetings and ResoLutions

Annual General Meeting

• publiccompaniesmustholdanAGM

• …everycalendaryear(GibsonvBarton)

• firstnomorethan18monthsafterincorporation

• subsequent,nomorethan15monthsafterprevious

• privatecompanymemberscanrequestanAGM

• 21daysnotice

• ordinarybusiness:-

• formalpresentationofthefinancialstatements

• reappointmentofdirectors

• reappointmentofauditors

• approvalofdividendproposedbydirectors

107June 2012 Examinations paper F4 gLo


Resolutions

• ordinary

• simplemajority

• ordinarybusinessand(some)specialbusiness

• 14daysnotice

• special

• 75%

• 14daysnotice

• written

• privatecompaniesonly

• anyresolution(ordinaryorspecial)

• …exceptforremovalofauditorordirector

• auditorneedstoapprovethewording

• resolutionpassedonthedaterequiredmajorityisreached

June 2012 Examinations paper F4 gLo

Company Law: mEEtings and REsoLutions Chapter 14 108


Resolutions – Special Notice

• specialnoticeappliesonlytosomeordinaryresolutions

• 28daysnoticeisgiventothecompany

• thecompanygives21daysnoticetothemembers

• resolutionsrequiringspecialnotice:-

• toremoveadirector

• toremoveanauditor

• toappointanewauditorotherthantheretiringauditor

• tofillacasualvacancyintheofficeofauditor

• toconfirminappointmentanauditorappointedbythedirectorsinthemid-termtofillacasualvacancy

• director/auditormaywritewrittenrepresentationsofreasonablelengthandnotdefamatoryinnature


Company Law: mEEtings and REsoLutions Chapter 14


Resolutions

• normallythedirectorswilldeterminetheagendaforameeting

• butsometimesmembersmayrequirearesolution

• membersmustholdatleast5%ofthetotalvotingrights,or...

• ...notlessthan5%innumberofthemembers,or...

• …benotlessthan100membersholdingonaveragenotlessthan£100eachinpaidupsharecapital

• therequestshouldbeinhardcopyform,orelectronicform

• therequestmustbedeliverednotlessthan6weeksbeforethegeneralmeeting

• therequisitionistsmayrequestthatastatementofreasonablelengthbecirculatedtogetherwiththenoticeofthemeeting

• reasonablelengthis,asusual,notmorethan1,000words

• therequisitionistswillbeartheincidentalcostsunless….

• ….thecompanyresolvesotherwise




Proxies

• aproxyis‘awrittenstatementauthorisinganotherpersontovoteonbehalfofanabsentshareholder’

• thepersonappointedneednotbeamemberofthecompany–itcanbeanyone

• theword‘proxy’isusedtodescribeboththeformandthepersonappointedbytheform

• proxiesmayspeakatthemeeting

• theymayvoteonapollandonashowofhands

• theymaydemandapoll

• companieswillprovide‘two-way’proxyformssothattheabsentmembercanindicatewhichwaytheproxyshouldvote–‘for’or‘against’eachresolution

• proxyformsshouldbedeliveredtothecompanynotlessthan48hoursbeforethemeeting

• aproxyappointedbyamemberwhichisacompanyiscalleda‘representative’

• apersonmaybeappointedbymorethanonememberastheirproxy




Quorum

• aquorumistheminimumnumberofmemberswhoshallbepresentatameetingbeforethemeetingmayvalidlypassresolutions

• theminimumnumberisnormallycontainedwithintheconstitution

• typically,theminimumnumberis2memberspresent,inpersonorbyproxy

• buttheword‘meeting’impliesthatthereshouldbeatleast2persons

• soonememberinpersonwhoalsoholdsaproxyforanothermembercannot,normally,beaquorum

• itis,however,possible!

