LW270: Corporate and Business Law
Outline Solutions June 2015
Question 1
This question involves the issues of consideration and intention to create legal relations.
a)
The first promise is to consider Laura’s promise to give Sarah £20. This is a commercial
relationship, and so any agreement will be intended to be legally binding. Edwards v
Skyways (1964). The main problem for the extra £20 payment is lack of consideration for
that promise, Laura’s hair was already finished before she made the promise. This raises the
issue of past consideration Re McArdle (1951). Past consideration is not good consideration
Laura’s promised is not supported by consideration therefore she will not have to pay the
extra £20
b)
The issue here is whether the agreement to hare the winning can be said to be intended to
create legal relations. The general presumption in social and domestic situations is there is
no intention. Balfour v Balfour (1919). The burden will be on Laura to prove that the
agreement between the three friends was intended to be binding. A similar case is that of
Simkins v Pays (1955), three women who lived in the same house regularly entered a
newspaper competition and shared the cost of the entrance fee, the court held there was an
intention to create legal relations. Applying this to Laura she may have difficulties with her
claim, this was a one off situation rather than a regular arrangement as in Simpkins v Pays,
and there was no shared entrance fee, it is unlikely she will be successful.
Question 2
Raymond has agreed to accept £200 in settlement of a debt of £800. The question is whether
Raymond can go back on that agreement and sue for the balance.
The rule in Pinnel's case (1602) 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 Foakes v Beer (1884).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.
There are, however, four exceptions to the rule in Pinnel's case (1602).
(1)No duress In D & C Builders v Rees (1966 ) Mrs Rees owed a sum to the claimants in respect of
some building work. Knowing that the claimants were in a parlous financial state, she put pressure
on them to accept a smaller sum. Under protest the builders accepted the smaller sum. It was held
that there was no true accord. Likewise here, Raymond 'after a bitter argument reluctantly’
accepted the £200.
Satisfaction means consideration. Thus if, e.g. 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. Other examples of consideration include the giving of an
asset, the performance of a service, and different modes of payment although in D & C Builders v
Rees (1966) it was held that there is no distinction, for these purposes, between payment by
cheque and payment by cash. Thus Samantha's payment of £200 by cheque confers no benefit
when compared to £800 in cash. If the agreement to accept the smaller sum is by deed then it is
binding on the creditor even though the debtor has given no satisfaction. Accordingly Raymond is
advised that there is most probably duress and certainly no 'satisfaction' sufficient to prevent him
from suing for the £600 balance.
Page 1 of 8
LW270: Corporate & Business Law (MS)
June 2015
Part payment by a third party-If the part payment to the creditor is made not by the debtor but by
some third party then the creditor cannot pursue the debtor for the balance. The given facts state
that Samantha paid the £200, not someone else; so this exception does not apply.
Composition with creditors-If the agreement with the creditor is part of a wider agreement between
the debtor and his creditors, and all the creditors accept the debtor's proposals, they cannot later
pursue the debtor for any shortfall. The given facts do not indicate that Samantha entered into such
a composition; so this exception does not apply.
Equitable doctrine of promissory estoppels-In certain circumstances, equity will stop a creditor from
going back on his promise to accept a smaller amount. In Central London Property Trust v High
Trees House (1947) 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 reliance it would in all the circumstances be just and equitable to hold the
creditor to his word.
Raymond is advised that none of the exceptions to the rule in Pinnel's case (1602) apply and he
may therefore sue Samantha for the £600 balance.
Question 3
In the case of George we first must establish whether he is self employed or employed for the
purposes of relying on employment rights protections. In such situations the courts will determine
status by looking at the reality of the situation. If there is a doubt about the nature of the
relationship the courts will consider any agreement between the parties, even if the parties refer to
the relationship as being self employed. It is possible that George could be considered as an
employed person and thus be afforded rights under the Employment Rights Act 1996. The test that
is predominantly used today for determining this the multiple test as developed in Ready Mix
Concrete (South East) Ltd v MPNI [1968]. In this case the driver of lorry had a contract with
company whereby he drove his lorry on company business, obeyed instructions, wore company
colours, but could employ a substitute driver, maintained own lorry etc., paid on goods delivered
and mileage. It was held that although employer exercised some control over work other factors
were consistent with a contract of service. Therefore the driver was an independent contractor. It
was established in this case that a contract for service exists if 3 conditions are fulfilled:



Employee agrees that in consideration of a wage or other remuneration he will provide his
work and skill in the performance of some service for his employer.
