ACCA F4

Corporate and Business Law

(English)

Revision Notes

(March/June 2017)

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Topic

Contents

Page No

Business, Political and Legal Systems 02

International Trade, Legal Regulations and Conflict of Laws 08

Alternate Dispute Resolution Mechanism 13

Contracts for the International Sale of Goods 20

Obligations and Risk in Contracts for International Sales 24

Transportation and Payment of International Business Transactions 31

Agency Law 43

Partnership 46

Corporation and Legal Personality 49

Company Formation 55

Constitution of a Company 58

Share Capital 63

Borrowing and Loan Capital 69

Capital Maintenance and Dividend Law 74

Company Directors and other Company Officers 78

Other Company Officers 84

Company Meetings and Resolutions 87

Insolvency and Administration 92

Fraudulent Behavior 99

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Business, Political and Legal Systems

Economic Systems

Economic systems are the means by which countries and governments distribute resources and trade goods and services.

Types of Economic Systems:

a) Planned Economy. It is an economic system in which production, investment, prices, and incomes are determined centrally by the government. Communism is a primary example of it.

There are three main types of economic systems:

b) Market Economy: It is an economic system in which there is free competition and prices are determined by the interaction of supply and demand i.e. by the aggregate interactions of a country's individual citizens and businesses. It is

c) Mixed Economy: A

also known as capitalist or free market economy (Opposite of a planned economy).

mixed economic system

combines elements of the market and command economy. Many economic decisions are made by free market forces but the government also plays a role in the allocation and distribution of resources

Political Systems There are mainly two types of political systems: a) Democratic Political System b) Dictatorial Political System

• Two important factors in any political system are:

a) Rule of Law Dictatorial Systems - dominated by state made laws and individual freedom is subject to it Democratic Systems - guarantee individual freedom and in a more traditional sense is a political system that allows for each individual to participate. Citizens elect legislators who, in turn, make laws.

b) Separation of Powers

Separation of powers refers to the division of government responsibilities into distinct branches to limit any one branch from exercising the core functions of another. The main three branches are the: 1) Legislature: Responsible for enacting the laws of the state 2) Executive: Responsible for implementing and administering the public policy enacted and

funded by the legislative branch. 3) Judiciary: Responsible for interpreting the constitution and laws and applying their

interpretations to controversies brought before it.

Legal Systems Legal system refers to a procedure or process for interpreting and enforcing the law.

Law is a system of rules that govern a society with the intention of maintaining social order, upholding justice and preventing harm to individuals and property

.

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Types of Law The major types of law prevailing in the world consist of: • International Law: Body of legal rules governing interaction between sovereign states and the

rights and duties of the citizens of sovereign states towards the citizens of other sovereign states. • National Law:

• Conflict of Laws: A

Domestic law, which can also be called national law or municipal law, come from legislature and customs and regulates rights and duties between individuals and the state.

• Common Law: Common law system developed in England. It arose out of traditional customs and practices which latter turned out to be very rigid and unfair. Common law is based upon amalgamating local customary laws into law of the land. Remedies under common law are monetary such as damages.

specialized branch of law which resolves cases which have an element of conflicting foreign law.

• Sharia Law: It is

• Criminal Law: Criminal law involves penal consequences which may result in conviction resulting in capital punishments or a specified time in prison. In criminal law the burden of proof rests with the prosecution which must prove its case beyond reasonable doubt. In jurisdiction of UK the criminal case is referred to as R vs Smith in which R represents the Crown and “R” signifies Regina the Queen.

the code of law derived from the Quran and from the teachings and examples of Mohammed (P.B.U.H).

• Civil Law: Civil law governs private disputes between two or more persons. It does not entail any penal consequences; rather liability is discharged by way of payment of damages or other appropriate remedy. In civil law the case must be proved on the balance of probabilities. Civil cases are referred to by the names of the parties involved in the dispute, for example, Smith v Jones. In civil law, a claimant sues (or ‘brings a claim against’) a defendant.

Common Law • The common law is the body of law formed through court decisions, as opposed to law formed

through statutes or written legislation. A common law system is the system of jurisprudence that is based on the doctrine of judicial precedent, the principle under which the lower courts must follow the decisions of the higher courts, rather than on statutory laws.

• The common law legal system originated in England was later adopted in the United States and Canada and is in place in most Commonwealth countries. While the English common law system has its roots in the 11th

century, the present system has evolved over the past 350 years, with judges basing their decisions on those made by predecessors.

Sources of Common Law a) Common Law & Equity: Common law is based upon merging local customary laws into law of the

land. Remedies under common law are monetary such as damages. The concepts of equity developed in later years which were based on fairness. Equity steps in whenever monetary compensation is not an adequate remedy. Specific Performance, Injunction, rescission are the main equitable remedies. Whenever there is a conflict between common law and equity then equitable principles would prevail.

b) Statute: This is law produced through the Parliamentary system. It upholds the doctrine of parliamentary sovereignty within the United Kingdom means that Parliament is the ultimate source of law and, at least in theory, it can make whatever laws it wishes.

c) Customs: Local customs also act as a source of law. d) European Union Law: Since joining the European Community, now the European Union, the

United Kingdom and its citizens have become subject to European Union law. In areas where it is applicable, European law supersedes any existing United Kingdom law to the contrary

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Doctrine of Judicial Precedent • Case law is judge made law which consists of decisions of the courts. Once a legal principle is decided

it is known as a Judicial Precedent. • Doctrine of Judicial Precedent: This means that the judge is bound to apply a decision from an earlier

case to the facts before him. This doctrine is known as stare decisis. Judicial Present can only be considered as a binding precedent if: a) It is a Ratio Decidendi. The ratio decidendi of a case may be understood as the statement of the

law applied in deciding the legal problem raised by the facts before a judge. b) The material facts are similar c) Decision must have been by a superior court

Statutory Interpretation: It is the process of interpreting and applying legislation. In most cases, there is some ambiguity or vagueness in the words of the statute that must be resolved by the judge. To find the meanings of statutes, judges use various tools and methods of statutory interpretation.

There are techniques of statutory interpretation: • Literal Rule: Is a type of statutory interpretation, which dictates that Acts are to be interpreted

using the ordinary meaning of the language of the Act. • Purpose Approach: Is a theory of statutory interpretation that suggests that courts should

interpret legislation in light of the purpose behind the legislation keeping in view the ordinary, literal and grammatical sense of the words.

• Contextual Rule: Words in statute should be interpreted keeping in view their context. Presumptions of Statutory Interpretation: a) Statue do not over ride existing law b) Statute does not alter existing common law c) Statute is not intended to deprive a person of his liberty d) Statute does not have a retrospective effect e) Statute does not bind the crown Civil Law System The civil law system is a codified system of law. It takes its origins from Roman law. Features of a civil law system include: • There is generally a written constitution based on specific codes (e.g., civil code, codes covering

corporate law, administrative law, tax law and constitutional law) protecting basic rights and duties; administrative law is however usually less codified and administrative court judges tend to behave more like common law judges.

• Only legislative enactments are considered binding for all. There is little scope for judge-made law in civil, criminal and commercial courts, although in practice judges tend to follow previous judicial decisions; constitutional and administrative courts can nullify laws and regulations and their decisions in such cases are binding for all.

• In some civil law systems, e.g., Germany, writings of legal scholars have significant influence on the courts.

• Courts specific to the underlying codes – there are therefore usually separate constitutional court, administrative court and civil court systems that provide opinion on consistency of legislation and administrative acts with and interpret that specific code.

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• Less freedom of contract - many provisions are implied into a contract by law and parties cannot contract out of certain provisions.

A civil law system is generally more prescriptive than a common law system. However, a government will still need to consider whether specific legislation is required to either limit the scope of a certain restriction to allow a successful infrastructure project, or may require specific legislation for a sector. Sources of Civil Law: As regards civil law systems, the main source of law is the various codes which provide the law relating to particular areas of activity. Such codes differ from United Kingdom legislation in that they are written in broad terms in the pursuit of general principles and the implicit power of the courts to make, or change, the law is reduced. Such systems also tend to operate with written constitutions, which provide a fundamental basis for legal activity and allows the courts to challenge any legislation that they decide is contrary to the constitution. Sharia Law System:

It is the code of law derived from the Quran and from the teachings and examples of Mohammed (P.B.U.H).

Sources of Sharia law: The main source of Sharia law is the Quran, which is accepted as the revealed dictate of Allah as revealed to his prophet Muhammad (P.B.U.H). In addition the Sunnah, which is derived from the sayings of the Prophet (the Ahadith), is also a primary source of law in Sharia systems As secondary sources of law, Sharia systems refer to the Madhab, which is the opinions of leading early jurists on the meaning and effect of Sharia law. Such systems also have written constitutions and these specifically subordinate law to the religious rules. Judicial system in Sharia Law: • Clerics known as Imam act as judges • In some Muslim countries they also appoint secular judges along with clerics. Scope of Interpretation in Sharia Law: • Sharia law is interpreted in accordance with the rulings in The Quran • The Quran, being the fundamental source of law upon which even the Hadith is based, is primary

precedent: its rulings are binding and not subject to any dispute or further interpretation. • In order to seek further clarity in the rulings judge may turn towards the secondary source i.e. The

Ahadith which were collected and written down by humans. It is recognized that due to human imperfection the sources were prone to error, and this gave rise to the different categories of Ahadith depending on their authority.

• The most guaranteed Ahadith are called Muwatir • The less certain ones are called Mashtur • Where the Ahadith’s authenticity is very less than the same will be categorized as Ahad.

Jurisprudence in Sharia Law: • After the Prophet’s death, there was a need to develop a system of jurisprudence that would serve the

dual purpose of safeguarding the system of Islam and to deal with previously unprecedented matters,

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not dealt with directly in the Quran or the Hadith texts. This necessary process gave rise to the development of the science of understanding and interpreting legal rulings known as fiqh.

• Fiqh in Arabic means ‘knowledge’, ‘understanding’ or ‘comprehension’. • The scholars of fiqh generated a body of additional rulings. The tools involved in giving life to this

third body of rules were: a) Ijma’ (consensus)

The universal consensus on religious issues of the scholars of the Muslim community as a whole can be regarded as conclusive Ijma.

b) Istihsan (legal extrapolation) Istihsan is a method of exercising personal opinion (ray) in order to avoid any rigidity and unfairness that might result from literal application of law. Istihsan as a concept is close to equity in western law.

c) Ijtihad (interpretation) Ijtehaad is the process where the scholars of Islam strive to find a solution to an issue on which the Quran and Sunnah are silent.

d) Qiyas (analogy) Qiyaas is a process whereby a clear ruling of the permissibility or impermissibility of an act or thing is applied to an issue closest related to it.

• The other methods of exercising ijtihad are: a) Maslahah Mursalah

Maslaha Al Mursalah is a concept in traditional Islamic Law. The world Maslaha is taken from the root word “Saluha” or “Salaha” which means to be good or to repair or to do good. Istislah on the other hand refers to the methods used by Muslim jurists to solve problems (a good deed) especially when there are no explicit guidance from the Qur’an and the Sunnah on such matters.

b) Urf

ʿUrf is an Arabic Islamic term referring to the custom, or 'knowledge', of a given society. To be recognized in an Islamic society, ʿurf must be compatible with the Sharia law. When applied, it can lead to the deprecation or inoperability of a certain aspect of fiqh.

c) Istishab This term refers to a situation in Islamic jurisprudence where the jurist presumes that the situation or a fact continues or discontinues holding applicable until the contrary is proven. A scholar can use the concept of istishab in deducing a ruling if other proofs are absent.

Ijtihad: The requirements for ijtihad are: 1. Its exercise cannot be done on certain issues such as on the existence of Allah 2. Judge (Mutahid) must be qualified.

Pre-requisits to be a Mutahid: a) Practicing Muslim b) Honest and reliable person c) Knowledge of Quran d) Knowledge of Sunnah of Prophet (P.B.U.H) e) Understanding of the principles of Ijma and Qiyas

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Taqlid • Doctrine of Taqlid, requires the adherence to the legal principles established by the legal scholars of

the second and third centuries of Islam and the refusal to further develop through the use of itjihad. Concept of Usury in Sharia • The word used for 'interest' in the Quran is Ar-Riba, an Arabic. • The literal meaning of riba is excess or increase. In Islamic terminology, interest means effortless

profit or profit which comes free from compensation or that extra earning obtained that is free of exchange.

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International Trade, Legal Regulations and Conflict of Laws

International law is the term commonly used for referring to laws that govern the conduct of independent nations in their relationships with one another.

International Law

Types of International Law a) Public International law

Public international law is the body of rules that is legally binding on States in their interactions with other States, individuals, organizations and other entities.

b) Private international law , or conflict of laws, which addresses the questions of i) In which legal jurisdiction may a case be heard; and ii) The law concerning which jurisdiction(s) apply to the issues in the case

International Trade and Domestic Laws • International trade is the exchange of capital, goods, and services across international borders

or territories. In most countries, such trade represents a significant share of gross domestic product (GDP). However, countries

enact laws to protect their domestic market and/or industry. These laws sometimes act as a barrier to the free international trade.

Modes to Protect Domestic market The countries laws act as a barrier to free international trade in order to protect their domestic market. The most common barriers to trade to protect their domestic market from foreign competition are tariffs, quotas, and nontariff barriers. a) Tariffs

A tax imposed on imported goods and services. Tariffs

b) Quotas

are used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers

A quota is a government-imposed trade restriction that limits the number, or monetary value, of goods that can be imported or exported during a particular time period. Quotas

c) Non-Tariff Barriers

are used in international trade to help regulate the volume of trade between countries

A nontariff barrier is a form of restrictive trade where barriers to trade are set up and take a form other than a tariff. Nontariff barriers include quotas, embargoes, sanctions, levies and other restrictions and are frequently used by large and developed economies.

Private International Law (Conflict of Laws) The rules of Private International law are the outcome of different state laws which are enacted by their legislatures. The countries in order to overcome these differences enter into treaties and conventions to regulate their matters. For example Rome Convention1980

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International Trade and the Function of International Organizations International organizations have a major role in the international trade and the drafting of international law. • The main organizations concerned with drafting of international law are:

UNITED NATIONS • The United Nations is an international organization founded in 1945. It is currently made up of

193 Member States. Each of the 193 Member States of the United Nations is a member of the General Assembly. States are admitted to membership in the UN by a decision of the General Assembly upon the recommendation of the Security Council.

• The UN states that its member states should codify and develop international law. The two bodies in the UN involved in drafting international law are The United Nations Commission on International Trade Law and International Chamber of Commerce.

a) The United Nations Commission on International Trade Law (UNCITRAL)

• The United Nations Commission on International Trade Law (UNCITRAL) is the core legal body within the United Nations system in the field of international trade law.

• It was established by the General Assembly in 1966 (Resolution 2205(XXI)). • UNCITRAL was given the task of furthering the progressive harmonization and unification of

the law of international trade. This was to be achieved by: – i) Co-ordinating the work of organizations active in this field and encouraging co-

operation among them; ii) Promoting wider participation in existing international conventions and wider

acceptance of existing model and uniform laws; iii) Preparing or promoting the adoption of new international conventions and

promoting the codification and wider acceptance of international trade terms. iv) Promoting ways and means of ensuring a uniform interpretation and application of

international conventions and uniform laws in the field of the law of international trade;

v) Collecting and disseminating information on national legislation and modern legal developments, including case law, in the field of the law of international trade;

vi) Establishing and maintaining a close collaboration with the United Nations Conference on Trade and Development;

vii) Maintaining liaison with other United Nations organs (General assembly, Security Council etc.) and specialised agencies concerned with international trade;

viii) Taking any other action it may deem useful to fulfill its functions.

• The Commission is composed of 60 Member States elected by the General Assembly. Members of the Commission are elected for terms of six years, the terms of half the members expiring every three years.

• The Commission carries out its work at annual sessions, which are held in alternate years at United Nations Headquarters in New York and in Vienna.

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The following are some of the most important outcomes of the work conducted by UNCITRAL: i. United Nations Convention on Contracts for the International Sale of Goods

(Vienna, 1980). This Convention establishes a comprehensive code of legal rules governing the formation of contracts for the international sale of goods, the obligations of the buyer and seller, remedies for breach of contract and other aspects of the contract.

ii. United Nations Convention on the Carriage of Goods by Sea, 1978 (the ‘Hamburg Rules’). This Convention establishes a uniform legal regime governing the rights and obligations of shippers, carriers and consignees under a contract of carriage of goods by sea.

iii. UNCITRAL Model Law on International Commercial Arbitration (1985). These provisions are designed to assist States in reforming and modernising their laws on arbitral procedure so as to take into account the particular features and needs of international commercial arbitration.

iv. United Nations Convention on International Bills of Exchange and International Promissory Notes (New York, 1988). This Convention provides a comprehensive code of legal rules governing new international instruments for optional use by parties to international commercial transactions.

v. UNCITRAL Model Law on Electronic Commerce. This Model Law, adopted in 1996, is intended to facilitate the use of modern means of communications and storage of information.

vi. UNCITRAL Model Law on Cross-Border Insolvency. This Model Law seeks to promote fair legislation for cases where an insolvent receivable (debtor) has assets in more than one State.

b) International Chamber of Commerce (ICC) • It was established in 1919. • The ICC aims to promote international trade, responsible business conduct and a global approach

to regulation through a unique mix of advocacy and standard setting activities—together with market-leading dispute resolution services.

• ICC is the largest and the most diverse business organization in the world. The ICC has hundreds of thousands of member companies that represent more than 130 countries. Its members include many of the world’s largest companies, SMEs, business associations and local chambers of commerce.

• It performs three primary activities: establishment of rules, resolution of disputes and policy advocacy. The ICC also fights against commercial crime and corruption in order to boost economic growth, creation of jobs and steady employment, as well as overall economic prosperity. Because members of the ICC, and their associates, take part in international business, the ICC has unparalleled authority in setting rules that govern how business is conducted across all borders. While these rules are voluntary, thousands of transactions on a daily basis operate by these ICC-established rules, as part of regular international trade.

• The organization’s international secretariat was also established in Paris, and its International Court of Arbitration was formed in 1923.

World Trade Organisation The World Trade Organization (WTO) deals with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible. The World Trade Organisation (WTO) was set up to continue to implement the General Agreement on Tariffs and Trade (GATT), and its main aims are to reduce the barriers to international trade. It has 164 members. The WTO encourages free trade by applying the most favoured nation principle between its members, where reduction in tariffs offered to one country by another should be offered to all members.

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The World Trade Organization is ‘member-driven’, with decisions taken by General agreement among all member of governments and it deals with the rules of trade between nations at a global or near-global level. Key objectives The WTO has six key objectives: (1) To set and enforce rules for international trade (2) To provide a forum for negotiating and monitoring further trade liberalization (3) To resolve trade disputes (4) To increase the transparency of decision-making processes (5) To cooperate with other major international economic institutions involved in global economic

management (6) To help developing countries benefit fully from the global trading system.

Structure

Ministerial Conference • Composed of all members of the WTO, which is to meet at least once every two years • Top level decision-making body General Council • Between sessions of the Ministerial Conference, its functions are exercised by the General Council,

made up of the full membership of the WTO • Two additional specific tasks: Dispute Settlement Body and as the Trade Policy Review Body Goods, services and TRIPS councils • Three separate sets of subsidiary bodies report to the General Council • Council for Trade in Goods, the Council for Trade in Services, and the Council for Trade-Related

Aspects of Intellectual Property Rights (known for short as the Council for TRIPS) Committees reporting to General Council (Second group) • Committee on Trade and Development, the Committee on Balance-of-Payments Restrictions, and the

Committee on Budget, Finance and Administration Dispute Settlement Body (DSB) • Countries bring disputes to the WTO if they think their rights under the agreements are being

infringed. • Judgments by specially appointed independent panel of experts are based on interpretations of the

agreemen • ts and individual countries’ commitments. • The system encourages countries to settle their differences through consultation. Failing that, they

can follow a carefully mapped out, stage-by-stage procedure that includes the possibility of the ruling by a panel of experts and the chance to appeal the ruling on legal grounds.

• Consensus is required for DSB’s rejection of panel’s report or appeal.

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• The WTO secretariat, based in Geneva, is headed by a Director-General. Secretariat

• Main duties to supply technical support for the various councils and committees and the ministerial conferences, to provide technical assistance for developing countries, to analyze world trade and to explain WTO affairs to the public and media.

• The Ministerial Conference shall appoint the Director-General who will then appoint the members of the staff of the Secretariat

• In the discharge of their duties, the Director-General and the staff of the Secretariat shall not seek or accept instructions from any government or any other authority external to the WTO.

Organization for Economic Cooperation and Development (OECD) • The Organization for Economic Cooperation and Development (OECD) is a unique forum where the

governments of 35 countries with market economies work with each other, as well as with more than 70 non-member economies

• It was setup in 1961 to administer American and Canadian aid to Europe after World War II. It is a forum of countries describing themselves as committed to democracy and the market economy, providing a platform to compare policy experiences, seeking answers to common problems, identify good practices and coordinate domestic and international policies of its members.

to promote economic growth, prosperity, and sustainable development.

International Institute for the Unification of Private Law (UNIDROIT) • The International Institute for the Unification of Private Law (UNIDROIT) is an independent

intergovernmental organization established in 1926 based in Rome. • Its purpose is to study needs and methods for modernizing, harmonizing and co-ordinating private

and, in particular, commercial law as between States and groups of States. • Membership of UNIDROIT is restricted to States complying with the UNIDROIT Statute. It has 63

Member States. • UNIDROIT’s basic statutory objective is to prepare modern, and where appropriate harmonised,

uniform rules of private law understood in a broad sense. • Uniform rules prepared by UNIDROIT are concerned with substantive law rules. The rules produced

by UNIDROIT assume one of three types: (i) Conventions These documents are designed to apply automatically in preference to a State’s

municipal law upon the completion of all the formal requirements of that State’s domestic law for their entry into force.

(ii) Model laws These documents are designed to allow states to adopt or adapt them, when drafting domestic legislation on the subject covered by the model law.

(iii) General principles This form is addressed directly to judges, arbitrators and contracting parties who are, however, left free to decide whether to use them or not.

Structure of UNIDROIT: a) Secretariat: Mainly responsible for the daily functioning and work of the organization. b) Governing Council: Its main task is to supervise the policy of UNIDROIT and the work of the

secretariat. It has 25 elected members and a president. c) General Assembly: It is the main decision making organ. It is responsible for approving budge,

work program and electing the governing council. The governing council has one member representative.

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Alternate Dispute Resolution Mechanism

Adjudication (settlement) is carried out in various forms, but most commonly occurs in the court system. Court Based Adjudication

• Adjudication by courts involves several different functions: the establishment of the facts in controversy, the definition and interpretation of relevant rules of law.

• Adjudication in courts starts from the court of first instance and then the appellate court (a higher court of appeal) if the decision by the lower court is contested.

• Countries have different court adjudication methods. Some countries have different courts for criminal and civil proceedings. Some countries have a judge only system but some countries follow the jury system like in the United Kingdom.

• The court based adjudication in the United Kingdom shall be analyzed for reference purposes.

The system of courts differ according to the nature of the claim (whether a claim is civil or criminal in nature) and also on the value of the claim (in civil cases).

English Legal System

Civil Court Structure: • The hierarchy of the civil courts is as follows:

a) Magistrate Courts mostly deals with small domestic matters b) County court deals with matters relating to contract and tort, equitable matters and all other

claims. Majority of the cases go to Count Court as it is the court of first instance. The presiding officer/judge of the court is called Circuit Judge.

c) High Court is presided by puisne judges and is further divided in three divisions i. Queen’s Bench Division ii. Family Division iii. Chancery Division

d) Court of Appeal is presided by the judges called the Lord Justices of Appeal. The Civil Division of the Court of Appeal hears appeals from County Court and High Court.

e) The Supreme Court/House of Lords is the highest court which hears appeals from the Court of Appeal and may hear cases directly from the High Court. The presiding judges are called Justices of Supreme Court and include a President and Deputy President.

