NOTES
(Association of Chartered Certified Accountants)
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ACCA Paper F4 (ENG)
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Corporate and
Business Law
Class Notes
December 2014
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First edition
Written and typeset by Debbie Crossman
© Debbie Crossman, August 2014
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without the prior written
permission of Debbie Crossman.
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Contents
PAGE
INTRODUCTION TO THE PAPER
5
CHAPTER 1: ENGLISH LEGAL SYSTEM
7
CHAPTER 2: LAW OF CONTRACT – FORMATION
33
CHAPTER 3: LAW OF CONTRACT – TERMS
45
CHAPTER 4: LAW OF CONTRACT – BREACH
55
CHAPTER 5: LAW OF TORTS
71
CHAPTER 6: LAW OF EMPLOYMENT
83
101
CHAPTER 8: PARTNERSHIP LAW
109
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CHAPTER 7: LAW OF AGENCY
123
CHAPTER 10: COMPANY LAW – SHARE CAPITAL
147
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CHAPTER 9: COMPANY LAW – LEGAL PERSONALITY & COMPANY FORMATION
163
CHAPTER 12: COMPANY LAW – DIRECTORS
173
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CHAPTER 11: COMPANY LAW – LOAN CAPITAL
191
CHAPTER 14: COMPANY LAW – COMPANY MEETINGS AND RESOLUTIONS
199
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CHAPTER 13: COMPANY LAW – OTHER COMPANY OFFICERS
207
CHAPTER 16: CORPORATE FRAUDULENT AND CRIMINAL BEHAVIOUR
217
APPENDIX AND INDEX OF CASES
231
EXERCISES AND SAMPLE QUESTIONS
261
ANSWERS TO EXERCISES AND SAMPLE QUESTIONS
367
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CHAPTER 15: COMPANY LAW – INSOLVENCY
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Introduction to the
paper
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IN T R O D U C T I O N T O T H E P A P E R
AIM OF THE PAPER
The aim of the paper is to develop knowledge and skills in the understanding of the
general legal framework, and of specific legal areas relating to business,
recognising the need to seek further specialist legal advice where necessary.
OUTLINE OF THE SYLLABUS
Corporate Law
1.
English Legal System
5.
Law of Agency
2.
Law of Contract
6.
Partnership law
3.
Law of Tort
7.
Company law
4.
Law of Employment
8.
Fraudulent Behaviour
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Business Law
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FORMAT OF THE EXAM PAPER
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ACCA’s Study Guide sets out the syllabus in detail – see the beginning of each
chapter.
The syllabus is assessed by a two-hour examination.
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The examination consists of 2 sections:
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Section A
which contains
25 × 2 mark objective test questions
50%
●
20 × 1 mark objective test questions
20%
AC
Section B
C
A
●
which contains
●
5 × 6 mark multi-task questions
30%
_____
100%
_____
All questions are compulsory.
The pass mark is 50%.
For December 2014 and June 2015 and for the foreseeable future ACCA are
planning to offer a paper-based examination.
At some stage in the future ACCA plans to add on-demand Computer Based
Examinations.
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Chapter 1
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English legal system
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SYLLABUS CONTENT (as set by ACCA’s study guide)
Law and the legal system
a)
Define law and distinguish types of law.[1]
b)
Explain the structure and operation of the courts.[1]
2.
Sources of law
a)
Explain what is meant by case law and precedent.[1]
b)
Explain legislation and evaluate delegated legislation.[1]
c)
Illustrate the rules and presumptions used by the courts in interpreting
statutes.[1]
d)
Identify the concept and impact of human rights law.[1]
AC
C
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1.
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
CHAPTER CONTENT DIAGRAM
THE ROLE OF THE COURTS IS TO DECIDE CASES BY
INTERPRETING AND APPLYING THE LAW.
What is public law and private law?
What is civil law and criminal law?
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What are the civil courts?
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What are the criminal courts?
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What are the sources of law?
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What is the doctrine of judicial precedent?
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What are the rules of statutory interpretation?
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What is the impact of the Human Rights Act 1998?
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
CHAPTER CONTENTS
PUBLIC LAW and PRIVATE LAW---------------------------------------- 10
DISTINCTION BETWEEN CIVIL LAW AND CRIMINAL LAW ---------- 11
THE CIVIL COURTS ------------------------------------------------------ 12
THE CRIMINAL COURTS ------------------------------------------------- 15
SOURCES OF LAW-------------------------------------------------------- 18
CASE LAW
18
LEGISLATION
19
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DOCTRINE OF JUDICIAL PRECEDENT---------------------------------- 22
STATUTORY INTERPRETATION ----------------------------------------- 24
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RULES
AIDS
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PRESUMPTIONS
25
26
27
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HUMAN RIGHTS ---------------------------------------------------------- 28
BACKGROUND
28
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IMPACTS OF THE HRA 1998 ON THE ENGLISH LEGAL SYSTEM
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
PUBLIC LAW and PRIVATE LAW
Public law
Public law is concerned with matters of the State such as criminal law,
administrative law, and constitutional law. Both the latter two are civil law.
Private law
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Private law is mostly concerned with actions between citizens such as contract, tort
etc. Most of private law is civil law.
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
DISTINCTION BETWEEN CIVIL LAW AND CRIMINAL LAW
LAW
CRIMINAL
CIVIL
AIM
Civil law sets out the rights and duties
of persons as between themselves.
The person whose rights have been
infringed can claim a remedy from
the wrongdoer. The aim, therefore, of
the civil law is to provide a means
whereby an injured party can obtain
compensation.
Criminal law is concerned with conduct
that is considered so undesirable that
the State punishes persons who
transgress. The aim, therefore, of the
criminal law is to regulate society by
the threat of punishment.
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AIM
TERMINOLOGY
TERMINOLOGY
The State
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The claimant
prosecutes
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sues
the defendant.
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If the claimant can prove the wrong
on the balance of probabilities (ie
his litigation is successful and the
defendant is held liable)
the accused / defendant.
If the State can prove the offence
beyond reasonable doubt (ie the
prosecution is successful and the
is
found
guilty
defendant
and
convicted)
the civil court will order the defendant
to pay damages or it might order
some other remedy such as specific
performance or injunction.
the criminal court will sentence the
defendant to a fine or it might impose
some other punishment such as
imprisonment.
COURTS
COURTS
The major civil courts are dealt with in
the next section.
The major criminal courts are dealt with
after the civil courts.
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
THE CIVIL COURTS
Overview
THE MAIN COURTS
OTHER COURTS
Supreme Court
Court of Appeal
High Court of Justice
County Courts
●
●
●
●
●
●
●
●
Magistrates Courts
Employment Appeal Tribunal
European Court of Justice
European Court of Human
Rights
EUROPEAN
COURT OF
HUMAN RIGHTS
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EUROPEAN
COURT OF
JUSTICE
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SUPREME
COURT
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COURT OF
APPEAL
COUNTY
COURT
HIGH COURT
OF JUSTICE
MAGISTRATES
COURT
EMPLOYMENT
APPEAL
TRIBUNAL
EMPLOYMENT
TRIBUNALS
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
Detail
County Courts
Jurisdiction: first instance civil claims in eg contract*, tort*, landlord & tenant,
probate, and insolvency.
Appeal: in the main lies to the Court of Appeal, but probate and insolvency appeals
lie to the Chancery Divisional Court.
High Court of Justice
Jurisdiction: for jurisdictional purposes the High Court has 3 divisions: the Queens
Bench Division, the Chancery Division and the Family Division.
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The Queens Bench Division: mainly first instance contract* and tort* multitrack* claims.
The power of judicial review is exercised by the Queens Bench Divisional
Court.
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The Chancery Division: its first instance civil jurisdiction includes probate,
company law, partnership law, and insolvency.
The Chancery Divisional Court hears appeals from the County Courts on
probate and insolvency matters.
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The Family Division: it has first instance civil jurisdiction in all matrimonial
matters.
The Family Divisional Court hears appeals from the Magistrates Court on
family matters.
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Appeal: appeal from the High Court’s first instance jurisdiction lies to the Court of
Appeal; although exceptionally a leap-frog appeal may be made direct to the
Supreme Court if the appeal is on a point of law of importance on which there is
already in existence a binding Court of Appeal precedent. Appeals from the
Divisional Courts lie to the Supreme Court.
AC
* The three-track system (mainly of relevance to contract (and tort claims)
in the County Court and the High Court)
On receipt of a claim, the court will allocate the case to one of three tracks for the
hearing.
The County Court hears all cases allocated to the small claims track, the majority of
fast track cases and some multi-track cases. The High Court hears some fast track
cases and most multi-track cases.
●
The small claims track is for simple claims valued at no more than £5,000
(tort £1,000). The hearing is informal, there are limited grounds for appeal
and costs of lawyers are not usually awarded.
●
The fast track provides a streamlined procedure for moderately-valued
claims (£5,000 to £25,000).
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The multi-track provides a flexible procedure for high value (over £25,000)
and/or complex claims.
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
Court of Appeal (Civil Division)
Jurisdiction: hears appeals from the County Courts and the High Court of Justice.
Appeal: lies to the Supreme Court.
Supreme Court
Jurisdiction: hears appeals from the Court of Appeal and the High Court of Justice.
[Prior to 1st October 2009 the Supreme Court was called the Judicial Committee of
the House of Lords. Cases in your Appendix abbreviate this to “HL”].
Magistrates Courts
Jurisdiction: Although its jurisdiction is mainly criminal; sitting as a ‘family
proceedings court’ it has a small but important civil first instance jurisdiction
dealing with matters under the Children Act 1989 such as council care orders.
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It also has jurisdiction to deal with recovery of council tax arrears.
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Employment Appeal Tribunal
Jurisdiction: Hears appeals on a point of law from the local Employment Tribunals.
The ETs deal with actions by employee v employer (eg unfair dismissal).
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Appeal: Court of Appeal.
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
THE CRIMINAL COURTS
Overview and introduction
Overview
The Criminal Courts comprise:
Magistrates Courts
●
Crown Courts
●
Divisional Court of Queens Bench
●
Court of Appeal (Criminal Division)
●
Supreme Court.
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Introduction
1.
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Statute classifies criminal offences into the following categories:
Summary offences
Indictable offences
By Magistrates
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2.
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These are triable summarily in the Magistrates Courts only.
(either lay or stipendiary, or a mixture).
Either way offences
A
3.
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These are triable on indictment in the Crown Court only. By a judge and jury.
These can be tried:
summarily in the Magistrates Court; or
●
on indictment in the Crown Court.
AC
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
Offences tried summarily in the Magistrates Court
A
CROWN COURT
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DIVISIONAL
COURT OF
QUEENS BENCH
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COURT OF
APPEAL
(Criminal
Division)
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SUPREME COURT
On a point of law & fact,
or fact only, or sentence
On a point of law only
MAGISTRATES
COURT
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
Offences tried on indictment in the Crown Court
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SUPREME COURT
COURT OF
APPEAL
(Criminal
Division)
On a point of law, or law
& fact, or sentence
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On a point of law only
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DIVISIONAL
COURT OF
QUEENS BENCH
CROWN COURT
MAGISTRATES
COURT
(committal
proceedings)
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
SOURCES OF LAW
Identification
Case Law (aka judicial precedent)
Legislation
Further knowledge is not
in your syllabus
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European Community Law
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Case law
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This is law developed by the judges as they are deciding cases.
Common law
●
Equity
Common Law, in developing from local customs which became common to the
whole country, is a complete system of law.
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1.
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Case Law
Common law rights & remedies are available as of right.
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2.
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Equity, in developing piecemeal to remedy injustices of the common law, is an
incomplete system.
•
•
AC
Equity is based on fairness & justice and so its rights and remedies are given
at the discretion of the court. The court exercises its discretion according to
well-known principles, eg
“Delay defeats the Equities”
“He who comes to Equity must come with clean hands”.
3.
If there is a conflict, Equity prevails over Common Law.
4.
Both are a product of the doctrine of judicial precedent.
beginning on page 22.
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
Legislation
This is law made by or on behalf of Parliament. There are 2 sub-types:
Act of Parliament
1.
Delegated legislation
Act of Parliament
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Made by Parliament itself.
First Reading
G
1.
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The 5 Parliamentary procedures are:
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An Act of Parliament starts life as a Bill. Most Bills are introduced into Parliament
by the Government of the day. The Bill, in order to become an Act of Parliament,
must go through the full Parliamentary stages in both the House of Commons and
the House of Lords and then receive the Royal Assent.
Second Reading
C
2.
A
This is purely formal. The title of the Bill and the name of the member
introducing it are read out by an official and the Bill is then ordered to be
printed.
3.
AC
This is a debate and vote on the general principles of the Bill.
Committee Stage
At this stage the Bill is examined in detail by a committee.
4.
Report Stage
At the report stage the committee which has considered the Bill will report
back to the House on its proposed amendments. The House votes on each
clause.
5.
Third Reading
This constitutes the final debate on the Bill, and a vote is taken.
Although the Bill becomes an Act (ie law) at the date of Royal Assent, it does not
necessarily become operative immediately. Most Acts come into force piecemeal
either on dates specified in the Act or by Commencement Order.
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
Doctrine of sovereignty of Parliament
Parliament is sovereign, ie it has supreme law-making authority.
In theory Parliament can make any law, and in any way, it sees fit.
●
In theory it is only Parliament that can make new law.
●
Each Parliament is sovereign.
2.
Delegated Legislation
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Made on behalf of Parliament.
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Types/who makes/uses
Statutory Instruments are commonly made by Government Ministers under
powers delegated by Act of Parliament.
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1.
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SIs are commonly used:
2.
Bye-laws are made by local authorities. They are therefore local laws.
3.
Orders-in-Council are made by the Privy Council in the name of the Queen
on the advice of the Prime Minister. They are often used as emergency
measures.
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
Advantages and disadvantages of delegated legislation as
compared with statute
saves Parliament’s time.
2.
timeliness and speed because it is easy to make and
unmake.
3.
possibility of expert/local input.
4.
flexibility because it is easy to make and unmake.
1.
difficult to keep up with because of its volume and lack of
publicity.
2.
undemocratic because delegated legislation is not made by
elected representatives of the people (although some SIs are
required to be laid before Parliament).
3.
possibility of loss of control.
There are, however, the following controls:
●
the enabling Act
●
the Scrutiny Committee
●
the laying procedures.
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Parliament exercises control through
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Disadvantages
1.
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Advantages
The courts exercise control through the power of judicial review. Anyone can
challenge the validity on the ground that the maker has acted ultra vires in
that he exceeded his statutory powers. The courts will declare anything ultra
vires to be illegal and void.
3.
Further, under the Human Rights Act 1998, the courts can refuse to apply
delegated legislation (except Orders-in-Council) to the extent that it
contravenes Human rights (see later – the syllabus topic ‘Human Rights’
beginning on page 28).
AC
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2.
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
DOCTRINE OF JUDICIAL PRECEDENT
What is the doctrine?
The system, adopted by the judges, of following previous precedents.
Some precedents are binding whereas others are merely persuasive.
3 factors are relevant in determining whether or not a precedent is binding:
1.
the hierarchy of the courts
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In general precedents of the higher courts bind the lower ones but not vice versa.
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Supreme
Court
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Court of
Appeal
Precedents of the Supreme Court bind all the lower courts.
AC
●
C
In particular:
County
Court
A
G
High Court of
Justice
The Supreme Court is not bound by its own previous precedents.
●
Precedents of CA bind all the lower courts.
The CA is usually bound by its own previous precedents.
●
High Court is not bound by its own previous precedents.
Note: County Court decisions are not reported.
Further:
●
Precedents of the European Court of Human Rights (ECtHR) are not binding
but they are highly persuasive.
●
Precedents of the ECJ bind all UK courts.
●
Precedents of foreign courts are not binding but they may be persuasive.
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
2.
ratio decidendi and obiter dicta
ratio
decidendi
literal translation:
the legal reason for the decision
the legal rule stated that was the
reason for the decision
obiter
dicta
literal translation:
other things that were said
other legal rules stated but which
were not the reasons for the decision
Ratio decidendi is capable of forming binding precedent.
Obiter dicta is not capable of forming binding precedent, but it may be persuasive.
A precedent which was made per incuriam is not binding.
material facts of the cases
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3.
Same → binding.
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Similar → persuasive.
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Advantages and disadvantages of judicial precedent
Advantages
Consistency, certainty & clarity promote predictability.
2.
Flexibility allows development to meet the changing needs of society.
3.
Arises from actual events and therefore practical.
Disadvantages
A
G
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1.
Vast number of cases leads to bulk, complexity and inconsistency.
2.
Rigidity leading to loss of flexibility and loss of development.
3.
Patchwork nature means that case law is reactive rather than proactive.
AC
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
STATUTORY INTERPRETATION
It is the duty of the courts to apply legislation. This is an aspect of the
of s…………………… of P……………………….
d…………
E&SQ 1
In order to ascertain the intention of Parliament the courts use:
●
Rules of interpretation
●
Aids
●
Presumptions
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when considering the meaning of words used in statute.
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
The major rules of interpretation
1.
Literal rule (a literal approach)
Words must be given their ordinary grammatical meaning – even though this
may lead to an unjust result or one probably unintended by Parliament.
Fisher v Bell
A statute made it a criminal offence to “offer for sale” an offensive weapon. A shopkeeper
displayed a flick knife in his shop window.
2.
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Was he “offering” to sell it?
Golden rule (also a literal approach)
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Used where the literal rule gives more than one meaning of a word.
Take the meaning which gives the least absurd result.
ba
Re Sigsworth
A son murdered his mother.
Mischief rule (a purposive approach)
C
3.
A
G
lo
Was he her “heir” so as to inherit her estate?
AC
Used where the words are still ambiguous or uncertain after the application of the
literal and golden rules – and the words do not achieve the apparent purpose for
which the statute was intended.
Take the meaning which deals with the mischief.
Gorris v Scott
In order to inhibit the spread of contagious diseases, an Act required all animals carried on
ferries to be contained in pens. The claimant sent his sheep on a ferry. The defendant, the
ferry operator, did not contain the sheep in pens and they were washed overboard.
Had the defendant breached the Act such that the claimant could sue him for
damages for the loss of his sheep?
Thus the purposive approach means that the courts are ascertaining the intentions
of Parliament by considering WHY the Act was made, ie what is its purpose?
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
4.
Euisdem generis rule
General words mean the same kind of thing as the specific words they
follow.
eg Powell v Kempton Park Racecourse.
Aids
1.
External aids
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These are aids which are not found in the Act itself.
Examples include:
the Interpretation Acts which define words common to many Acts.
ba
●
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There are two types of aids:
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For example the Interpretation Act 1978 states that the masculine includes
the feminine and vice versa; and that the singular includes the plural and vice
versa.
the Oxford English dictionary.
●
Reports of Law Commissions.
G
●
C
A
These are used as a tool to discover the state of pre-existing law and the
mischief which the statute was passed to remedy.
Reports of proceedings in Parliament (contained in a document called
“Hansard”).
●
Judicial precedents on interpretation.
2.
Internal aids
AC
●
These are aids contained within the particular Act itself.
Examples include:
●
the long title of and preamble to the Act.
For example, the preamble to the Companies Act 2006 is:
“An Act to reform company law and restate the greater part of the
enactments relating to companies; to make other provisions relating to
companies and other forms of business organisation; to make provision about
directors’ disqualification, business names, auditors and actuaries; to amend
Part 9 of the Enterprise Act 2002; and for connected purposes”.
●
the Act’s definition sections.
The Companies Act 2006 has more than two hundred of these.
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
Presumptions
1.
A presumption against legislation extending beyond the territorial jurisdiction
of the UK.
2.
A presumption that legislation does not have retrospective effect.
3.
A presumption that legislation does not put the UK in breach of its
international obligations.
4.
A presumption that legislation does not result in the exclusion of the
jurisdiction of the court.
5.
A presumption that legislation does not bind the Crown.
6.
A presumption that statutes do not alter the common law.
7.
A presumption against the imposition of criminal liability without fault/intent.
AC
C
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Like all legal presumptions, the above are rebuttable. For example, the Bribery Act
2010 explicitly states that it is a criminal offence to offer a bribe anywhere in the
world – thus rebutting presumption 1 above. The Bribery Act 2010 is covered in
detail in Chapter 16.
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
HUMAN RIGHTS
Background
Prior to the coming into force of the Human Rights Act 1998 in October 2000, any
person who wished to sue the State for breaching his human rights could only bring
his action in the European Court of Human Rights (in Strasbourg). Since the
Convention rights were not part of English law, the State could ignore any
judgement of the ECtHR if it wanted to.
lB
Can you give some examples of human rights?
ox
Much of this has now changed. The Human Rights Act 1998 incorporates many of
the Convention rights into English law and the overall effect is that persons can now
sue the State in the English courts for breach of the incorporated rights. The case
can still be taken to the ECtHR – but only after proceedings in the English courts
have been exhausted.
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Impacts of the HRA 1998 on the English Legal System
Impact on the doctrine of judicial precedent
Judges must take into account precedents of the European Court of Human
Rights when analysing previous precedents of the UK courts. Thus precedents
of the ECtHR are strongly persuasive.
G
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1.
For example, in R v Secretary of State for the Home Department [2002] the
HL followed the ECtHR’s decision in Stafford v UK [2002] (HL held that UK
C
A
legislation allowing the Secretary of State to fix the tariff for persons convicted of
murder was incompatible with Article 6 of the Convention rights (the right to a fair trial
by an impartial and independent tribunal)).
AC
Note:The ECtHR does not apply to itself the doctrine of binding precedent: it
is free to depart from its previous precedents since the Convention rights are
regarded as a ‘living instrument’. For example in Stafford v UK [2002] it did
not follow its own previous precedent in Wynne v UK [1994].
2.
Judges must refuse to follow any pre-2000 UK precedent that is in conflict
with the HRA 1998 – this means that a court is not bound to follow such a
previous precedent which would otherwise be binding.
For example, in Mendoza v Ghaidan [2003] the Court of Appeal refused to
follow a precedent of the House of Lords that pre-dated the HRA 1998 and
allowed a same-sex partner to inherit a statutory tenancy under the Rent Act 1977.
The CA interpreted the words “wife or husband” in the Act to include people living
together “as if they were wife or husband” so as to accord with Art 14 (prohibition of
discrimination).
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
Impact on the interpretation of legislation
1.
Judges must take into account precedents of the European Court of Human
Rights when interpreting legislation.
For example in R v Secretary of State for the Home Department [2002] the
HL followed the ECtHR’s decision in Stafford v UK [2002].
2.
Judges must interpret legislation in a way that is compatible with the
Convention rights – so far as is possible – s3 HRA 1998.
This has led to more use of the purposive approach to interpretation.
For example Mendoza v Ghaidan [2003] (the CA interpreted the words “wife
or husband” in the Rent Act 1977 to include people living together “as if they
were wife or husband” so as to accord with Art 14 (prohibition of
discrimination): and thus allowed a same-sex partner to inherit a statutory
tenancy under the Act).
If this is not possible, then High Court judges and above may make a
declaration of incompatibility.
ox
3.
But the courts must still apply incompatible primary legislation (for human
rights purposes this means Acts of Parliament plus Orders-in-Council). It is
then for Parliament to decide whether or not to alter incompatible legislation.
ba
4.
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In R v Secretary of State for the Home Department [2002], for example, the
HL issued a declaration of incompatibility.
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Impact on the doctrine of sovereignty and on the process of
making legislation
When Parliament is making new legislation, the Minister (or other person
responsible for the Bill) must make a written declaration either to the effect
that the Bill is thought to be compatible with the HRA 1998 or that it is
incompatible but it is wished to proceed with the Bill anyway. In this way the
doctrine of sovereignty of Parliament is preserved – in that Parliament can still
make any law it wishes. However, the declaration will bring the matter to the
attention of MPs, political commentators and thus the public.
2.
If the courts have declared a piece of primary legislation incompatible, it will
then be up to Parliament to decide whether or not to change it. Thus the
aspect of the doctrine of sovereignty, that the courts cannot strike down an
Act of Parliament and must apply it, is preserved.
3.
The HRA 1998 provides for a fast-track procedure where the legislature
wishes to remedy incompatible legislation. The procedure empowers Ministers
of the Crown to issue statutory instruments altering incompatible primary
legislation.
AC
C
A
1.
Test your knowledge and understanding of this chapter by working E&SQs 2, 3, 4,
5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27,
28 & 29
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CHAPTER 1 – ENGLISH LEGAL SYSTEM
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Chapters 2 – 4
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Law of contract
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OVERVIEW OF CHAPTERS 2 – 4
Is there a contract?
AC
FORMATION
What did the parties agree to do?
What if a party failed to do what he
agreed to do?
TERMS
BREACH OF CONTRACT
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Chapter 2
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Law of contract –
formation
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SYLLABUS CONTENT (as set by ACCA’s study guide)
Formation of contract
a)
Analyse the nature of a simple contract.[2]
b)
Explain the meaning of an offer and distinguish it from an invitation to treat.[2]
c)
Explain the termination of an offer.[2]
d)
Explain the meaning and consequences of acceptance.[2]
e)
Explain the need for consideration.[2]
f)
Explain adequacy and sufficiency of consideration.[2]
g)
Analyse the doctrine of privity.[2] (See chapter 4)
h)
Distinguish the presumptions relating to intention to create legal relations.[2]
AC
C
A
G
1.
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CHAPTER 2 – LAW OF CONTRACT: FORMATION
CHAPTER CONTENT DIAGRAM
FORMATION OF A CONTRACT
INTENTION TO CREATE
LEGAL RELATIONS
AC
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CONSIDERATION
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OFFER & ACCEPTANCE
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CHAPTER 2 – LAW OF CONTRACT: FORMATION
CHAPTER 2 CONTENTS
NATURE OF A CONTRACT ----------------------------------------------- 36
AGREEMENT – OFFER AND ACCEPTANCE ------------------------------ 37
OFFER
37
ACCEPTANCE
39
CONSIDERATION -------------------------------------------------------- 40
THE PART PAYMENT PROBLEM – RULE IN PINNEL’S CASE ---------- 42
AC
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INTENTION TO CREATE LEGAL RELATIONS --------------------------- 44
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CHAPTER 2 – LAW OF CONTRACT: FORMATION
NATURE OF A CONTRACT
A contract does not exist unless all three essential elements are present.
agreement
2.
consideration
3.
intention to create legal relations
AC
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1.
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CHAPTER 2 – LAW OF CONTRACT: FORMATION
AGREEMENT – OFFER AND ACCEPTANCE
The existence of a contract requires there to be an agreement between the parties
and is usually shown by the unconditional acceptance of a firm offer. The basic
rule is: in order for a binding contract to exist there must be both offer and
acceptance.
Offer
What is an offer?
A definite and unequivocal statement of willingness to be bound by contract on
specified terms without further negotiations.
1.
an invitation to treat is not an offer.
ox
What is not an offer?
ba
lB
ie, an invitation to the other party to make an offer (it is also sometimes
described as an indication that the person is willing to enter into
negotiations). Eg Gibson v Manchester City Council (“we may be prepared to
sell”).
Examples
lo
most advertisements – Partridge v Crittenden (Newspaper advert: “For
sale. Bramblefield cocks & hens 25 shillings each” held to be an invitation to
treat, not an offer).
G
●
A
There is a policy reason for adverts normally being invitations to treat
and not offers, in that sometimes an advertiser will need to be able to
reject responses to his advert.
C
BUT sometimes an advert is an offer. Eg the ‘take it or leave it’ advert
●
AC
where the wording makes it clear that no negotiations are intended
(such as rewards – Carlill v Carbolic Smoke Ball) and the policy
reason is inapplicable.
most shop displays whether in the window – Fisher v Bell (flick knife on
display in shop-window held to be an invitation to treat, not an offer) or on the
shelves – Pharmaceutical Society of GB v Boots Cash Chemists
(offer made by customer when he proffers the goods at the check-out;
acceptance by shop).
BUT, in the same way as with adverts it can sometimes be argued that
the shopkeeper is making an offer.
E&SQs 30, 31, & 32
●
company prospectus (offer is made by investor making application;
acceptance by company on allotment).
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CHAPTER 2 – LAW OF CONTRACT: FORMATION
●
an invitation by a potential purchaser for the submission of a tender.
The tender itself is an offer. There are 2 types of tender:
2.
The ‘one-off’ tender.
If the purchaser accepts the tender, a
contract comes into being and therefore the tenderer must supply.
2.
The ‘standing offer’ tender. If the purchaser ‘accepts’ the tender a
contract, as such, does not come into being. However, every time
he orders goods this will be an acceptance of the standing offer.
Each order therefore forms a separate contract. The tenderer
must supply the goods ordered but he can revoke his standing
offer for the future – GNR v Witham.
a mere statement of selling price in response to a request
for information is not an offer.
Harvey v Facey (in response to an enquiry F stated a price but did not state
E&SQ 33
whether or not he would sell).
ox
eg
3.
1.
a mere statement of intention is not an offer – Harris v Nickerson.
ba
if a finder of an article returns a lost article to its owner he has no contractual
right to any reward offered unless he knew of the reward before he returned
the article.
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Termination of an offer
lo
eg
lB
An offer is not effective unless and until it has been
communicated to the offeree
Once an offer has been terminated it cannot then be accepted.
●
C
revocation by the offeror
an offer can be revoked at any time before acceptance
AC
1.
A
3 methods of termination:
even though the offeror has agreed to keep it open for a certain time –
eg Routledge v Grant.
E&SQ 34
●
the revocation is not effective until and unless it is communicated to the
offeree – eg Byrne v Leon Van Tienhoven
the communication can be done by the offeror, or by a reliable third
party – eg Dickinson v Dodds.
2 further matters:
●
Options. If the offeree pays the offeror to keep the offer open any
revocation will amount to a breach of that collateral contract. So
although the offeree still could not accept, he could claim damages for
the loss of the opportunity to accept.
E&SQ 35
●
Unilateral contracts. In this situation it seems that the offeror may not
revoke his offer once the offeree has begun to perform the act(s) which
would if completed amount to acceptance – Errington v Errington.
E&SQ 36
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CHAPTER 2 – LAW OF CONTRACT: FORMATION
2.
rejection by the offeree
Rejection, whether outright or in the form of a counter-offer, terminates
the offer.
A counter-offer is an offer made in response to an offer – Hyde v Wrench.
E&SQ 37
3.
lapse
Examples
●
on death of offeree
●
on death of offeror (but not if offeree accepts in ignorance of the death)
●
passage of time (a)
(b)
expiry of fixed time, or if none
expiry of a reasonable time.
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Acceptance
lB
What is an acceptance?
The unqualified and unconditional assent to all the terms of the offer.
ba
Further points:
It can be oral, written or by conduct (eg Carlill v Carbolic Smoke Ball the
using of the smoke ball in the prescribed manner & catching flu was Mrs Carlill’s
acceptance).
●
The offeror may not stipulate that the offeree’s silence shall be acceptance –
Felthouse v Bindley.
E&SQ 38 & 39
G
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●
C
A
Communication of acceptance
AC
Basic rule:
Acceptance is not effective until and unless it has been communicated to the offeror
– Entores v Miles Far Eastern
E&SQ 40
The postal rule exception
Here, acceptance is complete as soon as the letter is posted, even though it
might never reach the offeror – Household Fire Insurance v Grant.
Provided: ●
●
the letter is properly stamped, addressed and posted, and
the post is a reasonable method of communication
(reasonable = within the contemplation of the parties).
E&SQ 41
Is it possible to revoke an acceptance?
E&SQ 42
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CHAPTER 2 – LAW OF CONTRACT: FORMATION
CONSIDERATION
Basic rule
Each party must give consideration.
Exception – agreements made in the form of a deed.
Definitions
some right, interest, profit or benefit accruing to one party, or some
forbearance, detriment, loss or responsibility given, suffered or undertaken by
the other – Currie v Misa [1875] .
●
one party’s act or forbearance (promised or actual) is the price of the other
party’s act or forbearance (promised or actual) – Dunlop v Selfridge [1915] .
ox
●
Executory consideration – in the form of a promise for the future.
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Executed consideration – in the form of an act at the time it is given – Carlill v
Carbolic Smoke Ball.
Consideration must not be past
G
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1.
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Rules
2.
C
If a request for services is made it may be treated as carrying an
implied promise to pay: the later actual promise of payment then
being treated as merely the fixing of the price – Re Casey’s
Patents.
AC
Modification:
A
Past consideration = act wholly performed before the other party gives his promise
– Re McArdle (M did work on house – could not enforce subsequent promise of payment).
Consideration must be SUFFICIENT but NEED NOT BE
ADEQUATE
SUFFICIENT means 2 things
(a)
must be valuable , ie of some monetary value
White v Bluett (son’s promise to cease complaining – not valuable).
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CHAPTER 2 – LAW OF CONTRACT: FORMATION
(b)
must be capable in law of amounting to consideration
●
Performance of an illegal act is no consideration.
●
Performance of an existing statutory duty is no consideration – Collins v
Godefroy (witness who was under subpoena to attend court could not enforce
promise of defendant to pay him for attending).
Modification. If the promisee does more than his existing duty, the
more is sufficient consideration – Glasbrook Bros v Glamorgan CC.
●
Performance of an existing contractual duty is no consideration
Stilk v Myrick (sailors under contract “to exert yourself to the utmost”
could not enforce captain’s promise to divide wages of 2 deserters
between them).
Modifications
If the promisee does more than his existing contractual duty, the
more is sufficient consideration – Hartley v Ponsonby.
(ii)
Performance of existing contractual duty may be sufficient if this
confers some benefit of a practical nature on the promisor.
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(i)
A
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Williams v Roffey [1990]
R. Bros contracted to refurbish a block of flats by a certain
date. The contract contained a ‘time penalty’ clause.
R. Bros sub-contracted the carpentry (to be done by a set
date) to W for a set fee.
During the course of the work it became apparent that W had
underpriced the sub-contract.
R. Bros approached W and promised him extra money if he
would complete the work as agreed.
W did the work as agreed but R. Bros refused to pay the extra
money.
AC
C
W successfully sued R. Bros on their promise of extra money
because, even though W merely did that which he was
already obliged to do, this nevertheless conferred a practical
benefit on R. Bros.
Note: it was key to the decision that W put no pressure on R. Bros.
(iii)
Performance of an existing contractual duty is sufficient to support
a promise from a third party – Shadwell v Shadwell.
NEED NOT BE ADEQUATE means there is no requirement that each party’s
consideration should match in value.
Thomas v Thomas.
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CHAPTER 2 – LAW OF CONTRACT: FORMATION
The part payment problem – rule in Pinnel’s case
Example
D owes £1,000 to C
D (who doesn’t have £1,000) goes along to C and says “Will you accept £900 in full
and final settlement?”
C replies “Yes”.
So D pays £900 to C.
lB
The Rule in Pinnel’s case [1602]:
YES/NO
ox
Can C now sue D for the outstanding £100?
ba
Payment of a smaller sum does not discharge a debt of a
greater amount.
lo
Foakes v Beer [1884]
Where there is accord and satisfaction between the debtor and the
A
1.
G
Four exceptions:
●
C
creditor, the debt is discharged.
accord (ie agreement) must be freely entered into
AC
D & C Builders v Rees (builder not bound by agreement to accept
smaller sum offered by Mrs Rees because she said “take this or you’ll
get nothing”, knowing he was in desperate need of immediate funds to
stave off bankruptcy).
●
satisfaction (ie consideration)
egs
D & C Builders v Rees (payment by cheque no benefit vis-à-vis cash).
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CHAPTER 2 – LAW OF CONTRACT: FORMATION
2.
Where payment of smaller sum
discharges the debt from all concerned.
is by a third party this
eg, Hirachand Punamchand v Temple.
3.
Where there is a composition with
creditor can go back on that composition.
4.
Where the equitable doctrine
then the debt is discharged.
creditors then no individual
of promissory estoppel applies
What is the doctrine?
It states: if creditor waives his rights in circumstances where the debtor is
intended to and does alter his position in reliance on the waiver,
equity will hold the creditor to his word where it would be just and equitable.
ba
lB
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Central London Property v High Trees
CLP owned a block of flats in central London which it let on a long lease to HT
at a head-rent of £5,000 p.a. (on the basis that HT would sub-let individual
flats on short leases at commercial sub-rents).
Shortly after the deal was done the Second World War began and this meant
that HT was unable to fill up the block at pre-war levels of rent.
So CLP and HT met to discuss the matter and CLP agreed to reduce the headrent to £2,500 p.a. thus enabling HT to fill up the block.
Once the war was over the CA dealt with the following questions:
lo
G
2.
Could CLP claim for the head-rent forgone during the war years?
Could CLP now claim the full originally agreed head-rent for the future?
●
●
The debtor must have acted fairly – D & C Builders v Rees (creditor not
estopped because debtor took unfair advantage of creditor’s parlous financial
situation).
AC
●
YES/NO
C
Further points:
●
YES/NO
A
1.
The doctrine may operate merely to suspend the creditor’s rights.
The doctrine is a ‘shield and not a sword’.
The doctrine does not apply to simple debtor-creditor situations such as
in Pinnel’s case.
E&SQs 43, 44, 45, 46, & 47
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CHAPTER 2 – LAW OF CONTRACT: FORMATION
INTENTION TO CREATE LEGAL RELATIONS
Basic rule
Each party must intend to enter into a legal relationship.
The 2 presumptions:
Where an agreement is made in a social, domestic or family context the law
presumes that the parties .................. intend to be legally bound –
Balfour v Balfour.
2.
Where an agreement is made in a business or commercial context the law
presumes that the parties .................. intend to be legally bound.
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Rebuttal of the 2 presumptions
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1.
..........................
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In both situations the appropriate presumption may be
by evidence to the contrary.
A
G
The evidence may be the express words of the parties, or it may be the
surrounding circumstances – Merritt v Merritt and Simpkins v Pays (compare
Wilson v Burnett).
AC
C
In order to rebut the presumption appropriate to commercial agreements very clear
evidence to the contrary is necessary – Rose & Frank v Crompton and Jones v
Vernon’s Pools.
E&SQs 48, 49, 50 & 51
Test your knowledge and understanding of this chapter by working E&SQs 52, 53,
54, 55, 56, 57, 58, 59, & 60
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Chapter 3
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Law of contract –
terms
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SYLLABUS CONTENT (as set by ACCA’s study guide)
Content of contracts
a)
Distinguish terms from mere representations.[1]
b)
Define the various contractual terms.[1]
c)
Explain the effect of exclusion clauses and evaluate their control.[2]
AC
C
A
G
2.
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CHAPTER 3 – LAW OF CONTRACT: TERMS
CHAPTER CONTENT DIAGRAM
Where do the terms come from?
SOURCES
CONDITIONS,
WARRANTIES and
INNOMINATE TERMS
ox
What are the types of term?
lB
Can a party exclude liability for
breach of contract?
AC
C
A
G
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EXEMPTION CLAUSES
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CHAPTER 3 – LAW OF CONTRACT: TERMS
CHAPTER CONTENTS
SOURCES OF THE TERMS ------------------------------------------------ 48
CONDITIONS, WARRANTIES AND INNOMINATE TERMS ------------ 49
EXEMPTION CLAUSES --------------------------------------------------- 50
50
THE TWO COMMON LAW RULES
51
UNFAIR CONTRACT TERMS ACT 1977
52
THE UNFAIR TERMS IN CONSUMER CONTRACTS REGULATIONS 1999
53
AC
C
A
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INTRODUCTION
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CHAPTER 3 – LAW OF CONTRACT: TERMS
SOURCES OF THE TERMS
SOURCES OF TERMS
EXPRESS
IMPLIED
By statute
By courts
1. custom
2. usage
3. to give business
efficacy
● in law
● in fact
lB
ox
eg Equality Act 2010
ba
ie such terms as are
necessitated by the
legal nature of the
contract
harbouring of a ship – term
implied that it must be a safe
harbour)
AC
C
A
G
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ie looking at the surrounding
facts, such terms as are so
obvious that the parties did
not bother to express them eg
The Moorcock (contract for the
A further note re express terms
Not everything expressed by the parties amounts to a term, some are merely
representations.
If a term is broken, the innocent party has an action for breach of contract. If a
mere representation is broken, the innocent party has an action for
misrepresentation, not for breach of contract.
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CHAPTER 3 – LAW OF CONTRACT: TERMS
CONDITIONS, WARRANTIES AND INNOMINATE TERMS
Up until about 40 years ago all terms were classified as either being a
condition or being a warranty. Now there is also a third possibility – the
innominate (also called intermediate) term.
2.
A condition is an important term going to the root of the contract – such
that its breach would deprive the innocent party of substantially the whole
benefit of the contract.
3.
A warranty is a term of lesser importance collateral to the main purpose of
the contract – such that its breach would not totally destroy the whole
purpose of the contract.
4.
An innominate term is unclassified: it is neither a condition nor a warranty.
5.
The classification is made at the time the contract is entered into (thus the
court is not entitled to the benefit of hindsight).
6.
Consequences/importance of the distinction
ox
1.
●
lB
The importance of the distinction is the remedies potentially available on
breach:
condition → damages or discharge or both
ba
Poussard v Spiers (opera singer – obligation to attend performances a
●
lo
condition. Therefore impresario had right to sack soprano for not turning up on
opening night (and he could claim damages if he had wanted)).
warranty → damages only
C
innominate
(i)
if effect of breach trivial → damages
(ii)
if effect of breach serious → damages or discharge or both
AC
●
A
G
Bettini v Gye (opera singer – obligation to attend rehearsals a warranty.
Therefore when impresario sacked tenor for not turning up to rehearsals the
impresario was in breach of contract: his only remedy for the tenor’s breach was
damages).
The Hansa Nord.
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CHAPTER 3 – LAW OF CONTRACT: TERMS
EXEMPTION CLAUSES
Introduction
What is an exemption clause?
A term in a contract that seeks to exclude a party’s liability for breach of contract.
Is an exemption clause valid?
ox
There are 2 sources of law relevant to determining whether or not an exemption
clause is valid – the common law and statute.
lB
1.
must be incorporated
into the contract
2.
wording must be apt
to cover loss
1.
UCTA 1977
AC
C
A
G
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ba
common
law rules
statutory
rules
2.
UTCCR 1999
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CHAPTER 3 – LAW OF CONTRACT: TERMS
The two common law rules
1.
Incorporation into the contract
ie the clause must be part of the contract.
It can be incorporated by signature, or by notice, or by previous dealings.
SIGNATURE – obtaining signature is enough (party deemed to have agreed
to it even though did not read or understand it) - L’Estrange v Graucob.
NOTICE – reasonable steps must be taken to bring the clause to the
attention of the other party.
What are ‘reasonable steps’ depends on
circumstances:
Thompson v LMS (reasonable steps taken even though train traveller was
illiterate).
ox
The obtaining of any signature or the giving of notice must occur before or at
the time of making the contract. Compare, for example, signing an invoice,
delivery note or receipt, and
lB
Olley v Marlborough Court (notice in hotel bedroom too late as the
contract was made earlier down in reception).
ba
PREVIOUS DEALINGS
It must be a consistent course of dealings.
G
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McCutcheon v David MacBrayne (sometimes M was asked to sign a contract
containing an exemption clause, sometimes not. Held: no consistency in the
dealings).
It must be a consistent course of dealings.
C
A
Spurling v Bradshaw (numerous deals – “too many to count” – between 2
businessmen over many years – “at least 10” – held to be a sufficient course).
2.
AC
Hollier v Rambler Motors (3 or 4 deals over about 5 years between garage
and private customer not sufficient).
Wording must be apt to cover the loss which occurs
Under the contra proferentem rule, the courts interpret the words narrowly
against the interests of the party seeking to rely on the clause.
A general case law example of a clause which satisfied the common law rules
is the leading case of Photo Productions v Securicor (Securicor in breach of
contract to provide security for P’s factories when Securicor’s guard burned factory
down.
P had signed contract with an exemption clause stating: “under no
circumstances shall Securicor be responsible for any injurious act or default by any
employee”).
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CHAPTER 3 – LAW OF CONTRACT: TERMS
Unfair Contract Terms Act 1977
Summary of UCTA
1.
Clauses exempting liability for DEATH or PERSONAL INJURY caused by
negligence are VOID.
2.
Clauses exempting liability for OTHER LOSS caused by negligence are VOID
UNLESS REASONABLE.
The reasonableness test
Burden of proving reasonableness is on the party seeking to rely on the
clause.
(b)
Court considers all the surrounding circumstances. Eg in RW Green v Cade
(unreasonable to impose a time limit of 3 days for complaints about seed potatoes
since defects might not be discovered until after growth).
(c)
Sched. 2 guidelines.
ox
(a)
lB
Egs are:
bargaining strength of the parties
●
inducements
●
whether the buyer knew or ought to have known of the existence and
the extent of the term
●
ability to insure.
C
A
G
lo
ba
●
AC
Recommendation:
read through the case St Albans City Council v
International Computers Ltd: it is a useful illustration of the Schedule 2
guidelines on the reasonableness test.
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CHAPTER 3 – LAW OF CONTRACT: TERMS
The Unfair Terms in Consumer Contracts Regulations
1999
The above Regulations were originally made in late 1994 to implement a European
Community directive. They were re-made in 1999.
Outline of the Regulations
The idea of the Regulations is to prevent businesses imposing unfair terms on
consumers.
The Regulations apply where
the terms have not been individually negotiated (ie on an overall assessment
it is a pre-formulated standard contract), and
●
the seller/supplier is a business, and
●
the other party is a consumer (ie a natural person acting for purposes outside
his business).
lB
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●
What is an unfair term?
Any term which is not expressed in plain, intelligible language.
(2)
Any term (but excluding terms as to price or subject-matter) which “contrary
to the requirement of good faith causes a significant imbalance in the parties’
rights and obligations under the contract to the detriment of the consumer”.
lo
ba
(1)
G
Schedule 3 to the Regulations contains a non-exhaustive list of 17 illustrations
of terms which may be regarded as unfair, eg
a term which allows the seller to alter the terms of the contract
unilaterally without a valid reason which is specified in the contract (eg
change of delivery date).
●
exclusion clauses (subject to much the same criteria as the UCTA 1977
reasonableness test).
AC
C
A
●
Consequences of the inclusion of an unfair term
If a term is unfair the particular term is not binding on a consumer.
The
Regulations also empower the Director-General of Fair Trading and certain other
organisations such as Which? to obtain an injunction against a business to prevent
the use of an unfair term.
E&SQ 61
Test your knowledge and understanding of this chapter by working E&SQs 62, 63,
64, 65, 66, 67, 68, & 69
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AC
C
A
G
lo
ba
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CHAPTER 3 – LAW OF CONTRACT: TERMS
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Chapter 4
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Law of contract –
breach
lo
SYLLABUS CONTENT (as set by ACCA’s study guide)
Breach of contract and remedies
a)
Explain the ways in which a contract may be discharged.[2]
b)
Explain the meaning and effect of breach of contract.[2]
c)
Explain the rules relating to the award of damages.[2]
d)
Analyse the equitable remedies for breach of contract.[2]
e)
Analyse the doctrine of privity.[2]
AC
C
A
G
3.
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CHAPTER 4 – LAW OF CONTRACT: BREACH
CHAPTER CONTENT DIAGRAM
DISCHARGE
Is there a breach of contract?
BREACH
REMEDIES
PRIVITY
AC
C
A
G
lo
ba
Who can sue, and be sued, for breach?
lB
What are the remedies of the injured party?
ox
How is a contract discharged?
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CHAPTER 4 – LAW OF CONTRACT: BREACH
CHAPTER 4 CONTENTS
DISCHARGE OF A CONTRACT ------------------------------------------- 58
DISCHARGE BY PERFORMANCE
58
DISCHARGE BY AGREEMENT
59
DISCHARGE BY FRUSTRATION
60
DISCHARGE BY ACCEPTANCE OF BREACH
62
WHAT IS A BREACH OF CONTRACT? ----------------------------------- 63
DEFINITION
63
ACTUAL BREACH AND ANTICIPATORY BREACH
63
REMEDIES FOR BREACH OF CONTRACT ------------------------------- 64
ox
ACTION FOR THE PRICE
SPECIFIC PERFORMANCE AND INJUNCTION
lB
DAMAGES
64
64
68
ba
DOCTRINE OF PRIVITY ------------------------------------------------- 69
69
IMPORTANT EXCEPTIONS TO THE DOCTRINE OF PRIVITY
70
AC
C
A
G
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BASIC PRINCIPLES OF THE DOCTRINE OF PRIVITY
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CHAPTER 4 – LAW OF CONTRACT: BREACH
DISCHARGE OF A CONTRACT
Discharge means the termination of the contract. The effect is that neither party
has any further obligations under the contract. There are 4 methods of discharge of
a contract:
1.
by performance ie the parties have carried out their contractual
obligations.
2.
by agreement ie the parties agree that they are no longer bound by their
contract.
3.
by frustration ie the contract has become impossible to carry out.
4.
by acceptance of breach.
Discharge by performance
ox
Basic rule
lB
In order to discharge a contract performance must be complete and exact.
eg of incomplete performance – Cutter v Powell [1795] (sailor who contracted for
Effect of non-performance
ba
whole voyage died during it).
G
lo
In general, an incomplete or inexact performer can recover nothing under
the contract (and, in general, is in breach of contract from which further
consequences follow – see later).
severable (or divisible) obligations
AC
1.
C
A
Exceptions to the general rule of non-recovery by an
incomplete or inexact performer:
Can recover the contract price for each part completed.
2.
performance prevented by other party
Can recover a quantum meruit (ie a reasonable amount; literally “so much as
he deserves/merits”) for that completed.
A quantum meruit is not necessarily the contract price nor a proportion of it.
3.
incomplete/inexact performance freely accepted by the
other party
Can recover a quantum meruit.
4.
equitable doctrine of substantial performance
A party who has done all that which he has agreed to do but who has done it
defectively can recover the contract sum less a deduction for putting right
those defects.
E&SQ 70
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CHAPTER 4 – LAW OF CONTRACT: BREACH
Discharge by agreement
The agreement can arise in two ways:
1.
The original contract contains a term providing for its
discharge
●
on the happening (or non-happening) of a specified event
●
at the option of one or other of the parties
eg ‘break-clauses’ in leases
eg ‘notice’ in contracts of employment.
2.
The parties make an agreement (called the agreement of
discharge) in which they agree to cancel their original
agreement.
ba
(a) bilateral discharge
lB
ox
The key point to understand here is that where the parties are making an
agreement of discharge they are doing nothing more than making a contract.
It follows then that all the rules on formation of a contract must be complied
with, in particular – consideration. This leads to the sub-categorisation into:
the original contract is executory (unperformed) on both sides at
the date of the discharge agreement
-
each party gives consideration because he is giving up his rights
under the original contract (remember: consideration can be
described in terms of ‘detriment’).
G
lo
-
C
one party has wholly performed his side of the contract, the other
has not
AC
-
A
(b) unilateral discharge
-
the ‘non-performer’ must give consideration for the discharge
agreement (there then being ‘accord and satisfaction’). Notice that
no consideration is necessary if the discharge agreement is by
deed. See earlier chapter 3 on page 42.
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CHAPTER 4 – LAW OF CONTRACT: BREACH
Discharge by frustration
Definition & concepts
Definition/description: a contract is frustrated where, although possible to perform
when made, it subsequently becomes impossible through the happening of a
supervening event which occurred through the fault of neither party.
also called subsequent impossibility, automatic discharge or discharge by
operation of law.
●
narrow doctrine. In that normally if a party fails to do what he agreed to do
then he is in breach of contract. So frustration only narrowly applies as a
lawful excuse for non-performance.
ox
●
1.
lB
Case law examples of frustration
destruction of the subject-matter
lo
change in the law / Government intervention rendering
performance illegal
G
2.
ba
Taylor v Caldwell (contract to hire out a specific music hall which then burnt
down. Contract frustrated).
C
non-occurrence of event which was known to both parties
to be the sole purpose of the contract
AC
3.
A
Re Shipton, Anderson (Government requisitioned subject matter (wheat) of
the contract. Contract frustrated).
Krell v Henry (room hired to watch coronation procession which was cancelled.
Contract frustrated).
distinguish Herne Bay Steamship v Hutton (hire of boat for 2 purposes (see
Naval Review and see fleet): only Review cancelled. Contract not frustrated).
4.
incapacity in contracts of personal service
-
distinguish between permanent incapacity (eg death) and the difficult
question of illness and imprisonment
-
with the 2 latter consider and balance for example: length of contract /
length of illness / prospects for recovery / key worker – so as to decide
whether or not the time has arrived when the employer can no longer
reasonably be expected to keep the sick employee’s job open for him.
Robinson v Davison (pianist ill on date of performance.
frustrated).
Contract
Condor v Barron Knights (key worker, drummer in band ill 3 nights out
of 7. Contract frustrated).
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CHAPTER 4 – LAW OF CONTRACT: BREACH
Case law examples of not frustration
1.
performance merely more difficult or expensive
Tsakiroglou v Noblee Thorl (Suez canal case. Contract for “shipping of
groundnuts from the Sudan to Hamburg” not frustrated by closure of Suez canal.
Merely a longer more expensive journey – not a case of impossibility. Contract
not frustrated).
Davis Contractors v Fareham UDC (building contract not frustrated by
shortages of materials and strikes by the builder’s workers).
2.
‘self-induced’ frustration
ox
Maritime National Fish v Ocean Trawlers (Contract to hire out a ship.
Company had three ships but was subsequently allocated only 2 licences by the
authorities. Chose not to allocate licence to ship which was subject of contract –
with the consequence that it would now be illegal to hire out that ship. Held:
contract for hire not frustrated by illegality).
AC
C
A
G
lo
ba
lB
E&SQs 71, 72, & 73
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CHAPTER 4 – LAW OF CONTRACT: BREACH
Discharge by acceptance of breach
This topic overlaps with conditions and warranties. See earlier on page 42.
1.
What does discharge by acceptance of breach mean?
There are various ways of expressing it
●
the party not in breach can accept that the other party’s breach terminates
the contract
●
the breach entitles the innocent party to put an end to the contract
●
the breach entitles the innocent party to repudiate the contract
●
the breach entitles the innocent party to withdraw from the contract.
Which breaches allow him to discharge the contract?
lB
2.
ox
Note: you may see written in text books that the innocent party has a right
to ‘rescind’ the contract.
Technically rescission is a remedy for
misrepresentation not for breach of contract, so try to avoid using the word
rescission in this context.
lo
ba
Although every breach entitles the innocent party to claim damages, not every
breach entitles him to terminate/repudiate the contract. If he does so when he is
not entitled he himself is in breach of contract. Remember for example: Bettini v
Gye (tenor / rehearsals / breach of warranty only / employer could not sack) on page 49;
and compare Poussard v Spiers (soprano / performances / breach of condition / employer
could sack), also on page 49.
G
The breaches which entitle the innocent party to repudiate the contract (sometimes
called repudiatory breaches or total breaches) are:
breach of condition
●
renunciation, ie a total failure to perform
●
serious breach (sometimes called fundamental breach because performance is
radically different than that envisaged by the parties).
3.
Does a repudiatory breach automatically terminate the
contract?
AC
C
A
●
No.
A repudiatory breach does not automatically discharge the contract – the innocent
party has a choice whether or not to accept that the breach discharges the
contract. In either event, he can still claim damages.
If he refuses to accept the breach he is said to ‘affirm’ the contract.
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CHAPTER 4 – LAW OF CONTRACT: BREACH
WHAT IS A BREACH OF CONTRACT?
Definition
A party is in breach of contract if, without lawful excuse, he fails to do completely
and exactly that which he has agreed to do or if he does it defectively.
Actual breach and anticipatory breach
The difference between actual breach and anticipatory breach lies in the timing of
the breach.
actual: the breach occurs on the due date for performance.
●
anticipatory: a party, prior to the due date for performance, shows an
intention (expressly or impliedly) not to perform his contractual obligations.
ox
●
lB
Express anticipatory breach occurs where a party actually states that he will
not be performing his contractual obligations – Hochster v De La Tour.
Implied anticipatory breach occurs where a party carries out some act which
makes performance impossible – Omnium Enterprises v Sutherland.
lo
ba
When anticipatory breach takes place the innocent party can sue for damages
immediately on receipt of the notification of the other party’s intention to
repudiate the contract, without waiting for the actual contractual date of
performance as in Hochster v De La Tour.
E&SQ 74
AC
C
A
G
Alternatively, he can wait until the actual time for performance before taking
action. In the latter instance, he is entitled to perform the contract and claim
the agreed contract price – White & Carter v McGregor (advertising of garage
on litter bins. Agency went ahead even though M cancelled campaign).
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CHAPTER 4 – LAW OF CONTRACT: BREACH
REMEDIES FOR BREACH OF CONTRACT
The remedies within your syllabus for breach of contract are:
●
Action for the price
●
Damages
●
Specific performance
●
Injunction.
Action for the price
This is the remedy applicable where the breach of contract is failure to pay
the price.
●
In general, a claimant can only maintain an action for the price once he has
completely and exactly performed all his contractual obligations (remember
the rules on discharge by performance in the previous Chapter on page 58).
ox
●
lB
Damages
ba
Basics
common law remedy available as of right
●
purpose is compensatory, ie to put the innocent party in the same
position he would have been in had the contract been properly
performed
G
lo
●
AC
C
A
not to punish the contract-breaker by depriving him of his ill-gotten gains –
Surrey CC v Bredero Homes.
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CHAPTER 4 – LAW OF CONTRACT: BREACH
Liquidated damages clauses and penalty clauses
Such a clause may be a:
liquidated damages clause
or it may be classed as a penalty
ie the amount is in the
nature of a threat and is
often very large in relation
to the expected loss
ox
ie the amount is a genuine
pre-estimate of the
expected loss on breach
VALID
ba
lB
UNENFORCEABLE
ie the amount stated is the
amount of damages payable
Making the distinction:
G
lo
ie ignore the clause
a liquidated damages clause is a genuine pre-estimate of the expected loss
on breach – Cellulose Acetate Silk v Widnes Foundry. An onerous liquidated
damages clause may be upheld if the figure is commercially justifiable –
Azimut-Benetti v D M Healey [2010].
●
a penalty clause is in the nature of a threat and the amount is often very
large in relation to the expected loss.
AC
C
A
●
In general, a clause will be classified as a penalty if:
→
the prescribed sum is extravagant in comparison with the maximum loss that
could follow from a breach.
→
the contract provides for payment of a certain sum but a larger sum is
stipulated to be payable on a breach.
→
the same sum is fixed as being payable for several breaches which would be
likely to cause varying amounts of damage.