• inthesituationofaclassmeeting,whereallthesharesofthatclassareownedbyasingleperson

• ifthecompanyisaprivatecompanywithonlyonemember

• ifthecourtdirectsthataquorumshallbeasingleperson

• ifameetingisinquorateatthescheduledstarttimeitwillnormallybeadjournedto‘sametime,sameplace,nextweek’




Voting

• followingdiscussionaboutaresolution,thechairwillcallforavote

• initially,thiswillbeby‘showofhands’

• eachmember,nomatterhowmanysharestheyhold,thereforehasonlyonevote

• butmembersholdingmanysharesmayask,followingashowofhands,foravotecount–apoll

• pollsmaybedemandedby

• notlessthan5members

• membersholdingnotlessthan10%ofthetotalvotingrights

• membersholdingnotlessthan10%ofpaid-upcapital

• thechair

• votesarecounted,whetherbyshowofhandsorbypoll

• abstentionsarenotcounted,neither‘for’nor‘against’

• thechair’sdecisionabouttheresultofthevoteisfinal







Chapter 15

Company Law: Loan CapitaL

Loan Capital

• adebentureis‘thewrittenacknowledgementofadebtbyacompany’

• maybesecuredorunsecured

• maybeasingledebentureoraseriesofdebentures

• ifissuedasaseries,debentureholdersrank‘paripassuinterse‘

• security/thechargemaybefixedorfloating

• tobevalid,thechargemustberegisteredwithin21daysofitscreation

• ifthereare2chargesoverthesameproperty,afixedchargewilltakeprecedenceoverafloatingcharge

• ifthereare2fixedcharges(or2floatingcharges)overthesameproperty,theearlieronewilltakeprecedence

• theearlieroneistheonewhichisregisteredfirst!

• debentureholdersarecreditorsofthecompany,notmembers



Fixed Charges

• attachestospecificassets

• companyisnotfreetodeal/disposeofthosechargedassets

• fixedchargecreatedwithinthe6monthsimmediatelypriortoacompanycommencingliquidationmaybeinvalid

• aliquidatorwilltrytoproveinvalidity

• areceivermayprovevalidityif

• thechargewasgrantedinexchangefornew‘money’or

• thecompanywassolventatthedateofcreationofthecharge

• intheeventofaliquidation,thefixedchargedebentureholderranksnumberoneinthesequenceofassetdistribution

• whereafloatingchargeexistsoveranasset,theremaybeanegativepledgeclause

• theeffect is toensure thatafloatingchargedebentureholderhas tobenotifiedofanyproposedfixedchargeoverthesameasset


Company Law: Loan CapitaL Chapter 15 116


Floating Charges

• unlikefixedcharges,floatingchargesdonotattachtospecificassets

• definedinthecasereYorkshireWoolcombersas:-

• achargeonaclassofassetsofacompany,presentandfuture

• wheretheclasschangesfromtimetotimeintheordinarycourseofbusiness

• andthecompanymaydealwiththeseassetsuntilthechargecrystallises

• typicallyappliestothecurrentassetsofinventoryandaccountsreceivable

• whetherachargeisfixedorfloatingisamatterofcommercialrealityratherthanhowithasbeennamed

• inreTunbridgea‘fixed’chargewasheldbythecourttobefloatingbecauseallthreeYorkshirecriteriaweremet

• inreCimexa‘floating’chargewasheldtobefixedbecausetheassetsdidnotchangefromtimetotimeintheordinarycourseofbusiness

• afloatingchargewillbeinvalidifcreatedwithinthe12monthsimmediatelypriortothecommencementofaliquidation


Company Law: Loan CapitaL Chapter 15


Debentures Compared with Shares

• fixedrateofinterest

• payableeventhoughnoprofits

• novotes

• security(notalways)

• preferentialentitlementtoreturnofmoney

• possessionofthechargedasset

• rightswhencompanydefaults

• applytocourtforliquidationorder

• applytocourtforadministrationorder

• appointareceiver(providednoadministrationorderisineffect)


Company Law: Loan CapitaL Chapter 15 118


Chapter 16

Company Law: Liquidations

Liquidation

• compulsoryorvoluntary

• voluntarymaybemembers’orcreditors’

• essentialdifferenceissolvency

• courtmayorderliquidationif:-


• numberofmembersfallsbelow2(plcsonly)

• failuretoobtainatradingcertificatewithin12monthsofincorporation(plcsonly)

• suspensionofbusinessfor12months(orfailuretocommencebusinesswithin12months)

• unabletopayitsdebtsastheyfalldue

• justandequitable



Compulsory Liquidation

• unabletopayitsdebtsastheyfalldue

• needtoshowthecourtthatthecompanyhasowedthepetitioningcreditormorethan£750formorethan21days

• thedebtshouldnotbeindispute

• justandequitable

• failureofsubstratum

- ReGermanDateCoffeeCo.