Employee agrees that the performance of that service he will be subject to the other’s control
in sufficient degree to make the other his employer.
Other conditions are consistent with it being a contract of service.
Later cases have used additional factors (Carmichael v National Power (1999)), and it must be
noted that no one test is decisive. However significant factors include:
a) Degree of control by employer
b) Degree to which the worker risks his own losses/gains
c) Ownership of tool and equipment
d) Degree to which the worker’s work is an integral part of the business
e) Regularity of payment
f) Regularity of hours
g) Mutuality of obligations – i.e. is the employee under a duty to provide work and the worker
under a duty to accept it
h) Ability to delegate performance of the contract
i) Terms used by the parties
Page 2 of 8
LW270: Corporate & Business Law (MS)
June 2015
If it can be established that George fits the criteria set out than he can be considered as an
employed person. It is likely that, as the services of George are exclusive to Royston then this is a
possibility. As an employed person George is entitled to refuse to falsify the accounts, as in
Morrish v Henlys (Folkstone) Ltd (1973) an employee was not in breach of contract when he
refused to falsify the company’s accounts. Therefore George would be entitled to claim for
constructive dismissal. This is where a serious breach of contract by employer such as entitles the
employee to treat the contract as discharged (Donovan v Invicta Airways (1970)).
Arnold is clearly an employee and this can rely on the Employment Rights Act 1996. Arnold may
wish to claim unfair dismissal, in order to claim the employee must be continuously employed for a
year. However the employee can justify dismissal for misconduct amounting to breach of duty of
good faith as in Whitlow v Alkanet Construction (1981). In this case W asked by Senior Executive
to do some work at E’s house. Instead of working W had an affair with E’s wife. Dismissal of W
was held to be fair as he was in breach of duty of good faith. It would appear that Arnold fits these
criteria and therefore would be unlikely to be able to claim successfully.
Gordon would be entitled to claim for unfair dismissal as he is employed and has worked at Cake
creations for over 1 year. Gordon may be able to claim for unfair dismissal. Royston could justify
dismissal on the ground that George is incompetent, however this would depend upon whether
George had been adequately trained. If employee is dismissed for incompetence it must be of
such a nature and quality to justify dismissal (Lewis Shops Group v Wiggins (1973)). As the new
machinery has only recently been installed, this suggests that proper training may not have been
implemented, if so then George would most likely succeed.
Question 4
Dan- The rules relating to the residual responsibility of retired partners for partnership debts
depend on when the debts were contracted and the action taken by the former partner to
announce their retirement from the business.
A retired partner remains liable for any debts or obligations incurred by the partnership prior to
retirement. Thus the date of any contract determines responsibility: if the person was a partner
when the contract was entered into, then they are responsible, even if the contract is completed
after their retirement. It is possible for the retiring partner to be discharged from existing liability
though as a consequence of a contract of novation.
Novation is essentially a tripartite contract involving the retiring partner, the remaining members of
the continuing partnership and the existing creditors. Under such an agreement any liability of the
retiring partner is passed to the remaining partners. As creditors effectively give up rights against
the retiring partner, their approval is required. Such approval may be express or it may be implied
from the course of dealing between the creditor and the firm.
Where someone deals with a partnership after a change in membership, they are entitled to treat
all the apparent members of the old firm as still being members until they receive notice of any
change in the membership.
In order to avoid liability for future contracts, a retiring partner must ensure that individual notice is
given to existing customers of the partnership; and advertise the retirement in the London Gazette.
This serves as general notice to people who were not customers of the firm prior to the partner's
retirement, but knew that that person had been a partner in the business. Such an advert is
effective whether or not it comes to the attention of third parties.
Dan could be liable for any debts towards the longstanding customer, Greg, unless he has taken
steps to notify Greg of his retirement from the partnership, which does not appear likely.