Criminal Courts Structure: The hierarchy of criminal courts is as follows: a) Magistrates Court: hears minor offences. Appeal is to the Crown Court or QBD of High Court ‘by

way of case stated’ on a point of law or that the magistrates went beyond their proper powers b) Crown Court: Conducts trial of offences. Trials are conducted in the presence of jury. Appeals can

be heard by criminal division of Court of Appeal and on the point of law be heard by QBD of High Court.

c) High Court (Queens Bench Division): Hear appeals from Crown Court/Magistrate Court d) Court of Appeal Criminal Division: Hear appeals from the Crown Court and High Court. e) House of Lords/Supreme Court: Hear appeals from Court of Appeal.

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• The essential criminal trial courts are the magistrates’ courts and Crown Courts. In serious offences, known as indictable offences, the defendant is tried by a jury in a Crown Court. For less serious offences, known as summary offences, the defendant is tried by magistrates; and for ‘either way’ offences, the defendant can be tried by magistrates if they agree, but the defendant may elect for jury trial.

Civil Procedure Claims: • Governed by Civil Procedure Rules (CPR) • Small claims are heard under the small claims track and the hearing process is quick. • County Courts and High Courts hear substantial/larger claims • Pretrial Disclosure procedure is a feature of English legal system where documents are disclosed to

the opposing party before trial. Pros and Cons of Court Based Adjudication: Pros: • Court orders and rulings can be effective than arbitration in certain circumstances • Establishment of judicial Precedent Cons: • Expensive than arbitration • Time taking and lengthy procedure than arbitration

International Courts play an important role in resolving the matters relating to conflicts of law and enforcement of settlements.

International Court:

The two main important Courts are: a)

• The Court of Justice interprets EU law to make sure it is European Court of Justice (ECJ)

applied in the same way in all EU countries, and settles legal disputes

• It is the highest court of law for all European Union member states. between national governments and EU institutions.

• Appeals from decisions of courts in the member states can also be filed in the ECJ.

b) • The International Court of Arbitration established by International Chamber of Commerce (ICC)

resolves international commercial and business disputes, administering more than half of all arbitration disputes worldwide.

International Court of Arbitration (ICA)

• It played significant role in the New York Convention of 1958 in which all the states ratifying the treaty agreed not to take disputes to courts in presence of written arbitration agreements.

• The Court of Arbitrations' role lies in providing an organizational framework for the procedures and offer, if necessary, support to arbitrators. It oversees procedures, helps to resolve problems and guarantees the enforcements of awards. Support is granted in French, English, Arab, German, Spanish, Italian, Portuguese, and Russian.

• The term "alternative dispute resolution" or "ADR" is often used to describe a wide variety of dispute resolution mechanisms that are alternative to full-scale court processes.

Alternate Dispute Resolution:

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• ADR systems may be generally categorized as negotiation, conciliation/mediation, or arbitration systems.

Arbitration • Arbitration is a procedure in which a dispute is submitted, by agreement of the parties, to one or

more arbitrators•

who make a binding decision on the dispute.

The solution can be in the form of compensation payment, behavioral change, apology etc.

Islamic Arbitration • Arbitration in Islam is called Takhim • Arbitrator is called Hakam • Arbitrator must be muslim, well versed of sharia law and should be able to arbitrate. Mediation and Conciliation: • Mediation and conciliation systems are very similar in that they interject a third party between the

disputants to mediate a specific dispute • Decisions are not legally binding • In Islam mediation is called wasta and conciliation is called soth. Pro’s of Alternate Dispute Resolution: • Takes far less time to reach a final resolution • Arbitrator of choice • Cost of Arbitration is low. • The parties can also have their dispute arbitrated or mediated by a person who is an expert in the

relevant field. UNICITRAL Model on International Commercial Arbitration: • The Model Law on international commercial arbitration was adopted by United Nations Commission

on International Trade Law in 1994. International Commercial Arbitration • International commercial arbitration is a means of resolving disputes arising under international

commercial contracts. • According to Article 1 Arbitration can be categorized as international if parties conduct business in

different countries or the business is in the same country but arbitration is designated to be in a different country and it is commercial if their business is commercial in nature.

Law on receipt of Written Communications: • Article 3 states that communication will be deemed to be delivered if it is sent to the addressee

personally or at his business or mailing address. • If the above are not possible then written communication sent at the addressee last known place of

business would be deemed to be valid.

Extent of Court Intervention • Article 5 states that in matters governed by this Law, no court shall intervene except where so

provided in this Law. • Article 6 states that the states which adopt the law should specify the court competent to perform

functions such as of appointment of arbitrators etc.

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Form of Arbitration Agreement • Article 7 defines the “Arbitration agreement” as an agreement by the parties to submit to arbitration

all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

• An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

• Article 7(2) states that the arbitration agreement shall be in writing. • Article 7(3) states Agreement is in writing if it is in written form or is referred in legal proceedings and

the other party has not denied it or a written contract between parties makes reference to an arbitration agreement.

Arbitration agreement and substantive claim before court • Article 8 states that a matter which is subject to arbitration in terms of arbitration agreement is

brought before the court, the court shall refer the same for arbitration unless the arbitration clause is null and void.

• Article 8(2) arbitral proceedings can be commenced and award can be granted even if the court proceedings have been initiated. (UN CASE 57)

Composition of Arbitral Tribunal (Article 10) 1. The parties are free to determine the number of arbitrators. 2. Failing such determination, the number of arbitrators shall be three.

• Each party shall appoint one arbitrator within 30 days and the two appointed arbitrators shall appoint the third arbitrator.

• Parties can agree upon a sole arbitrator. If the same cannot agree on the choice of person then the court can be requested to make the appointment.

Appointment of Arbitrators (Article 11). • The parties are free to agree on a procedure of appointing the arbitrator or arbitrators; however, the

same is subject to the following provisions of Article 11. a) Nationality is not a bar to be an arbitrator b) Upon failure of the parties to appoint an arbitrator court can be requested to do the same by any

party. c) If an arbitrator fails to fulfill his duties any party can apply to the court to take action. d) The actions taken by court in relation to b and c shall not be appealable. e) The arbitrator appointed shall be independent and impartial arbitrator.

Grounds for Challenging the Appointment (Article 12) a) The party seeking to challenge appointment must send within 15 days a written statement of grounds

of challenge to the arbitral tribunal. b) Unless the challenged arbitrator withdraws from his office or the other party agrees to the challenge,

the arbitral tribunal shall decide on the challenge. c) If the above mentioned withdrawal or agreement between parties doesn’t take place then arbitral

tribunal shall decide the challenge. d) If the challenge is unsuccessful then the challenging party may within 30 days request the court to

decide upon it. e) The decision of the court shall not be appealable. f) While a request for challenge is pending, the arbitral tribunal, including the challenged arbitrator,

may continue the arbitral proceedings and make an award.

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Failure or Impossibility to Act • If the arbitrator withdraws from his office or if the parties agree on the termination. • If the arbitrator vacates office then a substitute arbitrator can be appointed. Competence of Arbitral Tribunal to rule on its jurisdiction • The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the

existence or validity of the arbitration agreement. • An arbitration clause which forms part of a contract shall be treated as an agreement independent of

the other terms of the contract. • A decision by the arbitral tribunal that the contract is null and void shall not cause the invalidity of the

arbitration clause. Procedure of Arbitral Proceedings • There should be equality of treatment and full opportunity to present the case. • There is a freedom to adopt procedure of arbitration subject to law of arbitration • If there is a failure of agreement on procedure of arbitration then the tribunal shall conduct the

proceedings. Other clauses of Law of Arbitration • Article 20: Parties can choose place of arbitration otherwise the tribunal shall select the place • Article 21:Parties can agree on commencement of proceedings or the proceedings shall start when the

referral notice is received by the respondent • Article 22: Language of proceedings can be agreed between the parties • Article 26: Arbitral tribunal can appoint experts • Article 27: Court assistance in matters of evidence can be requested Statements of Claim and Defence (Article 23) • Statement of claim is made by the claimant and statement in defence shall be made by the defendant.

These statements shall be made in accordance with the time frame agreed between the parties or as stipulated by the arbitral tribunal.

• If the claimant fails to submit statement of claim within the time frame then the arbitral tribunal shall terminate the proceedings. If the defendant defaults in submitting the statement of defence than this shall not be treated as admission of guilt by the tribunal and will continue the proceedings.

Hearings and Written Proceedings (Article 24) • Subject to any contrary agreement by the parties, the arbitral tribunal shall decide whether to hold

oral hearings for the presentation of evidence or whether the proceedings shall be conducted on the basis of documents and other material.

Challenge the Jurisdiction of the Arbitral Tribunal • Plea by a party to challenge jurisdiction of tribunal shall be raised before the submission of statement

of defence. • The decision of the arbitral tribunal on its jurisdiction can be challenged within 30 days before the

court.

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Termination of Proceedings (Article 32) • The arbitral proceedings are terminated by the final award or by an order of the arbitral tribunal. • The arbitral proceedings can be terminated by the order of arbitral tribunal if:

a) Claimant withdraws his claim b) Parties mutually agree to terminate proceedings c) Arbitration has become unnecessary

Power of arbitral tribunal to order interim measures (Article 17) • The arbitral tribunal may, at the request of a party, order any party to take such interim measure of

protection as the arbitral tribunal may consider necessary in respect of the subject matter in dispute. Making of Award • Article 28: Decision of the tribunal shall be based upon the rules of law chosen by parties • Article 28: If rules not chosen by parties then the tribunal shall apply law it sees fit • Article 29: Decision shall be reached by majority of the arbitrators Settlement • Article 30: If, during arbitral proceedings, the parties settle the dispute, the arbitral tribunal shall

terminate the proceedings. Form and contents of award (Article 31) • The award shall be made in writing and shall be signed by the arbitrator or arbitrators. In arbitral

proceedings with more than one arbitrator, the signatures of the majority of the members of the arbitral tribunal shall suffice.

• Article 33: Additional award may also be requested by the party within 30 days of the receipt of the award which has not been mentioned in the award.

Recourse against Award (Article 34) An arbitral award may be set aside by the court specified in article 6 only if: The party making the application can prove that: i. A party to the arbitration agreement was under some incapacity; or the said agreement is not

valid under the law to which the parties have subjected it ii. The party making the application was not given proper notice of the appointment of an arbitrator

or of the arbitral proceedings or was otherwise unable to present his case; or iii. The award deals with a dispute not expected by or not falling within the terms of the submission

to arbitration iv. The composition of the arbitral tribunal was incorrect v. The subject-matter of the dispute is not capable of settlement by arbitration under the law of this

State vi. The award is in conflict with the public policy of this State

Recognition and Enforcement of Awards • An arbitral award, irrespective of the country in which it was made, shall be recognized as binding.

(Article 35) • In order to enforce the award the party will have to make application to the court.(Article 36)

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• The court may refuse enforcement of award if: a) Party to the arbitration agreement referred to in article 7 was under some incapacity; or the said

agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made.

b) The party against whom the award is invoked was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case.

c) The award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced.

d) The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, was not in accordance with the law of the country where the arbitration took place.

e) The award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which, or under the law of which, that award was made.

If the court finds that: i. The subject-matter of the dispute is not capable of settlement by arbitration under the law of this

State; or ii. The recognition or enforcement of the award would be contrary to the public policy of this State.

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Contracts for the International Sale of Goods

Application of UN Convention on the Contracts for the International Sale of Goods (UNCISG) • This  Convention  applies  to  contracts  of  sale  of  goods between parties whose places of business

are in different States (Article 1): a) when the States are Contracting States; or   b) when the rules of private international law lead to the application

of the law of a Contracting State • This Convention does not apply to the liability of the seller for death or personal injury caused 

by the goods to any person (Article 5) • Article 6: Under this article parties have the option to exclude the application of this Convention • Convention is based upon the basic principle that it is international, uniform and based on good faith. • According to Article 9 the parties are bound by the customs or the practices of trade. Sales of Goods: •

• Article 2: This Convention does not apply to sales:  

A contract of sale of goods is a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price.

a) Of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew  nor ought to have known that the goods were bought for any such use;  

b) By auction;   c) On execution or otherwise by authority of law;   d) Of stocks, shares, investment securities, negotiable instruments or  money;   e) of ships, vessels, hovercraft or aircraft;   f) Of electricity.

• Therefore the convention does not apply to sales of commodities for personal use. • The Convention will not be applicable to the supply of services or where the essential obligation of one

of the parties in the contract would be provision of labour. (Article 3) (UN Case 105) • The Convention will not be applicable when the buyer supplies substantial part of the materials for

manufacture or production. (Article 3) • Article 4: This convention governs only the formation of the contract of sale and the rights and

obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with the contract’s validity or usage, or with the effect of the contract on the property in goods sold.

Business Residence (Article 10): • If a party has more than one place of business, the one with closest relationship to the contract and

its performance will be the place of business. • If either of the parties does not have a place of business, reference is to be made to his habitual

residence.

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Convention Ratification • The member states must ratify (approve) the convention; however, they can also declare to be not

bound by parts of convention but this declaration will make them a non-contracting state. • Two or more contracting states which have the same or closely related legal rules on matters governed

by this Convention may at any time opt out of the convention in relation to each other or in relation to persons whose place of business is in each other’s states. (Article 94)

• Contracting States whose national legislation requires contracts of sale to be concluded or evidenced in writing may at any time dis-apply the convention which allows the contracts not to be in writing.

Contract Formation for the International Sale of Goods • Contract is formed once offer is validly accepted • Article 11 of the Convention states that the contract of sale need not be in writing and it can be proved

by any means, including witnesses. (Article 12)

• Article 14(1) of the UN Convention on Contracts for the International Sale of Goods provides that: Offer

‘A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price.’

• Thus in order for a proposal for concluding a contract to constitute an offer: (i) It must be addressed to one or more specific persons. Consequently the offer cannot be made

to ‘the world at large’ as it can in common law jurisdictions. (ii) It must be sufficiently definite. (iii) It must indicate that the offeror intends to be bound on those terms in the case of acceptance.

• The offer becomes effective when it reaches the offeree (Article 15). • Any communication which does not comply with the stated requirements for an offer is to be treated

as merely an invitation to make offers, or an invitation to treat in English law. Termination of Offer: • Offers may be terminated before acceptance and the consequent formation of a binding agreement, in

one of three distinct ways: a) Withdrawal: Article 15(2), which simply states that an offeror may withdraw their offer as long

as the withdrawal reaches the offeree before or at the same time as the offer. b) Rejection: The offeree may reject the offer, in which case it comes to an end and cannot be

subsequently reactivated and accepted by the offeree. c) Revocation: Offers may be revoked as long as any revocation reaches the offeree before he has

dispatched an acceptance. However, an offer cannot be revoked if: • It indicates that it is irrevocable, which it may do by stating a fixed time for acceptance or otherwise. • If it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in

reliance on the offer. An offer becomes effective when it reaches the offeree. • Even if the offer is irrevocable, it may be withdrawn if the withdrawal reaches the offeree before or at

the same time as the offer (Article 15(2)). Thus the difference between withdrawal and revocation is a matter of time rather than intention.

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• Article 18 of the UN Convention on Contracts for the International Sale of Goods provides that acceptance takes place where the recipient of the offer indicates their agreement to its terms.

Acceptance

• Acceptance may occur in a number of ways: a) By conduct b) By words

• Silence or inactivity does not amount to acceptance. Counter-offer: • Article 19 provides that:

(1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer.

(2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally.

Communication of Acceptance: • Where a time period has been fixed, acceptance must reach the offeror within that period of time. If

no time period is fixed, then the acceptance must reach the offeror within a reasonable time. • If the offeree can accept the offer by performing an act, without notice to the offeror, the acceptance is

effective at the moment the act is performed, provided it is done within any period of time laid down by the offeror.

• Where the offeror has fixed a period of time for acceptance in either a telegram or a letter, that period begins to run from the moment the telegram is handed in for dispatch or from the date shown on the letter. If no date is shown on the letter, the time runs from the date shown on the envelope. A period of time for acceptance fixed by the offeror by telephone, telex or other means of instantaneous communication, begins to run from the moment that the offer reaches the offeree.

Withdrawal of Acceptance: • An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as

the acceptance would have been effective. Termination or Modification of Contract: • A contract may be modified or terminated by the mere agreement of the parties (Article 29). ICC Incoterms: • ‘Incoterms’ is an abbreviation of International Commercial Terms. • Incoterms are frequently to be found in international contracts, and they seek to provide a common

set of rules for the most often used international terms of trade with the aim of removing confusion over their interpretation.

• These terms have been published by the International Chamber of Commerce (ICC) since 1936. Terms in relation to Mode of Transport: a) EX WORKS (EXW) ‘Ex works’ means that the seller fulfils his obligation to deliver when he has

made the goods available at his premises (i.e. works, factory, warehouse, etc) to the buyer. This means that the seller is not responsible for loading the goods on to the buyer’s vehicle or for clearing the goods for export, unless otherwise agreed.

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b) Free Carrier (FCA) means that the seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.

c) Carriage Paid To (CPT) means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.

d) Carriage and Insurance Paid to (CIP) means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.

e) Delivered at Terminal (DAT) means that the seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. “Terminal” includes a place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination, including payment of any import duty or customs charges.

f) Delivered at Place (DAP) means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.

g) Delivered Duty Paid (DDP) means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.

• Free Alongside Ship (FAS) means that the seller delivers when the goods are placed alongside the ship nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards.

Rules For Sea and Inland Waterway Transport

• Free On Board (FOB) means that the seller delivers the goods on board the ship nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.

• Cost and Freight (CFR) means that the seller delivers the goods on board the vessel (ship). The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

• Cost, Insurance and Freight (CIF) Seller clears the goods for export and delivers them when they are onboard the vessel at the port of shipment. Seller bears the cost of freight and insurance to the named port of destination. Seller's insurance requirement is only for minimum cover. Buyer is responsible for all costs associated with unloading the goods at the named port of destination and clearing goods for import. Risk passes from seller to buyer once the goods are onboard the vessel at the port of shipment.

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Obligations and Risk in Contracts for International Sales

Obligation of the Seller: • Article 35(1) state that, in general, the seller must deliver goods that are of the quantity; quality and

description required by the contract and that are contained or packaged in the manner required by the contract.

Delivery Obligations: • Article 30 states that the seller must deliver the goods, hand over any documents relating to

them and transfer the property in the goods, as required by the contract and the United Nation Convention for the Contract on international Sale of Goods (UNSIGS).

Place of Delivery (Article 31): • If the seller is not bound to deliver the goods at any other particular place, his obligation to

deliver consists of following: a) If the contract of sale involves carriage of the goods—in handing 

the goods over to the first carrier for transmission to the buyer;   b) If the parties are aware that goods would be in a particular place then the seller discharges the

obligation by placing the good at the buyer’s disposal at that place. c) If the above situations do not apply then the seller discharges his duty of delivery by placing the

goods at the place where the seller had their business at the time contract was concluded. Identification of Goods in Carriage (Article 32): • If the seller hands over the goods to the carrier and if the same are not identifiable then the

identification of goods can be done by markings on them and by the shipping documents. • The mode of transportation of goods selected by the seller must be reasonable and in accordance with

the usual terms. Insurance of Goods (Article 32): • If the seller is not bound to insure the goods then he must at the buyer’s request provide all the

information to the buyer to enable him to insure the goods. Delivery Time (Article 33): • The seller must deliver the goods on the date fixed and determined by contract. • If a date is to be determined from a period in the contract then at any time within that period or if it is

to be determined by the buyer then the date so determined by him. • If no date or time is stated in contract then within reasonable time. Handing over the Documents (Article 34): • Seller must hand over documents at the time and place as required in contract. • If the documents have been handed over before time, then any correction may be made in documents,

if necessary, before the required time provided it does not cause the buyer unreasonable expense. Conformity of the goods and third party claims (Article 35): • The seller must deliver goods which are of the quantity, quality and description required by the

contract and which are contained or packaged in the manner required by the contract. • The goods do not conform with the contract unless they:

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a) are fit for the purposes for which goods of the same description would ordinarily be used; b) are fit for any particular purpose expressly or impliedly made known to the seller at the time

of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller's skill and judgment;

c) possess the qualities of goods which the seller has held out to the buyer as a sample or model; d) are contained or packaged in the manner usual for such goods or, where there is no such

manner, in a manner adequate to preserve and protect the goods • The seller is not liable under above paragraphs a-d for any lack of conformity of the goods if at the

time of the conclusion of the contract the buyer knew or could not have been unaware of such lack of conformity.

• There is no obligation on the seller to sell goods in conformity with all the provisions in force in the buyer’s state unless: a) The same provisions are applicable in the seller’s state b) The buyer made the seller aware about the provisions c) The seller was aware of the provisions

• The seller is liable for any lack of conformity which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time.

• The seller is also liable for any lack of conformity which occurs after the time indicated in the preceding paragraph and which is due to a breach of any of his obligations.

Examination of Goods by Buyer (Article 38): • The buyer must examine the goods, or cause them to be examined, within as short a period as is

practicable in the circumstances. • If the contract involves carriage of the goods, examination may be deferred until after the goods have

arrived at their destination. • If goods have to be dispatched immediately by the buyer then the same can be examined at the next

destination. Third Party Claim and Right Article 41&42): • The seller must deliver goods which are free from any right or claim of a third party, unless the buyer

agreed to take the goods subject to that right or claim. However, if such right or claim is based on industrial property or other intellectual property, the seller's obligation is governed by article 42.

Intellectual Property: • Intellectual property is any product of the human intellect that the law protects from unauthorized

use by others. • Intellectual property is traditionally comprised of three categories: patent, copyright and trademark. • The seller has the obligation of delivering the goods to the buyer which are free from any claim of a

third party based on industrial or intellectual property. However, if the goods are subject to such claim then the buyer must have agreed to receive such goods. (Article 42)

Breach of Contract: • A breach of contract committed by one of the parties is fundamental if it results in such dtermiment to

the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. (Article 25).

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Remedies for breach of contract by the seller The buyer has the following remedies: • Performance, Avoidance of contract & Reduction of price in case of non-conformity.

1. Performance (Article 46): a) The buyer can require performance by the seller unless the buyer has resorted to an

inconsistent remedy. b) The buyer may fix an additional period of time of reasonable length for performance by the

seller of his obligations. (Article 47).

2. Non-Conformity of Goods (Article 46): • If the goods do not conform to the contract, the buyer may require delivery of substitute goods. • If the goods do not conform to the contract, the buyer may require the seller to remedy the lack of

conformity by repair. Remedy by Seller (Article 48): • The seller may, even after the date for delivery, remedy at his own expense any failure to perform his

obligations, if he can do so without unreasonable delay and without causing the buyer unreasonable inconvenience or uncertainty. However, the buyer retains any right to claim damages as provided for in this Convention.

• The seller can do the above by sending notice to the buyer as a request to let him know whether late performance would be acceptable.

Early & Excess Delivery by Seller (Article 52): • If the seller delivers the goods before the date fixed, the buyer may take delivery or refuse to take

delivery. • If the seller delivers a quantity of goods greater than that provided for in the contract, the buyer may

take delivery or refuse to take delivery of the excess quantity. Avoidance: Avoidance can be declared by the buyer if: a) Notice of avoidance given to other party (Article 24) b) Failure to performance by seller constitutes fundamental breach of contract (Article 51) c) Non-delivery of goods by the seller (Article 49) Reduction of Price: • Buyer is entitled to reduce price in proportion to the lack of conformity of goods. • The above remedy can be exercised if the seller does not correct the non-conformity of goods or this

correction is not accepted by the buyer. Obligation of Buyer: • The buyer must pay the price for the goods and take delivery of them as required by the contract.

