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CORPORATE AND BUSINESS LAW
(GLOBAL)
Paper
F4
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ACCA QUALIFICATIONCOURSE NOTES
JUNE 2012 EXAMINATIONS
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F1 Accountant in Business / FAB Foundations in Accountancy
F2 Management Accounting / FMA Foundations in Accountancy
F3 Financial Accounting / FFA Foundations in Accountancy
F4 Corporate & Business Law (English & Global)
F5 Performance Management
F6 Taxation (UK)
F7 Financial Reporting
F8 Audit and Assurance
F9 Financial Management
P1 Governance, Risk & Ethics
P2 Corporate Reporting
P3 Business Analysis
P4 Advanced Financial Management
P5 Advanced Performance Management
P6 Advanced Taxation (UK)
P7 Advanced Audit & Assurance
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June 2012 Examinations Paper F4 GLO
1 Sharia law 1
2 Market, planned and mixed economies 5
3 International organisations 7
4 International Court of Arbitration 17
5 UNCISG 25
6 International Sale Of Goods Contracts – The Seller’s Obligations 33
7 Rights and obligations of the buyer and the seller 39
8 When does risk pass from the seller to the buyer? 47
9 Documents found in international trade 51
10 Agency Law 59
11 Partnership Law 65
12 Company Law 73
13 Company Law: Directors and Officers 93
14 Company Law: Meetings and Resolutions 107
15 Company Law: Loan Capital 115
16 Company Law: Liquidations 119
17 Company Law: Corporate Governance 125
18 Company Law: Illegalities 133
19 Capital Maintenance 141
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Paper F4 Global
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June 2012 Examinations Paper F4 GLO
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Chapter 1
Sharia law
• Sharia - awaytoawateringplace
• Quran - primarysourceofSharialaw
• Sunnah - whathascometobeacceptedconduct
• Shia,Hanafi,Maliki,Hanbali,Shafii
• thefiveschoolsoflaw
• theyprovidefurtherdetails/interpretationofacceptableconductandapplicationofthelaw
• aShariajudgemayrefertothesesecondaryschoolstodeterminehowtoapplythelaw
• ljithad - methodsofinterpretingthelaw
• taqlid - thebeliefthatnofurtherinterpretationisrequired
• ijma - oneoftwomethodsofinterpretationopentoajudgewhoisnotafollowerofthetaqlidthinking
- ijmaisaconsensusofopinionoflegalscholarsorjudges
• qiyas - theShariaequivalentofjudicialprecedent
- involvesthecomparisonoftwosimilarsituationsandtheapplicationofacceptedlawinthefirstsituationtothesecond
1June 2012 Examinations Paper F4 GlO
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Judicial precedent
• inUKcommonlaw,judgesareboundtofollowdecisionsfromearliersimilarcases
• thisconceptdoesnothaveanytrueequivalentinSharialaw,thenearestequivalentisqiyas
• judges,intheUK,mayavoidtheearlierdecisionandthereforeavoidhavingtofollowtheprecedentdecision:
• ifearlierdecisionwasmadeperincuriam(withoutcare)
• iftooobscure
• ifinconflictwithbasisprincipleoflaw
• iftoowide
• (inEurope)ifinconflictwithEuropeanlaw
• iffactsarenotmateriallysimilar
• rulesforapplyingaprecedent
• mustbebasedonapointoflaw,notapointoffact
• mustbepartoftheratiodecidendiinthepreviouscase
• materialfactsshouldbesufficientlysimilar
• priorcourtmusthavesuperiorstatusinthehierarchyofthecourts
June 2012 Examinations Paper F4 GlO
Sharia law Chapter 1 2
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Separation of powers and the rule of law
• ruleoflawreflectsthesituationwhichexistswhenmembersofasocietyabide/obeyasetofrulesgoverningbehaviour
• separationofpowers
• theprocessofmakinglawsisseparatedintothreedistinctareas:
- the legislature–anelectedbodywhichdecideswhich lawsneedtobepassedtosatisfythenation’swishes(forexample,health,defence)
- theexecutive–anelectedbodywhichmakesthedecisionswhichputthelawintoaction(forexampleintheUK,theelectedgovernment)
- thejudiciary–anon-electedbodywhichrulesondisputesaboutlaw
- thesedisputesmaybebetweengovernmentandindividuals(criminallaw)
- orbetweenindividualandindividual(civillaw)
3June 2012 Examinations Paper F4 GlO
Sharia law Chapter 1
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June 2012 Examinations Paper F4 GlO
Sharia law Chapter 1 4
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Chapter 2
Market, planned and Mixed eConoMies
• Market
• allocationofresourceisdeterminedbytheforcesofsupplyanddemand
• marketforcesdictatequantityofproductionandconsumption
• priceisdependentuponsupplyanddemand
• wealthisheldindividuallyratherthancollectively
• Planned
• allocationofresourceisdeterminedcentrallybygovernment
• pricesarefixedcentrallyforbothresourcesandproduction
• pricesarenotthereforetheresultoftheforcesofsupplyanddemand
• individualsownitemsofpersonalpropertybut…
• ...realwealthisheldbygovernment(centralorregional)
• Mixed
• asthenamesuggests,itincorporateselementsofbothmarketandplannedeconomies
• resourceallocationandproductionaredeterminedbyamixtureoffactors
• governmentdecisions(bothdirectandindirect)
• privatesectordecisions
• pricesareaffectedbysupplyanddemand
• butarealsoaffectedbygovernmentactionssuchastaxationandsubsidies
• wealthissplitbetweentheindividualsinsocietyandthegovernment
5June 2012 Examinations paper F4 Glo
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June 2012 Examinations paper F4 Glo
MarkEt, plannEd and MixEd EconoMiEs chapter 2 6
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Chapter 3
InternatIonal organIsatIons
• UN–UnitedNations
• generalpurposes:
• maintenanceofpeaceandsecurity
• developmentoffriendlyrelationsamongnations
• promotionofcooperationinsolvingeconomic,social,culturalandhumanitarianproblems
• promotionofrespectforhumanrightsandinternationalfreedoms
7June 2012 Examinations Paper F4 glo
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UNCITRAL United Nations Commission on International Trade Law
• one of two bodies actively involved in drafting international law ( the other is the International LawCommission)
• concentratesonthedevelopmentandcodificationofinternationallaw
• triestoovercomethepracticalproblemscreatedbydifferentnationshavingdifferentlawsrelatingtotrade
• lookstostandardiseinternationallawinareassuchas:
• saleofgoods
• e-commerce
• disputeresolution
• alsoattemptstoincreaseinternationaltradebyintroducingtheHamburgrulescovering
• carriageofgoodsbysea
• internationalbillsofexchange
• cross-borderinsolvency
• encouragescountriestoadoptUNCITRALprinciples
June 2012 Examinations Paper F4 glo
IntErnatIonal organIsatIons Chapter 3 8
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UNCITRAL United Nations Commission on International Trade Law
• UNCITRAL–specificwaysinwhichUNCITRALtriestoharmoniseandunifyinternationaltrade
• coordinatingtheworkofthevariousinterestedorganisations
• encouraginginter-organisationalcooperation
• promotingwideracceptanceandparticipationinexistinginternationalconventions
• preparingnewinternationalconventions,modellawsanduniformlaws
• promotingwaysofensuringconsistencyintheinterpretationandapplicationofconventionsandlaws
• collectinganddisseminatinginformationonlegaldevelopmentsandnationallegislation
• maintainingcloseliaisonandcollaborationwiththeUNConferenceonTradeandDevelopment
• maintainingcontactandliaisingwithotherUNelementsconcernedwithinternationaltrade
9June 2012 Examinations Paper F4 glo
IntErnatIonal organIsatIons Chapter 3
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WTO World Trade Organisation
• formedin1995
• basedontheprinciplesoftheGeneralAgreementonTariffsandTrade(GATT)
• devotedtothepromotionofinternationalfreetradeingoods,servicesandintellectualproperty
• inordertoachievethis,itworksactivelytoremoveobstaclestofreetrade
• tariffs
• importcontrols
• customs
• bureaucracy
• actsasaforumforthecreationoftradeagreementsandthen…
• ...administersthemwhentheyareformed
• continuouslyreviewsthetradepoliciesofdifferentnations
• assistsdevelopingnationstodesigntheirownnationaltradepolicies
• assistsininternationaltradedisputeresolution
June 2012 Examinations Paper F4 glo
IntErnatIonal organIsatIons Chapter 3 10
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ICC – International Chamber of Commerce
• purposeistoserveworldbusinessbypromoting
• trade
• investment
• openmarkets
• advocatesfreeandfaircompetitionamongbusinesses
• encourageseconomicgrowthinbothdevelopedanddevelopingcountries
• activeinitsattemptstofightinternationalcommercialcriminalactivities
• concernedwiththelegalprocesseswhichunderpintradingactivitysuchastradeagreementsanddisputeresolutionarrangements
• developedINCOTERMS
11June 2012 Examinations Paper F4 glo
IntErnatIonal organIsatIons Chapter 3
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INCOTERMS
• producedandpromotedbyInternationalChamberofCommerce
• ideaistoaddressthemainissuesinvolvedininternationaltrade
• inparticular,thetermsaddress
• theextenttowhichthecostsofcarriageareincludedwithinthecontractprice
• whichpartyshouldbeartheriskintheeventofgoodsbeingdamagedduringthedeliveryofthosegoods
• atwhatmomentdoesownershipofthegoods,andthereforealsorisk,pass
• theextenttowhichcustomsdutiesareincludedwithinthecontractprice
• theresponsibilityforcustomsclearancedocumentation
• theseINCOTERMSincorporatedintoacontractestablishtheextentoftheserviceandtheriskacceptedbyeachofthecontractingparties,andwillbereflectedinthenegotiatedpriceofthecontract
June 2012 Examinations Paper F4 glo
IntErnatIonal organIsatIons Chapter 3 12
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INCOTERMS ( these MUST be learned! )
• thereusedtobe4categories
• now,witheffectfrom2010,therearejust2
• rulesforuseinrelationto“anymode/modesoftransport”
• rulesfortransportbyseaorinlandwaterway
• “anymodeoftransport”rules
• maybeusedwheneitherseatransportisnotinvolvedor….
• ….ifitis,,whenseatransportisonlyforpartofthejourney
• 7rules/abbreviationsapply
• EXW “exworks”
- minimumobligationsforthesellerconcerningdeliveryofthegoods
- buyerisresponsibleforallcostsincurredindeliveryfromseller’spremises
• FCA “freecarrier(namedplace)”
- seller completesobligationswhen thegoodshavebeencleared for export andcustodyhasbeentransferredtoanamedcarrierataspecifiedplace
• CIP “carriageandinsurancepaidto”
- thesellerisresponsibleforcarriageandinsuranceuptoaspecifiedlocation
- thereafter,thebuyerisresponsible
• CPT “carriagepaidto”
- thesellerpaysthecostsofdeliverytoastatedlocation
- onceatthatlocation,thebuyerassumesresponsibility
13June 2012 Examinations Paper F4 glo
IntErnatIonal organIsatIons Chapter 3
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• DAT“deliveredatterminal”
- requiresthesellertopayforcarriagetotheterminalandthecostsassociateduptothetimethegoodsareunloadedattheterminal
- doesNOTincludecostsofimportclearance–thesecostsaretheresponsibilityofthebuyer
- effectively, therefore, the goods are“delivered”when they are unloaded at the terminal andplacedatthebuyer’sdisposal
- theterminalisthe“namedterminalinthecontractatthenamedportorplaceofdestination”
• DAP“deliveredatplace”
- thesellerbearsallcosts(except importclearancecosts) involvedindeliveringgoodstothenameddestination–the“place”
- thismeansallcostsuptothepointwherethegoodsarereadytobeunloadedbythebuyerattheagreeddestination
• DDP “delivereddutypaid”
- sellercompletesobligationswhenthegoodshavebeendeliveredtothebuyerataspecifiedlocationinthebuyer’scountry
- sellerpaysallcostsofdeliverytothatlocationincludingallimporttaxes,customsdutiesandanyotherofficialchargesintheimportingcountry
• “seaorinlandwaterwaytransport”rules
• theserulesapplywhengoodsarebeingtransportedfromoneporttoanother
• 4rules/abbreviationsapply
• FAS “freealongsideship”
- onlyapplieswheregoodsaretransportedbyship
- seller’sresponsibilities/obligationsceasewhenthegoodsareplacedonthequayalongsidetheship
• buyershouldhavearrangedforexportformalities
• FOB “freeonboard”
- buyerarrangesforshipment
- sellercompletesobligationswhengoodsareloadedontotheship
- sellerprovidesexportdocumentation,buyerprovidesimportdocumentation
June 2012 Examinations Paper F4 glo
IntErnatIonal organIsatIons Chapter 3 14
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• CFR “costandfreight”
- onlyapplicabletogoodsbeingdeliveredbyship
- sellerpaysallcostsuntilthegoodshave“passedtheship’srail”intheexportcountry’sport
- afterthatpoint,thebuyerassumesresponsibility
- thusthebuyerarrangesformarineinsuranceandforcustomscosts
• CIF “cost,insuranceandfreight”
- allthreecostsshallbetheresponsibilityoftheseller
- insuranceissuchthatthebuyerhastherighttorecoverfromtheinsurer
- minimuminsurancecoveriscontractpriceplus10%
• termsapplytodomesticcarriageofgoodsaswellasinternational(previouslytheserulesonlyappliedtointernationalcarriage)
• goodssoldwhilstintransit?
• onlytheoriginalseller“ships”thegoods
• sosubsequentpurchasersnowhaveanobligationto“procuregoodsshipped”
• buyersandsellersmustcooperateinprovidingsufficientinformationtoeachothertomakeeasiertheimport/exportofthegoods
• handlingcosts
• the2010termstrytoremoveanawkwardsituationwhichusedtoexistunderthe2000terms
• 2010termsclearlyallocateresponsibilityforthehandlingcostsatthedestinationterminal
15June 2012 Examinations Paper F4 glo
IntErnatIonal organIsatIons Chapter 3
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June 2012 Examinations Paper F4 glo
IntErnatIonal organIsatIons Chapter 3 16
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Chapter 4
InternatIonal Court of arbItratIon
ICA International Court of Arbitration
• setupbytheInternationalChamberofCommercenearly100yearsago
• promotestheuseofarbitrationproceduresincommercialdisputes
• overseesallelementsofarbitrationprocess:
• maintainslistsofprospectivearbitrators
• confirmsappointmentofarbitrators
• makesdecisionsaboutchallengestoarbitrators
• approvesarbitrators’awards
• fixesarbitrators’fees
17June 2012 Examinations Paper f4 Glo
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UNCITRAL Arbitration
• involvesthesettlementofadisputedcontractbyanindependentthirdparty,thearbitrator,orarbiter
• ofteninvolvescompromise
• thetwodisputingpartiesmayormaynotbelegallyrepresented
• thedecisionofthearbitratorisbinding....