• deadlockontheboard

- ReYenidjiTobacco

• quasi-partnershipsituation

- EbrahimivWestbourneGalleries

• butjustandequitableonlygivenintheabsenceofalternativeremedy(reACompany)


Company Law: Liquidations Chapter 16 120


Administrator Appointed by the Court

• applicationtothecourtby:-

• membersordinaryresolution,directorsorbycreditors

• courtmaygrantif:-

• companyisunabletopayitsdebts

• theorder,ifgranted,islikelytoachievethedesiredresult

• effectofanorder

• moratoriumoncompany’sdebts

• powersofmanagementpassedtoadministrator

• petitionsforwinding-uparedismissed

• anyadministrativereceiveralreadyinofficemuststepaside


Company Law: Liquidations Chapter 16


Duties of an Administrator

• agentofthecompanyandthecreditors

• sohasfiduciarydutiesaswellaslegal

• mustsendnoticeofappointmenttocreditors

• mustobtainalistofcreditors

• mustsendnoticeofappointmenttoregistrarwithin7days

• mustrequireastatementofaffairs

• mustidentifyappointmentonallcompanybusinessletters/correspondence

• mustprepareproposalsforachievementofadministrationobjectives

• mustmanagetheaffairsofthecompany




Advantages of Administration Compared with Liquidation

• companymaycontinueaftertheprocessiscompleted

• companyisshelteredfromcreditorsallowingtimetodesignacceptableproposals

• creditorsarethereforepreventedfromapplyingforaliquidation

• administratorcanchallengeprevioustransactions

• creditorsmorelikelytogetsomemoneyback

• memberswillholdsharesinaviablecompany(possibly)

• anycreditorcanapplytothecourt

• floatingchargedebentureholderscanappointwithoutreferencetothecourt

• creditors(potentially)willhaveacontinuingcustomer

• directorscouldavoidacquiringthereputationofhavingbeeninvolvedinaninsolventcompany


Company Law: Liquidations Chapter 16


End of Administration Period

• automaticallyends:-

• whensuccessfullycompleted

• 12monthsafterappointment

• applicationtocourtbyadministrator

• applicationtocourtbyacreditor

• whenoriginalapplicantisdiscoveredtohavehadaninappropriatemotive

• administratorcanapplytocourt

• ondeterminingthatadministrationcannotbeeffective

• thecompanyshouldneverhavebeeninadministration

• (ifappointedbythecourt)theadministrationhasbeensuccessful




Chapter 17

Company Law: Corporate GovernanCe

Corporate Governance

• corporategovernanceisthesystembywhichcompaniesaredirectedandcontrolled

• importantbecause (often ) companies are controlledbypeople (directors )whoarenot theowners (shareholders)

• butthereareotherpeoplealsointerestedinthecontinuinghealthofacompany–thestakeholders

• forexample:

• employees –wishtocontinuetohavetheopportunityofearningasalary

• taxman –wishestocontinuetoreceiveshareofprofits

• customers –wishforcontinuityofsupplyofgoods

• suppliers –wishfortheopportunitytocontinuetosupply

• society –theultimateconsumers,butalsoaffectedbycompany’senvironmentalfootprint

• planetearth –weareallaffected,directlyorindirectly,bytheactivitiesofeveryoneelse!



Corporate Governance – Auditors

• theshareholdersofacompanyneedreassurance

• thismaybereassuranceconcerningthereliabilityoffinancialinformationor…..

• …concerningthelegalityofacompany’sactivitiesor…..