(Article 53) • The buyer's obligation to pay the price includes taking such steps and complying with such formalities

as may be required under the contract. (Article 54) • If parties concluded the contract without determining the price then the parties are deemed to have

concluded the price which is generally charged at the time of conclusion of contract. (Article 55) • If the price is fixed according to the weight of the goods, in case of doubt it is to be determined by the

net weight.(Article 56)

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• If the place of payment of price has not been specified in the contract then: a) Price will be paid at seller’s place of business or b) If the payment is to be made at the time of handing over the goods and documents then the place

and time when goods and documents are handed over. Taking Delivery (Article 60): • The buyer's obligation to take delivery consists:

a) In doing all the acts which could reasonably be expected of him in order to enable the seller to make delivery; and

b) In taking over the goods. Seller’s Remedies for breach of Contract by the Buyer: • If the buyer fails to perform any of his obligations then seller may:

a) Require the buyer to make payment, take delivery or perform their obligations (Article 62) b) Seller may grant additional time in which buyer can fulfill his obligations (Article 63) c) Declaration of avoidance of the contract if:

1. The buyer has committed fundamental breach 2. Buyer has failed to make payment or accept goods in the additional time provided 3. Buyer has declared not to accept the goods or make payment in the time

• The right of avoidance will be lost if the buyer paid for the goods. Buyer’s Duty of Specification of Goods: • If under the contract the buyer is to specify the form, measurement or other features of the goods and

he fails to make such specification the seller may, make the specification himself in accordance with the requirements of the buyer that may be known to him.

• If the seller makes the specification himself, he must inform the buyer of the details thereof and must fix a reasonable time within which the buyer may make a different specification.

Damages: • Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit,

suffered by the other party as a consequence of the breach. (Article 74) • Damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the

time of the conclusion of the contract, in the light of the facts known. • If the contract is avoided and if, within a reasonable time after avoidance, the buyer has bought goods

in replacement or the seller has resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable.

• If, however, the party claiming damages has avoided the contract after taking over the goods, the current price at the time of such taking over shall be applied instead of the current price at the time of avoidance.

Mitigation (Reduction) of Loss (Article 76): • A party who relies on a breach of contract must take such measures as are reasonable in the

circumstances to mitigate the loss. (Payzu Ltd vs Saunders 1919) • If the party fails to mitigate the loss, the party in breach may claim a reduction in the damages in the

amount by which the loss should have been mitigated.

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Breach of Contract: • One party's failure to fulfill any of its contractual obligations is known as a "breach" of the

contract.

Anticipatory Breach (Article 71): • In Anticipatory Breach one party informs in advance that he will not be able to perform his side of the

contract, the injured party may treat this as repudiation and claim damages or only claim damages and continue with a revised schedule of performance.

• A party may suspend the performance of his obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligations due to a serious deficiency in their ability to perform or creditworthiness and their conduct in preparing to perform the contract.

• A party suspending performance, whether before or after dispatch of the goods, must immediately give notice of the suspension to the other party and must continue with performance if the other party provides adequate assurance of his performance.

• If the seller has already dispatched the goods but has an indication that buyer does not wish to fulfill his obligations he may prevent the handing over of the goods to the buyer even if he holds title documents.

Fundamental Breach (Article 72): • A fundamental breach is a breach of contract where the offending party fails to complete a contractual

term that was so fundamental (hence the name of the breach) to the contract that another party was prevented from fulfilling their own responsibilities.

• If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided.

• If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance

Installment Contract: • If the failure of one party to perform any of his obligations in respect of any installment constitutes a

fundamental breach of contract the other party may declare the contract avoided with respect to that installment.

• If one party's failure to perform any of his obligations in respect of any installment gives the other party good grounds to conclude that a fundamental breach of contract will occur with respect to future installments, he may declare the contract avoided for the future.

• A buyer who declares the contract avoided in respect of any delivery may, at the same time, declare it avoided in respect of deliveries already made or of future deliveries if, by reason of their interdependence.

Interest: • If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest

on it. Exemptions (Article 79): • A party is not liable for a failure to perform any of his obligations if he proves that the failure was due

to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

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• If the party's failure is due to the failure by a third person whom he has engaged to perform the whole or a part of the contract, that party is exempt from liability only if: a) He is exempt under article 79(1); and b) The person whom he has so engaged would be so exempt if the provisions of that paragraph were

applied to him. • The party who fails to perform must give notice to the other party of the impediment and its effect on

his ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non-receipt.

• Nothing in this article prevents either party from exercising any right under this Convention other than to claim damages.

Effects of avoidance (Article 81) • Avoidance of the contract releases both parties from their obligations under it, subject to any damages

which may be due. Avoidance does not affect any provision of the contract for the settlement of disputes or any other provision of the contract governing the rights and obligations of the parties consequent upon the avoidance of the contract.

• Avoidance does not affect the right of a party to claim restitution from the other party of whatever the first party has supplied or paid under the contract.

• The buyer loses the right to declare the contract avoided if it is impossible for him to make restitution of the goods. (Article 82)

Preservation of Goods: • A party which has possession of the goods belonging to the other party, it is under a duty to preserve

them. • Following are the situations in which the duty to preserve the goods arises:

a) If the buyer has delayed in taking the delivery of the goods or, where payment of the price and delivery of the goods are to be made concurrently, if he fails to pay the price, and the seller is either in possession of the goods or otherwise able to control their disposition, the seller must take such steps as are reasonable in the circumstances to preserve them. He is entitled to retain them until he has been reimbursed his reasonable expenses by the buyer. (Article 85)

b) If the buyer has received the goods and intends to exercise any right under the contract or this Convention to reject them, he must take such steps to preserve them as are reasonable in the circumstances. He is entitled to retain them until he has been reimbursed his reasonable expenses by the seller. (Article 86)

c) If goods dispatched to the buyer have been placed at his disposal at their destination and he exercises the right to reject them, he must take possession of them on behalf of the seller.

d) A party who is bound to take steps to preserve the goods may deposit them in a warehouse of a third person at the expense of the other party provided that the expense incurred is not unreasonable. (Article 87)

e) A party who is bound to preserve the goods in accordance with article 85 or 86 may sell them by any appropriate means if there has been an unreasonable delay by the other party in taking possession of the goods or in taking them back or in paying the price or the cost of preservation, provided that reasonable notice of the intention to sell has been given to the other party.

f) If the goods are subject to rapid deterioration or their preservation would involve unreasonable expense, a party who is bound to preserve the goods must take reasonable measures to sell them. To the extent possible he must give notice to the other party of his intention to sell.

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• Loss of or damage to the goods after the risk has passed to the buyer does not discharge him from his obligation to pay the price, unless the loss or damage is due to an act or omission of the seller.( Article 66)

Passing of Risk:

Contracts Involving Carriage (Article 67): • If the contract of sale involves carriage of the goods the risk passes to the buyer when the goods are

handed over to the first carrier for transmission to the buyer in accordance with the contract of sale. • If the seller is bound to hand the goods over to a carrier at a particular place, the risk does not pass to

the buyer until the goods are handed over to the carrier at that place. • The risk does not pass to the buyer until the goods are clearly identified to the contract, whether by

markings on the goods, by shipping documents, by notice given to the buyer. Goods Sold in Transit (Article 68): • The risk in respect of goods sold in transit passes to the buyer from the time of the conclusion of the

contract. However, if the circumstances so indicate, the risk is assumed by the buyer from the time the goods were handed over to the carrier who issued the documents expressing the contract of carriage.

• If at the time of the conclusion of the contract of sale the seller knew or ought to have known that the goods had been lost or damaged and did not disclose this to the buyer, the loss or damage is at the risk of the seller.

Situations not involving Transit or Carriage: • The risk passes to the buyer when he takes over the goods or, if he does not do so in due time, from

the time when the goods are placed at his disposal and he commits a breach of contract by failing to take delivery.

• If the buyer is bound to take over the goods at a place other than a place of business of the seller, the risk passes when delivery is due and the buyer is aware of the fact that the goods are placed at his disposal at that place.

Liability and Risk on non-conformity: • The seller is liable in accordance with the contract and this Convention for any lack of conformity

which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time.

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Transportation and Payment of International Business Transactions

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

Operations of Bills of Lading:

• The document states the terms on which the goods are to be carried. Separate bills of lading are issued for domestic transportation and ocean or air transportation, although a through bill of lading can be issued covering all modes of transport to the destination.

• There are four types of bills of lading: a) Inland Bill of Lading – refers to a contract for transporting goods overland to an exporter’s

international carrier. b) Ocean Bill of Lading – refers to a contract for transporting goods from an exporter to a

specified foreign market overseas c) Through Bill of Lading – refers to a contract for transporting goods covering both the

domestic and international transport of export goods between specified points. d) Air Waybill – refers to a contract for transporting goods by way of domestic and international

flights to a specified destination. The air waybill is a non-negotiable document and only serves as a receipt for the shipper.

• A bill of lading has a threefold purpose: a) Formal receipt by the ship-owner for goods; b) Evidence of the contract of carriage; and c) Document of title to goods.

• Bills of lading can be either negotiable or non-negotiable. • In relation to negotiable bills of lading, ownership to the goods and the right to re-route the

shipment are with the person who has legal ownership of the bill of lading properly issued or negotiated to it. Negotiable bills of lading are issued to shipper’s order, rather than to a specific, named consignee. If the bill of lading is in negotiable form, the carrier will hold the goods until it receives an original bill of lading that has been endorsed by the shipper (seller). The exporter must endorse the bill of lading and deliver it to the bank in order to receive payment.

• As regards non-negotiable bills of lading, the carrier is required to deliver the goods only to the consignee named in the bill of lading. The person to whom the goods are being sent normally needs to show the bill of lading in order to obtain the release of the goods

• International sales payments are made by International Bank Transfers, Bills Of Exchange and Letters of Credit.

Modes of Payment:

• International Bank Transfers: Buyer directs his bank in his country to transfer funds to the seller’s bank in another country. This is done electronically.

UNICITRAL Model Law on International Credit Transfers: • This law applies to credit transfers where any sending bank and its receiving bank are in different

States. • "Credit transfer" means the series of operations, beginning with the originator's payment order, made

for the purpose of placing funds at the disposal of a beneficiary. The term includes any payment order issued by the originator's bank or any intermediary bank intended to carry out the originator's

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payment order. A payment order issued for the purpose of effecting payment for such an order is considered to be part of a different credit transfer.

• Article 2 of the UNCITRAL Model Law on International Credit Transfers contains the following definitions: 1. Originator means the issuer of the first payment order in a credit transfer and may include the

sender and the sender’s bank. 2. Sender means the person who issues a payment order, including the originator and any

intermediary bank involved in the passage of the credit transfer. 3. Receiving bank means a bank which receives a payment order and may include the

beneficiary’s bank or any intermediary bank involved in the series of transactions facilitating the credit transfer.

• Payment order means an unconditional instruction, in any form, by a sender to a receiving bank to place at the disposal of a beneficiary a fixed or determinable amount of money if: 1. The receiving bank is to be reimbursed by debiting an account of, or otherwise receiving payment

from, the sender, and 2. The instruction does not provide that payment is to be made at the request of the beneficiary.

Article 3 - Conditional instructions • When an instruction is not a payment order because it is subject to a condition but a bank that has

received the instruction executes it by issuing an unconditional payment order, it then becomes a full credit transfer.

Applicability of Model law: • According to Article 4 the applicability of the Model law in relation to the rights and obligations of

parties in relation to credit transfers may be varied by their agreement. Therefore the application of Model Law is not mandatory.

Obligations of Parties (Article 5): • A sender becomes obligated to pay the receiving bank for the payment order when the receiving bank

accepts it, but payment is not due until the beginning of the execution period.

Liabilities in relation to unauthorized payment order: • The UNCITRAL model law allocates responsibility for unauthorized payment between sender and

receiving bank differently depending on the circumstances of the case. • Article 5 of the model law makes it clear that the sender is bound by a payment order if they, or some

other person who had their authority to bind them, issued it. However, the issue arises as to liability where the person who issues the payment order is neither the sender, nor has the sender’s authority to do so.

• In such a situation, responsibility depends on whether authentication is by way of signature or a process such as encryption or the use of a code or some other process.

• Article 5.2 of the model law provides that where a payment order is subject to authentication, other than by means of comparing signatures, then the sender will be bound by the payment order, if 1. The authentication is in the circumstances a commercially reasonable method of security against

unauthorized payment orders; and 2. The receiving bank complied with the authentication.

• It is important to emphasize that the form of authentication must be commercially reasonable in the circumstances. The determination of what is commercially reasonable will vary from time to time and from place to place depending on the technology available,

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• What this provides is that if the bank accepts a transfer after carrying reasonable authorization procedures, then the sender will be required to honour the payment.

• The assumption is that, in the case of an electronic payment order, the receiving bank decides the authentication procedures it is prepared to implement. Consequently, the bank bears all the risk of an unauthorised payment order where it has not required and operated ‘commercially reasonable’ authentication procedures. Article 5(3) goes on to provide that the protection offered to the sender cannot be avoided by any agreement to the contrary.

• Article 5.4 of the model law considerably narrows the protection afforded to the receiving bank by providing that it does not apply where the supposed sender can prove that the payment order did not originate from either: 1. A present or former employee of theirs, or 2. A person whose relationship with them enabled that person to gain access to the authentication

procedure. • If the receiving bank can show that the authentication procedure was revealed to the unauthorized

sender through the fault of the sender themselves, then once again the purported sender will be liable to honour the payment.

Article 6 - Payment to receiving bank: • Payment of the sender's obligation under article 5(6) to pay the receiving bank occurs by making debit

to the account of the sender held by the receiving bank. • In another case an account of the sender bank is maintained by the receiving bank and the payment

can be made by the sending bank by crediting the receiving bank account. • Receiving bank can also net the obligations of the sending bank with other obligations. This can be

done by a bilateral netting agreement between the receiver and the sender bank. Obligations of receiving bank • A receiving bank that accepts a payment order is obligated under that payment order to issue a

payment order, within the time required by article 11, either to the beneficiary's bank or to an intermediary bank that is consistent with the contents of the payment order. (Article 8(2))

• The beneficiary's bank is, upon acceptance of a payment order, obligated to place the funds at the disposal of the beneficiary or otherwise to apply the credit, in accordance with the payment order. Article 10(1)

• Payment order may be accepted by the receiving bank in some other way before it executes it: a) The payment order is accepted when it is received by the receiving bank. b) The receiving bank upon accepting the payment order will debit the account of the sender.

• A receiving bank that is obligated to execute a payment order is obligated to do so on the banking day it is received. If it does not, it shall do so on the banking day after the order is received. (Article 11).

Consequences of failed, erroneous or delayed credit transfers • Until the credit transfer is completed, each receiving bank is requested to assist the originator and

each subsequent sending bank, and to seek the assistance of the next receiving bank, in completing the banking procedures of the credit transfer. (Article 13)

• If the credit transfer is not completed, the originator's bank is obligated to refund to the originator any payment received from it, with interest from the day of payment to the day of refund. The originator's bank and each subsequent receiving bank is entitled to the return of any funds it has paid to its receiving bank, with interest from the day of payment to the day of refund.

• Chain of responsibility is at the bank which has failed to complete the credit transfer.

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Liability of Interest for Delayed Payment • The liability of bank for causing delay is the payment of interest. • The bank which caused delay must pass on the payment plus interest of the delay to the receiving

bank. • If the interest has not been passed on to the beneficiary bank then the beneficiary has the direct right

of receiving it from the bank which holds it. Completion of Credit Transfer (Article 19): • A credit transfer is completed when the beneficiary's bank accepts a payment order for the benefit of

the beneficiary. When the credit transfer is completed, the beneficiary's bank becomes indebted to the beneficiary to the extent of the payment order accepted by it.

A bill of exchange is an order in writing by one person to another to pay a specified sum to a specified person or bearer on a particular date. A bill of exchange is a substitute for money. Consequently, a bill of exchange can be understood as a form of commercial credit instrument, or IOU, used in international trade. A bill of exchange may be stated to be payable on demand or at a given time on presentation. A cheque is a bill of exchange drawn on a banker, payable on demand.

Bills of Exchange:

The following terms apply: a) The person making the order or drawing the bill is known as the drawer. b) The person to whom the bill is addressed is the drawee (for example a bank). c) The person to whom the bill is payable is the payee. d) The person to whom a bill is transferred by indorsement is called the indorsee. e) The generic term ‘holder’ includes any person in possession of a bill who holds it either as payee,

endorsee or bearer. f) A bill which in its origin is payable to order becomes payable to bearer if it is indorsed in blank

• If the drawee assents to the order, he is then called the acceptor. An acceptance must be in writing and must be signed by the drawee.

• The mere signature of the drawee is sufficient. By the acceptance of a bill, the drawee becomes the principal debtor on the instrument and the party primarily liable to pay it.

• Acceptance may be either general or qualified. • As a qualified acceptance is so far a disregard of the drawer’s order, the holder is not obliged to

take it; and if he chooses to take it, he must give notice to antecedent parties, acting at his own risk if they dissent.

International Bills of Exchange: • Article 2 of the Convention provides that a bill of exchange is international if it specifies at least two of

the following places and indicates that they are situated in different States: a) The place where the bill is drawn; b) The place indicated next to the signature of the drawer; c) The place indicated next to the name of the drawee; d) The place indicated next to the name of the payee; e) The place of payment. • However, to comply, the place where the bill is drawn or the place of payment must be situated in

a contracting State. • Article 3 defines a bill of exchange as a written instrument which:

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a) Contains an unconditional order whereby the drawer directs the drawee to pay a definite sum of money to the payee or to their order;

b) Is payable on demand or at a definite time; c) Is dated; d) Is signed by the drawer.

Bill should be of a Definite Sum: • It is important to note that Article 7 of the Convention provides that the sum payable is deemed to be

a definite sum, although the instrument states that it is to be paid: a) With interest, which may be paid at a fixed or variable rate (Article 8); b) By installments at successive dates; c) By installments at successive dates when the unpaid balance becomes due upon default in

payment of any installment; d) According to a rate of exchange indicated in the instrument or to be determined as directed by the

instrument; or e) In a currency other than the currency in which the sum is expressed in the instrument.

• It should be noted that the Convention does not apply to international cheques. • If there exists an error in the amount to payable in words or in figures then the one expressed

in words is deemed to payable by instrument. (Article 8(1)) • If the bill states that interest is to be paid with sum and the exact date of the payment of

interest is not mentioned then the interest is to be paid from the date of the bill. (Article 8(4)) Payment of Bill: • A bill is said to be payable on demand if it is payable at sight or presentation or demand or even if no

time of payment is mentioned. • The time for payment is the date on which the bill is presented for payment. • Payment of bill on a definite time is if it states that:

a) It is payable on the stated date or at a fixed period after a stated date or at a fixed period after the date of the instrument,

b) At a fixed period after sight, c) By installments

Parties in the Bill of Exchange: a) Payee: A person to whom the drawer has instructed to make payment. Bill may be payable to two or

more persons. b) Drawer: Person who instructs to make payment.

• The Drawer is liable on the bill once he signs it. However signatures if forged bear no liability. • If the bill gets dishonored the drawer agrees to pay it to the holder or endorser. • Drawer can also limit his liability on the payment of bill if another party becomes liable.

c) Drawee and Acceptor: • Drawee•

is the bank which has the drawer's checking account from which a check is to be paid.

• The drawee is not liable on the bill until he accepts it (Article 40(1))

•

The acceptor engages that he will pay the bill in accordance to the terms of his acceptance to the holder, or to any party who takes up and pays the bill. Article 41: a) By the signature of the drawee accompanied by the word "accepted" or by similar words; or

An acceptance must be written on the bill on its front and back and may be effected:

b) By the signature alone of the drawee.

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• A bill may be accepted before, at or after maturity, or after it has been dishonoured by non-acceptance or by non-payment. (Article 42)

• An acceptance must be unqualified. An acceptance is qualified if it is conditional or varies the terms of the bill. (Article 43)

• If the drawee stipulates in the bill that his acceptance is subject to qualification (Article 43): a) He is nevertheless bound according to the terms of his qualified acceptance; b) The bill is dishonored by non-acceptance.

• A bill may be presented for acceptance. (Article 49 (1)) • A bill must be presented for acceptance: (Article 49 (2))

a) If the drawer has stipulated in the bill that it must be presented for acceptance; b) If the bill is payable at a fixed period after sight; or c) If the bill is payable elsewhere than at the residence or place of business of the drawee, unless

it is payable on demand. • A bill is duly presented for acceptance if it is presented in accordance with the following rules

(Article 51): a) The holder must present the bill to the drawee on a business day at a reasonable hour; b) Presentment for acceptance may be made to a person or authority other than the drawee if

that person or authority is entitled under the applicable law to accept the bill; c) If a bill is payable on a fixed date, presentment for acceptance must be made before or on that

date; d) A bill payable on demand or at a fixed period after sight must be presented for acceptance

within one year of its date; e) A bill in which the drawer has stated a date or time-limit for presentment for acceptance must

be presented on the stated date or within the stated time-limit. • If a bill which must be presented for acceptance is not so presented, the drawer, the endorsers

and their guarantors are not liable on the bill.(Article 53(1)) • Failure to present a bill for acceptance does not discharge the guarantor of the drawee of liability

on the bill. (Article 53(2)) • Article 54: A bill is considered to be dishonoured by non-acceptance:

a) If the drawee, upon due presentment, expressly refuses to accept the bill or acceptance cannot be obtained with reasonable diligence or if the holder cannot obtain the acceptance to which he is entitled under this Convention.

b) If a bill is dishonoured by non-acceptance the holder may exercise an immediate right of recourse against the drawer, the endorsers and their guarantors, (Article 54)

c) If a bill payable on demand is presented for acceptance, but acceptance is refused, it is not considered to be dishonoured by non-acceptance.(Article 54(3))

The Guarantor: 1. Payment of an instrument, whether or not it has been accepted, may be guaranteed, as to the whole or

part of its amount, for the account of a party or the drawee. A guarantee may be given by any person, who may or may not already be a party. (Article 46(1))

2. A guarantee must be written on the instrument or on a slip affixed thereto ("allonge"). (Article 46(2))

3. A guarantor may specify the person for whom he has become guarantor. In the absence of such

specification, the person for whom he has become guarantor is the acceptor or the drawee in the case of a bill, and the maker in the case of a note. Article 46(5)

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4. Article 47: The liability of a guarantor on the instrument is of the same nature as that of the party for whom he has become guarantor.

5. Article 48(2): The guarantor who pays the instrument may recover from the party for whom he has

become guarantor and from the parties who are liable on it to that party the amount paid and any interest.

Transfer of Bill of Exchange: • Article 13:An instrument is transferred:

a) By endorsement and delivery of the instrument by the endorser to the endorsee; or b) By mere delivery of the instrument if the last endorsement is in blank.

• Article 24: An instrument may be transferred in accordance with article`13 after maturity, except by the drawee, the acceptor or the maker.

Endorsement: • Endorsement relates to the way in which international bills of exchange are transferred and in effect it

allows the original payee of the instrument to transfer the benefit of it to some other party by signing it.

• Article 13 of the UN Convention on International Bills of Exchange and International Promissory Notes provides a bill of exchange is transferred either by: a) endorsement and delivery of the instrument by the endorser to the endorsee; or b) mere delivery of the instrument if the last endorsement is in blank.

• By virtue of Article 14, an endorsement must be written on the instrument attached to it. Any such endorsement may be: a) in blank, that is, by a signature alone or by a signature accompanied by a statement to the effect

that the instrument is payable to a person in possession of it; b) special, that is, by a signature accompanied by an indication of the person to whom the

instrument is payable. • A signature alone, other than that of the drawee, is an endorsement only if placed on the back of the

instrument. • An endorsement must be unconditional and in the light of any conditional endorsement, the bill of

exchange will still be transferred whether or not the condition is fulfilled (Article 18). • An endorsement must relate to the entire sum of the bills or it is ineffective (Article 19). If there are

two or more endorsements, it is presumed, unless the contrary is proved, that each endorsement was made in the order in which it appears on the instrument (Article 20).

• An instrument may be transferred in accordance with Article 13 after maturity, except by the drawee, the acceptor or the maker (Article 23).

• Under Article 17(1), a bill cannot be transferred if the bill or an endorsement on the bill contains words such as not negotiable/not transferable/not to order/pay x only.