• ...althoughthereisnormallyarightofappealtothecourts
• advantages
• cost
- nocourtcosts
- nocostsoflegalrepresentatives
• speed
- generallymuchquickerdecisionthantakingthedisputetocourt
- flexibilityoftheprocessgenerallyleadstoquickerdecisions
• privacy
- courtproceedingsareamatterofpublicrecord
- arbitrationisaprivate,unpublicisedmatter
• informality
- courtproceedingscanbeextremelystressful
- theinformalityofthearbitrationprocessismuchlessstressful
• expertise
- thearbitratorshouldbeanacknowledgedexpertincontractlawareaunderdispute
- ajudgeisanexpertinlawwithpossiblynoexperienceinthedisputedmatter
• decisions
- becausearbitrationisnotboundbyprecedent,decisionsofanarbitratorarelikelytobemoreinnovative
June 2012 Examinations Paper f4 Glo
IntErnatIonal Court of arbItratIon Chapter 4 18
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UNCITRAL – arbitration
• therequirementofqualificationsforanarbitratorshouldbeestablishedwithinthearbitrationagreement
• ifnoqualificationrequirementhasbeenagreed,thenanyonemaybeselected
• nooneshouldbepreventedfromservingasanarbitratoronthegroundsoftheirnationalityalone
• anarbitratorshouldbeindependentandunbiased
• anynominatedarbitratorshoulddiscloseanyrelevantfactswhichmaybeseentoimpairtheirindependence
• similarly, if it becomes the case that independence is threatened, an arbitrator should disclose thecircumstances
• if it becomes impossible for an appointedarbitrator to continue to act, they shouldwithdraw from theposition,or
• bothpartiesmayagreethattheappointmentshouldbeterminated,or
• eitherpartymaychallengethearbitratorconcerningindependence
19June 2012 Examinations Paper f4 Glo
IntErnatIonal Court of arbItratIon Chapter 4
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UNCITRAL – arbitration
• for a dispute to be submitted to arbitration, under the UN’s Model Law on International CommercialArbitrationtheagreementtoturntoarbitrationmustbeinwriting
• thereshouldthereforebyan“arbitrationclause”agreement
• toqualifyas“beinginwriting”oneofthefollowingrequirementsshouldbeappropriate
• itshouldbecontainedin:
• adocument,signedbybothparties
• anexchangeofdocumentsclearlyreferringtosuchanagreement/clause
• anexchangeofdocumentsofalegalnatureclearlyreferringtosuchanagreement/clause
• anotherwrittencontractbetweenthepartiesreferringtothearbitrationagreement/clause
• thearbitrationtribunal
• if theparties have agreed tohave a sole arbitrator, the twoparties should agreeon thatperson’sidentity
• ifthepartiescannotagree,theywillneedtoreferthemattertoanominatedcourtortribunalforthemtodecidetheidentityofthearbitrator
• ifthepartieshavenotagreedonasolearbitrator,theModelLawstatesthatthereshouldbethreearbitrators
- onechosenbyeachofthetwodisputingparties,and
- onechosenbythetwoarbitrators
June 2012 Examinations Paper f4 Glo
IntErnatIonal Court of arbItratIon Chapter 4 20
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UNCITRAL – arbitration
• disadvantages
• privacy!
- onepartyinthedisputemayactuallywantthepublicity
• applicationofthelaw
- independentarbitratorsdonotnecessarilyhaveexpertiseintheinterpretationandapplicationofthelaw,whereas
- judgesincourtsareexpertsinthisfield
• predictability
- arbitratorsarenotboundbyprecedentsomaybeinconsistentwhencomparedwithdecisionsinsimilardisputes,whereas
- judgesareboundtofollowtheprinciplesofprecedentsodisputeresolutionmaybeseenaspredictable
• precedent
- resolutionunderarbitrationcreatesnoprecedentsofuturesimilardisputeresolutioncoulddifferfromtheearlierarbitrationdecision,whereas
- whereadisputeliesbeyondthescopeofestablishedprecedent,acourtdecisioncouldbeseentocreateanewprecedentuponwhichlatersimilardisputeresolutionwillbebased
21June 2012 Examinations Paper f4 Glo
IntErnatIonal Court of arbItratIon Chapter 4
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UNCITRAL – arbitration – application to have an arbitration award set aside / cancelled
• incapacity
• occurswhenonepartyinthedisputeissufferingunderanincapacitywhenthetribunalhearingtookplace
• notice
• occurswheninsufficientnoticehasbeengivenofeither
- theappointmentofanarbitrator,or
- thedateoftheproceedings
• invalidityoftheagreement
• ifthetribunaldecisionisinvalidunderthelawgoverningthedisputecontract
• publicpolicy
• whereadecisionfromatribunalisclaimedtobeagainstthepublicpolicyoftheclaimant’sstate
• subjectmatter
• tribunals are restricted tomaking awards only onmatters includedwithin the agreement to seekarbitration
• compositionofthepanelofarbitrators
• iftheproperrequirementsofpanelselectionhavenotbeenfollowed(normallythreearbitrators)
June 2012 Examinations Paper f4 Glo
IntErnatIonal Court of arbItratIon Chapter 4 22
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UNIDROIT – International Institute for the Unification of Private Law
• independentinter-governmentalorganisation
• studies the need for and how tomodernise, harmonise, standardise and co-ordinate private law in aninternationalcontext
• ofparticularconcernisinternationaltradelaw
• threetierstructure
• secretariat
- responsibleforday-to-dayrunning
• governingcouncil
- supervisespolicy
- drawsupaworkprogramme
- superviseshowthesecretariatcarryouttheprogram
• generalassembly
- theultimatedecisionmakingbody
- approvesthebudget
- approvestheworkprogramme
- electsthegoverningcouncil
23June 2012 Examinations Paper f4 Glo
IntErnatIonal Court of arbItratIon Chapter 4
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June 2012 Examinations Paper f4 Glo
IntErnatIonal Court of arbItratIon Chapter 4 24
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Chapter 5
UNCISG
UNCISG – United Nations Convention on Contracts for the International Sale of Goods
• appliestocontractswherebuyerandsellerareindifferentstates
• twopossibilities
• wherebothstateshaveacceptedtheconvention(contractingstates)
• whereonlyoneofthestateshasacceptedtheconvention
• in this latter situation, both parties have agreed that the contract should be subject to the law of theacceptingstate
• nationalityofthepartiesisnotrelevant
• locationofparties’businessisimportant
25June 2012 Examinations Paper F4 GLO
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Contracts not covered by UNCISG
• acontractforthesaleofgoodsisoneinwhich
• theselleragreestotransfertitle(ownership)ofthegoods
• tothebuyer
• inexchangeforamoneyconsideration(theprice)
• soUncisgdoesnotapplytocontracts:
• forthesupplyofservices
• fortheexchangeofgoods
• whereoneofthepartieshasthemainobligationtosupplylabour
• formanufacture,wherethebuyerprovidesallthematerial(ormost)
• wheregoodsarepurchasedforpersonal,familyorhouseholduse…
• ....unlessthesellerkneworoughttohaveknownabouttheproposeduse
• wheregoodsareboughtatauction
• wheregoodsareboughtbylegalauthority
• forpurchaseofstocksandshares
• forpurchaseofshipsoraircraft
• forpurchaseofelectricity
June 2012 Examinations Paper F4 GLO
UNCISG Chapter 5 26
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UN CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS
• contractsareagreements
• anagreementconsistsofanofferandanacceptance
• theagreementshouldbesupportedbyconsiderationand....
• ....madewithintentiontocreatelegalrelations
• anofferisasufficientlydefiniteproposalforconcludingacontractwhich
• isaddressedtooneormorepersons
• indicatestheintentionandwillingnessoftheofferortobebounduponacceptanceoftheoffer
• indicatesthegoods involved, thequantityandthepriceandthereforequalifies for thedescription“sufficientlydefinite”
• offersmustbedistinguishedfrominvitations
• aninvitationisnotcapableofacceptance
• aninvitationisinvitinganotherpersontomakeanoffer
27June 2012 Examinations Paper F4 GLO
UNCISG Chapter 5
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UN CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS
• forexample:
• goodsinasupermarketareinvitations
• goodsinashopwindowareinvitations
• advertsarenormallyinvitations
• but,veryoccasionally,advertsmaybetakentobeoffers
• mailcataloguesareinvitations
• theprocessofanauctionsaleconstitutestheauctioneersinvitingaseriesofoffers
June 2012 Examinations Paper F4 GLO
UNCISG Chapter 5 28
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Offers
• halfoftheagreement
• anexpressionofwillingnesstobeboundonspecificterms
• mustbecertain
• muststillexistwhen“accepted”
• mustbedistinguishedfrominvitations
• mustbedistinguishedfromstatementsofintent
• aresponsetoarequestforinformationisnotanoffer
• arequestforinformationisnotacounteroffer
• revocationofanoffermustbecommunicatedtotheofferee
• anofferiseffectivefromthemomentitisreceivedbytheoffereewhether
- orally
- bymail
- bypersonaldelivery
• anofferwillceasetobecapableofacceptanceif
- withdrawn
- revoked
- rejected
29June 2012 Examinations Paper F4 GLO
UNCISG Chapter 5
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• withdrawal
• iswhere theofferor communicates to theofferee the intention towithdraw theofferbefore theoffereehasreceivedit
• revocation
• ( effectively,withdrawal after theoffereehas received it )maybe effected at any timebefore theoffereehasacceptedit
• ifanofferisstatedasbeing“irrevocable”thentheofferorcannotrelyuponrevocation
• rejection
• occurswhentheoffereesays“no”
• butmayalsooccurwhentheofferee’s“acceptance”isnotcompleteandunconditional
• anymaterialalterationtothetermsstatedintheofferor,indeed,anyadditionaltermsintroducedwithinthe“acceptance”willhavetheeffectofrejectingtheofferandreplacingitwithacounteroffer
• animmaterialalterationisnotrejectionandcounteroffer
• thecontractisvalidincorporatingtheimmaterialalterations
June 2012 Examinations Paper F4 GLO
UNCISG Chapter 5 30
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Acceptance
• theotherhalfoftheagreement
• mustbecompleteandunconditional…
• ...subjecttoallowingimmaterialalterationstotheoffer
• theoffermuststillbe“open”atthetimeofacceptance
• acceptancemustbecommunicatedtotheofferor,buttheofferormaywaivethisrightofcommunication
• communicationmaybebyareliablethirdparty
• silencecannotbeacceptance
• acceptancemaybebyconduct
• oncetheactsofacceptancehavestarted,theofferorcannotrevoketheoffer
• ifacceptanceisbyletter,itiseffectivefromthedateshownintheletter
• acceptanceshouldbewithinareasonabletimeoftheoffer
- oraloffer?immediateacceptance
- emailedoffer?twoorthreedays
- surfacemailoffer?a“few”days
- telegrammedoffer? reasonable time commences from the date the telegrammedofferwashandedinfordelivery
31June 2012 Examinations Paper F4 GLO
UNCISG Chapter 5
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June 2012 Examinations Paper F4 GLO
UNCISG Chapter 5 32
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Chapter 6
InternatIonal Sale of GoodS ContraCtS – the Seller’S oblIGatIonS
• contractsinvolvingcarriage
• if thegoodsarenot specific i.e. theyareunidentifiedgoods from inventory, the sellermustnotifythebuyerabout thedetailsof theconsignmentgivingclear indicationabout theparticulargoodsallocatedtothebuyer’scontract
• inaddition,thechoiceoftransportshouldbeappropriatetotheparticulargoods
- inanimateornon-perishablegoods,noproblem
- butperishablegoodsshouldbeplacedinthehandsofanappropriatecarrier
• timingofthedelivery
• deliveryshouldbeeffectedonthedatespecifiedinthecontract(orwithinaspecifiedperiod)
• ifnodateorperiodisspecified,thesellershoulddeliverwithinareasonabletimeoftheformationofthecontract
• specificgoods–thoseparticularunits/itemswhicharetobesoldi.e.“thisparticularpairoftrousers”
• unidentified goods drawn from inventory – not individually identifiable, rather they are part of generalinventoryi.e“apacketofbiscuits”ratherthan“thatpacketofbiscuits”
33June 2012 Examinations Paper f4 Glo
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Contracts involving carriage
• twomainareas
• delivery
• quality
• delivery
• thesellerisobligedtodeliverthegoods,handoveranydocumentsrelatingtothegoodsandtransfertitletothegoodsasrequiredbythecontract
• ifaplacefordeliveryisspecifiedwithinthecontract,thenthegoodsmustbedeliveredtothatspecifiedplace
• ifnoplaceisspecified,impliedtermsapply
• ifcarriageofthegoodsisinvolvedinthecontract,theseller’sobligationceaseswhenthegoodsaredeliveredtothecarrier(orfirstcarrierifmorethanoneisinvolved)
• ifunidentifiedgoodsareintheseller’sinventory,theseller’sobligationsarecompleteuponplacingthegoodsatthebuyer’sdisposal
• ifspecificgoodsareinvolved,again,theseller’sobligationsarecompleteuponplacingthegoodsatthebuyer’sdisposal.
• ifnoneoftheabovethree“place”situationsisapparent,theseller’sobligationsceasewhenthegoodsareplacedatthedisposalofthebuyerattheseller’splaceofbusiness
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Quality
• thesellermustdelivergoodswhichareofthequantity,qualityanddescriptionrequiredbythecontract,and...