• …theappropriatenessoftheinternalcontrolsystemsbeingfollowedwithinthecompany

• auditors have a statutory duty to report on the truth and fairness of the view shown by the financialstatements

• thisisprimarilyforthebenefitoftheshareholders

• butotherstakeholdersalsogainreassurance

• thereforeimportantthatauditorstakeactivestepstoensuretheircontinuingindependence

• protectthemselvesagainstanymatterwhichcouldthreatenthatindependenceor…

• …beperceivedbyotherstothreatenit


Company Law: CorporatE GovErnanCE Chapter 17 126


Corporate Governance – Directors

• theownersofacompanywilltypicallynotalsobeincontrol

• directorsareappointedasagentsofthecompanytoruntheentityinanorderlyandefficientmanner

• maybeexecutivedirectors

• involvedintheday-to-dayrunningactivities

• ornon-executive

• theirroleismoresupervisoryinnature

• theybringanindependentviewtotheboardmeetings

• theyhelptheboardtoprovideeffectiveleadership

• theyassistinthedevelopmentofthegoodreputationofthecompany

• theycomprisethemajorityorallofthegovernancesub-committeesoftheboard


Company Law: CorporatE GovErnanCE Chapter 17


Corporate Governance – Stakeholders

• obviousstakeholdersaredirectors,employees,customersetc

• butacademicresearchhasidentifiedanumberofdifferentwaysofcategorisingstakeholders:-

• primaryorsecondary

• internalorexternal

• narroworwide

• knownorunknown

• legitimateorillegitimate

• activeorpassive

• voluntaryorinvoluntary

• recognisedorunrecognised




Corporate governance – concepts

• honesty / probity–notsimplytellingthetruthbutalsonotbeingguiltyofissuingmisleadingstatementsorpresentinginformationinaconfusingordistortedway

• accountability–emphasisofthedirectors’accountabilitytoshareholders,butopensthedoorfordiscussionabouttheextentoftheiraccountabilitytootherstakeholders

• independence–strongemphasisontheappointmentofindependentnon–executivedirectorswhoarefreefromconflictsofinterestandarethusabletomonitoreffectivelytheentity’sandexecutivedirectors’activities,ideallyworkingcloselywiththeexternalauditors

• responsibility – a system of responsibility should exist whereby entity directors acknowledge theirresponsibilitiestothestakeholders,andwilltakewhatevercorrectiveactionisnecessaryinordertokeeptheentityfocussed

• decision taking / judgement–theskillwithwhichmanagementmakedecisionswhichwillimprovethewealth/prosperityoftheorganisation

• reputation–builtbydirectors,oftenasaresultoftheirabilitytocomplywithothercgconcepts

• integrity–straightforwarddealing,honesty,andbalanceForfinancialstatementstohavethecharacteristicofintegrity,thisdependsupontheintegrityofthosepeoplewhopreparethemIntegrityinvolvesapersonwhodemonstrateshighmoralcharacter,isprincipled,professional,honestandtrustworthy

• fairness–takingintoaccounttheinterests,rightsandviewsofeveryonewhohasalegitimateinterestintheentity

• transparency / openness–involvesfulldisclosureofmaterialmatterswhichcouldinfluencethedecisionsof stakeholdersThismeansnot simplyopenness in the reportingof information requiredby IFRS in thefinancialstatementsItalsoinvolvesotherinformationsuchascashandmanagementforecasts,environmentalreportsandsustainabilityreports




Corporate governance and agency theory

• directorsactasagentsoftheshareholders

• cg tries to ensure that agency responsibilities are fulfilled by requiring disclosure and by suggestingperformance-relatedrewards

• definition:anagencyrelationshipisacontractunderwhichoneormorepersons(theprincipals)engageanotherperson(theagent)toperformsomeserviceontheirbehalfthatinvolvesdelegatingsomedecision–makingauthoritytotheagent

• fiduciary duties definition: a duty imposed upon certain persons because of the position of trust andconfidenceinwhichtheystandinrelationtoanother