E&SQ 75
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CHAPTER 4 – LAW OF CONTRACT: BREACH
Assessment of unliquidated damages
(i) Remoteness of loss
Damages cannot be claimed for every loss – some losses are too remote.
The rule in Hadley v Baxendale states:
A loss is not too remote
Or
1.
If it arises naturally (ie according to the usual course of
things) from the breach.
2.
If it may reasonably be supposed to be within the
contemplation of the parties, at the time they made the
contract, as the probable result of breach.
Victoria Laundry v Newman Industries
E&SQ 76
lB
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Damages cannot normally be claimed for loss of amenity value / distress /
loss of enjoyment. Exception: the special case where the contract is selling
enjoyment – Jarvis v Swan Tours (holiday) and Ruxley Electronics v Forsyth
(swimming pool in garden).
(ii) Measure of damages
lo
ba
The general principle: the amount of damages is to put the claimant in the
same position that he would have been in had the contract been properly
performed.
Further points:
There are 2 alternative bases of assessment:
The loss of bargain (or loss of expectation) basis.
C
A
1.
G
●
AC
There can be difficulties in applying this basis (ie that the measure
is to put the claimant in the same position that he would have
been in had the contract been properly performed).
This is
particularly so with building contracts and the like where the
damages could be calculated:
●
as the difference between the value of the work had the
contract been properly performed and the value it has
because the contract has not been properly performed, or
●
as the cost to the owner re-doing the work so that it meets
the contractual specifications.
It is for the claimant to choose which, except that he cannot claim
the cost of re-instatement if this would be unreasonable.
Ruxley Electronics v Forsyth [1995]
RE agreed to build a swimming pool for F at F’s house for £17,797.40.
The contract specified a pool depth of 7ft 6in. In the event RE built the
pool between 6ft and 6ft 9in deep.
F claimed damages of £21,560 equal to the cost of re-doing the pool to
the agreed depth.
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CHAPTER 4 – LAW OF CONTRACT: BREACH
RE argued that the damages should be the difference in value between the
pool as specified and as built. (This would mean £0 since the pool as built
was just as suitable for swimming and diving as one built to the agreed
specifications).
The HL held that F would not be awarded damages so as to enable
him to re-build the pool as this was unreasonable since the cost
was out of all proportion to the benefit to be obtained. Thus
his claim would be confined to the difference in value. This of
course meant £0 – although the HL did uphold the lower court’s
award of £2,500 for loss of amenity/enjoyment (though they
commented that the amount was on the high side).
2.
The reliance loss (or out-of-pocket) basis.
Anglia Television v Reed (The claimants engaged an actor to appear
lB
ox
in a film they were making for television. He pulled out at the last
moment and the project was abandoned. The claimants claimed the
preparatory expenditure such as hiring the other actors and researching
suitable locations.
Held.
Damages were awarded for the wasted
preparatory expenditure.)
The claimant must take reasonable steps to mitigate his loss – Brace v
Calder.
●
If there is no actual loss, the damages will be nominal.
●
A notional deduction may have to be made to reflect taxation.
●
The court is prepared to evaluate the loss of a chance – Chaplin v Hicks.
E&SQs 77, 78, & 79
AC
C
A
G
lo
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●
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CHAPTER 4 – LAW OF CONTRACT: BREACH
Specific Performance and Injunction
The equitable remedies for breach of contract comprise
•
specific performance, and
•
injunction.
Specific performance is a Court order requiring a person to perform a positive
contractual obligation.
Injunction is a Court order requiring a person to perform a negative obligation.
Being equitable remedies they are given at the discretion of the Court.
1.
only where damages would be an .................….……...…....... remedy.
2.
an order will not be made where
.............………........ to a defendant.
3.
the contract must be .........................…....... enforceable.
4.
an order will not be made where it would require the constant
........................……....... of the court.
5.
“He
who
comes
to
......................……………….….......”.
6.
“D..................... defeats the Equities”.
would
cause
undue
G
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ba
lB
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it
Equity
must
come
with
E&SQs 80, 81 & 82
The same guidelines apply to the ordering of an injunction. However, an
injunction can be given of a contract of personal service unless this would be
tantamount to specific performance – Page One Records Ltd v Britton.
AC
C
2.
The Court will exercise its discretion to order specific performance
according to the following guidelines:
A
1.
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E&SQs 83, 84 & 85
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CHAPTER 4 – LAW OF CONTRACT: BREACH
DOCTRINE OF PRIVITY
You must (i) understand the meaning of the doctrine, and (ii) learn the important
exceptions to the doctrine. The important case to remember is Beswick v
Beswick.
Basic principles of the doctrine of privity
There are three ways of stating the doctrine
●
a contract creates rights and obligations only between the parties to it.
●
a contract cannot impose obligations on, or confer rights on, a stranger to it.
●
a person who is not party to a contract cannot sue or be sued on it.
AC
C
A
G
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lB
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E&SQs 86 & 87
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CHAPTER 4 – LAW OF CONTRACT: BREACH
Important exceptions to the doctrine of privity
1.
On death most of the deceased’s rights and liabilities automatically pass to his
PRs.
Beswick v Beswick [1968]
Peter Beswick (PB) sold his business to N. As part of the purchase price N agreed to
pay an annuity to PB for his life and thereafter to his widow (MrsB) for her life. When
PB died N refused to pay the annuity to MrsB.
Held: (1) in her personal capacity she could not enforce the contract against N
as she was not party to the contract; but (2) since she was PB’s executor she
could enforce the contract in that capacity.
Under the rules of land law, covenants run with the land.
3.
Under the rules of insurance law, a third party may take the benefit of a
contract of insurance.
4.
Under the rules of trust law, a beneficiary can enforce the trust.
5.
A third party may enforce rights under a contract where those rights have
been validly assigned to him.
lB
ox
2.
This does not apply to liabilities.
A third party may be able to bring a claim where there is a collateral contract
in existence between the claimant and the defendant and which is essential to
the formation of the main contract – Shanklin Pier Ltd v Detel Products Ltd
[1951].
7.
Under the rules of agency, an agent can bring into being contractual relations
between his principal and a third party even though he may not have
disclosed to the third party that he is an agent. (See later the syllabus topic
‘Agency’).
8.
The Contracts (Rights of Third Parties) Act 1999 allows a non-contracting
party to enforce a contractual term in his own right in two situations:
C
A
G
lo
ba
6.
if the contract expressly provides that he may, or
(ii)
if the term purports to confer a benefit on him (unless, on
construing the contract, it appears that the parties did not intend
the term to be enforceable by him).
AC
(i)
The third party must be expressly identified in the contract: by name, or as a
member of a class, or as answering a particular description.
Thus by virtue of (ii) it would seem that if Peter Beswick and N made their
contract today MrsB could enforce the term re the annuity in her personal
capacity.
Test your knowledge and understanding of this chapter by working E&SQs 88, 89,
90, 91, 92, 93, 94, 95, 96, 97, 98, & 99
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Chapter 5
ba
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Law of torts
lo
SYLLABUS CONTENT (as set by ACCA’s study guide)
The law of torts and professional negligence
a)
Explain the meaning of tort.[2]
b)
Explain the tort of ‘passing off’.[2]
c)
Explain the tort of negligence including the duty of care and its breach.[2]
d)
Explain the meaning of causality and remoteness of damage.[2]
e)
Discuss defences to actions in negligence.[2]
f)
Explain and analyse the duty of care of accountants and auditors.[2]
AC
C
A
G
4.
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CHAPTER 5 – LAW OF TORTS
CHAPTER CONTENT DIAGRAM
TORT
NEGLIGENCE
AC
C
A
G
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PASSING OFF
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CHAPTER 5 – LAW OF TORTS
CHAPTER CONTENTS
WHAT IS A TORT? ------------------------------------------------------- 74
TORT OF NEGLIGENCE -------------------------------------------------- 75
THE 3 ESSENTIAL ELEMENTS
75
DEFENCES
80
DISCLAIMERS
81
VICARIOUS LIABILITY
81
TORT OF PASSING OFF -------------------------------------------------- 82
82
REMEDIES OF THE CLAIMANT
82
AC
C
A
G
lo
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THE 3 MATTERS TO BE PROVED
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CHAPTER 5 – LAW OF TORTS
WHAT IS A TORT?
A tort is a civil wrong created by the law that arises independently of any contract
that the parties might have chosen to enter into.
There are numerous different torts: but your syllabus contains just two:
the tort of negligence;
2.
the tort of passing off.
AC
C
A
G
lo
ba
lB
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1.
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CHAPTER 5 – LAW OF TORTS
TORT OF NEGLIGENCE
The 3 essential elements
In order to succeed in the tort of negligence the claimant must prove 3 matters:
that the defendant owes him a duty of care
2.
that the defendant breached his duty of care
3.
that as a result the claimant suffered loss which is not too
remote.
Duty of care
ox
1.
1.
lB
This element is looking at who can be sued by the claimant.
To whom does a defendant owe a duty of care?
Answer given by Lord Atkin in Donoghue v Stevenson
lo
Who is his neighbour?
[1932] HL:
ba
Answer: to his neighbour.
G
“the person who is so closely and directly affected by my act or omission that
I ought reasonably to have him in contemplation as being so affected when I
am directing my mind to the acts or omissions in question”
A
ie a test of reasonable foreseeability and proximity.
AC
C
Later cases (eg Caparo Industries v Dickman [1990] HL) have introduced a third
criterion – public policy, ie even though there is reasonable foreseeability and
proximity, the courts will deny the existence of a duty of care. This will be the
situation where, in all the circumstances, it is not just, fair, and reasonable to
impose a duty of care.
Examples of the neighbour principle in operation
(i)
manufacturer (and others in the chain of supply) → ultimate consumer
Donoghue v Stevenson [1932] HL (snail in ginger beer bottle)
(ii)
road user → road user
(iii)
employer → employee (re health & safety in the workplace)
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CHAPTER 5 – LAW OF TORTS
(iv)
mis-statement causing economic loss (professional negligence)
The House of Lords in Caparo Industries v Dickman [1990] refined the
neighbour principle and established that 3 criteria must be satisfied for the
maker of a mis-statement to owe a duty of care to the recipient:
1.
It must be reasonably foreseeable that, in the circumstances, the
statement would be relied upon by such persons as the claimant.
Is it reasonably foreseeable that investors will rely on the auditor’s
report
YES/NO?
2.
There must be proximity , ie close and direct relations, between the
maker and recipient.
There will be if the statement is made to a known person or persons for
a known purpose and he uses it for that purpose.
Caparo Industries v Dickman [1990] HL
ox
Caparo bought all the shares in a company in reliance on the audited
accounts.
Does the auditor, Dickman, owe Caparo a duty of care?
lB
Held: No, because
the auditors’ report is addressed to the members as a body – ie the
company – and not to individual members or investors
●
the auditor’s report verifies the directors’ account of their
stewardship of the company for the purpose of the general meeting
deciding whether the company should reward (or otherwise) the
directors – and not for the purpose of people making investment
decisions.
G
lo
ba
●
A
Caparo gives the general rule. It was distinguished by the High Court on
the different facts of
C
ADT v Binder Hamlyn [1995]
AC
The defendant firm was the auditors of a company called Britannia
Securities Group (BSG) and the plaintiff was the purchaser of all the
shares of BSG. The 1989 accounts were published with an unqualified
audit report.
At a subsequent meeting between the Binder Hamlyn audit partner and a
director of ADT – a meeting which was known to both to be the final
hurdle before ADT finalised its bid for BSG – the Binder Hamlyn audit
partner specifically confirmed that he ‘stood by’ the 1989 accounts. ADT
then bought BSG for £105m. It was subsequently discovered that BSG’s
true value was only £65m.
The High Court held that Binder Hamlyn owed a duty of care to ADT in
relation to the statement by the Binder Hamlyn partner confirming the
accuracy of the accounts – proximity was established because that
statement was made to a known person for a known purpose. Caparo was
therefore distinguished.
Further useful cases are:
Al Saudi Bank v Clarke Pixley [1989].
James McNaughton Paper v Hicks Anderson [1991] CA.
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CHAPTER 5 – LAW OF TORTS
3.
In all the circumstances it must be fair, just and reasonable to impose a
duty of care, eg it must not be contrary to public policy to impose a duty of
care.
Overall summary & conclusions to the question ‘To whom does
an auditor owe and not owe a duty of care?’
As a general rule:
Recipient of audit report
Yes ( ) or No ( )
investor
shareholder
ox
creditor (eg a bank)
lB
director
AC
C
A
G
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ba
the company
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2.
Breach of duty
This is the fault element of negligence. It means that the claimant must prove that
the defendant failed to meet the standard of reasonable care.
1.
Reasonable care = “what a reasonable man guided upon those
considerations which ordinarily regulate the conduct of human affairs would
do or would not do”.
What is reasonable depends objectively on the circumstances.
Factors taken into account include:
●
Cost and practicability
A potential risk has to be balanced against the measures necessary to
eliminate it. If the cost of these measures far outweighs the risk, the
defendant will not be in breach of duty for failing to carry out those
measures.
ox
Latimer v AEC [1953] (employer not liable as in the circumstances he
●
lB
had done all that could reasonably be expected; viz brushed up slippery oil
and put down sawdust such that only very small patches remained).
Seriousness of the potential harm
Professionals
G
●
lo
ba
Paris v Stepney Borough Council [1951] (Paris, a welder, had sight in
one eye only. It was held that the reasonable man would expect extra
care to be taken with persons who are especially vulnerable. Paris was
especially vulnerable when compared with persons that had sight in both
eyes).
A
The standard care expected of a professional man, acting in that
capacity, is that of a reasonably competent member of his profession.
●
AC
C
Twomax v Dickson [1983] (failure to follow statutory provisions, codes
or guidelines is evidence of failure to meet the standard).
Car drivers
The standard of care expected of a car-driver, acting in that capacity, is
that of a reasonably competent driver.
●
Inexperienced persons
The standard is not lower because a defendant is inexperienced and/or
lacking skills.
Nettleship v Weston [1971] (a learner driver was in breach of duty
because he failed to reach the standard of a reasonably competent
driver).
●
Social utility
The standard of care expected takes into account the social utility and
importance of the defendant’s activity.
Watt v Hertfordshire CC [1954] (an emergency fire-fighter was injured
attending an emergency rescue – a woman in danger of losing her life).
●
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Facts and standards known at the time of the case
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CHAPTER 5 – LAW OF TORTS
2.
Res ipsa loquitur
In general, it is for the claimant to adduce evidence to prove that the
defendant failed to exercise reasonable care.
But, if the doctrine of res ipsa loqitur (literally = the thing speaks for itself)
applies the burden of proof exceptionally shifts from the claimant to the
defendant.
The doctrine will apply where:
3.
●
the obvious explanation of the accident was that the defendant was
negligent; and
●
the thing that caused the accident was under the control of the
defendant.
Resultant loss
1.
ox
This element is looking at what losses the claimant can claim damages for –
sometimes also called remoteness of damage.
The claimant must prove that he has suffered loss .
personal injury (eg physical or mental injury to the body, death)
●
damage to property (eg a wrecked car)
●
financial loss directly connected to personal injury or to property
damage (eg loss of earnings, loss of profits)
●
pure financial loss is only recoverable for negligent misstatements.
lo
ba
●
G
2.
lB
The loss recoverable can be:
The loss must have been caused by the breach of duty.
A
ie the injury would not have happened but for the defendant’s breach of
duty.
C
Jeb Fasteners v Marks Bloom [1982] CA (auditor was not liable because the
AC
claimant bought shares at price he did, not because of what accounts said, but
because he wished to acquire the expertise of company’s 2 directors). Also see
Barnett v Chelsea & Kensington Hospital [1969].
A further aspect of the “but for” test is novus actus interveniens (in English –
a new and intervening act). Such an act will break the chain of causation.
The defendant will therefore not be liable for events that caused damage after
this break in the chain of causation.
3.
The type of injury/damage must be reasonably foreseeable .
The Wagon Mound [1961] HL (captain of tanker who discharged heavy crude oil
into sea was held liable for pollution: but not for fire – because expert evidence
showed that such oil did not normally catch fire).
It is merely the type of loss that must be reasonably foreseeable – not its
extent or seriousness.
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Defences
1.
Volenti non fit injuria
●
Literal translation = to he who consents no injury is done.
●
Also called ‘consent’ or ‘volenti’.
●
Basic statement of defence:
Defendant alleges that the claimant, knowing of the risk of injury, freely
consented to run the risk.
●
A claimant does not freely consent if he is under pressure (social, economic,
moral).
eg
an employee will often be under economic pressure to continue in an
unsafe workplace
ox
Smith v Baker (quarrymen held not to have consented merely because
they continued to work on quarry floor whilst a crane was swinging nets of
stones over their heads).
lB
but distinguish the facts of
Bolt v WM Moss (painter fell off trestle whilst it was being moved did
consent because he had been previously warned to get off first).
ba
eg
Effect: defendant escapes liability entirely.
2.
Contributory negligence
●
Basic statement of defence:
G
lo
●
A
Defendant alleges that the claimant, by his own negligence, contributed to the
extent of his injuries.
Sayers v Harlow Urban District Council (the claimant became trapped in a
AC
C
public toilet due to a defective lock. She decided to climb out by placing one
foot on the toilet seat and the other on the toilet roll. The latter rotated and she
fell and injured herself. The court held that although the council had been
negligent with regard to the defective lock, the claimant had exacerbated her
injuries by the manner in which she tried to make her escape).
●
Effect: the claimant’s damages are proportionately reduced to reflect his
contributory negligence.
Froom v Butcher (vehicle accident victim’s damages reduced by 25% because
of failure to wear a seatbelt).
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CHAPTER 5 – LAW OF TORTS
Disclaimers
Unfair Contract Terms Act 1977:
●
any exclusion of liability for death or personal injury caused by failure to
take reasonable care (contractual or tortious) is void
●
any exclusion of liability for other loss (eg damage to property, financial
loss) caused by failure to take reasonable care is void unless reasonable .
Vicarious liability
Generally, liability in tort is personal only – ie if you commit a tort, it is you who
gets sued.
But, under the principle of vicarious liability a person who is not the tortfeasor is
AC
C
A
G
lo
ba
lB
ox
deemed liable. The most common situation is the employer’s vicarious liability for
torts committed by his employees whilst acting within the course of their
employment.
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CHAPTER 5 – LAW OF TORTS
TORT OF PASSING OFF
This tort arises when a defendant business passes off itself (or its products) as
another business.
The 3 matters to be proved
In order to succeed in the tort of passing off the claimant must prove 3 matters:
that the defendant’s business is using a name (or selling products) which is
similar to that of the claimant
2.
that persons are misled into believing that the defendant’s business (or
products) is the claimant’s business (or products)
3.
that this has caused damage to the claimant’s business, or will probably do
so.
ox
1.
Remedies of the claimant
lB
If the tort is proved the court may issue an injunction stopping the defendant from
using the name (or selling the products). It may also award damages.
ba
Case illustration
G
lo
Ewing v Buttercup Margarine Company [1917]. (Ewing ran the Buttercup Dairy
Company. He successfully got an injunction stopping the defendant from using the word
“Buttercup” in its name: there was evidence to show that people would confuse the 2
businesses).
AC
C
A
Test your knowledge and understanding of this chapter by working E&SQs 100,
101, 102, 103, 104, 105, 106, 107, 108, 109, & 110
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Chapter 6
ba
lB
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Law of employment
lo
SYLLABUS CONTENT (as set by ACCA’s study guide)
Contract of employment
a)
Distinguish between employees and the self-employed.[2]
b)
Explain the nature of the contract of employment and common law and
statutory duties placed on the employer and employee.[2]
2.
Dismissal and redundancy
a)
Explain termination of employment by notice.[2]
b)
Distinguish between summary and constructive dismissal.[2]
c)
Explain wrongful dismissal.[2]
d)
Explain unfair dismissal, including the procedure, and fair and unfair reasons
for dismissal.[2]
e)
Discuss the remedies available to those who have been subject to unfair
dismissal.[2]
f)
Explain what is meant by redundancy.[2]
AC
C
A
G
1.
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CHAPTER 6 – LAW OF EMPLOYMENT
CHAPTER CONTENT DIAGRAM
Is the worker employed under a contract of service?
NO
ie an independent
contractor
YES
ie an employee
ba
lB
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common law &
statutory
implied terms
if he has been dismissed
possibility of suing for
G
1. wrongful dismissal
AC
C
A
1. wrongful dismissal
2. unfair dismissal
3. redundancy
lo
if he has been dismissed
possibility of suing for
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CHAPTER 6 – LAW OF EMPLOYMENT
LAW OF EMPLOYMENT CONTENTS
THE TWO TYPES OF WORKER------------------------------------------- 86
DEFINITIONS
86
HOW TO MAKE THE DISTINCTION
86
IMPORTANCE OF THE DISTINCTION
87
THE CONTRACT OF EMPLOYMENT -------------------------------------- 88
88
ERA 1996 WRITTEN PARTICULARS
88
SOURCES OF TERMS
89
COMMON LAW DUTIES OF EMPLOYEES
89
COMMON LAW DUTIES OF EMPLOYERS
90
ox
FORMATION
STATUTORY RIGHTS OF EMPLOYEES
91
lB
DISMISSAL --------------------------------------------------------------- 93
BASICS
ba
WRONGFUL DISMISSAL
UNFAIR DISMISSAL
95
96
99
AC
C
A
G
lo
REDUNDANCY
93
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CHAPTER 6 – LAW OF EMPLOYMENT
THE TWO TYPES OF WORKER
Definitions
Employee
a worker who works under a
contract of service
Independent contractor
a worker who works under a
contract for services
How to make the distinction
The control test
lB
1.
ox
The 3 common law tests:
ba
If the employer controls not only when and where the work is done but also
HOW it is done → employee.
Nb: this test is inappropriate for skilled workers.
The integration test (or organisational test)
lo
2.
G
If the work being done is integrated into the employer’s business as part and
parcel of it → employee. Whereas if the work being done is merely accessory
to the employer’s business → independent contractor.
The multiple test (or economic reality test or entrepreneurial test)
AC
3.
C
A
Nb: this test became difficult to apply as a sole criterion.
Here the court takes into account, not simply control and integration, but all
the surrounding circumstances such as:
●
86
provision of tools
●
regularity of hours
●
regularity of payment (both in terms of timing and amount)
●
number of employers
●
mutuality of obligation
●
ability to delegate (provide a substitute)
●
degree of financial risk (profit motive)
●
opinion of the parties.
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CHAPTER 6 – LAW OF EMPLOYMENT
Importance of the distinction
1.
Employment Rights Act 1996 protection, eg unfair dismissal,
redundancy, minimum notice periods
for most employees
●
not for independent contractors.
2.
Insolvency of employer
●
employees rank as preferential creditors re a certain amount of unpaid wages
●
independent contractors rank as ordinary unsecured creditors.
3.
Tax
●
employees: Schedule E and PAYE
●
independent contractors: Schedule D, not subject to PAYE.
4.
National Insurance Contributions
●
employees: Class 1 (primary and secondary)
●
independent contractors: self-employed contribution.
5.
State benefits
●
employees have better benefits.
6.
Vicarious liability
●
employees: potentially
●
independent contractors: never.
7.
Common law implied contractual terms
●
extensive for employees.
AC
C
A
G
lo
ba
lB
ox
●
E&SQ 111
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CHAPTER 6 – LAW OF EMPLOYMENT
THE CONTRACT OF EMPLOYMENT
Formation
The rules are the same as for ordinary contracts.
ERA 1996 written particulars
(i)
Must be given to employee within 2 months
employment. Later changes within 1 month.
(ii)
No need for the written particulars if the employee has a written contract
covering all the required particulars.
(iii)
Examples of the required particulars
●
of
lB
●
●
ba
●
●
lo
Are the written particulars the employee’s contract of employment?
E&SQ 112
AC
C
A
G
(iv)
commencement
ox
●
of
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CHAPTER 6 – LAW OF EMPLOYMENT
Sources of terms
SUMMARY OF SOURCES OF TERMS
IMPLIED
EXPRESS
By courts
By statute
custom
usage
to give business efficacy
● in law
● in fact
eg
National Minimum Wage Act
1998
lB
eg
Working Time Regs 1998
(max average 48 hour
working week, mandatory
rest breaks & min 5.6 weeks
paid holiday)
ox
1.
2.
3.
ba
Common law duties of employees
Personal service.
2.
Reasonable care and skill.
A
G
lo
1.
Obedience, ie to obey all lawful and reasonable orders.
AC
3.
C
Lister v Romford Ice (L negligently ran over another employee with a fork lift truck).
Pepper v Webb (gardener refused to plant the plants where instructed).
4.
Fidelity, ie a duty of good faith/honesty, eg:
●
not to profit/benefit
Sinclair v Neighbour.
●
E&SQ 113
not to compete
Hivac v Park Royal Scientific.
●
5.
E&SQ 114
not to disclose/use confidential information.
Mutual co-operation,
reasonable manner.
ie
to
perform
the
work
in
a
Secretary of State for Employment v ASLEF.
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CHAPTER 6 – LAW OF EMPLOYMENT
Common law duties of employers
To pay reasonable remuneration.
2.
To indemnify employee for properly incurred expenses.
3.
To give reasonable notice of termination of employment.
4.
To provide a reasonably safe and healthy workplace.
5.
Mutual co-operation/respect.
ba
lB
ox
1.
lo
Further points:
There is no common law implied duty to give a reference.
(b)
In addition to the above common law implied terms/duties there may be
terms/duties implied in fact. Thus, although there is no common law duty to
provide work the employer might have a duty to provide work, for eg:
A
G
(a)
if contract contemplates development of skills – William Hill v Tucker.
●
if employee is remunerated on a piece work or commission basis, a
reasonable amount of work must be provided.
AC
C
●
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CHAPTER 6 – LAW OF EMPLOYMENT
Statutory rights of employees
Employees are given a very large number of statutory rights. This section deals
with a miscellaneous selection. Other rights in relation to dismissal are dealt with
separately.
1.
Equality
The Equality Act 2010 outlaws discrimination on a large number of grounds, eg sex,
race, disability, etc.
2.
Pregnant employees
The Employment Rights Act 1996 gives pregnant employees many rights, for
example:
the right to reasonable time off (with pay) for antenatal care
●
the right to maternity leave of up to 52 weeks.
ox
●
Health and safety
ba
3.
lB
It is also automatically unfair to dismiss a pregnant employee for any reason
connected with pregnancy or maternity leave rights.
The Employment Rights Act 1996 states that no employee shall suffer a detriment,
eg because he complains to the employer about health and safety.
lo
It is also automatically unfair to dismiss an employee because of his complaint.
G
Further, safety representatives have a right to time off (with pay) for their duties
and training.
Trade unions
A
4.
●
●
●
AC
C
The Employment Rights Act 1996 gives employees (and potential employees) the
right:
to belong to a TU
not to belong to a TU
to take part in union activities.
It is also automatically unfair to dismiss an employee for exercising or proposing to
exercise these 3 union rights.
Further, TU officials have a right to time off (with pay) for union duties and TU
members have a right to reasonable time off (no pay) for union activities.
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CHAPTER 6 – LAW OF EMPLOYMENT
5.
Other statutory rights to time off
These include:
6.
●
all employees have a right to time off for certain public duties (eg jury
service)
●
employees under notice of redundancy, who have been continuously
employed for 2 years at the date the notice period ends, have a right to
a reasonable amount of time off to:
o
look for another job
o
arrange training to help find another job.
Itemised pay statement: ERA 1996
7.
ox
On every pay day employer must give to the employee a written statement
showing gross pay, deductions (amounts and purposes), and net pay.
Minimum wages
The Working Time Regulations 1998
impose a maximum working week of 48 hours (averaged over a 17 week
period).
lo
●
ba
8.
lB
The National Minimum Wage Act 1998 sets the minimum hourly pay to which
an employee is entitled. There are different rates for different age brackets.
G
Opting out of the 48 hour week is allowed provided agreed beforehand
in writing. It is automatically unfair to dismiss an employee who refuses
to opt out.
Transfer of the business
C
9.
impose a minimum of 5.6 weeks (28 days) paid annual leave.
A
●
AC
Where a business has been transferred the Transfer of Undertakings (Protection of
Employment) Regulations 1981 provides that all employees employed by the
transferor at the date of the transfer automatically become employees of the
transferee.
Continuity of employment is preserved, as are their terms and
conditions of employment (except for certain occupational pension rights).
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CHAPTER 6 – LAW OF EMPLOYMENT
DISMISSAL
Basics
An employee who has been dismissed may have any one or more of the following 3
legal actions against his employer
●
wrongful dismissal
●
unfair dismissal
●
redundancy.
Characteristics of the 3 actions
Unfair
dismissal
dismissal
Redundancy
ox
Wrongful
lB
Source of law
ba
no fair reason for
dismissal and/or
unreasonableness
redundancy
lo
Basis
*
*
C
AC
Remedies
A
G
Claimant
re-instatement;
re-engagement;
monetary award
redundancy
payment
3 months
6 months
ET
ET
*
Limitation period
*
Venue
*
County Court or
High Court
Employees can bring a claim for wrongful dismissal in the ET provided the
damages claim is £25,000 or less. The limitation period is 3 months.
E&SQ 115
Meaning of summary dismissal
Dismissal without notice.
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CHAPTER 6 – LAW OF EMPLOYMENT
Meaning of constructive dismissal
In principle, an employee who resigns cannot sue for wrongful dismissal, nor for
unfair dismissal, nor for redundancy. The concept of constructive dismissal is a
modification of this principle.
It occurs where employer has committed a serious breach of contract such that the
employee is entitled to treat the contract as discharged. If the employee chooses
to treat the contract as at an end by resigning – he has been constructively
dismissed.
Simmonds v Dowty Seals (S was contracted to work on the night shift. His employer
ordered him to change to the day shift.
constructively dismissed).
S refused and resigned.
Held.
He had been
Minimum notice periods to be given by employer
ox
The period of notice is normally expressly agreed (if not, the common law implies
reasonable notice). The ERA 1996 imposes minimum notice periods:
Minimum period of notice
one month or more, to two years
one week
two years or more, to twelve years
one week for each complete year
ba
twelve weeks
lo
twelve years or more
lB
Length of continuous employment
G
These periods apply to notice contracts, not to fixed term contracts.
Minimum notice period to be given by employee
AC
C
A
In the absence of any expressly agreed period, an employee who has worked for
his employer for a continuous period of at least 4 weeks must give his employer at
least one week’s notice.
94
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CHAPTER 6 – LAW OF EMPLOYMENT
Wrongful dismissal
Wrongful dismissal is a common law action for breach of contract.
Notice contracts
Dismissal without notice is a wrongful dismissal. However, summary dismissal is
justified if the employee is in serious breach of contract.
E&SQ 116
Fixed term contracts
AC
C
A
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Early termination of a fixed term contract is a wrongful dismissal unless the
employee is in serious breach of contract.
E&SQ 117
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CHAPTER 6 – LAW OF EMPLOYMENT
Unfair dismissal
Employment Rights Act 1996 gives certain employees the right not to be unfairly
dismissed.
1.
Complaint
Must be brought in an Employment Tribunal within 3 months of dismissal.
2.
Qualifying condition
2 year minimum period of continuous service.
3.
Dismissal
ERA 1996 sets out 3 ways of proving dismissal:
ox
The employee must prove that he has been dismissed (cf resignation – Morton
Sundour Fabrics v Shaw).
Employer has terminated the contract.
●
Fixed term contract expires and is not renewed.
●
Constructive dismissal (eg Simmonds v Dowty Seals).
4.
Presumption that the dismissal was unfair
5.
Rebuttal by the employer
G
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●
Step 1
AC
Step 2
E&SQ 118
C
Devis v Atkins
A
The employer must prove that he had a reason for the dismissal.
And he must prove that his reason related to one or more of the following
5 fair reasons:
1.
2.
capability or qualification
conduct of employee, eg Stevenson v Golden Wonder (employee assaulted
another employee)
3.
redundancy
4.
legality of continued employment (ie it would contravene statute to
continue to employ him)
5.
other substantial reason
eg Singh v London County Bus Services (outside conviction for dishonesty
where employee’s job in a position of trust).
96
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CHAPTER 6 – LAW OF EMPLOYMENT
6.
Reasonableness
Once the employer has proved a fair reason, it is then for the tribunal to decide
whether or not it was a fair dismissal using the reasonableness test.
Case law shows that the reasonableness test has 2 aspects:
●
Was the reason given sufficiently serious to justify dismissing the employee?
(ie was dismissal a reasonable reaction to the fair reason proved?)
●
Did the employer act reasonably both in coming to the decision to dismiss and
in the manner of the dismissal?
ACAS Codes of Practice (eg investigate complaints of misconduct fully
and do not dismiss on mere suspicion; in cases of bad work, give
warnings and time to improve).
eg
Polkey v A E Drayton Services (unreasonable to sack a long-serving
employee without any warning even though for the fair reason of redundancy).
●
no qualifying condition
●
automatically unfair
●
higher award.
ba
Importance:
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Inadmissible reasons
lB
7.
eg
Pregnancy or exercise of maternity leave rights.
(ii)
Trade unionism (ie membership of; non-membership of; union activities).
(iii)
Complaint about health and safety.
(iv)
Assertion of statutory right.
(v)
Unfair selection for redundancy.
(vi)
‘Whistleblowers’, ie made a protected disclosure under the Public Interest
Disclosure Act 1999.
C
A
G
lo
(i)
AC
(vii) Refusal to work more than 48 hours per week.
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CHAPTER 6 – LAW OF EMPLOYMENT
8.
Remedies
1.
Reinstatement.
2.
Re-engagement.
3.
Monetary award.
Three possible components:
●
basic award
1½ weeks’ pay for each complete year aged ≥ 41, plus
1 week’s pay for each complete year aged ≥ 22 < 41, plus
½ week’s pay for each complete year aged < 22.
Maximum 20 years’ service; Maximum £464 p.w (wef 1st April 2014).
Reductions:
redundancy;
after-discovered facts.
compensatory award
lB
●
For loss.
mitigation; complainant contributed to his dismissal.
ba
Reductions:
ox
complainant contributed to his dismissal;
G
additional/higher/special awards
employer unreasonably refuses
reinstatement or re-engagement.
(b)
inadmissible reason.
(c)
discrimination (race/sex/disability).
98
or
ignores
an
order
for
C
A
(a)
AC
●
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The maximum compensatory award is the lower of £76,574 (wef 1st April
2014) or 52 weeks’ actual gross pay.
E&SQ 119
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CHAPTER 6 – LAW OF EMPLOYMENT
Redundancy
Basic right and meaning of redundancy
ERA 1996: Every employee who is dismissed by reason of redundancy is entitled to
receive a redundancy payment from his employer.
An employee is redundant if the dismissal is attributable wholly or mainly to:
(a)
the fact that the employer ceases to trade (either altogether or at the
employee’s place of work); or
(b)
the fact that work of the particular kind the employee contracted to do ceases
or diminishes (either altogether or at the employee’s place of work).
Vaux Breweries v Ward
E&SQ 120
European Chefs v Currell
E&SQ 121
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Procedures
Complaint must be made to an ET within 6 months of the dismissal.
2.
Qualifying condition
lB
1.
Dismissal
lo
3.
ba
Same as UFD.
4.
G
Same as UFD.
Redundancy
Remedy – a redundancy payment
C
5.
A
It is presumed that the employee was dismissed by reason of redundancy.
6.
AC
The calculation of the amount is the same as the UFD basic award.
Loss of the right to a redundancy payment
The right to a redundancy payment is lost if the employee unreasonably
refuses an ‘offer of suitable alternative employment’.
Taylor v Kent County Council (not unreasonable for a redundant headmaster
to refuse alternative job as a supply teacher because of loss of status – even
though new job at same pay etc).
Duty to consult
An employer proposing to make redundancies must consult a recognised trade
union or elected employees’ representatives. Failure to do so can lead to a
protective award being made by the ET (up to 90 days’ pay).
Test your knowledge and understanding of this chapter by working E&SQs 122,
123, 124, 125, 126, 127, 128, 129, 130, 131, 132, 133, 134, 135, 136, & 137
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AC
C
A
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CHAPTER 6 – LAW OF EMPLOYMENT
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Chapter 7
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Law of agency
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SYLLABUS CONTENT (as set by ACCA’s study guide)
Agency law
a)
Define the role of the agent and give examples of such relationships paying
particular regard to partners and company directors.[2]
b)
Explain the formation of the agency relationship.[2]
c)
Define the authority of the agent.[2]
d)
Explain the potential liability of both principal and agent.[2]
AC
C
A
G
1.
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10 1
CHAPTER 7 – LAW OF AGENCY
CHAPTER CONTENT DIAGRAM
PRINCIPAL
agency relationship
contract made by agent
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THIRD
PARTY
AC
C
A
G
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AGENT
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CHAPTER 7 – LAW OF AGENCY
CHAPTER CONTENTS
HOW THE AGENCY RELATIONSHIP ARISES -------------------------- 104
EXPRESS AGREEMENT
104
IMPLIED AGREEMENT
104
NECESSITY
104
RATIFICATION
105
ESTOPPEL
105
AC
C
A
G
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AUTHORITY ------------------------------------------------------------- 106
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CHAPTER 7 – LAW OF AGENCY
HOW THE AGENCY RELATIONSHIP ARISES
An agent is a person who is empowered to represent another person, called the
principal, and to bring the principal into a legal relationship with a third party. As a
general rule, there are no formal requirements for the appointment of an agent,
and anyone, even a minor, can validly be an agent.
The relationship between a principal (P) and an agent (A) may arise in any of the
following situations.
by
by
IMPLIED
AGREEMENT
NECESSITY
by
by
RATIFICATION
ESTOPPEL
ba
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by
EXPRESS
AGREEMENT
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5 ways
Express agreement
G
Implied agreement
lo
This is where P actually appoints A to be his agent, whether orally or in writing.
AC
Necessity
C
A
Where the parties have not expressly agreed to become principal and agent, it may
be possible to find an implied agreement based on their conduct or relationship.
4 conditions:
●
P’s property entrusted to A – Great Northern Railway v Swaffield.
●
emergency arises making it necessary for A to act – GNR v Swaffield cf
Prager v Blatspiel.
●
in P’s interests – GNR v Swaffield cf Sachs v Miklos.
●
not possible to communicate with P – GNR v Swaffield cf Springer v Great
Western Railway.
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CHAPTER 7 – LAW OF AGENCY
Ratification
The effect of ratification is to backdate A’s authority to act as agent.
6 conditions:
●
A purports to act as agent for a P who is named or otherwise identified –
Keighley, Maxted v Durant.
●
P has capacity and exists both at the date the contract is made and at the
date of ratification – Kelner v Baxter.
●
P has been fully informed of the terms of the contract (or is prepared to ratify
in any event).
●
P ratifies the whole contract.
●
P ratifies within a reasonable time.
●
P clearly signifies his intention to ratify to TP.
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A void or illegal contract cannot be ratified because it is of no legal effect from its
inception.
Estoppel
AC
C
A
G
lo
ba
Arises where P makes a representation to the third party that A is his agent, even
though he is not. P is then estopped from denying this representation – Freeman
& Lockyer v Buckhurst Park Properties.
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CHAPTER 7 – LAW OF AGENCY
AUTHORITY
This is the key agency topic: it overlaps into partnership law and company law.
Basic rule: A principal is bound to the third party only if the agent is acting within
his authority.
Types of Authority
ACTUAL
APPARENT
ox
Actual authority
lB
Actual authority is that which the principal has given to the agent and may be
express or implied.
Express authority is that which the principal has explicitly given to his agent.
●
An agent has implied authority to do those things:
ba
●
which are reasonably incidental to the performance of an express
authority, or
(b)
which an agent occupying the position or office would usually have
authority to do.
G
lo
(a)
A
Note: an agent cannot have implied authority to do things which have been
expressly prohibited by the principal.
C
Apparent authority
AC
This is where the agent does not actually have authority. Apparent authority is that
which the principal has represented to the third party, by words or by conduct, that
the agent has.
The representation (by P, not by A) may arise in a number of different ways eg:
●
from the appointment of the agent to an office or position (in which case it
will appear to the third party that the agent has authority to do those things
which are usually done by a person occupying that position).
●
from previous dealings (by allowing an agent to make contracts with a third
party in the past this is a representation to the third party that the agent has
authority to continue to make similar contracts in the future).
Note: a third party cannot rely on apparent authority where he knows of the lack
of actual authority.
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CHAPTER 7 – LAW OF AGENCY
Notes on usual authority
ie by virtue of some office or position
●
Watteau v Fenwick: manager of an inn had (usual) authority to purchase cigars.
●
Panorama Developments v Fidelis Furnishing Fabrics: company secretary
has (usual) authority to bind company in administrative matters eg engagement of
office staff, purchase of office equipment, hiring of cars.
●
Freeman & Lockyer v Buckhurst Park Properties: managing director has
(usual) authority to bind the company in commercial contracts eg borrowing money,
engaging architects.
●
mere director has no usual authority.
Breach of warranty of authority
ox
An agent who acts outside his authority is liable to the third party in damages for
breach of warranty of authority.
Breach of duty
ba
lB
Where an agent acts contrary to his principal’s instructions the principal can sue
him for damages (for breach of the agency agreement). If serious breach, P can
dismiss A.
lo
Test your knowledge and understanding of this chapter by working E&SQs 138,
139, 140, & 141
AC
C
A
G
There are further questions on agency in chapter 8 (partnership), chapter 12
(directors), and chapter 13 (other company officers).
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AC
C
A
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CHAPTER 7 – LAW OF AGENCY
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Chapter 8
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Partnership law
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SYLLABUS CONTENT (as set by ACCA’s study guide)
Partnerships
a)
Demonstrate a knowledge of the legislation governing the partnership, both
unlimited and limited.[1]
b)
Discuss the formation of a partnership.[2]
c)
Explain the authority of partners in relation to partnership activity.[2]
d)
Analyse the liability of various partners for partnership debts.[2]
e)
Explain the termination of a partnership and partners’ subsequent rights and
liabilities.[2]
AC
C
A
G
2.
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C H A P T E R 8 – P A R T N E R S H IP L A W
CHAPTER CONTENT DIAGRAM
LIMITED
PARTNERSHIP
LIMITED
LIABILITY
PARTNERSHIP
NATURE
NATURE
NATURE
LIABILITY FOR
DEBTS
LIABILITY FOR
DEBTS
LIABILITY FOR
DEBTS
AGENCY
POSITION OF
PARTNERS
AGENCY
POSITION OF
PARTNERS
AGENCY
POSITION OF
MEMBERS
AC
C
A
DISSOLUTION
G
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PARTNERSHIP
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C H A P T E R 8 – P A R T N E R S H IP L A W
CHAPTER CONTENTS
LEGAL FORMS OF BUSINESS ------------------------------------------ 112
WHAT IS A PA 1890 PARTNERSHIP? --------------------------------- 113
NATURE
113
LIABILITY OF THE PARTNERS FOR PARTNERSHIP DEBTS
113
AGENCY POSITION OF THE PARTNERS
113
DISSOLUTION OF THE PARTNERSHIP
114
WHAT IS A LIMITED PARTNERSHIP? --------------------------------- 116
WHAT IS A LIMITED LIABILITY PARTNERSHIP (LLP)? ------------- 117
117
ox
NATURE
AGENCY POSITION OF THE MEMBERS
118
AC
C
A
G
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LIABILITY OF THE MEMBERS
117
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C H A P T E R 8 – P A R T N E R S H IP L A W
LEGAL FORMS OF BUSINESS
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SOLE TRADER
COMPANY
(Companies Act 2006)
BUSINESS
AC
C
A
G
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PARTNERSHIP
(Partnership Act 1890)
LIMITED
PARTNERSHIP
(Limited Partnership Act
1907)
11 2
LLP
(Limited Liability
Partnership Act 2000)
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C H A P T E R 8 – P A R T N E R S H IP L A W
WHAT IS A PA 1890 PARTNERSHIP?
Nature
1.
Definition: s1 Partnership Act 1890 – the relation which subsists between
persons carrying on business in common with the view of profit.
2.
A partnership (which is a contractual relationship between the partners)
can be implied or it may be express. An express agreement may be in any
form, eg oral, in writing, by deed, etc. There are no legal formalities for
setting up a partnership.
3.
The word ‘firm’ is used to mean each and every individual partner.
ox
Liability of the partners for partnership debts – s9 PA
1890
lo
ba
lB
The liability of the partners for partnership debts is joint and several.
G
Agency position of the partners
A
Authority of partners – s5 PA 1890
C
Every partner is an agent of the firm for the purpose of the business.
AC
The firm is liable for contracts made by a partner if the partner was acting within
his actual (express), or implied (usual), or apparent authority.
An act falls within a partner’s implied authority if it is the usual way of carrying on
business of the kind carried on by the firm.
Mercantile Credit v Garrod.
Note:
In a non-trading partnership it is not usual for a partner to have
authority pledge the firm’s credit (ie to borrow money) – Higgins v
Beauchamp.
The firm is not bound by the implied or apparent authority of a partner if:
1.
the third party knows the partner has no actual authority, or
2.
the partner has no actual authority and the third party does not know or
believe him to be a partner.
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C H A P T E R 8 – P A R T N E R S H IP L A W
Liability to third parties of incoming and outgoing partners
1.
The incoming partner is not liable for debts incurred before he became a
partner.
2.
The incoming partner becomes fully liable for debts incurred after he becomes
a partner.
3.
The outgoing partner remains liable for debts incurred while he was a partner.
4.
The outgoing partner becomes liable for debts incurred after he has ceased to
be a partner unless the third party has been given notice of his retirement in
accordance with s36 PA 1890.
Under s36:
actual notice must be given to third parties who were customers of the
firm before his retirement
●
constructive notice in the London Gazette is sufficient for those parties
who were not existing customers but who knew the outgoing partner to
be a partner
●
no notice is necessary to those third parties who were not existing
customers and who did not know the outgoing partner to be a partner.
lB
ox
●
Indemnity. The continuing (and incoming) partners may agree to indemnify
the outgoing partner against debts incurred pre-retirement or post-retirement
or both.
lo
5.
ba
But also see Tower Cabinet v Ingram.
G
Liability of a person who is not a partner as if he were – s14
(holding out)
AC
Martyn v Gray.
C
A
Every person who by words or by conduct represents himself (or knowingly suffers
himself to be represented) as a partner is liable as if he is a partner to anyone who
thereby gives credit to the firm.
Dissolution of the partnership
Situations
1.
11 4
The firm is automatically dissolved:
1.
on expiry of any agreed fixed term.
2.
on the accomplishment of a venture (this being the purpose of the
partnership).
3.
death of any partner.
4.
bankruptcy of any partner.
5.
subsequent illegality.
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C H A P T E R 8 – P A R T N E R S H IP L A W
2.
Dissolution by a partner (or the partners):
1.
as per the partnership agreement.
2.
where it is a partnership at will, any partner at any time may dissolve by
giving notice.
Note: as this is inconvenient every properly drafted partnership
agreement excludes or modifies this right.
3.
Any partner may apply to the court for dissolution on any
of the following grounds set out by s35 PA 1890:
a partner becomes a mental patient.
2.
a partner becomes incapable of performing his part in the business.
3.
a partner engages in conduct prejudicial to the carrying on of the
partnership business.
4.
a partner commits a wilful breach, or persistent breaches, of the
partnership agreement; or otherwise conducts himself such that it is no
longer reasonably practicable for the others to carry on in business with
him.
5.
the business can only be carried on at a loss.
6.
where it would otherwise be just and equitable to dissolve the
partnership (eg unjustified exclusion from management).
ox
1.
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3.
if a partner’s share is made subject to charging order, the others have
the option of dissolution.
G
Financial consequences of dissolution
A
All the partnership property is sold.
C
The proceeds are applied in the following order:
in paying debts to outsiders
2.
in repaying advances to the firm
3.
in paying capital contributions.
AC
1.
Any residue is divided between the partners in the same proportion as they shared
profits.
If on the other hand there is a shortfall, this is met in the following order:
1.
out of any profits held back from previous years
2.
out of partners’ capital
3.
by the partners in the same proportion as they shared profits.
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C H A P T E R 8 – P A R T N E R S H IP L A W
WHAT IS A LIMITED PARTNERSHIP?
Governed by the Limited Partnership Act 1907.
1.
A limited partnership is a variant of the ordinary partnership: ie it is a
partnership where the liability of one or more partners (but not all) is limited
to his capital contribution.
2.
A partnership cannot be a limited partnership unless 2 conditions are fulfilled:
3.
•
must be at least one general partner (ie one with unlimited liability)
•
the fact of limited liability must be notified to the Registrar of
Companies.
A limited partner may not participate in management (ie he must be a
sleeping partner). If he does participate in running the business – he forfeits
his limited liability.
AC
C
A
G
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He has no power to bind the firm to contracts – ie he is not an agent of the
firm.
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C H A P T E R 8 – P A R T N E R S H IP L A W
WHAT IS A LIMITED LIABILITY PARTNERSHIP (LLP)?
The LLP has only been possible from April 2001. It is important that you realise at
the outset that it is completely different from the ordinary partnership: so don’t use
the word ‘firm’ to describe it; and don’t use the word ‘partners’ to describe the
people involved, instead use the word ‘members’.
Governed by the Limited Liability Partnerships Act 2000.
Nature
The LLPA 2000 introduced a new form of business: the limited liability partnership.
It is neither a partnership nor a company but is a mixture of the two forms of
business organisation.
The LLPA 2000 states that the law relating to partnerships does not apply to limited
liability partnerships.
lB
ox
A limited liability partnership is a body corporate with a legal personality separate
from its members, which is formed in accordance with the provisions of the LLPA
2000.
This means that it is a person in law and, in the same way as a company, it:
is an artificial legal entity with perpetual succession.
●
can hold property in its own right.
●
enters into contracts in its own name.
●
sues and is sued in its own name.
●
can create floating charges.
G
lo
ba
●
C
A
It is created by registering an incorporation document with the Registrar of
Companies.
AC
Agency position of the members
Each member of the LLP is an agent of the LLP.
This means that the LLP is liable to third parties on contracts made by members
acting within their actual and implied authority. However the LLP is not bound
where the third party knows of the lack of actual authority or does not know or
believe him to be a member of the LLP.
In relation to torts committed by members: not only is the member personally
liable but the LLP is also.
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C H A P T E R 8 – P A R T N E R S H IP L A W
Liability of the members
The liability of a member of an LLP to contribute to its debts is limited to his capital
contribution (if any). There is no requirement for a capital contribution and if there
has been one it can be withdrawn at any time. However, if an LLP goes into
liquidation then the court can order the member to repay any drawings (of
whatever nature) which were made in the previous 2 years if it can be shown that
the member knew or had reasonable grounds to believe that the LLP
●
was unable to pay its debts at the date of the withdrawal; or
●
would become so because of the withdrawal – s214A Insolvency Act 1986.
The fraudulent trading and wrongful trading provisions of the IA 1986 apply to
members of an LLP in much the same way as they apply to directors of companies.
AC
C
A
G
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Test your knowledge and understanding of this chapter by working E&SQs 142,
143, 144, 145, 146, 147, 148, 149, 150, 151, 152, 153, 154, 155, 156, 157, 158,
159, 160, 161, 162, 163, 164, 165, 166, 167, 168, & 169
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Chapters 9 – 15
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Company law
A
The formation and constitution of business
organisations
Agency law
a)
Define the role of the agent and give examples of such relationships paying
particular regard to partners and company directors.[2]
b)
Explain the formation of the agency relationship.[2]
c)
Define the authority of the agent.[2]
d)
Explain the potential liability of both principal and agent.[2]
2.
Partnerships
a)
Demonstrate a knowledge of the legislation governing the partnership, both
unlimited and limited.[1]
b)
Discuss the formation of a partnership.[2]
c)
Explain the authority of partners in relation to partnership activity.[2]
d)
Analyse the liability of various partners for partnership debts.[2]
e)
Explain the termination of a partnership and partners’ subsequent rights and
liabilities.[2]
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1.
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SYLLABUS CONTENT (as set by ACCA’s study guide)
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11 9
CHAPTERS 9 TO 15 – COMPANY LAW
Corporation and legal personality
a)
Distinguish between sole traders, partnerships and companies.[1]
b)
Explain the meaning and effect of limited liability.[2]
c)
Analyse different
companies.[2]
d)
Illustrate the effect of separate personality and the veil of incorporation.[2]
e)
Recognise instances where separate personality will be ignored (lifting the veil
of incorporation).[2]
4.
The formation and constitution of a company
a)
Explain the role and duties of company promoters, and the breach of those
duties and remedies available to the company.[2]
b)
Explain the meaning of, and
contracts.[2]
c)
Describe the procedure for registering companies, both public and private.[1]
d)
Describe the statutory books, records and returns that companies must keep
or make.[1]
e)
Analyse the effect of a company’s constitutional documents.[2]
f)
Describe the contents of model articles of association.[1]
g)
Explain how articles of association can be changed.[2]
h)
Explain the controls over the names that companies may or may not use.[2]
companies,
the
especially
private
and
public
rules relating to, pre-incorporation
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of
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types
A
Capital and the financing of companies
Share capital
a)
Examine the different types of capital.[2]
b)
Illustrate the difference between various classes of shares, including treasury
shares, and the procedure for altering class rights.[2]
c)
Explain allotment of shares, and distinguish between rights issue and bonus
issue of shares.[2]
d)
Examine the effect of issuing shares at either a discount, or at a premium.[2]
2.
Loan capital
a)
Define companies’ borrowing powers.[1]
b)
Explain the meaning of loan capital and debenture.[2]
c)
Distinguish loan capital from share capital, and explain the different rights
held by shareholders and debenture holders.[2]
d)
Explain the concept of a company charge and distinguish between fixed and
floating charges.[2]
e)
Describe the need and the procedure for registering company charges.[2]
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C
1.
AC
E
3.
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CHAPTERS 9 TO 16 – COMPANY LAW
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Capital maintenance and dividend law
a)
Explain the doctrine of capital maintenance and capital reduction.[2]
b)
Explain the rules governing the distribution of dividends in both private and
public companies.[2]
Management, administration and the regulation of
companies
Company directors
a)
Explain the role of directors in the operation of a company, and the different
types of directors, such as executive/non-executive directors or de jure and
de facto directors.[2]
b)
Discuss the ways in which directors are appointed, can lose their office and
the disqualification of directors.[2]
c)
Distinguish between the powers of the board of directors, the managing
director/chief executive and individual directors to bind their company.[2]
d)
Explain the duties that directors owe to their companies.[2]
2.
Other company officers
a)
Discuss the appointment procedure relating to, and the duties and powers of,
a company secretary.[2]
b)
Discuss the appointment procedure relating to, and the duties and rights of a
company auditor, and their subsequent removal or resignation.[2]
3.
Company meetings and resolutions
a)
Distinguish between types of meetings: ordinary general meetings and annual
general meetings.[1]
b)
Distinguish between types of resolutions: ordinary, special, and written.[2]
c)
Explain the procedure for calling and conducting company meetings.[2]
C
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1.
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F
3.
Insolvency law
1.
Insolvency and administration
a)
Explain the meaning of and procedure involved in voluntary liquidation,
including members’ and creditors’ voluntary liquidation.[2]
b)
Explain the meaning of, the grounds for, and the procedure involved in
compulsory liquidation.[2]
c)
Explain the order in which company debts will be paid off on liquidation.[2]
d)
Explain administration as a general alternative to liquidation.[2]
e)
Explain the way in which an administrator may be appointed, the effects of
such appointment, and the powers and duties of an administrator.[2]
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CHAPTERS 9 TO 15 – COMPANY LAW
CHAPTERS 9 – 15 CONTENT DIAGRAM
LEGAL PERSONALITY & COMPANY FORMATION
What is a company and how is it formed?
CAPITAL
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What types of capital can a company raise?
DIRECTORS
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What are the rules for directors?
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OTHER OFFICERS
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What are the requirements for a company secretary and auditors?
MEETINGS
How do members meet and pass resolutions?
INSOLVENCY
Financial problems – death or rescue?
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Chapter 9
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Company law – legal
personality and
company formation
G
SYLLABUS CONTENT (as set by ACCA’s study guide)
Corporation and legal personality
a)
Distinguish between sole traders, partnerships and companies.[1]
b)
Explain the meaning and effect of limited liability.[2]
c)
Analyse different
companies.[2]
d)
Illustrate the effect of separate personality and the veil of incorporation.[2]
e)
Recognise instances where separate personality will be ignored (lifting the veil
of incorporation).[2]
4.
The formation and constitution of a company
a)
Explain the role and duties of company promoters, and the breach of those
duties and remedies available to the company.[2]
b)
Explain the meaning of, and
contracts.[2]
c)
Describe the procedure for registering companies, both public and private.[1]
d)
Describe the statutory books, records and returns that companies must keep
or make.[1]
e)
Analyse the effect of a company’s constitutional documents.[2]
f)
Describe the contents of model articles of association.[1]
AC
C
A
3.
types
of
companies,
the
especially
private
and
public
rules relating to, pre-incorporation
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12 3
CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
g)
Explain how articles of association can be changed.[2]
h)
Explain the controls over the names that companies may or may not use.[2]
CHAPTER CONTENT DIAGRAM
COMPANY
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What is the nature of a company?
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What are the types of company?
How is a company formed?
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How do companies compare with
partnerships?
What can a company call itself?
What are the constitutional documents?
What are the statutory registers,
records, and returns?
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
CHAPTER CONTENTS
DOCTRINE & VEIL OF INCORPORATION ----------------------------- 126
DOCTRINE OF INCORPORATION
126
CONSEQUENCES OF INCORPORATION
127
LIFTING THE VEIL OF INCORPORATION
127
TYPES OF COMPANY ---------------------------------------------------- 129
CA 2006 DEFINITIONS
129
BASIC CLASSIFICATION
129
PUBLIC AND PRIVATE COMPANIES : MAJOR DIFFERENCES
130
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DIFFERENCES BETWEEN COMPANIES AND PARTNERSHIPS ------- 132
COMPANY REGISTRATION --------------------------------------------- 134
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PROMOTERS
REGISTRATION PROCEDURES
PRE-INCORPORATION CONTRACTS
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TRADING CERTIFICATE
134
134
135
136
WHAT RESTRICTIONS ARE THERE ON A COMPANY’S REGISTERED NAME?
137
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COMPANY NAMES ------------------------------------------------------- 137
138
ALTERATION OF THE REGISTERED NAME
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CHARACTERISTICS
A
ARTICLES OF ASSOCIATION------------------------------------------- 139
AC
MODEL ARTICLES
139
139
WHAT IS THE LEGAL EFFECT OF THE ARTICLES?