• Under Article 25, if an endorsement is forged, the person whose endorsement is forged, or a party who signed the instrument before the forgery, has the right to recover compensation for any damage which they may have suffered because of the forgery.

• This right may be exercised against: (a) the person who forged the endorsement; (b) the person to whom the instrument was directly transferred by the forger; (c) a party or the drawee who paid the instrument to the forger directly or through one or more endorsees for collection.

• However, an endorsee for collection is not liable if they have no knowledge of the forgery: a) at the time they pay the principal or advises them of the receipt of payment; or

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b) at the time they receive payment, if this is later, unless their lack of knowledge is due to their failure to act in good faith or to exercise reasonable care.

The endorser • Article 44: The endorser engages that upon dishonour of the instrument by non-acceptance or by

non-payment, and upon any necessary protest, he will pay the instrument to the holder, or to any subsequent endorser or any endorser's guarantor who takes up and pays the instrument.

• Article 45(1): Unless otherwise agreed, a person who transfers an instrument, by endorsement and delivery or by mere delivery, represents to the holder to whom he transfers the instrument that: a) The instrument does not bear any forged or unauthorized signature; b) The instrument has not been materially altered; c) At the time of transfer, he has no knowledge of any fact which would impair the right of the

transferee to payment of the instrument against the acceptor of a bill or, in the case of an unaccepted bill, the drawer, or against the maker of a note.

Holder: The holder of a bill of exchange, promissory note, or check is the person who has legally acquired the possession of the same, from a person capable of transferring it, by indorsement or delivery, and who is entitled to receive payment of the instrument from the party or parties liable to meet it. • Article 15(1): A person is a holder if he is:

a) The payee in possession of the instrument; or b) In possession of an instrument which has been endorsed to him, or on which the last

endorsement is in blank, and on which there appears an uninterrupted series of endorsements, even if any endorsement was forged or was signed by an agent without authority.

• (Article 16)The holder of an instrument on which the last endorsement is in blank may: a) Further endorse it either by an endorsement in blank or by a special endorsement; b) Convert the blank endorsement into a special endorsement by indicating in the endorsement that

the instrument is payable to himself or to some other specified person; or c) Transfer the instrument by delivery: Article 13(b)

Rights of holder: • The holder of an instrument has all the rights conferred on him by this Convention against the parties

to the instrument. • The holder may transfer the rights in accordance with article 13. • Article 31:The transfer of an instrument by a protected holder vests in any subsequent holder the

rights to and on the instrument which the protected holder had. Presentment of Bill for payment: • The holder must present the instrument for payment to the drawee or to the acceptor or to the maker

on a business day at a reasonable hour (Article 55) • The presentment of bill for payment can be (Article 55):

1. At the place of payment specified on the instrument; 2. If no place of payment is specified, at the address of the drawee or the acceptor or the maker

indicated in the instrument; or 3. If no place of payment is specified and the address of the drawee or the acceptor or the maker is

not indicated, at the principal place of business or habitual residence of the drawee or the acceptor or the maker;

• Presentment for payment is dispensed with if the bill has been protested for dishonour by non-acceptance.(Article 56)

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• If an instrument is not duly presented for payment, the drawer, the endorsers and their guarantors are not liable on it.(Article 57)

Dishonour by Non-Payment (Article 58): • An instrument is considered to be dishonoured by non-payment:

a) If payment is refused upon due presentment or if the holder cannot obtain the payment to which he is entitled under this Convention.

b) If presentment for payment is dispensed with and the instrument is unpaid at maturity. • If an instrument is dishonoured by non-acceptance or by non-payment, the holder may exercise a

right of recourse only after the instrument has been duly protested for dishonor (Article 59) Protest: Article 60:A protest is a statement of dishonour drawn up at the place where the instrument has been dishonoured and signed and dated by a person authorized in that respect by the law of that place. The statement must specify: a) The person at whose request the instrument is protested; b) The place of protest; c) The demand made and the answer given, if any, or the fact that the drawee or the acceptor or the

maker could not be found. • A protest may be made on the instrument or on a slip affixed thereto ("allonge"); or on a separate

document. • Article 61: Protest for dishonour of an instrument must be made on the day on which the

instrument is dishonoured or on one of the four business days which follow. • Article 63: If an instrument which must be protested for non-acceptance or for non-payment is

not duly protested, the drawer, the endorsers and their guarantors are not liable on it. • Article 64: The holder, upon dishonour of an instrument by non-acceptance or by non-payment,

must give notice of such dishonour: (a) To the drawer and the last endorser; (b) To all other endorsers and guarantors whose addresses the holder can ascertain on the basis of information contained in the instrument.

• Article 68: If a person who is required to give notice of dishonour fails to give it to a party who is entitled to receive it, he is liable for any damages which that party may suffer from such failure.

Amount payable • Article 69(1). The holder may exercise his rights on the instrument against any one party, or several or

all parties, liable on it and is not obliged to observe the order in which the parties have become bound. Any party who takes up and pays the instrument may exercise his rights in the same manner against parties liable to him.

• Article 70: After maturity the amount payable to holder of the instrument is the amount with interest, if interest has been stipulated for, to the date of maturity at the rate stipulated for plus any interest expenses of protest.

• The bill which on which the amount is paid before maturity often entails discount from the date payment was made to the date of maturity.

• Article 71: A party who pays an instrument and is thereby discharged in whole or in part of his liability on the instrument may recover from the parties liable to him: a) The entire sum which he has paid; b) Interest on that sum from the date on which he made payment; c) Any expenses of the notices given by him

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• Article 75: An instrument must be paid in the currency in which the sum payable is expressed. • Article 72: A party is discharged of liability on the instrument when he pays the holder, or a party

subsequent to himself who has paid the instrument and is in possession of it, the amount due: a) At or after maturity; or b) Before maturity, upon dishonour by non-acceptance.

• A letter of credit is an undertaking by a bank to make a payment to a named beneficiary within a specified time, against the presentation of documents which comply strictly with the terms of the letter of credit.

Letters of Credit

• The parties to a letter of credit are: i. the buyer (the applicant) ii. the buyer’s bank (the issuer) iii. the beneficiary (the seller/payee) iv. the beneficiary’s bank.

• A letter of credit is opened by an importer (applicant). The terms of the underlying sales contract may be made conditions of the letter of credit, in order to ensure that the seller has performed as required under that contract before they can receive payment

• The issuing bank has two main roles. First it provides security for the seller. Thus, it promises the seller that if compliant documents are presented, the bank will pay the seller the amount due. However, it also provides a measure of security for the buyer as it undertakes to examine the documents, and only pay if they comply with the terms and conditions set out in the letter of credit.

• The main advantage of letters of credit in international trade is that they provide security to both the exporter and the importer.

• The risk of non-payment by the buyer rests with the issuing bank. • As far as the exporter is concerned the letter of credit, apart from cash in advance, is the most secure

method of payment in international trade as long as the terms of the credit are met. • Most letters of credit are subject to the terms of the International Chamber of Commerce’s Uniform

Customs and Practice for Documentary Credits (UCP 500), which are the universally recognized set of rules governing the use of the documentary credits in international trade.

• The procedure for creating and using letters of credit is as follows: 1. the exporter and importer agree the terms of their contract; 2. the importer/buyer applies to their bank for issue of letter of credit; 3. the issuing bank issues letter of credit, sending it to the seller’s bank, the advising bank; 4. the advising bank establishes the authenticity of the letter of credit and informs exporter. The

advising bank may confirm the letter of credit, which means that it will undertake to ensure payment in any event;

5. the exporter ships the goods; 6. the exporter presents the documents called for in the letter of credit (invoice, transport document,

etc) to the advising bank; 7. the advising bank checks the documents against the letter of credit. If the documents are

compliant, the bank pays the seller and forwards the documents to the issuing bank; 8. the issuing bank checks the documents itself. If they are in order it reimburses the

exporter’s/seller’s bank; 9. the issuing bank debits the buyer and releases the documents (including transport document), so

that the buyer can claim the goods from the carrier.

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• Letters of credit may assume any of the following forms:

Revocable: • A revocable letter of credit can be amended or cancelled at any time by the importer without the

exporter’s agreement.

Irrevocable: • An irrevocable letter of credit cannot be amended or cancelled without the agreement of all

parties to the credit. Unconfirmed • An unconfirmed letter of credit is forwarded by the advising bank directly to the exporter without

adding its own undertaking to make payment or accept responsibility for payment at a future date, but confirming its authenticity.

Confirmed • A confirmed letter of credit is one in which the advising bank, on the instructions of the issuing

bank, has added a confirmation that payment will be made as long as compliant documents are presented, even if the issuing bank or the buyer fails to make payment.

A standby letter of credit • It is used as support where an alternative, less secure, method of payment has been agreed. Thus,

should the exporter fail to receive payment from the importer he may claim under the standby letter of credit?

Revolving Letter of Credit • This type of letter of credit is used where there are regular shipments of the same commodity to

the same importer and is used to avoid the need to be continually opening or amending letters of credit.

Transferable Letter of Credit • A transferable letter of credit is one in which the exporter has the right to request the paying, or

negotiating, bank to make either all or part of the payment due to a third party who was not a party to the original contract, for example the actual supplier of the goods that are the subject of the international contract.

Back-to-Back Letter of Credit • A back-to-back letter of credit can be used as an alternative to the transferable letter of credit.

Rather than transferring the original letter of credit to the supplier, once the letter of credit is received by the exporter from the opening bank, that letter of credit is used as security to establish a second letter of credit drawn on the exporter in favour of his supplier.

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Letters of Comfort • A parent company may be unable or unwilling to guarantee the borrowings of its subsidiary but it

might be prepared to issue a “comfort letter” to the lenders.

• A comfort letter is normally a letter given by a parent company to a lender whereby the parent company undertakes certain limited responsibilities but it falls short of being a guarantee. Sometimes comfort letters specifically provide that they are not intended to be legally binding. However absent such a provision, in a commercial context there will normally be little doubt that a comfort letter is intended to create legal relations. Accordingly, in establishing what avenues of recourse are available to the lenders in the event of a breach of the undertaking in the comfort letter by the parent, the question will normally be one of interpretation as to what the comfort letter means.

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The law of agency is an area of

Agency Law

commercial law dealing with a set of contractual, quasi-contractual and non-contractual relationships that involve a person, called the agent, that is authorized to act on behalf of another (called the principal) to create a legal relationship with a third party.[1]. This branch of law separates and regulates the relationships between: • Agents and principals; • Agents and the third parties with whom they deal on their principals' behalf; and • Principals and the third parties when the agents purport to deal on their behalf. A asks B to get car repaired. B acts as A’s agent in making a contract between A and the garage person.

a) Partners: Partners in a partnership firm at as agents of each other. Types of Agent:

b) Company Directors: They work on behalf of the company as its agent. c) Promoters: Person who undertakes to form a company. d) Factor: A person who buys or sells goods on behalf of another person. Also called a mercantile agent. e) Brokers: They are intermediaries who arrange contracts or meeting foe commission as payment. f) Auctioneers: Person who act as agents to auction another person’s property.

• Relationship is formed between principle and agent by mutual consent. It comes usually by express agreement; however it may be implied agreement due to the relationship or conduct of the parties.

How an Agency is Established?

• Express Agreement: By writing or orally • Implied Agreement: It may be implied by reason of their relationship and conduct.

• A principle may subsequently ratify an act of an agent retrospectively. Concept of Retrospective Ratification in Agency law

• If the principal agrees to the acts of the agent after the event, he may approve the acts of the agent by ratifying them retrospectively.

• The principal may only ratify if the following conditions are satisfied: 1. Principal must have been in existence at the time of agent’s act. 2. Principal must have legal capacity to make the contract 3. Agent must at the time of making the contract sufficiently identify or name the principal.

i) Implied agreement: The effect of an agency relationship created vide an implied agreement might result in agent with more authority than what the principal consented to.

Establishment of Agency Relationship without consent An agency relationship may be created without express consent. This happens by the principal of estoppels.

ii) Agent by Estoppel: An agency that is not created as an actual agency by a principal and an

agent but that is imposed by law when a principal acts in such a way as to lead a third party to reasonably believe that another is the principal's agent and the third party is injured by relying on and acting in accordance with that belief

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A principal has a duty to correct a third party's mistaken belief in an agent's authority to act on the principal's behalf. If the principal could have corrected the misunderstanding but failed to do so, he or she is estopped from denying the existence of the agency and is bound by the agent's acts in dealing with the third party. To rely on agency by estoppel, there must have been a representation by the principal as to the authority of the agent (Freeman and Lockyer v Buckhurst Park Properties Ltd (1964)) and the party seeking to rely on it must have relied on the representation.

iii) Agent by Necessity: The usual situation which gives rise to agency by necessity occurs where the agent is in possession of the principal’s property and, due to some unforeseen emergency, the agent has to take action to safeguard that property. • In order for agency by necessity to arise, there needs to be a: a) Genuine emergency (Great Northern Railway Co v Swaffield (1874)) and b) There must also be no practical way of obtaining further instructions from the

principal (Springer v Great Western Railway Co (1921)). c) The person seeking to establish the agency by necessity must have acted bona fide in the

interests of the principal (Sachs v Miklos (1948)). d) The person acting as an agent of necessity must have some existing contractual

relationship with the principal.

• Agreement binding only if the agent acts within the limits of his authority. Authority of the Agent

• Three kinds of Agent’s Authority: i) Express Authority:

Express actual authority means an agent has been expressly told he or she may act on behalf of a principal.

ii) Implied Authority:

Implied actual authority, also called "usual authority", is authority an agent has by virtue of being reasonably necessary to carry out his express authority. As such, it can be inferred by virtue of a position held by an agent. For example, partners have authority to bind the other partners in the firm, their liability being joint and several. • Watteau v Fenwick

The manager, bought cigars from a third party who later sued the owners for payment as the manager’s principal. It was held that the purchase of cigars was within the usual authority of a manager of such an establishment and that for a limitation on such usual authority to be effective it must be communicated to any third party

iii) Apparent/ostensible authority

• Apparent/ostensible authority refers to a situation where a reasonable person would understand that an agent had authority to act.

• This means a principal is bound by the agent's actions, even though the agent had no actual authority, whether express or implied.

• It raises an estoppel because the third party is given an assurance, which he relies on and would be inequitable for the principal to deny the authority given.

iv) Apparent/ostensible authority usually arises either:

a) Where the principal has represented the agent as having authority even though he has not actually been appointed.

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b) Where the principal has revoked the agent’s authority but the third party has not had notice of this: Willis Faber & co v Joyce.

Freeman & lockyer v Buckhurst Park Properties: It was held in this case that although there had been no actual delegation to Kapoor, the company had by its action led the claimants to believe that Kapoor was an authorized agent and the claimants had relied on it. The company was bound by the contract made by Kapoor under the principle of holding out or estoppels. The company was stopped from denying that Kapoor was its agent. How can an Agent’s authority effectively be Revoked? The authority of an agent to bind his principal may cease by revocation of that authority by the principal. However, the revocation of authority will only be valid if the principal has informed the third parties regarding the revocation of an agent’s authority. How can an Agency relationship brought to an end? An agency relationship can be brought to an end in the following ways: i) Principal or agent dies ii) Principal or agent becomes insane iii) Principal or agent becomes bankrupt

• Third parties are allowed to enforce contracts made later by agent until they are actively or constructively informed of the termination of the agency relationship.

a) Where he intended to take personal liability

Personal Liability of Agent: It arises in three situations:

b) Where there exists common practice or custom that he would be personally liable. c) Where he acts in his own capacity. Breach of warranty of authority: • Definition of breach of warranty of authority

• An

: Creating an impression of agency where no such relationship exists.

agent who enters into a contract with a third party (for and on behalf of a principal) by implication warrants that he or she has the authority to do so. If this is not the case, the third party has the right to sue the agent for breach of warranty of authority.

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Partnership

• “It is the relation which subsists between persons carrying on business in common with a view of profit.”

Definition of Partnership:

• Partnership can either be a formal (written) or an informal (oral) arrangement. Methods of Formation of Partnership:

• Partnership is formed when a minimum of two or more people decide to run a business together. • A written partnership agreement is not a mandatory requirement in order to form a partnership. If a

partnership is formed informally then the basic rights and duties of partners mentioned in the Partnership Act 1890 would apply to the partnership arrangement.

• A written partnership agreement has various advantages because the Partnership Act 1890 is silent on a number of matters such as expulsion of a partner. Therefore a written arrangement brings with it the following advantages: i) It overrides the implied terms of the Partnership Act. ii) It can include the clause of the expulsion of partners.

• Partners are jointly liable for all the partnership debts that result from the contracts made by other partners which bind the firm. Each Partner is agent of the firm and partners are jointly liable for the acts of their fellow partners so far as they bind the firm unless the partner so acting

Authority and Liability of Partners in Relation to Partnership Activity:

i) Has no authority to act for the firm ii) The third party knows that he has no authority

• Furthermore the act specifically states that where the partner of the firm specifically pledges the credit of the firm for a purpose which has no connection with the firm’s ordinary business, the firm will not bound unless he has express authority to do so.

• If authority of the partner is terminated, it will only be effective if the third party has had notice of it. • Authority of the partner mostly depends upon the perception of the third party. • New partner is only liable for the debts of the firm incurred after his inclusion. • A retiring partner remains liable for the debts of the firm even after he has retired.

Partnership is dissolved in the following instances: How can a Partnership be Brought to an End?

i) By death or bankruptcy of the partner ii) Expiry of the term or time of partnership iii) Order of the court iv) Notice given by one partner to another v) Termination of venture vi) Subsequent illegality vii) Agreement between partners

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Order of Distribution of Proceeds of Assets upon Termination of Partnership • The partnership assets are realized and proceeds are applied in this order:

a) Paying off external debts b) Repayment of loans to partners which they had made to the partnership firm c) Repayment of capital contribution to partners d) Any leftover proceeds are distributed amongst partners in accordance to their profit sharing ratio.

Partner’s Liability: a) New Partners: Partner is only liable for the debts of the partnership firm which are incurred after

his date of admission as a partner. b) Retired partners: A retiring partner is only liable for debts which were incurred while he was a

partner. Partnership Charge: • Partnership cannot grant floating charge but I can grant fixed charge or mortgage.

What is Limited Liability Partnership? • Limited liability partnership (LLP) is a partnership in which some or all partners (depending on

the jurisdiction) have limited liability.

• LLP’S are created under Limited Liability Partnership Act 2000. LLp’s are similar to limited companies in that they have a separate legal identity and unlimited liability for debts but the liability of the individual partners is limited to the amount of their capital contribution.

• The main difference between an LLP and companies is that the former have less statutory rules and they require no board of directors. All contracts with the third parties will be with the LLP.

i) Formation: LLP can be formed by anyone but it must be incorporated in order for it to

come into existence. LLP’s have an unlimited number of partners.

ii) External Relationships: Every member agent of the LLP. Where the member has authority, the LLP will be bound by the acts of the member.

LLP will not be bound where: A member has no authority and ceased to be a member and third party is aware of these facts.

iii) How can a Limited Liability Partnership brought to an End?: LLp does not dissolve when the member leaves or dies. LLP must be wound up when the time has come for it to be dissolved.

iv) Limited Partnership: This is formed under Partnership Act 1907:

One partner has unlimited liability and the other partners have limited liability for the debts. Limited partners may not withdraw their capital, not take part in management, cannot bind partnership in a contract and partnership must be registered with the Companies House.

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Corporation and Legal Personality

• A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of Definition of a Sole Trader:

business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business.

Advantages of a Sole Trader • It is easy to organize and needs only a small amount of capital. • It permits a high degree of flexibility for the owner since he/she is the boss of the business

establishment. • Due to its unlimited liability, some creditors are more willing to extend credit. • The owner gets all the profit of the business. Disadvantages of a Sole Trader• Has limited resources. Banks are reluctant to grant loans to single proprietorship considering its

small assets and high mortality rate.

:

• Unlimited liability for business debts. The single owner is responsible for paying all debts and damages of his business.

• If the firm fails, creditors may force the sale of the proprietor's personal property as well as his business property to satisfy their claim.

The Concept of Company’s Separate Legal personality Legal Identity • Legal personality (also artificial personality, juridical personality, and juristic personality) is the

characteristic of a non-living entity regarded by law to have the status of personhood. • A legal person (Latin: persona ficta) (also artificial person, juridical person, juristic person, and body

corporate) has a legal name and has rights, protections, privileges, responsibilities, and liabilities under law, just as natural persons (humans) do. The concept of a legal person is a fundamental legal fiction.

• Liability of the members to contribute to the debts of the entity is significantly limited. • Definition; Company is an entity registered under the Company’s Act 2006. Limited Liability of Members: • Company is distinct from its members and its members have limited liability. • It is a protection offered to members of certain types of company. Security of Members against Creditors • Limited liability prevents the creditors from demanding the company’s debts from members of the

company. Security from Business Failure • Limited liability only becomes an issue in the event of a business failure when the company is unable

to pay its own debts. Result is winding up which enables the creditors to be paid from the proceeds of any assets remaining in the company.

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Types of Corporations: 1. Corporation Sole:

Public office (created usually by an act of parliament) or ecclesiastical office (usually the owner of church land) that has a separate and continuing legal existence, and only one member (the sole

2. Chartered Corporations:

officeholder).

These are charities or bodies formed by the Royal Charter.

3. Statutory Corporations: The statutory companies are also known as statutory corporations

4. Registered Companies:

or public corporations, these are actually public bodies established and operated by Statute.

Companies formed under the Companies Act 2006.

5. Community Interest Companies: These are formed by social enterprises for the benefit of the community. These are established by the Companies (Audit, Investigations and Community Enterprise) Act 2004 and regulated by The Community Interest Company

a) Liability Limited by Shares

Regulations 2005. Types of Companies:

• "Limited by shares" means that the company has shareholders, and that the liability of the shareholders to creditors of the company is limited to the capital originally invested, i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the company.

• A shareholder's personal assets are thereby protected in the event of the company's insolvency, but money invested in the company will be lost.

b) Liability Limited by Guarantee • A guarantee company does not usually have a share capital or shareholders, but instead has

members who act as guarantors. The guarantors give an undertaking to contribute a nominal amount (typically very small) in the event of the winding up of the company.

c) Unlimited Liability Companies: • The liquidator can require members to contribute as much as may be required to pay the

company’s debts in full.

d) Private and Public Companies: • A public company is a company whose constitution states that it is public and that it has

complied with the registration procedures for such a company. • A private company is a company which may not offer its securities to public.

e) Requirements for a Public Company:

• A public company must hold a Registrars trading certificate and must have a minimum capital of 50,000 pounds.

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• Private company which is converted into a public company will not be permitted to trade until it has a allotted minimum share capital of 50,000 pounds out of which only a quarter of its nominal has to be paid and whole of its premium.

f) Minimum membership and Directors:

• Public company must have a minimum of one member and same is the case with private company. However minimum of two directors are required for public company and one for private company.

Differences between Public and Private Companies i) Capital:

a) Minimum of 50,000 pounds capital for public company and no minimum for private. b) Public company may offer shares to public but private is prohibited to do so. c) Public and Private Companies must generally first offer its existing members any ordinary

shares it issues for cash. This is also know as pre-emption right. Private company may permanently disapply this rule.

ii) Dealing in Shares Public company can obtain listing for its shares on the stock exchange.

iii) Accounts:

a) Pubic company has six months to produce its statutory audited accounts and private company has nine months.

b) Listed public company must publish its full accounts and reports on website. c) Public companies must lay their accounts before the general meeting annually but no such

requirement for private company.

iv) Commencement of business: Public Company can only commence business one it has obtained the trading certificate from the registrar, however private company can commence business as soon as it is incorporated.

v) Annual General meetings: Private companies are not required to hold annual general meetings but public companies must hold one within six months from its financial year end.

vi) Names and Identification

Words limited or Ltd must appear. Company should be identified as public or private company. Additional Classifications: • Parent ( Holding) and subsidiary companies:

A company will be a parent company of its subsidiary if: i) It holds majority voting rights ii) It has majority in the subsidiary and can exercise dominant control over the subsidiary

What are Quoted Companies: • Quoted companies are referred to as listed companies.