• ...whicharecontainedorpackagedinthemannerrequiredbythecontract
• however,ifthecontractfailstospecifyquantityandqualityandthereisnodescriptionwithinthecontract,thesellermustneverthelessmeet“conformityrequirements”
• goodsdeliveredshouldbefitforanypurposewhichhasbeenspecified
• ifnopurposehasbeenspecified,thegoodsdeliveredshouldbefitforthepurposeforwhichgoodsofthatdescriptionwouldnormallybeused
• ifasampleisofferedbythesellerforinspectionbythebuyer,thegoodsdeliveredmustbeexactlythesamequalityasthesampleoffered.Itisirrelevantwhetherthebuyerdoesinfactinspectthesample
• ifnosampleisoffered,thegoodsdeliveredmustbeexactlyinaccordancewithanydescriptiongiven
• thegoodsshouldbepackagedinthemannerwhichisnormalforgoodsofthatdescription
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IntErnatIonal SalE of GoodS ContraCtS – thE SEllEr’S oblIGatIonS Chapter 6
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• there isnoobligationontheseller toensurethatthegoodscomplywith legislation inthebuyer’sstateunless
• thatsamelegislationappliesintheseller’sstate,or
• thebuyermadethesellerawareofthelegislation,or
• thesellerknewtherequirementsimposedbythelegislation
• thesellerwillnotbeliableforbreachoftheconformityrequirementsinthesituationwherethebuyerknewthatthegoodswouldnotconform
• thesellerwillbeliableifthenon-conformityexistedatthedatethetitle/risktothegoodspassedtothebuyer
• thisissoevenifthefailuretoconformbecameapparentonlyafterthedatethetitle/riskpassed
• inaddition,thesellerisliableevenaftertitle/riskhaspassedwherethesellerisinbreachofobligations
• forexample,wherethereisaguaranteethatthegoodswillremainfitforthepurposeforaperiodoftimeafterdelivery
• finally,ifthequantitydeliveredislessthanthequantityorderedbutdeliveryisbeforethecontractdatefordelivery,thesellerisabletomakegoodtheshort-fallatanytimeuptothecontractdateofdeliverywithnopenalty
• theonlyexceptioniswhere,asaresultofthereducedquantity,thebuyerincursunreasonableexpenseorinconvenience.Inthatsituation,thebuyermayseekcompensationintheformofdamages
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IntErnatIonal SalE of GoodS ContraCtS – thE SEllEr’S oblIGatIonS Chapter 6 36
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The buyer’s duty to examine the goods
• assoonaspossibleafterdelivery,thebuyershouldexaminethegoods
• whenthebuyerisgoingtodespatchthegoodsimmediatelyonreceipt,andthesellerisawareofthatfact,thebuyermayinspectthegoodsuponreceiptatthatnextdestination
• noticeofnon-conformityshouldbegiventothesellerwithinareasonabletimeafterthenon-conformitywasdiscovered
• failuretogivenoticewithinthatreasonabletimewilllosethebuyertherighttosueforbreach
• ifnon-conformitynoticeisnotgivenwithintwoyearsofdelivery,thebuyerwilllosetherightofcompensation
• however, if thesellerknewof thenon-conformity,and failed todisclose this to thebuyer, thesellerwillremainresponsible
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IntErnatIonal SalE of GoodS ContraCtS – thE SEllEr’S oblIGatIonS Chapter 6
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Third party rights
• thesellermustdelivergoodswhicharefreefromanythirdpartyrightorclaim…
• ...unlessthebuyeragreestoacceptthosegoodssubjecttotherightorclaimofthethirdparty
• specialprovisionsrelatetothesituationwheretherightorclaimisbasedonintellectualpropertyorindustrialproperty
• in thesesituations thesellermustdelivergoodswhichare free fromtheseproperty rightsprovided therightsexistinthelawof
• thestatewherethegoodswillberesoldorused,or
• thestatewherethebuyerhasaplaceofbusiness
• intellectualpropertyincludes
• trademarks
• patents
• copyrights
• suchacontractwherethesethirdpartypropertyrightsareaffectedmustinvolvethebuyer’sawarenessandacceptancethattherightsexistandwillberespected
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Chapter 7
Rights and obligations of the buyeR and the selleR
• Thebuyer’sremediesarisingfromtheseller’sbreachofcontract
• requireproperperformance
• avoidthecontract
• proportionallyreducethecontractprice
• seekdamages
• damagesmaybeclaimedbythebuyerevenwhenanyofthefirstthreeremediesisalsoclaimed
• properperformance
• thebuyermayrequirethesellertohonourthecontract
• thisright is lost ifthebuyerhasalreadytakenactionwhichis inconsistentwiththerequirementofperformance,forexample,thebuyerhastreatedthecontractasavoided
• thebuyermayextendthetimeperiodforperformance
• anorderbythecourtofspecificperformancewillonlybeawardedifthatisconsistentwiththeexistinglocallaw
• ifabreachbytheselleriswithreferencetonon-conformanceofthedeliveredgoodsthebuyermayrequirethesellerto
- repairthegoodswherenon-conformanceisminor,or
- replacethegoodswherenon-conformanceisfundamental
• thesellermayseektoremedythefailuretoperformif
- thereisnounreasonabledelay,and
- thebuyerisnotunreasonablyinconvenienced
• forthistoapply,thesellermustgivenoticetothebuyeroftheintentiontoremedy,and
• thebuyershouldcontactthesellershowingacceptanceoflateperformance
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• note,thebuyermustactuallyreceivethenotificationfromtheseller
• wherethebuyerfailstoreplytotheseller’snotice,thesellerisentitledtoassumethatthebuyerhasacceptedlateperformance
• wheregoodsaredeliveredbeforetheduedate,thebuyer
• mayacceptdelivery,or
• refusedeliveryuntilthecontracteddate
• whereexcessgoodsaredelivered,thebuyer
• mayacceptallthegoods,or
• someoftheexcess,or
• justthosegoodsasperthecontract
• ifthebuyeracceptssomeoralloftheexcess,thebuyermustpayforthatexcess
• avoidthecontract
• thebuyermayavoidthecontractwherethesellerisinfundamentalbreach
• mayalsoavoidinthesituationwheretheseller
- failstodeliver,or
- givesnoticethatdeliverywillnotbepossibleonthecontractdate(oranyextensiontothatdate)
• suchadeclarationofavoidanceiseffectiveonlyifitismadebynoticefromthebuyertotheseller
• proportionallyreducethecontractprice
• fornon-conformitybreachthebuyermayreducethecontractpriceinproportiontothedegreeofnon-conformity
• ifthesellercorrectsthenon-conformity,thebuyercannotreducetheprice
• ifthirdpartyrightsareinvolvedandthebuyercouldnotreasonablyhaveknownthen,onsubsequentdiscovery,thebuyermayreducethecontractprice
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Rights and obligations of thE buyER and thE sEllER Chapter 7 40
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Obligations of the buyer
• thebuyermusttakedeliveryofthegoodsasspecifiedwithinthecontractandmustpaytheagreedpriceforthosegoods
• ifapriceisnotspecifiedwithinthecontractitisassumedthatthebuyerandsellerhaveanagreementtosetthepricewhichprevailedatthedateofthecontract
• ifthepriceisdeterminedbytheweightofgoodsdelivered,thevalueiscalculatedbasedonthenetweight
• placeofpayment,ifnotspecifiedwithinthecontract,shallbe
• attheseller’splaceofbusiness,or
• ifpayablewhengoods/documentsaredeliveredtothebuyer,attheplacewherethatdeliverytakesplace
• timingofpayment,ifnotspecifiedwithinthecontract,shallbe
• ondeliveryofthegoods/documents…
• ...butonlyafterthebuyerhasexaminedthegoods
• thesellermayincludeacontracttermwhichstatesthattitletothegoodsshallnotpassuntilpaymenthasbeenmade.Thisiscalleda“RomalpaClause”
• inaddition,wherecarriageisinvolved,thesellermaystatethatthegoodsshallnotbereleasedtothebuyeruntilpaymentismade
• wherethereisanagreeddateofpayment,thebuyershouldpayonthatdatewithoutthesellerhavingtorequestpayment
• thebuyerisobligedtotakedeliveryofthegoods,and
• takeallsuchreasonablestepstoenablethesellertoeffectdelivery
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Rights and obligations of thE buyER and thE sEllER Chapter 7
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• Theseller’sremediesarisingfromthebuyer’sbreachofcontract
• requireacceptanceofthegoods
• requirepaymentforthegoods
• avoidthecontract
• seekdamages
• acceptanceandpayment
• thesellermayenforcethecontractualtermswithreferencetoacceptanceandpaymentunless...
• ...thesellerhastakenstepsincompatiblewiththatright,forexample,thesellerhasnotifiedthebuyerthatthecontractisbeingtreatedasavoided
• itispossibleforthesellertoextendthetimeperiodforthebuyertomeetobligations…
• ...butsuchextensionshouldbeofreasonablelength
• avoidthecontract
• ifthebuyer’sbreachisfundamental,or
• thebuyerrefusestoacceptthegoods,or
• thebuyerfailstopayaccordingtothecontract
• ifthebuyerhaspaid,thesellerlosestherighttoavoidunless...
• ...itisinrespectoflateperformancebythebuyer,or
• ....itisinrespectofanyotherbreachbythebuyer
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Damages
• maybeclaimedbyeitherpartyinadditiontoanyotherremedyclaimede.g.avoidance
• isamonetaryamountclaimedincompensationforthelosssufferedbytheinjuredparty
• theamountofdamagesawardedislimitedtothatamountwhichcouldhavebeenreasonablyforeseeablebythebreachingparty
• theinjuredpartyshouldseektomitigatethelosssufferedasaresultofthebreach,forexample:
• bysellinggoodswhichhavebeenrejectedbythebuyerandclaimingonlythedifferencebetweencontractpriceandsaleproceeds
• bybuyingreplacementgoodsandclaimingonlytheamountpaidinexcessofthecontractprice
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Rights and obligations of thE buyER and thE sEllER Chapter 7
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Breach of contract
• definedas“thefailureofonepartytoperformtheirobligationsunderthecontract”
• twotypes
• anticipatorybreach,and
• breachduringperformance
• anticipatorybreachisabreachinadvanceoftheduedateforcommencementofperformance
• ifitbecomesapparentthattheotherpartywillnotperformamaterialpartoftheirobligationsbecause
- thereisaseriousindicationoftheirinabilitytoperform
- creditworthinessisindoubt
- indicationsarisingfromtheotherparty’spreparationtoperform
• in these situations, one party may suspend their own performance, even if the due date forcommencementhasnotyetbeenreached
• butmustgivenoticeoftheintentiontosuspend
• whensuchnotice is received, if theotherpartygivesassurancethateverything isfine, thenotifiercannotsuspendperformance
• whengoodshavealreadybeendespatchedbeforethepotentialbreachbecomesknown,thesellercanpreventdeliveryofthosegoods,eventhoughthebuyermayalreadyholdthetitledocuments
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Breach during performance
• remediesavailabletotheinjuredpartyhavealreadybeencoveredinthesenotes
• possiblethatthebreachmaybeclassedas“fundamental”
• thisisamajorbreach,forexample,onepartygivingnoticethattheywillnotcontinuewiththecontract
• inthissituation,theinjuredpartymaydeclarethatthecontractisavoidedand…
• ...claimdamages
• instalmentcontracts
• wheredeliveryofthegoodsisbyinstalmentstherightsoftheinjuredpartydependonthetimingofthebreach
- in(say)ateninstalmentcontract,thefirstinstalmentisinbreach(e.g.poorquality)thebuyermaytreatthewholecontractasavoided
- butifthefirstseveninstalmentsareacceptedandtheeighthisinbreach,thebuyerwilllikelyonlybeabletorejecttheeighthinstalmentandclaimdamagesorrequirereplacement
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Rights and obligations of thE buyER and thE sEllER Chapter 7
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Effects of avoidance
• whereacontractisavoided,bothpartiesarereleasedfromtheirobligations
• but,ofcourse,remediesmustthenbeavailabletotheinjuredparty
• claimdamages
• resorttoatribunal
• exerciseanyrightsspecifiedinthecontractinanticipationofavoidance
• claimrecoveryofanygoodsdelivered(restitution)
• butnote,restitutionisonlyavailableifnothirdpartyrightswillbeadverselyaffectedandfullrestitutionispossible(restitutioinintegrum)
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Rights and obligations of thE buyER and thE sEllER Chapter 7 46
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Chapter 8
When does risk pass from the seller to the buyer?
• whendoesriskpassfromthesellertothebuyer?
• threepossiblesituations
- contractsinvolvingcarriage
- contractsforgoodssoldwhilstintransit
- contractsnotinvolvingcarriage
• contractsinvolvingcarriage,specificgoods
• ifthecontractspecifiestheevent,timeorplacewhenriskistopass,thenriskpassesaccordingtothecontractterm
• ifnosuchtermiswithinthecontract,riskpasseswhenthegoodsareputintothehandsofthecarrier,orfirstcarrierifmorethanoneisinvolved
• contractsforgoodssoldwhilstintransit
• whengoodshavebeenputinthehandsofacarrier,forexample,todelivertoadistributioncentre,andthosegoodsaresoldwhilstintransit,riskpassestothebuyeratthetimethecontractisenteredinto
• theeffectofthisisthatthebuyerassumesresponsibilityand,therefore,riskasatthedatethegoodsareputintothehandsofthecarrier
• exceptionally,ifthesellerknewatthetimeofthecontractthatthegoodsweredamagedorhadbeenlost,thesellerremainsliable
• contractsnotinvolvingcarriage
• riskpassesfromthetimethegoodsareputatthedisposalofthebuyerandthebuyerisawareofthatfact
• finally,whengoodsdonotconformtorequiredstandards,andthisisnotdiscovereduntilafterriskhaspassed,thesellerisliableforbreachofobligationsconcerningnon-conformity
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Preservation of goods• bothpartieshaveadutytopreservethegoods(ptg)
• so,whoeverhaspossessionmustptgeventhoughownershiphaspassedtotheother
• ifabuyerrefusestoacceptdelivery,thesellerstillhasanobligationtoptg
• whenabuyerisobligedtopayforgoodsondelivery,butthenfailstodoso,thesellermustthenptg,butneednotdeliver
• whenabuyerintendstorejectthegoods,butneitherthesellernoragentisavailabletoacceptthisrejection,thebuyerisobligedtoptg
• thislatterpointappliesunlessitwouldbeunreasonablyexpensiveorinconvenient
• thepartywhoispreservingthegoodscanrecoverreasonableexpensesfromtheotherparty…
• ...andmayevenstoretheminthepremisesofathirdparty(atreasonableexpense)
• ifthegoodsareperishable,itisavailablefortheoneinpossessiontosellthematthebestavailablepricebeforetheybecomeworthless
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WhEn doEs risk pass from thE sEllEr to thE buyEr? Chapter 8 48
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Impediment
• ifapartyfailstoperformtheirobligationsunderacontract,thenormalpositionisthattheotherpartymayavoidthecontractandclaimdamages
• however,ifthebreachingpartycanprovethattheirfailuretoperformwasduetoanimpedimentbeyondtheircontrol,theywillnotbeliabletopaydamages
• theimpedimentshouldbesuchthatitwasnotreasonablyforeseeableatthetimethecontractwasenteredinto
• oncetheimpedingeventceasestopreventperformance,thecontractshouldgoaheadasplanned
• ifathirdparty’sfailuretoperformisthecauseofcontractfailure,thebreachingpartyisexemptfromliabilityonlyiftheycanprovethatboththemselvesandthethirdpartywouldbeexemptbecauseofcircumstancesbeyondtheircontrol
• iffailuretoperformisbecauseofanimpediment,theimpededpartymustgivenoticetotheotherpartywithinareasonabletimeafterfirstknowingoftheimpediment
49June 2012 Examinations paper f4 Glo
WhEn doEs risk pass from thE sEllEr to thE buyEr? Chapter 8
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June 2012 Examinations paper f4 Glo
WhEn doEs risk pass from thE sEllEr to thE buyEr? Chapter 8 50
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Chapter 9
DoCuments founD in international traDe
International Bills of exchange
• abillofexchangeis
• anunconditionalorder
• inwriting
• addressedbyoneperson(drawer)toanother(drawee)
• signedbythepersongivingit
• requiringthepersontowhomitisaddressed
• topay
• ondemand,orofafixedordeterminablefuturetime
• asumcertaininmoney
• to,ortotheorderof
• aspecifiedperson(payee)
• ortobearer
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• forabillofexchangetobeclassedas“aninternationalbillofexchange”,itmustidentifyatleasttwoofthefollowingfiveplacesofwhichatleasttwoareindifferentstates
• theplacewherethebillisdrawn
• theplacewherethedrawersigned
• theplacenexttothedrawee’sname
• theplacenexttothepayee’sname
• theplacewhereitistobepaid
• inaddition,thewords“InternationalBillofExchange”mustbeshown(UncitralConvention)
• thebillwillbesentbythedrawertothedrawee(typicallythedrawee’sbank)
• thedraweewillsignitandthusacceptliability
• bythatsignature,thedraweebecomestheacceptor
• theacceptedbillwillthenbedeliveredtothepayee(thedrawer’screditor)
• inturnthepayee,iftheywantthemoneynowinsteadofat“somefixedordeterminablefuturetime”,cansignthebillandthusbecomestheindorser
• theindorsementmaybeinfavourofaspecifiedperson(theindorsee)ormaybesignedinblank
• anindorseeofanindorsedbillcanthemselvesindorseitinfavourofanother....