139
AMENDMENT OF THE ARTICLES
141
OBJECTS CLAUSE AND ULTRA VIRES
143
STATUTORY REGISTERS, RECORDS, and RETURNS ----------------- 144
THE REGISTERED OFFICE
144
STATUTORY REGISTERS
144
STATUTORY RECORDS
144
STATUTORY RETURNS
145
A NOTE ON TERMINOLOGY
146
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
DOCTRINE AND VEIL OF INCORPORATION
Doctrine of incorporation
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Basic rule: a company is a separate legal person.
Salomon v Salomon [1897] (A company is liable for its debts, not its members nor its
AC
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director. A sole director / majority shareholder can be a creditor of company.)
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
Lee v Lee’s Air Farming (A sole director & majority shareholder can be an employee of
company).
Macaura v Northern Life Assurance (Members/directors do not have any interest in
the company’s property).
Consequences of incorporation
1.
Perpetual succession.
2.
Corporate name in which it:
●
owns property,
●
makes contracts and incurs liability,
●
sues and is sued.
Separation of ownership from management.
4.
Subject to the requirements of the Companies Act 2006.
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3.
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Lifting the veil of incorporation
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Exceptionally the corporate veil will be lifted – the most usual result is that
members or directors or both become personally liable for the company’s debts.
Statutory examples
plc, trading without a trading certificate – s767 CA 2006
lo
1.
A
G
If a public company commences trading without a trading certificate and the
company fails to honour its obligations within 21 days of being required to do
so, the directors become jointly and severally liable to third parties.
2.
C
We look at the detail of the trading certificate later at page 135.
fraudulent trading and wrongful trading – Insolvency Act 1986
AC
Fraudulent trading. If a person is party to the carrying on of business with
intent to defraud creditors, he can be ordered to make contribution to the
company’s assets.
Wrongful trading. If a director of a failing company fails to minimise losses
to creditors, he can be ordered to make contribution to the company’s assets.
We look at the detail of fraudulent and wrongful trading later at page 227 and
page 228.
3.
the phoenix company (restriction on re-use of name of
insolvent company) – IA 1986
If a director of a company that has gone into insolvent liquidation re-uses its
name within 5 years, he is personally liable for the debts of the phoenix
company.
We look at the detail of the phoenix company later at page 229.
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
Common law examples
Woolfson v Strathclyde [1978] HL – “veil will be lifted only where special
circumstances exist indicating the veil is mere façade concealing the true facts”.
E&SQ 170
●
●
Jones v Lipman (veil lifted to prevent seller of house evading specific performance).
Gilford Motor Company v Horne (veil lifted to prevent employee from evading an
injunction).
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A further example of the “mere façade” principle that may lead the courts to lift the
veil is for reasons of public policy to reveal the true nationality of the company.
An old case law example of this is Daimler Co Ltd v Continental Tyre and Rubber Co
(Great Britain) Ltd [1916].
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
TYPES OF COMPANY
CA 2006 definitions
1.
Private company – any company which is not a public company.
2.
Public company – one which meets the following conditions:
(i)
is limited by shares, and
(ii)
its Certificate of Incorporation states that it is a public company, and
(iii)
it has been properly registered or re-registered as a public company.
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REGISTERED COMPANY
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Basic classification
PRIVATE COMPANY
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PUBLIC COMPANY
UNLIMITED
LIMITED
AC
C
A
LIMITED
by shares
by shares
by guarantee
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12 9
CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
Public and private companies: major differences
Limitation of liability
Companies limited by shares. The liability of a shareholder is limited to the
amount unpaid (if any) on his shares. The company can call for the amount
at any time. May be a private or a public company.
●
Companies limited by guarantee. The liability of the members is limited to an
agreed amount which is only called on if the company cannot pay its debts on
being wound up. Must be a private company. Such a company, although
registered with the word “Ltd” as the last word in its name, is not required to
show the word “Ltd” on its documents etc.
●
Unlimited companies. The members are liable to the company to contribute
to the full extent of its debts. Must be a private company. Unlimited
companies are not required to file accounts.
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●
Raising of capital
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It is illegal for the shares of a private company to be advertised (by anyone) as
being available for public subscription. Thus private companies cannot raise capital
from the public: whereas public companies can (and this is why private and public
companies are so named).
AC
Minimum number of directors
PLC must have at least 2 directors. Private company can have just 1.
Company secretary
PLCs must have a company secretary and he must be qualified. Private companies
are not required to have a company secretary; (and if such a company chooses to
have one, he does not need to be qualified).
Commencement of business
Private company can begin business immediately it is incorporated (ie from date on
its certificate of incorporation).
PLC cannot begin business immediately on
incorporation, must get a further certificate from the Registrar, commonly called a
trading certificate.
Minimum capital
PLC must have a minimum capital of £50,000.
company.
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No min. (or max.) for a private
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
Administrative requirements of the Companies Act 2006
Some of the burdensome administrative requirements of the CA 2006 are relaxed,
in certain circumstances, for private companies. Eg a private company is not
required to hold annual general meetings. (See chapter 14 for detail).
Audit
The normal statutory audit requirement does not apply to small private companies.
(See chapter 13 for detail).
Level of financial disclosure
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All limited companies are required to file accounts. But certain small and mediumsized private limited companies do not have to file full accounts.
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
DIFFERENCES BETWEEN COMPANIES AND ORDINARY
PARTNERSHIPS
Reminder: a partnership is defined as “the relationship which subsists between
persons carrying on business in common with a view to profit” – Partnership Act
1890.
COMPANY
1.
PARTNERSHIP
Legal personality
1.
No legal personality
● partners own property
● company contracts in its own name
● partners are personally party to
contracts
● company sues and is sued in its own
name
● partners are jointly and severally
liable
● possibility of limited liability
● partners have personal unlimited
liability
● personality unaffected by death or
bankruptcy of members/directors –
formal procedure for dissolution,
called liquidation
● death or bankruptcy of any partner
means the partnership is dissolved
automatically
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Transferability of shares
G
2.
C
Charges
A
● member can freely sell his shares
3.
AC
● can create floating charges
4.
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● company owns property in its own
name
2.
No transferability of shares
● partner cannot sell his share without
consent of co-partners
3.
Charges
● cannot create floating charges
Participation in management 4.
Participation in management
● members have no right to participate,
directors run the business
● every partner has the right to take
part in management
5.
5.
CA 2006
PA 1890
● all must be complied with
● much can be disapplied by agreement
between the partners
● formalities of registration to
incorporate
● partnership may be created informally
● company cannot return capital to
members
● partners may withdraw capital
● restrictions on distributable profits
● partners agree profit-sharing ratios
● must prepare annual accounts
● no partnership law requirement for
accounts
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
● public financial disclosure (limited
companies)
● no financial disclosure to public
● administrative requirements eg the
holding of general meetings, audit,
and returns to Registrar of Companies
● no such administrative requirements
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Go back and ring the items that apply to LLPs.
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
COMPANY REGISTRATION
Promoters
A promoter is a person who ‘undertakes to form a company and who takes the
necessary steps to accomplish that purpose’ – Twycross v Grant. The definition
excludes persons acting in a purely professional capacity.
rescind the contract
●
claim damages for any loss caused
●
require him to account for any profit.
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●
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The key point is that because a promoter is a fiduciary he must not make a secret
profit out of the promotion. He therefore owes a fiduciary duty to the company to
make disclosure of any such profits to an independent board or to the existing and
intended shareholders. If he makes a secret profit, eg by selling property to the
company, the company may:
Registration procedures
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You should remember that a company is incorporated (ie brought into legal
existence) by registration by the Registrar of Companies.
The certificate of
incorporation issued by the Registrar is conclusive evidence of all matters stated on
it – s15 CA 2006. Matters are type of company, fact & date of incorporation –
Jubilee Cotton Mills v Lewis.
G
You must be able to list and describe the paperwork which must be filed at
Companies House to obtain registration, viz
Details of the company, ie
o
the company’s proposed name.
o
the type of company.
o
the country in which its registered office is to be situated.
o
the address of the registered office.
o
whether the articles of association are the statutory model or are
bespoke, and details of any entrenched articles.
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●
A
An application for registration (Form IN01) stating:
C
1.
●
Proposed officers
o
●
13 4
ie particulars and signed consent to act of the directors and
company secretary.
Statement of initial capital
o
details of initial shares (number, nominal value, amount paid up,
class).
o
initial shareholders (names & addresses, and details of their
shareholdings).
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
●
Statement of compliance
o
2.
signed by whoever is forming the company.
A Memorandum of Association. This states “Each subscriber of this
memorandum wishes to form a company and agrees to become a member of
the company and to take at least one share”. Then follows the name and
signature of each subscriber.
3.
The Articles of Association of the company (only if the company
is choosing not to adopt model articles).
4.
Registration fee.
Trading certificate (PLCs only)
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Practice note: instead of forming a company from scratch it is possible to buy a
company ‘off the shelf’. There are a number of businesses (generally called
company formation agents) that offer this service, and do so cheaply. Although
you then have the advantage of an ‘instant’ company it is very probable that the
name and the Articles of the off-the-shelf company are unsuitable for your
purposes and will have to be changed.
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A newly incorporated plc cannot do business (including the borrowing of money)
immediately on incorporation: it must get a further certificate from the Registrar
called the Trading Certificate – s761 CA 2006.
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In order to obtain a trading certificate an application is made to the Registrar
stating:
that the company has issued shares totalling at least £50,000 in nominal
value
2.
that each share is paid up to at least ¼ on the nominal value plus the whole
of any premium
3.
the amount of the preliminary expenses, and who has paid or is to pay them
4.
any benefits given or to be given to promoters.
AC
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1.
If a public company commences trading without a trading certificate:
1.
the company and any officer who is in default is liable to a fine;
2.
the validity of any transaction with the company is not affected: but if the
company fails to honour its obligations within 21 days of being required to do
so, the directors become jointly and severally liable to third parties.
Further, a petition may be presented by the Government for the winding up of the
company on the ground that it has not been issued with its certificate and more
than a year has expired since it was registered – s122 IA 1986.
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
Pre-incorporation contracts
What is a pre-incorporation contract?
A contract purportedly entered into on behalf of a company before it is
incorporated.
What is the legal effect of a pre-incorporation contract?
The company cannot enforce a pre-incorporation contract (even after
incorporation).
●
The company cannot, once incorporated, ratify (ie unilaterally adopt) the
contract – Kelner v Baxter [1866].
●
The third party cannot enforce the contract against the company (even
after incorporation and even though it has benefited from the contract –
Kelner v Baxter [1866]).
ox
●
s51 CA 2006: subject to any agreement to contrary, the TP can sue the
person who purported to act on behalf of company (and vice versa, ie the
promoter can sue the TP on the contract). Phonogram v Lane: clear and
express words are needed in order to negate personal liability.
ba
2.
Since the company was not in existence at the date the contract was made,
the company cannot be a party to it. This therefore means:
lB
1.
It is possible, once the company is incorporated, for the company, the
promoter and the TP to get together and to agree to ‘transfer’ the contract to
the company. This is called “novation”.
AC
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3.
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s51 is a statutory exception to the basic common law rule that agents (or
persons purporting to be agents) are not personally liable on the contracts
they make.
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
COMPANY NAMES
Many companies choose to carry on business under ‘trading’ or ‘business’ name.
However, the Companies Act requires every company to have a registered name –
this is its name for all company law purposes.
A company’s initial registered name must be filed on application for registration of
the company.
What restrictions are there on the choice of a company’s
registered name?
Positive restrictions
If the company is a public company → the last words in its name must be
‘public limited company’ or the abbreviation ‘plc’ or the equivalent in Welsh.
2.
If the company is a private company and limited → the last word in its name
must be ‘limited’ or the abbreviation ‘ltd’ or the equivalent in Welsh.
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1.
Negative restrictions
Cannot have:
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Note: there are no positive requirements for a private unlimited company.
plc or ltd except as appropriate.
2.
a name that is the same as a name already on the index maintained by the
Registrar.
3.
a name that is a criminal offence (under other legislation).
4.
a name that is offensive in the opinion of the Secretary of State.
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1.
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Approval restrictions
Approval is needed (primarily from the Secretary of State) for:
1.
any name suggesting connection with HMG or any local authority
2.
any word or phrase contained in a Statutory Instrument called the Company,
LLP and Business Names (Sensitive Words and Expressions) Regulations 2009
(egs of regulated names include National, British, European; University,
Chemist, Group, Insurance; Royal, King, Queen, Prince).
Unwise choices
1.
Phoenix company restriction. See later on page 229.
2.
Similar name & business to that of an existing business.
3.
Name too like that of an existing registered name. See below.
4.
Name gives a misleading impression of the nature of its business. See below.
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
Alteration of the registered name
Procedures
●
Special resolution, and
●
an application to the Registrar for an amended certificate of incorporation.
Circumstances
1.
Voluntary change, ie at any time for any reason
2.
Compulsory change
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Here distinguish between the statutory powers of the Secretary of State and
of the Names Adjudicators to compel a company to change its name on the
one hand, and on the other that a change of name is one possible outcome of
a common law tort action for passing off where a company is cashing in on
another’s goodwill by having a similar name (see earlier on page 82).
lB
Summary of SS’s statutory powers:
Name same as, or too like, an existing registered name – 12 month time
period.
(ii)
Name gives so misleading an indication of the nature of its activities as
to be likely to cause harm to the public – no time period.
(iii)
Misleading information/undertakings given when applying for a name
requiring approval – 5 year time period.
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(i)
Summary of the Names Adjudicators’ statutory powers:
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If Company B is using a similar registered name to Company A in order to
cash-in on Company A’s goodwill, then Company A can complain to the
Names Adjudicators. The Names Adjudicators can then order Company B to
change its name; if Company B does not comply, then the Names
Adjudicators can change its name.
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
ARTICLES OF ASSOCIATION
Characteristics
Every company must have articles.
The articles form the major constitutional document of the company.
There are no mandatory contents – but the articles of most companies will deal
with matters such as appointment of directors, and procedures for both board and
company meetings.
Model articles
ox
A company may file its own tailor-made articles on application for registration of
the company.
If it does not, then the statutory model articles becomes its articles in its entirety.
lB
The statutory model articles also apply to fill in any gaps in the company’s own
tailor-made articles.
There are 3 statutory models:
one for private companies limited by shares
●
one for private companies limited by guarantee
●
one for public companies.
G
lo
ba
●
What is the legal effect of the articles?
C
A
s33 CA 2006 deems the company’s articles to be a contract between the company
and its members.
1.
AC
Case law shows the articles are a contract binding:
the members to the company
Hickman’s case
E&SQ 171
Articles contained an arbitration clause, viz any dispute between company and member must
be referred to arbitration.
Hickman, member, was in dispute with company about his expulsion from membership.
Hickman went to court.
Can he do so?
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YES/NO
13 9
CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
2.
the company to the members
Pender v Lushington
E&SQ 172
Articles gave every share 1 vote. At a GM the chairman refused to count P’s votes.
What kind of wrong has chairman caused company to commit?
3.
the members to the members
Rayfield v Hands
E&SQ 173
ox
Articles required every director to hold shares in the company and also stated ‘Every
member who intends to transfer shares shall inform the directors who will take the said
shares equally between them at a fair value’.
P called upon the directors to take his shares at a fair value: they refused to do so.
lB
Are they bound to do so?
ba
BUT
YES/NO
G
lo
Case law shows that the articles are not a contract binding the company to nonmembers – Eley’s case, nor do they bind the members in any other capacity –
Beattie v E F Beattie.
Eley’s case
E&SQ 174
A
Articles stated that E should be the company’s solicitor.
C
E was appointed but was later dismissed.
AC
Could E sue for damages for breach of contract?
Beattie v E F Beattie
YES/NO
E&SQ 175
Articles contained an arbitration clause.
Beattie, a member and director, was in dispute with company (it was a wide-ranging dispute
but the central issue was that he had been denied access to minutes of board meetings).
Beattie went to court.
Can he do so?
YES/NO
E&SQ 176
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
Amendment of the articles
A company may amend its articles by special resolution – s21 CA 2006.
Restrictions
1.
Entrenched articles – CA 2006
If an article has been entrenched it can only be altered in accordance with the
entrenchment provision (or by agreement of all the members or by court order) not
by special resolution.
An entrenched article is where the articles require procedures for its amendment
that are more restrictive than a special resolution.
Any provision for entrenchment may only be made:
in the company’s articles on formation, or
(b)
by an amendment to the articles agreed to by all the members.
2.
Increase of a member’s liability – CA 2006
lB
ox
(a)
3.
Common law restriction
ba
A member is not bound by an alteration that increases his liability, unless he agrees
to it in writing.
G
lo
At common law a member may challenge an alteration to the Articles of Association
if he can prove that the alteration was not done bona fide for the benefit of the
company as a whole.
A
The meaning of the common law ‘bona fide for the benefit of the company as a
whole test’ laid down in Allen v Gold Reefs of Africa was explained by Evershed MR
in Greenhalgh v Arderne Cinemas when he said:
AC
C
“.....it is now plain that ‘bona fide for the benefit of the company as a whole’ means
not two things, but one thing. It means that the shareholder must proceed on
what, in his honest opinion, is for the benefit of the company as a whole. The
phrase, ‘the company as a whole’ does not (at any rate in such a case as the
present) mean the company as a commercial entity distinct from the corporators: it
means the corporators as a general body. That is to say the case may be taken of
an individual hypothetical member and it may be asked whether what is proposed
is, in the honest opinion of those who voted in its favour, for that person’s benefit.”
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
Case law applications of the ‘bona fide for the benefit of the company as a whole’
test:
●
Allen v Gold Reefs of Africa
The company’s articles gave the company a lien on partly paid shares for debts owing
to it. Allen was the only member who had fully paid shares and was the only member
who owed money to the company.
The company altered its articles to extend the lien to fully paid shares. Allen objected
to the alteration.
Was the alteration done bona fide for the benefit of the company as a whole?
YES/NO
●
Sidebottom v Kershaw Leese
ox
The articles were altered to allow the directors “to purchase at a fair price the shares
of any member who competed in business with the company”.
The intention was to invoke the clause against S who had recently set up a competing
business.
S objected to the alteration.
Brown v British Abrasive Wheel
YES/NO
ba
●
lB
Was the alteration done bona fide for the benefit of the company as a whole?
G
lo
The articles were altered to allow the majority shareholders “to purchase at a fair price
the shares of the minority”.
The intention was to invoke the clause against some minority members who were
refusing to inject much-needed further capital into the company.
They objected to the alteration.
YES/NO
AC
C
A
Was the alteration done bona fide for the benefit of the company as a whole?
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
Objects clause and ultra vires
Introduction
The articles of some companies will contain an article setting out the business of
the company – such an article is called an objects clause.
Problems arise where a company engages in a business or makes a contract that is
outside its objects – such a business/contract is said to be ultra vires.
Ashbury Railway Carriage v Riche [1875]
E&SQ 177
Re German Date Coffee [1882]
E&SQ 178
What is the effect of an ultra vires act?
This is given by the CA 2006 as follows:
Third parties can enforce ultra vires contracts against the company.
2.
The company may ratify an ultra vires contract by special resolution.
3.
Any member can get an injunction to stop the company entering into an ultra
vires transaction.
4.
The company’s directors commit a breach of duty if they cause the company
to act ultra vires (see later, directors’ duties, in chapter 12).
5.
If a company is unable to carry on business within the limits of its objects
clause any member can apply to the court for a winding up order on the ‘just
and equitable ground’ of s122(g) IA 1986 – the failure of the substratum
rule established in Re German Date Coffee [1882].
AC
C
A
G
lo
ba
lB
ox
1.
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
STATUTORY RECORDS, RECORDS, and RETURNS
The registered office
Every company must at all times have a registered office.
It must always be situated within the country as stated in the application for
registration as a company.
Initially the address must be notified to the Registrar of Companies when applying
for registration of the company.
Subsequently it can be changed (by board resolution). The change is not effective
until it has been notified to the Registrar and has been gazetted by him.
ox
Statutory registers
All companies must keep the following statutory registers at its registered office:
Register of Members
2.
Register of Debentureholders (if any)
3.
Register of Charges
4.
Register of Directors and Company Secretary
5.
Register of Directors’ Interests.
lo
ba
lB
1.
G
PLCs must, in addition, keep a Register of Notifiable Interests.
Statutory records
A
Private companies must, in addition, keep a Register of Written Resolutions.
AC
C
Apart from the statutory registers there are other statutory records that must be
kept at the registered office. Examples include:
A copy of the annual accounts & reports
These are
●
balance sheet
●
profit & loss account
●
cash-flow statement (plcs & certain private companies)
●
directors’ report
●
auditors’ report
●
group accounts (parent companies only).
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CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
Accounting records
These must be sufficient:
1.
to show and explain the company’s transactions, and
2.
to disclose the company’s financial position at any time, and
3.
to enable the directors to ensure that the annual accounts give a true & fair
view.
In particular the accounting records must show:
●
day-to-day entries of receipts & expenditure
●
a record of assets & liabilities
and where the company deals in goods:
statements of stock held at the end of each financial year
●
all statements of stocktaking
●
statements of all goods sold & purchased including identities of the buyers
and sellers (except in the case of retail sales).
lB
ox
●
ba
Copies of any instruments creating charges
lo
Minutes of board & company meetings
G
Statutory returns
The following are examples of returns that must be made to the Registrar:
the annual accounts and reports. A public company must file these within 6
months of its accounting reference date. The time period for a private
company is 9 months.
●
special resolutions.
●
changes of directors and in their particulars.
●
the annual return.
AC
C
A
●
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14 5
CHAPTER 9 – COMPANY LAW: LEGAL PERSONALITY & COMPANY FORMATION
A note on terminology
Since these Notes are for the F4(ENG) variant of Corporate and Business Law,
English terminology is used throughout. If you are studying the international
variants of other papers, you may find the comparative table below helpful.
English
Statement of Profit or Loss and Other Comprehensive Income
(or Statement of comprehensive income, or Income statement)
Profit and loss
account
Statement of financial position
Balance sheet
Inventory
Stock
Receivables
Debtors
Loan note
Debenture
$
£
ox
International
AC
C
A
G
lo
ba
lB
Test your knowledge and understanding of this chapter by working E&SQs 179,
180, 181, 182, 183, 184, 185, 186, 187, 188, 189, 190, 191, 192, 193, 194, & 195
14 6
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Chapter 10
ba
lB
ox
Company law – share
capital
lo
SYLLABUS CONTENT (as set by ACCA’s study guide)
Share capital
a)
Examine the different types of capital.[2]
b)
Illustrate the difference between various classes of shares, including treasury
shares, and the procedure for altering class rights.[2]
c)
Explain allotment of shares, and distinguish between rights issue and bonus
issue of shares.[2]
d)
Examine the effect of issuing shares at either a discount, or at a premium.[2]
2.
Loan capital
a)
Define companies’ borrowing powers.[1]
b)
Explain the meaning of loan capital and debenture.[2]
c)
Distinguish loan capital from share capital, and explain the different rights
held by shareholders and debenture holders.[2]
d)
Explain the concept of a company charge and distinguish between fixed and
floating charges.[2]
e)
Describe the need and the procedure for registering company charges.[2]
AC
C
A
G
1.
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14 7
CHAPTER 10 – COMPANY LAW: SHARE CAPITAL
CHAPTER CONTENT DIAGRAM
SHARE CAPITAL
lB
ISSUE OF SHARES
ox
SHARES and SHAREHOLDERS
AC
C
A
G
lo
ba
MAINTENANCE OF CAPITAL
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CHAPTER 10 – COMPANY LAW: SHARE CAPITAL
CHAPTER CONTENTS
MEANING OF CAPITAL ------------------------------------------------- 150
SHARES ------------------------------------------------------------------ 151
NATURE OF A SHARE
151
CLASSES OF SHARE
151
CLASS RIGHTS
152
ISSUE OF SHARES ------------------------------------------------------ 153
153
THE ALLOTMENT RULES
154
BONUS ISSUES, RIGHTS ISSUES, AND TREASURY SHARES
156
ox
THE PAYMENT RULES
MAINTENANCE OF CAPITAL ------------------------------------------- 158
lB
THE MAINTENANCE PRINCIPLE
SUMMARY OF THE MAINTENANCE RULES
ba
REDUCTION OF CAPITAL : S641
158
159
160
AC
C
A
G
lo
DISTRIBUTIONS
158
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14 9
CHAPTER 10 – COMPANY LAW: SHARE CAPITAL
MEANING OF CAPITAL
CAPITAL
SHARE
CAPITAL
LOAN
CAPITAL
ox
INITIAL CAPITAL
ba
uncalled
G
lo
called
lB
ISSUED CAPITAL
A
unpaid
AC
C
paid up
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CHAPTER 10 – COMPANY LAW: SHARE CAPITAL
SHARES
Nature of a share
A share is defined as a “the interest of a shareholder in the company defined by a
sum of money”.
ox
A share carries obligations and rights.
lB
Classes of share
What is meant by “class of share”?
ba
Shares are of a class if the rights attached to them are in all respects uniform –
s629 CA 2006.
G
lo
What classes of shares are found in practice?
AC
C
A
usually
ORDINARY
SHARES
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PREFERENCE
SHARES
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CHAPTER 10 – COMPANY LAW: SHARE CAPITAL
Class rights
What are class rights?
These are the rights attaching to different classes of shares.
What are the class rights associated with ordinary shares and
preference shares?
The usual position is:
Preference shares
Ordinary shares
None, or restricted
Full
Dividend rights
Prior fixed right to
dividend which is
cumulative
Fully participating,
after payment of
dividend on
preference shares
Surplus on winding-up
Prior return of
nominal value, but
no further
participation
Fully participating
after return of
nominal value to
preference
shareholders
lo
ba
lB
ox
Voting rights
G
How are class rights varied? s630 CA 2006
If the method is set out in the articles → it must be followed.
2.
If there is no method set out in the articles → class consent must be obtained:
A
1.
either by special resolution at a meeting of that class,
●
or by written consent of the holders of ¾ in terms of nominal value.
AC
C
●
Is there statutory minority protection? s633 CA 2006
●
Members whose rights have been varied may object to the court
provided they:
1.
make up at least 15% of the class in terms of nominal value
2.
did not consent to the variation
3.
apply to the court within 21 days.
●
The court may confirm or cancel the variation.
●
The court will cancel the variation only if the petitioner proves it is unfairly
prejudicial.
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CHAPTER 10 – COMPANY LAW: SHARE CAPITAL
ISSUE OF SHARES
The payment rules
Basic common law rule
Payment can be any form of consideration (eg cash, goods, services, etc). It is for
the company to value any non-cash consideration.
Statutory rules: all companies
1.
the no discount rule – s580
ox
It is unlawful for a company to allot a share at less than its nominal value –
Ooregum Mining Co. v Roper.
share premiums – s610
ba
2.
lB
Effect of breach: the shares are treated as if they had been issued at nominal value
and the allottee must pay up the discount with interest.
E&SQs 196, 197 & 198
lo
Basic rule: “If a company issues shares at a premium, whether for cash or
otherwise, a sum equal to the aggregate amount or value of the premiums on those
shares shall be transferred to an account called ‘the share premium account’.”
A
G
Status of the share premium account: s610, may not be reduced, the share
premium account must be treated as if it were part of the company’s paid up share
capital.
C
Exceptionally, s610 permits the share premium account to be applied for the
following purposes:
to pay for bonus issues
●
to pay for expenses etc of the issue of those shares.
AC
●
Additional statutory rules for plcs
1.
Under the one-quarter rule, a plc must not allot a share unless it is paid up to
at least ¼ on the nominal value plus the whole of any premium – s586
2.
Subscribers to the memorandum of a plc must pay cash for their subscription
shares – s584
3.
Payment for shares must not be in the form of work or services – s585
4.
Non-cash consideration must be received within 5 years – s587
5.
Non-cash consideration must be independently valued and reported on – s593
Independence is achieved by the requirement that the report be made by a
person qualified to be the company’s auditor and by the requirement that the
valuation be done by him or by someone outside the company appointed by
him.
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CHAPTER 10 – COMPANY LAW: SHARE CAPITAL
The allotment rules
1.
Authority of directors – s549 CA 2006
Basic rule
The CA 2006 requires that directors have authority to allot shares.
●
Given by the articles or by ordinary resolution.
●
Authority must state maximum amount of shares.
●
Authority must have a set time limit which may not exceed 5 years.
●
Authority may be renewed, modified or revoked at any time by ordinary
resolution.
Breach
lB
Exception for a private company
ox
Fine on directors.
Statutory pre-emption rights – s561 CA 2006
lo
2.
ba
If the company is private and has one class of shares only, the directors may allot
more on their own authority (unless the articles state otherwise).
Basic rule
Breach
A
G
The CA 2006 requires that an issue of equity securities (ie ordinary shares) for cash
be offered to existing members in proportion to their existing holding.
AC
C
Any member to whom shares should have been offered may sue the directors
and/or the company for compensation.
Exceptions
There are occasions when a company might wish to issue new ordinary shares for
cash and not issue them to the existing members – the CA 2006 provides for this.
For example:
●
shares issued under an employee share scheme are not subject to preemption rights.
●
the rights can be disapplied in relation to a particular allotment by special
resolution.
●
a private company’s articles may permanently disapply/modify the statutory
pre-emption rights.
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CHAPTER 10 – COMPANY LAW: SHARE CAPITAL
3.
The proper purposes rule – s171 CA 2006
What is the rule?
●
An aspect of the statutory duty of directors to act within their powers
(covered later as a topic in its own right in the chapter on Directors, starting
on page 182).
●
In particular to exercise their power to issue shares for the proper purpose
and not for some ulterior motive or personal benefit.
●
Prima facie, the proper purpose of an issue of shares is …
●
Have the courts concluded that the above is the only proper purpose?
ox
What is improper?
lB
Overall principle. It is improper for directors to issue shares to manipulate
control within a company – even for good business reasons. Why?
Case law examples:
to defeat a take-over bid – Hogg v Cramphorn
●
to secure the passing of a special resolution – Punt v Symons
●
to facilitate a take-over bid – Bamford v Bamford
●
to eliminate/dilute negative voting weight
AC
C
A
Clemens v Clemens
G
lo
ba
●
What is the effect of an improper issue?
It is voidable but may in general be validated by the members by ordinary
resolution.
●
If ratified after the event, the improperly issued shares may not vote.
●
If a director in breach of duty owns shares in the company, he may not vote
them on the ratifying resolution. See later director’s duties on page 185.
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CHAPTER 10 – COMPANY LAW: SHARE CAPITAL
Bonus issues, rights issues, and treasury shares
The terms bonus issues (or bonus shares) and rights issues refer to the issue of
new shares by the company to the existing members. Treasury shares are shares
that the company has in itself, eg XYZ plc owns 2,000 shares in XYZ plc.
Bonus issues
Bonus shares are free shares – in the sense that members receive them without
making any payment to the company.
But they are not ‘free’ in accounting terms. In that they must be paid for out of
shareholders’ reserves, ie out of:
distributable profit; or
●
the share premium account; or
●
capital redemption reserve.
ox
●
lB
With regard to the first source of funding, bonus shares are often issued as an
alternative to the payment of a cash dividend – and such an issue is often called a
“scrip” or “capitalisation” issue.
ba
Rights issues
lo
A rights issue is where members are given the right to subscribe for further shares
in the company in proportion to their existing holding, eg a “2 for 1” rights issue.
(See earlier on page 154 where the CA 2006 requires a rights issue where ordinary
shares are issued for cash.)
A
G
Such shares must be paid for and are issued in accordance with the ‘no-discount’
and ‘premium’ rules above. However, it is common for the company to make the
issue at a discount to the market value to encourage take-up.
C
Members are not bound to take up their rights – it is their choice. Normally, the
practice of listed companies is to give the shareholder one of three options:
do nothing and let the rights lapse;
●
take up the rights, and then exercise them or sell the rights in the market;
●
allow the company to sell the rights on the open market and remit the
shareholder the cash.
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AC
●
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CHAPTER 10 – COMPANY LAW: SHARE CAPITAL
Treasury shares
This relates to the CA 2006 rules re a company purchasing its own shares (detail is
not within your syllabus).
Normally a company that has bought back its own shares must cancel them.
Exceptionally, listed companies are not required to cancel them. If such a company
chooses not cancel them this means that the company registers the shares in its
own name. Such shares are called treasury shares. A company can hold a
maximum of 10% of its shares in treasury.
AC
C
A
G
lo
ba
lB
ox
Since the shares are owned by the company it can sell them and exercise any
rights issues rights and receive any bonus issues. However, the CA 2006 does not
allow the company to exercise all the rights normally exercised by a shareholder: in
particular, the company may not receive dividends nor may it exercise any voting
rights.
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CHAPTER 10 – COMPANY LAW: SHARE CAPITAL
MAINTENANCE OF CAPITAL
The maintenance principle
lo
ba
lB
ox
Capital must be maintained. This is to protect creditors.
G
Summary of the maintenance rules
The no discount rule ensures that a company raises capital when it issues
shares.
(2)
The share premium rule ensures premiums are credited to a share premium
account which is not distributable.
(3)
Capital may not be reduced (returned to members). There is an
exception under the formal procedures of s641 for a reduction of capital.
(4)
It is unlawful for a company to pay dividends except out of profits available
for distribution – s830-831.
15 8
AC
C
A
(1)
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CHAPTER 10 – COMPANY LAW: SHARE CAPITAL
Reduction of capital: s641
Basic rule
A company may not reduce capital.
Exception provided by s641
Any company may reduce any capital at any time, for any reason.
Situations envisaged by s641
2.
3.
Repayment of paid up
capital in excess of the
company’s wants
Cancellation of unpaid
liability on shares
Cancellation of paid up
share capital which is
lost or unrepresented
by net assets
G
Public company
lo
Procedures required by s641
ba
lB
ox
1.
Pass a special resolution.
2.
Make an application to the court
for its sanction.
1.
Pass a special resolution.
2.
The directors must make a
solvency statement … to the effect
that the company can pay its
debts, and will be so able for at
least the next 12 months.
C
A
1.
●
AC
The court considers:
●
the interests of members
→ must be treated fairly and
equally, and in accordance with
class rights as if it were a
liquidation.
interests of creditors
→ court in situations 1. & 2. must
(in situation 3. normally will)
require the company to settle a list
of creditors.
Private company
If the directors are unable to make a
solvency statement, the sanction of the
court must be obtained in the same way
as for a public company.
The court will not approve a reduction
that takes the issued capital below
£50,000
(unless
it
also
orders
conversion to a private company).
3.
Register a copy of the court minute
with the Registrar.
3.
Register details of the proposed
reduction with the Registrar.
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CHAPTER 10 – COMPANY LAW: SHARE CAPITAL
Distributions
The basic statutory rule is a company shall not make a distribution except out
of profits available for the purpose. Thus a company may not pay a dividend
out of capital: only out of distributable profit.
What is meant by distributable profit?
1.
s830 CA 2006 defines profit available for distribution as:
a………………………………… r…………………………… p………………
(so
far
as
not
previously utilised by distribution or capitalisation)
less
a……………………………… r……………………… l....………..
(so far as not previously
written off in reduction of capital).
A note on depreciation
E&SQs 199 & 200
s831 CA 2006 puts an additional restriction on p...........................
companies. s831 is sometimes called the ‘net assets’ test or the ‘full net
worth’ test.
ba
2.
lB
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Deemed by the CA 2006 to be a realised loss. But if an asset is revalued
upwards then the additional depreciation can be treated as realised profit.
s831 provides that both before and after the distribution the company’s
G
lo
n............. a.................... must be at least equal to the aggregate
c................................. share capital and undistributable reserves.
of its
E&SQ 201
(c)
C
(b)
s.......…........... p.........….............. a......…................
c..........…......... r……..…………………r...…..................
AC
(a)
A
s831 defines undistributable reserves as including:
the amount by which its accumulated unrealised profits exceed its
accumulated unrealised losses
The undistributable reserve at (c) above is generally referred to in
r.....................….......…..........
accounting
terminology
as
the
r.......……................... .
E&SQs 202 and 203
3.
The calculation of distributable profit must be done using the latest audited
accounts.
If the auditors qualified the accounts then any distribution is unlawful unless
the auditors have stated that the qualification is not material to the calculation
of distributable profit.
E&SQ 204
16 0
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CHAPTER 10 – COMPANY LAW: SHARE CAPITAL
What are the consequences of the payment of an unlawful
dividend?
The company can recover an unlawful distribution from:
1.
any member who at the time he received it knew, or had reasonable grounds
for knowing, that it was unlawful.
2.
from any director unless he can show he exercised reasonable care in relying
on properly prepared accounts.
3.
from its auditors if the dividend was paid in reliance on erroneous accounts
and the auditors negligently failed to report this.
What are the procedures for the payment of a dividend?
ox
The articles of most companies empower the directors to recommend payment of
a dividend and the general meeting to declare that dividend by ordinary
resolution.
E&SQ 205
AC
C
A
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ba
lB
Test your knowledge and understanding of this chapter by working E&SQs 206,
207, 208, 209, 210, 211, 212, 213, 214, 215, 216, & 217
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16 1
AC
C
A
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CHAPTER 10 – COMPANY LAW: SHARE CAPITAL
16 2
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Chapter 11
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Company law – loan
capital
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SYLLABUS CONTENT (as set by ACCA’s study guide)
Loan capital
a)
Define companies’ borrowing powers.[1]
b)
Explain the meaning of loan capital and debenture.[2]
c)
Distinguish loan capital from share capital, and explain the different rights
held by shareholders and debenture holders.[2]
d)
Explain the concept of a company charge and distinguish between fixed and
floating charges.[2]
e)
Describe the need and the procedure for registering company charges.[2]
AC
C
A
G
2.
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16 3
C H A P T E R 1 1 – C O M P A N Y L A W : L O A N C A P IT A L
CHAPTER CONTENT DIAGRAM
LOAN CAPITAL
DEBENTURES and DEBENTUREHOLDERS
lB
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CHARGES
AC
C
A
G
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SHARES and DEBENTURES COMPARED
16 4
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C H A P T E R 1 1 – C O M P A N Y L A W : L O A N C A P IT A L
CHAPTER CONTENTS
DEBENTURES ------------------------------------------------------------ 166
CHARGES ---------------------------------------------------------------- 167
TYPES OF CHARGE
167
CRYSTALLISATION OF FLOATING CHARGES
167
ADVANTAGES OF THE FLOATING CHARGE
168
DISADVANTAGES OF THE FLOATING CHARGE
168
PRIORITY OF CHARGES
168
REGISTRATION OF CHARGES
168
AC
C
A
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SHARES AND DEBENTURES COMPARED ------------------------------ 170
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C H A P T E R 1 1 – C O M P A N Y L A W : L O A N C A P IT A L
DEBENTURES
●
In law a debenture is “a document issued by or on behalf of a company
containing an acknowledgement of its indebtedness whether charged on the
company’s assets or not”.
●
The relationship between the company and the lender is a debtor-creditor
relationship.
●
It is a contractual relationship.
●
The terms of the contract are set out in the debenture.
encountered terms deal with:
Interest.
o
Date of repayment.
o
Whether or not secured and, if so, what type of charge.
ox
Since the terms of a loan contract are infinitely variable it follows that so are
the types of debenture.
AC
C
A
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●
o
Commonly
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C H A P T E R 1 1 – C O M P A N Y L A W : L O A N C A P IT A L
CHARGES
Types of charge
It is vital that you have a clear understanding of the distinction between fixed
charges and floating charges.
The fixed charge
Definition: a legal or equitable mortgage on a specific asset(s)
Characteristics:
on an identified asset
●
which is intended to be retained permanently within the business
●
the company has no general freedom to deal with the asset.
ox
●
lB
Examples of property commonly found subject to fixed charges are …
ba
The floating charge
lo
Characteristics:
on a class of assets, present and future
●
the assets within the class will change from time to time
●
company has freedom to deal with the charged assets in the ordinary course
of its business
A
G
●
AC
C
Examples of property commonly found subject to floating charges are …
Crystallisation of floating charges
What is the effect of crystallisation?
The floating charge becomes attached to the assets then within the charge and the
company can no longer deal freely with the assets.
When do floating charges crystallise?
Examples
-
cessation of business
-
liquidation
-
on the happening of any event set out in the debenture as causing
crystallisation.
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16 7
C H A P T E R 1 1 – C O M P A N Y L A W : L O A N C A P IT A L
Advantages of the floating charge (as opposed to the fixed
charge)
1.
the company is free to use the assets in the ordinary course of its business.
2.
a wider class of assets can be charged.
Disadvantages of the floating charge (as opposed to the
fixed charge)
the value of the security is uncertain until crystallisation.
2.
a floating charge is invalid if it was created within the 12 months immediately
preceding commencement of winding up and at a time when the company
was unable to pay its debts – s245 IA 1986.
3.
priorities (detail below).
4.
statute requires certain unsecured claims to be paid out of floating charge
assets prior to the floating chargee.
ox
1.
ba
lB
For all these reasons a floating charge is said to be an inferior or inadequate form
of security.
Priority of charges
lo
2 basic rules
With equal charges → the first in time prevails.
2.
With unequal charges (eg a fixed charge and a floating charge) → a fixed
charge takes priority over a floating charge.
E&SQ 218
A
G
1.
C
One further point
AC
An unregistered registerable charge does not obtain priority over a registered
charge.
Registration of charges
There are 2 places where charges must be registered.
1.
Registration at Companies House: s860 CA 2006
Basic rule: prescribed particulars of most charges must be delivered to the
Registrar within 21 days.
Notes:
1.
The filing must be done by the company or any person interested.
2.
Effects of failure?
16 8
●
Fine on company and every officer in default.
●
Money secured becomes immediately repayable.
●
An unregistered charge is void as against a liquidator.
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C H A P T E R 1 1 – C O M P A N Y L A W : L O A N C A P IT A L
2.
Registration at the company’s own registered office
(i)
A copy of every instrument creating a charge must be kept at the registered
office – s875
(ii)
Short particulars must be entered in the company’s Register of Charges –
s876.
AC
C
A
G
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If the company fails to comply with s875 or s876, the company and every officer in
default is liable to a fine.
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16 9
C H A P T E R 1 1 – C O M P A N Y L A W : L O A N C A P IT A L
SHARES AND DEBENTURES COMPARED
This is a commonly examined topic. Normally a question will require you to look at
shares and debentures either from the company’s point of view or from the
investor’s point of view, viz:
(a)
XYZ plc is in need of further capital funding. What factors should
the board consider in deciding whether to raise share capital or to
raise loan capital?
(b)
Q is considering investing in a company. What factors should he
consider in deciding whether to invest by way of shares or by way
of debentures?
Points in your answer draw on material from the whole of the syllabus topic of
‘Capital’. The major points are summarised below.
SHARE
ox
Definitions
lB
1.
DEBENTURE
“a document issued by or on behalf of a
company containing an
acknowledgement of its indebtedness,
whether charged on the company’s
assets or not” (ie a loan to the
company)
lo
ba
“the interest of a shareholder in the
company defined by a sum of money”
2.
AC
C
A
G
The fundamental principle which you must always make is that holders of shares
are members of the company and their rights are derived mainly from the
company’s articles and from the Companies Act whereas a holder of a debenture is
a creditor of the company and his rights are solely derived from the debenture
contract. Many of the points now summarised below are dependent on this
fundamental principle.
Income return
Dividend. Receipt depends on:
Interest.
●
directors’ recommendation
●
this is a contractual right
●
availability of distributable profit
●
payable irrespective of profit level
●
class rights (in which case may be
necessary to discuss preference &
ordinary share differences).
●
whether secured or unsecured will
affect the rate of interest (in which
case explain fixed & floating
charges).
3.
Voting
Dependent on class rights, but certainly
ordinary shares would expect full voting
rights.
17 0
No voting rights.
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C H A P T E R 1 1 – C O M P A N Y L A W : L O A N C A P IT A L
4.
Position on liquidation
If the company is insolvent,
shareholders will receive nothing as
creditors must be paid first.
Debentureholders are creditors:
therefore will rank for payment before
shareholders.
●
may be necessary to discuss
preference & ordinary share
differences.
●
●
if the shares are partly paid –
discuss the outstanding liability
may be necessary to discuss
secured & unsecured differences
Other general points
Both may be listed.
2.
Short term capital funding is nearly always borrowed money.
3.
High gearing will affect share price.
4.
Debentures, being less risky, are in general cheaper to service than shares.
5.
Debentures are generally regarded as a safer form of investment (particularly
if secured) but yielding a relatively low return. Shares carry more risk but the
return is potentially unlimited.
6.
It is often said that preference shares share the disadvantages of debentures
but lack the advantages.
G
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1.
AC
C
A
Test your knowledge and understanding of this chapter by working E&SQs 219,
220, 221, 222, 223, 224, 225, 226, 227, & 228
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AC
C
A
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C H A P T E R 1 1 – C O M P A N Y L A W : L O A N C A P IT A L
17 2
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Chapter 12
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Company law –
directors
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SYLLABUS CONTENT (as set by ACCA’s study guide)
Company directors
a)
Explain the role of directors in the operation of a company, and the different
types of directors, such as executive/non-executive directors or de jure and
de facto directors.[2]
b)
Discuss the ways in which directors are appointed, can lose their office and
the disqualification of directors.[2]
c)
Distinguish between the powers of the board of directors, the managing
director/chief executive and individual directors to bind their company.[2]
d)
Explain the duties that directors owe to their companies.[2]
AC
C
A
G
1.
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
CHAPTER CONTENT DIAGRAM
What is meant by ‘director’?
What are the types of director?
THE OFFICE OF
DIRECTOR
Who cannot be a director?
How are directors appointed?
Who sets their terms of service?
APPOINTMENT OF
DIRECTORS
TERMINATION
OF OFFICE
ba
DUTIES OF DIRECTORS
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What are the duties of directors?
lB
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Who can sack directors?
POWERS OF
DIRECTORS
AC
C
A
What are the agency powers of
directors?
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
CHAPTER CONTENTS
THE OFFICE OF DIRECTOR --------------------------------------------- 176
APPOINTMENT OF DIRECTORS ---------------------------------------- 178
QUALIFICATION AND DISQUALIFICATION
178
APPOINTMENT & REAPPOINTMENT PROCEDURES
179
SERVICE CONTRACTS OF DIRECTORS
179
TERMINATION OF OFFICE OF DIRECTORS --------------------------- 180
SUMMARY OF METHODS
180
S168
180
CA 2006
ox
GENERAL DUTIES OF DIRECTORS ------------------------------------- 182
TO WHOM ARE THE DUTIES OWED?
lB
WHAT ARE THE DUTIES?
FURTHER ADD-ONS TO THE 7 DUTIES
ba
CUMULATIVE NATURE OF THE DUTIES
CAN THE COMPANY RELIEVE A DIRECTOR FROM LIABILITY FOR BREACH OF DUTY?
182
182
184
185
185
lo
AGENCY POSITION OF DIRECTORS ----------------------------------- 186
G
INDIVIDUAL DIRECTORS AND THE MANAGING DIRECTOR (COMMON LAW RULES)
THE BOARD – STATUTORY RULES
186
187
AC
C
A
DIVISION OF POWER BETWEEN THE BOARD and THE GENERAL
MEETING----------------------------------------------------------------- 188
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
THE OFFICE OF DIRECTOR
What is meant by the term ‘director’?
Term director “includes any person occupying the position of director by whatever
name called” – CA 2006. The test is therefore one of function, not of title.
So what does a director do?
A de jure director is a person who has actually formally been appointed as a
director.
ox
A de facto director is a person who has not actually formally been appointed as a
director, but who carries out the functions of a director.
What is meant by the term ‘alternate’ director?
ba
lB
The company’s articles may permit an alternate director to be appointed by a
director to attend and vote at a board meeting on his behalf, if the director cannot
attend for some reason.
lo
Subject to the company’s articles, the director can choose to appoint anyone as his
alternate.
G
What is meant by the term ‘non-executive’ director?
Not required by law.
C
A
His function is to attend board meetings. He is likely to devote only part of his time
to the company.
AC
What is meant by the term ‘executive’ director?
Not required by law.
As well as attending board meetings, he is responsible for some aspect of the
management of the business. He is likely to be a full-time employee of the
company.
What is meant by the term ‘managing director’?
Managing director (MD) can be known by other titles, eg chief executive.
Not required by law but Articles will usually allow for one. The model articles allow
the board to appoint the MD. Person appointed must already be a director.
The model articles allow the board to delegate to the MD the day-to-day
management of the company’s business. Thus the board can give the MD actual
authority as it sees fit. MD also has apparent authority to enter into all contracts of
a commercial nature – Freeman & Lockyer v Buckhurst Park Properties.
17 6
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
What is meant by the term ‘chairman of the board’?
Function is to chair board meetings (and very likely also meetings of members).
May have other functions, eg commonly acts as spokesman for the company. Not
required by law as such, although all meetings must have someone as chairman.
Is there a statutory minimum number of directors?
plc
→
private
2
1
Is there a statutory maximum number of directors?
No.
What is meant by the term ‘shadow director’?
lB
ox
A shadow director is a person who is not a director. The CA 2006 states: “a
shadow director means a person in accordance with whose directions or instructions
the directors of a company are accustomed to act. However, a person is not
deemed a shadow director by reason only that the directors act on advice given by
him in a professional capacity”.
AC
C
A
G
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ba
Many statutory provisions regarding directors apply to shadow directors also: eg
the wrongful trading provisions of the IA 1986, eg the CDDA 1986 ‘unfitness’
provisions.
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
APPOINTMENT OF DIRECTORS
Qualification and disqualification
Qualification
There is a minimum age requirement of 16 years – CA 2006.
Disqualification
1.
By Articles of Association.
eg
●
insane
Undischarged bankrupts are automatically disqualified – CDDA 1986.
3.
Court disqualification orders – Company Directors Disqualification Act
ox
2.
lB
Effect of court disqualification order – cannot be concerned, directly or
indirectly, in the management of any company. (Nor be promoter, insolvency
practitioner, member of LLP).
ba
Grounds/length of order:
minimum 2 years,
maximum 15 years
on conviction of serious
offence in connection
with management of a
co
‘unfit to be concerned
in the management of
a company’ as shown
by a liquidator’s report
maximum 5 years
AC
C
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A
G
persistent default in filing
maximum 15 years
wrongful trading
fraudulent trading
‘unfit to be concerned in
the management of a
company’
as
shown
after
a
Government
investigation
Breach of disqualification order:
17 8
1.
Criminal offence (fine and imprisonment).
2.
Personal liability for any or all of the debts of any company with regard
to which he acted whilst subject to a disqualification.
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
Appointment and reappointment procedures
First directors
The first directors are appointed by the promoters on application for registration of
the company.
Subsequent directors
Subsequently directors are appointed in accordance with the articles.
The statutory model for public companies allows the initial appointment to be
made by
●
the members by ordinary resolution
●
board
→
to fill a casual vacancy
→
to make additional appointment.
●
At first AGM all retire.
●
At every subsequent AGM:
lB
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As regards retirement and reappointment the statutory model for public
companies provides:
board appointees retire
→
any director not appointed or
reappointed at one of the last two
AGMs retire.
be
reappointed
may
ordinary resolution
by
G
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→
A
Service contracts of directors
Not every director has an expressly agreed service contract.
executive directors will have.
2.
In general, it is for the board to decide the terms.
In practice
AC
C
1.
A director must not vote on his service contract.
3.
s188 CA 2006:
resolution.
long term service contracts must be approved by ordinary
Long-term = fixed term of 2 years or more.
If no approval by members → contract is deemed to contain a clause allowing
the company to terminate the contract at any time on the giving of
reasonable notice.
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
TERMINATION OF OFFICE OF DIRECTORS
Summary of methods
1.
Death.
2.
Dissolution of company.
3.
Disqualification:
articles
●
CDDA.
Retirement:
expiry of term (if any)
●
articles.
5.
Resignation.
6.
Removal:
ox
●
articles may provide
●
s168 ordinary resolution in GM.
ba
●
lB
4.
●
G
Statement of s168
lo
s168 CA 2006
1.
Special
C
Procedural steps
A
A company may by ordinary resolution at a meeting remove a director at any time.
notice
(......
days)
of
the
AC
..........................................
resolution
to
must
be
given
by
............................. .
2.
The company must forthwith send a copy to the director concerned.
3.
The director concerned has the right to require company to circulate his
representations amongst members.
4.
At the GM:
18 0
●
the director’s representations must be read out if there was no time for
prior circulation.
●
the director must be allowed to speak.
●
Ordinary resolution.
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
Overriding nature of s168
s168 can be used to remove a director despite anything to the contrary
●
in any service contract the director may have.
●
in the company’s constitution.
E&SQ 229
s168 does not:
deprive a director of any right to sue for damages for breach of his service
contract
●
nor to use his voting powers to defeat a resolution, whether these are the
usual voting rights (say 1 vote per share) or any additional rights given in the
articles. The latter are called weighted voting rights. In Bushell v Faith
[1970] the court held that the articles of a fairly small company could validly
give weighted voting rights to a director on a resolution to have the director
removed, in this case the director was given 3 votes per share and so could
defeat the resolution.
AC
C
A
G
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●
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
GENERAL DUTIES OF DIRECTORS: s171 – s177 CA 2006
To whom are the duties owed?
The general duties are owed to the company.
breach of duty?
So who sues a director who is in
Percival v Wright
E&SQ 230
What are the duties?
1.
Duty to act within powers – s171 CA 2006
A director must:
act in accordance with the company’s constitution;
2.
only exercise powers for the purposes for which they were conferred, not for
an ulterior motive and not for personal gain.
lB
ox
1.
ba
Most of the case law has arisen in relation to the power to allot shares, in that
it is a breach of duty for directors to cause a company to issue shares in order
to manipulate control within a company.
Hogg v Cramphorn (directors were held in breach of duty where shares were
Duty to promote the success of the company – s172 CA
2006
G
2.
lo
issued in order to block a takeover bid. This meant that the issue was voidable.)
A
A director must act in the way he considers, in good faith, would be most likely to
promote the success of the company for the benefit of its members as a whole.
C
In doing so he must have regard to:
the likely consequences of any decision in the long term,
●
the interests of the company’s employees,
●
the need to foster the company’s business relationships with suppliers,
customers and others,
●
the impact of the company’s operations on the community and the
environment,
●
the desirability of the company maintaining a reputation for high standards of
business conduct, and
●
the need to act fairly as between members of the company.
18 2
AC
●
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
3.
Duty to exercise independent judgment – s173 CA 2006
A director must exercise independent judgment.
4.
Duty to exercise reasonable care, skill and diligence –
s174 CA 2006
A director must exercise reasonable care, skill and diligence.
This means the care, skill and diligence that would be exercised by a reasonably
diligent person with –
(a)
the general knowledge, skill and experience that may reasonably be expected
of a person carrying out the functions carried out by the director in relation to
the company, and
(b)
the general knowledge, skill and experience that the director has.
5.
lB
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In Re Brazilian Rubber Plantation [1911] it was stated that a director does not have
to be an expert in the company's business. However, if the director has a special
skill (for example as an accountant) he is expected to use it, as director, for the
benefit of the company – Dorchester Finance v Stebbing [1989].
Duty to avoid conflicts of interest – s175 CA 2006
ba
A director must avoid a situation in which he has, or can have, a direct or indirect
interest that conflicts, or possibly may conflict, with the interests of the company.
lo
This applies in particular to the exploitation of any property, information or
opportunity.
G
This duty does not apply to transactions with the company.
covered by s177, below).
(Instead these are
C
A
This duty continues to apply to an ex-director as regards any matter he became
aware of while he was a director.
AC
If a director makes a profit from such an interest he is accountable to the company.
It is immaterial whether the company could take advantage of the property,
information or opportunity.
Regal (Hastings) v Gulliver [1942].
IDC v Cooley [1972]
C was MD of IDC with the task of negotiating consultancy contracts for IDC.
In that capacity he met the Gas Board and, using his best endeavours, began negotiations
for the award of a contract to IDC. It became apparent that Gas Board would not award the
contract to IDC. Being impressed by C’s personal qualities the Gas Board indicated he
should make a personal pitch for the contract. Over the weekend he prepared his personal
presentation.
He obtained a release from his service contract with IDC on the ground of mental ill-health.
He was then awarded the Gas Board contract.
Held: he was accountable to IDC for the profits made under the contract
-
even though IDC itself would not have been awarded the contract
-
even though C gained the contract largely through his personal qualities
-
even though he made the profit after he ceased to be a director.
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
The duty is not infringed if the matter has been authorised by the directors at a
board meeting.
Further points re authorisation:
●
if the company is public, authorisation by the directors is not allowed unless
its constitution so provides,
●
at the meeting, the interested director is not counted towards the quorum
and, if he votes on the matter, his vote is not counted.
6.
Duty not to accept benefits from third parties – s176 CA
2006
A director must not accept a benefit from a third party conferred by reason of his
being a director or his doing (or not doing) anything as director.
Duty to declare interest in proposed transaction or
arrangement with the company – s177 CA 2006
lB
7.
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This duty applies to ex-directors.
ba
If a director is interested, directly or indirectly in a proposed transaction with the
company, he must declare the nature and extent of that interest to the other
directors before the company enters into the transaction.
lo
If a declaration of interest proves to be, or becomes, inaccurate or incomplete, a
further declaration must be made.
G
If no declaration is made, the contract is voidable at instance of company and the
director must account for any gain.
Aberdeen Railway v Blaikie (The company bought some chairs from a firm. At the
AC
C
A
time of the contract one of the company’s directors, unknown to the company, was a partner
in the firm. Held: the company could avoid the contract because of this undisclosed conflict
of interest.) Division of power between the board and the general meeting
Further add-ons to the 7 duties
Declaration of interest in an existing transaction or
arrangement with the company – s182 CA 2006
In the same way as s177 (interest in a proposed transaction with the company), a
director must declare any interest in a transaction that has been entered into by
the company.
Failure to make the declaration is a criminal offence.
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
Substantial property transactions – s190 CA 2006
These must be approved by the members.
What is a substantial property transaction? Where director (or connected person) is
to sell to, or acquire from, the company any one or more non-cash asset which
exceeds the lesser of £100,000 or 10% of the company’s asset value. (Save that
no approval needed where requisite value is less than £5,000).
If there is no such approval:
●
the transaction is voidable at instance of company,
●
the director (and CP, and other directors who authorised transaction) are
liable to account to company for gain and/or indemnify company for loss.