• Thedutyismoreonerousthangenerallyarisesunderacontractualortortrelationship

• Itrequires

• fulldisclosureofinformationheldbythefiduciary,

• astrictdutytoaccountforanyprofitsreceivedasaresultoftherelationship,and

• adutytoavoidconflictsofinterest

• fiduciarydutiesareowedtotheentity,nottoindividualshareholders

• directorsmustexercisetheirpowersfortheproperpurpose




Duties of directors as agents

• performance– ifpaid,directorshaveacontractualobligation toperformasagreed ( ifunpaid,no suchobligation)

• obedience–directorsshouldactstrictlyinaccordancewiththeprincipal’sinstructions

• skillandcare–directorsshouldactwithsuchadegreeofskillandcareasmayreasonablybeexpectedfromapersonwithsuchexperienceandqualifications

• personalperformance–directorsshouldonlydelegatetheirassignmentswheretheyhavenoreasontobelievethatthepersontowhomtheworkisdelegatedisnotcapableofproperperformance

• avoidconflictsofinterest–egshouldnotsellhisownpropertytotheentity,eventhoughitmaybeatanindependent,arm’slengthvaluation

• confidence–agentsshouldnotdiscloseconfidentialmattersabout theprincipal,evenafter theagencyagreementhasended

• accounting for benefits – agentsmust account to theprincipal for anyundisclosedbenefitwhich theyreceiveasaresultoftheirofficeasagent

• becauseownershipofanentityisnecessarilyseparatedfromthemanagement,problemsmayresult




Corporate governance – potential problems

• directorsmaychoosetopursuestrategiesmorebeneficialfortheirowninterestratherthantheentity’s

• directorswillalmostcertainlyhaveadifferentattitudetorisk,andriskmanagement,sinceitisnottheirowninvestmentwhichtheyarerisking

• ifmanagementhaveonly a small beneficial interest in theentity ( or evennone at all ) then theymaywellpursueactivitieswhichimproveshorttermresults(thereforeimprovingtheircurrentbonuses)totheexclusionofmorefar–sightedstrategieswhichwouldbeofgreaterbenefittotheentityinthelongerterm

• ultimately,shareholdershavetherighttodecidewhoshall(andwhoshallnot)bedirectorsoftheirentityButthisis,inpracticalterms,verymuchatheoreticalpowerGenerallyshareholdersneitherhavethedynamismnororganisationtoeffectsuchachangeinthecompositionoftheboard

Overcoming the problem – alignment of interests ( goal congruence )

• incentivesdesignedtoaligninterestsinclude:

• profitrelatedpay

• shareissueschemes,forinstanceontheoccasionofamanagementbuy–out

• shareoptionschemes

• butforallofthesethereisanaturaltendencyformanagementtoadoptcreativeaccountingtomanipulatetheprofitfigureuponwhichtheseincentivesarebased




Chapter 18

Company Law: ILLegaLItIes

Wrongful Trading

• previouslawextendedbyInsolvencyAct1986

• previously,directorscouldonlybeliableforcompany’sdebtswheretheywereguiltyoffraudulenttrading–difficulttoprove

• I.A.1986designedtogivecreditorsincreasedprotection

• anexampleofliftingtheveil

• directors(andsometimesotherstoo)maybeheldliablewhen:-

• companyhascommencedinsolventliquidation

• theyknew,orshouldhaveknown,thatthiswasprobable

• theyheldapositionofpower(director)

• courtmayallocatefinancialpenaltyontheliquidator’sapplication

• directorsmayescapeliabilityiftheycanshowthecourtthattheytookeverystepnecessarytomitigate/minimisethecreditors’potentialloss



Money Laundering

• aprocesswherebytheproceedsofcriminalactivityareconvertedintoassetsappearingtohavealegitimateorigin

• usuallyinvolves3distinctphases

• placementofthefundsintolegitimatebusinessactivity

• transferofmoneyfrombusinesstobusiness(orplacetoplace)toconcealitsoriginalsource

• integration–themoneytakesontheappearanceofhavingcomefromalegitimatesource

• proceedsofCrimeAct2002seekstocontrolmoneylaunderingbythecreationof3categoriesofcriminalactivity

• laundering(maximum14yearsprisonand/orfine)

• failuretoreport(maximum5yearsprisonand/orfine)

• tipping-off(maximum5yearsprisonand/orfine)

• theoffenceof failuretoreport relatesonlyto individualsacting inthecourseofbusiness– forexample,accountants


Company Law: ILLEgaLItIEs Chapter 18 134


Insider Dealing

• insider–apersonwhohasabusinessconnectionwithacompanyasaresultofwhichtheymayacquirerelevantinformation

• dealing–buyingorsellingsharesorsecuritiesinacompany

• unpublishedprice– sensitive information is information about the companywhich is not in thepublicdomain…..