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When can a Company be Classified as a Small Company? A company is small if: a) Balance sheet is not more than 3.26 million pounds b) Turn over less than 6.5 million pounds c) 50 employees or less.

• Must fulfill both a and b conditions to be classified as small. Concept of Separate Legal Personality Salmon v Salmon The Claimant S had carried on his business. He decieded to form a limited company to purchase the business so he and six other members of his family each subscribed for shares of the company. The limited company then purchased Claimants business for 38,782 pounds. The Claimant was paid 8,782 pounds in cash by the company. Further, 1 pound of 20,000 shares were issued to him and debentures of 10,000 pounds were also issued.The company did not prosper and its liabilities exceeded its assets. The liquidator stated that company’s business was still in actual claimants and he himself should bear the liabilities of the debts and payments of debentures to him should be postponed until the company’s creditors are paid. House of lords held that the business was owned by and its debts were liabilities of the company. The claimant was under no liability to the company or its crediotrs, his debentures were validly issued and the security created by them over the company’s assets was effective. This was because company was a legal entity separate and distinct from S. What is a Veil of Incorporation and its purpose? • As a result of the Salmon’s case a veil of incorporation is said to be drawn between the members and

the company separating them for the purposes of liability and identification. Instances where Separate Personality can be Ignored • Separate legal personality can be ignored to:

i) Identify the company with its members and/or directors ii) Treat a group of companies as a single commercial entity

• The main instances for lifting veil are to enforce law, prevent evasion of obligations. Lifting of Veil by Statue to Enforce Law: i) Failure to obtain a trading certificate from the Registrar leads to personal liability. ii) Fraudulent and wrongful trading

• Fraudulent Trading is committed when affairs of the company are carried out with the intent to defraud the creditors. It is a criminal offence under sec 993 of the companies act 2006 and any person guilty of it is liable for a fine or imprisonment upto 10 years. It is also a civil offence under the Insolvency Act 1986.

Under UK insolvency law,[1] wrongful trading occurs when the directors of a company have continued to trade a company past the point when they: a) "knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent

liquidation"; and b) they did not take "every step with a view to minimising the potential loss to the company’s creditors".

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• Wrongful trading is an action that can be taken only by a company's liquidator, once it has gone into insolvent liquidation. (This may be either a voluntary liquidation - known as Creditors Voluntary Liquidation, or compulsory liquidation). It is not available to the directors of a company while it continues in existence, or to other insolvency office-holders such as an administrator. Court may order such directors to make a contribution to the company’s assets sec 214 of the Insolvency Act 1986.

Consequence of Piercing the Corporate Veil • If a court pierces a company's corporate veil, the owners, shareholders, or members of a corporation

or LLC can be held personally liable for corporate debts. This means creditors can go after the owners' home, bank account, investments, and other assets to satisfy the corporate debt. But courts will impose personal liability only on those individuals who are responsible for the corporation or LLC's wrongful or fraudulent actions; they won't hold innocent parties personally liable for company debts.

Liability of Disqualified Directors • Directors who are disqualified under the Directors disqualification Act 1986 and still participate in the

affairs of the company’s management will be jointly liable along with the company for the company’s debts.

How can Directors be held Liable for Abusing the Company Names: • It is a criminal offence under the Insolvency Act sec 217 and directors are held personally liable

where; they are a director of a company that goes into solvent liquidation and they become involved with the directing, managing or promoting of a business which has an identical name to the original company or a name similar enough to suggest a connection.

Ignorance of the Veil of Incorporation in case of Evasion of Obligations Gilford Motor Co v Home EB Horne was formerly a managing director of the Gilford Motor Co Ltd. His employment contract stipulated (clause 9) not to solicit customers of the company if he were to leave employment of Gilford Motor Co. Mr. Horne was fired, thereafter he set up his own business and undercut Gilford Motor Co's prices. He received legal advice saying that he was probably acting in breach of contract. So he set up a company, JM Horne & Co Ltd, in which his wife and a friend called Mr. Howard were the sole shareholders and directors. They took over Horne’s business and continued it. Mr. Horne sent out fliers saying,

“ Spares and service for all models of Gilford vehicles. 170 Hornsey Lane, Highgate, N. 6. Opposite Crouch End Lane... No connection with any other firm. ”

The company had no such agreement with Gilford Motor about not competing, however Gilford Motor brought an action alleging that the company was used as an instrument of fraud to conceal Mr Horne's illegitimate actions. Held. An injunction requiring observance of the covenant would be made both against the defendant and the company which he had formed as a mere cloak or sham.

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Avoidance of Tax: Unit Construction ltd v Bullock Held the companies were resident in the UK and liable to UK tax. The Kenyan connection was a sham, the question being not where they ought to have been managed but where they were actually managed. Pubic Interest: If in times of war with the enemy the court may life the viel of incorporation to determine if the company is being controlled by aliens. Quasi Partnership: Many small companies are regarded by the law as 'quasi-partnerships' - in other words, they are, in effect, small partnerships of a limited number of individuals which, although operating as a limited company, are in practical terms run as if they were a partnership between those individuals at the helm. Concept of Separate legal Personality in Group Companies and Lifting the Veil in Group Situations Companies even in groups retain their status of separate legal personalities. In the case of Adams v Cape Industries Plc three situations were stated under which the courts would consider the group as one and then lift the veil of incorporation. The three reasons are: 1. The subsidiary is acting as the agent of the holding company 2. The group is to be treated as a single economic entity 3. The corporate structure is sham or façade. Company and Partnership Distinction: • Some of the major distinction between partnership and a company are as follows:

1. Regulating Act: A company is regulated by Companies Act, 2006, while a partnership firm is governed by the Partnership Act, 1890.

2. Registration: A company cannot come into existence unless it is registered, whereas for a partnership firm registration is not compulsory.

3. Liability: In case of company the liability of shareholders is limited (except in case of unlimited

companies) to the extent of face value of shares or to the extent of guarantee, whereas, in case of partnership the liability of partners is unlimited.

4. Management: The affairs of a company are managed by its directors. Its members have no right

to take part in the day to day management. On the other hand every partner of a firm has a right to participate in the management of the business unless the partnership deed provides otherwise.

5. Capital: The share capital of a company can be increased or decreased only in accordance with the provisions of the Companies Act, whereas partners can alter the amount of their capital by mutual agreement.

6. Legal Status: A company has a separate legal status distinct from its shareholders, while a

partnership firm has no legal existence distinct from its partners.

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7. Transfer of Interest: Shares in a public company are freely transferable from one person to another person. In private company the right to transfer shares is restricted, while a partner cannot transfer his interest to others without the consent of other partners.

8. Insolvency/Death: Insolvency or death of a shareholder does not affect the existence of a company. On the other hand a partnership ceases to exist if any partner retires, dies or is declared insolvent.

9. Winding up: A company comes to an end only when it is wound up according to the provisions

of the Companies Act. A firm is dissolved by an agreement or by the order of court. It is also automatically dissolved on the insolvency of a partner.

10. Books: The provisions of Companies Act, 2006 have their bearing on the preparation of accounts books of a company but in case of firm there is no specific legal direction to this effect.

11. Audit: Audit of accounts of a company is compulsory whereas it is generally, discretionary in case of a firm.

12. Authority of Members: A shareholder is not an agent of a company and has no power to bind

the company by his acts. A partner is an agent of a firm. He can enter into contracts with outsiders and incur liabilities so long as he acts in the ordinary course of firm’s business.

13. Commencement of Business: A company has to comply with various legal formalities and has

to file various documents with the Registrar of Companies before the commencement of business while a firm is not required to fulfill legal formalities.

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Company Formation

Person who forms a company is called a promoter. It includes anyone who makes business preparations for the company.

Definition of a Promoter

Promoters have the following duties: Duties and Responsibilities of Promoters in law

i) Duty to exercise reasonable care and skill ii) He must account for the benefits obtained. iii) Must not place themselves in a conflict of interest position iv) Disclosure of benefits and transactions and accounts. Promoter may make a profit as a result of their position. a) Legitimate profit is when before promoting a company they sell the property to the promoted

company, provided they disclose it. b) Wrongful profit is when the promoter enters into and makes a profit personally in a contract as a

promoter. Promoters are in breach of their fiduciary duty if they make wrongful profit.

• The expenses in preparations such as drafting and legal documents cannot be obtained as an automatic right but they may agree with company that it shall reimburse them.

How can a Promoter Claim Pre-Incorporation Expenses?

• Pre-incorporation contract cannot be ratified by the company as a company cannot ratify a contract made on its behalf before it was incorporated.

Liability of Promoters for Pre-Incorporation Contracts• Promoter as an agent is liable for the pre-incorporation contracts made on behalf of the company.

;

Various ways for promoters to avoid liability for a pre-incorporation contract:

Methods of Avoidance of the Liability as a Promoter for Pre-Incorporation Contracts

a) If contract remains a draft until the company is formed. b) IF the company after its incorporation enters a new contract on identical terms. This is known as

novation. Novation is the act of either replacing an obligation to perform the new obligation or replacing a party to an agreement with a new party.

c) Promoter buys off the shelf company.

• Company is formed and registered when is it issued with the certificate of incorporation and when persons subscribe to the memorandum of association and comply with the requirements regarding registration.

Process of the Registration of Company

• Documents to be delivered for registration of company are memorandum of association, articles of association, statement of proposed officers, statement of capital and initial shareholdings. Once the documents are submitted a registration fee is payable for company registration.

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It is a company which was created and left with no activity - metaphorically put on the "shelf" to "age". The company can then be sold to a person or group of persons who wish to start a company without going through all the procedures of creating a new one.

Concept of an Off the Shelf Company and its Advantages and Disadvantages

Advantages for the purchase of off the shelf company: The following documents need not be filed with the Registrar by the purchase: i) Memorandum and articles ii) Application for registration iii) Statement of proposed officers iv) Statement of compliance v) Statement of capital and initial shareholdings vi) Fee Disadvantages: i) Directors may have to amend the model articles ii) They may want to change the name of the company iii) The subscriber shares will need to be transferred and the transfer recorded in the register of

members. Stamp duty will be payable

A private company may be able to re-register as public company if its allotted share capital requirement of 50,000 pounds is met. Quarter of it must be paid plus the whole of any premium.

Process of Re-Registration of a Company from Private to Public and Vice Versa

i) Special resolution is required of 75 percent to alter the constitution and a general meeting. ii) Additional documents are required for re-registration purposes. iii) If the share capital of a public company falls below 50,000 pounds then it must re-register as a

private company. Requirements for Commencement of Business for Public and Private Companies: • Public companies must obtain a registrar’s trading certificate before commencement of business. • Private company can commence its business immediately after obtaining certificate of incorporation.

Statutory Records

• Company is identified by its name and serial number which is always mentioned on every document sent to Companies House for filing.

The Registrar of Companies:

• On incorporation of company its files includes its certificate of incorporation and the original documents presented to secure its incorporation.

Some documents including the constitution, register of members, charges and directors must be kept at its registered office or at single alternative inspection location.

Statutory Books

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• Under the UK Significance of the Register of Charges

corporate legislation, the register that records all charges (judgments, liens, mortgages) on an incorporated or registered firm's assets, and which must be kept at the registered office of the firm

It must contain: i) Details of fixed or floating charges ii) Description of property charged iii) Amount of charge iv) Name of person entitled to charge

A corporate director is not a natural or real person, instead it is a company. Note that all companies must have at least one natural director (i.e. a real person) to ensure that the company has an individual that can be held responsible and accountable for the actions of the company.

What is a Corporate Director?

i) The corporate or firm name Where a company is a Director, the Register of Directors must Contain:

ii) Its registered or principal office

• The company should keep copies or written memoranda of all service contracts for its directors, including contracts for services which are not performed in the capacity of director. Members are entitled to view these copies for free or request a copy on payment of a set fee.

Records of Directors Services Contracts

• This director's service contract is to be used for executive directors - i.e. company directors who are also employees of the company. The template has a dual purpose: it sets out the basis for the director's employment by the company, and regulates his role as a director.

Examples of common executive director posts, in respect of which this director service contract template may be suitable for use, include finance directors, operations directors and managing directors.

• Company is required to keep accounting records sufficient to show and explain the company’s transactions. At any time it should be possible to disclose the companies financial position within six months and for directors to ensure that any accounts required to be prepared comply with the Act.

Accounting Records:

• Accounting records to be kept for 3 years in case of private company and six years in case of public company.

• Accounting records should be kept at company’s registered office.

Public companies must file their annual accounts with six months of their financial year end and the period for private companies is nine months.

Annual Accounts

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Constitution of a Company

• It is a simple document which states that the subscribers wish to form a company and become members of it.

Significance of the Memorandum of Association

• After the Company’s Act 2006 the essence of the memorandum has been retained and it mainly includes that the subscribers : i) Wish to form a company ii) Agree to become members of the company and to take at least one share each if the company

is to have share capital. • Memorandum must be signed by each subscriber.

The Constitution of the Company mainly consists of the following: Company’s Constitutional Documents and Model Articles:

i) The Articles of Association ii) Resolutions and Agreements that it makes that affects the constitution. Articles of Association • The Articles of Association is a document that contains the purpose of the company as well as the

duties and responsibilities of its members defined and recorded clearly. It is an important document which needs to be filed with the Registrar of companies.

Models of Articles • The Secretary of State provides its own model articles which can be incorporated provided a company

fails to register its own articles. Different models are available for different types of company; most companies would adopt model private or public companies articles.

How can the Articles be Amended? • The amendment is the articles can only be allowed if it is for the benefit of the company as a whole. • The articles may be amended by a special resolution i.e 75 percent. Copies of the amended articles

must be sent to the Registrar within 15 days of the amendment taking effect. How can a company’s constitution be made unalterable? Following are the methods through which the provisions of the company’s constitution can be made unalterable: a) The articles may give a member additional votes so that he can block a resolution to alter articles.

Bushell v Faith:

b) Articles may provide that when meeting is held the quorum present must include the member concerned. They can then deny the meeting quorum by absenting themselves.

Three members each had 100 shares. Article 9 of the company constitution said that under a resolution to remove a director, that directors’ shares would carry three votes each. When the two sisters tried to remove him, Mr Faith recorded 300 votes and the other two, 200 votes together. The House of Lords held that the provision was valid.

c) Section 22 of the act permits companies to entrench provisions in its articles. An entrenched clause or entrenchment clause of a constitution is a provision which makes certain amendments either more difficult than others or impossible. It may require some form of supermajority, a referendum submitted to the people, or the consent of some other party.

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Limitation on Alteration of Articles Alteration of articles is restricted by the following principles a) If alteration conflicts with Companies Act b) To protect a minority under section 994 court may order alteration or restrict it. c) Existing member may not be compelled by alteration to buying more shares unless consents d) Alteration on the rights of class of shares be made only if correct procedure adopted section 630 and

section 633 a 15 percent minority may apply to court to cancel the variation. e) A person whose contract is contained in the articles cannot obtain an injunction to prevent the articles

being altered but may be entitled to damages. Mr Shirlaw sued the company for

Southern Foundries v Shirlaw breach of contract, claiming for an injunction to stay in office or

substantial damages. High Court awarded £12,000 to Mr Shirlaw for breach of contract f) An alteration may be void if not done in bone fide

Bonda fide test includes; i) Majority are entitled to alter even if minority considers alteration is prejudicial to its

interests. ii) Minority is entitled to protection against an alteration which is intended to benefit the

majority rather than the company and which is unjustifiable discrimination against the minority.

Expulsion cases are concerned with; Expulsion of Minorities

a) Alteration of articles for the purpose of removing a director from office b) Alteration of the articles to permit a majority of members to enforce a transfer to themselves of a

shareholding of a minority • The action to achieve expulsion will be treated as valid even if discriminatory if it is

beneficial for the company. However, if the majority blatantly seeks to secure an advantage to themselves by their discrimination, the alteration made to the articles by their voting control of the company will be invalid.

• Shuttleworth v Cox Bros & Co

Held: Expulsion of director who had failed to account for the funds was held to be valid.

• Sidebottom v Kershaw, leese & Co

The company's articles were changed to allow for the compulsory purchase of shares of any shareholder who was competing with the company. One shareholder was competing with the company and challenged the alteration.Held: The Court of Appeal held that the article alteration was clearly valid, and very much for the benefit of the company. The important question was whether the alteration for the benefit of the company as a whole.

• Brown v British Abrasive Wheel Co The company needed to raise further capital. The 98% majority were willing to provide this capital if they could buy up the 2% minority. Having failed to effect this buying agreement, the 98% purposed to change the articles of association to give them the power to purchase the shares of the minority. The proposed article provided for the compulsory purchase of the minority’s shares on certain terms. However, the majority were prepared to insert a provision regarding price which stated that the minority would get a price which the court thought was fair.Held; That the alteration was invalid since it was merely for the benefit of the majority.

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• Any alteration made to the articles the copy of altered articles must be delivered to the Registrar within 15 days together with the signed copy of the special resolution making the alteration.

Filing of Alteration

a) Companies act will permit the company to take an action if articles authorize and on the other hand if it does not the company must alter them

Relationship between Statute and Articles

b) The companies act will over ride the articles if the companies act prohibits something and if something permitted by the Act only by a special resolution.

• Significance of the Companies Objects, Capacity and Ultra vires

Objects:

•

Under 2006 Act company’s objects completely unrestricted. Unless where company itself wishes to restrict it under sec 31. Alteration of Objects:

Objects can be altered by special resolution under section 21.

• If directors permit an act which is restricted by the company’s objects then the act is ultra vires. Capacity and Ultra Vires

• Ashbury Railway Carriage & Iron co ltd v Riche

Held: Constructing a railway was not within the company’s objects so the company did not have the capacity to enter into the contract.

• Following is the approach taken by the Companies Act 2006.

Section 39: A company’s capacityThis section provides that the validity of a company’s acts is not to be questioned on the ground of lack of capacity because of anything in a company’s constitution. It replaces the present section 35(1) and (4) of the 1985 Act, which made similar provision for restrictions of capacity contained in the memorandum.

• Section 40: Power of directors to bind the company

This section provides safeguards for a person dealing with a company in good faith and restates section 35A and 35B of the 1985 Act. The power of the directors to bind the company, or authorise others to do so, is deemed not to be constrained by the company’s constitution. This means that a third party dealing with a company in good faith need not concern itself about whether a company is acting within its constitution.

• Dealings with Directors

Section 41: Constitutional limitations: transactions involving directors or their associatesThis section restates section 322A of the 1985 Act. It applies to a transaction if, or to the extent that, its validity depends on section 40 and provides that where the party to a transaction with a company is an “insider” (for example, a director of the company or person connected to such a director – see subsection (2)(b)(i) and (ii)), then the protection afforded by that section will not apply. Instead, the transaction will be voidable at the instance of the company.

• Whether or not the contract is avoided, the party and any authorizing director is liable to repay any

profit they made or make good any losses that result from such a contract.

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A company’s constitution binds The Constitution as a Contract

i) Member to company ii) Company to Members iii) Members to Members

But not to third parties.

• Effect of company's constitution Constitution as a Contract between Members

1. The provisions of a company's constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions.

2. Money payable by a member to the company under its constitution is a debt due from him to the company.

In England and Wales and Northern Ireland it is of the nature of an ordinary contract debt.

Name of the Company must comply with the following rules: Company name:

a) It should end with the words Plc or ltd b) Company must not have a name similar to any other company c) No company must have a name which is offensive, sensitive or depicts a criminal offence d) Approval if required if the name of the company is similar to that of the government department. How can a company Change its Name: Can change its name by: i) Passing a resolution ii) By any other means provided in the articles Special resolution or any other procedure be notified to the Registrar.

• A company can be prevented by an injunction issued by the court in a passing-off action from using its registered name.

Concept of Passing off Action

• Ewing v Butter Cup Margarine

• If two companies business is different confusion is not likely to occur. Injunction will not be granted.( Dunlop Pnemumatic Tyre Co ltd v Dunlop Motor Co Ltd)

: Claimant traded as The Butter Cup Dairy Co and the Defendant as Buttercup Margarine Co ltd. It was held that an injunction would be granted to restrain the defendants from the use of its name since the Claimant had an established connection under the Buttercup name.

Role of the Company Names Adjudicator• Adjudicator can review a case if the name of a company is similar to that of the existing and must

decide within 90 days. He can also determine the new name.

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• It is mandatory for the company to have its registered office. Company Registered Office:

• Company can if it so desires change its registered office address but a person dealing with the company can present documents a the previous address for a period of 14 days.

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Share Capital

• A member is a person who has subscribed to the memorandum of association and every other person who has agreed in writing to become a member and whose name is entered in the register of members.

When an Individual becomes a Member:

• A person may become a member of a company by an application for shares subject to the formal acceptance by the company.

Method of Subscription of Shares

• The ordinary law of contracts applies to the agreement to take shares in a company. An application for share may be absolute or conditional.

• If it is absolute, a simple allotment and notice thereof to the applicant will constitute the agreement. • If it is conditional, the allotment must be on the basis of the conditions specified. A person may also

subscribe to the shares of the company as a trustee of the deceased or bankrupt member of the company.

Following are methods in which an individual’s membership can be brought to an end: Ceasing of the Membership

i) If the member dies ii) The company ceases to exist iii) Member transfers his shares to another person iv) Member surrenders his shares to the company v) Company forfeits the Members shares vi) Shares of the bankrupt member are registered in the name of the trustee

Number of Members of Public and Private Companies• Public and Private companies must have a minimum of one member. Where the issue is regarding a

single member company then the quorum required for general meetings is also one.

:

Share: Definition of Share and Types of Capital

• As defined in Borland’s Trustees v Steel (1901) a share: It is the interest of a shareholder in the company measured by a sum of money

Nominal Value of Share • It is value of the Share as indicated on the Share Certificate. This is also called face value. No share

can be issued at a value less than its nominal value. The nominal value of the shares held represents the maximum liability of a shareholder in a limited liability company.

• Once established, the nominal value of the share remains fixed and does not normally change. Types of Capital• The concept of ‘capital’ refers to the financial resources raised by companies to finance their

operation. The essential distinction in company law is between share capital, that is provided by the members of the company, and loan capital, which the company borrows from outsiders.

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• Allotted or issued capital represents the shares that have been applied for and the company has issued. It represents the nominal value of the shares actually issued by the company and public companies must have a minimum issued capital of £50,000 or the prescribed euro equivalent (s.763 CA 2006).

Issued and Allotted Share Capital

• The shares which the company retains are called the unissued share capital.

• When the shares are issued payment is usually required in full but not always. Sometimes the company will 'call up' only part of the amount due. This effectively splits the issued capital into two parts - the 'called up' and ' uncalled' parts. These two should, of course, add up to the issued figure. The uncalled part may be demanded later when the company needs more working capital.

Called up and Paid up Share Capital

• Paid up share capital is the amount which share holders have actually paid on the shares issued and called. On allotment public companies must receive at least one quarter of the nominal value of the shares paid up plus the whole of any premium.

• Capital generated through borrowing is called loan capital. It comprises of debentures and other long term loans.

What is Loan Capital?

• It is the current quoted price at which investors buy or sell a share of common stock or a bond at a given time. It is also known as "market price. The Market Value can be either higher or lower than the Nominal Value, depending on the performance of the company or the economic circumstances of the day.

Concept of Market Value of Shares

If constitution of the company states that there are no different shares, then they are all presumed to be ordinary shares.

Types of Shares

• This term is used to refer to the shares which are not given any special rights. If the company issues shares which all enjoy uniform rights, they will be ordinary shares.

Ordinary Shares

• These are not preferred shares and do not have any predetermined dividend amounts. An ordinary share represents equity ownership in a company and entitles the owner to a vote in matters put before shareholders in proportion to their percentage ownership in the company.

• Ordinary shares are also called equity shares. • Ordinary shareholders are entitled to receive dividends if any are available after dividends on

preferred shares are paid. They are also entitled to their share of the residual economic value of the company should the business unwind; however, they are last in line after bondholders and preferred shareholders for receiving business proceeds.