Cumulative nature of the duties
AC
C
A
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The CA 2006 directs the court to consider and apply each and every duty to a given
set of facts.
Can the company relieve a director from liability for
breach of duty?
The answer is, in general, YES by ordinary resolution of the members. The CA
2006 forbids a director voting any shares he has on the ratifying resolution. See,
for example, Clemens v Clemens.
The CA 2006 outlaws anything in the company’s Articles or in the director’s contract
that indemnifies him from liability for breach of duty.
E&SQ 231
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18 5
C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
AGENCY POSITION OF DIRECTORS
When directors act for the company, they are acting as its agents. The company
will be bound by their actions in accordance with the common law principles of
agency as applied to company law and as modified by the CA 2006.
Individual directors and the managing director (common
law rules)
Where a director acts outside the scope of his authority, the contract, at common
law, is voidable at the company’s option. Where the third party has suffered loss
as a result, he can sue the director personally for breach of warranty of authority.
Most companies’ articles delegate entire running of the business to the board, and
further allow the board to sub-delegate to individual directors and others.
●
ox
The authority of a director may be express (actual), implied (usual) or apparent.
Express
Implied
ba
●
lB
eg the board passes a resolution which authorises a director to borrow
£50,000 on behalf of the company.
If a person occupies a particular office he has implied authority to bind the
company to contracts that are usual to that office.
the office of MD carries implied authority to bind the company to all
contracts of a
AC
C
A
G
o
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Freeman & Lockyer v Buckhurst Park Properties established that:
o
●
the office of an individual director carries
Apparent
Where a company holds out a person as occupying a particular position it is
then estopped from denying that the person has authority usual to that
position – Freeman & Lockyer v Buckhurst Park Properties.
E&SQ 232
A third party cannot rely on apparent authority when he knows of the lack of
actual authority.
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
The board – statutory rules
s40 CA 2006 provides “in favour of a person dealing with a company in good faith,
the power of the board of directors to bind the company, or authorise others to do
so, shall be deemed to be free of any limitation under the company’s constitution”.
So what does this mean?
E&SQ 233
s40 further provides:
that a third party is presumed to be in good faith;
●
that he is not to be taken to be in bad faith merely because he knows of any
lack of authority.
ox
●
lB
Where a director is the third party s40 CA 2006 does not apply: instead s41 CA
2006 applies to provide:
The transaction is voidable at the instance of the company.
●
He is liable to account to the company for any gain.
●
He is liable to indemnify the company for any loss.
AC
C
A
G
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ba
●
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
DIVISION OF POWER BETWEEN THE BOARD and THE
GENERAL MEETING
The concept ‘division of power’ raises 2 questions:
1.
What powers are vested in the board and what in the general meeting?
2.
To what extent can the general meeting give directions to the board?
The starting point for the answers is the articles. Most company’s articles will be
similar to the model articles which delegate the running of the business to the
board.
Subject to the provisions of the Act and the articles
(i)
ox
THE BUSINESS OF THE COMPANY SHALL BE MANAGED BY
THE DIRECTORS WHO MAY EXERCISE ALL THE POWERS OF THE
COMPANY
lB
(ii)
ba
… and a meeting of directors at which a quorum is present may
exercise all powers exercisable by the directors.
●
lo
So -
It is for the board to manage the business
G
This means that the members cannot purport to usurp the board’s
management powers.
A
Breckland Group Holdings v London & Suffolk [1989]
AC
C
C, 51% shareholder, purported to engage solicitors in the name of the company
and to cause the company to commence litigation.
It was held: 1. That the company had not engaged solicitors and
therefore it had no liability to the solicitors for their fees. 2. That C had
no power to start litigation in the name of the company and therefore
the litigation had no effect and the company was not liable for costs.
●
It is for the board to decide whether or not to exercise their powers
This means that the members cannot instruct the board as to the exercise of
its powers.
Shaw v John Shaw [1935]
The members in general meeting passed an ordinary resolution instructing the
board to discontinue litigation in the company’s name.
It was held that the resolution had no legal effect and therefore the
board was not bound to discontinue the litigation.
Although the board is the most powerful organ as regards the day-to-day running
of the business, the members in general meeting have ultimate control in that the
general meeting:
●
18 8
can remove directors by ordinary resolution – s168 Companies Act 2006;
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
●
can alter the company’s articles by special resolution to restrict the directors’
powers – s21 Companies Act 2006.
Summary:
The shareholders cannot interfere with the management of the
company unless authorised by the Articles of Association or the law and this
therefore means that as a general rule:
●
members cannot exercise management powers; and
●
members cannot give directions to the board.
If members don’t like what the board is doing, the solution is for the members to
sack the board.
AC
C
A
G
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Test your knowledge and understanding of this chapter by working E&SQs 234,
235, 236, 237, 238, 239, 240, 241, 242, 243, 244, 245, 246, 247, 248, & 249
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18 9
AC
C
A
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C H A P T E R 1 2 – C O M P A N Y L A W : D IR E C T O R S
19 0
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Chapter 13
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Company law – other
company officers
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SYLLABUS CONTENT (as set by ACCA’s study guide)
Other company officers
a)
Discuss the appointment procedure relating to, and the duties and powers of,
a company secretary.[2]
b)
Discuss the appointment procedure relating to, and the duties and rights of a
company auditor, and their subsequent removal or resignation.[2]
AC
C
A
G
2.
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19 1
CHAPTER 13 – COMPANY LAW: OTHER COMPANY OFFICERS
CHAPTER CONTENT DIAGRAM
OTHER OFFICERS
COMPANY SECRETARY
AC
C
A
G
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STATUTORY AUDITORS
19 2
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CHAPTER 13 – COMPANY LAW: OTHER COMPANY OFFICERS
CHAPTER CONTENTS
COMPANY SECRETARY ------------------------------------------------- 194
APPOINTMENT
194
QUALIFICATION
194
DUTIES AND FUNCTIONS
194
AGENCY POSITION
195
AUDITORS --------------------------------------------------------------- 196
196
TERMINATION OF OFFICE
197
DUTIES AND POWERS
197
AC
C
A
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APPOINTMENT
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19 3
CHAPTER 13 – COMPANY LAW: OTHER COMPANY OFFICERS
COMPANY SECRETARY
Appointment
Every PUBLIC company must have a Company Secretary.
A private company may have a Company Secretary.
Model articles empower the board to make the appointment.
Qualification
Public company only.
It is the statutory duty of board to ensure that the Company Secretary is qualified
by one or more of the following:
has been secretary of a public company for at least 3 of the preceding 5
years, or
2.
possesses certain designated professional qualifications (eg membership of
the major accounting bodies; membership of ICSA; is a barrister or solicitor),
or
3.
“is a person who, by virtue of his holding or having held any other position or
his being a member of any other body, appears to the directors to be capable
of discharging the functions of secretary”.
A
No statutory duties.
G
Duties and functions
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1.
AC
C
His duties and functions will therefore be whatever the Board decrees, eg
19 4
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CHAPTER 13 – COMPANY LAW: OTHER COMPANY OFFICERS
Agency position
Ability to bind the company in contract:
●
Express authority – to do whatever board delegates to him.
●
Implied (usual/apparent/ostensible) by virtue of office: leading case which
must be cited is the 1971 decision of the Court of Appeal in Panorama
Developments v Fidelis Furnishing Fabrics. “He is no longer a mere
clerk. … He is entitled to sign contracts connected with the administrative side
of a company’s affairs, such as employing staff, and ordering cars, and so
forth.
All such matters now come within the ostensible authority of a
company’s secretary.”
Further points:
1.
Re Maidstone Buildings (obiter dictum of CA, also in 1971, to effect that
2.
ox
Company Secretary’s implied authority does not extend to making ‘commercial’
as opposed to ‘administrative’ contracts).
Re Cleadon Trust [1968] (office did not carry implied authority to borrow
E&SQ 250
AC
C
A
G
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money).
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CHAPTER 13 – COMPANY LAW: OTHER COMPANY OFFICERS
AUDITORS (statutory)
Appointment
Requirement
The basic rule is every company must have auditors except:
small p................ companies (small = with a turnover of less than
£6.5m and balance sheet total of less than £3.26m),
(i)
and
(ii)
any dormant company which has
resolution dispensing with the need.
passed
a
s........................
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E&SQ 251
Qualification
(a)
a member of a recognised supervisory body and authorised to
audit by that body. The RSBs are
ba
either
.............................................................
.............................................................
●
authorised by the Government and having similar overseas
qualifications as above.
G
(b)
lo
●
or
lB
The auditor must be:
C
A
Also – he must be independent of the company, eg anyone who is an officer or
employee of the company, or is employed by or is a partner of such a person etc is
disqualified.
AC
E&SQ 252
Procedures
The first auditors may be appointed by the directors, who may also fill casual
vacancies. In each case the auditor holds office until the next general meeting at
which the accounts are laid.
Otherwise, the auditors are appointed or re-appointed by
resolution at the accounts meeting. And –
........................
●
in the case of a public company, the auditor holds office until the next
accounts meeting.
●
in the case of a private company, the auditor need not be appointed or reappointed every year. He is deemed to be re-appointed.
If
at
any
time
a
company
is
without
an
auditor
it
must
notify
the
S...................... of S.......... within 7 days.
E&SQ 253
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CHAPTER 13 – COMPANY LAW: OTHER COMPANY OFFICERS
Termination of office
Resignation
1.
An auditor may resign at any time by notice in writing to the company.
TRUE/FALSE
2.
A resigning auditor has a statutory right to requisition a general meeting.
TRUE/FALSE
3.
A resigning auditor must send to the company a statement to the effect that
either there are no circumstances which ought to be brought to the attention
of the members or that there are such circumstances and what they are.
TRUE/FALSE
E&SQ 254
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Removal
Auditors may be removed from office by the directors.
2.
Auditors may be removed from office at any time for any reason by
lB
1.
meeting
of
which
ba
..................... resolution in general
...................... notice has been given.
TRUE/FALSE
A removed (or about to be removed) auditor has a statutory right to
requisition a GM.
TRUE/FALSE
4.
A
removed
auditor
must
circumstances/circumstances.
lo
3.
the
statement
of
no
TRUE/FALSE
E&SQ 255
A
G
send
The basic statutory duty of an auditor is to report to the members whether or
AC
1.
C
Duties and powers
t..... a.... f...... v...... and have been
p................ p..................... in accordance with the Companies
not the accounts give a
Act.
In particular the auditor must investigate so far as necessary to form an
opinion as to whether:
2.
(i)
proper accounting records have been kept
(ii)
proper returns have been received from branches
(iii)
the accounts are in agreement with the accounting records
(iv)
the information given in the directors’ report is consistent with the
accounts.
Should auditors discover, for example, that proper accounting records have
not been kept, what must they do?
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19 7
CHAPTER 13 – COMPANY LAW: OTHER COMPANY OFFICERS
3.
Auditors have a statutory right of access at all times to the company’s books.
TRUE/FALSE
4.
Auditors have a statutory right to obtain from the company’s officers and
employees such information and explanations as the directors think necessary
for the performance of the auditors’ duties.
TRUE/FALSE
5.
Should such a person refuse to give an explanation to an auditor what must
the auditor do?
6.
Is it a criminal offence to tell falsehoods to auditors?
YES/NO
E&SQ 256
AC
C
A
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Test your knowledge and understanding of this chapter by working E&SQs 257,
258, 259, 260, 261, & 262
19 8
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Chapter 14
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Company law –
company meetings and
resolutions
G
SYLLABUS CONTENT (as set by ACCA’s study guide)
Company meetings and resolutions
a)
Distinguish between types of meetings: ordinary general meetings and annual
general meetings.[1]
b)
Distinguish between types of resolutions: ordinary, special, and written.[2]
c)
Explain the procedure for calling and conducting company meetings.[2]
AC
C
A
3.
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19 9
C H A P T E R 1 4 – C O M P A N Y L A W : C O M P A N Y M E E T I N G S A N D R E S O L U T IO N S
CHAPTER CONTENT DIAGRAM
What are the types of company meeting?
THE ANNUAL GENERAL MEETING
THE GENERAL MEETING
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THE CLASS MEETING
THE ORDINARY RESOLUTION
THE SPECIAL RESOLUTION
AC
C
A
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What are the types of company resolution?
20 0
THE WRITTEN RESOLUTION
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C H A P T E R 1 4 – C O M P A N Y L A W : C O M P A N Y M E E T I N G S A N D R E S O L U T IO N S
CHAPTER CONTENTS
MEETINGS --------------------------------------------------------------- 202
TYPES OF MEETING
202
THE ANNUAL GENERAL MEETING
202
THE GENERAL MEETING
203
RESOLUTIONS----------------------------------------------------------- 204
204
WRITTEN RESOLUTIONS
204
AC
C
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RESOLUTIONS AT A MEETING
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20 1
C H A P T E R 1 4 – C O M P A N Y L A W : C O M P A N Y M E E T I N G S A N D R E S O L U T IO N S
MEETINGS
Types of meeting
There are 3 types of meeting.
1.
The Annual General Meeting.
2.
The General Meeting.
3.
The Class Meeting (for example to vary class rights).
Procedures for annual general meetings and for general meetings are a mixture of
statute, common law and the company’s articles. Procedures for class meetings are
largely the same as for general meetings adapted where necessary to cater for the
fact that some only of the members will be entitled to attend.
ox
As with the examination, these Notes concentrate on annual meetings and general
meetings.
lB
The Annual General Meeting
ba
It is mandatory and must be held at set intervals
lo
Every PUBLIC company must hold an AGM within the 6 months following its
accounting reference date – s336 CA 2006.
Members must receive a minimum of 21 days’ notice – s337 CA 2006.
the articles may require longer
2.
shorter notice is permitted if every member entitled to attend
and vote so agrees.
The notice must state the meeting is an AGM.
AC
●
1.
C
But:
A
●
G
Notice of an AGM
Business at an AGM
There is no statutorily set agenda but would commonly include, for example:
●
election of directors
●
election of auditors
●
laying of the accounts
●
declaration of a dividend.
Members can force a resolution onto the agenda if they hold 5% of voting rights or
number 100 members averaging £100 paid up each – s338 CA 2006.
20 2
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C H A P T E R 1 4 – C O M P A N Y L A W : C O M P A N Y M E E T I N G S A N D R E S O L U T IO N S
The General Meeting
In general a GM is not mandatory and there is no set frequency.
Public companies will hold one in between AGMs where the need arises.
All company meetings of private companies will be general meetings.
Who convenes a GM?
1.
The Board
A company’s articles will inevitably empower the board to do so.
Statute requires the board to convene a GM in the following 3 situations:
Members holding at least 5% of the paid up voting capital may require
the directors to convene a GM – s303 CA 2006.
2.
A resigning auditor may require the directors to convene a GM.
3.
If a public company suffers a serious loss of capital the board must
convene a GM – s656 CA 2006.
lB
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1.
2.
ba
A serious loss is where net assets fall to half or less of its paid up share
capital.
The Court
lo
The court has a default power to convene a GM (ie where otherwise impracticable),
either on its own motion or on an application by any member or director.
G
The court may make any order it sees fit with regard to the meeting.
A
Notice of a GM
1.
the articles may require longer
AC
But:
C
Members must receive a minimum of 14 days’ notice.
2.
shorter notice is permitted if a majority of members in number, entitled
to attend and vote, holding at least 95% in nominal value of the
company’s shares so agree.
Business at a GM
In general, it is for the person who requisitions/convenes the GM to set the agenda.
So no set agenda, except in relation to serious loss by a plc where s656 states ‘for
the purpose of considering whether any, and if so what, steps should be taken to
deal with the situation’.
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20 3
C H A P T E R 1 4 – C O M P A N Y L A W : C O M P A N Y M E E T I N G S A N D R E S O L U T IO N S
RESOLUTIONS
Resolutions at a meeting
Types of resolution
Ordinary resolution
●
simple majority of the votes cast
●
most ordinary resolutions do not require filing
●
it is the default type of resolution.
E&SQ 263
Special resolution
three-fourths majority of the votes cast
●
all special resolutions must be filed at Companies House.
●
used where the company’s constitution or statute specifies a special
resolution.
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●
There are 2 ways of taking a vote:
ba
How is a vote taken?
on a show of hands (one member, one vote)
2.
on a poll (votes per share).
G
lo
1.
Proxies
A
Every member has a right to appoint a proxy.
C
A proxy need not be a member of the company.
AC
Every notice of every meeting must state the above 2 matters.
Written resolutions
●
A written resolution may be passed by a private company only.
It can be used for any resolution except to remove a director or auditor from
office.
It can be proposed and circulated by the directors whenever they wish. The
directors must circulate it if members holding at least 5% of the voting rights
so require.
●
A written resolution is passed when the company has received agreement (in
writing) from the required majority of the members. (The required majority is
the same as for special and ordinary resolutions).
A proposed written resolution lapses 28 days after the circulation date (or
whatever period is stated in the company’s articles).
●
20 4
A copy of any proposed written resolution must be sent to auditors (criminal
offence if don’t).
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C H A P T E R 1 4 – C O M P A N Y L A W : C O M P A N Y M E E T I N G S A N D R E S O L U T IO N S
●
The company must enter all written resolutions in a Register of Written
Resolutions, which must be kept at the registered office.
AC
C
A
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Test your knowledge and understanding of this chapter by working E&SQs 264,
265, 266, 267, 268, 269, 270, 271, 272, 273, 274, 275, 276, & 277
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20 5
AC
C
A
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C H A P T E R 1 4 – C O M P A N Y L A W : C O M P A N Y M E E T I N G S A N D R E S O L U T IO N S
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Chapter 15
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Company law –
insolvency
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SYLLABUS CONTENT (as set by ACCA’s study guide)
Insolvency and administration
a)
Explain the meaning of and procedure involved in voluntary liquidation,
including members’ and creditors’ voluntary liquidation.[2]
b)
Explain the meaning of, the grounds for, and the procedure involved in
compulsory liquidation.[2]
c)
Explain the order in which company debts will be paid off on liquidation.[2]
d)
Explain administration as a general alternative to liquidation.[2]
e)
Explain the way in which an administrator may be appointed, the effects of
such appointment, and the powers and duties of an administrator.[2]
AC
C
A
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C H A P T E R 1 5 – C O M P A N Y L A W : IN S O L V E N C Y
CHAPTER CONTENT DIAGRAM
Company has financial problems
ADMINISTRATION
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LIQUIDATION
“administrator”
G
aim →
ALTERNATIVE
to liquidation
AC
C
A
aim →
DISSOLUTION
of the company
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“liquidator”
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C H A P T E R 1 5 – C O M P A N Y L A W : IN S O L V E N C Y
CHAPTER CONTENTS
PUTTING A COMPANY INTO LIQUIDATION -------------------------- 210
SUMMARY OF METHODS
210
COMPULSORY LIQUIDATION PROCEDURES
210
MEMBERS’ VOLUNTARY LIQUIDATION PROCEDURES
212
CREDITORS’ VOLUNTARY LIQUIDATION PROCEDURES
212
CONVERSION OF MEMBERS’ VOLUNTARY LIQUIDATION TO A CREDITORS’ VOLUNTARY
LIQUIDATION
213
LIQUIDATION – APPLICATION OF ASSETS -------------------------- 214
ADMINISTRATION ------------------------------------------------------ 215
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INTRODUCTION
WHO CAN APPOINT AN ADMINISTRATOR?
215
215
215
AC
C
A
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SUBSEQUENT PROCEDURES
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PURPOSES
215
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C H A P T E R 1 5 – C O M P A N Y L A W : IN S O L V E N C Y
PUTTING A COMPANY INTO LIQUIDATION
Summary of methods
1.
Compulsory liquidation
So called because the court orders the company to be wound up.
2.
Voluntary liquidation
MVL
●
CVL
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So called because the company (by resolution of its members) chooses to go
into liquidation.
Ground
ordinary
where period fixed for duration of company has expired or
an event occurs upon which the Arts state that the
company should be wound up
special
company is being wound up for any other reason
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Resolution
G
Compulsory liquidation procedures
A
Putting the company into liquidation
AC
C
A compulsory winding up is commenced by presenting a petition to the court for a
winding up order.
The s122 IA 1986 grounds for the petition are:
●
ss(a)
special resolution by company that it be wound up by the court.
●
ss(b)
plc that has failed to obtain a trading certificate within a year of
incorporation.
●
ss(d)
company has not started business within the year of incorporation or
has suspended its business for over a year and does not intend to
start again.
●
ss(f)
company is unable to pay its debts.
s12 3 IA 1986 provides that a company is deemed to be unable to
pay its debts in the following situations:
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C H A P T E R 1 5 – C O M P A N Y L A W : IN S O L V E N C Y
●
ss(g)
1.
A creditor has served a statutory demand on the company,
which exceeds £750 and it has not been not settled by the
company within three weeks of service.
2.
If the value of the company’s assets is less than its liabilities,
including the company’s contingent and prospective liabilities.
3.
If a creditor can prove to the satisfaction of the court that the
company is unable to pay its debts as they fall due.
the court is of the opinion that it is just and equitable that the
company be wound up.
For each ground the possible petitioners are:
Subsequent procedures
All actions for the recovery of debt against the company cease. The company
ceases to carry on business except where necessary for the beneficial
winding-up of the company, for example to complete work in progress.
Powers of the directors cease but they still continue in office. Employees are
automatically made redundant but the liquidator can re-employ them to help
him complete the winding-up.
2.
On the making of the winding up order the Official Receiver becomes
liquidator.
3.
Within 3 months he will normally summon meetings of the creditors and
contributories for the purpose of appointing a licensed insolvency practitioner
as liquidator to take over the job of winding up the company’s affairs and for
the purpose of appointing a liquidation committee.
4.
Once the winding up is complete the liquidator will summon meetings of the
creditors and contributories for the purpose of them approving his final
accounts. He will then apply to the Registrar for dissolution of the company.
AC
C
A
G
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C H A P T E R 1 5 – C O M P A N Y L A W : IN S O L V E N C Y
Members’ voluntary liquidation procedures
Putting the company into liquidation
1.
A board meeting is held to make a declaration of solvency, ie that the
company is able to pay its debts (together with statutory interest) within the
next twelve months and is therefore solvent at the time the declaration is
made. It must have annexed a statement of assets and liabilities. The
declaration must be made within the five weeks immediately preceding the
winding up resolution and must be filed with the Registrar within 15 days after
the date of the resolution.
2.
A general meeting is held:
i
to resolve to wind up, and
ii
to appoint a named insolvency practitioner as liquidator.
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Subsequent procedures
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Once the liquidator has wound up the company’s affairs he will summon a meeting
of the members for their approval of his final accounts and will then apply to the
Registrar for dissolution of the company.
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Creditors’ voluntary liquidation procedures
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If a declaration of solvency is not made, the voluntary liquidation must proceed as
a creditors’ voluntary winding up.
Putting the company into liquidation
A
A general meeting is held:
to resolve to wind up, usually by special resolution,
ii
to appoint a named insolvency practitioner as liquidator, and
iii
C
i
AC
1.
to nominate up to five persons to serve on a liquidation committee.
As from the close of this meeting the company is in liquidation and its assets
are under the care and control of the liquidator. But, he may not normally
dispose of assets until after the creditors’ meeting.
2.
A creditors’ meeting must be held not later than fourteen days after the
members’ meeting – s98 IA 1986.
At the creditors’ meeting:
21 2
i
A statement of affairs, together with the list of creditors, must be put
before the meeting for consideration.
ii
The creditors are invited to appoint a named insolvency practitioner as
liquidator. Creditors vote by simple majority in value.
iii
The creditors may appoint up to five persons to serve on a liquidation
committee.
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C H A P T E R 1 5 – C O M P A N Y L A W : IN S O L V E N C Y
Subsequent procedures
Once the liquidator has wound up the company’s affairs he will summon a meeting
of the creditors for their approval of his final accounts and will then apply to the
Registrar for dissolution of the company.
Conversion of members’ voluntary liquidation to a
creditors’ voluntary liquidation
If the liquidator forms the opinion that the debts together with statutory interest
will not be paid in accordance with the directors’ declaration of solvency he must
(s95 Insolvency Act 1986):
summon a meeting of the creditors for a day not later than 28 days after he
formed that opinion;
2.
send notices of the meeting to the creditors not less than 7 days before the
day of the meeting;
3.
advertise the meeting in the Gazette.
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1.
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The liquidator must attend and preside at the meeting.
At the meeting:
a statement of affairs must be laid before the creditors;
2.
the creditors may vote to appoint a replacement liquidator;
3.
the creditors may vote to appoint a liquidation committee.
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1.
G
As from the date of the meeting the members’ voluntary winding up becomes a
creditors’ voluntary winding up.
AC
C
A
The directors making the declaration of solvency commit a criminal offence unless
they can prove that they had reasonable grounds for making it. Those in default
are liable to imprisonment or a fine or both.
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C H A P T E R 1 5 – C O M P A N Y L A W : IN S O L V E N C Y
LIQUIDATION – APPLICATION OF ASSETS
1.
Fixed charges
2.
Preferential creditors
ie employees in respect of:
●
wages or salaries due during the four months
preceding the date of commencement of winding
up not exceeding £800 per employee.
●
all accrued holiday pay.
Floating charges
4.
Ordinary unsecured creditors
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3.
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Rank equally amongst themselves.
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ie all other creditors.
G
Rank equally amongst themselves.
Post-liquidation interest
6.
Surplus to contributories (members) in the following
order:
●
●
AC
C
A
5.
Declared but unpaid dividends (if any).
Balance in accordance with class rights.
Payment of expenses
These are paid out of the fund to which they relate.
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C H A P T E R 1 5 – C O M P A N Y L A W : IN S O L V E N C Y
ADMINISTRATION
Introduction
Often used as an alternative to putting the company into liquidation.
It involves the appointment of an administrator to manage the affairs, business and
property of the company.
Purposes
The Insolvency Act 1986 as amended by Enterprise Act 2002 specifies the following
3 purposes:
to rescue the company as a going concern, or
2.
to achieve a better result for the company’s creditors as a whole than would
be likely if the company were to be put into liquidation, or
3.
to realise property in order to make a payment to one or more secured or
preferential creditors.
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1.
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An administrator can be appointed by:
ba
Who can appoint an administrator?
the Court
2.
the holder of a ‘qualifying’ floating charge
A
G
1.
the company or its directors.
AC
3.
C
A ‘qualifying’ floating charge is a floating charge which relates to the whole or
substantially the whole of the company’s property.
Subsequent procedures
1.
The company cannot be put into liquidation.
2.
There is a moratorium on the rights of creditors.
3.
The administrator is the company’s agent and takes control of all company’s
property. He must act in the best interests of all company’s creditors.
4.
He has wide powers to manage the business and property of the company,
including the power to bring and defend legal proceedings, sell assets and
borrow money.
5.
Directors still continue in office but their powers are suspended. He has the
power to remove and replace directors.
6.
He has 14 days in which to decide which employee contracts to adopt. If the
contract is not adopted, employees are made redundant.
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C H A P T E R 1 5 – C O M P A N Y L A W : IN S O L V E N C Y
7.
Within eight weeks of commencement of administration, he must draw up a
statement of his proposals which must be approved at a creditors meeting. If
approval is refused, court may provide that administrator’s appointment shall
cease and may make any order it considers to be appropriate.
8.
He remains in office for no more than one year. (Although the period can be
extended by the court or with the consent of secured creditors).
AC
C
A
G
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Test your knowledge and understanding of this chapter by working E&SQs 278,
279, 280, 281, 282, 283, 284, 285, 286, 287, 288, & 289
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Chapter 16
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Corporate fraudulent
and criminal behaviour
G
SYLLABUS CONTENT (as set by ACCA’s study guide)
Fraudulent and criminal behaviour
a)
Recognise the nature and legal control over insider dealing.[2]
b)
Recognise the nature and legal control over market abuse.[2]
c)
Recognise the nature and legal control over money laundering.[2]
d)
Recognise the nature and legal control over bribery.[2]
e)
Discuss potential criminal activity in the operation, management and
liquidation of companies.[2]
f)
Recognise the nature and legal control over fraudulent and wrongful
trading.[2]
AC
C
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1.
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C H A P T E R 1 6 – F R A U D U L E N T B E H A V IO U R
CHAPTER CONTENT DIAGRAM
AC
C
A
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I’m an accountant –
get me out of here!
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C H A P T E R 1 6 – F R A U D U L E N T B E H A V IO U R
CHAPTER CONTENTS
INSIDER DEALING ------------------------------------------------------ 220
WHAT ARE THE PUNISHMENTS?
220
WHAT ARE THE OFFENCES?
220
WHO CAN COMMIT THE OFFENCES?
220
WHAT ARE THE DEFENCES?
221
MARKET ABUSE --------------------------------------------------------- 222
WHAT IS MARKET ABUSE?
222
WHAT ARE THE CONSEQUENCES OF MARKET ABUSE?
222
BRIBERY ----------------------------------------------------------------- 223
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WHAT ARE THE PUNISHMENTS?
WHAT IS A BRIBE?
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WHAT ARE THE OFFENCES?
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WHAT IS THE TERRITORIAL SCOPE OF THE BA 2010 AND WHO CAN BE LIABLE?
223
223
223
224
MONEY LAUNDERING -------------------------------------------------- 225
WHAT IS ‘MONEY LAUNDERING’?
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WHAT IS THE LEGISLATION?
G
WHAT ARE THE CRIMINAL OFFENCES?
225
225
225
A
FRAUDULENT TRADING ------------------------------------------------ 227
C
WHAT IS FRAUDULENT TRADING?
AC
WHAT ARE THE CONSEQUENCES OF LIABILITY?
227
227
WRONGFUL TRADING -------------------------------------------------- 228
WHAT IS WRONGFUL TRADING?
228
WHAT ARE THE CONSEQUENCES OF LIABILITY?
228
THE PHOENIX COMPANY ----------------------------------------------- 229
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C H A P T E R 1 6 – F R A U D U L E N T B E H A V IO U R
INSIDER DEALING
Also known as
What are the punishments?
The Criminal Justice Act 1993 makes insider dealing a criminal offence
punishable by an unlimited fine and/or a maximum of 7 years’ imprisonment.
What are the offences?
The offences of ‘insider dealing’ are:
Dealing in securities on a regulated market.
ox
1.
2.
3.
Encouraging another person to deal.
lB
It does not matter whether the person does the deal himself or gets another
person to deal on his behalf.
Disclosing information (otherwise than in the proper performance of his
ba
job).
lo
Who can commit the offences?
G
The offences can only be committed by an ‘insider’.
An ‘insider’ is a person who has information if:
(b)
the information is, and he knows that it is, inside information, and
A
(a)
he got the information, and he knows that he got it, from an inside
AC
C
source.
(a) What is inside information?
Inside information is that which:
●
relates to particular securities or to a particular company or
companies; and
●
is specific or precise; and
●
has not been made public; and
●
is price-sensitive.
(b) When does a person have information from an inside
source?
A person has information from an inside source if he has it
22 0
(a)
through being director, employee or shareholder; or through
having access by virtue of his job; or
(b)
directly or indirectly from a person in category (a).
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C H A P T E R 1 6 – F R A U D U L E N T B E H A V IO U R
What are the defences?
1.
2.
There are three general defences to insider dealing:
●
proof that he did not expect the dealing to result in a profit (or the
avoidance of a loss)
●
proof that he believed on reasonable grounds that the information had
been widely disclosed
●
proof that he would have done what he did even if he had not had inside
information.
A person prosecuted for the disclosure offence in addition has a defence if he
can prove that he reasonably believed that the recipient would not deal etc.
AC
C
A
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E&SQ 290
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C H A P T E R 1 6 – F R A U D U L E N T B E H A V IO U R
MARKET ABUSE
What is market abuse?
Broadly speaking: improperly affecting the share price – colloquially called share
ramping.
Can you think of an example?
More specifically, the Financial Services and Markets Act 2000 states that market
abuse occurs where a user of the market has been unreasonably disadvantaged by
others in the market who:
used to their own advantage information not generally available, or
2.
created a false or misleading impression, or
3.
undertook activities that distorted the market.
lB
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1.
ba
What are the consequences of market abuse?
AC
C
A
G
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The Financial Services and Markets Act 2000 delegates responsibility for controlling
market abuse to the Financial Conduct Authority (the FCA). The FCA can impose
civil penalties.
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C H A P T E R 1 6 – F R A U D U L E N T B E H A V IO U R
BRIBERY
What are the punishments?
The Bribery Act 2010 makes bribery a criminal offence punishable by an
unlimited fine and/or a maximum of 10 years’ imprisonment.
What is a bribe?
The offering, promising, or giving a financial or other advantage in order to induce
a person improperly to perform a relevant function or duty.
What are the offences?
Bribing a person
ie offering, promising, or giving a bribe.
Being bribed
ba
2.
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1.
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The BA 2010 creates 4 offences:
ie requesting, agreeing to receive, or accepting a bribe.
Bribing a foreign public official
G
3.
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See, for example, the very first conviction under the BA 2010 – R v Munir Patel
[2011].
Failure by a company or partnership to prevent bribery
C
4.
A
ie offering, promising, or giving a bribe.
AC
There is a defence if the organisation can show that it has adequate procedures in
place for preventing bribery.
The Ministry of Justice has produced guidance for companies based on the following
6 guiding principles:
1.
Proportionate procedures
The risks faced by organisations will vary according to the type, size and
nature the business so the procedures to be put in place will differ between
organisations.
2.
Top level commitment
Those at the top of the organisation, such as the board, should be involved in
developing the procedures.
3.
Risk assessment
There should be external and internal reviews conducted on a periodic basis of
the nature and extent of the risks of exposure to bribery.
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C H A P T E R 1 6 – F R A U D U L E N T B E H A V IO U R
4.
Due diligence
The organisation should carry out due diligence procedures on associated
persons to discover any bribery risks and so mitigate effect.
5.
Communication and training
Organisations should ensure policies of anti-bribery are understood by all
employees and associated persons.
6.
Monitoring and review
There should be constant review
improvements where necessary.
to
prevent
bribery
and
to
make
There is no need for these procedures if there is no risk of bribery.
What is the territorial scope of the BA 2010 and who can
be liable?
ox
The offences can be committed:
by any company or LLP incorporated in the UK – whether or not the actual
bribe occurred in the UK. And by their senor officers (eg directors) if that
person consented to or connived at the bribe etc.
2.
by any person closely connected with the UK (eg persons resident here or
carrying on business here) – whether or not the actual bribe occurred in the
UK. And by their senor officers (eg directors) if that person consented to or
connived at the bribe etc.
3.
by any person working for 1 or 2 (whether as employee, independent
contractor, agent etc) – again, whether or not the actual bribe occurred in the
UK.
AC
C
A
G
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ba
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1.
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C H A P T E R 1 6 – F R A U D U L E N T B E H A V IO U R
MONEY LAUNDERING
What is the legislation?
Proceeds of Crime Act 2002 (as amended).
What is ‘money laundering’?
Money laundering is the process by which the proceeds of crime, either money or
other property, are converted into assets which appear to have a legitimate rather
than an illegal origin. The aim of the process is to disguise the source of the
property, in order to allow the holder to enjoy it free from suspicion as to its
source.
1.
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The process normally has 3 stages:
Placement
Layering
ba
2.
lB
This is the initial disposal of the proceeds of criminal activity, for example by buying
a business.
Integration
G
3.
lo
This involves the transfer of money from, for example, place to place or business to
business with the aim of concealing its initial source.
A
This is the end result of the previous stages – in that the money now has an
appearance of coming from a legitimate source.
C
What are the criminal offences?
1.
AC
There are three categories of offence.
Laundering
This category includes acquiring, possessing, or using the proceeds of criminal
activity; it also includes assisting another to retain the proceeds of criminal activity;
it also includes concealing the proceeds of criminal activity.
The penalty is a maximum of 14 years’ imprisonment and/or an unlimited fine.
2.
Failing to report
This applies to professionals in the regulated sector, such as accountants in
professional practice. Such a person has a duty to report (either personally or via
the organisation’s money laundering officer) to the National Crime Agency (NCA) if
he knows or suspects, or has reasonable grounds to know or suspect, that another
is engaged in money laundering.
The penalty is a maximum of 5 years’ imprisonment and/or an unlimited fine.
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C H A P T E R 1 6 – F R A U D U L E N T B E H A V IO U R
3.
Tipping off
Professionals must not make any disclosure which is likely to prejudice any
investigation under the legislation.
AC
C
A
G
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The penalty is a maximum of 5 years’ imprisonment and/or an unlimited fine.
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C H A P T E R 1 6 – F R A U D U L E N T B E H A V IO U R
FRAUDULENT TRADING
What is fraudulent trading?
A person is liable for fraudulent trading if he is knowingly party to the carrying on
of business with intent to defraud creditors or for any fraudulent purpose.
eg
•
Ordering goods knowing they will not be paid for – R v Grantham,
•
but not where there is an honest belief that they will eventually be paid
for – Re William C Leitch Bros.
What are the consequences of liability?
Under s213 Insolvency Act, on the application of liquidator, the court will
order the defendant to make contribution to company’s assets.
2.
Under the CDDA 1986 a director can be disqualified for up to
3.
Under the CA 2006 fraudulent trading is a criminal offence punishable by an
unlimited fine and/or up to … years in prison. Liability can arise outside
insolvency procedures.
… years.
AC
C
A
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C H A P T E R 1 6 – F R A U D U L E N T B E H A V IO U R
WRONGFUL TRADING – s214 IA 1986
What is wrongful trading?
A person is liable for wrongful trading if the liquidator can prove:
the company is in insolvent liquidation, and
2.
the person was director (or shadow director) at a time when he knew or ought
to have known that there was no reasonable prospect of avoiding insolvent
liquidation.
ox
1.
ba
lB
The defendant has defence if he can prove “he took every step he ought to have
taken with a view to minimising the potential loss to creditors”.
lo
See Re Produce Marketing Consortium.
1.
G
What are the consequences of liability?
On the application of liquidator – the court will order the defendant to make
contribution to company’s assets.
Under the CDDA 1986 a director can be disqualified for up to
AC
2.
C
A
Like fraudulent trading, the amount is normally equal to the debts incurred
during the wrongful trading period.
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… years.
E&SQ 291
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C H A P T E R 1 6 – F R A U D U L E N T B E H A V IO U R
THE PHOENIX COMPANY (RESTRICTION ON RE-USE OF
NAME OF INSOLVENT COMPANY) – IA 1986
IA 1986 forbids a person from being concerned in the management (eg as
director) of a company (the phoenix company) which has the same/similar
name as another company of which he was a director at any time during the
12 months prior to its insolvent liquidation.
The prohibition lasts for 5 years from commencement of liquidation of the old
company.
Breach
(i)
criminal offence
(ii)
personal liability for debts of phoenix company.
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C H A P T E R 1 6 – F R A U D U L E N T B E H A V IO U R
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Appendix and index of
cases
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This combined appendix and index includes all the cases referred to in the body of
your notes.
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The facts of cases are an important aid to understanding legal rules. They illustrate
how the law is applied to practical situations. They are also often a source of
inspiration for your examiner, both for the setting of Section A multiple choice
questions and Section B multi-task questions.
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Cases recorded by name only are cases where you will not gain anything by having
read the facts.
AC
Sometimes a case is referred to more than once in your notes – indicated here in
this appendix and index by multiple page references. If you are at an early stage in
your studies you will find that you might not understand all the points in what was
held by the court. This will be because we haven’t yet got to that point of law in
your notes. Don’t worry about it until you get to the later reference. By the time
you get to the last reference for the case you should ensure you understand all of
what was held.
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APPENDIX AND INDEX OF ENGLISH LEGAL SYSTEM CASES
ENGLISH LEGAL SYSTEM
Fisher v Bell [1961]. A statute made it a criminal offence to ”offer for sale” an
offensive weapon. A shopkeeper displayed a flick knife in his shop window. Was
he ”offering” to sell it? Held. No. The display of goods in a window is not an
‘offer’ but ‘an invitation to treat’. ................................................................. 25
Gorris v Scott [1874]. In order to inhibit the spread of contagious diseases, an
Act required all animals carried on ferries to be contained in pens. Scott sent his
sheep on a ferry. Gorris, the ferry operator, did not contain the sheep in pens
and they were washed overboard. Scott brought an action for damages for the
loss of his sheep. Held. His action must fail because the purpose of the penning
requirement was to stop the spread of contagious diseases (the Act required
animals from different farms to be contained in separate pens) not to stop
animals being washed overboard. ................................................................25
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Mendoza v Ghaidan [2003] CA. The Rent Act 1977 allowed a person to inherit a
statutory tenancy from his ”wife or husband”. Could a person inherit a statutory
tenancy from a same-sex partner with whom he was living? Held. Yes. The CA
interpreted the words ”wife or husband” in the Act to include people living
together ”as if they were wife or husband” so as to accord with Art 14 (prohibition
of discrimination). In doing so the CA refused to be bound by a previous
precedent of the HL holding exactly the opposite. (In 2004 the HL upheld this
approach of the CA). ............................................................................ 28, 29
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Powell v Kempton Park Race Course [1889] HL.
s1 Betting Act 1853
prohibited betting in a ”house, office, room or other place”. The question was
whether Tattersalls Ring at a racecourse was an ”other place” within the meaning
of the Act. Held. It was not. The words ”house, office, room” created a class of
indoor places. As Tattersalls ring is an outdoor enclosure at the racecourse it
did not fall within that category. ..................................................................26
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R v Secretary of State for the Home Department [2002] HL. UK legislation
allowed the Secretary of State to fix the minimum time in prison for persons
convicted of murder. Held. The HL followed the ECtHR’s decision in Stafford v
UK [2002] and held that the UK legislation was incompatible with Article 6 of the
Convention rights (the right to a fair trial by an impartial and independent
tribunal). ............................................................................................ 28, 29
Sigsworth, Re [1935]. A son murdered his mother. Was he her ”heir” so as to
inherit her estate under the Administration of Estates Act 1925? Held. Although
under the literal rule the word ‘heir’ could be interpreted so as to include the son;
here, by application of the golden rule it meant ‘rightful heir’. Since the son had
murdered his mother he was therefore not a rightful heir, so he could not inherit.
............................................................................................................... 25
Stafford v UK [2002] ECtHR. UK legislation allowed the Secretary of State to fix
the minimum time in prison for persons convicted of murder. Held. The ECtHR
held that the UK legislation was incompatible with Article 6 of the Convention
rights (the right to a fair trial by an impartial and independent tribunal). .... 28, 29
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Wynne v UK [1994] ECtHR. UK legislation allowed the Secretary of State to fix
the minimum time in prison for persons convicted of murder. Held. The ECtHR
held that the UK legislation was not incompatible with Article 6 of the Convention
rights (the right to a fair trial by an impartial and independent tribunal). ..........28
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APPENDIX AND INDEX OF CONTRACT CASES
CONTRACT
Anglia Television v Reed [1972]. The claimants engaged an actor to appear in
a film they were making for television. He pulled out at the last moment and the
project was abandoned. The claimants claimed the preparatory expenditure such
as hiring the other actors and researching suitable locations. Held. Damages
were awarded for the wasted preparatory expenditure. ..................................67
Balfour v Balfour [1919]. Prior to a long business trip abroad a husband agreed
to pay his wife £30 per month to support herself while he was away. He made
some payments but then stopped. His wife sued him for breach of contract.
Held. Her action failed. There was no contract between them. As the parties
were contracting in a social or domestic context there was presumably no
intention to create legal relations and there was no evidence to the contrary to
rebut this presumption. ..............................................................................44
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Beswick v Beswick [1968]. Peter Beswick (PB) sold his business to N. As part
of the purchase price N agreed to pay an annuity to PB for his life and thereafter
to his widow (MrsB) for her life. When PB died N refused to pay the annuity to
MrsB. Held. (1) In her personal capacity she could not enforce the contract
against N as she was not party to the contract; but (2) since she was PB’s
executor she could enforce the contract in that capacity. .......................... 69, 70
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Bettini v Gye [1876]. B, a tenor, agreed to sing in Great Britain for a period
beginning on 30 March 1875, and to be in London for rehearsals six days before
that date. B did not reach London until 28 March 1875, when G refused to accept
B’s services, treating B’s absence from rehearsals as a breach of condition. B
sued G for breach of contract. Held. The clause referring to rehearsals was
subsidiary to the main agreement, and its breach was no more than a breach of
warranty. G was therefore liable to B for breach of contract; although G might
have a counterclaim for any additional costs incurred because of B’s nonattendance at some of the rehearsals. ..........................................................49
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Brace v Calder [1895]. The claimant was been employed as a manager in a
business with four partners. Two of the partners died. The surviving partners
wished to continue in business so they gave the claimant a technical dismissal
linked with an offer of re-employment. The claimant resented the dismissal and
refused the offer. He sued for wrongful dismissal claiming loss of earnings.
Held. The claimant would receive nominal damages only. He had not mitigated
his loss – if he had accepted their reasonable offer he would have suffered no loss
of earnings. .............................................................................................. 67
Byrne v Van Tienhoven [1880]. Letter of revocation was received by the offeree
after he had posted his acceptance. Held. Revocation too late. Contract came
into being when the acceptance was posted. .................................................38
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Carlill v Carbolic Smoke Ball [1893] HL. The defendant company invented a
smoke ball which it believed to be a cure for influenza and other similar illnesses.
It ran an advertising campaign. The advertisements (on posters) promised to
pay £100 to any person who used the smoke ball in accordance with the
instructions and subsequently caught flu. Mrs Carlill read the poster, acquired a
smoke ball, used it as directed, and caught flu. The defendant refused to pay Mrs
Carlill arguing that there was no contract obliging it to do so. Held. There was a
contract and therefore Mrs Carlill had a contractual right to the £100 reward. (1)
The defendant’s argument that an offer cannot be made to the whole world was
dismissed.
(2) The defendant’s argument that the advertisement was an
invitation to treat, not an offer, was dismissed because no-one would expect
persons, such as Mrs Carlill, to attempt to negotiate – it was a ‘take it or leave it’
situation. (3) The defendant’s argument that Mrs Carlill had not accepted their
offer was dismissed. Her acceptance was the act of using the smoke ball and
catching flu. (4) The defendant’s argument that her acceptance was not effective
because it hadn’t been communicated to them was dismissed because
communication is not necessary in relation to unilateral contracts. (5) The
defendant’s argument that she had not provided consideration was dismissed.
Her act of using the smoke ball and catching flu was sufficient consideration.... 37,
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Casey’s Patents, Re [1892]. Casey spent two years promoting a patent jointly
owned by two persons who requested him so to act. Later, Casey was promised
that he would receive a one-third share of the patent in payment for his work.
Held. The promise was binding: an implication existed when Casey began to
work for the owners of the patent that he would ultimately be paid for his
services. ................................................................................................... 40
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Cellulose Acetate Silk Co Ltd v Widnes Foundry Ltd [1933]. W contracted to
build a factory for C. The contract provided that W would pay C £20 per week if
completion were delayed. There was a delay of 30 weeks. C sued W for £5,850
actual losses. Held. The contract sum only need be paid, ie £20 x 30 weeks =
£600, as this was in the nature of a genuine liquidated damages clause. ..........65
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Central London Property Trust v High Trees [1947]. The claimants let a block
of flats to the defendants in 1937 at a rent of £2,500 per annum. The agreement
was on the basis that the defendants would sublet individual flats. Owing to the
outbreak of war and subsequent bombings of London it was difficult to sublet the
flats and in 1940 the claimants agreed to halve the rent. After the end of the war
the claimants sued the defendants for the full rent throughout the period of the
war. Held. The claimants were able to reinstate the full rent from the end of the
war. However, they could not claim the arrears relating to the war years because
the defendant had in good faith relied on the promise and assumed it would be
kept, reducing rents to sub tenants accordingly. ............................................43
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Chaplin v Hicks [1910]. The defendant, an actor and theatrical manager, agreed
with Miss Chaplin that she would attend a meeting (the time and place of which
he agreed to give her at a later date) at which he would interview 50 actresses
and would then select 12 to whom he would give remunerative employment. In
breach of contract he failed to notify Miss Chaplin of the time and place for the
interview and thus she lost the chance of obtaining remunerative employment.
Miss Chaplin sued for loss of earnings (ie, for the remuneration she would have
earned had she been one of the 12 chosen). The defendant contended that she
should only get nominal damages since she might not have been chosen – she
only had a 1 in 4 chance and moreover a chance that depended amongst other
imponderables on his own volition. Held. Damages can be awarded for the loss
of a chance: Miss Chaplin was therefore awarded substantial damages based on
her 1 in 4 chance of having succeeded in the interview. ..................................67
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Collins v Godefroy [1831]. Godefroy subpoenaed Collins and promised to pay
him six guineas for giving evidence on Godefroy’s behalf. Held. Collins was
already under a legal duty to give evidence.
Thus he had provided no
consideration for the promise of six guineas. .................................................41
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D & C Builders v Rees [1966]. The defendant owed £482 to the claimant (a
building company) for work carried out. The defendant, knowing the claimant
was in desperate need of money to stave off bankruptcy, offered £300 by cheque
in settlement of the debt saying that if the claimant refused it would get nothing.
The claimant accepted the £300 reluctantly in settlement but then sued for the
balance. Held. The claimant was successful in suing for the balance. Several
reasons contributed to the court’s decision. (1) In view of the pressure put on
the claimant and the claimant’s reluctance there was no true accord. (2)
Payment by cheque and cash are, in these circumstances, no different. Therefore
the payment by cheque did not amount to consideration: it conferred no benefit
over and above payment in cash. (3) The equitable doctrine of promissory
estoppel did not apply because the defendant had acted inequitably. ......... 42, 43
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Dickinson v Dodds [1876]. Dodds offered to sell his property, the offer to be left
open ”until 9am Friday”. On the Thursday, Dickinson learnt from X that Dodds
had sold the property to B. On Friday morning at 7am Dickinson purported to
accept Dodds’ offer. Held. Dodds was free to revoke the offer at any time prior
to acceptance and since the revocation by Dodds had been received by Dickinson
on Thursday he was not able to accept on Friday. It did not matter that the
communication of the revocation had been done by a person other than Dodds. 38
Dunlop v Selfridge [1915]. ........................................................................40
Entores v Miles Far East Corporation [1955]. The claimants made an offer by
telex to the defendants in Amsterdam. The defendants accepted the offer by
telex. They argued (for reasons that are not within your syllabus) that the
contract had been made in Amsterdam when the acceptance was typed into the
teleprinter.
Held.
Acceptance is not effective until and unless it is
communicated.
Therefore the contract was made in London where the
acceptance was received. ...........................................................................39
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Errington v Errington [1952]. A man offered to transfer his house to this son
and daughter-in-law if they cleared the mortgage debt by paying all instalments
when due. The couple began paying the instalments but when the man died his
personal representatives attempted to withdraw the offer. Held. The man’s offer
could not now be revoked because the couple had, by paying some instalments,
commenced the act of acceptance. ..............................................................38
Felthouse v Bindley [1862]. The claimant wrote to his nephew offering to buy
the nephew’s horse and stating ”if I hear no more about him I consider it mine for
£30 15s”. The nephew did not reply. Held. The nephew’s silence did not
amount to acceptance. ...............................................................................39
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Fisher v Bell [1960]. A shopkeeper displayed a flick knife in his shop window,
with a price tag attached. Was he ”offering” to sell it? Held: No. The display of
goods in a window is not an ‘offer’ but ‘an invitation to treat’, ie he was inviting
people to make offers to buy it: he was not stating that he would definitely sell it
(whether at the price on the tag or at all). ....................................................37
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Foakes v Beer [1884] HL. Mrs B obtained a judgement for debt against Dr F in
the sum of £2,090. The parties agreed that if Dr F paid £500 at once and the
balance by instalments Mrs B would not take ”any proceedings whatever on the
judgement”. Dr F paid the £2,090, but Mrs B then claimed interest on the
judgement debt. Held. Dr F had to pay the interest. The agreement between
the parties did not help him because it was unsupported by consideration. .......42
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Gibson v Manchester City Council [1979] HL. The Council sent a letter to
Gibson stating ”We may be prepared to sell the house to you at the purchase
price of £2,725”. Held. This was not an offer capable of acceptance by Gibson
because the Council did not definitely state that they would sell the house. It was
an invitation to treat. ................................................................................. 37
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Glasbrook Bros Ltd v Glamorgan County Council [1925]. Glasbrook Bros
asked the Glamorgan police to provide extra police officers to protect its property
against striking miners. Glasbrook Bros signed an agreement promising to pay
the officers’ expenses. Glasbrook Bros refused to pay the bill on the grounds that
the police were doing no more than their legal duty and therefore there was no
consideration. Held. Glasbrook Bros were bound by the promise. The police
had exceeded their legal duty by providing more officers than they thought
necessary and therefore had given consideration. ..........................................41
GNR v Witham [1873]. Witham successfully tendered for a contract to supply
certain iron goods to GNR for a period of one year. The wording of the tender
was ‘to supply such quantities as GNR may order from time to time'. GNR placed
several orders but after a time Witham refused to supply orders.
Held.
Witham's tender was a standing offer which GNR accepted every time it placed an
order. As a result Witham was bound to supply orders that had already been
placed, but he was free to revoke the standing offer for the future. Thus he was
not liable to supply orders made after his revocation had been received by GNR.
............................................................................................................... 38
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Green (RW) v Cade [1978]. A farmer bought seed potatoes from supplier and
when they grew up it transpired that the seed was defective. The contract
provided that any complaint about defective seed must be made within three
days of the seed being delivered. Held. The clause failed the reasonableness
test because the defect was one which could not become apparent until the seed
had had time to grow. ................................................................................52
Hadley v Baxendale, Rule in [1854]. The rule in Hadley v Baxendale states: a
loss is not too remote if (a) it arises naturally (ie, according to the usual course of
things) from the breach; or (b) if it may reasonably be supposed to be within the
contemplation of the parties, at the time they made the contract, as the probable
result of breach. ........................................................................................ 66
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Hansa Nord, The [1976]. A contract for the purchase of some citrus pulp pellets
stated that one of the terms of the contract was ”shipment to be made in good
condition”.
On arrival some of the pellets were damaged and the buyer
repudiated the contract. Subsequently the buyer bought the consignment when
they were later offered on the open market and used them for the original
intended purpose. Held. Although the term relating to shipment might appear
to be a condition, it was actually an innominate term since its breach could have
had a number of outcomes varying considerably in gravity. In the event the
outcome had not been so serious as to justify repudiating the contract and
therefore the buyer’s only remedy was damages. ..........................................49
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Harris v Nickerson [1968]. The defendant, an auctioneer, advertised that he
would sell certain furniture on a specified date. The claimant arrived at the sale
but the goods had been withdrawn. The claimant claimed expenses and damages
saying he had accepted by attending the sale. Held. The advertisement was a
mere statement of intention, not an offer. Thus the claimant had no claim.......38
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Hartley v Ponsonby [1857]. The facts of the case were similar to Stilk v Myrick
except that so many sailors deserted that the ship was rendered unseaworthy.
Held. In agreeing to sail an unseaworthy ship the remaining sailors went beyond
their existing contractual duty and so had given consideration for the captain’s
promise. Accordingly, they succeeded in their claim for the extra wages. .........41
Harvey v Facey [1893]. The following communications were exchanged between
the parties. Claimant: ”Will you sell us Bumper Hall Pen, telegram lowest price”.
Defendant: ”Lowest price for Bumper Hall Pen £900”. Claimant: ”We agree to
buy Bumper Hall Pen for £900 as asked by you”. To this last telegram there was
no reply and the claimant claimed there was a contract between himself and the
defendant. Held. There was no contract. The second telegram was not an offer
but in the nature of an invitation to treat, ie, the lowest price if it were to be sold.
............................................................................................................... 38
Hirachand Punamchand v Temple [1911]. The creditor accepted a smaller sum
from the debtor’s father in full settlement. Held. The creditor could not sue the
debtor for the balance as it would be a fraud on the father to allow the creditor to
go back on his promise. ..............................................................................43
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Hochster v De La Tour [1853]. The defendant agreed in April to employ the
claimant as his courier for a foreign tour commencing on June 1. On May 11 he
wrote to him saying that he had changed his mind about the tour and therefore
would not require a courier. Held.
The defendant’s anticipatory renunciation
allowed the claimant to treat the contract as discharged in May and sue for
damages immediately. He was not obliged to wait until June. .........................63
Hollier v Rambler Motors [1972]. On three or four occasions over a period of
five years the claimant had had repairs done on his car at a garage. On each
previous visit he had signed a form on which the garage disclaimed liability for
damage caused by fire to customers’ cars. On this particular visit he was not
asked to sign any form and his car was damaged by fire. The garage contended
that the disclaimer had by a course of dealing become an established term of this
time’s contract. Held. The clause was not incorporated into this time’s contract.
In the circumstances there was no course of previous dealings. .......................51
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Household Fire Insurance v Grant [1879]. Grant applied for shares in a
company (ie he made an offer). The company posted an acceptance letter of
allotment to Grant but he never received it. The company went into liquidation
and Grant was sued for the balance outstanding on his shares.
Held.
Acceptance was complete when the letter of allotment was posted and Grant was
therefore liable to pay the outstanding balance. ............................................39
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Hyde v Wrench [1840]. Wrench offered to sell his farm for £1,000. Hyde
offered £950, which Wrench refused. Hyde then purported to accept the offer of
£1,000. Held. There was no contract because the counter offer was an implied
rejection of the original offer to sell at £1,000. ..............................................39
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Jarvis v Swan Tours [1973]. Mr Jarvis went on a skiing holiday on the basis of
the description in the defendant’s brochure which amongst other things said that
he would be in a party of lively young people, there would be nut-cakes for tea,
and yodelling in the evenings. In the event, none of these things were provided.
Held.
Mr Jarvis was awarded damages to compensate him for his
disappointment and distress. .......................................................................66
Jones v Vernons Pools [1938]. The defendants denied having received a
football coupon sent to them by the claimant. The coupon stated ”any agreement
entered into is binding in honour only”. Held. There was no contract between
the claimant and the defendant. The words ”binding in honour only” clearly
negated any intention to create legal relations. .............................................44
L’Estrange v Graucob [1939]. The owner of a café bought an automatic vending
machine, signing a sales agreement containing an exclusion clause which she did
not read. Held. The clause was incorporated in the contract by virtue of her
signature and therefore she was bound by it. ................................................51
McArdle, Re [1951]. X made improvements to her mother-in-law’s house. The
rest of the family then promised to reimburse her. The payment was not made.
Held. The improvements had been carried out before the promise was made.
Therefore the consideration was past and accordingly the promise unenforceable.