• andthat“other”canindorseitinfavourofanotherwhocan,inturn,indorseitinfavourof.......
• ifsignedinblank,thebillbecomesabearerbillandthepersonwhohaspossessionofthatbearerbillisthepersonentitledtoclaimthemoneyrepresentedbythebill
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• thebearerofabearerbillcansettleadebtmerelybypassingthebilltotheircreditorwho,inturn,becomesthebearer
• liability?If,onfinalpresentationtotheacceptor(originallycalledthedrawee)theacceptorrefusestopay,thebillisclassedasdishonoured
• inthissituation,allpriorpartieswhohavesignedthebillbeforeitcameintothehandsoftheholder(aswellasthepersonwhopassedabearerbilltotheholder)willbeliable
• itispossibletohaveyetanotherpartytoabill–aguarantorincaseofneed
• suchapersonwhoguaranteesabillispresumedtobeguaranteeingthatthedraweewillpaythebillonfinalpresentation.
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DocumEnts founD in intErnational traDE chapter 9
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Parties
• drawer owesmoneytothepayee
• drawee typically,thedrawer’sbank
• payee thecreditorofthedrawer
• acceptor thedraweewhosignsas“accepted”
• indorser thepayeewhosignsthebillontothepayee’sowncreditor
• indorsee thecreditoroftheindorser
• guarantor apersonwhoguaranteesthatthebillwillbehonoured
• holder apersonwhohastakenthebillthroughtheprocessofnegotiation/indorsement,orthebearerofabearerbill
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Bills of lading
• documentswhichareissuedbyacarriertoaseller(oragent)acknowledgingthatthecarrierhasreceivedthegoodsandthattheyhavebeenplacedonboardaparticularvesselboundforaparticularlocation
• evidencesthetimingofthepassingofgoodstothecarrier
• normally,therefore,alsothepassingofrisktothebuyer...
• ...unlessthepartieshaveseparatelyagreedthetimingofthepassingofrisk
• billofladingmaybe:
• negotiableornon-negotiable
• inland,oceanorthrough
• airway
• negotiable
• thepersonwhoownsthebillofladingalso,therefore,ownsthegoods
• thebillsismadeoutinfavouroftheseller
• thecarrierthereforeholdsthegoodsonbehalfoftheseller
• thesellerwillpresentthebilltoabanktoobtainpayment…
• ...andthenindorsethebillbysigningit(negotiateit),therebytransferringtitletothegoods
• non-negotiable
• thebillismadeoutinfavourofthebuyertowhomthecarriermustdeliverthegoods
• allairwaybillsarenon-negotiable
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DocumEnts founD in intErnational traDE chapter 9
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• inlandbill
• relatestoacontractforcarriageoverlandtotheinternationaldeparturepoint
• forexample,frompointofmanufacturetotheshippingport
• oceanbill
• relatestoacontractforcarriagefromaportintheseller’sstatetoaspecifiedportinanotherstate
• throughbill
• relatestoacontractforcarriagewhicheffectivelycombines“inland”with“ocean”
• soacontracttotransportgoodsfrompointofmanufacturetospecifiedportinbuyer’sstate
• airwaybill
• relatestoacontractforcarriageofgoodsbyair
• appliesbothtodomesticflightsaswellasinternationalflights
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Letters of credit
• areameanswherebyasellercangetimmediatepaymentforgoodssold....
• ...butthebuyerstillenjoysaperiodofcreditbeforepaymentismade
• lettersofcreditshouldbearrangedbeforethecontractisenteredinto
• mechanism(Bisbuyer,BBisbuyer’sbankortheissuingbank,Sisseller,SBisseller’sbankortheadvisingbank)
1BasksBBtoissuealetterofcreditinfavourofS
2bytheissue,BBisguaranteeingthatSwillbepaid
3BBasksSBtoadviseSthataletterofcredithasbeenissued
4SBagreestohandletheirendoftheprocess
5SproducestoSBproofofdelivery/transferofthegoods
6SBpaysS,andforwardsthedocumentstoBB
7BBchecksthedocuments,andpaysSB
8BBdebitsB’saccount,andhandsthedocumentsovertoB
• aletterofcreditmaybeconfirmedorunconfirmed
• confirmediswhere,atstep4above,SBaddsitsownguarantee
• unconfirmed–SBdoesnotadditsownconfirmation/guaranteethatSwillbepaid
• lettersofcreditmayberevocableorirrevocable
• revocable–abuyermaychangethedetailswithoutnotifyingtheseller
• irrevocable–muchpreferable froma seller’s pointof view– thebuyer cannot amend thedetailswithoutnotifyingtheseller
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DocumEnts founD in intErnational traDE chapter 9
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Letters of comfort
• applytosituationsinvolvingagroupofcompanies
• typically,aletterofcomfortwillbewrittenbyaparent/holdingcompanyindicatingitsintentiontocontinuetosupportitssubsidiary
• mostcommonlyapplicablewherethesubsidiaryisinsolventoristryingtoraisefinance
• but(normally)itisjustacomfort
• rarelydoes sucha letterbind theparent so, if the subsidiary in factdoesbecome insolvent, there isnoliabilityfortheparenttosettlethesubsidiary’sobligations
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Chapter 10
AgenCy LAw
Agency – creation
• anagencyrelationshipexistsbetweenaprincipalandanagentinwhichtheroleoftheagentistobringtheprincipalintocontractualpositionswiththirdparties
• thisrelationshipmaybeestablishedinanumberofways
• byagreement,express
• usuallyinwriting,theprincipalwillappointtheagent,typicallywithspecificauthority
• iftheagenthasunrestrictedpowertoactonbehalfoftheprincipal,thisisapowerofattorneyandmustbeinwriting
• byagreement,implied
• asaresultoftheconductofthetwoparties,thecourtsmayimplyanagencyrelationship
• byratification
• anagencyrelationshipmaybecreatedretrospectively!
• whereanunauthorisedpersonactsinawaywhichsuggeststheyareanagent,thepersononwhosebehalftheyclaimedtobeactingmayadopt/ratifythecontract
• ratificationisnotpossibleif,atthetimethe“agent”enteredintotheagreement,the“principal”didnotexist
• ratificationmustapplytotheentire“contract”andmustbenotifiedtothethirdpartywhomusthaveknownthattheagentwasnotactingontheirownbehalf
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• byestoppel
• agencyrelationshipcreated,possiblywithouteitherexpressorimpliedagreementoftheprincipal
• wheretheprincipalholdsouttothirdpartiesthatsomebodyistheiragentthen...
• ...theycannotdeny(theyareestoppedfromdenying)thatthe“somebody”istheiragent
• bynecessity
• where there isanemergencysituationand thegoods’ownercannotbecontacted,a thirdpersonactingingoodfaithmaytakeactionconcerningtheowner’sgoods
• thataction-takingthirdpartybecomesanagentbynecessity
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Authority of the agent
• authorityofanagentmaybeexpress,impliedorapparent
• expressauthorityiswheretheprincipalexpresslyauthorisestheagentinrelationtoaspecificcontract
• thisauthoritymaybewrittenor
• maybeoral
• whereanagentactsbeyondthelimitsoftheexpressauthoritytheagentwillbeliableforbreachofwarrantyto
• theprincipaland
• thethirdparty
• impliedauthorityariseswheretheagentactsinaccordancewithwhatis“normal”inthecircumstance
• forexample,anagentactingasthepurchasingofficerofanentitymaybeseentohavetheimpliedauthoritytoenterintopurchasing/procurementcontractsontheentity’sbehalf
• theentitywillthereforebeliabletothethirdparty,but…
• ...theentitywillhaveaclaimagainsttheagent
• apparentauthority,sometimescalled“ostensible”authoritymaybegreaterthanactualauthority
• thissituationarisesforexamplewhenanentityallowstheagenttoactasthoughtheyhaveauthorityeventhoughsuchauthoritydoesnotinfactexist
• whereathirdpartycontractswiththisagent,andisnotawareofanyrestrictionontheagent’spower,theentitywillbeliabletotheinnocentthirdparty
• thisapparentorostensibleauthorityisnotlimitedtowhatisnormalforanagent
61June 2012 Examinations Paper F4 gLO
AgEncy LAw chapter 10
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• itcouldbemuchwider,andwillbesoif:
• theentityitself(andnotjustthedirector)representstheagentashavingwiderauthority
• suchrepresentationshouldbeoneoffact,notoneoflaw
• therepresentationmustbemadedirecttothethirdpartyandnot,therefore,tosomeoneelse
• thethirdpartymustshowthattheyrelieduponthisrepresentationand…
• ...musthaveacteduponthatrepresentation
Termination of agency relationship
• anagencyagreementmaybeterminatedby
• agreementor
• operationoflaw
• itisautomaticallyterminatedby
• deathoftheagentortheprincipal
• insanityoftheagentortheprincipal
• bankruptcyoftheprincipal
June 2012 Examinations Paper F4 gLO
AgEncy LAw chapter 10 62
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Liability of the agent
• solongasanagentactswithinthelimitsoftheirauthority,theagent
• incursnoliabilityunderthecontract
• cannotenforcethecontract
• butanagentmaybeheldpersonallyliablewhere
• theagententersintoacontractwithoutdisclosingtheexistenceofaprincipal
• theagentactsonownbehalfeventhoughclaimingtoactonbehalfofaprincipal
• normaltradecustomhasestablishedliabilityontheagent
63June 2012 Examinations Paper F4 gLO
AgEncy LAw chapter 10
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June 2012 Examinations Paper F4 gLO
AgEncy LAw chapter 10 64
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Chapter 11
PartnershiP Law
• apartnershipisdefinedinUKlawas“therelationshipwhichsubsistsbetweentwoormorepeoplecarryingonbusinessincommonwithaviewtoprofit”
• muchofpresent-daypartnershiplawiscontainedinthePartnershipAct1890
• partnersmayagreeamongstthemselveshowtheirfirmistooperate,solongastheirarrangementislegal
• thebusinessmustbebeing“carriedon“.Itshouldbemorethanaone-offtransaction,andmustbecontinuing
• itmustbe“withaviewtoprofit”andismorethanthesimplesharingofgrossrevenues
• ifabusiness relationshipsatisfies thedefinition, thecourtsmaywelldeterminethatapartnershipexists,regardlessofanywrittendocumentation(orintentionoftheparties)tothecontrary
• asageneralrule,partnersinafirmarejointlyandseverallyliableforpartnershipdebts
• everypartnerisanagentofthefirmandtheotherpartnersforthepurposeofthebusinessofthefirm
• theactsofeverypartnerdoneinthecourseofthefirm’sbusinessbindthefirmandthepartnersunlessthepartnerwasexceedinghisauthorityand……
• ...theotherpartyknewthatfact,orwasnotawarethatthepersonwasapartner
65June 2012 Examinations Paper F4 GLO
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The Agreement
• partnershipsareformedbyagreement,andtheinternalarrangementsareamatterforagreementamongstthepartners
• partnerscanagreetodoanything-solongasit’slegal
• becauseapartnershipisformedbyagreement,itisalsocapableofbeingamendedbyagreement....