• If the company is profitable, not only will they enjoy dividend payments but the market value of their shares will go up. On the other hand if the company does not do well, they may well not receive any payment and the value of their shares will diminish.

• As members of the company, ordinary shareholders are entitled to attend and vote at general meetings. One of their most important rights is to elect and dismiss the directors of the company who are involved in its day-to-day running for the general benefit of those members.

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• Ordinary shares usually carry rights of pre-emption, which entitles the holders to have first call on any new shares issued by the company.

• The right which is enjoyed by a particular type of shareholder is a class right. Different special rights with respect to shares are: Dividends (Return on Capital Employed), redemption of capital, voting and the right to appoint or remove a director.

Class Rights

• Variation of class rights is a change in the rights entitled to shareholders in their capacity as equity holders of the company.

Variation of Class Rights

• Class rights can be varied by passing a special resolution by at least three quarters majority of that class.

• It is not a variation of class rights to issue shares to new members, to subdivide shares or to create a new class of preference shareholders.

Application of Variation of Class Rights

• Greenhalgh vs Arderne Cinemas ltd: It was held by the court that by dividing the 50p shares in five 10p shares did not vary the rights of original 10p shares since they still had one vote per share as before.

• A minority not in favor of the variation, holding at least 15 percent or more of the issued shares, can apply to the court within 21 days to have the variation cancelled.

Rights of a Minority in Cases of Unfair Prejudice

• Preference shares represent a more secure form of investment than the ordinary shares. The reason for this is that preference shares receive a fixed rate of dividend before any payment is made to the ordinary shareholders and usually they enjoy priority over ordinary shares with regard to repayment of capital (in case of liquidation). The actual rights enjoyed by the preference will be stated in the company’s articles of association.

Preference Shares

• Preference shareholders cannot insist on receiving a dividend payment, but as their dividend rights are usually cumulative, any failure to pay the dividend in one year has to be made good in subsequent years, subject to the company’s profitability.

• Company law enforces the strict rule that dividends, whether on ordinary or preference shares, cannot be paid out of the company’s capital. In case of liquidation, the company has no obligation to pay previously accrued cumulative preference dividend. The exceptions to this are that the dividend has been declared but not yet paid or when the articles explicitly state otherwise.

• These are shares issued on terms that they may be bought back by the company in future. Redeemable Shares

• Treasury shares or reacquired stock are the shares which are bought back by the issuing company, reducing the amount of outstanding capital in the open market.

Treasury Shares

• Plc can purchase its own shares listed on the stock exchange.

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• Allotment of shares means an appropriation of a certain number of shares to an applicant in response to his application for shares. Allotment means distribution of shares among those who have submitted written application.

Allotment of Shares

• The issue of shares is when the company formally issues the share certificate to the allotee.

• Pre-emption rights refer to the rights of existing shareholders to be offered any new issue of shares before those shares can be offered to non-shareholders.

Concept of Pre-Emption Rights

• The purpose of pre-emption rights is to ensure that existing shareholders have an opportunity to maintain their interest in their company by preventing their percentage holding being watered down by the issue of shares to new members. There is, of course, no compulsion on the part of the shareholder to take the shares if they do not wish to.

• Currently, by virtue of s.561 Companies Act (CA) 2006, a company cannot offer new shares for cash unless the existing shareholders have been offered the chance to buy the shares in proportion to their existing holding. Section 565 specifically exempts pre-emption rights where non-cash consideration is involved.

• As it is not always cost effective to offer new shares to all existing members, pre-emption rights can be waived by provision in the articles of association or by a special resolution of shareholders.

• Pre-emption rights may also be included in a company’s articles of association. • Private Company can exclude the statutory right of first refusal. • Any company can exclude the pre-emption rights by passing a special resolution.

• A rights issue is the procedure through which a company raises new capital by offering new shares to its existing members. As the shares are offered to the existing shareholders in proportion to their existing holding, it can be seen as respecting and giving effect to the shareholders’ pre-emption rights.

What are Rights issue?

• Once again there is no compulsion to participate in the rights issue and often the rights to participate in the allotment of new shares are usually tradeable securities in themselves. Consequently shareholders who do not want to buy the new shares themselves may sell the rights to a third party.

• The offer of rights issue should specify a period of not less than 21 days for the offer to be accepted.

• A bonus issue of shares, sometimes referred to as a scrip issue or more accurately a capitalisation issue is similar to a rights issue in that existing members receive new shares in proportion to their existing holdings, but it differs in one essential point: the individuals who receive the new shares usually do not have to pay anything for them; they are received free.

What is Bonus Issue of Share?

• Bonus issues must never be funded from a company’s ordinary capital. Value of shares and discount: • Every share has a nominal value and a premium value (market value). • A company must not issue shares at a price lower than the nominal value of the share or at a discount

to that. Ooregum Gold Mining Co of India v Roper [1892] Held: A company while allotting shares can give discount in the premium value of shares but cannot give discount in the nominal value of the shares.

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• Sec 588 of the Companies Act 2006 states that if shares are allotted to the allotee at a discount to their nominal value, the allottee will still be bound to pay the remaining nominal value of the share to the company.

Payment for shares in a private company can be in a variety of ways including cash, goods, services, property or even shares in another company.

Payment for Shares

Generally, people can pay for shares in a private company; • Wholly for cash; • Partly for cash and partly for a non-cash payment; or • Wholly for a non-cash payment. Payment for shares in a public company must, in most instances, be for cash. However, if shares are allotted in a public company for a non- cash consideration, the consideration for the shares is subject to an independent valuation in most cases. The following rules also apply to public companies: • At least 25% of the nominal value and the whole of any premium on shares in a public company must

be paid on allotment, • A public company cannot accept an undertaking to do work or perform services as consideration for

the allotment of shares. • Within two years of receiving its trading certificate, a public company may not receive a transfer of

non-cash asset. • A public company should not accept non-cash consideration for the payment of shares if it contains

an undertaking that such consideration may be performed later than 5 years after the allotment. Allotment of Shares at a Premium Value and Share Premium Account • Sec 610 (1) states that if a company issues shares at a premium, whether for cash or otherwise, a sum

equal to the aggregate amount or value of the premiums on those shares must be transferred to an account called “the share premium account”.

Share Premium Account: • It is used to pay for bonus shares • It is used to pay commissions and expenses as regards new share issue. Statement of capital and initial shareholdings • Section 9 of the CA 2006 removes the concept of ‘authorised capital’ and replaces it with the

requirement to submit a ‘statement of capital and initial shareholdings’ to the registrar in the application to register the company.

• The statement of capital and initial shareholdings is essentially a ‘snapshot’ of a company's share capital at the point of registration.

• Section 10 CA 2006 requires the statement of capital and initial shareholdings to contain the

following information: The total number of shares of the company to be taken on formation by the subscribers to the

memorandum;

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The aggregate nominal value of those shares; For each class of shares: prescribed particulars of the rights attached to those shares, the total

number of shares of that class and the aggregate nominal value of shares of that class; and The amount to be paid up and the amount (if any) to be unpaid on each share (whether on

account of the nominal value of the shares or by way of premium).

• The statement must contain such information as may be required to identify the subscribers to the memorandum of association. With regard to such subscribers it must state: The number, nominal value (of each share) and class of shares to be taken by them on formation;

and The amount to be paid up and the amount (if any) to be unpaid on each share. Where a subscriber takes shares of more than one class of share, the above information is

required for each class.

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Borrowing and Loan Capital

Borrowing• Companies have an inherent power to borrow money.

:

• Contract to repay money is unenforceable where: i) Borrowing is for an ultra vires purpose and the lender has knowledge of it ii) Directors breach their borrowing power.

Borrowing and Personal guarantees • Since the inception of the concept of the separate legal entity some lenders in order to secure their

lending require directors and/or members to agree to repay a loan out of their personal wealth if the company default’s to pay its debt.

• Personal guarantee is the tool to protect the lender from the members hiding behind the protection of limited liability.

• It is the capital generated through borrowing. What is Loan Capital?

• Loan capital may be obtained from a bank or finance company as long-term loans, or from debt-equity investors in the form of debentures or preferred stock (preference shares), and is usually secured by a fixed and/or floating charge on the company's assets.

• Debentures are documents that acknowledge a company’s borrowing, although the term has been extended to cover the loan itself.

What is a Debenture?

• As debenture holders lend money to the company they are its creditors, they are not members. • As creditors they are entitled to receive interest, whether the company is profitable or not. It may even

be necessary to use the company’s capital to pay the debenture interest. Three types of debentures; i) Single Debentureii)

: To create charge and giving the bank various safeguards for the loan. Debentures issued as a series and registered

iii)

: It is the number of debentures issued to different lenders who provide different amounts and each lender receives a debenture in identical form in respect of his loan. Registered debenture is one which is registered in the name of a holder in the books of the company. It is transferable in the same way as a share. Debenture Stock

• A company must maintain a register of all debenture holders and register an allotment within 2 months.

: Public companies usually use this method to offer its debentures to the public. Public companies usually issues number of debentures at one time through this method. Only this form requires a debenture trust deed.

What is Debenture Trust Deed and where is it required? • It is a formal legal document/contract that outlines the terms of the debenture issue between issuer

and holders. • It states the maturity date, interest rate, interest payment , protective provisions and any other terms

& conditions between issuer & holders.

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Elements of trust deed: 1) The appointment of trustee for prospective debenture stock holders. Trustee can be bank, company or

individual. 2) Trustee is authorized to enforce the security in case of default and in particular to appoint a receiver

with suitable powers of management. 3) Provisions for transfer of stock and meetings of debenture stockholders.

Advantages: i) The Trustee will deal with all correspondence regarding your debt. ii) Trustee has powers to intervene in case the borrow defaults. iii) Security for the debenture stock in the form of charges over property can be given to a single

trustee. iv) Trustee has the power to call the meeting of the debenture holders and obtain a decision

acceptable to all.

Similarities and Differences between Debenture Holders and Shareholders:

Common: i) Both are transferable securities ii) The procedure of issuance of both the securities is almost similar iii) The procedure of the transfer of both the securities is almost similar. Differences:

Shareholder Debenture holder i) Is the owner of the company Is the creditor of the company ii) Has the power to vote May not vote iii) Share cannot be issued below nominal value. Debentures may be issued below nominal. iv) Dividends paid out of profits. Interest must be paid. v) Restrictions on redeeming. No restrictions on redeeming. vi) Paid last in the event of liquidation. Paid before shareholders.

• The term used to describe any right established over a borrower's property to secure a debt or performance of an obligation.

Definition of Charges

Fixed Charges: • In this situation a specific asset of the company is made subject to a charge in order to secure a debt.

Once the asset is subject to the fixed charge the company cannot dispose of it without the consent of the debenture holders.

• The asset most commonly subject to fixed charges is land, although any other long-term capital asset may also be charged.

• It would not be appropriate, however, to give a fixed charge against stock-in-trade, as the company would be prevented from freely dealing with it without the prior approval of the debenture holders. Such a situation would obviously prevent the company from carrying on its day-to-day business.

• If the company fails to honor the commitments set out in the document creating the debenture, such as meeting its interest payments, the debenture holders can appoint a receiver who will if necessary sell the asset charged to recover the money owed. If the value of the asset that is subject to the charge is greater than the debt against which it is charged then the excess goes to pay off the rest of the

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company’s debts. If it is less than the value of the debt secured then the debenture holders will become unsecured creditors for the amount remaining outstanding.

• Fixed charges take priority over floating charges. Floating Charges: • The floating charge is most commonly made in relation to the ‘undertaking and assets’ of a company

and does not attach to any specific property whilst the company is meeting its requirements as stated in the debenture document.

• The security is provided by all the property owned by the company, some of which may be continuously changing, such as stock-in-trade. Thus, in contrast to the fixed charge, the use of the floating charge permits the company to deal with its property without the need to seek the approval of the debenture holders. However, if the company commits some act of default, such as not meeting its interest payments, or going into liquidation, the floating charge is said to crystallize.

Detection of charges as fixed or floating • The company would be prevented from freely dealing with the property having a fixed charge on it

without the prior approval of the debenture holders. • Floating charge permits the company to deal with its property without the need to seek the approval

of the debenture holders. However, charge over assets will not be registered as fixed if it allows the company to deal with the charges assets without obtaining pripor consent of the chargee.

Right of British Columbia v Federal Business Development Bank Bank had a fixed charge over the property and specific mortgage charge. A term allowed the company to making sales until notified in writing by the bank to stop doing so. Held the charge was created as floating not a fixed charge.

• Crystallization happens when a floating charge is converted into a fixed charge. Concept of the Crystallization of a Floating Charge

Events causing crystallization i) Liquidation of company ii) Cessation of company’s business iii) Intervention by chargee via a receiver iv) If charge contract so provides, when notice is given by the charges that the charge is converted

into a fixed charge. v) Crystallization of another floating charge if it causes the company to cease business. Floating charges sometimes make provision for automatic crystallization Comparison of fixed and floating charges • Fixed charge is a better form of security as it grants confers immediate rights over identified assets. • Floating charge may automatically become invalid if the company creates the charge to secure an

existing debt and goes into liquidation within a year thereafter sec 245IA. This period is only six months with a fixed charge.

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Charges over Book Debts • Charges which are created over the current and future book debts of the company. • If the money is received by the company and it deals with it without the consent of the chargee then

the charge will be categorized as floating charge. • If the money is received by the chargee and the company has no control over it then the charge will be

categorized as fixed charge. Priority of Fixed and Floating Charge • As per the general rule all fixed charges have priority over the floating charge irrespective of their time

of creation. • Fixed charges take priority against each other in order of their time of creation. • Floating charges take priority according to their time of creation. • A floating charge will only take priority over the fixed charge if the latter had notice that the former

will take priority charge.

Negative Pledge Clause: • Floating charge holder can include a negative pledge clause in his agreement with the company which

prohibits the company from creating a fixed charge over the same property. • If the above agreement is breached the fixed charge holder will only obtain priority if he did not have

knowledge about the prohibition created over the property. Disposing off or Selling off a Charged Asset: If a charged property is sold to a third party by the company then: • The charge will be transferred with the property. • The property will only have floating charge attached to it if the third party while purchasing it had

knowledge about it. Registration of Charges and Consequences of non-registration of a Charge • All charges, including both fixed and floating, have to be registered with the Companies Registry

within 21 days of their creation. • Failure to register the charge as required has the effect of making the charge void, i.e. ineffective,

against any other creditor, or the liquidator of the company. • The charge, however, remains valid against the company, which means in effect that the holder of the

charge loses their priority as against other company creditors. • In addition to registration at the Companies Registry, companies are required to maintain a register

of all charges on their property. Although a failure to comply with this requirement constitutes an offence, it does not invalidate the charge.

Rights of Secured and Unsecured Debenture Holder

Rights of unsecured debenture holders • Can sue the company and seize property if judgment for debt unsatisfied. • Can present a petition to the court for compulsory liquidation of the company • Can apply to the court for administrative order.

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Rights of Secured Debenture Holders: • Can take possession of the assets if they have a fixed charge. • Can sell the asset • Can apply to the court to transfer the ownership of the asset. • Can appoint a receiver provided no administration is in progress.

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Capital Maintenance and Dividend Law

• Every company is required to maintain capital for the protection of its creditors. Capital Maintenance

• As shareholders in limited companies, by definition, have the significant protection of limited liability the courts have always seen it as the duty of the law to ensure that this privilege is not abused at the expense of the company’s creditors. To that end they developed the doctrine of capital maintenance, the specific rules of which are now given expression in the Companies Act (CA) 2006.

• There are a number of specific controls over how companies can use their capital, but perhaps the two most important are the rules relating to capital reduction and company distributions.

• A reduction of share capital occurs when any money paid to a company in respect of a member's share is returned to the member.

Reduction of Share Capital

• Section 641 sets out three particular ways in which the capital can be reduced by: a) Removing or reducing liability for any capital remaining as yet unpaid. In effect the company is

deciding that it will not need to call on that unpaid capital in the future. b) Cancelling any paid up capital which has been lost through trading or is unrepresented by in the

current assets. This effectively brings the balance sheet into balance at a lower level by reducing the capital liabilities in recognition of a loss of assets.

c) Repayment to members of some part of the paid-up value of their shares in excess of the company’s requirements. This means that the company actually returns some of its capital to its members on the basis that it does not actually need that level of capitalisation to carry on its business.

• Limited companies can without restriction cancel unissued shares. It may do so if: i) It has power in the articles ii) It passes a special solution to alter its articles

• The procedures through which a company can reduce its capital are laid down by ss.641–653 Companies Act 2006.

Procedure of Reduction of Share Capital:

• Section 641 states that, subject to any provision in the articles to the contrary, a company may reduce its capital in any way by passing a special resolution to that effect. In the case of a public company any such resolution must be confirmed by the court. In the case of a private company, however, it is also possible to reduce capital without court approval as long as the directors issue a statement as to the company’s present and continued solvency for the following 12 months (ss.642 & 643). It is also called declaration of solvency.

• The special resolution, a copy of the solvency statement, a statement of compliance by the directors confirming that the solvency statement was made not more than 15 days before the date on which the resolution was passed, and a statement of capital must be delivered to the registrar within 15 days of the date of passing the special resolution. The methods of reduction of share capital have been discussed above.

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• Under s.648 the court may make an order confirming the reduction of capital on such terms as it thinks fit. In reaching its decision the court is required to consider the position of creditors of the company.

Requirement of Approval by Court:

• The court also takes into account the interests of the general public. In any case the court has a general discretion as to what should be done. If the company has more than one class of shares, the court will also consider whether the reduction is fair between classes.

• When a copy of the court order together with a statement of capital is delivered to the registrar of companies a certificate of registration is issued (s.649).

• A company can address the creditors concerns regarding the reduction of its share capital by adopting one of the following approaches:

Protection against Creditors’ Concerns

a) Paying back all the loans taken from the creditors b) By giving the court a bank guarantee

• Share Capital can be reduced by the company for any of the below mentioned grounds: Reasons for Reduction of Share Capital

i) To bring the value of assets in line with the capital, if the assets had suffered any impairment loss.

ii) The company makes a complex arrangement to change its financial structure by replacing share capital with loan capital.

iii) The company plans to completely extinguish a particular class of shares.

Paying a dividend is the usual way for a company to distribute a share of its profits among the shareholders. There are detailed statutory rules as to distributions in CA 2006, sec829 to sec853.

Rules of Dividends

Dividends are the return received by shareholders in respect of their investment in a company. Subject to any restriction in the articles of association, every company has the implied power to apply its profits in the distribution of dividend payments to its shareholders. The long-standing common law rule is that dividends must not be paid out of capital (Flitcroft’s case 1882). The current rules relating to the payment of dividends are to be found in part 23 Companies Act (CA) 2006. The Act governs, and imposes restrictions on distributions made by all companies, both public and private. Section 829 defines distribution as any payment, cash or otherwise, of a company’s assets to its members, except for the categories stated in the section, which include the issue of bonus shares, the redemption of shares, authorised reductions of share capital, and the distribution of assets on winding up.

• Dividends can be declared by the following methods: Dividend Declaration

• In a public company, the usual practice is for the directors to declare and pay an interim dividend based on the accounts for the first six months of the company's financial year.

• The directors recommend a final dividend to the Annual General Meeting based on the profits made in the full year, and the AGM then passes a resolution declaring that dividend.

• In private companies the practice varies widely. If the company is making profits there are essentially two ways in which those profits can be paid over to the people who own and run the company. One is for the directors (or others, e.g. family members) to be paid salaries or fees for the work they have done for the company. The other way of taking money out of the company is for the company to pay

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dividends. These are paid to shareholders (rather than directors) and (unless the company has special articles) will be paid in accordance with the rights of the respective shareholders.

• Section 830 goes on to provide the basic condition for distribution, applying to all companies, which, in essence, is that they must have ‘profits available for that purpose’. This term is defined in the section as accumulated realised profits less accumulated realised losses, with profit or loss being either revenue or capital in origin.

Distributable Profit

• It is important to note that the use of the term accumulated means that any previous years’ losses must be included in determining the distributable surplus, and that the requirement that profits be realised prevents payment from purely paper profit resulting from the mere revaluation of assets. Section 841 provides that all losses are to be treated as realised except where a general revaluation of all fixed assets has taken place.

• The foregoing realised profits test applies to both private and public companies, but public companies face an additional test in relation to distributions, in that s.831 requires that any distribution of dividend must not reduce the value of the company’s net assets below the aggregate of its total called up share capital and undistributable reserves (share premium, capital redemption reserve, unrealized profits’ reserve or any other capital reserve).

Dividends of Public Companies:

• The effect of this rule is that public companies have to account for changes in the value of their fixed assets, and are required to apply an essentially balance sheet approach to the determination of profits.

• Under the rule in Flitcroft’s case any directors of a company who breached the distribution rules, and knowingly paid dividends out of capital, were held jointly and severally liable to the company to replace any such payments made. The fact that the shareholders might have approved the distribution did not validate the illegal payment (Aveling Barford Ltd v Perion Ltd (1989)).

Violation of Dividend Rules

• Directors are held responsible since they either recommend to members in a general meeting that a dividend should be declared or they declare interim dividends.

The liability of directors arises in the following circumstances: a) The payment of dividend out of capital was done in the complete knowledge of directors. b) The dividend was declared without the complete preparation of financial statements and

subsequently resulted in payment out of capital. c) Declaration of unlawful dividend by misinterpretation or wrongful application of law and

constitution. Responsibilities of members: i) If members have knowledge of unlawful dividend, they can obtain an injunction to stop the

company from making the payment. ii) Members cannot knowingly approve payment of an unlawful dividend at AGM. Liabilities of members: i) Section 847 Companies Act 2006 restates the common law rule, providing that shareholders, who

either know or have reasonable grounds for knowing that any dividend was paid from capital (unlawful dividend), shall be liable to repay any such money received to the company.

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ii) The shareholders may have the option to indemnify the directors for payments they might have already received it (Moxham v Grant (1900)).

iii) To the extent that the distribution is made in excess of the distributable profits as determined by properly prepared accounts, any liability of the director extends to the repayment of part which is unlawful. Similarly, any shareholder who either knew or had reasonable grounds for knowing that the dividends were improperly paid will have to recompense the company to the extent that their dividends were overpaid.

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Company Directors and other Company Officers

Section 250 of the Companies Act 2006, defines a director as including ‘any person occupying the position of a director, by whatever name called.’

Director:

Kinds of Directors: i) De Jure director

It is person who is formally and legally appointed or elected as a director in accordance with the articles of association of the firm, and gives written consent to hold the office of a director. He or she enjoys full rights and privileges of a director, and is held individually and collectively (with other directors) liable for the acts and/or negligence of the firm.

ii) De-facto Director

Any person who is not legally appointed as a director but performs the functions of a director. Whether or not such a person fulfills the qualifications of a director, or enjoys the rights and privileges of a director, he or she is generally held liable as a de jure director.

iii) Shadow Director

• The concept of a shadow director is introduced in s.251 CA 2006. • A shadow director is a person who, although not actually appointed to the board, instructs the

directors of a company as to how to act. It is a person’s function rather than their title that defines them as a director. Such individuals are subject to all the rules applicable to ordinary directors. A person is not to be treated as a shadow director if the advice is given in a purely professional capacity.

Thus, a business consultant or a company doctor (another title given to someone called in to give advice to companies in trouble), would not be liable as a shadow director for the advice they might give to their client company.

iv) Executive Director

• Executive directors usually work on a full-time basis for the company and is employed through a service contract.

• Section 227 of the Companies Act 2006 defines a director’s service contract as a contract under which a director of the company undertakes personally to perform services (as director or otherwise) for the company. Section 228 requires a copy of every director’s service contract to be kept available for inspection and under s.229 company members have the right to inspect and request a copy of such contracts.

• Additionally s.188 of the Companies Act 2006, relating to directors’ long-term service contracts, requires that no such contract may be longer than two years, unless it has been approved by resolution of the members of the company.

v) Non-Executive Director

• Non-executive directors or outsider directors do not usually have a full-time relationship with the company; they are not employees and only receive directors’ fees. The role of the non-executive directors, at least in theory, is to bring outside experience and expertise to the board of directors. They are also expected to exert a measure of control over the executive directors

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to ensure that the latter do not run the company in their, rather than the company’s, best interests.