............................................................................................................... 40
McCutcheon v David MacBrayne [1964] HL................................................51
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Merritt v Merritt [1970]. A husband who had separated from his wife agreed to
transfer the matrimonial home to her if she paid the mortgage. The wife paid off
the mortgage but the husband refused to transfer title to the house to her,
alleging that his promise was a domestic arrangement not giving rise to legal
relations. Held. The husband’s promise was enforceable. Since the husband
was separated from his wife the normal ‘domestic presumption’ was rebutted
because they were separated and therefore from the circumstances were at arms’
length. Balfour v Balfour was distinguished on the facts. ................................ 44
Moorcock, The [1889]. W, a wharf owner, contracted to allow a ship owner to
unload his ship at the wharf. The ship was damaged when, at low tide, it became
grounded on some rocks at the bottom of the river bed. Held. The court implied
a term into the contract that the river bottom must be reasonably safe. ...........48
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Olley v Marlborough Court Hotel [1949]. The claimant booked a room in the
defendant’s hotel. Later the claimant saw a notice in her bedroom exempting the
defendant from liability for articles lost or stolen unless handed to the
management for safe custody. The claimant’s furs were stolen from her room.
Held. The contract was made at the reception desk. The notice in the bedroom
could not have been seen by the claimant until later; therefore it was not
incorporated into the contract. ....................................................................51
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Omnium Enterpises v Sutherland [1919]. The defendant agreed to hire a ship
to the claimant. Before the hire period was due to commence he sold the ship.
Held. The defendant’s act of selling the ship amounted to an implied anticipatory
breach and the claimant could sue for damages immediately. He was not obliged
to wait until the beginning of the hire period. ................................................63
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Page One Records Ltd v Britton [1968]. The claimants requested an injunction
to restrain a band, The Troggs, from engaging as their manager anyone other
than the claimant. Held. The injunction was refused, on the ground that to
grant it would in effect compel The Troggs to continue to employ the claimant
(and no court would give an order of specific performance to that end). ...........68
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Partridge v Crittenden [1968]. The appellant advertised for sale ”Bramblefinch
cocks and hens 25 shillings each”. Held. The advertisement was an invitation to
treat, not an offer. ..................................................................................... 37
Pharmaceutical Society of Great Britain v Boots Cash Chemists [1953] HL.
The defendants operated a self-service shop in which the customers selected their
purchases from shelves displaying the goods, and paid at a cash desk. The
Pharmacy and Poisons Act 1933 requires that the sale of drugs must be
supervised by a pharmacist. A pharmacist was present at the cash desk but not
at the shelves. The claimants claimed that Boots were infringing the law by
offering poisonous drugs for sale to the public. Held. The display of goods was
not an offer but an invitation to treat. The contract was made when the
customers offered to pay for the goods at the cash desk. The pharmacist could
then accept or reject the offer. ....................................................................37
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Photo Productions v Securicor [1980] HL. The claimant entered into a contract
with Securicor by which Securicor agreed to provide security services at the
claimant’s factory, including night patrols. While carrying out a night patrol at
the factory an employee of Securicor deliberately lit a fire and as a result the
factory and stock inside, together valued at £615,000, were completely
destroyed. The claimant sued Securicor for breach of contract. In its defence
Securicor pleaded an exemption clause which stated: ” ... under no circumstances
shall Securicor be responsible for any injurious act or default by any employee of
Securicor ...”. Held. The exemption clause was clear and unambiguous and
protected Securicor from liability. Note: despite the date of this case the Unfair
Contract Terms Act 1977 was not relevant because its facts arose before 1977. 51
Pinnel’s case [1602]. .................................................................................42
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Poussard v Spiers [1876]. P, a soprano, agreed to sing in an operetta, the first
performance of which was scheduled for 28 November 1874. She failed to
appear until 4 December. S needed a substitute but found that the only way to
obtain a suitable person was to engage the substitute to perform for the whole
period. When P appeared on 4 December, S refused her services. P then sued S
for breach of contract. Held. P’s failure to perform the contract from the start
(28 November) was a breach of condition, which entitled S to repudiate the
contract with P. ......................................................................................... 49
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Rose & Frank v Crompton Bros [1925] HL. X agreed to act as Y’s agent buying
and selling goods. They agreed ” … this is not entered into as a legal agreement
… ”. Later Y backed out of the agreement. Held. He was able to so. There was
no contract because the clear words negated any contract between the parties. 44
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Routledge v Grant [1828]. Grant offered to buy Routledge’s horse and gave him
six weeks to decide whether to accept or not. Before the six weeks had elapsed
and at a time when Routledge had not accepted, Grant withdrew his offer. Held.
Grant was entitled to revoke his offer. ..........................................................38
AC
Ruxley Electronics v Forsyth [1995] HL. RE agreed to build a swimming pool
for F at F’s house for £17,797.40. The contract specified a pool depth of 7ft 6in.
In the event RE built the pool between 6ft and 6ft 9in deep. F claimed damages
of £21,560 equal to the cost of re-doing the pool to the agreed depth. RE argued
that the damages should be the difference in value between the pool as specified
and as built. (This would mean £0 since the pool as built was just as suitable for
swimming and diving as one built to the agreed specifications). The HL held that
F would not be awarded damages so as to enable him to re-build the pool as this
was unreasonable since the cost was out of all proportion to the benefit to be
obtained. Thus his claim would be confined to the difference in value. This of
course meant £0 – although the HL did uphold the lower court’s award of £2,500
for loss of amenity/enjoyment (though they commented that the amount was on
the high side). ........................................................................................... 66
Shadwell v Shadwell [1860]. N was engaged to be married to E (in those days
a binding contract). U promised N an allowance if he would carry out his
contractual obligation and marry E. Held. N’s act of marrying E was sufficient
consideration to support the promise from U. ................................................41
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APPENDIX AND INDEX OF CONTRACT CASES
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Shanklin Pier Ltd v Detel Products Ltd [1951]. The claimant had a contract with X
Co under which the company had agreed to repair and repaint the claimant’s pier.
X Co allowed the claimant to choose the materials which would be used for the
project – in particular the choice of paint. The defendant recommended the use
of a particular paint to the claimant, which the defendant specifically stated was
suitable for the project and of good quality.
The claimant followed the
defendant’s advice and required X Co to use the defendant’s product. The paint
turned out to be unsatisfactory and the claimant had to spend £4,000 to remedy
the problems caused by the paint. The claimant sued the defendant for breach of
contract. In its defence the defendant argued that there was no contract
between the claimant and the defendant, as it was X Co that had purchased the
paint not the claimant. Held: there was a collateral contract between the
claimant and the defendant in which the defendant had guaranteed the paint’s
quality and suitability in return for the claimant specifying that X Co used the
paint. The main contract would not have come into existence had it not been for
the formation of the collateral contract. The claimant therefore had a claim
against the defendant. ...............................................................................70
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Simpkins v Pays [1955]. Every week a grandmother, her granddaughter, and
their lodger specifically sat down together to enter a competition. On the entry
form, which was in the grandmother’s name, each made one entry. All three
shared the entry fees & postage. They agreed to share any prize. One week the
granddaughter’s entry won. The lodger asserted that the agreement to share any
prize was a contract. Held. There was a contract because the presumption
relevant to domestic or social agreements was rebutted by evidence to the
contrary. The surrounding facts showed that the parties were engaged in a
serious joint enterprise. .............................................................................. 44
AC
C
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Spurling v Bradshaw [1956]. The parties contracted for the storage of the
claimant’s barrels of orange juice in the defendants’ warehouse. Subsequent to
the making of the contract the defendants sent a document to the claimant which
amongst other things excluded liability for any loss or damage to the stored
goods. (The claimant had dealt with the defendants for many years (in the words
of the judge ”numerous dealings over a period of at least 10 years”) and had
always received a similar document.) When the claimant came to collect his
barrels he discovered that some were missing. Held. Although the exemption
clause was only received by the claimant after the contract was made, it was
incorporated into the contract through the parties’ previous dealings. This was
despite the fact that the claimant had never read the previous documentation
since reasonable steps had been taken to bring it to his attention. ...................51
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APPENDIX AND INDEX OF CONTRACT CASES
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St Albans City Council v International Computers Ltd [1995]. The defendant
company supplied a database for the community charge register to a local
authority. Owing to an error in the computer software the community charge
rate was set too low, causing the authority a shortfall of £1.3 million. The
defendant company sought to rely on a clause limiting their liability to £100,000.
Held. The exclusion clause did not satisfy the test of reasonableness under the
Unfair Contract Terms Act 1977 because: (1) The parties were of unequal
bargaining power. ICL was a major international company whereas the claimant
was a local authority and was not run by ‘businessmen’. There was pressure on
the claimant to conclude the contract quickly eg ”if the contract is not signed by
the next Monday there is a risk that partly constructed hardware cannot be
reserved”; ”if you object to our terms then we shall have to go back to our legal
department and this will cause further delay”. (2) Ability to insure. It was
normal for a company such as ICL to insure against such losses and in view of its
cover worldwide of £50m the limitation of liability to £100,000 for this contract
was unjustifiably small. St Albans, as is the case with most local authorities, was
not insured for this kind of loss and there was no ‘ready-made’ policy available.
(3) The practical consequences counted in favour of the authority, including the
fact that the company was insured and was well able to pass on the premium to
its customers but, if the loss were to be borne by the authority, it would be borne
by the local population. .............................................................................. 52
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Stilk v Myrick [1809] HL. The terms of a crew’s contract of employment obliged
them ”to exert themselves to the utmost”. During the voyage two sailors
deserted and the captain promised to divide the wages of those two among the
remaining crew if they worked the ship home. Held. The promise was not
enforceable. In sailing the ship home the crew had done no more than they were
already contractually bound to do and therefore had given no consideration. .... 41
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Surrey County Council v Bredero Homes [1993] CA. SCC sold some land to
BH and in the contract of sale BH covenanted to build no more than 72 houses on
the plot. In deliberate breach of contract BH built 77 houses. SCC claimed
damages equal to the profit BH had made on the extra houses. Held. The
purpose of damages at common law for breach of contract is to compensate the
innocent party for his loss: its purpose is not to transfer to him any benefit which
the wrongdoer has gained by his breach of contract. Since SCC had not suffered
any loss, it followed that the damages recoverable had to be nominal. .............64
Thomas v Thomas [1842].
The executors of a will agreed to allow the
deceased’s widow to occupy his house in return for her promise to pay rent of £1
per year. Held. The £1 was valuable; the fact that it was inadequate was
immaterial. ............................................................................................... 41
Thompson v LMS Railway [1930]. Mrs Thompson, who could not read, bought
an excursion ticket on which was printed ”excursion: for conditions see back”. On
the back it was stated that the ticket was issued subject to conditions contained
in the company’s timetables. These conditions excluded liability for injury. Held.
In the circumstances reasonable steps had been taken to bring the exemption
clause to Mrs Thompson’s attention before the contract was made: thus the
clause was incorporated into the contract. ....................................................51
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APPENDIX AND INDEX OF CONTRACT CASES
Victoria Laundry v Newman Industries [1949]. V bought from N a boiler for
use in V’s laundry. Delivery was agreed for 5 June but was not made until five
months later. V sued N, claiming: (a) loss of profit of the laundry during the
period of delay on its normal everyday business; and (b) loss of profit from two
very unusual and highly profitable dyeing contracts that it was offered but was
unable to take. Held. V succeeded under (a) because this was normal loss, but
the loss under (b) was not recoverable. It was abnormal and neither N (nor V)
knew about it nor had they any reason to know about it at the time the boiler
contract was made. .................................................................................... 66
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White & Carter Ltd v McGregor [1962] HL. The claimant agreed to advertise
the defendant’s business for three years on plates attached to litter bins. The
defendant cancelled the contract on the same day that it was made. The
claimant nevertheless manufactured and displayed the plates as originally
agreed, and claimed the full amount due under the contract. Held. They were
entitled to do so. The reasoning being that a renunciation does not, of itself,
bring the contract to an end. Its effect is to give the innocent party a choice of
whether or not to affirm the contract. If he chooses to affirm the contract it
remains in full effect. ................................................................................. 63
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White v Bluett [1853]. The alleged consideration was a son’s promise to his
father that he would cease complaining to him. Held. Such a promise could not
be measured in terms of money and was therefore not capable of amounting to
valuable consideration. ............................................................................... 40
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Williams v Roffey Bros [1990] CA. R. Bros contracted to refurbish a block of
flats by a certain date. The contract contained a ‘time penalty’ clause. R. Bros
sub-contracted the carpentry (to be done by a set date) to W for a set fee.
During the course of the work it became apparent that W had underpriced the
sub-contract. R. Bros approached W and promised him extra money if he would
complete the work as agreed. W did the work as agreed but R. Bros refused to
pay the extra money. Held. W could sue R. Bros on their promise of extra
money because, even though W merely did that which he was already obliged to
do, this nevertheless conferred a practical benefit on R. Bros in that they not only
avoided penalties under the head-contract but also the cost and aggravation of
employing substitute carpenters. .................................................................41
Wilson v Burnett [2007]. The facts of Wilson v Burnett are not entirely clear,
but in essence 3 work-friends went on a girls’ night out to play bingo.
Beforehand at work (and perhaps later inside the bingo hall), they agreed to
share ‘the prize’. One of the girls won not only the house prize of £153 but also
the huge national prize of £101,211! Did the other 2 have a contractual right to
their share? It was held no. The presumption that they did not intend to be
legally bound applied because the context was a social matter (thus far following
Simpkins v Pays). But Simpkins v Pays was then distinguished because in Wilson
v Burnett there was no evidence of a “serious joint enterprise”. Thus the
presumption that they did not intend to be legally bound was not rebutted and
therefore stood. Sadly for the two claimants. You might like to read the
judgement
of
the
Court
of
Appeal
–
it’s
a
very
short
one!
http://www.bailii.org/ew/cases/EWCA/Civ/2007/1170.html will take you there. 44
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APPENDIX AND INDEX OF TORT CASES
TORT
ADT v Binder Hamlyn [1995]. The defendant firm was the auditors of a
company called Britannia Securities Group (BSG) and the plaintiff was the
purchaser of all the shares of BSG. After the 1989 accounts had been published
(with an unqualified audit report by Binder Hamlyn) ADT asked Binder Hamlyn to
confirm those accounts. At a meeting between the Binder Hamlyn audit partner
and a director of ADT – a meeting which was known to both to be the final hurdle
before ADT finalised its bid for BSG – the Binder Hamlyn audit partner specifically
confirmed that he ‘stood by’ the 1989 accounts. ADT then bought BSG for
£105m. It was subsequently discovered that BSG’s true value was only £65m.
Held. Binder Hamlyn owed a duty of care to ADT in relation to the statement by
the Binder Hamlyn partner confirming the accuracy of the accounts – proximity
was established because that statement was made to a known person for a
known purpose. Caparo was therefore distinguished. .................................... 76
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Al Saudi Bank v Clarke Pixley [1989]. In reliance on annual accounts audited
by Clarke Pixley, Al Saudi Banque loaned money to a company called Gallic Credit
International Ltd. Later Gallic went into insolvent liquidation with an estimated
deficiency of £8.6m – meaning that Al Saudi Banque was not able to recover all
of the loan that it had made to Gallic. So Al Saudi Banque (and other lenders)
sued Clarke Pixley in the tort of negligence. Held. Auditors of a company do not
owe a duty of care to a bank which lends money to that company, regardless of
whether the bank is an existing creditor making further advances or is a potential
creditor making new advances. There is no proximity between existing or
potential creditors of a company and its auditors. ..........................................76
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Barnett v Chelsea & Kensington Hospital [1969]. Mr Barnett went to hospital
complaining of severe stomach pains and vomiting. He was seen by a nurse who
telephoned the doctor on duty. The doctor told her to send him home and
contact his GP in the morning. Mr Barnett died five hours later from arsenic
poisoning. Had the doctor examined Mr Barnett at the time there would have
been nothing the doctor could have done to save him. Held. The hospital was
not liable as the doctor’s failure to examine the patient did not cause his death.
This is an application of the “but for” test, ie “But for the defendant’s negligence,
would the claimant have suffered loss?”. Here Mr Barnett would have died
anyway. ................................................................................................... 79
Bolt v WM Moss. ........................................................................................80
Caparo Industries v Dickman [1990] HL. Caparo bought all the shares in a
company in reliance on the audited accounts. Does the auditor, Dickman, owe
Caparo a duty of care? Held. No, because: (1) the auditors’ report is addressed
to the members as a body – ie the company – and not to individual members or
investors.
(2) the auditor’s report verifies the directors’ account of their
stewardship of the company for the purpose of the general meeting deciding
whether the company should reward (or otherwise) the directors – and not for
the purpose of people making investment decisions. ................................ 75, 76
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APPENDIX AND INDEX OF TORT CASES
Donoghue v Stevenson [1932] HL. Mrs Donoghue became ill after drinking
from a bottle of ginger beer which contained the decomposed remains of a snail.
She sued the manufacturer. The question before the House of Lords was ”Did the
manufacturer owe her a duty of care?” Held. Yes. Manufacturers ought
reasonably to foresee that consumers of their products will become ill if they are
contaminated. ........................................................................................... 75
Ewing v Buttercup Margarine Company [1917]. ........................................82
Froom v Butcher [1975]. ...........................................................................80
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James McNaughton Paper v Hicks Anderson [1991] CA. JMP entered into
negotiations with MK paper for an agreed take-over of MK. The chairman of MK
asked its accountants, HA, to prepare draft accounts for MK to use in the
negotiations. The accounts were shown by MK to JMP. After the take-over was
completed JMP discovered certain discrepancies in the accounts – which meant
that it had paid too much for MK.
JMP brought an action against MK’s
accountants in the tort of negligence. Held. No duty of care was owed because
of lack of proximity between JMP and HA. The prime reason being that the
accounts were produced for MK’s use in the negotiations, not for JMP’s. ...........76
Jeb Fasteners v Marks Bloom [1982] CA.................................................... 79
ba
Latimer v AEC [1953]. ...............................................................................78
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Nettleship v Weston [1971].......................................................................78
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Paris v Stepney Borough Council [1951]. The claimant only had sight in one
eye. He worked in a garage as a welder. While using a hammer, metal entered
his good eye and as a result he became totally blind. The claimant was not using
protective goggles at the time and none were supplied by his employer, as was
common practice in this trade at the time – the 1950s. The court held that the
defendant should have taken into account the condition of the claimant’s eyes
and the gravity of the consequences if anything should happen to his good eye.
Held. In not providing goggles the defendant was in breach of his duty of care.
Tutorial Note: these days statutory obligations require all welders to be
provided with goggles – irrespective of how many good or bad eyes they might
have! ....................................................................................................... 78
Sayers v Harlow Urban District Council [1958]. The claimant became trapped
in a public toilet due to a defective lock. She decided to climb out by placing one
foot on the toilet seat and the other on the toilet roll. The latter rotated and she
fell and injured herself. Held. Although the council had been negligent with
regard to the defective lock, the claimant had exacerbated her injuries by the
manner in which she tried to make her escape. .............................................80
Smith v Baker [1891]. ...............................................................................80
The Wagon Mound [1961] HL. ...................................................................79
Twomax v Dickson [1983]. ........................................................................78
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Watt v Hertfordshire CC [1954]. The claimant was a fireman. A woman had
been involved in a traffic accident and was trapped underneath a lorry. This was
200-300 yards away from the fire station. The fire services were called to release
the woman. They needed to transport a heavy lorry jack to the scene of the
accident. The jack could not go on the fire engine and the normal vehicle for
carrying the jack was not available. The fire chief ordered the claimant and other
firemen to lift the jack on to the back of a truck. There was no means for
securing the jack on the truck and the firemen were instructed to hold it on the
short journey. When the truck braked, the jack fell onto the claimant's leg
causing severe injuries. Held: there was no breach of duty. The emergency of
the situation and utility of the defendant's conduct in saving a life outweighed the
need to take precautions. ...........................................................................78
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APPENDIX AND INDEX OF EMPLOYMENT CASES
EMPLOYMENT
Devis v Atkins [1977] HL. Mr Devis was dismissed at a time when the employer
had no reason for the dismissal. Subsequent to Mr Devis’s departure the
employer discovered that he had been embezzling funds. Mr Devis brought an
action for unfair dismissal. Held. His action succeeded. The employer was not
able to rely on the after discovered facts of dishonesty to justify the dismissal as
fair since the dishonesty was not the reason for the dismissal. Since the
employer had no reason for the dismissal at the date of the dismissal, it was an
unfair dismissal. Note: such after discovered facts are relevant to assessing the
amount of any monetary award. ..................................................................96
European Chefs v Currell [1971]. .............................................................. 99
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Hivac Limited v Park Royal Scientific Instruments Limited [1946]. Two
employees of a company which manufactured sophisticated components for
hearing aids worked at the weekends for a rival company. Held. An injunction
was granted as there was potential for misuse of the secret information. ..........89
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Lister v Romford Ice [1957].
An employee negligently ran over another
employee with a fork-lift truck. Held. He was liable in damages to his employer
for breach of contract. Note: although an isolated act of negligence is not
normally regarded as sufficiently serious so as to entitle the employer to
terminate the contract (ie, dismiss the employee), repeated acts do, as does a
single act of gross negligence. .....................................................................89
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Morton Sundour Fabrics v Shaw [1966]. An employee was warned that it was
likely that he would be dismissed (for redundancy) at some unspecified date in
the future. He then left (because he had found another job). Held. He had not
been dismissed and therefore had no actions under the ERA 1996 (whether for
unfair dismissal or redundancy). ..................................................................96
AC
Pepper v Webb [1968]. A gardener, in breach of the common law duty of
obedience when he refused to plant the plants where instructed by his employer
and also in breach of the common law duty to perform the work in a reasonable
manner when he swore at his employer, was summarily dismissed. Held. He
had no action for wrongful dismissal because these serious breaches of duty
justified the summary dismissal as rightful....................................................89
Polkey v A E Drayton Services [1987] HL. .................................................97
Secretary of State for Employment v ASLEF [1972]. Some employees, who
were railway workers, ‘worked to rule’ ie, they obeyed the British Rail rulebook to
the letter. This resulted in considerable delays to the train service. Held. They
were in breach of contract since, although they were performing the work, they
were doing so in a wholly unreasonable way in that their actions had the effect of
disrupting the service they were there to provide...........................................89
Simmonds v Dowty Seals [1978]. S was contracted to work on the night shift.
His employer ordered him to change to the day shift. S refused and resigned.
Held. He had been constructively dismissed. ......................................... 94, 96
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Sinclair v Neighbour [1967]. An employee secretly borrowed from the shop till.
He repaid the money the next day. Held. He was in breach of the duty of good
faith and, since this was a serious breach of contract, the employer was justified
in summarily dismissing him. ......................................................................89
Singh v London Bus Service. ......................................................................96
Stevenson v Golden Wonder Ltd [1977]. ................................................... 96
Taylor v Kent County Council [1969]. Taylor was the headmaster of a school.
The school was amalgamated with another school and a new head was appointed
to the combined school. Taylor was offered employment in a pool of new
teachers, standing in for short periods in understaffed schools. He would retain
his current salary. Held. Taylor was entitled to reject this offer and to claim a
redundancy payment. The reduction in status made it reasonable for him to
refuse the alternative employment. ..............................................................99
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Vaux and Associated Breweries v Ward [1969]. Mrs Ward was engaged as a
barmaid. Subsequently the public house was modernised by, amongst other
things, installing a discotheque. Mrs Ward was dismissed in order to make way
for a younger more glamorous ‘Bunny girl’ barmaid. Held. Mrs Ward had not
been dismissed for redundancy. Her job was barmaid and the pub still had need
of a barmaid. ............................................................................................ 99
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Willian Hill v Tucker. Employee worked as a senior dealer (only one of five
authorised to do so) operating in the field of spread betting. He served notice to
terminate his contract in order to work for a competitor. Employer insisted that
he remain on the pay roll for the notice period but stayed at home ‘on garden
leave’. Employee sought to start new job immediately arguing employers were in
breach of contract in refusing to allow him to work. Held. Employer was in
breach by not providing work because employee had particular skills which must
be exercised to maintain them. ...................................................................90
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APPENDIX AND INDEX OF AGENCY CASES
AGENCY
Freeman & Lockyer v Buckhurst Park Properties [1964] CA. Two directors of
a company left X, the third director, for some years to run the company’s
business of property development. X engaged some architects on the company’s
behalf although he had no express authority to do so. Later the company refused
to pay the architects on the ground that X had no authority. Held. (1) as
director X’s position did not give him usual authority to enter into commercial
contracts such as the engaging of architects; but (2) the position of a managing
director does carry such usual authority; and (3) even though X was not
managing director the company had led third parties to believe that he was.
Thus the company was estopped from denying that X had authority as if he were
managing director. The result, therefore, was that the company had to pay the
architects.........................................................................................105, 186
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Great Northern Railway v Swaffield [1874]. Swaffield sent his horse by rail
and on its arrival at its destination there was no one to collect it. GNR was
unable to contact Swaffield. GNR incurred the expense of stabling the horse in a
livery stable for the night. Held. GNR was an agent of necessity and therefore
had authority to incur the expense of stabling it overnight. ........................... 104
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Keighley, Maxsted v Durant [1901] HL. X agreed to buy some wheat from T.
Although X intended this to be on behalf of P, X did not tell T this nor did he
indicate to T that he was dealing as an agent, and nor did X have any authority
from P. When X told P what he had done P purported to ratify, but he later
changed his mind and refused to take delivery of the wheat. Held. He was not
bound to do so. His ‘ratification’ was inoperative because T did not know of the
existence of P. ......................................................................................... 105
AC
C
A
Kelner v Baxter [1866]. Three promoters of a company bought goods from K on
the company’s behalf before it was incorporated. Once the company was
incorporated it then purported to ratify the contract with K. Held. It was not
able to do so since it did not exist at the date the contract was made. Thus K had
no claim against the company for payment. ................................................ 105
Panorama Developments v Fidelis Furnishing Fabrics [1971] CA.
The
company secretary of a company hired a self-drive limousine in the name of the
company. He had no express authority to do so and, unknown to the car hire
firm, used the limousine for his own private purposes. Held. The company was
bound to pay the bill since such a contract is within the usual authority of a
person occupying the position of company secretary. ................................... 107
Prager v Blatspiel [1924]. A bought skins as agent for P but was unable to send
them to P because of prevailing war conditions. Being unable to communicate
with P he sold the skins. Held. A was not an agent of necessity, because he
could have stored skins until the end of the war. There was no real emergency.
............................................................................................................. 104
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Sachs v Miklos [1948]. M agreed to store S’s furniture. Some considerable time
later M decided that he needed the storage space for his own use. He tried to
contact S to get the furniture removed but was unable to do so, so he sold the
furniture. When S found out he sued M for wrongfully disposing of the furniture.
Held. He was liable. His argument that he had acted as an agent of necessity in
disposing of the furniture was dismissed since he had sold it merely for his own
convenience. ........................................................................................... 104
Springer v Great Western Railway [1921]. A consignment of fruit was found
by the carrier to be going bad. The carrier sold the consignment locally instead of
delivering it to its destination. Held. The carrier was not an agent of necessity
because he could have obtained new instructions from the owner of the fruit. He
was therefore liable in damages to the owner. ............................................. 104
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Watteau v Fenwick [1893]. F owned a pub that A ran for him. F forbade A from
buying cigars for re-sale in the pub. A bought some cigars from W for the
purpose of re-sale in the pub. W did not know that A had no actual authority to
do this. Held. Since such a purchase was within the usual authority of an innkeeper and W did not know of the prohibition, F was bound to pay W for the
cigars. .................................................................................................... 107
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APPENDIX AND INDEX OF PARTNERSHIP CASES
PARTNERSHIP
Higgins v Beauchamp [1914]. B and M were in partnership as proprietors and
managers of cinemas. Without the consent of B, M borrowed money from H, who
subsequently sued B for its return. Held. The character of the firm was nontrading (because it provided services, rather than buying and selling goods) and
therefore no partner had any implied power to borrow. Thus the action failed.113
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Martyn v Gray [1863]. G went down to Cornwall to discuss possibly investing in
a tin mine belonging to X. Nothing came of the discussions but while G was down
in Cornwall he was introduced by X to M as ”a gentleman down from London, a
man of capital”. M later gave X credit believing he was in partnership with G.
Held. Although the introduction was oblique it amounted to a representation that
G was in partnership with X; and so G was liable for the debt incurred subsequent
to the introduction. He should have made the true position clear by correcting
the impression made. ............................................................................... 114
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Mercantile Credit v Garrod [1962]. P was a partner in a firm carrying on a
garage business mainly concerned with lettting lock-up garages and repairing
cars. G was a sleeping partner. A clause in the partnership agreement excluded
the buying and selling of cars. P, without G’s authority, sold a car, to which he
had no title, to the claimant for £700. When the claimant found out that P had
had no title to the car, it claimed the £700 from G. Held. The sale of the car
was ”an act for carrying on in the usual way business of the kind carried on by
the firm”, and thus the firm was bound, and therefore G was accountable for the
money. The court was of the view that the outside world in general would think
that persons trading as a garage would usually buy and sell cars. .................. 113
AC
C
A
Tower Cabinet v Ingram [1949]. C and I carried on a business of household
furnishers under the name ”Merry’s”. The partnership was dissolved in 1947,
with C continuing the business alone under the same name. One year later the
claimant, which had not previously dealt with Merry’s, received an order to supply
six suites of furniture. This order was confirmed on some old headed notepaper,
with I’s name on it as well as C’s, which was inadvertently used by C without I’s
authority. The price of the goods was not paid: and the claimant obtained
judgement against Merry’s. The claimant then sought to enforce the judgement
against I. Held. I was not liable. This was because (1) prior to his retirement
he was not known to the claimant to be a member of the firm, and accordingly I
was under no obligation to give any notice of his retirement to the claimant; and
(2) he had not knowingly allowed C to hold him out as a partner under s14
Partnership Act 1890. ............................................................................... 114
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APPENDIX AND INDEX OF COMPANY LAW CASES
COMPANY LAW
Allen v Gold Reefs of Africa [1900]. The company’s articles gave the company
a lien on partly paid shares for debts owing to it. Allen was the only member who
had fully paid shares and was the only member who owed money to the
company. The company altered its articles to extend the lien to fully paid shares.
Allen objected to the alteration. Held. Allen’s objection was dismissed. The
alteration was done bona fide for the benefit of the company as a whole. The
hypothetical member would agree to an alteration allowing a company to collect
monies owing to it. .................................................................................. 142
Ashbury Railway Carriage v Riche [1875]. At a time when the company’s
objects clause stated that the company’s business was to be ”the building of
rolling stock” the directors caused the company to enter into a contract to build a
railway line. Held. The building of the railway line was ultra vires. ............... 143
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Beattie v E F Beattie [1938]. Under the articles, differences between a company
and any of the members had to be referred to arbitration. Beattie, a shareholder
and a director with a dispute with the company relating to access to minutes of
board meetings, sued the company without referring the matter to arbitration.
Held. Beattie in his capacity as a director was not contractually bound by the
articles. The company was therefore not entitled to have the court action stayed.
............................................................................................................. 140
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Brazilian Rubber Plantation Limited, Re [1911]....................................... 183
AC
C
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Brown v British Abrasive Wheel [1920]. The articles were altered to enable
the majority shareholders to purchase at ”a fair value the shares of the minority”.
The intention was to invoke the clause against some minority members who were
refusing to inject much-needed further capital into the company. They objected
to the alteration. Held. This was a not a bona fide alteration in the interests of
the company as a whole. This was because no reason was stated in the new
article for the exercise of the power of expulsion. ........................................ 142
Bushell v Faith [1970] HL. The company had three directors who were also the
only shareholders. Each held 100 shares and each share had one vote. A clause
in the articles stated that on the occasion of a resolution to remove a director,
each of his shares would carry three votes. A director then used his votes to
oppose a resolution by the other two to remove him. Held. The weighted voting
article was valid and therefore the resolution to remove the director was defeated
by 300 votes to 200. ................................................................................ 181
Cleadon Trust, Re [1968] ........................................................................ 195
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APPENDIX AND INDEX OF COMPANY LAW – CASES
Clemens v Clemens Bros [1976]. This case involves a complex contest between
an Aunt and her niece for the control of a company: the facts are given in simple
terms within the remit of your ACCA syllabus. The Aunt was on the board of
directors. The niece was not on the board. The Aunt held 55% of the shares and
her niece held 45% This, of course, meant that the Aunt could pass any ordinary
resolution of the members that she wished; but that she needed the co-operation
of her niece in order to pass any special resolution. The ordinary resolution
voting power of the Aunt also meant that, in effect, she controlled the other
directors on the board (remember s168 Companies Act 2006 – if you’ve forgotten
see page 180). With a view to diluting the negative voting weight of her niece,
the Aunt caused the board to issue new shares to trustees under the company’s
employee share scheme. The Aunt then used her ordinary resolution voting
power to ratify her breach of duty as a director. Held. The ratifying ordinary
resolution was not valid. Thus the shares were not validly issued and the niece
retained her negative voting weight. ...................................................155, 185
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Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd
[1916] Background. In times of war it is illegal to trade with enemy aliens. The
essential question was whether the defendant company was an enemy alien or
not. The defendant was a company registered in England & Wales. All except
one its shares were held by German residents and all directors were German
residents.
The secretary was an English national as was the non-German
shareholder.
The defendant supplied tyres to Daimler, but Daimler was
concerned that making payment might contravene the common law offence of
trading with the enemy as well as a proclamation issued under s1(2) Trading with
the Enemy Act 1914. Daimler brought the action to determine if payment could
legally be made, given that it was the First World War. It was held that the veil
would be lifted between the defendant company and its majority shareholders
and directors. In short, it was held that the defendant company was an enemy
alien despite being registered in England & Wales. Thus the nationality of the
company was treated as being German. So Daimler must not make payment..
............................................................................................................. 128
AC
Dorchester Finance Company v Stebbing [1989]. The company was a money
lending-company and had three directors, Stebbing, Parsons and Hamilton. It
appears that Parsons and Hamilton had no professional qualifications, although
they were describes by one judge as /........................................................ 183
Eley’s case, Eley v Positive Life Asssurance Company [1876]. The articles
appointed E as a solicitor of the company for life. While employed in this capacity
E became a member. He was later dismissed as solicitor and brought an action
against the company for damages for breach of contract (ie, loss of earnings)
contained in the articles. Held. The action failed. There was no contract
between the company and E as solicitor under the articles. E was an outsider in
his capacity as a solicitor. The articles gave him rights only in his capacity as a
member and here he was suing to enforce rights as solicitor, not membership
rights. .................................................................................................... 140
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APPENDIX AND INDEX OF COMPANY LAW CASES
Freeman & Lockyer v Buckhurst Park Properties [1964] CA. Two directors of
a company left X, the third director, for some years to run the company’s
business of property development. X engaged some architects on the company’s
behalf although he had no express authority to do so. Later the company refused
to pay the architects on the ground that X had no authority. Held. (1) as
director X’s position did not give him usual authority to enter into commercial
contracts such as the engaging of architects; but (2) the position of a managing
director does carry such usual authority; and (3) even though X was not
managing director the company had led third parties to believe that he was.
Thus the company was estopped from denying that X had authority as if he were
managing director. The result, therefore, was that the company had to pay the
architects. .......................................................................................176, 186
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German Date Coffee, Re [1882]. The company’s objects clause stated its
business to be ”the working of a German patent for the manufacture of coffee
from dates”. The company was unable to obtain a German patent. However, it
obtained a Swedish patent from which it successfully made coffee from dates. A
minority member petitioned for the winding up of the company on the ground
that it would be just and equitable under s122(g) Insolvency Act 1986. Held.
The entire business of the company was ultra vires. Since it was not possible for
the company to carry on business within the confines of its objects clause it was
just and equitable to wind the company up. Note: at the date of the case, the
law did not allow a company to alter its objects clause. ................................ 143
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Gilford Motor Co v Horne [1933]. H entered into a covenant, as part of his
employment contract with GM, not to solicit customers from GM in the five years
after he had left. When he left he formed a company and the company itself
solicited customers. Held. The veil of incorporation was lifted and thus an
injunction would be granted against both H and his company. The company was
a sham since H was using the façade of the company to enable him to act in
breach of the covenant. ............................................................................ 128
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Greenhalgh v Arderne Cinemas [1951]. ................................................... 141
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Hickman’s case, Hickman v Kent or Romney Marsh Sheep Breeders
Association [1915]. Under the articles, differences between a company and
any of the members had to be referred to arbitration. Hickman, a shareholder
with a dispute with the company relating to his expulsion from the company,
sued the company without referring the matter to arbitration. Held. Hickman in
his capacity as a member was contractually bound by the articles. The company
was entitled to have the action stayed and the matter referred to arbitration. . 139
Hogg v Cramphorn [1967]. The directors learned of a takeover bid and that
should the bid be successful the new controllers would change the board of
directors. To defeat the takeover, they caused the company to issue 5,000 new
shares to the employees’ pension scheme, knowing that the trustees of the
pension scheme would vote against the bid. Held. The issue was an improper
exercise of directors’ powers and thus invalid. ......................................155, 182
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APPENDIX AND INDEX OF COMPANY LAW – CASES
IDC v Cooley [1972] CA. Cooley, the managing director of IDC, negotiated with
the Eastern Gas Board to acquire a building contract for his company. The Gas
Board decided not to award the contract to the company. Later the Gas Board
approached Cooley privately to offer him the contract personally. Pretending ill
health, Cooley left the company and took on the contract himself. Held.
Although IDC could not have won the contract, Cooley had breached his fiduciary
duty to his company. He therefore had to account for the profit he had received
or would receive under the contract. .......................................................... 183
Jones v Lipman [1962]. Lipman agreed to sell some land to Jones. Lipman then
changed his mind and, in order to evade specific performance of the contract,
sold the land to a company of which he was the controlling member. Held. The
company was a sham and therefore the veil would be lifted. This meant that the
order of specific performance extended not only to Lipman but also to the
company. ............................................................................................... 128
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Jubilee Cotton Mills v Lewis [1925]. The Registrar of Companies registered a
company on the 8th of January. In error he dated the certificate the 6th of
January. On the 7th of January the directors had allotted shares on behalf of the
company. Later the allottees refused to pay, arguing that the company did not
exist on that date. Held. The date on the certificate was conclusive evidence as
to the date of incorporation of the company. Therefore the allottees had to pay
for the shares. ......................................................................................... 134
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Kelner v Baxter [1866]. Three promoters of a company bought goods from K on
the company’s behalf before it was incorporated.
Once the company was
incorporated it then purported to ratify the contract with K. Held. It was not
able to do so since it did not exist at the date the contract was made. Thus K had
no claim against the company for payment. ................................................ 136
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Lee v Lee’s Air Farming Ltd [1960]. A small company was formed to run an
aerial crop spraying business. Mr Lee was the sole shareholder, managing
director and pilot for the company. He was killed in a flying accident while crop
spraying. Mrs Lee claimed payment under the Workmens Compensation Acts for
the death of her husband in his capacity as an employee. Held. Mr Lee and the
company were two separate entities. Acting in one capacity he was the employee
of the company. Since he died whilst acting in the course of his employment, Mrs
Lee was able to claim compensation. The concept of separate legal personality
enabled Mr Lee to be both owner and employee simultaneously. ................... 127
Macaura v Northern Life Assurance Company Ltd. [1925] HL. Macaura
owned a timber estate. He formed a limited company, in which he owned all the
shares, and sold the timber estate to it. Before he sold the estate to the
company it had been insured in his own name. After the sale he neglected to
transfer the insurance policy to the company. Some years later the estate was
destroyed by fire. Held. Macaura could not claim under the policy because the
assets that were damaged belonged to a different person, the company. Macaura
even as the only member had no insurable interest in the timber estate. All he
could do was to recover the premiums. ...................................................... 127
Maidstone Buildings, Re [1971] ............................................................... 195
Ooregum Mining Company v Roper [1892]. ............................................. 153
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APPENDIX AND INDEX OF COMPANY LAW CASES
Panorama Developments v Fidelis Furnishing Fabrics [1971] CA.
The
company secretary of a company hired a self-drive limousine in the name of the
company. He had no express authority to do so and, unknown to the car hire
firm, used the limousine for his own private purposes. Held. The company was
bound to pay the bill since such a contract is within the usual authority of a
person occupying the position of company secretary. ................................... 195
Pender v Lushington [1877]. The articles provided one vote for every 10 shares
held, up to a maximum of 100 votes. A member who held a large number of
shares transferred his surplus to a nominee who was to vote according to his
instructions. The chairman refused to accept the nominee’s votes. Held. The
right to vote was enforceable against the company. ..................................... 140
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Percival v Wright [1902]. The directors purchased shares from a member
without disclosing to the member that they were in negotiation to sell the
company. The sale of the company would inflate the share prices in the company
considerably. Held. The shareholder could not have the sale of his shares set
aside because directors owe no duty to individual shareholders. .................... 182
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Phonogram v Lane [1982]. A company was to be formed to manage a rock
band. Phonogram loaned the ‘company’ £6,000 for business expenses. The
promoter signed the loan document ”for and on behalf” of the company. The
company was never incorporated and Phonogram sued the promoter for the
£6,000. Held. The promoter was personally liable under s51 Companies Act
2006. The words ”for and behalf of” were not sufficient to negate personal
liability on the contract. ............................................................................ 136
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Punt v Symons [1903]. For good business reasons, the directors wished to
secure the passing of a special resolution that they knew the majority
shareholders would not pass. To ensure the passing of the resolution, they
caused the company to issue new shares to their supporters. Held. The issue
was an improper exercise of directors’ powers and thus invalid. .................... 155
AC
Rayfield v Hands [1960] HL. The articles of a private company stated ”every
member who intends to transfer shares shall inform the directors who will take
the shares equally between them at a fair value”. The directors were also obliged
by the articles to become members. The claimant member told the defendant
directors that he wanted to transfer his shares but the directors denied liability to
take and pay for them. Held. The articles created a contractual relationship
between the claimant as a member and the defendant directors as members.
The reasoning of the House of Lords was two-fold. (1) The use of the word ”will”
meant that the directors were obliged to take up the shares. (2) The article
imposed an obligation on the directors in their capacity as members. The court
took the view that the words ”the directors” meant ‘members who were also
directors’. Note: The court was able to take this view because of the other
article requiring the directors to become members. If this other article had not
been present, then arguably the case would have been decided differently – see
Beattie v E F Beattie. ............................................................................... 140
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APPENDIX AND INDEX OF COMPANY LAW – CASES
Regal (Hastings) v Gulliver [1967] HL. The directors pumped capital into a
company by buying shares so that the company could run a cinema. The venture
was successful and the directors sold their shares at a profit. Control of the
company changed hands and the new controllers caused the company to sue the
ex-directors for breach of fiduciary duty. Held. The directors were ordered to
account for the profit. The directors had made the profit through an opportunity
that came to them via their directorships. It was no defence that the company
itself was unable to fund the venture. ........................................................ 183
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Salomon v Salomon & Company Limited [1897] HL. S owned a boot and shoe
business, ie, he was a sole trader. He then formed a company and sold his
business to the company in return for shares and a loan secured on the
company’s assets. Subsequently the company became insolvent and went into
liquidation. It was argued that (a) S was personally liable for the debts of the
company, and (b) S had no right to repayment of the loan on the basis that since
he was the company he could not be a creditor of it. Held. A company is a
separate person from its shareholders. This therefore meant (1) the company
was liable for its debts, not S; and (2) he could be a creditor of it and therefore
he had a right to repayment of the loan from it. .......................................... 126
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Sidebottom v Kershaw, Leese and Company Limited [1920]. The articles
were altered to enable directors to purchase at ”a fair price the shareholding of
any member who competed with the company in its business”. A minority
shareholder who was in competition sought a declaration that the resolution was
invalid. Held. This was a bona fide alteration in the interests of the company as
a whole. This was because (1) the power of expulsion in the articles was only
exercisable for a stated reason and (2) that stated reason was a reason a
hypothetical member would agree was for the benefit of the company. .......... 142
A
Twycross v Grant [1877]. ........................................................................ 134
AC
C
Woolfson v Strathclyde Regional Council [1978] HL. Mr Woolfson owned the
premises which he leased to a company, Woolfson Ltd, of which he was the
director and controlling shareholder. Strathclyde Regional Council compulsorily
purchased the premises and refused to pay the level of compensation that is
statutorily due to an owner-occupier, arguing that there was no one person who
was both owner and occupier of the premises. Mr Woolfson argued that the veil
of incorporation between he and his company should be lifted so as to treat them
as one. Held. The veil will be lifted only where special circumstances exist
indicating the veil is a mere façade concealing the true facts. This was not such a
special circumstance since it is a common business arrangement for a major
shareholder to lease property to his company. ............................................ 128
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APPENDIX AND INDEX OF FRAUDULENT BEHAVIOUR CASES
FRAUDULENT BEHAVIOUR
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Produce Marketing Consortium Ltd (No. 2), Re [1989]. The company, after
trading successfully for nine years, built up an overdraft, had a continuing trading
loss and had an excess of liabilities over assets at least as at July 1986. Because
the directors had failed to produce timely accounts they did not recognise that
liquidation was inevitable until January 1987. They then carried on trading until
October 1987 arguing that this period of trading minimised loss to creditors while
allowing an orderly disposal, for value, of the company’s goods. Held. (1) They
would have known that liquidation was inevitable in July 1986 had the company
produced timely internal accounts and this therefore marked the beginning of the
period from which they should have been minimising losses to creditors. (2)
While trading on to dispose of assets might sometimes be justifiable, the
directors had done no more than dispose of assets and therefore had failed to
take every step to minimise losses. Accordingly, the directors were liable for
wrongful trading and were each ordered to contribute £75,000 to the assets of
the company. (The total sum equated to the net debts incurred during the
wrongful trading period). .......................................................................... 228
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R v Grantham [1985]. The two directors ordered a consignment of potatoes on a
month’s credit at a time when they knew that the potatoes would not be paid for
at the end of the month. Held. They had committed to crime of fraudulent
trading. .................................................................................................. 227
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R v Munir Patel [2011]. Munir Yakub Patel, 22, worked at Redbridge Magistrates’
Court as a court clerk. At least 53 times he requested sums totalling at least
£20,000 from persons charged with motoring offences on the basis that he would
then not put the detail of their traffic summons on the court database. He was
convicted of bribery (the specimen count being a request for £500 in August
2011). On 18th November 2011 he was sentenced to prison for 3 and 6 years to
run concurrently. (For general information on how serious a crime bribery is, you
might find it useful to read the remarks of the sentencing judge – at
http://www.judiciary.gov.uk/Resources/JCO/Documents/Judgments/munir-patelsentencing-remarks.pdf)........................................................................... 223
William C Leitch Bros, Re [1932] ............................................................. 227
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APPENDIX AND INDEX OF FRAUDULENT BEHAVIOUR CASES
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Exercises and sample
questions
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The questions that follow are a mixture of exercise questions and sample questions.
G
Sample questions are examination standard questions (both multiple choice
questions and multi-task questions). Where marks are given at the end of the
question, this indicates that the question is a sample question.
AC
C
A
Where marks are not given at the end of a question, this indicates that the question
is an exercise question.
Such exercise questions are designed to test your
understanding of a particular point of law.
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26 1
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
ENGLISH LEGAL SYSTEM
It is the duty of the courts to apply legislation. This is an aspect of the
d………… of s…………………… of P……………………….
Which of the following is NOT an example of public law?
A case brought by the Crown Prosecution Service seeking imprisonment
of an alleged criminal accused of robbery
B
A contractual claim by a civil servant against his employer, the State, for
non-payment of his salary
C
An action for judicial review of a statutory instrument
Which of the following is correct?
(2 marks)
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A
The aim of the criminal law is to regulate behaviour within society by the
threat of punishment.
B
The aim of the criminal law is to punish offenders.
C
The aim of the criminal law is to provide a means whereby injured
persons may obtain compensation.
D
The aim of the criminal law is to ensure that offenders will be rehabilitated into society
A
G
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A
C
(2 marks)
A
B
AC
Which of the following is civil proceedings?
A prosecution for murder
An action by the
misrepresentation
claimant
for
£3m
damages
for
fraudulent
C
Proceedings where the accused is tried for the offence of applying a
false trade description to goods
D
A prosecution by Her Majesty’s Revenue & Customs (HMRC) for nonpayment of tax
(1 mark)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
The standard of proof in criminal cases is
A
on the balance of probabilities
B
beyond reasonable doubt
C
beyond all reasonable doubt
(1 mark)
The standard of proof in civil cases is
A
on the balance of probabilities
B
beyond reasonable doubt
C
beyond all reasonable doubt
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(1 mark)
B
Supreme Court
C
High Court
D
Crown Court
ba
House of Lords
(1 mark)
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A
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Which of the following is the highest court in England and Wales?
Which of the following courts has civil jurisdiction only?
Supreme Court
B
Magistrates Court
C
Crown Court
C
AC
D
A
A
County Court
(1 mark)
Clive lost an action in the County Court for breach of contract and now
wishes to appeal.
To which court will his appeal lie?
A
Divisional Court of Queen’s Bench
B
Court of Appeal
C
Crown Court
D
High Court of Justice
(1 mark)
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26 3
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
All criminal cases commence in
A
the County Court
B
the Crown Court
C
the Court of Appeal
D
the Magistrates Court
(1 mark)
Which of the following courts has criminal jurisdiction only?
Supreme Court
B
Magistrates Court
C
Crown Court
D
County Court
ox
A
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(1 mark)
Nivi is charged with an offence which is triable on indictment only.
ba
In which court will her trial take place?
Divisional Court of Queen’s Bench
B
Magistrates Court
C
Crown Court
D
County Court
(1 mark)
C
A
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A
AC
Xavier has been convicted by a Magistrates Court and wishes to appeal on a
point of law only.
To which court will his appeal lie?
A
Divisional Court of Queen’s Bench
B
Court of Appeal
C
Crown Court
D
County Court
(2 marks)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Case stated appeals from the Magistrates Courts lie to the
A
Crown Court
B
County Court
C
High Court
D
Court of Appeal
(2 marks)
Which of the following is correct?
An Act of Parliament can overrule both common law and equity
2
In the event of a conflict between equity and the common law, the
common law prevails
A
1 only
B
2 only
C
Neither 1 nor 2
D
Both 1 and 2
(2 marks)
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1
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Which of the following is NOT correct in relation to the doctrine of
sovereignty of Parliament?
A later Parliament can always repeal an Act made by an earlier
Parliament
B
The courts may not challenge subordinate legislation
C
The courts must apply an Act of Parliament even though it may conflict
with human rights
AC
C
A
G
A
(2 marks)
Which of the following does NOT make delegated legislation?
A
The UK Parliament sitting at Westminster
B
Local councils
C
The Privy Council
D
Ministers in charge of Government departments
(1 mark)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
A local council has made it a criminal offence to drop cigarette butts in the
street.
What is this an example of?
A
An Act of Parliament
B
A bye-law
C
An Order-in-Council
D
A Statutory Instrument
(1 mark)
A Bill goes through a number of stages in order to become an Act of
Parliament.
At which stage does it become an Act of Parliament?
At the date of the third reading
B
At the date of Royal Assent
C
At the date of Proclamation by the Privy Council
D
At the date of Proclamation by the Prime Minister
(1 mark)
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A
G
The doctrine of judicial precedent is best described as
that, according to the doctrine of sovereignty of Parliament, legislation
supersedes case law
B
the system, adopted by the judges, of following earlier case law
decisions
C
the order in which the Law Lords speak in the Upper House
C
AC
D
A
A
the fact that the Lord Chancellor is head of the UK legal system
(1 mark)
Which part of a case decided by the courts is binding on lower courts
dealing with the same material facts?
A
Obiter dicta
B
The decision of the judge
C
The ratio decidendi
D
None of the above
(1 mark)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Zed placed a flick knife in his shop window priced at £10.99. He is
prosecuted for offering for sale an offensive weapon. In the course of his
judgement a judge made the following statements:
1
“I find Zed not guilty”
2
“I find that goods on display in a shop window is an invitation to treat,
not an offer”
3
“I find that the Crown Prosecution Service has proved the facts beyond
reasonable doubt”
Which is ratio decidendi?
1 only
B
2 only
C
3 only
D
1 and 2 only
(1 mark)
lB
ox
A
ba
Which of the following statements relating to the doctrine of judicial
precedent is correct?
The Supreme Court is bound by its own previous ratio decidendi
B
The Supreme Court is bound by its own previous obiter dicta
C
All courts in England and Wales in are bound by ratio decicendi of the
European Court of Human Rights
D
The High Court is bound by ratio decidendi of the Court of Appeal
(1 mark)
C
A
G
lo
A
1
2
AC
A judge may distinguish an earlier precedent if he finds that
the earlier precedent was made per incuriam
the earlier precedent was made over 100 years ago
3
the earlier precedent was of a higher court to his
4
the earlier precedent had different material facts
Which TWO statements above are correct?
A
1 and 2 only
B
2 and 3 only
C
2 and 4 only
D
1 and 4 only
(2 marks)
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26 7
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which rule of statutory interpretation states “take the meaning that
gives the least absurd result”?
A
The literal rule
B
The golden rule
C
The mischief rule
D
The eiusdem generis rule
(1 mark)
The literal rule
B
The golden rule
C
The mischief rule
D
The eiusdem generis rule
(1 mark)
ba
lB
A
ox
Which of the following takes a purposive approach to statutory
interpretation?
Which of the following is NOT an extrinsic aid to statutory
interpretation?
Reports of the Law Commission
B
Hansard
C
The Interpretation Acts
D
The preamble to the Act
(1 mark)
AC
C
A
G
lo
A
Which of the following is an intrinsic aid to statutory interpretation?
A
Reports of the Law Commission
B
Hansard
C
The Interpretation Acts
D
The long title to the Act
(1 mark)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
In relation to the interpretation of statutes the courts use presumptions.
Which of the following is NOT correct?
A
A presumption against legislation extending beyond the territorial
jurisdiction of the UK
B
A presumption that legislation does not have retrospective effect
C
A presumption that legislation binds the Crown
D
A presumption against the imposition of criminal liability without intent
AC
C
A
G
lo
ba
lB
ox
(1 mark)
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26 9
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
CONTRACT
Advo puts the following advertisement in a newspaper.
“For sale. Laptop and laser printer. Good condition. £100. Phone Advo or
text on … ”
What is its legal effect?
A
The statement is an offer for sale
B
The statement is a “mere puff or boast”
C
The statement has no legal effect
D
The statement is an invitation to treat
ox
(1 mark)
ba
Which of the following is correct?
lB
Ali displays a carpet in his shop window. The price tag states “For sale at
£100”. Baba sees the window display, goes into the shop, and says to Ali
that he will buy the carpet for £100. Ali says it has been wrongly priced and
refuses to sell it.
A contract has been made between Ali and Baba
B
No contract has been made because Baba makes an offer to Ali which Ali
has rejected
C
No contract has been made because Ali makes a counter-offer which
Baba has rejected
D
No contract has been made because there is no offer
(2 marks)
AC
C
A
G
lo
A
Bigshop plc puts a notice in the window of its store reading
“iPud. Latest model. One only will be definitely be sold at the give-away
price of €10 to the first person to come into the store on 1st of next month
with a €10 note”.
Is the notice in the window an offer or an invitation to treat?
A
an offer
B
an invitation to treat
C
both an offer and an invitation to treat
D
neither an offer nor an invitation to treat
(1 mark)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Exercise based on Harvey v Facey
H telegrammed F: “Will you sell Bumper Hall Pen?
price”.
Telegraph lowest cash
F telegrammed in reply: “Lowest cash price for Bumper Hall Pen £900”.
H then telegrammed: “We accept for the £900 asked by you”.
Is F contractually bound to sell BHP to H for £900?
YES/NO
Exercise based on Routledge v Grant
Offeror offered to buy horse, stated he would keep the offer open for 6
weeks. Before the 6 weeks expired, and at a time when the offeree had not
accepted, he withdrew the offer.
YES/NO
ox
Can he do so?
lB
On Monday X offers to sell his car to Y for £5,000.
Y says he would like time to think about it and offers X £60 to keep the offer
open until Thursday. X agrees and takes the £60.
ba
On Tuesday X decides that he doesn’t want to sell his car after all and, in
passing, mentions this to you.
G
lo
On Wednesday you happen to meet Y and tell him that X’s car is no longer
for sale. Y immediately text messages X with the words: “I’m accepting
your offer”.
Can X revoke his offer before Thursday?
2
When was the revocation effective?
3
Does Y have the contractual right to buy the car?
C
YES/NO
AC
4
YES/NO
A
1
Any further advice to Y?
Exercise based on Errington v Errington
F offered to transfer a house to S if S paid all the instalments on the
mortgage. After S began to pay the instalments, F revoked his offer.
Can he do so?
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YES/NO
27 1
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
X says to Y: “I offer to sell you this car for £6,000.”
Y replies: “What about £5,500?”
X says: “No, I’m not selling at that price.”
Y says: “OK, I’ll buy for £6,000.”
X says: “Sorry, I’ve changed my mind and I don’t want to sell after all.”
Is X contractually bound to sell his car to Y?
YES/NO
Exercise based on Felthouse v Bindley
An uncle wrote to his nephew offering to buy the nephew’s horse and stating
“if I hear no more about the matter I shall consider the horse mine”.
The nephew, who did not wish to sell the horse to his uncle, never replied.
YES/NO
ox
Is the uncle contractually entitled to the horse?
ba
lB
ABC plc sends some goods to you with an invoice and a letter stating “it is
assumed you agree to take these goods unless we hear to the contrary
within 14 days”. You have had no previous communications with ABC, you
do not want the goods and you do not reply.
YES/NO
G
lo
Is there a contract between you and ABC?
Exercise based on Entores v Miles Far Eastern
A
An offer was telexed from London to Amsterdam.
C
The acceptance was telexed from Amsterdam to London.
A
B
AC
Where was the contract made?
Amsterdam
London
Exercise based on Byrne v Leon Van Tienhoven
1 Oct:
offer posted by L
8 Oct:
revocation posted by L
11 Oct am: offer received by B
11 Oct pm: acceptance posted by B
15 Oct:
revocation received by B.
20 Oct:
acceptance received by L.
Is there a contract between B and L?
27 2
YES/NO
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Hilary advertised a printing press in a specialist trade journal for £15,000.
Eleanor wrote to Hilary offering to buy it for £10,000. Hilary replied by
return of post saying she would accept £13,000. When she heard nothing
further from Eleanor, Hilary wrote again saying she would accept £10,000.