• ….islessthan6monthsold,and……

• ….is,onpublication,likelytohaveamaterialimpactonthemarketpriceofthecompany’sshares

• aninsiderinpossessionofunpublishedprice–sensitiveinformationshouldnotdeal

• anoffenceisalsocommittediftheinsiderencouragesanotherpersontodeal

• a person dealing as a result of that encouragement, and believing the source to be an insider, is alsocommittinganoffence

• disclosureofinsideinformation,otherthaninthepropercourseofemploymenttoanauthorisedperson,isalsoanoffence

• somedefencesareavailabletobeclaimed


Company Law: ILLEgaLItIEs Chapter 18


Bribery

• BriberyAct2010targetsbothbriberyandcorruption

• 4offences

• bribinganotherperson

• receivingabribe

• bribingaforeignpublicofficial(FPO)(seenextpage)

• commercialorganisationfailingtopreventbribery(seenext)

• bribing=offeringfinancialorotheradvantagetoperformarelevantfunctionoractivityimproperly

• relevantfunctionoractivity:

• anyfunctionofapublicnature

• anyactivityconnectedwithabusiness

• anyactivityperformedinthecourseofaperson’semployment

• anyactivityperformedby,oronbehalfof,agroupofpersons

• these“relevantfunctionsoractivities”maybeanywhereintheworld




Bribing an FPO

• offencetooffer,directlyorindirectly,afinancialorotheradvantagetoanFPOintendingtoinfluencethemingainingbusinessoranadvantageinconnectionwithbusiness

• anFPOholdsanadministrative,legislativeorjudicialpositionoutsidetheUK

• commercialorganisationfailing...

• acompanyorpartnershipisliableifanagent,employeeorsubsidiarybribesanotherpersonintendingtogainabusinessadvantage

• Defence-ifacompanycanshowthatithadadequateproceduresinplace,appropriatetothelevelofrisk

• “adequateprocedures”basedonsixguidanceprinciples




The Six principles

• proportionateprocedures

• proportionatetorisksfacedandsizeofcompany

• commitmentbymanagement

• managementshouldassessthenatureandextentofrisksfacedanddevelopappropriateprocedurestomanagethatrisk

• duediligence

• thecompanyshouldapplyduediligenceprocedures in respectofcompanypersonnelwhoareatgreaterriskofofferingbribes

• communication

• toensureallemployees/connectedpersonsareawareofthecompany’scultureandattitude

• includestrainingandeducationprocedures

• monitoringandreview

• proceduresshouldberegularlyreviewedandimprovedasnecessary

• “adequacyofprocedures”isamatterforacourttodecide

• NB“hospitality”thatisreasonableandproportionateisacceptable,ieisitnotprohibitedbytheAct.




Penalties

• anindividualwhoisfoundguiltyfacesimprisonmentupto10years

• aguiltycompanyisliabletoanunlimitedfine

• but,inaddition,thereisreputationloss...

• ...andpotentially,civilclaimsagainstthedirectorsforfailingtoimplementadequateprocedures

First conviction

• MunirPatelfoundguiltyofaccepting£500tosuppressadrivingconvictionfromcourtrecords.Servinga3yearprisonsentence