• andterminatedbyagreement
• typicalmatterstobeagreeduponinclude:-
• -accountsandaudit
• -divisionofprofitsand,therefore,alsosharingoflosses
• -drawingsallowedtobetakeninadvanceofbeingcreditedwithashareofprofits
• -capitalofthefirmandrespectivecontributionsofeachpartner
• -interestpayableoncapitalcontributionsorchargeableonoverdrawncurrentaccounts
• -salariesofpartnersbeforeprofitsareshared
• -currentaccountsaswellasfixedcapitalaccounts,orjustonecombinedaccountforeachpartner
• -goodwillcomputationbasis
• -timeperiodforwhichthepartnershipistolast.Ifnotimeperiodisspecified,thisisa“partnershipatwill”
June 2012 Examinations Paper F4 GLO
PartnErshiP Law Chapter 11 66
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1890 Actin the event that partners fail tomake an arrangement about somematterwhich is later disputed, then thePartnershipAct1890establisheswhatshouldhappen.Themainprovisionsare:-(medicsinbed)
• managemententitlementforallpartners
• equalityofprofitshare
• derivedbenefit,withoutconsentoftheotherpartners,shouldbepaidbackintothefirm
• indemnitybyotherpartnerswhereonepartnerincursapersonalliabilitywhendoinganythingnecessarytoprotectthefirmoritsproperty
• competingbusinessprofits,gainedwithoutconsent,shouldbepaidbackintothefirm
• salaries-noautomaticentitlement
• interestoncapitalnotpayable,butinterestattherateof5%perannumispayableonloansandadvances
• madetothefirmoverandaboveagreedfixedcapital
• nonewpersonmaybeintroducedintothefirmasapartner
• booksofaccountshallbeavailableforinspectionbyanypartneratanytime
• expulsionofapartnerrequiresunanimousconsent
• disputesconcerningthebusinessofthefirmaresettledbymajorityvotebutnochangeinthenatureofthefirm’sbusinessmaybemadewithoutunanimousconsent
67June 2012 Examinations Paper F4 GLO
PartnErshiP Law Chapter 11
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Dissolution Grounds – Automatic and by Court Order ( dissolutions )
• deathofapartner
• insolvencyofapartner
• sendingnoticeinapartnershipatwill
• sharepledgedbypartnertosettleprivatedebts
• objectofajointventureiscomplete
• lapseoftimewherepartnershipformedforaspecificperiod
• unabletocarryoutone’sobligationscreatedbythepartnershipagreement
• terminationbytheCourtundertheprinciplesof“justandequitable”
• insanityofapartner
• onlyabletocarryonthebusinessataloss
• naughtyconductcalculatedtoaffectthecarryingonofthefirmprejudicially
• shirtyconduct-persistentbreachesofthepartnershipagreement
• thefirstsixareallobjectivemattersoffact,whereas
• thelastsixhavetobeprovedinaCourtandthedissolutionisasaresultoftheCourt’ssubjectivedecision
June 2012 Examinations Paper F4 GLO
PartnErshiP Law Chapter 11 68
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LPA 1907 and LLPA 2000
• LimitedPartnershipsAct1907mainfeaturesare:-
• atleastonegeneralpartner(withunlimitedliability)andonelimitedpartner(withlimitedliability)
• mustberegisteredwiththeregistrarofcompanies
• limitedpartnershouldtakenopartinthemanagementofthefirm
• ifthefirmbecomesbankrupt,onlythegeneralpartnersareliableforthefirm’sdebts
• LimitedLiabilityPartnershipsAct2000mainfeaturesare:-
• combinationoftheadvantagesofapartnershipwiththoseofalimitedcompany
• mustberegisteredwiththeregistrarofcompanies
• mustfilefinancialstatementsandbeaudited
• asaseparatelegalentity,thepartnersarenotliableforthefirm’sdebts,therebyprotectingthemselvesfrompersonaldisasters.However,theprovisionsrelatingtowrongfulandfraudulenttradingapply.
69June 2012 Examinations Paper F4 GLO
PartnErshiP Law Chapter 11
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International partnerships
• Frenchlawdoesnotrecognisepartnerships
• instead,Frenchlawlookstodeterminewhetherapersonorgroupofpeopleareactingforcommerce
• ifthis“actingforcommerce”isestablishedasafact,theaffectedpersonorpeoplearerequiredto
• maintainproperaccountingrecords
• recordparticularsinthe“commercialregister”
• wheretwoormorepeopleareinvolvedinactingforcommercetheyareknownasa“Societé”
• aSocietéisthereforetheFrenchequivalentofaUKpartnership
• aSocietémaybe
- societéennomcollectif,or
- societéencommanditesimple
• ennomcollectifissimilartoatraditionalUKpartnership
• encommanditesimpleissimilartoalimitedpartnershipinthatoneormoreoftheparticipantshaslimitedliability
June 2012 Examinations Paper F4 GLO
PartnErshiP Law Chapter 11 70
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International partnerships
• Muslimlawrecognisesthreetypesofprofit-sharingoperations
• Musharakah
• Mudaraba
• Shirkahal-Inan
• MusharakahisverysimilartoatraditionalUKpartnership
• participantspoolresourcestoinvestinacommercialventure
• decisiontakingisshared
• profitsandlossesareshared
• MudarabaissimilartoaUKpartnershipwhereone(ormore)ofthepartnerstakesnoactivepart
• thisdormantorsleepingpartnerinvestsinthefirmandsharesinthefirm’sprofits
• theinvestmenthastheappearanceofaloanbutunderMuslimlawthepaymentofinterestisforbidden
• ...butareturnbywayofprofit-sharingisnotforbidden
• Shirkahal-InanhastheappearanceofatraditionalUKpartnership
• participantsinvestmoneyorothervalueand
• shareprofits
• butpartnersarenotliableforthedebtsoftheotherpartnersand
• canonlysueoncontractswhichtheythemselvesenteredinto.
71June 2012 Examinations Paper F4 GLO
PartnErshiP Law Chapter 11
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Partnership compared with company ( learn fast rats )
Partnership Company
liability usuallyunlimitedforpartners usuallylimitedformember
existence noseparatelegalexistencesonoperpetualexistence
separatelegalentitysoenjoyperpetualexistence
accounts norequirementtofilewithgovernment requiredtofileannualaccounts
raisingcapital cannotsecuredebtsbywayoffloatingcharge
cansecuredebtbywayoffloatingcharge
number normallyalimitof20partners nolimitonthenumberofmembers
formality firmmaybecreatedbyinformaloralagreement
companymusthaveaformalconstitution
assets partnersownassetsjointly companyownsassets–membersowncompany
separateentity firmdoesnotexistasaseparateentity companydoeshaveseparatepersonality
transferofinterest partnerscannotwithoutunanimousconsent
memberscan
reductionofcapital easyforpartnerstowithdrawtheircapital
verydifficultforcompaniestoreducecapital
activeparticipation partnersareentitledtotakeanactivepartinmanagement
membersappointdirectorsasagentstomanagethecompany
taxation partnerstaxedonprofitshare companypaystaxonprofitsmemberspaytaxontheirdividendincome
secretary norequirementforpartnershipfirmtohaveasecretary
publiccompaniesmusthaveappropriatelyqualifiedsecretary
June 2012 Examinations Paper F4 GLO
PartnErshiP Law Chapter 11 72
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Chapter 12
Company Law
Types of Corporation and Ways of Formation
• corporationsole–apublicofficeoccupiedbyanaturalperson.Deathofthepersondoesnotaffectthecontinuingsurvivalofthecorporation.TheMayorofLondonisacorporationsole.
• corporationaggregate–acollectionoflike-mindedpeoplewhocombinetoformanartificialperson–thecorporationaggregate.Deathofindividualmembershasnoeffectontheexistenceofthecorporation.
• formationmaybebyanyof3ways
• RoyalCharter –egEastIndiaTeaCompany,manyUKuniversities
–veryrareinmoderntimes
• Statute –equally(ifnotmore)rare
–EgBritishWaterways
• Registration –byfarthemostcommonmethod
–EgTescoplc,Small&CoLtd.
• since2004anewformofcompany,theCommunityInterestCompany(CIC)isavailableinUKfororganisationscreatedforthebenefitofthecommunity/societyratherthanforthepursuitofprofit
73June 2012 Examinations paper F4 GLo
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Types of Company
• publicquoted
• sharepricequotedonarecognisedstockexchange
• mustbelimitedbyshares
• publicunquoted
• againlimitedbyshares,butnotquoted
• private–unlimited
• private–limitedbyshares
• private–limitedbyguarantee,andhavingasharecapital
• private–limitedbyguaranteebutwithnosharecapital
• communityinterestcompanies
June 2012 Examinations paper F4 GLo
Company Law Chapter 12 74
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Public Companies
• acompanyisapubliccompanyifitsatisfiesthedefinition
• itisacompanywhichislimitedbyshares
• hasatleast2members
• theconstitutionstatesthatitispublic
• thenameendswiththewords“publiclimitedcompany“or“plc”
• ithasanallottedsharecapitalnotlessthan£50,000…
• …ofwhichnotlessthan25%iscreditedaspaidup…..
• ….togetherwiththewholeofthesharepremium
• anycompanywhichdoesnotsatisfythedefinitionisaprivatecompany
• althoughapubliccompanyexistsfromthedateonitscertificateofincorporation,itcannotcommencetotradeuntilitacquiresatradingcertificate
75June 2012 Examinations paper F4 GLo
Company Law Chapter 12
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Trading Certificates
• publiccompaniescannotcommencetotradeuntilaftertheyhavereceivedatradingcertificate
• thisisissuedbytheregistrarfollowinganapplicationmadebythecompany
• theapplicationstates
• thatthenominalvalueofallottedsharesisnotlessthan£50,000
• thepreliminary/formationexpenses
• andtowhomthesehavebeenpaid(orarestillpayable)
• theapplicationmustbeaccompaniedbyastatementofcompliance
• ifapubliccompanydoesinfactcommencetradingbeforethereceiptofthetradingcertificate,aninnocentthirdpartyisprotected
• butthecompany,andanyofficerindefault,isliabletoafine
• if apubliccompany fails toobtaina tradingcertificatewithin12monthsof incorporation, thecourtonapplicationmaygrantaliquidationorderagainstthecompany
June 2012 Examinations paper F4 GLo
Company Law Chapter 12 76
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Advantages of Being a Company as Distinct From a Partnership
• separatelegalpersonality(SalomonvSalomon)(AdamsvCapeIndustries)
• limitedliability
• perpetualexistence
• raisingfinance
• offersharestothepublic
• secureborrowingbywayoffloatingcharge
• ownershipofproperty
• numberofmembers
• transferofinterest
• BUT there are disadvantages
• legalimplications
• expense
• publicityanddisclosure
77June 2012 Examinations paper F4 GLo
Company Law Chapter 12
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Disadvantages ( Expanded )
• legalimplications
• formation
• audit
• shareissues
• meetingsandresolutions
• liquidation
• “properaccountingrecords“
• expense
• publicity
• detailsofdirectorsandtheirremuneration
• businessdetails
June 2012 Examinations paper F4 GLo
Company Law Chapter 12 78
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Lifting the Veil
• thecourtwill lookbehindtheveilof incorporationwhere justicerequires ittopreventfraud, illegalityoroppression:-
• GilfordMotorCovHorne
• DaimlervContinentalTyreandRubber
• EbrahimivWestbourneGalleries
• RvOll
• ReFGFilms
• theveilwillalsobeliftedundertheprovisionsofstatute:-
• fraudulenttrading
• wrongfultrading
• commencingtotradewithoutatradingcertificate
• abuseofcompanyname
• othersituations:-
• preparationofgroupaccounts
• taxlaw
• personalguarantees
79June 2012 Examinations paper F4 GLo
Company Law Chapter 12
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International companies similar to UK companies
-France
-Sociétéanonyme(SA)
-Sociétéàresponsibilitélimitée(SaRL)
-SAissimilartoaUKpubliccompany
-musthavenotlessthan6members
-musthavenotlessthan3directors…
-...notmorethan12directors
-musthaveanauditor
-SaRLcomparablewithUKprivatecompany
-however,SaRLdoesnothaveasharecapital
-financingisdividedintopartswhichtheholderscannotselltothegeneralpublic
-commonlyusedforfamilycompanies
-Germany
-Aktiengesellschaft(AG)-similartoaUKpubliccompany
-GesellschaftmitbeschränkterHaftung(GmbH)-similartoaUKprivatecompany
-Muslimsocieties
-noseparatecorporateformisrecognisedbyMuslimlaw,unlikepartnershipswhicharerecognised
-Europeancompanies
-anorganisationwithoperationsinmorethanoneEUmemberstatecanincorporateanewtypeofcompany–theEuropeancompany
-aEuropeancompanyorSocietasEuropaea(SE)
-isapubliccompanywith
-limitedliabilityforthemembersand
-aminimumcapitalof€120,000and
-mustberegisteredinthememberstatewherethecompanyhasitsadministrativeheadquarters
-fourwaysofestablishingaEuropeancompanybycompaniesfromatleasttwoEUmemberstates
-bymerger
-byformationofanewholdingcompany
June 2012 Examinations paper F4 GLo
Company Law Chapter 12 80
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-byformationofanewsubsidiary
-bytransformingacompany(inoneEUmemberstate)whichhasownedasubsidiaryforatleasttwoyearsinanotherEUmemberstate
81June 2012 Examinations paper F4 GLo
Company Law Chapter 12
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Formation
• formedbypromoters(seenext)
• preincorporationcontracts(KelnervBaxter)
• documentstobefiled:-
• applicationforregistration
• memorandum
• articles
• statementofcompliance
• statementofcapitalandinitialshareholders
• registrationfee
• certifiedtranslation
June 2012 Examinations paper F4 GLo
Company Law Chapter 12 82
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Formation - role and duties of promoters
• roles
• act,underinstruction,toformacompany
• thisinvolves:
- finding people who will sign the memorandum and articles of association, and act as thecompany’sfirstdirectors
- selectasuitablenameforthecompany
- determinetheformandamountofthecompany’ssharecapital
- determinetherightstobeattachedtothedifferentclassesofsharecapital
- preparetheconstitutionofthecompany
- submitallthenecessaryformstotheregistrarofcompanies
- payallthepreliminaryandformationexpensesofthecompany
• duties
• actwithreasonableskillandcare
• discloseanyprofitorpotentialconflictofinterest
- eithertothefirstindependentboardofdirectors,or
- tothecompany’sexistingorintendedshareholders
• breach of duty - ie non-disclosure - allows the company to rescind the contract and recover thepurchaseprice(ErlangervNewSombreroPhosphateMiningCo)
• the company may require the promoter to pay over to the company any undisclosed profits(GlucksteinvBarnes)(WhaleyBridgevGreen)
• thecompanymaysuethepromoterandclaimdamagesforbreachoffiduciaryduty(LeedsvHanley)
83June 2012 Examinations paper F4 GLo
Company Law Chapter 12
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Formation ( continued )
• theapplicationforregistrationdetails:-
• proposedname
• registeredoffice(EnglandandWales)
• proposedpostaladdressofregisteredoffice
• limitationofmembersliability(sharesorguarantee)
• publicorprivate
• certificateofincorporation
• ifeverythingisinorder,registrarwillissueacertificateofincorporation
• thedateonthecertificateisconclusiveproof
• JubileeCottonMillsvLewes
June 2012 Examinations paper F4 GLo
Company Law Chapter 12 84
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Memorandum and the Constitution
• historicallythememorandumofassociationwasamajordocument
• since2006,nowjustamatterofrecord
• statesthatthesubscribers
• wishtoformacompany
• agreetobecomemembers
• agreetotakeatleastoneshareeach
• company’sconstitutioncomprises
• articles
• resolutions(affectingthearticles)
• agreements(affectingthearticles)
85June 2012 Examinations paper F4 GLo
Company Law Chapter 12
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Articles – Contractual Force
• whenapersonbecomesamemberofacompany,itisasthoughtheyhaveseparatelyenteredacontractwiththecompanyandwithalltheothermembersindividually
• thetermsofthatcontractarecontainedwithinthearticles
• theeffectistobindthememberstothecompany
• HickmanvKentorRomneyMarshSheepbreedersAssociation
• …..andthecompanytothemembers
• PendervLushington
• ….andthememberstothemembers
• ClarkevDunraven
• butthearticlesdonotcreateacontractbetweenthecompanyandthirdparties
• EleyvPositiveGovernmentLifeAssuranceCo.