Eleanor says she no longer wants to buy the printing press.
Hilary wrote to Amy offering for sale an office computer for £1,000. The
morning that she received the letter Amy wrote to Hilary agreeing to buy at
the asking price.
After she had posted the letter, but before it was
delivered, Amy changed her mind and sent Hilary a fax asking her to ignore
the letter when it arrived.
Required:
Advise Hilary as to whether binding contracts exist between herself
and:
Eleanor
(4 marks)
(b)
Amy
(2 marks)
(6 marks)
lB
ox
(a)
ACCA J97 (part)Which of the following is NOT correct?
Consideration must be valuable
B
Consideration must be sufficient
C
Consideration must be adequate
D
Consideration must not be past
(1 mark)
A
G
lo
ba
A
2
3
The performance of an existing duty under the general law
AC
1
C
Which of the following examples of performance amounts to good
consideration?
The performance of an existing contract in return for a promise by a
third party
The performance of an act, followed by a promise to pay for that act
A
1 only
B
2 only
C
1 and 2 only
D
2 only
(2 marks)
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27 3
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
In which of the following situations will the consideration most
probably be regarded as being no consideration?
A
An offer of a reward is made by X, and Y, later satisfying the conditions
of the reward, claims it
B
X requests that Y helps him negotiate a partnership agreement and Y
succeeds in so doing, with the consequence that X agrees to pay Y £200
for his help
C
X helps his friend and neighbour Y to dig over his garden. A week later
Y promises X £20 for his efforts
D
X agrees to deliver some raw materials which Y, a business associate
asked him to do; no price is agreed for the work at the time but
afterwards X puts in to Y a bill for £20
ox
(2 marks)
Which of the following statements is correct?
If a creditor agrees to accept less than the full amount due, the debt is
discharged at common law
B
At common law, a creditor who has agreed to accept less than the full
amount due, may go back on his word and recover the balance
C
Payment of less than the full amount due by a third party cannot
discharge the whole debt
D
Payment of less than the amount due cannot discharge the whole debt,
even if made early at the request of the creditor
(1 mark)
C
A
G
lo
ba
lB
A
AC
Raymond runs a business specialising in personal taxation advice. He
entered into a contract with Samantha, a struggling artist, under which he
agreed to prepare some draft business accounts for her, covering the last
three years, for the sum of £800. Raymond completed the work, but
Samantha told him she could only afford to pay £200 for the work.
Raymond then accepted the £200 from Samantha, which was stated to be in
full and final settlement of the debt.
Shortly afterwards Samantha’s paintings began to realise very high prices
and Raymond has just read in a newspaper that her latest work has been
sold for £20,000. He now wishes to claim the balance of £600 from
Samantha and approaches you for advice.
Required:
Advise Raymond.
ACCA J96 (adapted)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Exercise based on Balfour v Balfour
Prior to a long business trip abroad a husband agreed to pay his wife £30
per month to support herself & family while he was away.
Was there intention to create legal relations?
YES/NO
Exercise based on Merritt v Merritt
A husband who had separated from his wife agreed to transfer the
matrimonial home to her if she paid the mortgage.
Was there intention to create legal relations?
YES/NO
Exercise based on Simpkins v Pays
lB
ox
Every week a grandmother, her granddaughter, and the lodger specifically
sat down together to enter a competition. On the form, which was in the
grandmother’s name, each made one entry. All 3 shared the entry fees &
postage. They agreed to share any prize.
One week the granddaughter’s entry won.
lo
ba
Was there intention to create legal relations such that the lodger
had a contractual claim to a share of the prize?
YES/NO
G
Exercise based on Jones v Vernon’s Pools
C
A
The defendants denied having received a football coupon sent to them by
the claimant. The coupon stated “any agreement entered into is binding in
honour only”.
YES/NO
AC
Is there a contract between the parties?
In contract law, which of the following statements describes an
offer?
A
A statement of possible terms issued in writing by an offeror to an
offeree
B
A definite and unequivocal statement of willingness to be bound by
specified terms
C
A definite and unequivocal statement of willingness to enter in to
negotiations
(1 mark)
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27 5
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Axa Ltd placed the following advertisement on the internet:
“We are able to offer for sale of number of portable colour television sets at
a specially reduced price of £5.90. Order now while stocks last.”
The advertisement contained a mistake in that the television sets should
have been priced at £59.00. Bee Ltd immediately placed an order for 100
television sets.
Which of the following statements is correct?
Bee Ltd has accepted an offer and is contractually entitled to the 100
television sets
B
Axa Ltd can refuse to supply Bee Ltd as the advertisement is not an
offer, but an invitation to treat
C
Axa Ltd can only refuse to sell the television sets to Bee Ltd if it has sold
all its stock
D
As Bee Ltd has not yet paid for the television sets, it has no contractual
right to them
lB
ox
A
events,
occurring
before
ba
Which of the following actions or
acceptance, would terminate an offer?
(2 marks)
The death of the offeree
B
A request from the offeror for additional information
C
The offeree posting a letter of revocation
(1 mark)
A
G
lo
A
B
C
When the letter of acceptance is posted
AC
A
C
Under the postal rule, when is acceptance effective?
When the letter of acceptance is delivered
When the letter of acceptance is read
(1 mark)
Which of the following statements regarding the adequacy and
sufficiency of consideration is correct?
A
Consideration does not need to have a value to be sufficient
B
Consideration is sufficient if it has some monetary value
C
Consideration does not need to be sufficient but must be adequate
(1 mark)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following statements regarding the intention to create
legal relations is NOT correct?
A
The presumption in domestic agreements is the parties do not intend to
be legally bound
B
The presumption in social agreements is the parties do not intend to be
legally bound
C
The presumption in business agreements is the parties intend to be
legally bound
D
The presumptions regarding the intention of parties to be legally bound
may not be rebutted
AC
C
A
G
lo
ba
lB
ox
(2 marks)
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27 7
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Andy sells prestige used cars. In the window of his office showroom Andy
displays a whiteboard. On January 20 Andy wrote on this board:
●
2013 Ferrari, just arrived, mint condition, £50,000
●
2013 Porsche, just arrived, like new, £40,000
On January 21 Hamza offered Andy £40,000 for the Ferrari and Steve
offered Andy £30,000 for the Porsche.
Andy told both Hamza and Steve that he would consider their offers and get
back to them. On January 22 Andy phoned Hamza and said he would accept
£45,000 for the Ferrari. On the same day Andy phoned Steve and said he
would accept £35,000 for the Porsche.
ox
Steve and Hamza both requested time to think about their decision. Andy
told Hamza that for payment of £100 he would hold the offer to Hamza
open, and not accept an offer from anyone else, until 12 noon on January
26. Andy reached exactly the same agreement with Steve in relation to
Steve’s offer for the Porsche.
On January 25 Hamza posted a letter to Andy agreeing to buy the Ferrari for
£45,000. Hamza’s letter arrived at 9.30 am on January 26.
lo
ba
lB
At 11.45 am on January 26 Steve phoned Andy. Andy didn’t answer, so
Steve left a voicemail message agreeing to buy the Porsche for £35,000. At
11.50am, concerned that Andy may not receive his voicemail message,
Steve sent a text (SMS) message to Andy stating he would buy the Porsche
for £35,000.
G
Required:
State whether the notice on Andy’s whiteboard placed in the
window of his office was an offer or an invitation to treat.
(2 marks)
(b)
State whether a contract for the sale of the Ferrari exists.
(2 marks)
AC
C
A
(a)
(c)
27 8
State whether a contract for the sale of the Porsche exists.
(2 marks)
(6 marks)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Sanjay, a gardener, agrees to perform gardening work for his client Susan.
They agree a price of £200, to be paid in full on completion of the work.
On completion of the work, Susan advises Sanjay that she had some
unforeseen expenses and as a result can only pay him £150.
Susan tells Sanjay she will pay him £150 immediately if he agrees to accept
£150 as full settlement. Sanjay reluctantly agrees and takes the £150.
A month later Sanjay advises Susan he has changed his mind. He now
requires payment in full of the £200 originally agreed and therefore Susan
owes him £50.
Required:
State the legal rule regarding payment of a smaller sum in
settlement of a debt and whether Sanjay has the right to
pursue Susan for the remaining £50.
(2 marks)
(b)
Identify whether the position would be different if the original
agreement was that Sanjay would be paid a month following
completion of the work.
(2 marks)
(c)
Identify whether the position would be different if the offer of
£150 in full settlement had been made by Susan’s housemate
Sandra, rather than by Susan.
(2 marks)
(6 marks)
lo
ba
lB
ox
(a)
A
G
Last year Carol decided to open a gallery selling her artwork.
She
approached her sister Gemma, and her friend Molly, as she knew that they
were both interested in purchasing paintings for their business premises.
AC
C
Gemma ordered two pictures for her café at a total cost of £800. Molly
ordered 5 paintings for her new office, which she wanted to look impressive
when welcoming new clients, at a total cost of £1,000.
Several months passed while Carol worked on the paintings.
The final picture for Molly took slightly longer than expected, it was
eventually delivered one month later than the initial date agreed. This was
partly due to Carol being busier than expected, as Carol’s gallery became
well-known and financially successful very quickly.
Molly and Gemma, although delighted with their pictures, feel Carol ‘doesn’t
really need the money’ and are now reluctant to pay for the paintings.
Required:
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27 9
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Task 1
Which one of the following statements regarding the agreement
between Carol and Gemma is correct?
A
This is a family agreement and therefore outside the scope of the legal
system
B
Gemma can avoid the contract on the grounds that Carol took
advantage of their family relationship and charged excessive
consideration
C
This is a business agreement and therefore the presumption is there is
an intention to create legal relations
D
If Gemma returns the paintings she will be under no obligation to pay
for them
(2 marks)
ox
Task 2
lB
Which one of the following statements regarding the agreement
between Carol and Molly is correct?
This is a social agreement and therefore outside the scope of the legal
system
B
Molly can avoid the contract based on the late delivery of the final
painting
C
This is a business agreement and therefore the presumption is there is
an intention to create legal relations
D
If Molly returns the paintings she will be under no obligation to pay for
them
(2 marks)
C
Task 3
A
G
lo
ba
A
AC
If Carol’s agreement with Gemma included a term stating there was
no intention to create legal relations and the agreement was
‘binding in honour only’ would Carol be able to enforce the
agreement with Gemma through the courts?
A
No, because even without the term this is a family agreement and
therefore outside the scope of the legal system
B
Yes, because the agreement is a business agreement and
presumption to create legal relations cannot be rebutted
C
Yes, because a valid contract exists following offer, acceptance and
agreement on consideration
D
No, because the term would rebut the presumption of the intention to be
legally bound
(2 marks)
the
(6 marks)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Grace, an accountant, works as a sole practitioner. She does not employ any
staff. Grace has recently won a lucrative contract from Expansion Ltd to
undertake all the company’s payroll work. The initial period is for six months,
renewable thereafter on a 12 monthly basis as long as the work done by
Grace is satisfactory.
In order to undertake the work for Expansion Ltd, Grace hires a powerful
desktop computer together with dedicated software from Office Supplies Ltd.
Grace signed a written hire contract with Office Supplies Ltd but she did not
read it. It contained a clause stating that ‘Office Supplies Ltd are not liable for
any financial losses or other losses, however caused, occasioned by using
hardware or software products supplied by the company’.
ox
Neither the computer nor the software operated correctly because of negligent
design and manufacture by the company and as a result Grace failed to make
proper National Insurance deductions for the employees of Expansion Ltd.
Expansion Ltd consequently refused to renew the contract with Grace and she
has suffered considerable loss in her profits as a result. In addition, because
the desktop computer had been negligently manufactured by Office Supplies
Ltd, Grace suffered damage to her eyes as a consequence of using the
machine.
lB
Office Supplies Ltd admits that it has been negligent but denies any liability to
Grace on the basis of the exclusion clause in the contract.
ba
Required:
Advise Grace in the law of contract
whether the exemption clause is incorporated into her contract
with Office Ltd.
(1 mark)
(a)
in the light of the Unfair Contract Terms Act 1977, whether or
not she is likely to be successful in her claim against Office
Supplies for her loss of profits.
(4 marks)
(b)
in the light of the Unfair Contract Terms Act 1977, whether or
not she can claim against Office Supplies for the damage to her
eyes.
(1 mark)
AC
C
A
G
lo
(a)
(6 marks)
Adapted from ACCA D94
In contract law, what are ‘express terms’?
A
Terms specifically agreed between the parties
B
Terms included in a contract based on previous dealings between the
parties
C
Terms which seek to limit a party’s liability
D
Terms not stated but introduced by implication
(2 marks)
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28 1
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following statements regarding express terms is
correct?
A
To be enforceable, express terms must be written
B
A contract may include express terms or implied terms, but not both
C
To be enforceable, express terms must be clear and precise
(1 mark)
What is a representation?
A statement made subsequent to contract formation
B
A statement made before contract formation that induces formation
C
A contract term which cannot be defined as either a condition or a
warranty
(1 mark)
lB
ox
A
In contract law, which of the following statements describes a
warranty?
A term vital to the contract that if breached entitles the injured party to
treat the contract as discharged
B
A statement made before contract formation that induces formation
C
A term subsidiary to the main purpose of the contract that if breached
entitles the injured party to claim damages
(1 mark)
C
A
G
lo
ba
A
A
B
C
AC
Which of the following statements describes the contra proferentem
rule?
An exclusion clause that attempts to exclude all liability is void
Any ambiguity in an exclusion clause will be interpreted against the
party seeking to rely on the clause
Exclusion clauses must be incorporated into the contract by signature
(1 mark)
28 2
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which one of the following statements is NOT a method used to
incorporate an exclusion clause in to a contract?
A
By signature
B
By statute
C
Through previous dealings
D
By notice
(2 marks)
Which of the following statements concerning the Unfair Terms in
Consumer Contracts Regulations 1999 is correct?
The regulations aim to protect businesses involved in consumer
contracts
B
The regulations only apply to terms that have been individually
negotiated
C
The regulations allow a natural person who is acting in the course of
their business to be classed as a consumer
D
The regulations aim to prevent businesses imposing unfair terms on
consumers
(2 marks)
AC
C
A
G
lo
ba
lB
ox
A
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28 3
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Live The Dream Ltd provides a limousine and driver hire service. All of the
company’s clients sign the company’s standard contract. The contract
includes a clause, within the standard terms and conditions, that states:
‘Live The Dream Ltd accepts no liability whatsoever for any property damage
or personal injury incurred during the hire period’.
Leona hired a limousine and driver for her 40th birthday night out. She
signed the standard contract which included the standard terms and
conditions and paid £500, the full cost of the hire, in advance.
When Leona was getting in to the limousine at the start of her night out, the
vehicle was nudged from behind by a passing car. As a result, the limousine
rolled forward and ran over Leona’s foot.
Leona’s foot was badly bruised and Leona was in too much pain to continue
with her birthday night out. The other vehicle involved drove off, and all
subsequent attempts to identify the vehicle and the driver failed.
ox
Live The Dream Ltd has used the exclusion clause to justify not refunding
any of the £500 Leona paid.
lB
Required:
Task 1
ba
Has the exclusion clause been incorporated in to the contract?
Yes, Leona has signed the contract, which includes the exclusion clause,
so it is incorporated
B
Possibly, but only if the clause was highlighted and explained to Leona
before she signed
C
Possibly, but only if Leona received a copy of the signed contract after
signing
D
No, exclusion clauses included within the standard terms and conditions
cannot be incorporated in to contracts involving consumers
(2 marks)
AC
C
A
G
lo
A
Task 2
Which of the following statements regarding the impact of The
Unfair Contract Terms Act 1977 on this scenario is correct?
28 4
A
Under the Act, the exclusion clause is void because it was included
within the standard terms and conditions
B
The Act would not apply as the contract is for provision of a service
C
Under the Act, the exclusion clause will be void unless found to be
reasonable
D
Under the Act, the wording of the exclusion clause is too general and is
therefore void
(2 marks)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Task 3
Which of the following statements regarding the impact of The
Unfair Terms in Consumer Contracts Regulations 1999 on this
scenario is correct?
A
The Regulations do not apply as the contract is for provision of a service
B
The Regulations do not protect Leona as her signature signifies
acceptance of the term, regardless of whether it is unfair
C
The Regulations do not apply to the exclusion clause as they only apply
to contract terms that have been individually negotiated
D
Under the Regulations, Leona could seek to have the exclusion clause
classified as unfair and not binding on her
(2 marks)
ox
(6 marks)
ba
Which of the following is correct?
lB
Ash Ltd contracted to re-surface NPC plc's car park for £60,000. Ash Ltd
completed two-thirds of the re-surfacing, stopped work, went into
liquidation, and failed to complete the re-surfacing.
The contract between Ash Ltd and NPC plc is frustrated
B
Ash Ltd has substantially performed the contract and is entitled to a
reasonable sum in respect of the work done
C
Ash Ltd has completed two-thirds of the work and is, therefore, entitled
to £40,000
D
Ash Ltd is entitled to nothing
(2 marks)
AC
C
A
G
lo
A
In relation to frustration, which of the following is NOT correct?
A
A contract is frustrated if it becomes more expensive to perform
B
If a contract is frustrated it is discharged and neither party is in breach
of contract
C
Self-induced frustration is no frustration
D
A contract is frustrated if it becomes impossible to perform through no
fault of either party
(1 mark)
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28 5
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following is correct?
A
A contract is frustrated when an event happens after it has been entered
into which renders the contract more difficult to perform
B
A contract is frustrated when a party expressly agrees to provide a
service and then discovers that this will be far more expensive to
produce than he thought at the time of the contract
C
A contract is frustrated when something happens after it has been
entered into which renders the contract impossible to perform
D
A contract is frustrated if it is impossible to perform at the time it is
made
(2 marks)
ox
Baf Ltd is under contract to manufacture computer chips for Affle plc by a
set date.
lB
Which of the following is a valid legal reason for Baf Ltd failing to
complete the contract on time?
Baf Ltd’s factory was flooded due to a burst local authority water main
B
Baf Ltd had taken on too many orders and had to give priority to its
regular customers
C
Baf Ltd’s employees went out on strike
D
A number of Baf Ltd’s key workers were absent through illness
(1 mark)
Original by me based on CIMA FBLW N03
A
G
lo
ba
A
C
Exercise based on Hochster v De La Tour
●
28 6
In April DLT employed H as courier to begin June.
AC
●
In May DLT informed H his services in June would not be required.
(a)
Is the breach by DLT actual or anticipatory?
(b)
What are H’s TWO options?
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
In February B contracted to add 10 rooms to H’s hotel and to do this by the
end of May in time for the busy summer season when such rooms would
normally be let at a profit of £100 per week each. The contract provided
that B would pay “a penalty of £1,000” for each week he was late in
completing the work.
B completed the work 3 weeks late.
In fact, due to shortage of accommodation in the town, H had managed to
pre-let the 10 rooms for those three weeks for a rate higher than normal.
Due to B’s late completion he loses profits totalling £5,000 on these rooms.
H is now claiming damages of £5,000.
B is arguing that he is only liable for the contractually agreed sum of £3,000.
Advise.
ox
Exercise based on Victoria Laundry v Newman Industries
NI contracted to install a boiler in VL’s laundry by a set date.
lB
The installation was 5 months late.
Can VL claim damages for:
ba
After the making of the contract with NI, VL was unexpectedly offered a
‘once-in-a-lifetime’ cleaning contract by the government.
loss of profit on its normal business for the 5-month period of
reduced capacity?
YES/NO
(b)
loss of the specially lucrative Government contract that it was
unable to take because of the reduced capacity?
YES/NO
A
G
lo
(a)
AC
C
X is employed under a 4-year service contract at a salary of £10,000 per
annum.
He is wrongfully dismissed at the end of the first year. Six months later he
manages to get a new job at £8,000 per annum.
Calculate X’s damages assuming that his effective rate of taxation is
estimated at 20%.
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28 7
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
On Monday Seller agreed to sell his car to Buyer for £10,000.
agreed delivery and payment for the following Thursday.
They also
On Thursday Buyer arrives at Seller's premises with the price. Seller tells
Buyer that he cannot have the car because he (Seller) sold and delivered it
earlier in the day to Mug for £10,500 even though such cars are freely
available on the open market for £9,800.
Which of the following is correct?
Buyer is entitled to £500 damages for breach of contract
B
Buyer is entitled to nominal damages for breach of contract
C
Buyer is not entitled to damages for breach of contract because he has
suffered no loss
D
Buyer is not entitled to damages for breach of contract because he has
not provided consideration
(2 marks)
lB
ox
A
lo
ba
Andrew is an accountant. He agrees with George, a garage proprietor, that
he will assist George with his annual tax return if George will service his car
for him on the Monday. Right at the beginning of the negotiations Andrew
told George that he must have the car for the following Tuesday since he
needed it to go to an important meeting with a client to pitch for a valuable
deal.
A
G
Andrew assists George, but because the service was not done correctly the
car breaks down when Andrew is on the way to the important meeting.
Andrew is very late for this meeting and as a result the client switches his
work, worth some £25,000 per annum, to another accountant. In addition
Andrew incurs £500 costs putting right the defective service.
AC
Required:
C
Andrew now wishes to sue George for damages for breach of contract.
Task 1
Is Andrew’s claim against George for putting right the defective
service?
A
a normal loss
B
an abnormal loss
C
neither a normal nor an abnormal loss
D
both a normal and an abnormal loss
(2 marks)
28 8
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Task 2
Is Andrew’s claim against George for the loss of the client?
A
a normal loss
B
an abnormal loss
C
neither a normal nor an abnormal loss
D
both a normal and an abnormal loss
(2 marks)
Task 3
B
£25,000 in damages
C
£30,000 in damages
D
Nominal damages only
lB
£500 in damages
(2 marks)
(6 marks)
ba
A
ox
Which of the following is correct in relation to the damages that
Andrew will be able to recover from George? (Ignore the possible
implications of tax and mitigation).
G
lo
The Court will exercise its discretion to order specific performance
according to the following guidelines:
only where damages would be an
remedy.
2.
an
order
A
1.
will
not
be
made
................................
where
it
would
cause
undue
C
.............……........ to a defendant.
................................ enforceable.
the contract must be
4.
an order will not be made where it would require the constant
AC
3.
........................…....... of the court.
............................”.
5.
“He who comes to Equity must come with
6.
“D..................... defeats the Equities”.
P made a contract in writing to sell his house to Q. P is now refusing
to complete.
Q is advised that an order of specific performance requiring P to transfer title
is
very
likely
to
be
ordered
because
damages
...............................................
.
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28 9
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
X made a contract of employment to work for Z.
(a)
X is now refusing to start work.
Will Z obtain an order for specific performance?
(b)
YES/NO
Z is now refusing to employ X.
Will X obtain an order for specific performance?
YES/NO
Trucker contracted with Inward plc to carry goods by road to Inward plc for
£5,000. Trucker performed the contract but the amount due remains
outstanding.
Trucker may
recover damages for breach of contract subject to its obligation to take
reasonable steps to mitigate its loss
B
apply for an order of specific performance to force Inward plc to pay
C
sue for the price without any obligation to mitigate
D
take back the goods from Inward plc if it still has them
(2 marks)
lo
ba
lB
ox
A
G
Which of the following statements is NOT correct?
An order for injunction will not be granted where damages provide an
adequate remedy
B
A decree of specific performance will not be granted where damages
provide an adequate remedy
C
An order for injunction will not be granted where the contract is for
personal services
C
AC
D
A
A
A decree of specific performance will not be granted where the contract
is for personal services
(1 mark)
29 0
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following contracts might be specifically enforceable?
A
An accountant has contracted to purchase a number of reams of copier
paper for his practice but the seller now refuses to proceed with the
contract
B
Scot has contracted to buy a new scooter but he is now refusing to
honour the contract
C
Letty has contracted to lease her flat to Ian but has changed her mind
and no longer wishes to let it
D
Rowley has contracted to write a book for Publisher, but Rowley is now
refusing to write it as he has won the lottery and doesn't now need the
money
(2 marks)
ox
Example based on Dunlop Pneumatic Tyre v Selfridge [1915]
ba
lB
A, a manufacturer, sold a consignment of bolts to B, a wholesaler, under a
contract which required B (i) to resell them in their original 5 bolt bubblewrapped packs and (ii) to impose the same contractual obligation on any
sub-buyer. B complies with both his contractual obligations but C, a subbuyer, breaks open the packs and sells the bolts singly.
YES/NO
lo
Can A sue C for breach of contract?
A
G
F bought a portable air-conditioning unit from S Ltd. He gave it to his
daughter, D. When she first turned it on it blew up and she was badly
injured.
Can D sue S Ltd for breach of contract and thereby recover
damages for her injuries?
YES/NO
2
Can F sue S Ltd for breach of contract and thereby recover
damages for his daughter’s injuries?
YES/NO
AC
C
1
At what point in time does anticipatory breach of a contract occur?
A
At the time performance is due
B
After performance is due
C
Before performance is due
(1 mark)
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29 1
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following statements in relation to damages awarded
for breach of contract NOT correct?
A
In general, damages are payable to compensate for mental distress
B
An onerous liquidated damages clause will be upheld, if the figure was
commercially justifiable
C
An innocent party is required to take reasonable steps to mitigate their
losses
D
Damages are payable to compensate for the loss of an opportunity
(2 marks)
In contract law, which of the following statements correctly
describes the contents of a liquidated damages clause?
A genuine estimate of the probable loss which may be incurred by the
innocent party if the contract is breached
B
A specific sum payable in the event of a breach of contract to penalise
the defaulting party for their breach
C
A sum payable by the defaulting party based on the profits lost by the
innocent party
D
A sum payable by the defaulting party based on the expenditure
incurred by the innocent party
(2 marks)
G
lo
ba
lB
ox
A
B
C
D
C
An amount intended to put the claimant into the position they would
have been in had the contract had not been made
AC
A
A
Which of the following statements describes damages assessed on
the basis of reliance loss?
An amount based on the profits lost by the innocent party due to the
breach
An amount based on the value of an opportunity lost by the innocent
party due to the breach
An amount based on the expenditure incurred by the innocent party
that, as a result of the breach, has been wasted
(2 marks)
29 2
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
In which of the following circumstances is an award of specific
performance most common?
A
Following breach of an employment contract
B
Following breach of a contract for personal services
C
Following breach of a contract for the sale of land
(1 mark)
Which of the following is NOT an example of an equitable remedy for
breach of contract?
Injunction
B
Damages
C
Specific performance
(1 mark)
lB
ox
A
Which of the following statements is NOT a basic principle of the
doctrine of privity?
A contract creates rights and obligations only between the parties to it.
B
A person who is not party to a contract cannot sue or be sued on it
C
A personal representative of a party to a contract can sue on a contract
even though they are not party to it
D
A contract cannot impose obligations on, or confer rights to, a person
who is not party to it
(2 marks)
AC
C
A
G
lo
ba
A
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29 3
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Tick Tock Ltd manufactures watches. Deep Dive Ltd approached Tick Tock
and told them they were seeking to purchase ten watches for deep sea
scuba diving. Deep Dive asked Tick Tock whether the TT Dive watch they
produced was suitable for use at a depth of 50 metres. Tick Tock confirmed
it was. Tick Tock advised Deep Dive it was not permitted to sell TT Dive
watches direct to them, but put them in touch with a local retailer, The
Watch Shop Ltd.
Deep Dive purchased ten TT Dive watches from The Watch Shop for a total
cost of £2,000.
When Deep Dive used the watches at a depth of 50 metres the watches
failed, letting water in which damaged the mechanism and rendered the
watches useless.
Required:
Explain the doctrine of privity of contract.
(2 marks)
(b)
Explain the ‘collateral contract’ exception to the privity rule.
(2 marks)
(c)
Identify whether Deep Dive Ltd can take action against Tick
Tock Ltd.
(2 marks)
(6 marks)
lo
ba
lB
ox
(a)
G
Carl has a contract to supply Georgina with a gold necklace based on a
design supplied by Georgina, to be delivered to Georgina on May 31. The
contracted price is £500, payment due on delivery.
C
A
On May 2, Carl contacted Georgina and mentioned that the price of gold had
risen to such an extent that Carl would make a loss on the contract.
AC
On May 4 Carl contacted Georgina again and said: “I’m sorry Georgina but
I’m running a business here not a charity. I can’t supply the necklace, I
suggest you look for a different supplier”.
Required:
(a)
State the meaning of anticipatory breach.
(2 marks)
(b)
Explain the options open to Georgina in relation to the timing
of taking action against Carl.
(2 marks)
(c)
Identify the common law remedies available to Georgina.
(2 marks)
(6 marks)
29 4
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Eric entered into a contract with Amazing Conservatories Ltd for the
construction of a new conservatory at the back of his house. Eric specifically
requested that the conservatory must measure exactly 3 metres × 7 metres,
as the conservatory had to accommodate his model railway, which he had
been building for the past 3 years to fit precisely into the new conservatory.
Eric had to leave the country on business for a few weeks whilst the builders
were completing the work. To his horror when he returned he discovered
that in fact the conservatory only measured 2.65 metres in length rather
than the agreed 3 metres. His railway will not fit into the room and he will
have to redesign his track.
Eric is furious and is considering taking legal action.
Required:
Identify the legal remedy Eric would need to apply for to
require
Amazing
Conservatories
Ltd
to
rebuild
the
conservatory and briefly explain the issues the court would
consider in relation to such a request.
(2 marks)
(b)
Explain:
lB
The general aim of damages
(ii)
Two specific options for calculating damages relating to
Eric’s conservatory
(2 marks)
lo
ba
(i)
Explain whether an award of damages that enabled Eric to
have the conservatory rebuilt would be appropriate. (2 marks)
(6 marks)
AC
C
A
G
(c)
ox
(a)
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29 5
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Jaymini runs her small business providing wedding cakes. On October 30,
Sally signed a contract with Jaymini under which Jaymini would deliver a
three-tier traditional wedding cake before 1pm on the day of the wedding,
December 1. The fee agreed, £400, was paid in advance.
At 8am on December 1 Jaymini phoned Sally and told her she had slipped
while carrying the cake, and as a result the cake had been destroyed.
Jaymini advised Sally she was on her way to hospital as she suspected she
had broken her wrist in the fall, and would be unable to supply a cake of any
kind. Jaymini took Sally's bank details and arranged for a full refund of
£400 to be processed immediately.
Sally frantically phoned possible suppliers and eventually found one based
20 miles away who was able to produce and deliver a three-tier cake by
1pm. The cake supplied was similar in appearance to the original, although
due to the limited time available the cake itself had to be made from sponge
rather than the traditional fruit cake. The price agreed was £600.
ox
Required:
lB
Task 1
ba
Which of the following statements correctly identifies whether Sally
has a claim for damages from Jaymini for breach of contract, and
also correctly states the reason why?
Sally does not have a claim because she has already received a full
refund
B
Sally does not have a claim because injury made it impossible for
Jaymini to complete the contract
C
Sally may have a claim, but only if the contract did not include a valid
exclusion clause
D
Sally does have a claim because she has suffered a loss as a result of
Jaymini’s breach
(2 marks)
AC
C
A
G
lo
A
Task 2
Which of the following statements correctly identifies whether the
cake that Sally was able to arrange had to be made of ‘sponge’
would be considered significant by the court, and also correctly
states why?
29 6
A
The court would not consider this significant because it would only be
concerned with the monetary cost of the replacement cake
B
The court would not consider this significant as it is clearly a trivial
matter
C
The court would consider this significant because the original contract
was for a traditional wedding cake
D
The court may consider this significant if is established Sally dislikes
sponge and has therefore suffered a loss
(2 marks)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Task 3
Which one of the following statements correctly identifies whether
the court would agree that Sally met her duty to mitigate losses, and
also correctly states the reason why?
The court would agree that Sally met her duty to mitigate as Sally took
all reasonable steps in the circumstances
B
The court would not agree that Sally met her duty to mitigate as the
replacement cake is 50% more expensive than the original
C
The court would not agree that Sally met her duty to mitigate as Sally
would be expected to use a local supplier to minimise delivery costs
D
The court would accept that Sally met her duty to mitigate because Sally
was left in such a position that the court would accept her actions as
justified no matter what the cost
(2 marks)
(6 marks)
AC
C
A
G
lo
ba
lB
ox
A
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29 7
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Zayd is a high profile popular music artist, a ‘pop star’. In December last
year, his company, Zayd Enterprises Ltd signed a contract with Stadium
Events Ltd for Zayd to perform a concert at Wembley Stadium, London, on
June 1 this year.
Under the terms of the contract, revenue from ticket sales would be split:
90% Stadium Events Ltd, 10% Zayd Enterprises Ltd. Stadium Events were
responsible for all expenses associated with the event.
The contract included a clause preventing Zayd from performing at any
other United Kingdom venue between March 1 and September 1 this year.
In March this year, during a television interview, Zayd announced he would
be appearing at the UK’s biggest Summer Music festival, to be held on
August 10 this year. During his interview, Zayd said ‘Don’t worry if you
can’t make my concert at Wembley, I’ll see you at the festival’.
ox
Stadium Events Ltd are considering taking out an injunction to prevent Zayd
from appearing at the festival.
Required:
lB
Are each of the following statements TRUE or FALSE?
An injunction could not be granted in this case because injunctions
cannot be granted in relation to contracts for personal service.
(1 mark)
2
An injunction may be granted in this case as Zayd has breached a
negative condition of his contract with Stadium Events.
(1 mark)
3
An injunction may be granted in this case but would only be granted
if damages were considered an inadequate remedy.
(1 mark)
4
If all tickets for the Wembley concert had been sold by the end of
February this year, this would reduce the chance of any action by
Stadium Events Ltd succeeding.
(1 mark)
6
lo
G
A
C
AC
5
ba
1
As Zayd will only be appearing at the festival, not performing, this
would reduce the chance of any action by Stadium Events Ltd
succeeding.
(1 mark)
An injunction could not be granted in this case because the festival
event does not take place until over two months after the concert
(1 mark)
(6 marks)
29 8
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
TORT
Which of the following is NOT an essential element of the tort of
negligence?
A
The defendant must owe the claimant a duty of care
B
The defendant must have broken the duty of care
C
The defendant must have intended harm to the claimant
D
The defendant’s actions must have resulted in loss or injury to the
claimant
(1 mark)
Which of the following is correct?
ox
Dax has proved that his breach of his duty of care did not cause any loss or
injury to Clare.
Clare may recover nominal damages only
B
Clare may recover damages in respect of physical injury but not
financial loss
C
Dax is not liable
D
Dax is fully liable as he has broken his duty of care
(2 marks)
G
lo
ba
lB
A
C
A
Addy is the auditor of Bee plc. As a general rule, Addy owes a duty
of care to
Bee plc and its individual shareholders
B
Bee plc and its existing and potential shareholders
C
D
AC
A
Bee plc only
anyone who relies on information published by Addy
(1 mark)
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29 9
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Kezia carried out the statutory audit of the accounts of Bigstock plc and gave
an unqualified report. Subsequently the accounts have been found to
include overvalued stock and the company has recently gone into
liquidation.
Which of the following might be able to sue Kezia in negligence?
The company’s bankers who relied on the audited accounts in deciding
to extend the company’s overdraft
B
A shareholder who relied on the audited accounts in deciding to invest in
further shares in the company
C
A person who relied on the audited accounts in deciding to invest in
further shares in the company who had been personally assured by
Kezia that the accounts were correct
D
A director who relied on the accounts in deciding to exercise share
options granted to him by the company
(2 marks)
lB
ox
A
In the tort of negligence, damages are payable in respect of
reasonably foreseeable losses
B
losses which are a direct consequence of the breach of duty
C
all losses caused by the breach of duty
D
losses which are within the contemplation of the parties
(1 mark)
A
G
lo
ba
A
AC
C
Cam has sued Mo in the tort of negligence to recover compensation for
personal injuries. Cam has proved that Mo owed and breached a duty of
care.
In that event Cam can recover compensation for
A
all injuries caused by Mo
B
physical but not mental injuries caused by Mo
C
all reasonably foreseeable physical and mental injuries caused by Mo
D
physical and mental injuries which are a direct consequence of Mo’s
actions
(1 mark)
30 0
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
If, in the tort of negligence, the defendant can show that the
claimant was partly responsible for his own injuries
A
the claimant cannot recover any compensation from the defendant
B
the court will reduce the damages payable to the claimant
C
the court will take no account of the claimant’s actions so long as the
defendant owes the claimant a duty of care
D
the court will prevent the claimant from proceeding with the case as
there has been a novus actus interveniens
(1 mark)
If, in the tort of negligence, the defendant is able to establish that
the claimant freely consented to run the risk of injury
the claimant cannot recover any compensation from the defendant
B
the court will reduce the damages payable to the claimant
C
the court will take no account of the claimant’s actions so long as the
defendant owes the claimant a duty of care
D
the court will prevent the claimant proceeding with the case as there has
been a novus actus interveniens
(1 mark)
lo
ba
lB
ox
A
G
Which of the following is NOT correct in respect of the tort of
negligence?
Contributory negligence is a partial defence to an action in negligence
B
If the defendant successfully pleads volenti non fit injuria he escapes
liability
C
A disclaimer of liability for death caused by negligence is void unless it is
proved to be reasonable
C
AC
D
A
A
The effect of a successful plea of res ipsa loquitur is to reverse the
burden of proof of negligence
(1 mark)
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30 1
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Bee injured her eye after failing to close a safety gate on a machine as
instructed. She was also not wearing mandatory safety goggles as required
by her contract of employment.
Which of the following is this an example of?
A
Novus actus interveniens
B
Volenti non fit injuria
C
Res ipsa loquitur
D
Contributory negligence
(2 marks)
ACCA Pilot Paper
ox
Tariq was driving his elderly mini, at night, along a dual carriageway in thick
fog. The road was unlit. The car’s engine died and the car came to a
sudden stop in the road. Tariq tried to restart the engine but at that
moment a white van came hurtling along the road at 90 miles an hour and
crashed into the car.
lB
The mini was badly damaged and Sally, a passenger in the back of the car,
was seriously injured.
lo
ba
The van then ricocheted off of the mini and shot across the central
reservation blocking the road. Four other oncoming vehicles ploughed into
it, all of the cars were damaged and Brian, one of the drivers was killed.
Required:
G
Explain with reference to the law of negligence:
Did Tariq owe Sally a duty of care?
(b)
Did Tariq owe the drivers in the other cars a duty of care?
(1 mark)
C
AC
(c)
(1 mark)
A
(a)
Is Tariq liable for the injuries to his passenger, Sally?
(1 mark)
(d)
Is Tariq liable for the injuries to Brian?
(1 mark)
(e)
Suppose Sally, whilst being treated for her injuries in hospital, was
given contaminated blood due to the negligence of one of the
doctors.
Would Tariq be responsible for her contracting a potentially
fatal disease?
(2 marks)
(6 marks)
30 2
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
EMPLOYMENT
Ron applied for, and obtained, a post described as marketing consultant with
Sales Ltd, based at the Liverpool office of Sales Ltd. Under the terms of the
contract between Ron and Sales Ltd he was described as self-employed;
however, Sales Ltd controlled closely the work Ron did and provided all his
necessary office equipment. Ron did not work for any other employer and
his hours of work were 9am to 5pm.
Required:
Advise Ron on the following matters:
whether he would be regarded as an employee or as an
independent contractor;
(b)
why it is important.
ox
(a)
ba
lB
In relation to employment law, describe and explain the purpose of the
statutory statement of written particulars.
(5 marks)
Sinclair v Neighbour
lo
Employee borrowed money from the till. Left an I.O.U. Replaced it the next
morning.
YES/NO
A
G
Was the employee in breach of contract?
C
Hivac v Park Royal Scientific
AC
Employees working on secret processes worked for competitor in their spare
time.
Were they in breach of contract?
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YES/NO
30 3
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
You ought to be able to fill in the spaces in the table from what
we’ve done in class (contract) & from what you’ve studied by
yourself. Have a go.
Wrongful
Unfair
dismissal
dismissal
Redundancy
Source of law
no fair reason for
dismissal and/or
unreasonableness
Basis
redundancy
ox
Claimant
lB
re-instatement;
re-engagement;
monetary award
ba
Remedies
3 months
6 months
G
lo
Limitation period
redundancy
payment
County Court or
High Court
ET
ET
C
A
Venue
AC
X is employed under a contract which provides for an employer’s notice of 3
months.
(a)
(b)
(c)
X is dismissed on 3 months’ notice. His employer has no reason for
the dismissal.
Has X been wrongfully dismissed?
YES/NO
X is dismissed on 3 months’ notice.
reason is that X has blonde hair.
The employer states that his
Has X been wrongfully dismissed?
YES/NO
X is summarily dismissed for stealing from his employer.
Has X been wrongfully dismissed?
(d)
X is summarily dismissed for being 2 minutes late for work.
never ever been late in the past.)
Has X been wrongfully dismissed?
30 4
YES/NO
(X has
YES/NO
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
F is employed under a 10 year fixed term contract.
(a)
F is dismissed at the end of 10 years.
Has F been wrongfully dismissed?
(b)
YES/NO
F is dismissed during year 3 because the employer’s business has
contracted and F is not needed any longer.
Has F been wrongfully dismissed?
(c)
YES/NO
F is dismissed during year 3 when it is discovered that F, without
permission, has been using the work telephone for personal calls.
Has F been wrongfully dismissed?
YES/NO
Devis v Atkins
ox
Mr Devis was dismissed. Later the employer discovered that Mr Devis had
been embezzling funds.
Can the employer use this reason to justify this dismissal as fair?
YES/NO
(b)
Could the employer have used these after-discovered facts to
justify dismissal at common law?
YES/NO
ba
lB
(a)
C
A
G
lo
Many years ago Ron applied for, and obtained, a post described as
marketing consultant with Sales Ltd, based at the Liverpool office of Sales
Ltd. At the beginning of January this year Sales Ltd told Ron that, because
of a reduction in work in Liverpool, from June this year he was to be
transferred to its London office, some 500 miles away from Liverpool. Ron
refused to accept the transfer, arguing that he was employed to work in
Liverpool, and on 1 April this year Ron wrote to Sales Ltd, terminating his
contract with the company.
AC
Ron now wishes to pursue an unfair dismissal claim against Sales Ltd.
Required:
Advise Ron on the following matters:
(a)
The significance of the fact that Ron terminated his contract
with Sales Ltd;
(2 marks)
(b)
His likely chances of success in a claim for unfair dismissal;
(1 mark)
(c)
If successful, the remedies which might be available to him.
(3 marks)
(6 marks)
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30 5
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Vaux Breweries v Ward
W was a middle-aged barmaid (“a motherly type of person”). VB revamped
their pub and replaced W with a “Bunny Girl” type of barmaid more suitable
to the type of clientele the pub was now aimed at.
Has W been made redundant?
YES/NO
European Chefs v Currell
C’s job was as a pastry chef specialising in making éclairs. The nature of the
employer’s business changed and C was sacked and replaced by a pastry
chef whose speciality was continental pastries.
Has C been made redundant?
YES/NO
B
A contract for services
C
A contract for service
D
A contract of services
lB
A contract of service
(1 mark)
lo
ba
A
ox
What type of contract does an employee work under?
G
Which of the following factors would be considered as indicating a
worker is self-employed rather than an employee?
The worker is obliged to obey an order
B
The worker works set hours on a regular basis
C
The worker provides their own tools
AC
C
A
A
(1 mark)
The courts use tests to determine whether a worker is an employee or is
self-employed.
Which one of the following statements describes the focus of the
integration test?
A
The extent of control the employer has over how the worker performs
their work
B
The length of time the worker has performed work for the employer
C
Whether the worker works exclusively for a single employer
D
The nature of the work the worker performs and how it fits in to the
employer's business
(1 mark)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
H plc carries on business using both employees and independent
contractors. It is important for H plc to be able to distinguish between its
employees and independent contractors for a number of reasons.
Which of the following is NOT correct?
A
Employees have a right not to be unfairly dismissed but this does not
apply to independent contractors
B
H plc must deduct income tax and national insurance contributions from
the wages paid to its employees, but not from the amount paid to
independent contractors
C
Both employees and independent contractors can enforce contractual
rights against H plc
D
Both employees and independent contractors would rank as preferential
creditors in respect of unpaid wages, if H plc went into liquidation
ox
(2 marks)
Which of the following is correct?
An employer is vicariously liable for the torts of employees committed in
the course of their employment
2
An employer is vicariously liable for the torts of independent contractors,
if they were committed whilst carrying out work for the employer
A
1 only
B
2 only
C
Both 1 and 2
D
Neither 1 nor 2
2
A
Which of the following is correct?
A contract of employment must be in writing
AC
1
(1 mark)
C
A
G
lo
ba
lB
1
An employer must provide written particulars of the employment for the
employee
1 only
B
2 only
C
Both 1 and 2
D
Neither 1 nor 2
(1 mark)
An employer must provide an employee with a written statement of particulars of the empl
A
within one month of the employment commencing
B
as soon after the commencement of employment as possible
C
within two months of the employment commencing
D
within a reasonable time of the employment commencing
(1 mark)
Which of the following is a source of the terms of a contract of employment?
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30 7
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
1
Custom and practice
2
A collective agreement between the union and the employer
A
1 only
B
2 only
C
Both 1 and 2
D
Neither 1 nor 2
(1 mark)
Which of the following is NOT correct?
An employer is obliged to provide an employee with a reference
B
An employer must allow health and safety representatives reasonable
paid time off work with pay to perform their functions
C
An employer must provide an employee with a reasonably safe working
environment
D
Employees are entitled to paid leave
lB
ox
A
(1 mark)
Which of the following is NOT correct?
Employees are entitled to 5.6 weeks’ annual paid leave plus Bank
Holidays
B
Employees are entitled to work no more than 48 hours per week
averaged over a 17 week period
C
Employees are entitled to a written pay statement
D
Employees are entitled to belong to a trade union
A
G
lo
ba
A
(2 marks)
C
Adam has worked for the same employer continuously for 9 years. Adam's employer plans to dismiss
A
B
C
AC
What is the minimum statutory notice period that Adam is entitled
to?
1 month
9 weeks
9 months
(1 mark)
Brian has been employed by Wye Ltd for 10 years. His contract of employment states that if either W
30 8
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following is correct?
A
Both Brian and Wye Ltd are entitled to 10 weeks’ notice
B
Brian is entitled to 10 weeks’ notice but Wye Ltd is entitled to only 1
week’s notice
C
Brian is entitled to 1 month’s notice and Wye Ltd is entitled to 10 weeks’
notice
D
Both Brian and Wye Ltd are entitled to 1 week’s notice
(2 marks)
Edwina has recently been dismissed by her employer from her job as a roofer. The job entails lifting
Which of the following is an automatically unfair reason for her
dismissal?
Edwina has recently become pregnant and therefore has become
economically useless to her employer because she is unable to perform
her job as a roofer lifting heavy materials
2
Edwina was never very good at lifting heavy materials anyway and is
thus incapable of doing her job
A
1 only
B
2 only
C
Both 1 and 2
D
Neither 1 nor 2
(2 marks)
G
lo
ba
lB
ox
1
Which of the following is NOT available to an Employment Tribunal once it has made a find
An order of reinstatement
B
An order of re-engagement
C
Damages
C
AC
D
A
A
A monetary award
(1 mark)
Amar has won his action for unfair dismissal and is entitled to a basic award calculated according to a
Which of the following is correct?
A
the calculation will award him ½ a week’s pay for each year of
continuous service
B
the calculation will award him 1 week’s pay for each year of continuous
service
C
the calculation will award him 1½ half a week’s pay for each year of
continuous service
D
the calculation will award him 2 week’s pay for each year of continuous
service
(2 marks)
Top Pots Ltd produces pottery which it sells to retailers and through its own factory shop. The shop m
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30 9
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Required:
(a)
State the nature of Tina's dismissal.
(2 marks)
(b)
State the rules regarding accepting alternative employment
instead of redundancy.
(2 marks)
(c)
Explain how Tina's statutory redundancy payment would be
calculated (the actual calculation is not required).
(2 marks)
AC
C
A
G
lo
ba
lB
ox
6 marks
31 0
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
AGENCY
The board of Pak plc has instructed one of its employees, Ali, to sign a
contract with Tac for the purchase of some cardboard boxes. Ali duly does
this.
Which of the following is correct?
Since Ali is an employee he cannot also be an agent of Pak plc
B
The contract with Tac is binding on Pak plc because Ali is an
employee
C
The contract with Tac is binding on Pak plc because Ali had implied
authority to make the contract
D
The contract with Tac is binding on Pak plc because Ali had actual
authority to make the contract
(1 mark)
lB
ox
A
ba
Pam instructs Abe to sell her car.
In order to do so Abe puts an
advertisement in the Evening Times newspaper.
G
lo
In the context of the law of agency, who is liable to pay the Evening
Times newspaper for the cost of the advertisement?
Abe only since he had no actual authority to commit Pam to this
contract
B
Abe only since agents such as Abe are always liable for contracts they
make on behalf of their principal
C
D
AC
C
A
A
Pam only because Abe was acting as an agent of necessity
Pam only because Abe was acting as an agent with implied authority
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(2 marks)
31 1
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Ace agreed with Pawni to transport some prawns belonging to Pawni.
During the course of the very long journey Ace noticed that the prawns were
looking likely to go off in the next few hours. Ace immediately left a text
message with Pawni informing her of the situation and asking her what he
should do. Since Ace heard nothing from Pawni within those the next few
hours he stopped at the next market and sold the prawns to the highest
bidder, a local restaurant, Thai. It turns out that the prawns were in fact,
unknown to Pawni, Ace and Thai, more than a little off and when Thai served
the prawns some of its customers became ill. In consequence Thai has
made claims in contract against both Ace and Pawni.
In the context of the law of agency, who is potentially liable to Thai?
Ace only because it was he who was totally responsible for
transporting the prawns
B
Pawni only because in selling the prawns to Thai Ace was acting as an
agent of necessity
C
Both Pawni and Ace
D
Neither Pawni nor Ace since Thai was negligent in failing to check the
quality of the prawns before it served them to its customers
(2 marks)
lo
ba
lB
ox
A
A
G
Pal has not agreed that Agnes should act as his agent. But Agnes does act
as his agent and makes a contract with a third party. When Pal hears about
the contract he decides that it is in fact a good contract for him and decides
to adopt it.
B
Agnes became an agent of necessity as from the date Pal adopted the
contract
AC
A
C
Pal’s adoption of the contract means that
Agnes became an agent of necessity as from the date Agnes made
the contract
C
Agnes became an agent by ratification as from the date Pal adopted
the contract
D
Agnes became an agent by ratification as from the date Agnes made
the contract
(2 marks)
31 2
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
PARTNERSHIP
Scenario Exercise
Alf, Ben and Cleo are involved in a garage business trading in the name of
‘Firestar’. Their main business is servicing cars but they also have a forecourt
selling petrol.
Ben and Cleo are active in running the business whilst Alf, who has provided all the
capital, is not.
The following 6 questions are based on the scenario above.
Are Alf, Ben and Cleo partners in an ordinary partnership or in a
limited partnership?
ba
lB
(b)
ox
(a) Describe the ordinary partnership and the limited partnership,
paying particular attention to the liability of partners for
partnership debts.
lo
Unknown to Alf and Cleo, Ben has recently sold a car to Mercy for
£30,000. The car is severely defective and Mercy wants her money
back.
Knowing that Alf is a partner and very wealthy, can Mercy claim
all the money from Alf?
(b)
How would your answer differ if, at the time of the purchase:
G
(a)
A
Mercy knew that the selling of cars was contrary to the
partnership agreement?
C
(i)
AC
(ii) Mercy thought that Ben was a sole trader?
(iii) Mercy thought that Ben and Cleo were the only partners in
Firestar?
Alf, Ben and Cleo decide that they should expand the business and, in
order to obtain finance from a bank, they take Croesus, who is not a
partner, with them to a meeting at the bank of all partners as
requested by the bank manager.
Impressed by the apparent
creditworthiness of all four the manager advances the necessary
funds to Firestar.
(a)
Is Croesus jointly and severally liable with Alf, Ben and Cleo on
the loan agreement?
(b)
Does Croesus have any rights to any profits made by the
venture?
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31 3
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Alf, Ben and Cleo invite Dai to become a partner.
invitation.
Dai accepts the
(a)
Will Dai be liable for debts incurred by the firm before he became
a partner?
(b)
Will Dai be liable for debts incurred by the firm after he becomes
a partner?
Cleo is to retire from the partnership.
(a)
Alf, Ben and Dai agree that Cleo will not be liable in respect of the firm’s
debts incurred prior to her retirement.
Explain to Cleo the legal effect of this agreement.
Advise Cleo of the steps she should take in order to minimise the
risk of becoming liable for the firm’s debts incurred after her
retirement.
ox
(b)
lB
Alf, Ben and Dai have heard of the limited liability partnership (LLP).
Describe to them:
what it is;
(b)
the major advantages and disadvantages of an LLP as compared
with the partnership;
G
lo
ba
(a)
C
A
Following your advice Alf, Ben and Dai have decided to dissolve the
partnership as part of the process of converting to an LLP and Dai
would like to know exactly how much his share in the partnership is
worth.
AC
They provide you with the following data and information so that you can
make a precise calculation:
1.
They estimate that the partnership property will realise £300,000.
2.
Debts due to outsiders amount to £10,000. Dai is owed £30,000
(including interest) in respect of an advance he made to the firm to
finance the purchase of a computerised fault diagnostic system. Alf is
owed £60,000 rent in respect of the premises from which the firm
trades. Alf’s original capital contribution was £100,000.
3.
Their current profit sharing ratios are Alf 20%; Ben 40%; and Dai 40%.
Required:
Calculate the
dissolution.
31 4
value
of
Dai’s
interest
in
the
partnership
on
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following is correct?
1
An ordinary partnership is subject to the provisions of the Partnership
Act 1890
2
A limited partnership is subject to the provisions of the Limited
Partnership Act 1907
3
A limited liability partnership is subject to the provisions of the Limited
Liability Partnership Act 2000
A
1 and 2
B
2 and 3
C
1 and 3
D
1, 2, and 3
ox
(2 marks)
Which of the following is correct?
A limited liability partnership is an incorporated body
B
An ordinary partnership is an incorporated body
C
A limited partnership is an incorporated body
(1 mark)
lo
ba
lB
A
G
Which of the following is NOT correct?
An ordinary partnership has no existence distinct from the partners
B
A partnership must have a written partnership agreement
C
An ordinary partnership is subject to the Partnership Act 1890
D
Each partner is an agent of the firm
AC
C
A
A
(1 mark)
Axa, Belle and Caro have carried on business together in partnership since
July 2014.
In September 2014, they decided to enter into a formal
partnership agreement. The partners agreed to terms of the agreement in
October 2014 and signed the completed agreement in November 2014.
When did the partnership begin?
A
July 2014
B
September 2014
C
October 2014
D
November 2014
(1 mark)
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31 5
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
In all types of partnership
1
the minimum number of partners is two
2
the maximum number of partners is fifty
Which is correct?
A
1 only
B
2 only
C
Neither 1 nor 2
D
Both 1 and 2
(1 mark)
Which of the following is NOT correct?
In a limited partnership all the partners have limited liability
B
In an ordinary partnership all the partners have unlimited liability
C
In a limited liability partnership all the members have limited liability
(1 mark)
ba
lB
ox
A
lo
In an ordinary partnership all partners
are agents of the firm
2
are employees of the firm
A
Which is correct?
1 only
B
2 only
C
Neither 1 nor 2
AC
C
A
D
G
1
Both 1 and 2
(2 marks)
In relation to a Partnership Act 1890 partnership which is NOT correct?
A
Joint liability means that all partners are fully liable without limit for all
of the partnership debts
B
Joint liability means that all partners are responsible for just their
proportionate share of the partnership debts
C
Several liability means that creditors can sue the partners
simultaneously in one legal action or to choose to bring successive
actions
(1 mark)
31 6
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Dex has sued Eli, a partner in an ordinary partnership, for a debt of £1,000
in respect of goods supplied to the firm by Dex. It has transpired that Eli
cannot satisfy the whole judgement debt but he has managed to pay Dex
£800.
Dex now wishes to sue the other partners.
How much can he sue each of them for?
A
£200
B
£1,000
C
Nothing since his action against Eli means that he now cannot sue
another partner
(2 marks)
B
£10,000.
C
£15,000.
D
£30,000
lo
Nothing.
(2 marks)
A
G
A
ba
What is Fifi’s liability to Iona?
lB
ox
Fifi, Gita and Han are partners in an ordinary partnership. They have agreed
that Fifi’s liability for business debts should be limited to her original capital
contribution of £15,000. There is a business debt owing to Iona of £30,000.
2
A
In an ordinary non-trading trading partnership all partners have
authority to borrow money
AC
1
C
Which of the following is correct?
In an ordinary trading partnership all partners have authority to borrow
money
1 only
B
2 only
C
Neither 1 nor 2
D
Both 1 and 2
(2 marks)
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31 7
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following would be classified as a non-trading
partnership?
A
A firm of accountants that purely provides accountancy services
B
A firm that buys and sells paintings
C
A firm that buys and sells cars
D
A firm that buys and sells land
(1 mark)
Jax has recently retired from an ordinary partnership.
Which of the following is NOT correct?
He will continue to be liable to creditors for existing debts
B
He will become liable to existing creditors for new debts unless they
were personally notified of his retirement
C
He will not be liable to existing creditors for new debts if his retirement
was properly gazetted
D
He will not be liable to new creditors who knew he was a partner for new
debts if his retirement was properly gazetted
(2 marks)
lo
ba
lB
ox
A
G
Which of the following is correct?
Death of any partner in an ordinary partnership means that the firm is
automatically dissolved
2
Bankruptcy of any partner in an ordinary partnership means that the
firm is automatically dissolved
A
1 only
C
AC
C
A
1
D
Both 1 and 2
B
2 only
Neither 1 nor 2
(1 mark)
Which of the following is NOT a ground for dissolution of a
partnership under s35 Partnership Act 1890?
A
Death of partner
B
The business can only be carried on at a loss
C
A partner is in deliberate breach of the partnership agreement
D
It is just and equitable to dissolve the partnership
(1 mark)
31 8
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following is the correct order of application of assets of
an ordinary partnership in the process of dissolution?
1
Debts due to outsiders
2
Repayment of advances by partners to the firm
3
Repayment of capital contributions to partners
A
1, then 2, then 3
B
2, then 1, then 3
C
3, then 2, then 1
D
1, then 3, then 2
(2 marks)
Which of the following is correct?