• It is important to note that there is no distinction in law between executive and non-executive directors and the latter are subject to the same controls and potential liabilities as are the former.

• The UK Corporate Governance Code requires that there should be a clear division of responsibilities at the head of a company between the running of the board of directors and the executive responsibility for the running of the company’s business. It also requires that the roles of chairman and chief executive should not be exercised by the same individual.

Separation of Role of Chairman and CEO

• The Chairman of the Board (of Directors) of a company, is (or should be) the chief representative of the shareholders. The CEO of the company, should be, by definition, the leader of the managers.

Role of Chairman • Article 12 of the model articles of association for public limited companies provides for the board of

directors to appoint one of their members to chair their meetings. The UK Corporate Governance Code explains that the chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role. The chairman is responsible for setting the board’s agenda and ensuring that adequate time is available for discussion of all agenda items, in particular strategic issues.

• The chairman should ensure effective communication with shareholders. In relation to general meetings, although s.319 provides that any member may act as chair, this is subject to the provision of the articles and Model Article 31 states that if the directors have appointed a chairman, the chairman shall chair general meetings.

• The chairman conducts the meeting and must preserve order and ensure that it complies with the provisions of the companies’ legislation and the company’s articles. He or she is under a general duty at all times to act bona fide in the interests of the company as a whole, and thus must use his or her vote appropriately.

Role of Chief executive • Under Article 5 of the model articles, the board of directors may delegate any of the powers, which are

conferred on them under the articles, to such person or committee as they think fit and any such act of delegation may authorize further delegation of the directors’ powers by any person to whom they are delegated.

• In this way, the board may appoint one or more managing directors or chief executives who will have the authority to exercise all the powers of the company and to further delegate those powers as they see fit. Article 5 also makes provision for the board of directors to revoke any delegation in whole or part, or alter the terms and conditions under which it may be operated.

• There exists no upper age limit for the directors; however the minimum age requirement for a director is 16.

Directors Age requirement and their Method of Appointment

• Directors are normally appointed by an ordinary resolution.

• Directors are paid in accordance to the terms of their service contracts Remuneration, Reimbursement and Compensation for Directors

• Directors are entitled to be reimbursed for the expenses they incur in the exercise of their duty.

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• Any non-contractual compensation for the loss of office can only be paid to the director after the same has been approved by the members in the general meeting.

• Approval is not required where the company is contractually bound to make payments

Quoted companies are required to include a Director’s remuneration report as part of their annual report, which is also audited. The report must cover the following:

Remuneration Report

• The details of each individual directors’ remuneration package • The company’s remuneration policy • The role of the board and remuneration committee in deciding the remuneration of directors

A director can vacate his office in the following ways; Method of the Director’s Vacation from Office

i) Resignation ii) Death iii) Dissolution of Company iv) Not contesting for re-election v) Disqualification vi) Removal of office by an ordinary resolution after giving a special notice

• At the first AGM of the company all directors shall retire. Retirement and Re-Election Rules

• At every subsequent AGM any directors appointed by the other directors since the last AGM shall retire.

• Directors who were not appointed or re-elected at one of the preceding two AGMs shall retire.

i) In order for a shareholders to propose a resolution for directors removal they must either hold at least 10% of the paid up share capital or 10% of the voting rights where the company does not have shares.

Limitations on the Removal of Directors:

ii) A director can also use his own voting rights (as a member) and can defeat a resolution of his removal

iii) Class rights agreement can be drafted that each class must be present at a general meeting to constitute a quorum.

The Company Directors Disqualification Act (CDDA) was introduced in an attempt to prevent the misuse of the company form by unscrupulous individuals looking to hide behind the corporate personality of the company to avoid personal liability for their actions. Directors can be disqualified on one of the following grounds:

Disqualification of Directors

i) Bankrupt ii) Unsound Mind iii) Absent for board meetings for a period of three consecutive months without leave iv) Convicted of an indictable offence v) Person has been persistently in default of legislation vi) Guilty of crime of fraud in the operation of company vii) Liable for fraudulent trading

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• The period of disqualification depends upon the seriousness of the offense. The individual concerned may be disqualified from acting as a company director for a maximum period of 15 years. Sec.13 makes it a criminal offence for anyone to act in contravention of a disqualification order. Any such person is liable for the following penalties:

• Imprisonment for up to two years and/or a fine, on conviction on indictment, and • Imprisonment for up to six months and/or a fine not exceeding the statutory maximum, on summary

conviction.

Courts can impose a lower period of disqualification due to one or more of the following reasons: Mitigating Circumstances in Relation to Disqualification

a) Lack of Dishonesty b) Loss of director’s own money c) Absence of personal gain d) Efforts to mitigate e) Likelihood of re-offending

• Directors’ powers are stated in the articles of the company Powers of Directors

• They must exercise their powers in the best interest of the company and for the benefit of the company.

• They can appoint or remove directors vide an ordinary resolution Members’ Control of Directors

• Articles can allow members to pass special resolution to make directors act in a particular manner • Members have a power to ratify any act of the director which would otherwise be regarded as a

breach.

• Chief executive is also known as managing director Chief Executive and Agency

• He has apparent authority to act as agent of the company • He can enter into contracts with the third parties on behalf of the company • They have the authority to bind the company into contracts • They can be terminated form office like any other director Freeman &Lockyer v Buckhurst Park Properties: It was held that the company was bound by the contract as the other directors by their actions had represented that the managing director had the authority to enter into contracts on behalf of the company.

Directors have seven major duties under the companies act 2006: Director Duties

i) Duty to act within the powers for the best interest of the company. Section 171 CA replaces existing similar common law duties and requires directors to act in accordance with the company’s constitution. Section 17 of the Act provides that a company’s constitution includes not only the company’s articles of association but the resolutions and agreements specified in s.29, which includes special resolutions passed by the company and any resolutions or agreements that have been agreed to, or which otherwise bind classes of shareholders.

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Directors are also required to use powers only for the purposes for which they were conferred. This is a restatement of the long-standing ‘proper purposes doctrine’. Howard Smith v Ampol Petroleum

: It was held that the allotment of shares was invalid as directors had breached their fiduciary duty (duty of trust) for the purpose of destroying an existing majority.

ii) Duty to promote the success of the company for the benefit of members as a whole Section 172 CA 2006 replaces the previous common law duty on directors to act in good faith in the best interest of the company. In the course of making their decisions under Part 1 of the section, then, directors are now required to have regard to each of the following list of matters: • the likely consequences of any decision in the long term, • the interests of the company’s employees, • the need to foster the company’s business relationships with suppliers, customers and others, • the impact of the company’s operations on the community and the environment, • the desirability of the company maintaining a reputation for high standards of business

conduct, and • the need to act fairly as between members of the company. The above list is non-exhaustive and directors must also have regard to other non-specific matters.

iii) Duty to exercise independent judgment. They should not delegate their decision making powers to anyone else.

iv) Duty to exercise reasonable skill, care and diligence while exercising their duties v) Duty to avoid conflict of interest.

A director must not profit from his position of power. Section 175 CA 2006 reflects the long-standing common law rule that directors, as fiduciaries, must respect the trust and confidence placed in them and should do nothing to undermine or abuse their position as fiduciaries. The practical effect of the rule is that any conflict of interest must be authorized by the members of the company, unless some alternative procedure is properly provided. In the case of a private company, a conflict can be authorized by the other directors of the board unless the company’s constitution provides to the contrary. The position is the same for public companies, except that the constitution must expressly permit authorization by the board. Regal Hastings v Gulliver: held that the defendants had made their profits “by reason of the fact that they were directors of Regal and in the course of the execution of that office”. They therefore had to account for their profits to the company. Industrial Development Consultants v Cooley: Managing director was held liable as he had diverted a corporate opportunity from the company towards himself.

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vi) Directors have a duty not to accept benefit from the third parties which creates a conflict of interest. Under s.176, a director must not accept a benefit from a third party, which is conferred by reason of (a) his being a director or (b) his doing (or not doing) anything as director. This duty is an aspect of the previous general duty to avoid conflicts of interest, but it has been stated separately in order to ensure that the obtaining of a benefit from a third party by a director can only be authorized by members of the company rather than by the board.

vii) Directors have a duty to declare interest in any proposed or existing transaction

by written notice, general notice or verbally at a board meeting. Under s.177 CA 2006 a director must declare to the other directors any situation in which they are in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company. Again this further emphasizes the duty to avoid a conflict of interests by ensuring that directors are transparent about personal interests, which could, even remotely, be seen as affecting their judgment.

Several remedies exist for the breach of duty by the director: Remedies against Directors

i) Account for personal gain ii) Indemnify the company for the loss iii) Rescission of the contract iv) Court can declare an act as ultra vires Company can ratify a director’s breach of duty by passing a resolution or by altering its articles.

• Directors are not liabel fro the actions of other directors Directors Liability for the Actions of Fellow Directors:

• If the breach of duty of other directors is in their knowledge they have to duty to inform members.

Personal liability of director can arise in the following manner: Personal Liability of Directors:

i. Where veil of incorporation is lifted ii. Where directors of company have unlimited liability by reason of the articles iii. Directors can have personal liability o creditors in situations where they extend their personal

guarantee for the repayment of loan. iv. If the directors commit wrongful or fraudulent trading they will be held personally liable.

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Other Company Officers

• It is mandatory for a public company to have a company secretary but private companies are not required to have one.

Company Secretary

• Every public company is required to have a secretary, who is one of the company’s officers for the purposes of the Companies Act 2006 and who, in addition, may, or may not, be a director of the company.

• Private companies are no longer required to appoint company secretaries, although they still can do so if they wish.

Appointment Section 1173 Companies Act (CA) 2006 includes the company secretary amongst the officers of a company. Every public company must have a company secretary and s.273 of the CA requires that the directors of a public company must ensure that the company secretary has the requisite knowledge and experience to discharge their functions. Section 273(2) & (3) sets out the following list of alternative specific minimum qualifications, which a secretary to a public limited company must have: • They must have held office as a company secretary in a public company for three of the five years

preceding their appointment to their new position; • They must be a member of one of a list of recognized professional accountancy bodies, including

ACCA; • They must be a solicitor or barrister or advocate within the UK; • They must have held some other position, or be a member of such other body, as appears to the

directors of the company to make them capable of acting as company secretary. Duties The duties of company secretaries are set by the board of directors and therefore vary from company to company, but as an officer of the company, they will be responsible for ensuring that the company complies with its statutory obligations. The following are some of the most important duties undertaken by company secretaries: • To ensure that the necessary registers required to be kept by the Companies Acts are established and

properly maintained; • To ensure that all returns required to be lodged with the Companies Registry are prepared and filed

within the appropriate time limits; • To organize and attend meetings of the shareholders and directors; • To ensure that the company’s books of accounts are kept in accordance with the Companies Acts and

that the annual accounts and reports are prepared in the form and at the time required by the Acts; • To be aware of all the statutory requirements placed on the company’s activities and to ensure that the

company complies with them; • To sign such documents as require their signature under the Companies Acts. Powers Although old authorities, such as Houghton & Co v Northard Lowe & Wills (1928) suggest that company secretaries have extremely limited authority to bind their company, later cases have recognized the reality of the contemporary situation and have extended to company secretaries potentially extensive powers to bind their companies. As an example consider Panorama Developments Ltd v Fidel is Furnishing Fabrics Ltd (1971). In this case the Court of Appeal held that a company secretary was entitled ‘to sign contracts connected with the administrative side of a company’s affairs, such as

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employing staff and ordering cars and so forth. All such matters now come within the ostensible authority of a company’s secretary.’

• The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. Auditors have an extremely important role to play in that regard: they are appointed to ensure that the interests of the shareholders in a company are being met.

Company Auditor

• Their key function is to produce independent and authoritative reports confirming, or otherwise, that the accountancy information provided to shareholders is reliable.

Qualifications • The essential requirement for any person to act as a company auditor is that they are eligible under

the rules, and a member of, a recognized supervisory body. This in turn requires them to hold a professional accountancy qualification.

‘Supervisory bodies’ are ones established in the UK to control the eligibility of potential company auditors and the quality of their operation. The recognized supervisory bodies are: a) The Institute of Chartered Accountants in England and Wales; b) The Institute of Chartered Accountants of Scotland; c) The Institute of Chartered Accountants in Ireland; d) The Association of Chartered Certified Accountants; and e) The Association of Authorized Public Accountants. The first four bodies mentioned above are also recognized as ‘qualifying bodies’, meaning that accountancy qualifications awarded by them are recognized professional qualifications for auditing purposes. A person is ineligible for appointment as auditor if they are either: a) an officer or employee of the company (the auditor being specifically declared not to be an officer or

employee); and/or b) a partner or employee of a person in (a) above, or is in a partnership of which such a person is a

partner. Appointment and remuneration • Every company must appoint auditors for each financial year. • Auditors are usually appointed in a general meeting vide an ordinary resolution • They hold office from 28 days after the meeting in which accounts are laid until the end of the

corresponding year. • Secretary of state may appoint auditor if the members fail • Usually directors fix their remuneration Removal or Vacation of Auditor from office Auditor can vacate office in the following ways: • Resignation • By ordinary resolution • Does not wish to be reappointed

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Actions to be adopted once Auditors resigns: • Once the auditor resigns he must:

a) Circulate a statement of circumstances of his departure if it is a quoted company. b) If it is a non-listed or private company then if there are no circumstances then he should state

that there exists nothing of relevance to be brought to the notice. • Company must copy of the circumstances to who so ever entitled to receive it. • Auditors have the right to circulate statement to the members or requisition the meeting and explain

the reason of his departure. Rights and duties • The auditors have the right of access at all times to the company’s books and accounts, and officers of

the company are required to provide such information and explanations as the auditors consider necessary. It is a criminal offence to make false or reckless statements to auditors.

• A company’s auditors are entitled to require from the company’s officers such information and explanations as they think necessary for the performance of their duties as auditors. It is a criminal offence for an officer of the company to provide misleading, false or deceptive information or explanations. However, it is not an offence for them to fail to provide any information or explanation that the auditors require of them.

• Auditors are entitled to receive notices and other documents in connection with all general meetings, to attend such meetings and to speak when the business affects their role as auditors. Where a company operates on the basis of written resolutions rather than meetings, then the auditor is entitled to receive copies of all such proposed resolutions as are to be sent to members.

• Auditors are required to make a report on all annual accounts laid before the company in a general meeting during their tenure of office. They are specifically required to report on certain issues: a) whether the accounts have been properly prepared in accordance with the Act; and b) whether the individual and group accounts show a true and fair view of the profit or loss and state

of affairs of the company and of the group, so far as concerns the members of the company; c) whether the information in the Directors' Report is consistent with the accounts presented.

Auditors are required to investigate: a) Whether the company has kept proper accounting records and obtained proper accounting returns

from branches. b) Whether the accounts are in agreement with the records; and state:

1. whether they have obtained all the information and explanations that they considered necessary; 2. whether the requirements concerning disclosure of information about directors’ and officers’

remuneration, loans and other transactions have been met; and rectify any such omissions. Audit Exceptions • Usually small companies are totally exempted from audit if its turnover is less than £6.5 million and

balance sheet is not more than £3.26 million having 50 or less employees. • This exemption does not apply to a public company, banking or insurance companies. • Members holding 10% or more capital of any company can veto the exemption Indemnification of Auditors: • Any agreement between the auditor and the company which seeks to indemnify the auditor for their

negligence or breach of duty is void. However, auditor liability can be limited vide an agreement.

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Company Meetings and Resolutions

• The decision making power in the company mainly vests with the Members. Company Meetings

• The decisions reached in the meetings are binding only if the meetings are convened in accordance with the rules and procedures prescribed.

There are mainly two kinds of general meetings: Kinds of General Meetings:

i) Other General Meetings ii) Annual General Meeting

• Directors and the Members of the company have the power to call a general meeting General Meetings:

• Directors have the power under the articles of association to call the general meeting • Members can make a requisition to the directors to call the general meeting under sec 303 of the

Company’s Act 2006.

Procedure of Notice: 14 days clear notice must be given to the members in advance of the meeting Procedure for Members Requisitioning a Meeting: i) The members of companies must hold at least 5% of the paid up share capital holding voting

rights. ii) A signed requisition stating the objects of meeting must be sent to the registered office of the

company. iii) Directors should send a notice to convene a meeting within 21 days of the requisition iv) The meeting must be held within 28 days of the notice v) If the directors fail to call a meeting within 21 days then the members may convene the meeting

with 3 months from the date of the deposit of the requisition.

• An annual general meeting (commonly abbreviated as AGM) is a mandatory (required by law), yearly gathering of a publicly traded company's executives, directors and interested shareholders.

Annual General Meeting:

• An AGM is held every year to elect the board of directors and to inform their members of previous and future activities. At the annual general meeting, the CEO and director typically speak, and the company presents its annual report.

• Shareholders with voting rights vote on current issues, such as appointments to the company's board of directors, executive compensation, dividend payments and auditors. Shareholders who do not attend the meeting in person are asked to vote by proxy, which can be done online or by mail.

• It is mandatory for the public companies to hold AGM within six months of the year end. However, it is not mandatory for the Private companies.

• Directors must call AGM in accordance with the rules and procedures prescribed

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Procedure for Calling AGM: i) Notice in writing must be sent ii) At least 21 days of notice should be given iii) Shorter notice is valid only if all members agree Role of Court• Court upon an application of a director or a member can order to hold a meeting and can also rule on

the quorum

:

Under the provisions of the Companies Act (CA) 2006 there are three main types of resolutions: ordinary resolutions, special resolutions and written resolutions.

Kinds of Resolutions:

(a) An ordinary resolution

• Section 282 CA 2006 defines an ordinary resolution of the members generally, or a class of members, of a company, as a resolution that is passed by a simple majority.

(b) A special resolution

• A special resolution is required for major changes in the company such as the change in name, reduction of share capital or winding up of the company.

• A special resolution of the members (or of a class of members) of a company means a resolution passed by a majority of not less than 75%, determined in the same way as for an ordinary resolution (CA s.283). If a resolution is proposed as a special resolution, it must be indicated as such, either in the written resolution text or in the meeting notice.

• Where a resolution is proposed as a special resolution, it can only be passed as such although anything that may be done as an ordinary resolution may be passed as a special resolution (s.282(5)). There is no longer a requirement for 21 days’ notice where a special resolution is to be passed at a meeting.

(c) A written resolution

• Private limited companies are no longer required to hold meetings and can take decisions by way of written resolutions (s.281 CA 2006). The CA 2006 no longer requires unanimity to pass a written resolution. It merely requires the appropriate majority of total voting rights, a simple majority for an ordinary resolution (s.282(2)) and a 75% majority of the total voting rights for a special resolution (s.283(2)).

• By virtue of s.288(5) CA 2006 anything which in the case of a private company might be done by resolution in a general meeting, or by a meeting of a class of members of the company, may be done by written resolution with only two exceptions:

• The removal of a director; and • The removal of an auditor.

Both of these procedures still require the calling of a general meeting of shareholders. A written resolution may be proposed by the directors or the members of the private company (s.288 (3)). Under s.291 in the case of a written resolution proposed by the directors, the company must send or submit a copy of the resolution to every eligible member. This may be done as follows: • Either by sending copies to all eligible members in hard copy form, in electronic form or by means of

a website;

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• By submitting the same copy to each eligible member in turn or different copies to each of a number of eligible members in turn;

• By a mixture of the above processes. The copy of the resolution must be accompanied by a statement informing the members both how to signify agreement to the resolution and the date by which the resolution must be passed if it is not to lapse (s.291 (4)). It is a criminal offence not to comply with the above procedure, although the validity of any resolution passed is not affected. Agreement to a proposed written resolution occurs when the company receives an authenticated document, in either hard copy form or in electronic form, identifying the resolution and indicating agreement to it. Once submitted, agreement cannot be revoked. The resolution and accompanying documents must be sent to all members who would be entitled to vote on the circulation date of the resolution. The company’s auditor should also receive such documentation (s.502 CA 2006). • Members holding 5% of the voting rights may request a written resolution. • The default period for agreement on a written resolution is 28 days.

• Members have the authority to waive the required notice period by the following method: Timings of Notices

i) In public companies all members must consent in respect of AGM ii) In other cases members holding 90% of the issued shares or voting rights must consent.

However, 95% is required by a public company

• Special Notice is a notice of 28 days before the meeting Special Notice:

• This notice is given when a resolution concerns the removal or appointment of the auditor or the director.

The members of a private company may require the company to circulate a resolution: Procedure for Members to Requisition a Resolution

• If they control 5% of the voting rights (or a lower percentage if specified in the company’s articles). • Resolution must be in hardcopy and should be sent at least 6 weeks before the AGM or General

meeting. • They can also require a statement of not more than 1,000 words to be circulated with the resolution

(s.292)

The decision of the meeting is only binding if: Necessities for an Effective Meeting:

i) It is properly convened by notice. ii) It fulfills the quorum requirement. iii) The Chairman presides it. Note that chairman has a casting vote if the articles permit. iv) The voting procedure of the resolutions is properly complied.

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Quorum of Meetings

• Two members must be present to complete the quorum. However both the persons may not be members. Proxies can also be appointed.

It is the number of members of a company required to be present to transact the business legally

Definition: Proxy and Rules of Appointment

An agent legally authorized to act

on behalf of another party. E.g. a person representing a shareholder at company meetings.

• Any member can appoint proxy Rules of appointment

• The proxy does not necessarily have to be member • They have the right to speak at the meetings • They have the right to vote at the meetings • They have the right to demand a poll • Notice of proxy appointment must be given to the company at least 48 hours before the meeting to the

company.

i) Show of hands: Methods of Voting:

Show of hands is a method of voting in which every member has one vote irrespective of his number of shares. Chairman has the authority to call the votes by show of hands unless the other method is demanded.

ii) Voting by Poll

It is a method of voting which allows members to use their votes in accordance to their shareholding rights. Voting by poll can be demanded by: i) Not less than five members ii) Members representing not less than one tenth of the total voting rights iii) Members holding shares which represent not less than one tenth of the paid up capital.

• Minutes of the meeting must be signed by the chairman. Minutes of Meetings

• The record of the minutes of the meeting must be kept with the company for 10 years. • All the members have the right to inspect the record of the minutes of the meeting.

• Class meetings are held for either the shareholders holding shares in different classes or under arrangement with creditors.

Class Meetings:

• If the company has more than one class of share, it may be necessary to call a meeting of that class to approve a proposed variation of the rights attached to their shares.

• The Quorum for class meeting is fixed at two persons (holding at least one third of nominal value of issued share capital) unless the class only consists of one person.

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• Special rules exist for single member private companies. Single Member Private Companies:

• Sole member should keep a written record of the decisions that would have been taken by him at the general meeting.

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Insolvency and Administration

• Winding up, or liquidation, is the process whereby the life of the company is brought to an end. It is a formal and strictly regulated procedure through which the company’s assets are realized and distributed to its creditors and members. The procedure is governed by the Insolvency Act (IA) 1986.

Liquidation:

• The directors, creditors or the members can initiate the process of liquidation.

• A liquidator is the officer appointed when a company goes into winding-up or liquidation who has responsibility for collecting in all of the assets of the company and settling all claims against the company before putting the company into dissolution.

Liquidator:

Following factors exist when liquidation commences: i) All directors’ powers to manage cease ii) Dealing in shares is not allowed iii) Changes in members is not allowed iv) Company documents and website must state that the company is in liquidation

There are two kinds of liquidation: Kinds of Liquidation:

i) Voluntary ii) Compulsory

There exist two types of voluntary liquidation: Voluntary Liquidation

i) Members’ voluntary liquidation (Company is solvent) ii) Creditors’ voluntary liquidation ( Company is insolvent)

1. Members’ voluntary winding-up can be resorted to by solvent companies and thus requires the filing of Declaration of Solvency by the Directors of the company with the Registrar. Creditors’ winding-up, on the other hand, is resorted to by insolvent companies or by application to court.