June 2012 Examinations paper F4 GLo
Company Law Chapter 12 86
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Articles – Alterability
• basicrule–canonlyalterifforthebenefitofthecompanyasawhole
• individualhypotheticalmemberofthefuture
• GreenhalghvArderneCinemas
• nooutsidecontractshallpreventachange,butcompanymaybecomeliableforbreachofthatcontract(SouthernFoundriesvShirlaw)
• evenifproposedalterationadverselyaffectsonlyonemember,itmaystillbevalid(AllenvGoldReefsofWestAfrica)
• alterationsallowingcompulsorypurchaseofminority’sshareswillbe(normally)disallowed(DafenTinplatevLlanelliSteel)
• allowingexpulsionofdefraudingdirector–OK(ShuttleworthvCoxBrothers)
• allowingexpulsionofcompetingmembers–OK(SidebottomvKershawLeese)
• possibletopreventalterationbyweightedvotingrights
• BushellvFaith
87June 2012 Examinations paper F4 GLo
Company Law Chapter 12
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Articles – Procedure for Alteration
• specialresolution
• 75%majority
• 14daysnotice
• copyofresolutiontoregistrarwithin15days
• copyofamendedarticlestoregistrar
• alterationisbindingonallmembers
• articlesmaysaythat,forameetingproposinganalteration,theaffectedmembermustbepresent
• soaffectedmembercanpreventalterationbynotattending
• articlesmayrequireagreatermajoritythan75%
• …butcanneverbedraftedtopreventamendment
June 2012 Examinations paper F4 GLo
Company Law Chapter 12 88
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Company Names
• basicrule–companycanhaveanynameselectedbypromoters
• buttherearerestrictions
• registrarmayrefusetoregisteracompanywithanamewhichismisleadingoroffensive
• connectionwithroyalty,banks…..
• namemayberestrictedbystatute
• ANZAC
• namewillnotbeallowedifthesameasanexistingcompany
• namemaybedisallowedasatort(passing-off)
• EwingvButtercupMargarine
• theword‘limited’(orplc)shallnotappearanywhereexceptattheendofthename
89June 2012 Examinations paper F4 GLo
Company Law Chapter 12
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Name Change
• compulsoryorvoluntary
• mayberequiredtochangebyorderfromtheregistrar
• ….within12monthsifthecompanyhasbeen,bymistake,registeredwithanametoosimilartoanexistingcompany
• ….within5yearsifmisleadinginformationwassupplied
• atanytimeiftheuseofthenameislikelytocauseharmtothepublic
• specialresolution
• 75%majority
• 14daysnotice
• copyofresolutionandamendedconstitutiontoregistrarwithin15days
• registrarissuesnewcertificateofincorporation
June 2012 Examinations paper F4 GLo
Company Law Chapter 12 90
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Objects
• companycandoanythingsolongasitislegal
• sosince2006,onlyreasontomentionobjectsinthearticlesisrestrictively
• ifcompanytriestoignoretherestriction,ultravires
• membercanobject(AshburyRailwayvRiche)
• “thevalidityofatransactionshallnotbecalledintoquestiononthegroundsoflackofcapacity”
• “in favourofa thirdpartyacting ingood faith, thepowerof thedirectors tobindthecompanyshallbedeemedtobefreeofanylimitationunderthecompany’sconstitution”
• theseapplyonlytothirdparties,nottomembers
• goodfaith–butthisispresumedunlessshownotherwise
• norequirementforthirdpartytomakeenquiries
• sothirdpartiesareprotected,butcompanycannotsuetoenforceanultravirestransaction
91June 2012 Examinations paper F4 GLo
Company Law Chapter 12
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June 2012 Examinations paper F4 GLo
Company Law Chapter 12 92
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Chapter 13
Company Law: DireCtors anD offiCers
General Points
• adirectorisanyonewhooccupiesthepositionof...
• ashadowdirectorisapersoninaccordancewithwhoseinstructionsthedirectorsareaccustomedtoact
• defactodirector–apersonwhopurportstoactasthoughtheywereadirector
• alternatedirector–apersonappointedbyadirectorwhoisunabletoattendaboardmeeting
• executivedirectors–moreonthesenext
• non–executivedirectors
• integralelementofcorporategovernance
• bringanindependentview
• helpinprovidingeffectiveleadership
• helptoestablishandmaintainfinancialprobity
• keepawatchfuleyeontheeffectivenessoftheexecutivedirectors
93June 2012 Examinations paper f4 GLo
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Number and Eligibility
• privatecompany–atleastone
• publiccompany–atleasttwo
• anyonemaybeadirector(butsomerestrictions)
• mustbeover16
• maybeanon-naturalperson
• mustnotbedisqualifiedunderCDDA(seelater)
• mustnotbebankrupt
• mustnotbeofunsoundmind
• shouldnotbeabsent,withoutpermission,fromboardmeetingsforaperiodinexcessof6months
June 2012 Examinations paper f4 GLo
Company Law: DirECtors anD offiCErs Chapter 13 94
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Company Directors Disqualification Act
• onapplicationtotheCourt,adirectormaybedisqualifiedbycourtorderonanumberofgrounds:
• for an offence committed in the promotion, formation,management, liquidation or striking off acompany
• wherepersistentlyindefault(3offencesin5years)offilingreturns
• whenfoundguiltyoffraudulentorwrongfultrading
• wheninvolvedinacompanyinsolventliquidation
• followingaDepartmentofTradeinvestigation
• ingeneral,thedisqualificationperiodis“upto15years”
• breakingthedisqualificationorder upto2yearsinprison
95June 2012 Examinations paper f4 GLo
Company Law: DirECtors anD offiCErs Chapter 13
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Directors Appointment
• firstdirectors–namedindocumentssenttoregistrarbeforeincorporation
• subsequentdirectorsmaybeappointedby:-
• membersingeneralmeeting
• otherdirectors–tofillacasualvacancy
• thecourt(rare)
• alender(ifpartoftheloanagreement)
• administrator–underanadministrationorder
• 1/3rotationprocedure
• FTSEtop350company?Alldirectorsretireeveryyear
• appointedbyordinaryresolution
• registrarnotified
June 2012 Examinations paper f4 GLo
Company Law: DirECtors anD offiCErs Chapter 13 96
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Directors Removal
• ordinaryresolution
• specialnotice
• 28daysnoticetocompany
• 21daysnoticetomembers
• opportunitytomakewrittenrepresentationsofreasonablelengthandnotdefamatoryinnature
• reasonablelength
• mustalsosatisfylegalrestrictions–100membersholding≥£100sharecapitalonaverage
• noticetoregistrar
• weightedvotingrightscanmakeremovalimpossible
• BushellvFaith
• companymayhavetopaysubstantialcompensationtoaremoveddirector(SouthernFoundriesvShirlaw)
97June 2012 Examinations paper f4 GLo
Company Law: DirECtors anD offiCErs Chapter 13
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Directors - Statutory Duties
• 2006Actputintostatutemanyoftheestablishedcommonlawprinciples
• 7duties
• actwithintheirpowers
• performtheirdutieswithreasonableskill,careanddiligence
• promotesuccessofcompany(seenext)
• independentjudgement
• avoidconflictsofinterest
• nobenefitsfromthirdparties
• declareinterestintransactions/contracts
• commonlawcaseswhichthecourtswillfollowininterpretingthesestatutorydutiesfollow
June 2012 Examinations paper f4 GLo
Company Law: DirECtors anD offiCErs Chapter 13 98
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Directors’ Duties – Common Law Cases
• ReCityEquitableFireInsurance
• DorchesterFinanceCovStebbing
• CookvDeeks
• IDCvCooley
• Regal(Hastings)vGulliver
• HowardSmithvAmpolPetroleum
• BamfordvBamford
• HoggvCramphorn
99June 2012 Examinations paper f4 GLo
Company Law: DirECtors anD offiCErs Chapter 13
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Directors – Promoting Success
• statutetryingtoencouragelong-termapproachbydirectors
• directorstohaveregardforallstake-holders
• non-exhaustivelistofmattersfordirectorstoconsider:
• long-termconsequencesoftheirdecisions
• employees’interests
• goodrelationshipswithcustomersandsuppliers
• localcommunityandenvironmentalimpact
• highstandardsofbusinessconduct
• goodreputation
• fairtreatmentforallmembers
June 2012 Examinations paper f4 GLo
Company Law: DirECtors anD offiCErs Chapter 13 100
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Directors – Remedies
• makethemaccountforpersonalgain(Regal(Hastings)vGulliver)
• makethemindemnifythecompanyagainstlosscausedbytheirnegligence(seebelow)
• rescindthecontractwheredirectorhasaconflictofinterest
• askthecourttodeclareatransactionisultravires
• directorsarenotliablefortheactsofotherdirectors
• maybeheldliablebythecourtlookingbehindtheveilofincorporation
• maybeheldliablebythecourtforfraudulentorwrongfultrading
• liablefornegligence?
• notifhonest(PavlidesvJensen)
• butifnegligenceresultsinpersonalbenefit?(DanielsvDaniels)
101June 2012 Examinations paper f4 GLo
Company Law: DirECtors anD offiCErs Chapter 13
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Company Secretary
• everypubliccompanymusthaveone
• shouldbeappropriatelyqualified
• duties, determined by the directors, are administrative in nature ( Panorama Developments v FidelisFurnishingFabrics)
• maintainingcompany’sstatutoryrecords(seelater)
• filingreturnswiththeregistrar
• takingminutesofmeetings
• ensuringthecompanycomplieswithstatutoryrequirements
• signingdocumentsasrequiredbylaw
• underprinciplesofcorporategovernanceshouldalso:-
• advisetheboardongovernancematters
• arrangetheinductionprocessfornewneds
• enableeffectivecommunicationbetweenboardanditsvarioussub-committees
June 2012 Examinations paper f4 GLo
Company Law: DirECtors anD offiCErs Chapter 13 102
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Company Secretary: Statutory books
• everycompanymustmaintaincertainrecordsrequiredbystatute–“thestatutorybooks”
• theserecordsmustbekeptatthecompany’sregisteredoffice,unless...
• ...theregisterofmembersismaintainedbyanindependentorganisation–thecompany’sregistrars
• inthissituation,certainotherbooksmaybekeptalsoattheofficesofthecompany’sregistrars
• registersinclude:
• members
• directors
• secretary
• mortgagesandcharges
• debentureholders
• directors’interests
• substantialshareholders
103June 2012 Examinations paper f4 GLo
Company Law: DirECtors anD offiCErs Chapter 13
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Auditors
• required(unless‘small’)
• appointedby:-
• directors(firstandcasualvacancies)
• members(subsequentandcasualvacancies)
• secretaryofstate(ifno-oneelsedoes)
• mustbeappropriatelyqualified
• cannotbe:-
• directororemployeeofthecompany
• partneroremployeeoftheabove
• undischargedbankrupt
• professionallypreventedfrom
• owningbeneficialinterest
• beingcloserelativeofcompanyofficersoremployees
June 2012 Examinations paper f4 GLo
Company Law: DirECtors anD offiCErs Chapter 13 104
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Auditors – Rights and Duties
• rights
• accesstocompanyrecords
• informationandexplanations
• noticeofandattendanceatcompanygeneralmeetings
• writtenrepresentations(whenproposedforremoval)
• receivecopiesofproposedwrittenresolutions
• duties
• expressanopinionontruthandfairness(andproperpreparation)
• reportifdirectors’reportisinconsistentormisleading
• (forquotedcompanies)reportoncertainelementsofthedirectors’remunerationreport
• auditorsshouldsignanddatetheauditreport
• report,byexception,ifproperaccountingrecordsnotkept
105June 2012 Examinations paper f4 GLo
Company Law: DirECtors anD offiCErs Chapter 13
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June 2012 Examinations paper f4 GLo
Company Law: DirECtors anD offiCErs Chapter 13 106
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Chapter 14
Company Law: meetings and ResoLutions
Annual General Meeting
• publiccompaniesmustholdanAGM
• …everycalendaryear(GibsonvBarton)
• firstnomorethan18monthsafterincorporation
• subsequent,nomorethan15monthsafterprevious
• privatecompanymemberscanrequestanAGM
• 21daysnotice
• ordinarybusiness:-
• formalpresentationofthefinancialstatements
• reappointmentofdirectors
• reappointmentofauditors
• approvalofdividendproposedbydirectors
107June 2012 Examinations paper F4 gLo
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Resolutions
• ordinary
• simplemajority
• ordinarybusinessand(some)specialbusiness
• 14daysnotice
• special
• 75%
• 14daysnotice
• written
• privatecompaniesonly
• anyresolution(ordinaryorspecial)
• …exceptforremovalofauditorordirector
• auditorneedstoapprovethewording
• resolutionpassedonthedaterequiredmajorityisreached
June 2012 Examinations paper F4 gLo
Company Law: mEEtings and REsoLutions Chapter 14 108
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Resolutions – Special Notice
• specialnoticeappliesonlytosomeordinaryresolutions
• 28daysnoticeisgiventothecompany
• thecompanygives21daysnoticetothemembers
• resolutionsrequiringspecialnotice:-
• toremoveadirector
• toremoveanauditor
• toappointanewauditorotherthantheretiringauditor
• tofillacasualvacancyintheofficeofauditor
• toconfirminappointmentanauditorappointedbythedirectorsinthemid-termtofillacasualvacancy
• director/auditormaywritewrittenrepresentationsofreasonablelengthandnotdefamatoryinnature
109June 2012 Examinations paper F4 gLo
Company Law: mEEtings and REsoLutions Chapter 14
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Resolutions
• normallythedirectorswilldeterminetheagendaforameeting
• butsometimesmembersmayrequirearesolution
• membersmustholdatleast5%ofthetotalvotingrights,or...