In a limited partnership a limited partner cannot take part in
management and if he does he forfeits his limited liability status
2
A partner in a limited partnership cannot have limited liability unless this
has been notified to the Registrar of Companies
A
1 only
B
2 only
C
Neither 1 nor 2
D
Both 1 and 2
(1 mark)
A
G
lo
ba
lB
ox
1
B
There must be at least 2
AC
A
C
Which of the following is NOT correct in relation to designated
members of an LLP?
Their details must be notified to the registrar, but if not, all the
members are deemed to be designated members
C
Their responsibilities include making the LLP’s statutory returns to the
Registrar of Companies
D
They are fully liable for the debts of the LLP
(1 mark)
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31 9
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Kay, May and Lei formed a partnership to run a petrol station. The
partnership agreement expressly stated that the partnership business was to
be limited exclusively to the sale of petrol.
Lei entered into a £15,000 contract on behalf of the partnership to buy some
used cars, which he hoped to sell from the garage forecourt. May received
£10,000 from the partnership’s bank drawn on its overdraft facility. She
told the bank that the money was to finance a short-term partnership debt
but in fact she used the money to pay for a round the world cruise.
Required:
Under the Partnership Act 1890
explain the types of authority of a partner to bind the firm to
contracts;
(2 marks)
(b)
explain the liability of the partners for the debt incurred by Lei
on the contract to buy used cars;
(2 marks)
(c)
explain the liability of the partners for the debt owed to the
bank incurred by May.
(2 marks)
lB
ox
(a)
(6 marks)
ba
Adapted from ACCA December 2008 (Ham, Sam & Tam)
G
lo
Some 10 years ago Nim, Opra and Pav formed an ordinary partnership,
called NOP. Nim is a sleeping partner. Last year Opra retired from NOP.
Opra gave notice of her retirement to existing customers and advertised her
retirement in the London Gazette.
AC
C
A
After Opra’s retirement Pav entered into two contracts on behalf of NOP.
The first one was with a longstanding customer Qi. The second contract was
with a new customer Rob. Rob has never read the London Gazette and
believed that Opra was still a partner in the business.
Required:
(a)
state the liability of Nim, Opra and Pav to creditors in respect
of debts incurred by the partnership prior to Opra’s
retirement;
(2 marks)
(b)
explain the liability of Opra to Qi;
(2 marks)
(c)
explain the liability of Opra to Rob.
(2 marks)
(6 marks)
Adapted from ACCA June 2008 (Clare, Dan & Eve)
Sim, Tim and Una formed a partnership, under the Partnership Act 1890, to
run a pottery business trading under the name STU Potteries. On formation,
Sim introduced £6,000 into the business, Tim introduced £3,000 and Una
introduced £1,000. All of them took an active part in the operation of the
business and the partnership agreement stated that all profits and losses
should be divided in proportion to the capital contribution. However, as Una
32 0
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
was the person who would actually be making the pottery, it was agreed
that she would not be liable for any more than her initial contribution
towards any future debts. After some time, Sim provided the partnership
with an advance of £1,000 in order to sustain the operation of the business.
Unfortunately, the business is not successful and has made significant
losses. Today the partners decide that it would be best to stop trading and
dissolve the partnership. Its assets are worth £5,000 and its external debts
are £9,000.
Required:
explain how much each partner will have to contribute to
paying the external debts;
(4 marks)
(b)
explain how Sim’s advance of £1,000 will be dealt with.
(2 marks)
ox
(a)
(6 marks)
AC
C
A
G
lo
ba
lB
Adapted from ACCA June 2013 (Han, Ita & Jo)
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32 1
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
COMPANY LAW
Woolfson v Strathclyde [1978]
Mr W was the controlling shareholder and sole director of W Ltd. He owned
the premises from which the company traded. Strathclyde Regional Council
compulsorily purchased the premises and refused to pay the level of
compensation that is statutorily due to an owner-occupier – arguing that
there was no one person who was owner-occupier.
Was the veil lifted so as to treat Mr W and his company as one and
the same?
YES/NO
Hickman’s case
ox
Articles contained an arbitration clause, viz any dispute between the
company and a member must be referred to arbitration.
Hickman, a member, was in dispute with the company about his expulsion
from membership.
lB
Hickman went to court.
YES/NO
ba
Can he do so?
lo
Pender v Lushington
Articles gave every share 1 vote.
G
At a GM the chairman refused to count P’s votes.
C
A
What kind of wrong has chairman caused company to commit?
Rayfield v Hands
AC
Articles required every director to hold shares in the company and also
stated ‘Every member who intends to transfer shares shall inform the
directors who will take the said shares equally between them at a fair value’.
P called upon the directors to take his shares at a fair value: they refused to
do so.
Are they bound to do so?
YES/NO
Eley’s case
Articles stated that E should be the company’s solicitor.
E was appointed but was later dismissed.
Could E sue for damages for breach of contract?
32 2
YES/NO
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Beattie v E F Beattie
Articles contained an arbitration clause.
Beattie, a member and director, was in dispute with the company (it was a
wide-ranging dispute but the central issue was that he had been denied
access to minutes of board meetings).
Beattie went to court.
Can he do so?
YES/NO
The Articles of Association of Retailer Ltd include the following provisions:
Article 1: K is to be the company’s managing director for life at a salary of
£50,000 per annum plus such annual bonus as shall be agreed by the
company in general meeting.
ox
Article 2: Any member who wishes to sell his shares must offer them to the
directors who will purchase them at a price to be determined by the
company’s auditors.
lB
Can the Articles be relied upon
by K to obtain compensation in the event of the company
dismissing him?
YES/NO
(b)
by L if the board should refuse to purchase her shares in the
company?
YES/NO
G
lo
ba
(a)
Ashbury Railway Carriage v Riche [1875]
A
Objects clause: “…to build rolling stock…”.
Company built a railway line.
AC
C
Is the contract intra vires or ultra vires?
Re German Date Coffee [1882]
Objects clause: “…to work a German patent for the manufacture of coffee
from dates…”.
Company was unable to obtain a German patent but it obtained a Swedish
patent from which it successfully manufactured coffee from dates.
Is the business intra vires or ultra vires?
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32 3
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following is NOT correct?
A
A public limited company is a legal entity
B
A private company limited by shares is a legal entity
C
A private company limited by guarantee is a legal entity
D
A private unlimited company is not a legal entity
(1 mark)
Jhoti owns shares in Kelly Ltd. This means that Jhoti
1
is a part-owner of Kelly Ltd
2
is a part-owner of Kelly Ltd’s property
B
2 only
C
Both 1 and 2
D
Neither 1 nor 2
lB
1 only
(2 marks)
ba
A
ox
Which of the above is correct?
G
lo
With regard to lifting the veil of incorporation, which of the following
is NOT correct?
Under the Insolvency Act 1986 the veil will be lifted between the
company and its directors if the directors are found to be liable for
wrongful trading
B
A court may exceptionally lift the veil where special circumstances exist
indicating the veil is mere façade concealing the true facts
C
A court may exceptionally lift the veil where it is fair, just and
reasonable to do so
C
AC
D
A
A
A court may exceptionally lift the veil for public policy reasons
(1 mark)
Which of the following is NOT required in order to register a
company limited by shares?
A
An application for registration on Form IN01
B
A Memorandum of Association
C
Articles of Association
D
A fee
(1 mark)
32 4
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following correctly represents the position regarding
liability for debts in an unlimited company?
1
The company is liable to its creditors for its debts
2
Any creditor can sue any member to force him to pay the company’s
debts
3
On a liquidation all the members are liable to the creditors without limit
4
On a liquidation all the members become liable to the company to
contribute to the full extent of its debts
A
1, 3 and 4
B
2 and 3
C
1 and 3
D
1 and 4
ox
(1 mark)
lB
Under the Companies Act 2006, a public limited company cannot commence
business or borrow money until the nominal value of the company’s allotted
share capital is not less than a set minimum.
£30,000
C
£40,000
D
£50,000
lo
B
G
£20,000
(1 mark)
C
A
A
ba
What is that minimum?
AC
Under the Companies Act 2006, a public limited company cannot commence
business or borrow money until the paid up value of the company’s allotted
share capital is not less than a set minimum.
What is that minimum?
A
£12,500
B
£30,000
C
£40,000
D
£50,000
(1 mark)
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32 5
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
On 1st June P submitted a complete and correct application to the Registrar
of Companies for the registration of XYZ plc. On 20th June the Registrar
issued XYZ plc’s certificate of incorporation. By mistake the Registrar dated
the certificate ‘10th June’.
What is the date of incorporation of XYZ plc?
A
1st June
B
10nd June
C
20nd June
D
None of these
(1 mark)
Which of the following is correct?
It is not lawful to register a company limited by shares with the same
name as a company already on the register
2
Once on the register a company limited by shares cannot change its
registered office
A
1 only
B
2 only
C
Both 1 and 2
D
Neither 1 nor 2
(2 marks)
A
G
lo
ba
lB
ox
1
C
Which of the following is NOT correct?
A public company limited by shares must have at least two directors
B
A public company limited by shares must have at least two shareholders
C
D
AC
A
A private company limited by shares must have at least one director
A private company limited by shares must have at least one shareholder
(1 mark)
32 6
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
The following statements are about a private company.
1
A private company is a company which does not qualify under the
Companies Act to be a public company
2
A private company is an incorporated business
3
A private company is not required by law to file annual accounts at
Companies House
4
The shareholders of a private company cannot benefit from limited
liability
Which of the following gives the correct position?
1 and 2
B
2 and 3
C
1, 3 and 4
D
1, 2 and 3
(2 marks)
lB
ox
A
The following statements relate to a public company.
Its shares must be offered to the public
2
It must have a minimum of 50,000 members
3
It must have a minimum nominal capital of £50,000 in order to trade
4
Its shares must be listed on a recognised stock exchange
G
lo
ba
1
Which of the following gives the correct position?
1, 3 and 4
B
1, 2 and 3
C
1, 2, 3 and 4
D
3
AC
C
A
A
(2 marks)
A business has been registered under the name “The John Lewis Partnership
Company plc”.
What type of business organisation must this be?
A
A partnership
B
A private limited company
C
A public limited company
D
Any of the above as this is a business name
(1 mark)
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32 7
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following is NOT correct?
A
The Articles of Association form a contract between the members and
the directors
B
The Articles of Association form a contract between the members and
the company
C
The Articles of Association form a contract between each member and
the other members
D
The Articles of Association are only contractual in respect of membership
matters
(1 mark)
Fee Ltd has the following clauses in its articles of association.
Members shall be paid dividends in cash
2
All members are entitled to attend and vote at general meetings of the
company
3
Ghota (a member) shall be the company’s managing director for life
4
Members wishing to sell their shares shall offer them to the other
members
ba
lB
ox
1
1, 2 and 4
B
1, 2 and 3
C
1, 2, 3 and 4
D
3
(2 marks)
AC
C
A
A
G
lo
Which of the above clauses in the Articles of Association of Fee Ltd
would be enforceable against the company as a breach of contract?
Ojo Ltd has recently carried out an act in relation to a third party which is
not expressly or impliedly authorised by the objects clause of Ojo Ltd’s
Articles of Association.
Which of the following NOT correct?
32 8
A
The validity of the act cannot be questioned on the ground of lack of
capacity by reason of anything in the company’s constitution
B
The act may be restrained by any member of Ojo Ltd
C
The act may be enforced by Ojo Ltd and the third party.
D
The act is in breach the duty of the directors to observe any limitations
on their powers flowing from the company’s constitution
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
The directors and shareholders of Abe Ltd are Bee, Cee, Dee and Eee. Each
has 25 of the company’s paid up voting shares and each share carries one
vote.
Bee, Cee and Dee have just discovered that Eee has recently become
involved in a major competing company as a freelance. They are concerned
that Eee might disclose sensitive information to that competing company.
They are also aware that their company is in dire need of further funding.
They are agreed that they will produce the funding but they are aware that
Eee will not do so.
They feel that Eee is no longer a person that should be a shareholder of Abe
Ltd and have proposed the following changes to the company’s articles of
association in order to expel her as a shareholder:
“Any member who works with a competitor of the company must offer
their shares to the other members who then have a right to buy those
shares pro rata at a fair value”. They have the intention to invoke this
new article against Eee for competing against the company.
2
“On the passing of an ordinary resolution any member must offer their
shares to the other members who then have a right to buy those shares
pro rata at a fair value”. They have the intention to invoke this new
article against Eee for refusing to inject the sorely needed extra funding.
ba
lB
ox
1
Required:
Explain whether Bee, Cee and Dee have the necessary
shareholder voting power to change the articles of association
of Abe Ltd.
(2 marks)
(b)
Explain whether proposal 1 above will be a valid alteration to
Abe Ltd’s articles of association.
(3 marks)
(c)
Explain whether proposal 2 above will be a valid alteration to
Abe Ltd’s articles of association.
(1 mark)
AC
C
A
G
lo
(a)
(6 marks)
Ooregum Mining Co. v Roper
The company issued a £1 share, credited as fully paid, for 75p.
Has the share been issued at a discount?
YES/NO
ABC Ltd issues a £1 share, credited as 75p paid up, for 75p.
Has the share been issued at a discount?
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YES/NO
32 9
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
DEF Ltd issues 50,000 £1 shares, fully paid, in return for an asset valued at
£40,000.
(i) Have the shares been issued at a discount?
YES/NO
(ii) What if the asset is valued at £50,000?
s830 CA 2006 defines profit available for distribution as:
(so
ox
a………………………………… r…………………………… p………………
far
as
not
less
lB
previously utilised by distribution or capitalisation)
a……………………………… r……………………… l....………..
private companies only.
B
public companies only.
C
all limited companies, but not unlimited companies.
D
all companies.
C
A
G
A
DEF was incorporated 11 years ago and made net losses of £10,000
for each of the first 10 years. This year it makes a net trading profit
of £10,000 and manages to sell a piece of land at a net profit of
£130,000.
AC
(b)
lo
(a) s830 CA 2006 applies to
ba
written off in reduction of capital).
(so far as not previously
How much, if anything, is available for distribution?
(c)
33 0
GHI revalues an asset upwards.
(i)
Is an amount equal to the increase in value distributable?
YES/NO
(ii)
Is the associated increase in depreciation distributable?
YES/NO
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
s831 CA 2006 puts an additional restriction on p...........................
companies. s831 is sometimes called the ‘net assets’ test or the ‘full net
worth’ test.
s831 provides that both before and after the distribution the company’s
n............. a.................... must be at least equal to the aggregate
c................................. share capital and undistributable reserves.
of its
s831 defines undistributable reserves as being:
(a)
(b)
s.......…........... p.........….............. a......…................
c..........…......... r……..…………………r...…..................
(c) the amount by which its accumulated unrealised profits exceed its
accumulated unrealised losses
lB
ox
The undistributable reserve at (c) above is generally referred to in
r.....................….......…..........
accounting
terminology
as
the
r.......……................... .
ba
The overall effect of s831 is to force a plc to cover its unrealised
losses before it can make a distribution.
TRUE/FALSE
G
lo
JKL has £100,000 distributable profit as per its latest audited accounts, all of
which it proposes to distribute as dividend. The auditors qualified the
accounts.
A
Which of the following is correct?
The distribution can go ahead if sanctioned by the members in general
meeting.
B
No distribution is permitted.
AC
C
C
A
The distribution is lawful if the directors consider that the qualification is
not material to the calculation of distributable profits.
D
The distribution is lawful if the auditors make a statement that the
qualification is not material to the calculation of distributable profits.
MNO has distributable profit but its directors recommend that no dividend
should be paid. The shareholders in general meeting disagree with the
directors and wish to compel payment of a dividend.
(a)
Can the general meeting force payment by passing a resolution
to that effect?
YES/NO
(b) Would your answer be any different if the company’s share
capital included 5% preference shares?
YES/NO
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33 1
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
If a company issues new ordinary shares for cash, the general rule is
that
A
the shares must first be offered to the existing members in the case of a
public but not a private company
B
the shares must first be offered to the existing members whether the
company is public or private
C
the shares must first be offered to the existing members in the case of a
private company but not in the case of a public company
D
the shares need not be first issued to the existing members
(2 marks)
B
bonus issue
C
capitalisation issue
D
none of the above
lB
scrip issue
(1 mark)
ba
A
ox
Another term for ‘rights issue’ is
lo
ABC plc has issued ordinary £1 shares.
market value of £5 per share.
At present, the shares have a
33 2
G
Which of the following is NOT correct?
ABC plc can lawfully allot shares at 50p each
B
ABC plc can lawfully allot shares at £1 each
C
ABC plc can lawfully allot shares at £6 each
D
ABC plc can lawfully allot shares at £10 each
AC
C
A
A
(1 mark)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following is NOT correct?
A
Where, on issuing shares, a company has transferred a sum to the share
premium account, it may use that sum to write off the expenses of the
issue of those shares
B
Where, on issuing shares, a company has transferred a sum to the share
premium account, it may use that sum to write off the expenses of an
issue of debentures
C
Where, on issuing shares, a company has transferred a sum to the share
premium account, it may use that sum to write off any commission paid
on the issue of those shares
D
A company may use the share premium account to pay up new shares
to be allotted to members as fully paid bonus shares
ox
(2 marks)
Which of the following statements in relation to companies limited
by shares is NOT correct?
If a private company issues shares for a non-cash consideration, the
consideration must be independently valued.
B
If a public company issues shares for a non-cash consideration, the
consideration must be independently valued.
C
Directors of a public company must be authorised to issue shares by
ordinary resolution or by the Articles of Association.
D
If directors cause a company to issue shares to prevent a take-over bid,
they are acting for an improper purpose.
(2 marks)
C
A
G
lo
ba
lB
A
1
2
AC
Which of the following would be regarded as an issue of shares for
an improper purpose?
An issue of shares in return for non-cash consideration
An issue of shares to enable directors to maintain control of the board
3
An issue of shares to facilitate a take-over bid
A
1 only
B
1 and 2 only
C
2 and 3 only
D
3 only
(2 marks)
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33 3
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Cap Ltd has £1 shares issued at par. The asset value of each share is £2.
Astrid and Ben are the only shareholders. Each has taken 50,000 shares
and each has, so far, paid £10,000.
Which of the following is correct?
A
The issued share capital of Cap Ltd is £100,000, and the paid-up capital
is £20,000
B
The issued share capital of Cap Ltd is £50,000, and the paid-up capital is
£10,000
C
The issued share capital of Cap Ltd is £200,000, and the paid-up capital
is £20,000
D
The issued share capital of Cap Ltd is £20,000, and the paid-up capital is
£20,000
ox
(1 mark)
lB
s641 Companies Act 2006 envisages three specific circumstances in which a
company can reduce capital.
Which of the following is NOT one of those circumstances?
To repay capital to members that is in excess of the company’s wants
B
To extinguish or reduce liability on partly paid shares
C
To cancel capital that is lost or unrepresented by available assets
D
To repay outstanding capital on debentures
(1 mark)
A
G
lo
ba
A
B
The company’s net assets must at least equal the total of its called up
share capital plus undistributable reserves
AC
A
C
Which of the following does NOT apply to a private company about
to declare a dividend?
The company must take account of accumulated realised profits
C
The company must take account of accumulated realised losses
D
There must be profits available for dividend
(1 mark)
33 4
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following statements is correct?
1
A company is under a legal duty to pay dividends on its ordinary shares
if it has distributable profit
2
A company is under a legal duty to pay dividends on its preference
shares if it has distributable profit
A
1 only
B
2 only
C
Both 1 and 2
D
Neither 1 nor 2
(2 marks)
lB
ox
Last year Push Limited needed to raise further capital, as it was experiencing
financial difficulties. The company therefore issued 10,000 fully paid shares
to Qa. Qa was required to pay only 75 pence per share and the company
told Qa that this was all that she would ever have to pay. At the same time
it issued 10,000 75p partly paid to Rob. Rob was required to pay 75 pence
per share.
lo
ba
The company has had a much more financially successful year this year. In
order to fund further expansion it wishes to raise further capital and now
intends to issue shares to Sim at £1.50 per share. The company has called
upon Sim to pay the full amount at the time of allotment
G
The nominal value of all Push Ltd’s shares is £1.
Explain whether the issue to Qa is lawful and whether Qa may
have outstanding liabilities to the company in respect of these
shares.
(2 marks)
AC
C
(a)
A
Required:
(a)
Explain whether the issue to Rob is lawful and whether Rob
may have outstanding liabilities to the company in respect of
these shares.
(2 marks)
(c)
Explain whether it is lawful for the company to issue the
shares to Sim at £1.50 per share.
(2 marks)
(6 marks)
Since commencing trading three years ago Timor Ltd has not been
successful and has recorded losses of £20,000 for each of the past three
years. This year has been has seen an upturn and the company has made a
trading profit of £50,000. In addition, this year the company sold a piece of
equipment for £10,000 for more than it paid for it, and it revalued its
warehouse premises upwards by £15,000. Timor Ltd’s shareholders have
made it known to the directors that it is about time a dividend is paid on
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33 5
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
their investment.
The directors have therefore recommended that a
dividend of £15,000 be paid to shareholders.
Required:
(a)
State the statutory definition
distribution by Timor Ltd.
of
profits
available for
(2 marks)
(b)
Advise Udi, a shareholder, whether the directors can lawfully
recommend the payment of the dividend.
(3 marks)
(c)
State the liability of the directors in the event that the
company pays an unlawful dividend.
(1 marks)
(6 marks)
Alpha
ox
XYZ owns a building which is subject to two legal fixed charges.
Bank’s charge is dated 1991 and Beta Bank’s charge is dated 1994.
lB
Which chargee has first call on the building?
ba
Lee is a debentureholder of MNO plc. The debenture provides for interest to
be paid on the loan.
Lee must be a secured creditor
2
Lee has a contractual right to interest irrespective of whether or not
MNO plc has profits available for distribution
3
Lee will only receive interest if MNO plc has profits available for
distribution
A
G
lo
1
B
C
D
1 only
AC
A
C
Which of the following gives the correct position?
1 and 2 only
2 only
3 only
(2 marks)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
The following statements relate to charges created by companies.
1
A characteristic of a fixed charge is that the company has to pay a fixed
rate of interest
2
A characteristic of a floating charge is that the company has to pay a
floating (or variable) rate of interest
3
A characteristic of a floating charge is that the charged assets will vary
from time to time
Which of the following gives the correct position?
A
1 only
B
1 and 2 only
C
3 only
D
1, 2, and 3
lB
Which of the following is correct?
ox
(2 marks)
A floating charge has priority over a fixed charge
B
The preferential creditors take priority over fixed charge holders
C
A fixed charge has priority over a floating charge
D
Ordinary unsecured creditors take priority over floating charge holders
(2 marks)
A
G
lo
ba
A
In relation to company charges, which of the following is correct?
A private company cannot create fixed charges
B
A public company cannot create floating charges
D
AC
C
C
A
Both private and public companies may create fixed and floating charges
All business organisations can create fixed and floating charges
(1 mark)
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33 7
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
A company has created various charges in favour of various lenders. The
charges are on some of the same assets of the company. These assets are,
in total, not sufficient to satisfy the claims of all the chargees.
Which of the following is NOT correct?
A
In general fixed charges take priority over floating charges
B
In general charges of the same type rank in order of creation
C
in general charges of the same type rank in order of registration at
Companies House
(1 mark)
Which of the following is the correct period within which company
charges must be registered with the Registrar of Companies?
within 7 days following the creation of the charge
B
within 14 days following the creation of the charge
C
within 21 days following the creation of the charge
D
within 28 days following the creation of the charge
(1 mark)
ba
lB
ox
A
lo
In relation to the registration of charges at Companies House, which
of the following is NOT correct?
Once a charge has been properly registered it is retrospectively effective
from the date of creation
B
Once a charge has been properly registered it is effective from the date
of registration
C
An unregistered charge is void against the liquidator
A
C
AC
D
G
A
A creditor whose charge has not been registered can nevertheless claim
in the liquidation
(2 marks)
Ian is a risk-averse investor.
He is considering whether to invest in
preference shares, or ordinary shares, or debentures.
Rank the three in order of LEAST risk.
A
preference shares, then debentures, then ordinary shares
B
debentures, then ordinary shares, then preference shares
C
ordinary shares, then debentures, then preference shares
D
debentures, then preference shares, then ordinary shares
(2 marks)
33 8
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Ida has won £50,000 on the lottery and wishes to invest her winnings. She
has decided to lend the money to a company.
Required:
Explain to Ida
(a)
the legal nature of a debenture;
(2 marks)
(b)
the legal nature of a fixed charge;
(2 marks)
(c)
the legal nature of a floating charge.
(2 marks)
(6 marks)
ox
A goodly number of years ago, Cold Ltd entered into the following
borrowings in the same year in an endeavour to sustain its business:
It borrowed £50,000 from Dee, secured by a floating charge. The
floating charge was created on 1 April and it was registered on 15 April.
2
It borrowed £50,000 from Ezra. This loan was secured by a floating
charge created on 3 April and registered on 12 April.
3
It borrowed £50,000 from Fixit Bank. This loan was secured by a fixed
charge. It was created on 5 April and was registered on 16 April.
ba
lB
1
Required:
C
Explain whether or not the three charges have been validly
registered with the Registrar of Companies.
(2 marks)
AC
(a)
A
G
lo
All three charges are on some or all of the same assets of Cold Ltd. The
three creditors are now aware that these secured assets are not sufficient to
repay all their loans. They are also aware that none of the charges contain
negative pledge clauses.
(b)
ASSUMING* all three charges have been validly registered:
(i)
state the order in which the three creditors will be
ranked for payment;
(2 marks)
(ii)
explain your reasoning.
(2 marks)
(6 marks)
*
Please note. You are advised NOT to alter your answer to part (a) based on
the assumption in the question requirement of part (b) that the three charges
were validly registered. They may have been, on the other hand they might
not have been.
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33 9
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
D, a director, has a 4-year fixed term service contract.
Can he be removed by the members before the 4 years are up?
YES/NO
Percival v Wright
A member offered to sell his shares to a director at a set price. The director,
knowing a take-over bid was to be made shortly at a higher price, accepted
the offer and was therefore able to re-sell to the bidder at a profit. The
member sued the director for breach of duty to make him account for the
profit.
Was the director in breach of duty?
YES/NO
(b)
Could the member sue him?
YES/NO
ox
(a)
Len is a director of Mod plc, but he also owns a majority interest in Nim Ltd.
lB
Last year Mod plc entered into a contract to buy new machinery from Nim
Ltd. Len attended the board meeting that approved the contract and voted
in favour of it, without revealing any link with Nim Ltd.
G
lo
ba
At the same meeting the board of Mod plc decided not to pursue the
development of a new product that had been offered to them by its inventor.
Len, however, liked the new product and arranged for it to be produced by
Nim Ltd. It has proved to be a great success and Nim Ltd has made a great
deal of money from its production.
Required:
C
A
Owen is a shareholder in Mod plc and has found out about Len’s links
with Nim Ltd. He seeks your advice as to whether any action can be
taken against Len in relation to either:
the purchase of the machinery from Nim Ltd; or
(b)
the development of the new product by Nim Ltd.
AC
(a)
ACCA June 2000 (amended)
The Articles of Association of ABC Ltd are in the form of the model articles.
A, B and C form the board of directors. A and B generally leave the running
of the business to C; although C has not been appointed as Managing
Director.
Without reference to A and B, C causes the company to borrow £20,000
from the company’s bank for the purpose of the business.
A and B disapprove of this.
Is ABC Ltd bound by the contract with the bank?
34 0
YES/NO
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
The Articles of Association of DEF Ltd are in the form of the model articles
except that the board are required to obtain the sanction of an ordinary
resolution for any single borrowing that exceeds £½m.
Without obtaining such sanction the board causes the company to borrow
£2m from the company’s bank for the purpose of the business.
Can the bank can enforce this loan contract against DEF Ltd? YES/NO
The following statements relate to a public company.
By law a public company must have
at least 2 directors
2
some executive and some non-executive directors
3
a managing director and a finance director
4
a chief executive
ox
1
B
1 and 2 only
C
1, 2 and 3 only
D
1, 2, 3 and 4
ba
1 only
(2 marks)
G
lo
A
lB
Which of them are correct?
A
The following statements relate to a private company.
2
3
4
at least 1 director
AC
1
C
By law a private company must have
some executive and some non-executive directors
a managing director and a finance director
a chief executive
Which of them are correct?
A
1 only
B
1 and 2 only
C
1, 2 and 3 only
D
1, 2, 3 and 4
(2 marks)
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34 1
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
The below statements relate to ‘directors’.
Which of the following is NOT correct?
A
A de jure director is a person who has been lawfully appointed as a
director
B
A de facto director is a person who acts as a director although he has
not been appointed as such
C
An alternate director is not a director as such but may vote at board
meetings as if he is a director
D
A shadow director is a type of non-executive director
(1 mark)
ox
William has been held liable for wrongful trading under s214 of the
Insolvency Act 1986.
5 years
C
15 years
D
25 years
ba
B
lo
2 years
(1 mark)
A
G
A
lB
What is the maximum period that the court may disqualify him from
being concerned in the management of a company under the
Company Directors Disqualification Act 1986?
B
C
D
ordinary resolution with special notice of 21 days to the company
AC
A
C
A director may be removed from office under section 168 of the
Companies Act 2006 by
special resolution with special notice of 21 days to the company
ordinary resolution with special notice of 28 days to the company
special resolution with special notice of 28 days to the company
(2 marks)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following is correct in relation to the directors of a
solvent company?
1
They must take into account the interests of the company’s employees
2
They must take into account the interests of the company’s creditors
3
They must take into account the interests of the company’s shareholders
A
3 only
B
1 only
C
2 and 3 only
D
1 and 3 only
(2 marks)
ox
Which of the following is correct in relation to the directors of an
insolvent company?
They must take into account the interests of the company’s employees
2
They must take into account the interests of the company’s creditors
3
They must take into account the interests of the company’s shareholders
A
3 only
B
1 only
C
2 and 3 only
D
1, 2 and 3
(2 marks)
A
G
lo
ba
lB
1
1
2
3
AC
C
Which of the following, as a general rule, can enforce the seven
general duties owed by a director to his company?
The majority shareholders
The company
Individual directors
A
1 only
B
2 only
C
1 and 2 only
D
3 only
(1 mark)
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34 3
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following is a ‘substantial property transaction’?
A
The sale of a ship by the company to one of its directors where the
value of the transaction exceeds the lesser of £100,000 or 10% of the
company’s asset value, subject to a minimum value of £5,000
B
The sale of a ship by the company to one of its directors where the
value of the transaction exceeds the lesser of £100,000 or 20% of the
company’s asset value, subject to a minimum value of £5,000
C
The sale of a ship by the company to one of its directors where the
value of the transaction exceeds the lesser of £200,000 or 10% of the
company’s asset value, subject to a minimum value of £5,000
D
The sale of a ship by the company to one of its directors where the
value of the transaction exceeds the lesser of £200,000 or 20% of the
company’s asset value, subject to a minimum value of £5,000
ox
(1 mark)
lB
Di is the sole director of a private limited company.
She is also a
shareholder. For good business reasons the company is contemplating
buying Di’s house for its open market value of £250,000.
ba
Which of the following is NOT correct?
Di must formally disclose her interest to the board
B
The purchase must be approved by the shareholders by ordinary
resolution
C
The purchase is unlawful as a sole director is forbidden from contracting
with her company
D
Di is allowed to vote at any general meeting convened to approve the
purchase
(2 marks)
AC
C
A
G
lo
A
In relation to directors of companies limited by shares, which of the
following is NOT correct?
A
The board is the agent of the company
B
The board is the agent of the shareholders
C
Individual directors cannot contract on behalf of the company unless
power has been delegated to them
D
The shareholders cannot interfere with the running of the company’s
business unless authorised by the Articles of Association or the law
(1 mark)
34 4
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
XYZ plc’s Articles of Association are not in the form of the statutory model
articles in that they provide that any single borrowing above £1m must be
authorised by the members in general meeting. The board of XYZ plc has
caused the company to borrow £3m from BCD Bank. The contract was not
put before the general meeting.
Which of the following statements is correct?
A
The general meeting may not ratify the contract
B
The directors are not liable to the company for breach of duty
C
If BCD Bank was acting in good faith it may enforce the contract against
the directors personally
D
If BCD Bank was acting in good faith it may enforce the contract against
the company
ox
(2 marks)
ba
Which of the following is correct?
lB
Chien Tze is a shareholder of Chin Ltd holding 75% of the ordinary voting
shares of the company and 75% of the non-voting preference shares. She is
most disappointed that its directors have failed to recommend a dividend
this year despite the company having profits.
She can use her special resolution voting power to require the directors
to declare a dividend
B
The directors are in breach of duty as dividends must be paid on
preference shares
C
The directors are in breach of duty as dividends must be paid on
ordinary shares
D
She can use her ordinary resolution voting power to remove the
directors from office
AC
C
A
G
lo
A
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(2 marks)
34 5
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Earlier this year Mal was disqualified from acting as a company director for a
period of 10 years under the Company Directors Disqualification Act 1986 for
engaging in fraudulent trading.
However, he decided to continue to pursue his fraudulent activities and, in
an endeavour to avoid the consequences of the disqualification order, he
arranged for his son, Nim, to register a new company, Oka Ltd, with Nim as
the only shareholder and director of the company. Mal also arranged that
Nim should limit his involvement in the company to attending board
meetings. So Mal arranged for his accountant Pan to actually run the
business on his instructions. Although Pan was never officially appointed as
a director, he nonetheless signs documents on behalf of the company as
director and participates at board meetings with Nim.
Required:
(b)
Nim;
(c)
Pan;
lB
Mal;
ba
(a)
ox
Explain the EXACT status of
(2 marks)
(2 marks)
(2 marks)
as possible directors in relation to Oka Ltd.
G
lo
(6 marks)
AC
C
A
The board of directors of Sea Ltd is considering a proposal that the company
buy a ship from one of its directors, Tan, at its fair market value of
£150,000. They know that Tan proposes to vote in favour of the contract at
the board meeting called to approve the contract. They also know that as a
shareholder Tan proposes to vote in favour of the resolution at the
members’ meeting. They also know that in both situations Tan will be voting
in his own selfish interests, rather than in the interests of Sea Ltd.
Required:
(a)
Explain whether the board alone can commit Sea Ltd to this
contract.
(2 marks)
(b)
Explain whether Tan is in breach of any the seven general
duties owed by director to his company:
(i)
at the board meeting;
(2 marks)
(ii)
at the general meeting.
(2 marks)
(6 marks)
34 6
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Maisonette Ltd is a small property development company. The company has
three directors Leo, Oscar and James. In reality Leo has been left by the
other two directors to deal with the day to day running of the company while
the other directors have taken a back seat. Leo has not been appointed as
the managing director by the other directors, but the company has allowed
him to act as if he were managing director. This has been going on for
several years and Leo has previously dealt successfully with several
developments. The company has, however, not been doing so well recently
due to the fact that it has had to heavily discount the sale prices on its
recent developments. Oscar and James have now realised how serious the
position of the company is and have identified two contracts, which Leo
entered into on behalf of the company and for which Leo had no express
authority. First, a contract with a planning consultant to obtain planning
permission for a site that the company did not actually acquire. Second, a
contract for the making and fitting of iron gates for Leo’s home address.
ox
Required:
In relation to directors
explain what is meant by implied/usual authority;
(b)
explain what is meant by apparent/ostensible authority;
(2 marks)
(c)
explain whether Maisonette Ltd is bound by the two contracts
made by Leo.
(2 marks)
(2 marks)
(6 marks)
A
G
lo
ba
lB
(a)
AC
C
Sal is the Company Secretary to Estates plc, a construction company.
Without reference to the board of directors she placed three orders on behalf
of Estates plc.
The first was for the hire of a car from Flashy Cars LLP ‘to transport 2
Japanese businessmen from Heathrow Airport to head office of Estates plc in
London’. In fact, and unknown to Flashy Cars LLP, Sal used the car to take
a friend on a shopping trip to London’s West End.
The second was with Office Supplies Ltd for a number of filing cabinets for
the offices of Estates plc.
The third was with Bricks & Co for a consignment of bricks for one of Estates
plc’s projects.
Is Estates plc bound by the contract with:
(a)
Flashy Cars LLP?
YES/NO
(b)
Office Supplies Ltd?
YES/NO
(c)
Bricks & Co?
YES/NO
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34 7
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
The basic rule is every company must have auditors except
(i)
p................ companies with a turnover of less than £5.6m, and
(ii) any dormant company which has passed a
resolution dispensing with the need.
s........................
The auditor must be:
either
(a)
a member of a recognised supervisory body and authorised
to audit by that body. The RSBs are
●
●
or
(b)
.......................................................
.......................................................
authorised by the Government and having similar overseas
qualifications as above.
lB
ox
Also – he must be independent of the company, eg anyone who is an officer
or employee of the company, or is employed by or is a partner of such a
person etc is disqualified.
Otherwise,
the
lo
ba
The first auditors may be appointed by the directors, who may also fill casual
vacancies. In each case the auditor holds office until the next general
meeting at which the accounts are laid.
auditors
are
appointed
or
re-appointed
G
........................ resolution at the accounts meeting.
by
And –
in the case of a public company, the auditor holds office until the next
accounts meeting.
●
in the case of a private company, the auditor need not be appointed or
re-appointed every year. He is deemed to be re-appointed.
C
A
●
AC
If at any time a company is without an auditor it must notify the
S...................... of S.......... within 7 days.
34 8
1.
An auditor may resign at any time by notice in writing to the
company.
TRUE/FALSE
2.
A resigning auditor has a statutory right to requisition a General
Meeting.
TRUE/FALSE
3.
A resigning auditor must send to the company a statement to the
effect that either there are no circumstances which ought to be
brought to the attention of the members or that there are such
circumstances and what they are.
TRUE/FALSE
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
1.
Auditors may be removed from office by the directors.
2.
Auditors may be removed from office at any time for any reason by
.....................
resolution of which
TRUE/FALSE
......................
notice
has been given.
3.
A removed (or about to be removed) auditor has a statutory right to
requisition a GM.
TRUE/FALSE
4.
A
removed
auditor
must
circumstances/circumstances.
1.
The basic statutory duty of an auditor is to report to the members
whether or not the accounts give a t...... a.... f...... v...... and
have been p................ p..................... in accordance with
the Companies Act.
send
the
statement
of
no
TRUE/FALSE
ox
In particular the auditor must investigate so far as necessary to form an
opinion as to whether:
proper accounting records have been kept
(ii)
proper returns have been received from branches
(iii)
the accounts are in agreement with the accounting records
(iv)
the information given in the directors’ report is consistent with the
accounts.
ba
lB
(i)
Should auditors discover, for example, that proper accounting records
have not been kept, what must they do?
3.
Auditors have a statutory right of access at all times to the company’s
books.
TRUE/FALSE
4.
Auditors have a statutory right to obtain from the company’s officers
and employees such information and explanations as the directors think
necessary for the performance of the auditors’ duties.
TRUE/FALSE
5.
Should such a person refuse to give an explanation to an auditor what
must the auditor do?
AC
6.
C
A
G
lo
2.
Is it a criminal offence to tell falsehoods to auditors?
YES/NO
In relation to the company secretary, which of the following is NOT
correct?
A
Both public and private companies must have a company secretary
B
The company secretary of a private company need not be qualified
C
The company secretary of a public company must be qualified
D
The company secretary can bind the company in contract if acting within
his actual or implied authority
(1 mark)
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34 9
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
In relation to the company secretary, which of the following is
correct?
A
He has implied authority to bind the company to contracts of both a
commercial and administrative nature
B
He has implied authority to bind the company to contracts of a
commercial nature
C
He has implied authority to bind the company to contracts of an
administrative nature
D
He has no implied authority to bind the company to contracts
(1 mark)
Under the Companies Act 2006, which of the following is NOT
correct?
All members of ACCA are qualified to audit
B
All non-dormant public companies are required to have auditors
C
Private companies with a turnover of less than £6.5m are not required
to have auditors
ba
lB
ox
A
(1 mark)
lo
Under the Companies Act 2006, which of the following is correct?
Public companies must appoint or re-appoint auditors every year
B
Private companies required to have auditors must appoint or re-appoint
auditors every year
C
In general, it is for the members to appoint or re-appoint auditors by
special resolution
D
Auditors may be removed from office by board resolution
AC
C
A
G
A
(2 marks)
Howard and Bill are in the process of making an application to the Registrar
of Companies to register a public company. They have noticed that a
company secretary must be appointed for the new company.
Required:
(a)
State the Companies Act 2006 qualification requirements for
the company secretary.
(3 marks)
(b)
State THREE likely responsibilities of the company secretary.
(3 marks)
(6 marks)
35 0
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Flora is the company secretary of Flower plc, a company whose business is
providing gardening services. Flora has recently entered into the following
contracts in the name of Flower plc. The directors of Flower plc have only
recently become aware of these contracts.
Required:
In the context of company law, with specific regard to the authority
of company secretaries, state whether the below contracts are
binding on Flower plc.
an extremely expensive, long-term contract with A plc for the
maintenance of Flower plc’s photocopiers;
(2 marks)
(b)
a contract to hire a car from B plc which Flora used for her
own, non-business related purposes;
(2 marks)
(c)
a contract with C plc to landscape the garden of her, Flora’s,
personal house.
(2 marks)
(6 marks)
lB
ox
(a)
lo
ba
XYZ Ltd has 100 members each having 1 share carrying 1 vote. At a
general meeting 10 members are present (personally or by proxy). On a
motion for an ordinary resolution two members vote in favour, one votes
against and the other 7 abstain.
YES/NO
G
Has an ordinary resolution been carried?
A
Which of the following is correct in relation to annual general
meetings (AGMs)?
Only private companies are required to hold AGMs
B
Only public companies are required to hold AGMs
AC
C
C
A
Both private and public companies are required to hold AGMs
(1 mark)
Which of the following is correct?
A
Public companies must hold an AGM within 1 month after its accounting
reference date
B
Public companies must hold an AGM within 3 months after its accounting
reference date
C
Public companies must hold an AGM within 6 months after its accounting
reference date
D
Public companies must hold an AGM within 12 months after its
accounting reference date
(1 mark)
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35 1
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
The statutory minimum period of notice that members must in
general receive of an AGM is
A
14 days
B
21 days
C
28 days
D
6 weeks
(1 mark)
The Companies Act 2006 allows members holding a minimum percentage of
the company’s paid up voting shares to force the company to include their
resolution onto the agenda of the company’s AGM.
B
10%
C
50%
D
75%
lB
5%
(1 mark)
lo
ba
A
ox
That minimum percentage is
B
21 days
C
28 days
D
6 weeks
A
14 days
AC
C
A
G
The statutory minimum period of notice that members must in
general receive of a general meeting is
(1 mark)
The Companies Act 2006 (as amended) allows members holding a minimum
percentage of the company’s paid up voting shares to force the company to
hold a general meeting.
That minimum percentage is
A
5%
B
10%
C
50%
D
75%
(1 mark)
35 2
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
A special resolution requires
A
a 75% majority of all the members
B
a simple majority of all the members
C
a 75% majority of the members voting by show of hands or by a poll
D
a simple majority of the members voting by show of hands or by a poll
(1 mark)
The holders of 900,000 of the 1,000,000 ordinary shares of Change plc vote
on a poll to alter the company’s name. Each share carries one vote.
B
675,000
C
675,001
D
750,000
lB
600,000
(2 marks)
ba
A
ox
The minimum number of votes which must be cast in favour of the
resolution to give effect to it is
lo
Which of the following resolutions does NOT generally have to be
filed at Companies House?
Ordinary
2
Special
A
1 only
B
2 only
C
Both 1 and 2
A
C
AC
D
G
1
Neither 1 nor 2
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(2 marks)
35 3
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following is correct with regard to the statutory
procedure for written resolutions?
A
Any resolution which would otherwise have to be passed at a general or
class meeting can be passed by written resolution
B
Any company can use the procedure
C
Failure to send a copy of the resolution to the auditors of the company
invalidates the resolution
D
If the resolution would have been a special resolution at a meeting, the
resolution is passed once the company has received agreement from
members holding 75% of the company’s shares in terms of nominal
value
(2 marks)
ox
Which of the following CANNOT be carried out by written resolution?
The alteration of the Articles of Association
B
The appointment of a director
C
The removal of an auditor
D
The alteration of the company’s registered name
(1 mark)
lo
ba
lB
A
A
G
The holders of 900,000 of the 1,000,000 ordinary shares of Change Ltd vote
on a written resolution to alter the company’s name. Each share carries one
vote.
B
C
D
600,000
AC
A
C
The minimum number of votes which must be cast in favour of the
resolution to give effect to it is
675,000
675,001
750,000
(2 marks)
In order for a private company to alter its Articles of Association, the
shareholders must pass
A
a special resolution only
B
an ordinary resolution only
C
a special resolution or a written resolution
D
an ordinary resolution or a written resolution
(2 marks)
35 4
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
To dismiss a director under section 168 of the Companies Act 2006
requires
A
an ordinary resolution with 14 days’ notice to the company
B
a special resolution with 14 days’ notice to the company
C
an ordinary resolution with 28 days’ notice to the company
D
a special resolution with 28 days’ notice to the company
(2 marks)
X Ltd is insolvent.
B
a member
C
a creditor
D
the Secretary of State
lB
X Ltd
(1 mark)
ba
A
ox
As a general rule, which of the following CANNOT petition for the
compulsory winding up of X Ltd?
lo
Credo is a creditor of Nomore plc and wishes to petition for its compulsory
winding up on the ground that it is insolvent.
G
Which of the following are valid evidential grounds for Credo’s
petition?
Nomore plc’s assets total £1m and its debts total £2m
2
Credo served a valid statutory demand on Nomore plc for an undisputed
debt of £700 and Nomore plc did not pay that debt within 3 weeks
3
Credo’s email from the finance director of Nomore plc which includes the
statement that Nomore plc cannot pay Credo’s debt on the due date but
if Credo can wait a little longer it will surely be paid
A
AC
C
A
1
B
1 and 3 only
C
2 and 3 only
D
1, 2 and 3
1 and 2 only
(2 marks)
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35 5
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which TWO of the following are correct with regard to the making of
winding up order by the court?
In general the date of commencement of the winding up dates back to
the date of the presentation of the petition
2
All employees are automatically made redundant on the making of the
winding up order
3
All directors are automatically removed from office on the making of the
winding up order
4
The winding up order includes the appointment of a qualified insolvency
practitioner
A
1 and 2 only
B
1 and 3 only
C
2 and 3 only
D
1 and 4 only
(2 marks)
lB
ox
1
ba
In relation to a members’ voluntary winding up which TWO of the
following are correct?
The required declaration of solvency
must be made by all of the directors
2
must be made within the 5 weeks before the resolution to wind up
3
must have annexed to it a statement of assets and liabilities of the
company
A
1 and 2 only
B
1 and 3 only
C
2 and 3 only
35 6
G
A
C
AC
D
lo
1
1, 2, and 3
(2 marks)
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Err Ltd is in members’ voluntary liquidation and the liquidator has formed
the opinion that the company’s debts will not be paid in accordance with the
directors’ declaration of solvency.
Which of the following is NOT correct?
A
The directors are liable to a fine
B
The directors are liable to imprisonment
C
The directors are liable to pay the company’s debts
D
The liquidator must convert the members’ voluntary liquidation to a
creditors’ voluntary liquidation
(1 mark)
B
the members
C
the directors
D
the court
lB
the creditors
(1 mark)
lo
ba
A
ox
In a creditors’ voluntary winding up the company is put into
liquidation by
G
In relation to the commencement of a creditors’ voluntary
liquidation the Insolvency Act 1986 requires the creditors’ meeting
to be held within
7 days of the members’ meeting
B
14 days of the members’ meeting
C
21 days of the members’ meeting
C
AC
D
A
A
28 days of the members’ meeting
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(1 mark)
35 7
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
A company is in liquidation and has the following creditors:
1
a fixed chargee
2
a floating chargee
3
an employee with a claim for outstanding holiday pay
4
a preference shareholder with a claim for a declared but unpaid dividend
What is the correct ranking for payment under the Insolvency Act
1986?
A
1, 2, 3, then 4
B
1, 2, 4, then 3
C
3, 4, 1, then 2
D
1, 3, 4, then 2
ox
(2 marks)
lB
Which of the following CANNOT put a company into administration
without a court order?
An unsecured creditor
B
The company
C
The directors
D
A floating chargee with a charge on the entire undertaking of the
company
(1 mark)
A
G
lo
ba
A
B
C
to rescue the company as a going concern
AC
A
C
Which of the following is NOT a ground under the Insolvency Act
1986 for putting a company into administration?
to achieve a better result for the company’s shareholders than would be
possible if the company were put into liquidation
to realise property to make a payment to one or more secured or
preferential creditors
(1 mark)
35 8
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Lemon plc is in administration.
Which TWO of the following are correct?
1
All its employees were automatically dismissed on appointment of the
administrator
2
Any existing actions for debt by creditors of Leman automatically ceased
on the appointment of the administrator
3
Creditors of Lemon cannot now begin actions for debt
4
The administrator will normally be in office for no longer than 2 years
A
1 and 2
B
1 and 4
C
2 and 3
D
3 and 4
ox
(2 marks)
G
lo
ba
lB
Hilda is an employee of Washout Ltd. Over last weekend she noticed that
her salary of £20,000 for the month had not been paid and on arriving at
work on Monday she is informed that the company has gone into insolvent
liquidation. She is aware that the company owns the freehold title to the
company’s offices, which were purchased with the aid of a loan from a bank.
The bank took a fixed charge over the offices as security for repayment of
the loan. One of Hilda’s colleagues, Andrew, has told her that her that he
made a loan of £10,000 to the company last year. His debenture is secured
by way of a floating charge over the company’s stock.
A
Required:
AC
C
State the order in which the creditors will be paid paying particular
attention to:
(a)
the bank loan;
(b)
Andrew;
(c)
Hilda.
(2 marks)
(1 mark)
(3 marks)
(6 marks)
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35 9
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
CORPORATE CRIMINAL AND FRAUDULENT BEHAVIOUR
X is a director of XYZ plc, a company whose shares are listed on the Stock
Exchange. On his return from a board meeting where the main item on the
agenda was the first draft of a press release announcing an agreed takeover bid by PQR plc:
(a)
X buys some XYZ plc shares from an acquaintance.
Has X committed a criminal offence?
(b)
X buys some XYZ plc shares on the Stock Exchange.
Has X committed a criminal offence?
YES/NO
lB
Has X committed a criminal offence?
X telephones his daughter (whom he knows often dabbles on the
Stock Exchange) and says “PQR plc is about to make an attractive bid
for us”.
ba
(d)
YES/NO
X telephones his son and says “I can’t tell you why, but I advise you
to buy, today, as many shares in my company as you can afford”.
ox
(c)
YES/NO
YES/NO
AC
C
A
G
lo
Has X committed a criminal offence?
36 0
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Mat and Nan have conducted a wholesale greengrocers’ business as Orange
Produce Consortium Ltd. They have been the sole directors since its
incorporation in 1994. The business was never particularly successful and
has never made profits on which to declare dividends. It has only managed
to carry on trading by using its £20,000 overdraft facility with the Peoples
Bank plc.
In January 2007, Orange Produce Ltd entered into a large contract in the
strawberry futures market, and by July 2007 it was obvious that it had lost
£100,000 on the contract. Mat and Nan disguised the loss by unilaterally
ignoring the limit on their agreed overdraft and delaying the payments on
their outstanding contracts. They decided that they should try to trade their
way out of their loss situation, relying on a buoyant lettuce market.
Unfortunately the lettuce market wilted by September and the company lost
another £50,000. Undaunted, the pair decided that they could recoup
everything in the following summer’s mango market. Again their optimism
was unfounded and they lost an additional £25,000.
lB
ox
In October 2008 Mat and Nan applied to have Orange Produce Consortium
Ltd wound up, owing debts of £100,000. The realisable value of the
company’s assets is £10,000.
Required:
G
lo
ba
Analyse the above situation from the perspective of Mat and Nan’s
potential liability for either fraudulent or wrongful trading under the
Insolvency Act 1986. In particular, explain their potential liability to
the various creditors.
(20 marks)
ACCA December 2003
A
The term insider dealing relates to a number of potential criminal offences.
2
3
Encouraging someone to engage in insider dealing
AC
1
C
Which TWO of the following are crimes in relation to insider dealing?
Failing to report insider dealing
Concealing insider dealing
4
Passing on inside information
A
1 and 2
B
1 and 4
C
2 and 3
D
2 and 4
(2 marks)
Source – ACCA Pilot Paper
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36 1
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Which of the following is NOT a defence to insider dealing?
A
If the defendant can prove that he did not expect the dealing to result in
a profit (or the avoidance of a loss)
B
If the defendant can prove that he believed on reasonable grounds that
the information had been widely disclosed
C
If the defendant can prove that he would have taken the same course of
action (and dealt, encouraged or disclosed) even if he had not had
inside information
D
If the defendant can prove that he used an agent or nominee to carry
out the transaction
(1 mark)
Which TWO of the following statements are correct?
Insider dealing is always a criminal offence
2
Insider dealing is always a civil wrong
3
Market abuse is always a criminal offence
4
Market abuse is always a civil wrong
A
1 and 2
B
1 and 4
C
2 and 3
D
2 and 4
(2 marks)
A
G
lo
ba
lB
ox
1
1
2
AC
C
Which TWO of the following statements are correct in relation to the
Bribery Act 2010?
Bribery is a criminal offence that can be punished by up to 10 years in
prison
Bribery is a civil wrong with unlimited liability in damages
3
It does not apply to non-UK nationals
4
It creates the specific offence of bribing a foreign public official
A
1 and 2
B
1 and 4
C
2 and 3
D
2 and 4
(2 marks)
36 2
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
The process of money laundering normally has three stages.
Which of the following is NOT one of the three stages?
A
Theft
B
Layering
C
Placement
D
Integration
(1 mark)
Which TWO of the following are correct?
Fraudulent trading is a criminal offence under the Companies Act 2006
2
Fraudulent trading is a civil wrong under the Companies Act 2006
3
Fraudulent trading is a criminal offence under the Insolvency Act 1986
4
Fraudulent trading is a civil wrong under the Insolvency Act 1986
A
1 and 2
B
1 and 4
C
2 and 3
D
2 and 4
(2 marks)
G
lo
ba
lB
ox
1
A
Which of the following may be held liable for wrongful trading under
section 214 of the Insolvency Act 1986?
A person who is or has been a director or shadow director of the
company
B
A person who is or has been a director or a shareholder of the company
D
AC
C
C
A
The directors and shareholders of the company
The shareholders of the company at the time of liquidation
(1 mark)
The court has decided that Wan, a director and shareholder of X Ltd,
has been wrongfully trading.
What orders may the court make?
A
It may order him to pay a fine
B
It may order him to serve a term of imprisonment
C
It may order him to make contribution to X Ltd’s assets
D
It may order him to sell his shares in X Ltd
(1 mark)
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36 3
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Karen is the finance director of All plc. The company is intending to take
over a competitor company Comp Ltd. At the point at which negotiations
are almost complete Karen informs her sister Charlotte that All pic is about
to take over a rival company and she should buy shares in All plc, as she
may make a profit. She tells Charlotte that the takeover is top secret and
she must not tell anyone else. Karen has a friend Liz that has just received
an inheritance and is looking for some investment advice. Karen suggests to
Liz that she may wish to buy shares in All plc, as it may be a good
investment. Both Charlotte and Liz purchase shares in All plc the following
day. Two days later the takeover of Comp Ltd is completed and is news of
the takeover is made public.
The share price of All plc increases
substantially and Charlotte and Liz make a large profit.
Required:
In relation to the Criminal Justice Act 1993
What offences has Karen committed?
(a)
State whether Liz is an insider.
(c)
State whether Charlotte is an insider.
(4 marks)
(1 mark)
(1 mark)
(6 marks)
ba
lB
ox
(a)
AC
Required:
C
A
G
lo
Ann is an accountant in professional private practice. Last week a new
client, Paul, came in for a meeting and instructed her to act for him in
respect to the acquisition of a business. The transaction has progressed
very quickly and today Paul has attended Ann’s office and presented her
with £40,000 of cash for the purchase. Ann is now very concerned about
the transaction and particularly regarding the source of the money
presented to her.
Analyse the scenario from the perspective of the law relating to
money laundering.
(a)
If Ann accepts Paul’s request, state which of the three stages
of money laundering that she will be engaging in and what
offence she will be committing.
(2 marks)
(b)
State what TWO other offences she may be committing.
(4 marks)
(6 marks)
Tim and Henry are directors of a company which sells food products. Last
year the company’s profits declined substantially and this year the directors
have realised that the company is in serious financial difficulty after losing
an important contract. They decided to continue trading in the hope that
the position would improve. They have continued to place orders as usual
with their main supplier of fruit. Finally, after a further three months and
36 4
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E X E R C I S E S A N D S A M P L E Q U E S T IO N S
now owing considerable debts, the company has gone into insolvent
liquidation.
Required:
Explain whether Tim and Henry will be liable for either of the
following:
(a)
Fraudulent trading under s213 Insolvency Act 1986; (2 marks)
(b)
Wrongful trading under s214 Insolvency Act 1986.
(4 marks)
AC
C
A
G
lo
ba
lB
ox
(6 marks)
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36 5
AC
C
A
G
lo
ba
lB
ox
E X E R C I S E S A N D S A M P L E Q U E S T IO N S
36 6
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AC
C
A
G
lo
ba
lB
ox
Answers to exercises
and sample questions
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36 7
A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
1
It is the duty of the courts to apply legislation.
B
6
A
7
B
8
D
9
B
10
D
11
C
12
C
13
A
14
C
15
A
16
D
17
A
18
B
19
B
20
B
21
C
22
B
23
D
24
D
25
B
26
C
27
D
36 8
lB
5
ba
B
lo
4
G
A
A
3
C
B
AC
2
Doctrine of Sovereignty of Parliament.
ox
This is an aspect of the
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
28
D
29
C
30
D
31
B
32
A
Explanation
The general rule is that shop-window displays and notices are invitations to
treat and not offers – Fisher v Bell. This is because:
further negotiations are normally intended or expected, and
•
where items are for sale a shopkeeper sometimes needs the ability to
reject offers to buy by customers. This can be important if he receives
offers in excess of the number of items that he has to sell and if he
receives offers from persons to whom he does not wish to supply goods.
ox
•
lB
If neither of these conditions is present then a display can be an offer, for
example in the ‘reward’ cases such as Carlill v Carbolic Smoke Ball where no
further negotiations were either intended or expected.
ba
There are a number of indications in the Bigshop’s notice that could well lead
to a finding that it amounted to an offer, not an invitation to treat:
the words “will be sold” indicate a definite willingness to be bound
without further negotiations, and
•
the advertisement contains very specific terms, and
•
the words of the advertisement confine the total number of possible
acceptances to 1.