Distinction between ‘Members’ Voluntary Winding-up’ and ‘Creditors’

2. In members’ voluntary winding-up there is no need to have creditors’ meeting (as it is assumed that their debts will be paid in full). But, in the case of creditors’ voluntary winding-up, a meeting of the creditors must be called immediately after the meeting of the members.

3. Liquidator, in the case of members’ winding-up, is appointed by the members. But in the case of creditors’ voluntary winding-up, if the members and creditors nominate two different persons as liquidators, creditors’ nominee shall become the liquidator.

4. In the case of Creditor’s voluntary winding-up, if the creditors so wish, a ‘Liquidation Committee’ comprising of up to five representatives of the creditors may be appointed. In the case of Members’ voluntary winding-up, there is no provision for any such Committee.

• Liquidation can commence by an ordinary resolution (if articles permit) or by a special resolution. Members Voluntary Liquidation

• The most essential element of this liquidation is the declaration of solvency by the directors of the company.

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• A declaration of solvency is a statutory declaration made by the directors of the company, to the Registrar, which lists the assets and liabilities of a firm, and seeks the voluntary bankruptcy to show that the entity is capable of repaying what it owes within 12 months.

Statutory Declaration:

• It is a criminal offence if a director makes a statutory declaration without having reasonable grounds. • The declaration must be made not more than 5 weeks before the resolution to windup is passed and

it must be delivered to the registrar within 15 days after the meeting of the members in which the resolution of winding up is passed.

The liquidator calls meetings of members: i) Within three months after each anniversary of the commencement of the winding up and should

lay before it an account of his transactions during the year. ii) When the liquidation is complete, to lay before it his final accounts.

• The formal process of a Creditors Voluntary Liquidation means that an insolvent company can be closed in an official and professional manner.

Creditors Voluntary Liquidation

• If the directors fail to make a statutory declaration of solvency then the winding up is converted into the creditors’ voluntary winding up. Where a voluntary liquidation proceeds by way of creditor's voluntary liquidation, a liquidation committee may be appointed.

Procedure: • Directors convene a general meeting of members to pass a special resolution • Creditors meeting must also be convened within 14 days of the members meeting. Members in their meeting can: a) Pass a resolution to windup the company b) Appoint a liquidator c) Appoint at least five of its representative to be part of the liquidation committee. Creditors can appoint a liquidator of their choice in their meeting and their choice will prevail over the members’ choice. However, if the creditors decide not to appoint a liquidator then the members’ liquidator will continue in the office.

The members’ liquidator will be in office for the interim period before the creditors decide to make their appointment. This interim period has been exploited by the members through their liquidator for the purpose known as centre binding.

Principle of Centre binding

Re Centre Binding ltd 1966: In this case the liquidator appointed by the members had disposed of the assets before the creditors could make their appointment. The court held that the liquidator had the power to act from when he was appointed until the creditors’ meeting and so could dispose of the company's assets in the meantime. However, the powers of the members’ liquidator in the creditor’s winding up have now been restricted to: i) Taking control of the company’s property ii) Disposing of perishable goods iii) Doing things which are necessary for the protection of company’s assets.

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iv) The member’s liquidator will require the leave of the court if he decides to perform any act other than those listed above.

• A compulsory winding up is a winding up ordered by the court under s.122 IA 1986 and has to be distinguished from the voluntary winding up procedures, either a members’ voluntary winding up or a creditors’ voluntary winding up, neither of which involve the court action to initiate them.

Compulsory Liquidation:

• The seven grounds under which a registered company may be wound up by the court under s.122 Insolvency Act 1986 (IA), are as follows: (i) the company has passed a special resolution that it be wound up by the court; (ii) it is a public company which has not within a year since its registration obtained a trading

certificate with the share capital requirements; (iii) it is an ‘old public company’ which has failed to re-register; (iv) it has not commenced business within a year from its incorporation or has suspended its

business for a whole year; (v) (except in the case of a private company limited by shares or by guarantee) the number of

members is reduced below two; (vi) the company is unable to pay its debts; (vii) the court is of the opinion that it is just and equitable that the company should be wound up.

• The most common of these grounds are (vi) and (vii). • If for any reason the members of the company no longer wish to continue the business they will use

(i). Following are the statutory reasons for Compulsory liquidation: i) 122(1) (f) Company is unable to pay its debts

The creditor, in order to establish that the company is unable to pay its debts, must prove by one of the following three ways mentioned under Section 123: a) If a company with a debt exceeding £750 fails to pay it within 21 days of receiving a written

demand from the creditor and the company neglects it, then it is deemed unable to pay its debts.

b) Court has passed a judgment in favor of the creditor and against the company and the creditor is unable to enforce the judgment because the company has no assets to satisfy the judgment.

c) If the creditor satisfies the court that the company’s assets are less than its liabilities and the company is unable to pay its debts as they fall due.

ii) 122(1) (g) It is just and equitable to windup the company: • A discontented member can apply to the court to windup the company on just and equitable

grounds. • A member in order to obtain the judgment in his favor must satisfy the court that no other

remedy is available and this option has been used as a matter of last resort. Re German Date Coffee 1882: The Company was formed only with the objective to acquire German patent for the production of coffee. Unfortunately the patent was not obtained and the company started to manufacture coffee with substitutes. It was held that the company be wound up on just and equitable grounds as the purpose for which the company was formed was no longer pursued.

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Following are the consequences of compulsory liquidation: Consequences of Compulsory Liquidation:

i) The winding up is deemed to have started on the date the petition was presented. ii) Any disposition of the company’s property and any transfer of its shares after that date is void. iii) After commencement of liquidation process all the existing legal proceedings against the

company are halted. iv) Floating charge crystallizes into fixed charge. v) The employees are also dismissed automatically. vi) Management powers are vested with the liquidator. vii) The official receiver becomes liquidator. viii) The company’s property may not be seized by creditors; ix) No action can be taken against the company or its property without leave of the court; x) The directors are dismissed;

He can investigate the: Investigation Powers of the Official Receiver

i) The main causes of the company’s failure ii) Business dealing of the company If he finds any irregularities, he can report the same to the court and he can: a) Require public examination of the alleged persons b) Apply to the court for public examination where half the creditors or three quarters of the

shareholders request.

The liquidator after liquidation follows the following order in distributing the assets of the company: Mode of Payments after Liquidation:

i) Costs: Liquidator’s salary and liquidation .costs ii) Preferential Debts: Employees wages, benefits etc. iii) Debts secured by floating charges iv) Debts owed to unsecured ordinary creditors v) Deferred debts: Interest accrued and dividends declared but not paid vi) Members: Any surplus left is distributed to the members Note: Official receiver can also apply to the registrar for an early dissolution of the company, if its realizable assets will not cover his expenses and no further investigation is required.

• Administration, on the other hand, is a means of safeguarding the continued existence of business enterprises in financial difficulties, rather than merely ensuring the payment of creditors. Administration was first introduced in the IA 1986. The aim of the administration order is to save the company, or at least the business, as a going concern, by taking control of the company out of the hands of its directors and placing it in the hands of an administrator. Alternatively, the procedure is aimed at maximizing the realized value of the business assets.

Administration:

• Once an administration order has been issued, it is no longer possible to commence winding up proceedings against the company or enforce charges, retention of title clauses, or even hire-purchase agreements against the company.

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A company can be brought into administration by the followings methods: Methods of Initiating Administration

i) Administration with the court order ii) Administration without a court order

• An application to the court for an administration order may be made by a company, the directors of a company, or any of its creditors, but in addition the Enterprise Act allows the appointment of an administrator without the need to apply to the court for approval.

Administration without the Court Order:

• Such ‘out of court’ applications can be made by the company or its directors, but may also be made by any floating charge holder.

Following persons can appoint an administrator without a court order: a) Floating charge holders b) Directors c) Company

a) Floating Charge Holders

By virtue of the Enterprise Act 2002, which amends the previous provisions of the Insolvency Act 1986, floating charge holders no longer have the right to appoint administrative receivers, but must now make use of the administration procedure as provided in that Act. As compensation for this loss of power the holders of floating charges are given the right to appoint the administrator of their choice. A floating charge holder can appoint an administrator if: i) He has given a two day notice to other floating charge holders ii) His charge is enforceable Upon the expiry of two day notice period, the floating charge holder will have to submit a list of documents in the court such as notice of appointment of administrator, his statement of consent and statutory declaration that he qualifies for the appointment.

b) Company and Directors

Company or its directors can appoint an administrator if the following exist: a) Company has been subject to moratorium since last 12 months b) The company is likely to be unable to pay its debts c) Company is not in liquidation d) No administrator or receiver has already been appointed e) Neither petition for winding up or administrative order has been made nor any order of winding

up or administration in respect of the company has already been obtained. Company or its directors in order to appoint an administrator out of court must give a notice to the floating charge holder having a right to appoint an administrator.

The following persons can apply to the court for an administrative order: Administration with a Court Order

a) Company (Ordinary Resolution) b) Directors

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c) Creditors d) Justice and chief executive of the Magistrates Court due a default committed by the company on

payment of the fine imposed by the court. Administrative order is granted by the court on the following grounds: a) Company is unable to pay its debts b) Administrative order is likely to achieve the purpose of administration

Administration has the following effects on the company: Consequences of Administration:

a) Management powers are granted to the administrator b) Moratorium over the debts of the company c) Any pending petitions of winding up are dismissed Permission of the court is required for the following: a) To enforce a security over the property of the company b) Initiation or continuation of legal proceedings against the company c) To repossess the goods held under hire purchase d) To conduct forfeiture by the landlord by peaceable entry Procedure to be followed after appointment: The administrator after his appointment has the following legal duties to perform: a) Publish notice of his appointment and also send it to the company b) Notify all the creditors c) Within 7 days of his appointment send notice of appointment to the registrar d) Request a statement of affairs which must be provided within 11 days of the request e) All the business documents of the company must bear the name of the administrator f) He must manage all the affairs of the company g) Prepare his proposals and send the same to the registrar and to the creditors The administrator must within 8 weeks set out his proposals for saving the company. He must call a meeting of the creditors within 10 weeks of his appointment to approve the proposals.

The main aim of the administrator is to: Functions of the Administrator:

a) Rescue the company as a going concern, or b) Achieve a better result for the company’s creditors as a whole than would be likely if the company

were to be wound up, or c) Realize the value of the property in order to make a distribution to the secured or preferential

creditors. The administrator is only permitted to pursue the third option where: 1. He thinks it is not reasonably practicable to rescue the company as a going concern, and 2. Where he thinks that he cannot achieve a better result for the creditors as a whole than would be

likely if the company were to be wound up, and 3. If he does not unnecessarily harm the interests of the creditors of the company as a whole.

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During the administration process the administrator has the powers to: Powers of the Administrator:

• Do anything necessary for the management of the company • Remove or appoint directors • Pay out monies to secured or preferential creditors without the need to seek the approval of the court • Pay out monies to unsecured creditors with the approval of the court • Take custody of all property belonging to the company • Dispose of company property. This power includes property which is subject to both fixed and floating

charges, which may be disposed of without the consent of the charge holder, although they retain first call against any money realized by such a sale.

• The administration period is usually 12 months, although this may be extended by six months with the approval of the creditors, or longer with the approval of the court.

Tenure of Administrator

Following can also bring an end to the administrator’s tenure: a) Purpose of administration has been achieved. A notice to this effect is sent to the creditors, the court

and the companies registry. b) Period of 12 months has elapsed c) Ulterior motive of the administration has been discovered d) A creditor petition’s in the court to end the administration e) If the administrator forms the opinion that none of the purposes of the administration can be

achieved, the court should be informed and it will consider ending the appointment.

1. It keeps the company alive. Advantages of Administration

2. It provides an opportunity for the company to revive its business 3. It buys company time from the creditors 4. It prevents any person to petition in the court for compulsory liquidation 5. During the process of administration the members continue to hold shares in the company 6. Creditors can also petition in the court for administration 7. Floating charge holders can also appoint an administrator without applying to the court

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Fraudulent Behavior

Insider Dealing

:

Definition: Insider dealing is dealing in shares, on the basis of access to unpublished price sensitive information. Such activity is unlawful and is governed by part V of the Criminal Justice Act 1993 (CJA). Elements of the offence of insider dealing: Under s.52 of the Criminal Justice Act (CJA) 1993 an individual is guilty of insider dealing if (i) He encourages another person to deal in securities that are price-affected securities on a

regulated market OR (ii) He deals in securities that are price-affected securities on the regulated market OR (iii) He discloses the information, otherwise than in the proper performance of the functions of his

employment, office or profession, to another person. Following is the explanation of the above mentioned elements: (i) Section 54 specifically includes shares amongst the securities (ii) Dealing is defined in s.55, as acquiring or disposing of securities, whether as a principal or agent,

or agreeing to acquire securities.

Inside Information:

Section 56 defines ‘inside information’ as: (i) Relating to particular securities; (ii) Being specific or precise; (iii) Not having been made public; and (iv) Being likely to have a significant effect on the price of the securities.

Section 57 states that a person has information as an insider only if they know it is inside information and they have it from an inside source and covers those who get the inside information directly through either:

Who is an Insider?

(i) Being a director, employee or shareholder of an issuer of securities ( primary insider); or (ii) Having access to the information by virtue of their employment, office or profession.

• If a person receives information either directly or indirectly from the primary insider, that person is called a secondary insider.

(i) There existed no expectation of profit or loss Defences to Insider Dealing:

(ii) The information had been disclosed widely enough (iii) The transaction would have taken place regardless of the information received.

(i) If it is published in the regulated market Information Made Public?

(ii) If it is part of the public records (iii) If it can be readily acquired by any person from the general public

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On indictment the penalty is an unlimited fine and/or a maximum of seven years imprisonment. Penalty for Insider Dealing:

In essence, market abuse may occur when investors have been unreasonably disadvantaged, directly or indirectly, by others who:

Market Abuse

have used information that is not publicly available to trade in financial instruments to their advantage (insider dealing);

have distorted the price-setting mechanism of financial instruments; or have disseminated false or misleading information Directors can also be held personally liable for the public announcements made by them. (R v Bailey)

Money Laundering• Money laundering refers to the attempt to disguise the origin of money acquired through criminal

activity in order to make it appear legitimate. The aim of the process is to disguise the source of the property, in order to allow the holder to enjoy it free from suspicion as to its source.

:

• Sec 3 of the Criminal Justice Act: defines criminal property as any property which the person knows or has suspicion that it relates to a criminal conduct.

Money laundering was first made a criminal offence in the United Kingdom under the Drug Trafficking Offences Act 1986 and is now regulated by the Proceeds of Crime Act 2002, and the Money Laundering Regulations 2007 together with the specifically anti-terrorist legislation, such as the Prevention of Terrorism Act 2005.

Criminal Offences in the Proceeds of Crime Act 2002

The Proceeds of Crime Act 2002 seeks to control money laundering by creating three categories of criminal offences in relation to the activity.

(i) Laundering:

The first category of principal money laundering offences relates to laundering the proceeds of crime or assisting in that process and is contained in ss.327–329. Under s.327, it is an offence to conceal, disguise, convert, transfer or remove criminal property from England and Wales, Scotland or Northern Ireland. Concealing or disguising criminal property is widely defined to include concealing or disguising its nature, source, location, disposition, movement or ownership or any rights connected with it. These offences are punishable on conviction by a maximum of 14 years imprisonment and/or a fine.

(ii) Failure to report:

The second category of offence relates to failing to report a knowledge or suspicion of money laundering and is contained in ss.330–332. Under s.330 it is an offence for a person who knows or suspects that another person is engaged in money laundering not to report the fact to the appropriate authority. However, the offence only relates to individuals, such as accountants, who are acting in the course of business in the regulated sector. The offences set out in these sections are punishable, on conviction by a maximum of five years imprisonment and/or a fine.

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(iii) Tipping off: The third category of offence relates to tipping off and is contained in s.333, which makes it an offence to make a disclosure which is likely to prejudice any investigation under the Act. The offences set out in these sections are punishable on conviction by a maximum of five years imprisonment and/or a fine.

Every person who has knowledge of money or laundering or suspects the same must report it to the Money Laundering Reporting Officer or to Serious Organized Crime Agency.

The process usually involves three distinct phases: Process of Money Laundering:

(i) Placement is the initial disposal of the proceeds of criminal activity into apparently legitimate business activity or property.

(ii) Layering involves the transfer of money from business to business, or place to place in order to conceal its initial source.

(iii) Integration is the culmination of the previous procedures through which the money takes on the appearance of coming from a legitimate source.

The main purpose of the money laundry regulations is that the organization should establish internal systems to prevent the individuals from using the organizations to launder their money.

Money Laundry Regulations 2007:

Following are the key provisions of the regulations: • Need to have a risk assessment in place, and conduct their client due diligence on the basis of that

assessment including: • Simplified due diligence • Enhanced due diligence (including provisions regarding politically exposed persons • Need to identify the beneficial owner of a client • Are required to monitor, on an ongoing basis, their relationship with the client and have evidence of

identity in place for all clients, even those which have been on the books for many years. • Need to monitor their firm's compliance with the regulations

Bribery is defined as ‘giving someone a financial or other advantage to encourage that person to perform their functions or activities improperly or to reward that person for having already done so. So this could cover seeking to influence a decision-maker by giving some kind of extra benefit to that decision-maker rather than by what can legitimately be offered as part of a tender process.’ (Ministry of Justice Guide to the Bribery Act 2010)

Bribery:

There are four categories of offences of bribery under the Act: (i) Offences of bribing another person (s.1 BA)

It is an offence to offer a financial or other advantage to another person to perform improperly a relevant function or activity, or to reward a person for the improper performance of such a function or activity.

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(ii) Offences relating to being bribed (s.2 BA) It is an offence where a person receives or accepts a financial or other advantage to perform a relevant function or activity improperly. ‘Relevant function or activity’ includes any function of a public nature, any activity connected with a business, any activity performed in the course of a person’s employment, and any activity performed by – or on behalf of a body of persons. The activity may be performed in a country outside the UK.

(iii) Bribery of foreign public officials (s.6 BA)

It is an offence directly, or through a third party, to offer a financial or other advantage to a foreign public official (FPO) to influence them in their capacity as a FPO, and to obtain relevant business, or an advantage in the conduct of business. ‘FPO’ means an individual who holds a legislative, administrative or judicial position of any kind outside the UK, or who exercises a public function outside the UK, or is an official or agent of a public international organization.

(iv) Failure of commercial organizations to prevent bribery (s.7 BA)

It is an offence for a commercial organization (a UK company or partnership) if a person associated with it bribes another person intending to obtain or retain business, or to obtain or retain an advantage in the conduct of the business, for the organization. This could take place outside the UK. Section 8 defines associated persons as someone who performs services for – or on behalf of – the commercial organization, and, therefore, could be an employee, agent or subsidiary

If an individual is charged with bribery he can raise the following defences: Defences for Bribery

a) The act was of an intelligence agency b) It was related to armed forces

While s.7 makes it an offence for a commercial organization to fail to prevent bribery, it also provides a full defence against any such allegation. Thus, a commercial organization will have a defence if it can show that adequate procedures have been put in place to prevent persons associated with it from engaging in bribery. This defence also serves the purpose of ensuring that commercial organizations have developed procedures to prevent bribery.

Defence of Adequate Procedures:

Although no definition of ‘adequate procedures’ is provided, Ministry of Justice guidance indicates six principles which underpin the defence of adequate procedures. These principles are: (i) Proportionate procedures

The procedures taken by an organization should be proportionate to the risks it faces and the nature, scale and complexity of its activities. A small organization would require different procedures to a large multinational organization.

(ii) Top-level commitment

The top-level management should be committed to prevent bribery and foster a culture within the organization in which bribery is unacceptable.

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(iii) Risk assessment Organizations should assess the nature and extent of their exposure to risks of bribery, including potential external and internal risks of bribery. For example, some industries are considered higher risk than others, such as the extractive industries; some overseas markets may be higher risk where there is an absence of anti-bribery legislation.

(iv) Due diligence

The organization should apply due diligence procedures in respect of persons who perform services for – or on behalf of – the organization in order to mitigate bribery risks.

(v) Communication

The organization should ensure its bribery prevention policies and procedures are embedded and understood throughout the organization through internal and external communication, including training, proportionate to the risks it faces. Communication and training enhances awareness and helps to deter bribery.

(vi) Monitoring and review

The organization should monitor and review procedures designed to prevent bribery and make improvements where necessary. The risks an organization faces may change and, therefore, an organization should evaluate the effectiveness of its anti-bribery procedures and adapt where necessary. The question of whether an organization had adequate procedures in place to prevent bribery is a matter that will be determined by the courts by taking into account the circumstances of the case. The onus will, however, be on the organization to prove it had adequate procedures in place. If an organization is charged with bribery it can raise the defence that it had adequate procedures designed to prevent it.

Offences in Relation to Winding up:

Following are the offences relating to winding up:

a) Declaration of Solvency: It is a criminal offence if a director makes a statutory declaration without having reasonable grounds.

b) Fraudulent Trading: This offence is committed If the company has carried on its business with the intent to defraud the creditors of the company. Fraudulent trading can also be a civil offence but it only applied if the company is in liquidation.

c) Wrongful Trading: According to the Insolvency Act 1986, wrongful trading refers to companies that continued to carry on their daily business trading insolvent, that is, unable to pay their debts as they fall due. It is usually a case of hoping that things will improve even though they continue to spiral downward. In wrongful trading there is no intent to defraud the company’s creditors but merely a case of poor judgment or the failure of directors to carry out their responsibilities. A judgment of wrongful trading carries with it potential disqualification as a director for up to 15 years, plus other financial fines and penalties. Being held personally liable for company debts is also a possibility. Although not considered a criminal offence, wrongful trading is a civil offence which is taken very seriously by the courts.

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d) Director while being disqualified: A person who continues to act as a director even after being disqualified under the company director disqualification Act 1986 will be personally liable for the company’s debts.

e) Phoenix Companies: A phoenix company is where the assets of one Limited Company are moved

to another legal entity. Often some or all of the directors remain the same and in some cases, the new company has the same or a similar name to the failed business. The phoenix company will operate in the same sphere as its predecessor. It is a criminal offence to create such a company within 5 years of the original company being liquidated.

Offence in relation to Management and Operation of Company: a) False Accounting: A person who falsifies or conceals information required for an accounting

purpose knowing that the information is misleading may commit an offence of false accounting. b) Accounting Record: The CA 2006, s 386 sets out the duties of a company to keep accounting

records. Section 387 makes it an offence for a company to fail to comply with any provision of section 386 and in those circumstances the offence is committed by every officer of the company who is in default. It is a defence for a person charged to show that he acted honestly and that in the circumstances in which the company's business was carried on the default was excusable.

c) False Information: An offence is committed if a director's report containing the statutory statement is approved but is false. Every director who either knew that the statement was false, or was reckless to as to whether it was false and failed to take reasonable steps to prevent the report from being approved commits the offence.

d) Filling of Accounts: If the company fails to file accounts after the end of its financial year then it will be liable to fine.

e) Annual Return: Failure by the officers of the company to deliver the return on time will also be an offence under the Company’s Act 2006.

Fraud Act 2006: The offence of fraud can be committed in three different scenarios: a) False Representation: A person commits the offence of fraud by false representation if he

dishonestly makes a false representation and intends, by making the representation, to make a gain for himself or another, or to cause loss to another, or to expose another to a risk of loss.

b) Failure to Disclose information: A person commits an offence of failing to disclose information if he dishonestly fails to disclose information to another person information which he is under a legal duty to disclose and he intends, by failing to disclose the information, to make a gain for himself or another, or to cause loss to another, or to expose another to a risk of loss.

c) Abuse of Position: Fraud by abuse of position is committed where a person occupies a position in which he is expected to safeguard, or not to act against, the financial interests of another person, and he dishonestly abuses that position and intends, by means of the abuse of that position, to make a gain for himself or another, or to cause loss to another, or to expose another to a risk of loss.