Page 3 of 8
LW270: Corporate & Business Law (MS)
June 2015
Frank had let it be known generally that he was a partner and if ,as would appear likely, the other
partners knew about Frank's claim and did nothing to deny it, then they would be estopped
subsequently from insisting on the true nature of affairs (Freeman and Lockyer v Buckhurst Park
Properties Ltd (1964)). Frank would therefore be seen as a partner with the authority to bind the
partnership (s.5 Partnership Act 1890). However, the partnership would be liable for the contracts
even if the other partners were not aware of Frank's claim to be a partner. The question states that
Eve and Clare left much of the day to day running of the business to Frank and it can be seen that,
on that basis alone, he had the authority to manage the business irrespective of the question as to
whether he was a member of the partnership or not. Third parties are entitled to assume that
agents holding a particular position have all the powers that are usually provided to such an agent.
This is referred to as implied actual authority and means that, without actual knowledge to the
contrary, outsiders may safely assume that an agent has the usual authority that goes with their
position (Watteau v Fenwick (1893)). Entering into ordinary trading contracts, such as the one with
Greg, would come within Frank's implied actual authority as the business manager.
As for Frank's liability, anyone who represents themselves, o rknowingly permits themselves to be
represented, as a partner is liable to any person who gives the partnership credit on the basis of
that representation. The partners would be estopped from denying Frank's membership if they
knew of his claim to be a partner. Frank would also be estopped from denying that he was a
partner. Frank therefore would also be liable for the debts.
Clare and Eve being active partners have full responsibility for the partnership debts.
Under s9 of the PA 1890, the liability of partners as regards debts or contracts is joint and several.
The effect of joint liability used to be that, although the partners were collectively responsible, a
person who took action against one of the partners could take no further action against the other
partners, even if they had not recovered all that was owing to them. That situation was remedied
by the Civil Liability (Contributions Act) 1978. This act effectively states that a judgment against
one partner does not bar a subsequent action against the other partners. This means that as
regards Greg's debt Clare, Dan, Eve and Frank are all personally responsible for any shortfall and
hemay take action against any one of them. The one against whom the action is taken will be able
to claim a proportionate indemnity from the others.
Page 4 of 8
LW270: Corporate & Business Law (MS)
June 2015
Question 5
Murray has breached his duties as a director s175 CA 2006 duty not to compete, Regal Hastings v
Gulliver, Idc v Cooley, and s172 CA 2006 duty to act in good faith and promote the success of the
company. It is understandable that the other directors want to dismiss him.
In the case of Shuttleworth v Cox Bros & Co Ltd (1927), the expulsion of a director who had failed
to account for funds was held to be valid. Therefore it is possible to carry out an expulsion if there
is an instance of bad faith (Greenhalgh v Ardene Cinemas Ltd (1950).
The CA 2006 S21 states any company has a statutory power to alter its articles by special
resolution requiring a 75% majority. In order to alter the articles however there must be shown to
be a bona fide benefit to the company, in other words the alteration must be for the benefit of the
company. A subjective test applies to those deciding upon the alteration. They must believe they
are acting in the interest of the company. Whether any alteration meets this requirement depends
on the facts of the particular case. In Sidebottom v Kershaw Leese & Co (1920) an alteration to
the articles to give the directors the power to require any shareholder, who entered into competition
with the company, to sell their shares to nominees of the directors at a fair price was held to be
valid. In Dafen Tinplate Co Ltd v Llanelly Steel Co (1907) a minority shareholder was acting to the
detriment of the company, an alteration to the articles, to allow for the compulsory purchase of any
member’s shares on request so to do, was also held to be too wide to be in the interest of the
company as a whole.
It appears that, as Murray is in direct competition with PCI Ltd, the alteration would be valid in line
with Sidebottom v Kershaw Leese & Co. Consequently it is likely that the alteration would be valid
as being in the interest of the company as a whole on the basis of Sidebottom v Kershaw Leese &
Co (1920).
Question 6
a)
The nominal share capital is the total number of shares that can be issued by a company.
b)
The issued share capital is the shares that have actually been allotted and paid for by the
shareholders. Note that the amount charged for the shares need not all be collected when
the shares are issued. In a private company, there are no requirements as to the amount
shares must be paid up. A PLC must receive at least one-quarter of the nominal amount of
the share and the whole of any premium when the shares are issued: CA 2006, s586.
c)
Paid up capital is the amount of issued capital that has been paid for. The amount charged
for the shares need not all be collected when the shares are issued. In a private company,
there are no requirements as to the amount shares must be paid up. A PLC must receive at
least one-quarter of the nominal amount of the share and the whole of any premium when
the shares are issued: CA 2006, sec586.