• ...notlessthan5%innumberofthemembers,or...
• …benotlessthan100membersholdingonaveragenotlessthan£100eachinpaidupsharecapital
• therequestshouldbeinhardcopyform,orelectronicform
• therequestmustbedeliverednotlessthan6weeksbeforethegeneralmeeting
• therequisitionistsmayrequestthatastatementofreasonablelengthbecirculatedtogetherwiththenoticeofthemeeting
• reasonablelengthis,asusual,notmorethan1,000words
• therequisitionistswillbeartheincidentalcostsunless….
• ….thecompanyresolvesotherwise
June 2012 Examinations paper F4 gLo
Company Law: mEEtings and REsoLutions Chapter 14 110
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Proxies
• aproxyis‘awrittenstatementauthorisinganotherpersontovoteonbehalfofanabsentshareholder’
• thepersonappointedneednotbeamemberofthecompany–itcanbeanyone
• theword‘proxy’isusedtodescribeboththeformandthepersonappointedbytheform
• proxiesmayspeakatthemeeting
• theymayvoteonapollandonashowofhands
• theymaydemandapoll
• companieswillprovide‘two-way’proxyformssothattheabsentmembercanindicatewhichwaytheproxyshouldvote–‘for’or‘against’eachresolution
• proxyformsshouldbedeliveredtothecompanynotlessthan48hoursbeforethemeeting
• aproxyappointedbyamemberwhichisacompanyiscalleda‘representative’
• apersonmaybeappointedbymorethanonememberastheirproxy
111June 2012 Examinations paper F4 gLo
Company Law: mEEtings and REsoLutions Chapter 14
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Quorum
• aquorumistheminimumnumberofmemberswhoshallbepresentatameetingbeforethemeetingmayvalidlypassresolutions
• theminimumnumberisnormallycontainedwithintheconstitution
• typically,theminimumnumberis2memberspresent,inpersonorbyproxy
• buttheword‘meeting’impliesthatthereshouldbeatleast2persons
• soonememberinpersonwhoalsoholdsaproxyforanothermembercannot,normally,beaquorum
• itis,however,possible!
• inthesituationofaclassmeeting,whereallthesharesofthatclassareownedbyasingleperson
• ifthecompanyisaprivatecompanywithonlyonemember
• ifthecourtdirectsthataquorumshallbeasingleperson
• ifameetingisinquorateatthescheduledstarttimeitwillnormallybeadjournedto‘sametime,sameplace,nextweek’
June 2012 Examinations paper F4 gLo
Company Law: mEEtings and REsoLutions Chapter 14 112
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Voting
• followingdiscussionaboutaresolution,thechairwillcallforavote
• initially,thiswillbeby‘showofhands’
• eachmember,nomatterhowmanysharestheyhold,thereforehasonlyonevote
• butmembersholdingmanysharesmayask,followingashowofhands,foravotecount–apoll
• pollsmaybedemandedby
• notlessthan5members
• membersholdingnotlessthan10%ofthetotalvotingrights
• membersholdingnotlessthan10%ofpaid-upcapital
• thechair
• votesarecounted,whetherbyshowofhandsorbypoll
• abstentionsarenotcounted,neither‘for’nor‘against’
• thechair’sdecisionabouttheresultofthevoteisfinal
113June 2012 Examinations paper F4 gLo
Company Law: mEEtings and REsoLutions Chapter 14
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June 2012 Examinations paper F4 gLo
Company Law: mEEtings and REsoLutions Chapter 14 114
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Chapter 15
Company Law: Loan CapitaL
Loan Capital
• adebentureis‘thewrittenacknowledgementofadebtbyacompany’
• maybesecuredorunsecured
• maybeasingledebentureoraseriesofdebentures
• ifissuedasaseries,debentureholdersrank‘paripassuinterse‘
• security/thechargemaybefixedorfloating
• tobevalid,thechargemustberegisteredwithin21daysofitscreation
• ifthereare2chargesoverthesameproperty,afixedchargewilltakeprecedenceoverafloatingcharge
• ifthereare2fixedcharges(or2floatingcharges)overthesameproperty,theearlieronewilltakeprecedence
• theearlieroneistheonewhichisregisteredfirst!
• debentureholdersarecreditorsofthecompany,notmembers
115June 2012 Examinations paper F4 GLo
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Fixed Charges
• attachestospecificassets
• companyisnotfreetodeal/disposeofthosechargedassets
• fixedchargecreatedwithinthe6monthsimmediatelypriortoacompanycommencingliquidationmaybeinvalid
• aliquidatorwilltrytoproveinvalidity
• areceivermayprovevalidityif
• thechargewasgrantedinexchangefornew‘money’or
• thecompanywassolventatthedateofcreationofthecharge
• intheeventofaliquidation,thefixedchargedebentureholderranksnumberoneinthesequenceofassetdistribution
• whereafloatingchargeexistsoveranasset,theremaybeanegativepledgeclause
• theeffect is toensure thatafloatingchargedebentureholderhas tobenotifiedofanyproposedfixedchargeoverthesameasset
June 2012 Examinations paper F4 GLo
Company Law: Loan CapitaL Chapter 15 116
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Floating Charges
• unlikefixedcharges,floatingchargesdonotattachtospecificassets
• definedinthecasereYorkshireWoolcombersas:-
• achargeonaclassofassetsofacompany,presentandfuture
• wheretheclasschangesfromtimetotimeintheordinarycourseofbusiness
• andthecompanymaydealwiththeseassetsuntilthechargecrystallises
• typicallyappliestothecurrentassetsofinventoryandaccountsreceivable
• whetherachargeisfixedorfloatingisamatterofcommercialrealityratherthanhowithasbeennamed
• inreTunbridgea‘fixed’chargewasheldbythecourttobefloatingbecauseallthreeYorkshirecriteriaweremet
• inreCimexa‘floating’chargewasheldtobefixedbecausetheassetsdidnotchangefromtimetotimeintheordinarycourseofbusiness
• afloatingchargewillbeinvalidifcreatedwithinthe12monthsimmediatelypriortothecommencementofaliquidation
117June 2012 Examinations paper F4 GLo
Company Law: Loan CapitaL Chapter 15
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Debentures Compared with Shares
• fixedrateofinterest
• payableeventhoughnoprofits
• novotes
• security(notalways)
• preferentialentitlementtoreturnofmoney
• possessionofthechargedasset
• rightswhencompanydefaults
• applytocourtforliquidationorder
• applytocourtforadministrationorder
• appointareceiver(providednoadministrationorderisineffect)
June 2012 Examinations paper F4 GLo
Company Law: Loan CapitaL Chapter 15 118
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Chapter 16
Company Law: Liquidations
Liquidation
• compulsoryorvoluntary
• voluntarymaybemembers’orcreditors’
• essentialdifferenceissolvency
• courtmayorderliquidationif:-
• specialresolution
• numberofmembersfallsbelow2(plcsonly)
• failuretoobtainatradingcertificatewithin12monthsofincorporation(plcsonly)
• suspensionofbusinessfor12months(orfailuretocommencebusinesswithin12months)
• unabletopayitsdebtsastheyfalldue
• justandequitable
119June 2012 Examinations paper F4 GLo
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Compulsory Liquidation
• unabletopayitsdebtsastheyfalldue
• needtoshowthecourtthatthecompanyhasowedthepetitioningcreditormorethan£750formorethan21days
• thedebtshouldnotbeindispute
• justandequitable
• failureofsubstratum
- ReGermanDateCoffeeCo.
• deadlockontheboard
- ReYenidjiTobacco
• quasi-partnershipsituation
- EbrahimivWestbourneGalleries
• butjustandequitableonlygivenintheabsenceofalternativeremedy(reACompany)
June 2012 Examinations paper F4 GLo
Company Law: Liquidations Chapter 16 120
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Administrator Appointed by the Court
• applicationtothecourtby:-
• membersordinaryresolution,directorsorbycreditors
• courtmaygrantif:-
• companyisunabletopayitsdebts
• theorder,ifgranted,islikelytoachievethedesiredresult
• effectofanorder
• moratoriumoncompany’sdebts
• powersofmanagementpassedtoadministrator
• petitionsforwinding-uparedismissed
• anyadministrativereceiveralreadyinofficemuststepaside
121June 2012 Examinations paper F4 GLo
Company Law: Liquidations Chapter 16
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Duties of an Administrator
• agentofthecompanyandthecreditors
• sohasfiduciarydutiesaswellaslegal
• mustsendnoticeofappointmenttocreditors
• mustobtainalistofcreditors
• mustsendnoticeofappointmenttoregistrarwithin7days
• mustrequireastatementofaffairs
• mustidentifyappointmentonallcompanybusinessletters/correspondence
• mustprepareproposalsforachievementofadministrationobjectives
• mustmanagetheaffairsofthecompany
June 2012 Examinations paper F4 GLo
Company Law: Liquidations Chapter 16 122
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Advantages of Administration Compared with Liquidation
• companymaycontinueaftertheprocessiscompleted
• companyisshelteredfromcreditorsallowingtimetodesignacceptableproposals
• creditorsarethereforepreventedfromapplyingforaliquidation
• administratorcanchallengeprevioustransactions
• creditorsmorelikelytogetsomemoneyback
• memberswillholdsharesinaviablecompany(possibly)
• anycreditorcanapplytothecourt
• floatingchargedebentureholderscanappointwithoutreferencetothecourt
• creditors(potentially)willhaveacontinuingcustomer
• directorscouldavoidacquiringthereputationofhavingbeeninvolvedinaninsolventcompany
123June 2012 Examinations paper F4 GLo
Company Law: Liquidations Chapter 16
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End of Administration Period
• automaticallyends:-
• whensuccessfullycompleted
• 12monthsafterappointment
• applicationtocourtbyadministrator
• applicationtocourtbyacreditor
• whenoriginalapplicantisdiscoveredtohavehadaninappropriatemotive
• administratorcanapplytocourt
• ondeterminingthatadministrationcannotbeeffective
• thecompanyshouldneverhavebeeninadministration
• (ifappointedbythecourt)theadministrationhasbeensuccessful
June 2012 Examinations paper F4 GLo
Company Law: Liquidations Chapter 16 124
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Chapter 17
Company Law: Corporate GovernanCe
Corporate Governance
• corporategovernanceisthesystembywhichcompaniesaredirectedandcontrolled
• importantbecause (often ) companies are controlledbypeople (directors )whoarenot theowners (shareholders)
• butthereareotherpeoplealsointerestedinthecontinuinghealthofacompany–thestakeholders
• forexample:
• employees –wishtocontinuetohavetheopportunityofearningasalary
• taxman –wishestocontinuetoreceiveshareofprofits
• customers –wishforcontinuityofsupplyofgoods
• suppliers –wishfortheopportunitytocontinuetosupply
• society –theultimateconsumers,butalsoaffectedbycompany’senvironmentalfootprint
• planetearth –weareallaffected,directlyorindirectly,bytheactivitiesofeveryoneelse!
125June 2012 Examinations paper F4 GLo
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Corporate Governance – Auditors
• theshareholdersofacompanyneedreassurance
• thismaybereassuranceconcerningthereliabilityoffinancialinformationor…..
• …concerningthelegalityofacompany’sactivitiesor…..