34
YES.
35
a.
C
NO.
AC
33
A
G
lo
•
YES.
Even though X has been paid to keep the offer open, the rule is that he
can revoke it at any time before acceptance.
b.
Wednesday.
ie when Y knew the car was no longer for sale.
c.
NO.
d.
Since there was agreement backed by consideration (payment) to keep
the offer open until Thursday, X is in breach of this collateral contract
(aka ‘option contract’). So Y is advised that although he has no rights to
the car, he can sue X for damages for breach of the collateral contract.
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
36
The decision in Errington is NO.
37
NO.
38
NO.
39
NO.
40
B
ie London, where the telex was received. This is the effect of the rule
“acceptance is not effective until and unless it is communicated to the
offeror”.
41
YES.
Short explanation
lB
ox
Under the postal rule, acceptance is effective when posted – thus the
revocation was too late because it was communicated to the offeree (ie
received) after acceptance. Be careful to realise that the postal rule applies to
acceptance only, not to revocation.
42
Eleanor
ba
(a)
Generally, advertisements are invitations to treat, not offers. Here, Hilary’s
advertisement is an invitation to treat and Eleanor’s reply is an offer.
G
lo
Hilary’s reply by return of post is not an acceptance: it is a counter offer
because it attempts to negotiate the price up to £13,000. A counter offer
terminates the original offer.
C
A
Therefore Hilary’s counter offer means that Eleanor’s £10,000 offer no longer
exists.
Accordingly, when Hilary writes again saying she would accept
£10,000, this is not an acceptance, but is a fresh offer which Eleanor then
rejects.
AC
In conclusion Hilary is advised that no binding contract exists with Eleanor.
(b)
Amy
Under the postal rule exception, a posted acceptance is effective when the
letter is posted, not when it is received. As Hilary used the post for her offer
it is strongly arguable that it was reasonable for Amy to reply by post. So the
postal rule applies.
In conclusion, a contract existed between Hilary and Amy from the moment
Amy posted her acceptance. Her later fax cannot revoke it.
43
C
44
B
As to (1) – see the illustrative case of Collins v Godefroy.
As to (2) – see the illustrative case of Shadwell v Shadwell.
As to (3) – see the illustrative case of Re McArdle.
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45
The best answer is C
Explanation
Since in both B and D a request was made for the service it is very likely that
the court would be persuaded to treat the request as carrying an implied
promise to pay. The likelihood arises because the request was made in a
business situation where it is easy to convince the courts that there is an
implication of payment. The later actual promise in B is then treated as
merely the fixing of the price – see Re Casey’s Patents.
In contrast to B and D: in C, on the given facts, no request was made for the
digging of the garden. Nb: even if such a request had been made it is
unlikely in the circumstances that the courts would imply a promise of
payment. Another ground (not asked for in the wording of the stem of the
question) on which Y might deny contractual liability to pay for X’s digging of
the garden is lack of ‘intention to create legal relations’.
46
B
ox
This question is testing your understanding of the rule in Pinnel’s case and its
exceptions.
lB
47
ba
Note. Students often find the part payment problem difficult – so in order to
help you I have given you a full explanation.
G
lo
The issue here is consideration, in particular the ‘part-payment problem’: in
that Raymond has agreed to accept £200 in settlement of a debt of £800.
The issue is whether Raymond can go back on that agreement and sue for the
balance.
C
A
The rule in Pinnel’s case states that ‘payment of a smaller sum does not
discharge a debt of a greater amount’. This is because the debtor has not
given consideration for the creditor’s agreement to accept the smaller
amount. Under the rule Raymond may go back on his agreement to accept
£200 in full and final settlement and may sue Samantha for the outstanding
balance of £600.
1.
AC
There are, however, four exceptions to the rule in Pinnel’s case. Of possible
relevance here are:
Accord and satisfaction
Accord means agreement and must be freely entered into by the
creditor for his benefit.
Satisfaction means consideration. Thus if for example the creditor
agreed to accept payment of a smaller sum at a date earlier than the
whole debt was due this benefit would constitute consideration for his
promise to accept the smaller amount.
Accordingly Raymond is advised that although there is accord, there is
no satisfaction and therefore this exception does not apply.
2.
Equitable doctrine of promissory estoppel
In certain circumstances equity will stop a creditor from going back on
his promise to accept a smaller amount. In Central London Property v
High Trees it was established that the doctrine applies only where the
creditor has waived his rights with the intention that the debtor will alter
his [legal] position in reliance on the waiver and that as a result of such
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reliance it would in all the circumstances be just and equitable to hold
the creditor to his word.
There are limitations on the doctrine: it does not apply to simple debtorcreditor situations as is Samantha’s and Raymond’s.
In summary: Raymond is advised that none of the exceptions to the rule in
Pinnel’s case apply and he may therefore sue Samantha for the £600 balance.
48
NO.
Short explanation
Agreement between husband & wife re a family matter.
Therefore
social/family/domestic presumption applies. No facts given that might serve
to rebut the presumption.
49
YES.
Short explanation
50
lB
ox
Agreement between husband & wife re a family matter.
Therefore
social/family/domestic presumption applies. Fact that they were separated
and thus at “arm’s length” was enough to rebut the presumption.
YES.
ba
Short explanation
51
NO.
A
Short explanation
G
lo
Agreement to share prize in a domestic situation while playing a game.
Therefore social/family/domestic presumption applies. Presumption rebutted
from surrounding facts that showed they were engaged in a “serious joint
enterprise”.
B
53
B
54
A
55
A
56
B
57
D
AC
52
C
Business presumption rebutted by the clear words staing that the agreement
was only binding in honour.
58
(a)
37 2
The notice in Andy’s window combined with the cars displayed on the
forecourt would have the same legal standing to goods displayed in a
shop window. Goods displayed in a shop window represent an invitation
to treat rather than an offer. An invitation to treat is an indication that a
party would like to receive offers with a view to entering into a binding
contract. To constitute an offer, the whiteboard statement must be a
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definite and unequivocal statement of willingness to be bound by specific
terms. The statement on the whiteboard is an invitation to treat.
Andy and Hamza initially negotiated face-to-face and later by telephone.
It is unlikely in these circumstances that the use of the post to
communicate acceptance was contemplated or expected, so the postal
rule does not apply. However, Hamza’s acceptance arrived within the
time stipulated for acceptance (the time that Hamza provided
consideration of £100 for) and therefore a contract for the sale of the
Ferrari exists.
(c)
Andy is obliged to keep the offer to sell the Porsche to Steve for £40,000
open until 12 noon (as Steve provided consideration for this). The basic
rule regarding acceptance is that it must be communicated to the
offeror. If Andy does not listen to the voicemail message or read the
text message before 12 noon, there is some doubt as to whether a
contract exists. Although acceptance through electronic communication
is a grey area, it is likely that the voicemail and text (SMS) message
combined, both sent before 12, would constitute acceptance and that a
contract for the sale of the Porsche exists.
(a)
The general rule, as established by Pinnel’s case [1602], is that payment
of a smaller sum in settlement of a debt does not discharge a debt of a
greater amount. Therefore, Sanjay is entitled to pursue Susan for the
remaining £50.
(b)
An exception to the general rule, which was also established in Pinnel’s
case, is that an agreement to accept a smaller sum can be binding if it is
agreed in return for consideration. Consideration can include making
payment at an earlier time. If Sanjay and Susan had originally agreed a
sum of £200 payable in a month following completion, then a
subsequent agreement to accept £150 paid on completion would provide
satisfaction and discharge the debt in full.
(c)
Another exception to the general rule is that if payment of a smaller sum
by a third party is accepted then this discharges the debt from all
concerned. Therefore, if Sanjay had agreed to accept £150 from Sandra
in full, he would have no further claim.
ox
(b)
AC
C
A
G
lo
ba
lB
59
60
Task 1
C
Explanation. Gemma ordered the pictures for use in her business premises,
a cafe. This is a business agreement, so the presumption that the parties
intend to create a legally enforceable agreement applies. The two parties are
sisters, but there is no other evidence to rebut the general presumption that
the parties intended their agreement to have legal effect.
Task 2
C
Explanation. Molly has asked Carol to produce paintings for use in her
business, rather than for a personal or domestic use. This is a business
agreement and therefore the presumption is there is an intention to create
legal relations. Despite the fact that Molly and Carol are friends, this is a
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37 3
A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
business agreement and therefore the presumption is that there is an
intention to create legal relations.
Task 3
D
Explanation. If an agreement is stated to be ‘binding in honour only’ this
negates the intention to create legal relations – Jones v Vernon’s Pools
[1938]. Other clear statements may also be sufficient to rebut the intention
to create legal relations – Rose & Frank v Compton Bros [1925].
61
(a)
The clause is incorporated because Grace signed the contract containing the
exemption clause – it is immaterial that she did not read it
(b)
ox
Office Supplies Ltd can only rely on its exemption clause to protect it from
liability for Grace’s loss of profits if it can prove that the exemption is
reasonable.
lB
The court adjudges whether the exclusion clause is reasonable in the light of
all the surrounding circumstances and in particular:
the relative bargaining strength of the parties. The given facts suggest
that Grace (“a sole practitioner”) is a ‘small man’ and may well be in a
weak bargaining position. No indication is given as to whether Office
Supplies Ltd was in the strong position of being able to dictate its terms
to Grace, as in for example International Computers v St Albans. This
factor would therefore appear to be neutral.
●
whether the other party knew or ought to have known of the existence
and extent of the clause. This factor will operate in Office Supplies Ltd’s
favour since Grace had the opportunity to read the clear words on the
contract she signed.
●
the ability to insure. This factor would appear to be in favour of Grace
since Office Supplies Ltd can insure but Grace presumably could not.
AC
C
A
G
lo
ba
●
The burden of proof is on Office Supplies to prove that its clause is
reasonable. On the bare facts given it will fail do so (since there is no positive
balance in favour of Office Supplies), so the result is that Office Supplies Ltd’s
exclusion clause with regard to Grace’s loss of profits is unreasonable. If the
court so decides, then Grace is advised that she can sue for these losses.
62
A
63
C
64
B
65
C
66
B
67
B
68
D
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69
Task 1
A
Explanation. Leona has signed the contract, which includes the exclusion
clause, so it is incorporated in to the contract.
Task 2
C
Explanation. Under the Act, clauses exempting liability for death or personal
injury caused by negligence are void. Clauses exempting liability for other
loss caused by negligence are void unless found to be reasonable. The clause
in the Live the Dream contract is wide ranging, but it is unambiguous. In a
consumer contract an exclusion clause cannot protect against liability for
death or personal injury caused by negligence, but the clause may provide
protection in other situations, if it is reasonable. It is up to the party seeking
protection from the clause to prove it is reasonable.
Task 3
D
lB
ox
Explanation. Under the Regulations, if a term is unfair to a consumer then
that term does not bind him. When deciding whether a term is unfair, the
courts would consider the clarity of the language used and whether the term
results in a significant imbalance in the parties’ rights and obligations (to the
detriment of the consumer).
D
71
A
72
C
73
A
74
a.
Anticipatory.
b.
He could accept that DLT’s breach discharges the contract and sue for
damages immediately.
C
A
G
lo
ba
70
75
AC
Or he could wait and see what happens in June.
B only has to pay the contractually agreed sum of £3,000 – not H’s actual
loss.
Explanation
The issue here is whether the contractually stated sum is a penalty clause or
whether it is a liquidated damages clause. If it is a penalty clause it is not
enforceable and therefore H has a claim for his actual loss. If it is a liquidated
damages clause it is enforceable and therefore H has a claim only for the
stipulated sum of £3,000.
The essence of a liquidated damages clause is that it is a genuine preestimate of the expected loss on breach, whereas a penalty clause is not – it’s
more in the nature of a threat intended to penalise the party in breach.
If you look at the figures given, the stipulated sum was a genuine estimate
(yes, it turned out to be wrong, but it was genuine at the time it was agreed).
So the clause is a liquidated damages clause.
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76
(a)
YES.
This is normal loss and is therefore recoverable under the first limb of
the rule in Hadley v Baxendale.
(b)
NO.
This is abnormal loss and is therefore only recoverable under the second
limb of the rule in Hadley v Baxendale if it was within the reasonable
contemplation of the parties at the time they made their contract. The
facts tell you that neither VL nor NI knew of the Government deal at that
stage. And, further, they had no reason to know.
77
£8,000
Explanation
Gross loss of earnings for the 3 years unexpired period of the contract
3 x 10,000 =
30,000
ox
less: gross earnings in new job by way of mitigation
lB
2½ x 8,000 =
(20,000)
10,000
less: notional deduction to reflect taxation
B
Task 2
B
Task 3
C
3.
only where damages would be an inadequate remedy.
AC
2.
A
A
C
Task 1
1.
8,000
G
79
80
(2,000)
lo
78
ba
20% x 10,000 =
an order will not be made where it would cause undue hardship to a
defendant.
the contract must be mutually enforceable.
4.
an order will not be made where it would require the constant
supervision of the court.
5.
“He who comes to Equity must come with clean hands”.
6.
“Delay defeats the Equities”.
81
… are an inadequate remedy …
82
(a)
NO.
Because it would cause undue hardship (slavery) to compel X to work
for Z.
(b)
NO
Because the contract fails the mutually enforceable requirement.
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
You should now see that specific performance is never given of a contract of
personal service.
C
84
C
85
C
86
NO. A was not a party to the contract between B and C.
87
(a)
NO. The daughter was not party to the contract between B and S Ltd.
(b)
NO. A party to a contract can only sue for his own losses, not for other
people’s losses.
A
90
A
91
D
92
C
93
B
94
C
lB
89
ba
C
lo
88
ox
83
95
The doctrine of privity of contract determines who can enforce the terms
of the contract and against whom the contract can be enforced. Under
the doctrine, a contract can only create rights and obligations between
the parties to the contract. A contract cannot impose obligations on, or
confer rights on a person who is not a party to the contract.
AC
(a)
C
A
G
A personal representative of a party to a contract can sue on a contract even
though they are not party to it. However, this is a common law exception to
the doctrine of privity, rather than a basic principle of the doctrine.
(b)
Under the collateral contract exception, a third party (a party outside
the main contract) may be able to bring a claim under a collateral
contract. One type of collateral contract is a subsidiary contract that
induced a party to enter into a main contract.
(c)
By providing assurances as to the quality of the TT Dive watches, Tick
Tock induced Deep Dive to enter the main contract with The Watch
Shop. Tick Tock and Deep Dive could therefore be held to have made a
collateral contract – with Tick Tock’s promise relating to the quality of
the watches being consideration for Deep Dive’s promise to enter into
the main contract with The Watch Shop. Deep Dive can therefore take
action against Tick Tock under this collateral contract.
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96
Anticipatory breach occurs when one party to the contract, prior to the
due date for performance specified in the contract, shows an intention
that they do not intend to perform their contractual obligations. In this
scenario, Carl has made it clear that he intends to breach the contract
(express anticipatory breach).
(b)
Georgina has the option of suing for damages immediately, as she has
received notification of Carl’s intention to repudiate the contract.
Alternatively, Georgina has the option of waiting until after May 31 (the
contracted date of performance) before taking action. George may
decide to tell Carl she expects him to deliver the necklace on May 31 as
agreed, and will take legal action should he fail to do so.
(c)
Carl has repudiated the contract before the due date for performance.
Georgina has the option of terminating the contract – Hochster v De La
Tour [1853]. Carl’s breach also entitles Georgina to claim damages
(financial compensation).
The amount awarded would aim to put
Georgina in the position she would have been in had the contract been
properly performed. For example, if Georgina paid £750 to a different
supplier for an equivalent necklace, damages would be in the region of
£250 (plus any related expenses).
(a)
To require Amazing Conservatories Ltd to reconstruct the conservatory,
Eric would need to apply to the court for an order for specific
performance. The court would consider whether damages would be an
adequate remedy, as specific performance will only be awarded if
damages would not be adequate.
The court would also consider
whether enforcing an order for specific performance would require
supervision from the court and whether such an order would cause
undue hardship for the defendant.
(b)
The aim of damages is to put the innocent party (Eric) in the position he
would have been in had the contract been properly performed. In
principle, Eric could claim either:
lB
ox
(a)
AC
C
A
G
lo
ba
97
(c)
37 8
●
The difference between the value of the work completed and the
value of the work had the contract been properly performed, or
●
The cost of reconstructing the conservatory to the contract
specifications. However, this basis will not be allowed if this would
be out of proportion to any benefit that would be gained.
Yes, this would be appropriate. Although the case is similar to Ruxley
Electronics v Forsyth, (where the cost of reconstructing the swimming
pool to the contractually specified depth was not allowed since the
swimming pool was still suitable for its purpose) a key difference is that
Eric’s reason for building the conservatory was to accommodate his train
set (and he communicated this to Amazing Conservatories) and the
conservatory as built is useless for this purpose. It is likely therefore
that the court would award damages to enable him to have the
conservatory rebuilt.
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98
Task 1
D
Explanation. Sally does have a claim because she has suffered a loss as a
result of Jaymini’s breach. Even after the £400 refund, Sally is out of pocket
by £200 (as the replacement cake cost £600). Sally has also suffered
hardship on her wedding day, and has had to ‘make do’ with a cake made of
sponge when her preference was for a traditional wedding cake.
Task 2
C
Explanation. The court would consider this significant because the original
contract was for a traditional wedding cake (made from fruit cake). Sally
wanted a traditional wedding cake, and as a consequence of Jaymini’s breach
Sally was denied this opportunity. The court would consider this loss and
attempt to put a monetary value on it when awarding damages.
Task 3
A
ba
lB
ox
Explanation. The court would agree that Sally met her duty to mitigate as
Sally took all reasonable steps in the circumstances. Given the short amount
of time Sally had, it seems she did all that could be expected of her. It would
not be unreasonable to pay more for a ‘same-day’ service. It would also not
be unreasonable to look further than the immediate local area, given that it
would likely prove very difficult to find someone with the capability and time
to produce and deliver a cake on that day.
1
lo
99
FALSE
TRUE.
C
2
A
G
Explanation. An injunction can be granted. A service contract may
contain negative obligations which can be enforced by injunction without
amounting to specific performance of the whole contract.
3
AC
Explanation. Zayd has breached a negative condition of his contract
with Stadium Events. One of the possible remedies is injunction.
TRUE
Explanation. An injunction may be granted, but would only be granted
if damages were considered an inadequate remedy.
4
TRUE
Explanation. If all tickets for the Wembley concert had been sold then
Zayd’s appearance at the festival would not cause any financial harm, so
a remedy would not be required.
5
TRUE
Explanation.
The injunction prevents Zayd from performing, not
appearing. An appearance without performing would be unlikely to
cause significant harm to the Stadium Events concert.
6
FALSE
Explanation.
September 1.
The contract clause covered the period March 1 to
Announcing an additional performance by Zayd before
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the concert would likely impact concert ticket sales, even if the
performance announced was scheduled to take place after the concert.
100 C
101 C
102 C
103 C
104 A
105 C
106 B
ox
107 A
108 C
lB
109 B
ba
Option B describes the defence of volenti (often called consent). It is a
complete defence and applies here as Bee, knowing of the danger, freely
consented to the likelihood of injury.
lo
110
All those carrying out activities on a highway owe a duty of care to other
highway users. Therefore Tariq owes sally a duty of care.
(b)
Similarly Tariq owes Brian a duty of care.
(c)
Tariq would be liable to Sally if he was in breach of his duty of care and
his acts or omissions caused the injury. He was the cause of her injury
in that ‘but for’ his car being stopped in the middle of the road the van
would not have hit it and she would not have been injured.
AC
C
A
G
(a)
(d)
It is unlikely that Tariq would be liable for the injuries to Brian since his
initial negligence was not an operative cause of the injuries in the
collision on the other side of the road, those injuries were caused by the
van blocking the road.
(e)
The doctor’s negligence would be an intervening act on the part of a
third party, a novus actus interveniens breaking the chain of causation.
It is also likely to fail on a test of remoteness since the type of injury
that might be suffered in a road accident is not the same type of loss
that might be caused by exposure to contaminated blood. Thus Tariq
would not be liable for her potentially fatal disease.
111
(a)
This part of the question is testing your knowledge of how the distinction is
made between an independent contractor and an employee. In any such
question you must consider ALL the given facts. No one fact is conclusive.
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
Facts pointing towards Ron being an employee are:
●
Ron’s work (marketing consultant) is integrated into Sales Ltd’s business
– the integration test
●
Sales Ltd exercises close control over his work – the control test
●
Sales Ltd provides all his equipment
●
Ron has one employer only
●
Ron has regular hours of work.
Facts pointing towards Ron being an independent contractor are:
●
The opinion of the parties.
So, if the matter came to court, which type of worker would you predict Ron
would be?
Key points – part (b)
ox
State that the law treats employees differently from independent contractors.
Then go on to give Ron examples of the differences.
lB
112
lo
ba
Under the Employment Rights Act 1996 a statement of written particulars
must be given by the employer to the employee within two months of the
commencement of employment. It is not needed if the employee has a
written contract containing all the required particulars.
G
This written statement (perhaps in the form of a letter of engagement or as
part of an actual written contract) must include such things as the following:
The names of the employer and employee
●
The date on which employment began
●
Pay – how it is to be calculated and how it is to be paid
●
Job title or description of the work
●
●
C
AC
●
A
●
Hours of work
Holidays and holiday pay entitlement
Sick leave and sick pay
●
Any pension rights
●
Place or places of work
●
Disciplinary and grievance procedures (if any)
●
Any collective agreement relating to the employment
●
Length of notice to be given by each party to terminate the agreement.
Or length of contract if it is a fixed term contract.
If any change is made to these written details, the employer must give the
employee a written statement of the change within one month.
The statement is not the employee’s contract. Its purpose is to bring to the
attention of the employee at an early stage what the employer believes to be
the terms of the contract. This should thus assist the vast majority of
employees who have no formal written contract to know their obligations may
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38 1
A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
be and, if the written particulars are inaccurate, to bring to the attention of
the employer what was differently actually agreed.
113 YES.
114 YES.
115
Wrongful
Unfair
dismissal
dismissal
Redundancy
common law
ERA 1996
ERA 1996
Basis
breach of contract
no fair reason for
dismissal and/or
unreasonableness
redundancy
ox
Source of law
any worker
certain employees
ba
Claimant
lB
*
*
*
redundancy
payment
6 years
3 months
6 months
ET
ET
A
Limitation period
re-instatement;
re-engagement;
monetary award
lo
damages
G
Remedies
certain employees
C
*
County Court or
High Court
AC
Venue
116 (a) NO.
(b)
NO.
(c)
NO.
(d)
YES.
117 (a) NO.
(b)
YES.
(c)
NO.
118 (a) NO.
(b)
38 2
YES.
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
119
(a)
An employee who has resigned (as is the case with Ron) cannot
normally bring an action for wrongful dismissal, unfair dismissal nor for
redundancy. However, he can if he has been constructively dismissed.
Since Sales Ltd has committed a serious breach of contract by requiring
Ron to re-locate and Ron has chosen to resign because of this – he has
been constructively dismissed.
(b)
One of the fair reasons that an employer can rely on is that the
employee is redundant. Clearly that is the situation here. So Ron has
no chance of being successful in a claim for unfair dismissal.
(c)
The remedies for unfair dismissal are:
Reinstatement. This is an order that Ron be taken back under his
existing contract.
●
Re-engagement. This is an order that Ron be taken back but
under a new contract.
●
Monetary award.
In the circumstances this will have two
components: the basic award (calculated according to set formula
depending on Ron’s age, his weekly pay, and his length of service)
and the compensatory award (which is for loss).
lB
ox
●
ba
120 NO.
lo
The work she was employed to do – barmaid – has neither ceased nor
diminished.
G
121 YES.
124 D
125 D
C
123 C
AC
122 A
A
The work he was employed to do – pastry chef making éclairs – has ceased.
126 A
127 B
128 C
129 C
130 A
131 A
132 B
133 B
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
134 A
135 C
136 B
137
Tina has been dismissed because her role will cease to exist. Top Pots intends
to close down the part of the business in which Tina works. Therefore, Tina
has been made redundant.
(b)
Rather than terminating the employment of an employee facing redundancy,
an employer may choose to offer the employee alternative employment. The
alternative employment should be suitable for the particular employee. In
Taylor v Kent County Council a redundant head master was offered alternative
employment as a supply teacher. It was held that this was not suitable
because of the loss of status even though he retained his previous salary. If
the employee unreasonably refuses the offer, he loses his entitlement to a
redundancy payment.
(c)
Tina has been employed for three years and is 32 years of age. Applying the
rules of statutory redundancy pay, Tina is entitled to a redundancy payment
of 1 week's pay per complete year of employment. Tina will therefore receive
3 weeks' pay (or three times the statutory maximum weekly pay if Tina's pay
exceeds that).
ba
lB
ox
(a)
lo
138 D
G
139 D
A
140 B
C
141 D
AC
142 (a) See class answer.
(b)
Application of the above to show:
●
facts given fit partnership;
●
facts given do not entirely fit limited partnership because there is
no mention that they have registered with the Registrar as a
limited partnership.
143 (a) YES. See s5, s9 and Mercantile Credit v Garrod.
(b)
(i)
Different from part (a), ie cannot claim from Alf (nor Cleo). Firm
is not bound under s5: she cannot rely on apparent authority
because she knows of the lack of actual authority.
(ii)
Different from part (a), ie cannot claim from Alf (nor Cleo). Firm
is not bound under s5: she cannot rely on apparent authority
because she did not know nor believe Ben was a partner in a
partnership.
(iii) Same as part (a), ie can claim from Alf (and Ben and Cleo).
Doesn’t make any difference that she didn’t know who all the
partners were – it is enough that she knew that she was dealing
with a partner.
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
144 (a) YES. See s14. Croesus allowed himself to be held out as if he were a
partner.
(b)
NO.
145 (a) NO.
(b)
YES.
146 (a) ●
The agreement does not absolve her from liability to creditors. So,
to this extent it has no legal effect.
●
But if she is sued and pays up, it entitles her to get the money
from Alf, Ben, and Dai.
(b)
A partner who has retired becomes liable for the firm’s debts incurred
after retirement unless notice has been given under s36.
This means that Cleo is advised:
To give actual notice of her retirement to all persons who were
customers of the firm at any time while she was a partner. This
could be done by sending a circular letter to them informing them
of her retirement.
2.
To publish notice of her retirement in the London Gazette. This will
protect her from becoming liable to persons who were not
customers of the firm but who did know she was a partner. She
will have this protection whether such a person actually reads the
notice or not.
ba
lB
ox
1.
A
G
lo
In order to prevent liability arising under s14 (allowing herself to be held
out as if she were still a partner) she should instruct Alf, Ben, and Dai
not to use any letterheads or other documentation that shows her to be
a partner and she should also ensure that any ‘brass plaques’ etc at the
premises with her name on are taken down.
147 (a) A limited liability partnership is a body corporate with a legal personality
AC
C
separate from its members, which is formed in accordance with the
provisions of the Limited Liability Partnerships Act 2000. It is not a
partnership and is not subject to the PA 1890. Further, you would not
be partners (in the legal sense) any longer but instead you would be
members of the LLP. LLPs have only been possible since April 2001.
(b)
Advantages
1.
Perpetual succession. Because an LLP is an artificial legal entity it
has an existence separate from its members. Thus no longer will
the death or bankruptcy of either of you affect its existence.
2.
Limitation of liability. The legal personality of the LLP means that
it is the LLP itself that is party to contracts you make on its behalf
(you are no longer agents of each other, solely of the LLP). Thus it
is the LLP that is liable to creditors, not you personally.
Your liability is to the LLP and is limited to any capital contribution
you might agree to make.
However, if your LLP goes into liquidation then the court can order
you, the members, to repay any drawings (of whatever nature)
which you made in the previous 2 years if it can be shown that you
knew or had reasonable grounds to believe that the LLP
•
was unable to pay its debts at the date of the withdrawal; or
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38 5
A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
•
would become so because of the withdrawal – s214A
Insolvency Act 1986.
Further, if you as a member of an LLP commit a tort you are
personally liable (the LLP is also liable) but any other members are
not. In the partnership you are both jointly and severally liable for
torts committed by each other.
Caveat. It is the common practice of banks, in lending to small
business organisations, to require the humans involved to give a
personal guarantee of the business’s indebtedness to it. Thus it is
likely that you would still be personally liable to the business’s
bankers.
3.
Ability to create floating charges. An LLP, but not a partnership,
can secure its borrowings by floating charge*. This may well mean
greater access to raising capital funding.
* We do the detail of floating charges in company law.
ox
Disadvantages
lB
The major disadvantage is a high level of regulation and disclosure. For
example, LLPs must prepare and file annual accounts, and appoint
auditors if the turnover is over £5.6m.
148 Partnership assets
300,000
290,000
60,000
30,000
A
G
Dai’s advance
(90,000)
200,000
(100,000)
100,000
AC
C
less: Alf’s capital contribution
Residue:
(10,000)
lo
less: rent due to Alf
ba
less: debts due to outsiders
Divided as per agreed profit sharing ratios means that the value of
Dai’s share is £40,000 (ie 40%).
149 D
150 A
151 B
152 A
153 A
154 A
155 A
156 B
157 B
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
158 D
159 B
160 A
161 C
162 D
163 A
164 A
165 D
166 D
Actual authority is authority that the partners have expressly given to
a partner. Thus if, as here, it has been agreed that the partners can
sell petrol – the partnership (ie all the partners) is bound by any
contract made by a partner to sell petrol.
ba
lB
(a)
ox
167
C
Clearly Lei had no actual authority to make the contract to buy the
cars. So the issue now is did he have apparent authority? Following
Mercantile Credit the answer is yes. Thus all three partners are liable
for this contract.
AC
(b)
A
G
lo
Under s5 Partnership Act 1890 an act falls within a partner’s apparent
authority if it is the usual way of carrying on business of the kind
carried on by the firm. In Mercantile Credit v Garrod [1962] it was
established that test is an external one, ie, what does the outside
world in general regard as within the scope of the business. In that
case it was established that it is usual for a garage business repairing
cars and selling petrol to buy and sell cars.
(c)
In a trading partnership every partner has apparent authority to
borrow money on behalf of firm. A trading partnership is a firm whose
business is that of buying and selling goods. (Contrast non-trading
partnerships, such as firms of accountants – Higgins v Beauchamp
[1914].) Since their petrol business is a trading one, the firm is bound
by May’s borrowing. Thus all three partners are personally liable to the
bank.
(a)
Under s9 Partnership Act 1890 all partners are jointly and severally
liable for debts incurred on behalf of the firm. Thus all three partners
are liable. It makes no difference that Nim is a sleeping partner and
that Opra has retired.
(b)
Even though Opra has retired she will become liable to Qi in respect of
this new contract unless Opra gave notice of her retirement in
168
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accordance with s36 Partnership Act 1890. Since Qi is an existing
customer s36 requires actual notice to be given to him of Opra’s
retirement. Opra did this. Therefore she is not liable to Qi in respect
of the new contract made by Pav.
(c)
Under s36 Opra will not be liable to new customers who believed she
was a partner since she published notice of her retirement in the
London Gazette. Rob is such a customer. It makes no difference that
Rob has not read that notice because publication constitutes
constructive notice.
(a)
Under the Partnership Act 1890 the partnership assets must first be
used to pay debts to outsiders.
169
lB
ox
As the value of the assets (£5,000) is insufficient to cover all of these
debts (£9,000), the partners will be required to contribute additional
funds to make good the shortfall of £4,000. These losses will be met
according to the partnership agreement, which stated that all profits
and losses were to be divided in proportion to their capital
contributions (6:3:1). Consequently the partners will be required to
contribute as follows:
ba
Sim: £2,400
lo
Tim: £1,200
G
Una: £400
Once debts due to outsiders have been dealt with, debts due to
partners are dealt with. Again the losses will be divided between the
partners in the ratio of 6:3:1; so Sim will lose another £600, and Tim a
further £300. Una’s loss of £100 will be split between Sim and Tim,
so, in effect, only Tim will be required to pay an additional £50.
AC
C
(b)
A
Una, of course, has the right to recover any payment she makes
beyond her original contribution of £1,000 from the other two partners.
170 NO.
171 Hickman’s case
Articles contained an arbitration clause, viz any dispute between the company
and a member must be referred to arbitration.
Hickman, a member, was in dispute with the company about his expulsion
from membership.
Hickman went to court.
Can he do so?
NO – he is contractually bound by the articles to refer the dispute to
arbitration.
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
172 Pender v Lushington
Articles gave every share 1 vote.
At a GM chairman refused to count P’s votes.
What kind of wrong has chairman caused company to commit?
Breach of contract
173 Rayfield v Hands
Articles required every director to hold shares in the company and also stated
‘Every member who intends to transfer shares shall inform the directors who
will take the said shares equally between them at a fair value’.
P called upon the directors to take his shares at a fair value: they refused to
do so.
Are they bound to do so?
ox
YES – the article imposed a contractual obligation on the directors in their
capacity as members.
174 Eley’s case
lB
Articles stated that E should be the company’s solicitor.
E was appointed but was later dismissed.
Could E sue for damages for breach of contract?
ba
NO – the article did not give him any contractual rights as solicitor.
lo
175 Beattie v E F Beattie
C
Can he do so?
A
G
Articles contained an arbitration clause.
Beattie, a member and director, was in dispute with the company (it was a
wide-ranging dispute but the central issue was that he had been denied
access to minutes of board meetings).
Beattie went to court.
AC
YES – the article did not impose a contractual obligation on him as a director.
176 (a) NO.
Situation is similar to Eley’s case, where Eley was affected by his
removal in his capacity as an officer rather than as a member, court held
that he had no right to sue under s33.
As K is affected by clause in his capacity as a director, he cannot rely on
the Articles.
However, if he has a separate service contract which includes term from
the Articles, he can sue for breach of that service contract.
(b)
PERHAPS – depends on the facts.
Situation is similar to Rayfield v Hands, where court held that the
directors were affected by pre-emption clause in their capacity as
members because they were also members of the company.
It is not stated whether the directors are required to hold shares in the
company. If they do L can rely on the Articles, otherwise not.
177 Ultra vires.
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178 Ultra vires.
179 D
180 A
According to the doctrine of incorporation the company, being a legal person,
owns its property – not the shareholders, so 2 is not correct. Shareholders
are often described as the owners of the company.
181 C
182 C
If a company limited by shares doesn’t submit Articles of Association then the
Model Articles become its Articles of Association, automatically.
183 D
ox
184 D
lB
A plc must issue at least this minimum in order to get a trading certificate.
185 A
ba
The minimum nominal value is £50,000 but only a minimum of ¼ has to be
paid-up on each share.
lo
186 B
G
187 A
C
189 A
A
188 B
AC
The Companies Act 2006 specifically defines a public company and then goes
on to define a private company as any company which is not a public
company: thus 1 is correct.
All companies, in the legal sense of the word, are incorporated: thus 2 is
correct.
The CA 2006 requires all limited companies (whether public or private) to file
at least some form of annual accounts; it is unlimited companies only which
are totally exempt from the requirement. Thus 3 is not correct. It would,
however, be correct as a general rule if it read ‘A private unlimited company is
not required by law to file annual accounts at Companies House’.
The CA 2006 permits a private company to be limited or unlimited: thus 4 is
not correct.
190 D
The 3 other statements will often be the case in practice – but none are legal
requirements.
191 C
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192 A
193 A
194 B
195
(a)
In general, alterations to a company’s articles require a special
resolution. The minimum majority for a special resolution is 75%.
Bee, Cee and Dee have 25% + 25% + 25% of the paid up voting
capital. Therefore they have the necessary shareholder voting power
to change the articles of Abe Ltd.
(b)
Any alteration of the articles must be done bona fide for the benefit
of the company as a whole.
lB
ox
The bona fide requirement means that Bee, Cee and Dee must vote
honestly for the benefit of the company as a whole. The company as a
whole means the members as a body, both present and future. Thus
what is for the benefit of the company as a whole is tested by looking
at the matter through the eyes of a hypothetical shareholder.
G
lo
ba
In Sidebottom v Kershaw Leese [1920] an altered article allowing for
the expulsion of a member on the ground of competing in business
with the company was held to be valid – the new article stated a
reason for the expulsion, and the court was of the view that a
hypothetical shareholder would agree that that reason benefitted the
company.
Thus the proposed alteration 1 is valid.
A
In contrast to Sidebottom, in Brown v British Abrasive Wheel [1919] an
altered article providing for the expulsion of a member that did not, in
the article, state the reason for the expulsion was not upheld – on the
basis that a hypothetical shareholder would not agree to an unlimited
power of expulsion.
AC
C
(c)
Thus the proposed alteration 2 is not valid.
196 YES – an illegal discount of 25p.
197 NO
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198 (i)
YES.
(ii)
NO.
This last example is designed to make you aware of the potential for
manipulation of the no discount rule where shares are issued for noncash consideration. In the case of a plc there are statutory antiavoidance provisions.
199
s830 CA 2006 defines profit available for distribution as accumulated realised
profits (so far as not previously utilised by distribution or capitalisation) less
accumulated realised losses (so far as not previously written off in reduction
of capital).
200 (a) D.
£40,000.
ie
this year’s profit (10,00 +130,000)
=(100,000)
lB
less: 10 years’ losses
= 140,000
ox
(b)
Explanatory notes
40,000
‘accumulated’ means that the losses from previous years must be
brought into account in the current year.
(ii)
the words ‘profit’ and ‘loss’ refer not only to revenue (or trading)
profits and losses but also to capital profits and losses.
(i)
NO. This, colloquially called a paper profit, is an unrealised profit
and is therefore not distributable.
(ii)
YES.
lo
ba
(i)
C
A
G
(c)
AC
201
s831 CA 2006 puts an additional restriction on public companies. s831 is
sometimes called the ‘net assets’ test or the ‘full net worth’ test. s831
provides that both before and after the distribution the company’s net assets
must be at least equal to the aggregate of its called up share capital and
undistributable reserves.
202
s831 defines undistributable reserves as being:
(a)
share premium account
(b)
capital redemption reserve
(c)
the amount by which its accumulated unrealised profits exceed its
accumulated unrealised losses
The undistributable reserve at (c) above is generally referred to in accounting
terminology as the revaluation reserve.
203 TRUE
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204 D
205 (a) NO.
(b)
NO. Although preference shareholders are often said to have a right to
their fixed dividend this is misleading as whether or not they actually
receive the amount depends on (i) the availability of distributable profit
as per s830 (and s831 in the case of a public company), and (ii) whether
or not the directors choose to recommend a dividend, and (iii) whether
or not the general meeting declares it.
206 B
207 D
Another word for ‘bonus’ issue is ‘scrip’ or ‘capitalisation’ issue.
208 A
ox
209 B
lB
210 A
211 C
ba
212 A
lo
213 B
G
214 A
215 D
A company is not permitted by the Companies Act 2006 to issue shares
at a less than their nominal value. The issue to Qa is therefore
unlawful.
AC
(a)
C
A
216
Under the Companies Act 2006 the shares issued to Qa are treated as
having been issued at their nominal value, and therefore Qa is liable to
pay the outstanding discount of 25p per share plus interest at the
statutory rate.
(b)
A company is permitted to issue shares partly paid, which means that
the shares have been issued at nominal value, but the company leaves
the holder to pay part of the price for the shares at some later date.
The shareholder may be called upon to pay the unpaid part of the
shares at any time by the company. In the event that the company
goes into liquidation the liquidator will call on the shareholder to pay
the amount which remains unpaid – to the extent necessary to pay
creditors.
The issue to Rob is therefore lawful. He, however, has an outstanding
liability to pay 25p per share to the company when called upon to do
so.
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
(c)
The shares issued to Sim have been issued at a premium, ie at 50
pence above their nominal value.
This is lawful, and £1.50 is
presumably what the directors considered that the shares were worth
in terms of their market value.
The company must credit this premium of 50p per share to its share
premium account – a non-distributable reserve.
217
(a)
Timor Ltd is a private company. Profits available for distribution are
defined by the Companies Act 2006 as:
“accumulated realised profits (which have not been previously utilised
by distribution or capitalisation) less accumulated realised losses
(which have not been previously written off in reduction of capital)”.
(b)
Applying the above definition:
lB
ox
This year’s profits:
Trading profits
Capital profit on sale of asset
Total trading profit =
ba
Net off last 3 years’ losses at £20,000 per year
50,000
10,000
60,000
(60,000)
00,000
lo
The revaluation of the warehouse premises (£15,000) is an unrealised
profit and is not distributable.
G
As the profit available for distribution is therefore zero, Udi is advised
that the directors must not recommend payment of a dividend.
A
Timor Ltd has the right to recover any unlawfully paid dividend from a
director unless he can show he exercised reasonable care in relying on
properly prepared accounts.
AC
C
(c)
218 Alpha Bank – because its charge was created first.
219 C
220 C
221 C
222 C
223 C
224 C
225 B
226 D
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227
(a)
A debenture can be defined as “a document issued by or on behalf of a
company containing an acknowledgement of its indebtedness whether
charged on the company’s assets or not”. The debenture is a contract
between the company and the lender and its terms can therefore be
enforced against the borrower in the event of default, for example, if
interest payments are not made. Debentures may be issued as a
single debenture, as a series of debentures or as debenture stock. The
debenture document will set out the terms for interest and repayment.
Debentures usually rank in the order of creation and so the company
will have to pay off the earlier debentures first as they have priority
over later debentures.
Tutorial note. In simple terms, a debenture is a loan to a company.
A fixed charge can be defined as a legal or equitable mortgage on a
specific asset(s). It attaches to a particular asset(s) and the company
is not able to deal with the asset in the ordinary course of its business.
Theoretically, fixed charges can be taken as security over any asset
whatsoever. But, in practice assets suitable for fixed charges include
land and other assets that the company intends to retain long-term
within the business.
lB
ox
(b)
G
In the case of Re Yorkshire Woolcombers Ltd [1903] a floating charge
was identified as having three characteristics.
It is a charge on a class of assets present and future.
2.
The assets within the charge will change from time to time in the
ordinary course of the company’s business.
3.
The company has the general freedom to deal with the assets in
the ordinary course of its business.
C
A
1.
AC
(c)
lo
ba
On liquidation the charge will give the lender priority for repayment of
their debt from the value of the charged asset ahead of payment to
other creditors.
The floating charge does not attach to the asset on creation but only
once the charge has crystallised.
As long as the floating charge has not crystallised the company can
deal with the charged assets in the ordinary course of its business as it
sees fit. This means that a floating charge can be taken over the
company’s stock in trade, in practice a floating charge is commonly
taken over the whole of the company’s business.
228
(a)
All charges created by all companies must be registered with the
Registrar of Companies within 21 days of creation. Therefore all three
charges have been validly registered.
(b)
(i)
Fixit Bank, then Dee, then Ezra.
(b)
(ii)
With unequal charges (ie the bank as opposed to the other two
floating chargees) fixed charges take priority over floating
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
charges – the order of creation is immaterial. With equal
charges (ie the two floating chargees) they rank in order of the
date of creation – NOT in order of registration.
229 YES. He can still though sue the company for damages if the removal is in
breach of contract.
230 (a) YES.
(b)
NO.
231 See class discussion.
232 YES.
●
Consider express authority first.
●
ox
A company’s articles delegate the running of the business to the board –
not to individual directors. So unless C has been authorised by the
board to borrow money, no actual authority.
Next consider implied authority.
●
Next consider apparent authority.
lB
As director, C’s office does not carry usual authority.
lo
ba
But under the doctrine of holding out, he has been represented as
holding the office of MD. Thus the company is estopped from denying to
the bank that C has authority usual to the office of MD.
A
G
The office of MD carries usual authority to bind the company to
commercial contracts within the day-to-day business of the company,
such as the borrowing of money – Freeman & Lockyer v Buckhurst Park
Properties.
235 A
236 D
AC
234 A
C
233 YES. See s40 Companies Act 2006.
237 C
238 C
239 D
240 D
241 B
242 A
243 C
244 B
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
245 D
246 D
247
Mal is NOT a director. He has not been formally appointed, nor does
he carry out any functions of a director. He is, though, a shadow
director. This is defined by the Companies Act 2006 as “a person in
accordance with whose directions or instructions the board are
accustomed to act”.
(b)
Nim is a de jure director.
He has officially been appointed on
registration of the company (remember Form 1N01). Since he is not
active in the day-to-day running of the business (merely attending
board meetings) he is also a non-executive director.
(c)
Pan is a de facto director.
Although he has not officially been
appointed as a director, he carries out at least two functions of a
director – signing documents on behalf of Oka Ltd as if he were a
director, and participating at board meetings. Since he is involved in
the day-to-day running of the business, he is also an executive
director.
ba
lB
ox
(a)
lo
Tutorial note. For each of parts (b) and (c) the full 2 marks will only be
awarded should you have covered both de jure/de facto and nonexecutive/executive director status.
In general, the business of a company is run by its board of directors.
They therefore make decisions regarding what contracts the company
should enter into. However, the Companies Act 2006 modifies this
principle in relation to substantial property transactions: (ie a contract
with a company and a director for more than £100,000) by requiring
such to be approved by the members. Therefore this contract between
Sea Ltd and Tan must be approved by the members.
AC
C
A
(a)
G
248
Tutorial note. The fact that Tan, a director is interested in the
contract does NOT mean that the board cannot cause the company to
enter into the contract – it is the fact that the contract is for more than
£100,000 with a director and is therefore substantial property
transaction that means that approval of the members is required.
(b)
(i) The seven general duties that directors owe to their company are
only owed when a director is acting as director.
At board
meetings, therefore, as a fiduciary, Tan owes director’s duties to
Sea Ltd.
s172 Companies Act 2006 states that a director has a duty to
promote the success of the company. Thus when Tan votes at
the board meeting in his own selfish interests rather than in the
interests of the company he is in breach of this fiduciary duty.
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
s177 Companies Act 2006 requires a director to disclose the
board any interest he may have in a company contract. Clearly
Tan has done this.
But he should not have voted on the
resolution to approve the contract – thus his vote will be
discounted.
(b)
(ii) At the general meeting Tan is exercising his votes as a
shareholder. In this capacity he owes no fiduciary duty to Sea
Ltd. In principle, shareholders do not owe fiduciary duties to
their company.
Thus Tan is not in breach of duty as a
shareholder. He can lawfully vote at the general meeting – and
in any way he personally sees fit.
(a)
This arises where a person occupies a particular office or position –
impliedly he will have authority to make contracts that are usually
made by a person occupying that office.
ox
249
ba
lB
Freeman & Lockyer v Buckhurst Park Properties [1964] established
that the office of managing director carries implied authority to bind
the company to all contracts of a commercial nature – ie to do with the
day-to-day running of the business. The same case established that
the office of any other director carries no such implied authority.
Where a company holds out a person as occupying a particular office or
position, the company is then estopped from denying to third parties
that he has authority usual to that held out office or position. In the
Freeman case a director was allowed to act as if he were MD – and so
he had apparent authority to engage a firm of architects for the
company’s construction business.
(c)
Leo is merely a director, not managing director, so the two contracts
made do not fall within his implied authority.
AC
C
A
G
lo
(b)
However, he has been held out by the company as if he were
managing director. The two contracts are commercial ones and would
appear to a third party to be connected with the company’s day-to-day
business: therefore they fall within Leo’s apparent authority.
Accordingly Maisonette Ltd is bound by the two contracts.
250 (a) YES.
(b)
YES.
(c)
NO.
251 The basic rule is every company must have auditors except:
(i)
small private companies,
and
(ii)
39 8
any dormant company which has passed a special resolution dispensing
with the need.
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
252 The RSBs are
●
Institute of Chartered Accountants in England & Wales (and
Scotland and Northern Ireland)
●
Chartered Association of Certified Accountants.
253 The first auditors may be appointed by the directors, who may also fill casual
vacancies. In each case the auditor holds office until the next general
meeting at which the accounts are laid.
Otherwise, the auditors are appointed or re-appointed by ordinary resolution
at the accounts meeting. And –
●
in the case of a public company, the auditor holds office until the next
accounts meeting.
●
in the case of a private company, the auditor need not be appointed or
re-appointed every year. He is deemed to be re-appointed.
An auditor may resign at any time by notice in writing to the company.
TRUE
lB
254 1.
ox
If at any time a company is without an auditor it must notify the Secretary of
State within 7 days.
A resigning auditor has a statutory right to requisition a GM.
TRUE
3.
A resigning auditor must send to the company a statement to the effect
that either there are no circumstances which ought to be brought to the
attention of the members or that there are such circumstances and what
they are.
TRUE
255 1.
G
lo
ba
2.
Auditors may be removed from office by the directors.
FALSE
Auditors may be removed from office at any time for any reason by
ordinary resolution of which special notice has been given.
3.
A removed (or about to be removed) auditor has a statutory right to
requisition a GM.
FALSE
4.
A
removed
auditor
must
circumstances/circumstances.
C
AC
256 1.
A
2.
send
the
statement
of
no
TRUE
The basic statutory duty of an auditor is to report to the
members whether or not the accounts give a true and fair view
and have been properly prepared in accordance with the
Companies Act.
In particular the auditor must investigate so far as necessary to form an
opinion as to whether:
2.
(i)
proper accounting records have been kept
(ii)
proper returns have been received from branches
(iii)
the accounts are in agreement with the accounting records
(iv)
the information given in the directors’ report is consistent with the
accounts.
Should auditors discover, for example, that proper accounting records
have not been kept, what must they do?
qualify the accounts in the audit report.
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
3.
Auditors have a statutory right of access at all times to the company’s
books.
TRUE
4.
Auditors have a statutory right to obtain from the company’s officers
and employees such information and explanations as the directors think
necessary for the performance of the auditors’ duties.
FALSE – should be …explanations as the auditors think…
5.
Should such a person refuse to give an explanation to an auditor what
must the auditor do?
qualify the accounts in the audit report.
6.
Is it a criminal offence to tell falsehoods to auditors?
YES
257 A
258 C
259 A
ox
260 A
It is the responsibility of the board to ensure that the company
secretary is qualified in one or more of the following ways:
The secretary has been the secretary of a public company for at
least three of the preceding five years.
2.
The secretary possesses a professional
Companies Act 2006 states that these are:
lo
qualification.
The
is a member of one of the major accounting bodies (eg ACCA);
●
is a solicitor or barrister;
●
is a member of ICSA.
A
G
●
The secretary is a person who, by virtue of his holding or having
held any other position or his being a member of any other body,
appears to the directors to be capable of discharging the functions
of secretary.
AC
3.
ba
1.
C
(a)
lB
261
(b)
The Companies Act 2006 does not set out the duties/responsibilities of
the company secretary – this is a matter for the board.
As chief administrative officer of the company the board is likely to set
his responsibilities as including:
40 0
1.
responsibility for making the company’s statutory returns to
Registrar of Companies;
2.
responsibility for the convening of company and board meetings;
3.
the giving of advice at board meetings on company law matters.
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
262
(a)
Panorama Developments v Fidelis Furnishing Fabrics [1971]
established that the implied authority of a company secretary extends
to making contracts of an administrative nature, but not to those of a
commercial nature.
The contract for the maintenance of the photocopiers would appear to
be of an administrative nature. Thus the contract with A plc is binding
on Flower plc.
This contract is of an administrative contract and is the same as that in
the Panorama case. Thus the contract with B plc is binding on Flower
plc.
(c)
This contract is a commercial type contract, ie to do with Flower plc’s
day-to-day business. Thus the contract with C plc is not binding on
Flower plc.
ox
(b)
lB
Tutorial note. The fact that the landscaping was done at Flora’s own
house is NOT a valid reason for stating that the contract was not
binding on Flower plc.
ba
263 YES. Of the 3 votes cast: a majority were in favour.
264 B
lo
265 C
G
266 B
270 C
C
269 A
AC
268 B
A
267 A
A special resolution is defined in the Companies Act 2006 as one requiring a
three-fourths majority. As with any resolution passed at a meeting ‘majority’
is a majority of the votes actually cast.
271 B
●
A special resolution is required to alter the registered name of the
company.
●
The majority required for a special resolution is at least three-fourths
(75%) of the votes which are cast (here that means ¾ x 900,000 =
675,000).
272 A
273 B
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
274 C
The written resolution procedure can be used for any resolution except
●
removal of auditor, and
●
removal of director.
275 D
Compare this answer with the answer to that to Q271.
276 C
277 C
278 B
279 B
ox
280 A
lB
281 C
282 C
ba
283 B
lo
284 B
G
285 A
A
286 A
287 B
289
AC
288 C
C
B would be correct if it had had the word “creditors” instead of “shareholders”.
The order of payment is as follows:
40 2
(a)
As a fixed chargee, the bank will be paid out of the proceeds of sale of
the offices. The bank will rank for any shortfall as an unsecured
creditor. If there is a surplus this will go into the general pot available
for creditors.
(b)
Next to rank is Andrew in respect of the £10,000 secured by floating
charge (but subject to Hilda’s prior claim as a preferential creditor –
see part (c) below). This will be dealt with in the same way as the
fixed charge.
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
(c)
Hilda will rank as a preferential creditor for £800 of her unpaid salary,
ie below the bank but above Andrew. If there is insufficient to pay all
the preferential claims by employees they will rank pari passu.
After Andrew, the floating chargee, are the ordinary unsecured
creditors including the £19,200 balance of Hilda’s salary. If there is
insufficient to pay all the unsecured creditors they will rank pari passu.
290 (a) NO – under the CJA 1993 the dealing offence is committed only where
the dealing is done on the market, not where the dealing is done
privately.
(b)
YES – that of ‘dealing’.
(c)
YES – that of ‘encouraging.’
(d)
YES – that of ‘disclosure’.
ox
291 See class discussion.
292 B
lB
293 D
ba
The actual dealing etc does not have to be done by the defendant himself. If
he gets someone to buy or sell shares etc on his behalf, he still commits an
offence.
lo
294 B
G
295 B
296 A
298 A
AC
297 B
C
A
The actual crime (whether theft or other crime) by which illegal funds are
obtained is not one of the recognised stages of money laundering.
Wrongful trading is limited to directors and shadow directors (both current
and former).
299 C
Options A and B are incorrect because wrongful trading is not a criminal
offence – contrast fraudulent trading.
300
(a)
The offences can only be committed by a person who is an ‘insider’ for
the purposes of the Act. An insider is a person who has insider
information and he knows that the information is inside information and
he has obtained the information from an inside source, which he knows
to be from an inside source.
To qualify as inside information the following criteria need to be fulfilled:
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
1.
It must relate to particular securities or to a particular company or
companies; and
2.
It must be specific or precise; and
3.
It must not have been made public; and
4.
If it were made public it would be likely to have a significant effect
on the price of the securities.
Clearly Karen is an insider. When she passes on the information about
the proposed bid to Charlotte she commits the offence of disclosing
information. She also commits the offence of encouraging Charlotte to
deal.
Charlotte is also an insider. She got inside information from Karen, an
inside source.
(c)
Liz is not an insider. She did not receive inside information (as defined
above) – Charlotte merely encouraged her to buy shares.
(a)
If Ann buys the business a requested by Paul she is engaged in
‘placement’ – the initial stage where the proceeds of crime are used to
purchase legitimate assets.
ox
(b)
lB
301
Failure to report. Individuals in a business in the regulated sector (for
example solicitors and accountants) have a duty to disclose any
knowledge or indeed suspicion that another individual is engaged in
money laundering to the Money Laundering Reporting Officer in their
organisation or direct to the National Crime Agency (NCA).
A
G
(b)
lo
ba
Ann will be committing the main ‘laundering’ offence which includes
assisting another to retain the proceeds of criminal activity or concealing
the proceeds of criminal activity.
AC
C
Ann is an accountant in private practice and is therefore in a regulated
sector. She has a duty to report any suspicions that she may have
regarding a client’s involvement in money laundering. The £40,000 in
cash that has been given to her should make her suspicious.
Tipping off. It is an offence for professionals to disclose to anyone
suspected of money laundering any information which is likely to
prejudice any investigation under the legislation.
If she discloses any of her suspicions to her client regarding the source
of the cash or the fact that she or her firm has reported the matter to
the NCA she could be liable for the offence of tipping off.
(a)
Fraudulent trading is carrying on business with intent to defraud
creditors (or for any fraudulent purpose). The liquidator must prove
that Tim and Henry were actually dishonest (eg ordering goods on credit
knowing they will never be paid for).
This does not seem to be the case here – they continued trading and
ordering goods in the hope that the company’s position would improve.
Accordingly, they will not be liable for fraudulent trading.
(b)
40 4
The liquidator must prove that Tim and Henry were directors at a time
when they knew or ought to have known that there was no reasonable
prospect of avoiding insolvent liquidation.
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A N S W E R S T O E X E R C I S E S A N D S A M P L E Q U E S T IO N S
They knew of the company’s serious financial position after losing an
important contract – so it is strongly arguable that there little hope of
turning the company around.
However they will be able to avoid liability if they can prove that they
took every step they ought to have taken to minimise losses to
creditors. All they did was to trade on in the hope that things would
improve. This is not every step.
Accordingly, it is very likely that they will be liable for wrongful trading.
In consequence they will be ordered to make contribution to the
company’s assets.
302
Fraudulent trading is carrying on business with intent to defraud
creditors (or for any fraudulent purpose). The liquidator must prove
that Tim and Henry were actually dishonest (eg ordering goods on credit
knowing they will never be paid for).
ox
(a)
The liquidator must prove that Tim and Henry were directors at a time
when they knew or ought to have known that there was no reasonable
prospect of avoiding insolvent liquidation.
ba
(b)
lB
This does not seem to be the case here – they continued trading and
ordering goods in the hope that the company’s position would improve.
Accordingly, they will not be liable for fraudulent trading.
G
lo
They knew of the company’s serious financial position after losing an
important contract – so it is strongly arguable that there little hope of
turning the company around.
C
A
However they will be able to avoid liability if they can prove that they
took every step they ought to have taken to minimise losses to
creditors. All they did was to trade on in the hope that things would
improve. This is not every step.
AC
Accordingly, it is very likely that they will be liable for wrongful trading.
In consequence they will be ordered to make contribution to the
company’s assets.
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