•







Chapter 19

Capital MaintenanCe

Capital Maintenance

• thememberscontributecapitaltothecompany

• thisshouldbemaintainedwithinthecompanybywayofnetassets

• knownasthebufferfund

• called“shareholders’equity“andcomprisessharecapitalplusundistributablereserves

• undistributablereservesare:-

• sharepremiumaccount

• capitalredemptionreserve

• accumulatedunrealisedprofitslessaccumulatedunrealisedlosses

• anyotherreserveidentifiedbythecompany’sconstitutionasundistributable

• developmentoftheprincipleofcapitalmaintenanceaddressesthreeareas:-

• restrictionsonthepaymentofdividends

• restrictionsonthereductionofcapital

• assistancegiventooutsiderstoacquirethecompany’sshares

141June 2012 Examinations paper F4 GlO


Capital Maintenance – Payment of Dividends

• powertodeclaredividendsisgiventothedirectorsbythecompany’sconstitution

• membersdonothaveanautomaticrighttoreceiveadividend(theyapproveoneatthecompany’sgeneralmeetingbutcannotvotetoincreasethedividendproposedbythedirectors)

• dividendsarenormallypaidbasedonthepaid-upcapitalofthecompany

• dividendsmaybeintheformofacashpayment(normal)orinanotherform(forexample,ascripdividend)

• adividendisacompanydebtonlyfromthedateitisdeclaredanddueforpayment

• ifitisdeclaredandunpaid,itisadeferreddebt

• unclaimeddividendsbecomestatutebarredafter6years

• dividendsmayonlybedeclaredoutofprofitsavailableforthepurpose

• thisisdefinedas‘accumulatedrealisedprofitslessaccumulatedrealisedprofits’

• thereisnodistinctiondrawnbetweencapitalprofitsandrevenueprofits

June 2012 Examinations paper F4 GlO

Capital MaintEnanCE Chapter 19 142


Capital Maintenance – Reduction of Capital

• acompanymayreduceitscapital,butonlyunderthestrictestcontrol

• 3authoritiesarerequired


• powerintheconstitution

• consentofthecourt

• andforonly3reasons/situations

• thecompany’scapitalisnolongerrepresentedbyavailableassets(ithasbeensufferinglosses)

• thecompanywishestoextinguish/canceltheliabilityofaclassofshare-forexamplea£1share,70ppaidcouldbecomea70psharefullypaid

• thecompanywishestorestructureitscapitalfundingandmay,forinstance,nowwishtoreplacesomeofitssharesbywayofloancapital

• thecourtisinvolvedbecausecreditors’rightscouldbeadverselyaffected


Capital MaintEnanCE Chapter 19


Share Capital

• itisillegaltoissuesharesforanamountwhichislowerthanthenominalvalueoftheshare

• wheresharesareissued,whetherforcashorotherwise,foranamountinexcessoftheirnominalvalue,anamountequaltothatexcessshallbecreditedtotheSharePremiumAccount

• thesharepremiumaccountisanundistributablereserveandhasverylimiteduses:-

• financetheissueoffullypaidbonussharestoexistingmembers

• writeoffpreliminaryandformationexpenses

• provideforthepremiumpayableontheredemptionofsharesordebentures

• write off the expenses of, discounts allowed on or commissions paid on any issue of shares ordebentures

• butthecombinationof‘discountsallowedon’and‘issueofshares’isanillegalcombination

• despitetheprinciplethatsharesmaynotbeissuedatadiscount,privatecompaniesareabletoissuesharesinconsiderationfornon-cashgoodsorservicesreceived

• thetrue/fairvalueofthesegoodsorservicescouldbelowerthanthenominalvalueofthesharesissued.Thisisnotillegal–butonlyappliestoprivatecompanies

June 2012 Examinations paper F4 GlO

Capital MaintEnanCE Chapter 19 144


Share Capital

• variationofclassrights

• rightsattachtoaparticularclassofshareandtypicallyreferto:-

- votingrights

- entitlementtodividends

- returnofcapitalinaliquidation

• ifthevariationofrightsisspecifiedbytheconstitution,thenfollowtheconstitution

• ifnotspecifiedbytheconstitution,thenspecialresolutionisneeded

• note,ifconstitutionprovidesforthevariation,itcouldrequiremerelyanordinaryresolutionorcouldevenrequiresomegreatermajoritythan75%

• theseprovisionsapplyevenforcompanieswithoutasharecapital,forexampleacompanylimitedbyguarantee


Capital MaintEnanCE Chapter 19

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