• …theappropriatenessoftheinternalcontrolsystemsbeingfollowedwithinthecompany
• auditors have a statutory duty to report on the truth and fairness of the view shown by the financialstatements
• thisisprimarilyforthebenefitoftheshareholders
• butotherstakeholdersalsogainreassurance
• thereforeimportantthatauditorstakeactivestepstoensuretheircontinuingindependence
• protectthemselvesagainstanymatterwhichcouldthreatenthatindependenceor…
• …beperceivedbyotherstothreatenit
June 2012 Examinations paper F4 GLo
Company Law: CorporatE GovErnanCE Chapter 17 126
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Corporate Governance – Directors
• theownersofacompanywilltypicallynotalsobeincontrol
• directorsareappointedasagentsofthecompanytoruntheentityinanorderlyandefficientmanner
• maybeexecutivedirectors
• involvedintheday-to-dayrunningactivities
• ornon-executive
• theirroleismoresupervisoryinnature
• theybringanindependentviewtotheboardmeetings
• theyhelptheboardtoprovideeffectiveleadership
• theyassistinthedevelopmentofthegoodreputationofthecompany
• theycomprisethemajorityorallofthegovernancesub-committeesoftheboard
127June 2012 Examinations paper F4 GLo
Company Law: CorporatE GovErnanCE Chapter 17
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Corporate Governance – Stakeholders
• obviousstakeholdersaredirectors,employees,customersetc
• butacademicresearchhasidentifiedanumberofdifferentwaysofcategorisingstakeholders:-
• primaryorsecondary
• internalorexternal
• narroworwide
• knownorunknown
• legitimateorillegitimate
• activeorpassive
• voluntaryorinvoluntary
• recognisedorunrecognised
June 2012 Examinations paper F4 GLo
Company Law: CorporatE GovErnanCE Chapter 17 128
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Corporate governance – concepts
• honesty / probity–notsimplytellingthetruthbutalsonotbeingguiltyofissuingmisleadingstatementsorpresentinginformationinaconfusingordistortedway
• accountability–emphasisofthedirectors’accountabilitytoshareholders,butopensthedoorfordiscussionabouttheextentoftheiraccountabilitytootherstakeholders
• independence–strongemphasisontheappointmentofindependentnon–executivedirectorswhoarefreefromconflictsofinterestandarethusabletomonitoreffectivelytheentity’sandexecutivedirectors’activities,ideallyworkingcloselywiththeexternalauditors
• responsibility – a system of responsibility should exist whereby entity directors acknowledge theirresponsibilitiestothestakeholders,andwilltakewhatevercorrectiveactionisnecessaryinordertokeeptheentityfocussed
• decision taking / judgement–theskillwithwhichmanagementmakedecisionswhichwillimprovethewealth/prosperityoftheorganisation
• reputation–builtbydirectors,oftenasaresultoftheirabilitytocomplywithothercgconcepts
• integrity–straightforwarddealing,honesty,andbalanceForfinancialstatementstohavethecharacteristicofintegrity,thisdependsupontheintegrityofthosepeoplewhopreparethemIntegrityinvolvesapersonwhodemonstrateshighmoralcharacter,isprincipled,professional,honestandtrustworthy
• fairness–takingintoaccounttheinterests,rightsandviewsofeveryonewhohasalegitimateinterestintheentity
• transparency / openness–involvesfulldisclosureofmaterialmatterswhichcouldinfluencethedecisionsof stakeholdersThismeansnot simplyopenness in the reportingof information requiredby IFRS in thefinancialstatementsItalsoinvolvesotherinformationsuchascashandmanagementforecasts,environmentalreportsandsustainabilityreports
129June 2012 Examinations paper F4 GLo
Company Law: CorporatE GovErnanCE Chapter 17
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Corporate governance and agency theory
• directorsactasagentsoftheshareholders
• cg tries to ensure that agency responsibilities are fulfilled by requiring disclosure and by suggestingperformance-relatedrewards
• definition:anagencyrelationshipisacontractunderwhichoneormorepersons(theprincipals)engageanotherperson(theagent)toperformsomeserviceontheirbehalfthatinvolvesdelegatingsomedecision–makingauthoritytotheagent
• fiduciary duties definition: a duty imposed upon certain persons because of the position of trust andconfidenceinwhichtheystandinrelationtoanother
• Thedutyismoreonerousthangenerallyarisesunderacontractualortortrelationship
• Itrequires
• fulldisclosureofinformationheldbythefiduciary,
• astrictdutytoaccountforanyprofitsreceivedasaresultoftherelationship,and
• adutytoavoidconflictsofinterest
• fiduciarydutiesareowedtotheentity,nottoindividualshareholders
• directorsmustexercisetheirpowersfortheproperpurpose
June 2012 Examinations paper F4 GLo
Company Law: CorporatE GovErnanCE Chapter 17 130
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Duties of directors as agents
• performance– ifpaid,directorshaveacontractualobligation toperformasagreed ( ifunpaid,no suchobligation)
• obedience–directorsshouldactstrictlyinaccordancewiththeprincipal’sinstructions
• skillandcare–directorsshouldactwithsuchadegreeofskillandcareasmayreasonablybeexpectedfromapersonwithsuchexperienceandqualifications
• personalperformance–directorsshouldonlydelegatetheirassignmentswheretheyhavenoreasontobelievethatthepersontowhomtheworkisdelegatedisnotcapableofproperperformance
• avoidconflictsofinterest–egshouldnotsellhisownpropertytotheentity,eventhoughitmaybeatanindependent,arm’slengthvaluation
• confidence–agentsshouldnotdiscloseconfidentialmattersabout theprincipal,evenafter theagencyagreementhasended
• accounting for benefits – agentsmust account to theprincipal for anyundisclosedbenefitwhich theyreceiveasaresultoftheirofficeasagent
• becauseownershipofanentityisnecessarilyseparatedfromthemanagement,problemsmayresult
131June 2012 Examinations paper F4 GLo
Company Law: CorporatE GovErnanCE Chapter 17
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Corporate governance – potential problems
• directorsmaychoosetopursuestrategiesmorebeneficialfortheirowninterestratherthantheentity’s
• directorswillalmostcertainlyhaveadifferentattitudetorisk,andriskmanagement,sinceitisnottheirowninvestmentwhichtheyarerisking
• ifmanagementhaveonly a small beneficial interest in theentity ( or evennone at all ) then theymaywellpursueactivitieswhichimproveshorttermresults(thereforeimprovingtheircurrentbonuses)totheexclusionofmorefar–sightedstrategieswhichwouldbeofgreaterbenefittotheentityinthelongerterm
• ultimately,shareholdershavetherighttodecidewhoshall(andwhoshallnot)bedirectorsoftheirentityButthisis,inpracticalterms,verymuchatheoreticalpowerGenerallyshareholdersneitherhavethedynamismnororganisationtoeffectsuchachangeinthecompositionoftheboard
Overcoming the problem – alignment of interests ( goal congruence )
• incentivesdesignedtoaligninterestsinclude:
• profitrelatedpay
• shareissueschemes,forinstanceontheoccasionofamanagementbuy–out
• shareoptionschemes
• butforallofthesethereisanaturaltendencyformanagementtoadoptcreativeaccountingtomanipulatetheprofitfigureuponwhichtheseincentivesarebased
June 2012 Examinations paper F4 GLo
Company Law: CorporatE GovErnanCE Chapter 17 132
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Chapter 18
Company Law: ILLegaLItIes
Wrongful Trading
• previouslawextendedbyInsolvencyAct1986
• previously,directorscouldonlybeliableforcompany’sdebtswheretheywereguiltyoffraudulenttrading–difficulttoprove
• I.A.1986designedtogivecreditorsincreasedprotection
• anexampleofliftingtheveil
• directors(andsometimesotherstoo)maybeheldliablewhen:-
• companyhascommencedinsolventliquidation
• theyknew,orshouldhaveknown,thatthiswasprobable
• theyheldapositionofpower(director)
• courtmayallocatefinancialpenaltyontheliquidator’sapplication
• directorsmayescapeliabilityiftheycanshowthecourtthattheytookeverystepnecessarytomitigate/minimisethecreditors’potentialloss
133June 2012 Examinations paper F4 gLo
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Money Laundering
• aprocesswherebytheproceedsofcriminalactivityareconvertedintoassetsappearingtohavealegitimateorigin
• usuallyinvolves3distinctphases
• placementofthefundsintolegitimatebusinessactivity
• transferofmoneyfrombusinesstobusiness(orplacetoplace)toconcealitsoriginalsource
• integration–themoneytakesontheappearanceofhavingcomefromalegitimatesource
• proceedsofCrimeAct2002seekstocontrolmoneylaunderingbythecreationof3categoriesofcriminalactivity
• laundering(maximum14yearsprisonand/orfine)
• failuretoreport(maximum5yearsprisonand/orfine)
• tipping-off(maximum5yearsprisonand/orfine)
• theoffenceof failuretoreport relatesonlyto individualsacting inthecourseofbusiness– forexample,accountants
June 2012 Examinations paper F4 gLo
Company Law: ILLEgaLItIEs Chapter 18 134
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Insider Dealing
• insider–apersonwhohasabusinessconnectionwithacompanyasaresultofwhichtheymayacquirerelevantinformation
• dealing–buyingorsellingsharesorsecuritiesinacompany
• unpublishedprice– sensitive information is information about the companywhich is not in thepublicdomain…..
• ….islessthan6monthsold,and……
• ….is,onpublication,likelytohaveamaterialimpactonthemarketpriceofthecompany’sshares
• aninsiderinpossessionofunpublishedprice–sensitiveinformationshouldnotdeal
• anoffenceisalsocommittediftheinsiderencouragesanotherpersontodeal
• a person dealing as a result of that encouragement, and believing the source to be an insider, is alsocommittinganoffence
• disclosureofinsideinformation,otherthaninthepropercourseofemploymenttoanauthorisedperson,isalsoanoffence
• somedefencesareavailabletobeclaimed
135June 2012 Examinations Paper F4 GLO
Company Law: ILLEgaLItIEs Chapter 18
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Bribery
• BriberyAct2010targetsbothbriberyandcorruption
• 4offences
• bribinganotherperson
• receivingabribe
• bribingaforeignpublicofficial(FPO)(seenextpage)
• commercialorganisationfailingtopreventbribery(seenext)
• bribing=offeringfinancialorotheradvantagetoperformarelevantfunctionoractivityimproperly
• relevantfunctionoractivity:
• anyfunctionofapublicnature
• anyactivityconnectedwithabusiness
• anyactivityperformedinthecourseofaperson’semployment
• anyactivityperformedby,oronbehalfof,agroupofpersons
• these“relevantfunctionsoractivities”maybeanywhereintheworld
June 2012 Examinations paper F4 gLo
Company Law: ILLEgaLItIEs Chapter 18 136
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Bribing an FPO
• offencetooffer,directlyorindirectly,afinancialorotheradvantagetoanFPOintendingtoinfluencethemingainingbusinessoranadvantageinconnectionwithbusiness
• anFPOholdsanadministrative,legislativeorjudicialpositionoutsidetheUK
• commercialorganisationfailing...
• acompanyorpartnershipisliableifanagent,employeeorsubsidiarybribesanotherpersonintendingtogainabusinessadvantage
• Defence-ifacompanycanshowthatithadadequateproceduresinplace,appropriatetothelevelofrisk
• “adequateprocedures”basedonsixguidanceprinciples
137June 2012 Examinations Paper F4 GLO
Company Law: ILLEgaLItIEs Chapter 18
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The Six principles
• proportionateprocedures
• proportionatetorisksfacedandsizeofcompany
• commitmentbymanagement
• managementshouldassessthenatureandextentofrisksfacedanddevelopappropriateprocedurestomanagethatrisk
• duediligence
• thecompanyshouldapplyduediligenceprocedures in respectofcompanypersonnelwhoareatgreaterriskofofferingbribes
• communication
• toensureallemployees/connectedpersonsareawareofthecompany’scultureandattitude
• includestrainingandeducationprocedures
• monitoringandreview
• proceduresshouldberegularlyreviewedandimprovedasnecessary
• “adequacyofprocedures”isamatterforacourttodecide
• NB“hospitality”thatisreasonableandproportionateisacceptable,ieisitnotprohibitedbytheAct.
June 2012 Examinations paper F4 gLo
Company Law: ILLEgaLItIEs Chapter 18 138
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Penalties
• anindividualwhoisfoundguiltyfacesimprisonmentupto10years
• aguiltycompanyisliabletoanunlimitedfine
• but,inaddition,thereisreputationloss...
• ...andpotentially,civilclaimsagainstthedirectorsforfailingtoimplementadequateprocedures
First conviction
• MunirPatelfoundguiltyofaccepting£500tosuppressadrivingconvictionfromcourtrecords.Servinga3yearprisonsentence
•
139June 2012 Examinations Paper F4 GLO
Company Law: ILLEgaLItIEs Chapter 18
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June 2012 Examinations paper F4 gLo
Company Law: ILLEgaLItIEs Chapter 18 140
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Chapter 19
Capital MaintenanCe
Capital Maintenance
• thememberscontributecapitaltothecompany
• thisshouldbemaintainedwithinthecompanybywayofnetassets
• knownasthebufferfund
• called“shareholders’equity“andcomprisessharecapitalplusundistributablereserves
• undistributablereservesare:-
• sharepremiumaccount
• capitalredemptionreserve
• accumulatedunrealisedprofitslessaccumulatedunrealisedlosses
• anyotherreserveidentifiedbythecompany’sconstitutionasundistributable
• developmentoftheprincipleofcapitalmaintenanceaddressesthreeareas:-
• restrictionsonthepaymentofdividends
• restrictionsonthereductionofcapital
• assistancegiventooutsiderstoacquirethecompany’sshares
141June 2012 Examinations paper F4 GlO
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Capital Maintenance – Payment of Dividends
• powertodeclaredividendsisgiventothedirectorsbythecompany’sconstitution
• membersdonothaveanautomaticrighttoreceiveadividend(theyapproveoneatthecompany’sgeneralmeetingbutcannotvotetoincreasethedividendproposedbythedirectors)
• dividendsarenormallypaidbasedonthepaid-upcapitalofthecompany
• dividendsmaybeintheformofacashpayment(normal)orinanotherform(forexample,ascripdividend)
• adividendisacompanydebtonlyfromthedateitisdeclaredanddueforpayment
• ifitisdeclaredandunpaid,itisadeferreddebt
• unclaimeddividendsbecomestatutebarredafter6years
• dividendsmayonlybedeclaredoutofprofitsavailableforthepurpose
• thisisdefinedas‘accumulatedrealisedprofitslessaccumulatedrealisedprofits’
• thereisnodistinctiondrawnbetweencapitalprofitsandrevenueprofits
June 2012 Examinations paper F4 GlO
Capital MaintEnanCE Chapter 19 142
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Capital Maintenance – Reduction of Capital
• acompanymayreduceitscapital,butonlyunderthestrictestcontrol
• 3authoritiesarerequired
• specialresolution
• powerintheconstitution
• consentofthecourt
• andforonly3reasons/situations
• thecompany’scapitalisnolongerrepresentedbyavailableassets(ithasbeensufferinglosses)
• thecompanywishestoextinguish/canceltheliabilityofaclassofshare-forexamplea£1share,70ppaidcouldbecomea70psharefullypaid
• thecompanywishestorestructureitscapitalfundingandmay,forinstance,nowwishtoreplacesomeofitssharesbywayofloancapital
• thecourtisinvolvedbecausecreditors’rightscouldbeadverselyaffected
143June 2012 Examinations paper F4 GlO
Capital MaintEnanCE Chapter 19
For latest course notes, free audio & video lectures, support and forums please visit
Share Capital
• itisillegaltoissuesharesforanamountwhichislowerthanthenominalvalueoftheshare
• wheresharesareissued,whetherforcashorotherwise,foranamountinexcessoftheirnominalvalue,anamountequaltothatexcessshallbecreditedtotheSharePremiumAccount
• thesharepremiumaccountisanundistributablereserveandhasverylimiteduses:-
• financetheissueoffullypaidbonussharestoexistingmembers
• writeoffpreliminaryandformationexpenses
• provideforthepremiumpayableontheredemptionofsharesordebentures
• write off the expenses of, discounts allowed on or commissions paid on any issue of shares ordebentures
• butthecombinationof‘discountsallowedon’and‘issueofshares’isanillegalcombination
• despitetheprinciplethatsharesmaynotbeissuedatadiscount,privatecompaniesareabletoissuesharesinconsiderationfornon-cashgoodsorservicesreceived
• thetrue/fairvalueofthesegoodsorservicescouldbelowerthanthenominalvalueofthesharesissued.Thisisnotillegal–butonlyappliestoprivatecompanies
June 2012 Examinations paper F4 GlO
Capital MaintEnanCE Chapter 19 144
For latest course notes, free audio & video lectures, support and forums please visit
Share Capital
• variationofclassrights
• rightsattachtoaparticularclassofshareandtypicallyreferto:-
- votingrights
- entitlementtodividends
- returnofcapitalinaliquidation
• ifthevariationofrightsisspecifiedbytheconstitution,thenfollowtheconstitution
• ifnotspecifiedbytheconstitution,thenspecialresolutionisneeded
• note,ifconstitutionprovidesforthevariation,itcouldrequiremerelyanordinaryresolutionorcouldevenrequiresomegreatermajoritythan75%
• theseprovisionsapplyevenforcompanieswithoutasharecapital,forexampleacompanylimitedbyguarantee
145June 2012 Examinations paper F4 GlO
Capital MaintEnanCE Chapter 19
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