d)
Current market price as indicated by the latest recorded trade on the stock exchange, in a
private limited company calculate total assets less liabilities and divide by number of shares
in issue.
e)
An issue of rights to a company's existing shareholders that entitles them to buy additional
shares directly from the company in proportion to their existing holdings, within a fixed time
period. In a rights offering, the subscription price at which each share may be purchased in
generally at a discount to the current market price. Rights are often transferable, allowing the
holder to sell them on the open market.
f)
A bonus issue is an offer of free additional shares to existing shareholders, in propeortion to
their existing shareholding. A company may decide to distribute further shares as an
Page 5 of 8
LW270: Corporate & Business Law (MS)
June 2015
g)
h)
alternative to increasing the dividend payout. Also known as a "scrip issue" or "capitalization
issue".
If a company issues shares at a premium it must set up a share premium account: CA 2006,
s610. This is frequently misunderstood. It does not mean that the amount of the premium has
to be put in a separate bank account. It is simply a balance sheet entry that is subject to
statutory rules which require this amount to be treated in much the same way as share
capital.
Any excess should be credited to the share premium account.
Question 7
Section 84 Insolvency Act states that a company may be wound up voluntarily:
I when any period fixed for the duration of the company by the articles expires or any event occurs
which shall, according to the articles, lead to its dissolution. Under such circumstances the winding
up has to be approved by an ordinary resolution.
II for any other reason whatsoever. Under these circumstances a special resolution is required to
approve the winding up.
In either case the winding up is deemed to have started on the date that the appropriate resolution
was passed. There are two distinct forms of voluntary liquidation:
Members' voluntary winding up
This takes place when the directors of the company are of the opinion that the company is solvent
and is capable of paying off its creditors. The directors are required to make a formal declaration to
the effect that they have investigated the affairs of the company and that in their opinion it will be
able to pay its debts within 12 months of the start of liquidation. It is a criminal offence for directors
to make a false declaration without reasonable grounds. On appointment, by an ordinary resolution
of the company, the job of the liquidator is to wind up the affairs of the company, to realise the
assets and distribute the proceeds to its creditors. On completion of this task the liquidator must
present a report of the process to a final meeting of the shareholders. The liquidator then informs
the Registrar of the holding of the final meeting and submits a copy of his report to it. The Registrar
formally registers these reports and the company is deemed to be dissolved three months after
that registration. Creditors' voluntary winding up
This takes place when the company is insolvent when it is decided to wind it up. The essential
difference between this and the former type of winding up is that, as the name implies, the
creditors have an active role to play in overseeing the liquidation of the company .Firstly a meeting
of the creditors must be called within 14 days of the resolution to liquidate the company at which
the directors must submit a statement of the company's affairs. The creditors have the final say in
who should be appointed as liquidator and may, if they elect, appoint a liquidation committee to
work with the liquidator. On completion of the winding up the liquidator calls and submits his report
to meetings of the members and creditors.
Page 6 of 8
LW270: Corporate & Business Law (MS)
June 2015
The liquidator then informs the Companies' Registry of the holding of these final meetings and
submits a copy of his report to it. The Registrar formally registers these reports and the company is
deemed to be dissolved three months after that registration.
The judge in Re Yorkshire Woolcombers' Association (1903) stated that a floating charge has the
following characteristics:



it attaches to a class of asset, both present and future
the assets within the class will be changing from time to time
until some step is taken which crystallises the charge, the company remains free to deal
with the assets in the ordinary course of business.
Floating charges have the following disadvantages which may mean that they provide inadequate
security:




Priorities: fixed charges take priority over floating charges even though they may have been
created later.
The company's freedom to deal with assets subject to a floating charge includes the ability
of the company to dispose of the assets. This may mean that if a liquidation occurs there
are few assets available to the floating chargee.
On liquidation the claim of the floating chargee is subject to the prior claims of any fixed
chargees on the same assets and the preferential creditors.
Heart of England should check the register of charges at Hassock plc's registered office
and Companies House. In order to be valid, all charges must be registered at Companies
House within 21days of their creation. It is Hassock plc's duty to register the charge, but
anyone interested (i.e. Heart of England Bank plc) may affect the registration. If
unregistered, the charge is void as against the liquidator, i.e.Heart of England Bank plc
becomes an unsecured creditor if Hassocks plc goes into insolvent liquidation.
Question 8
The stock market value of shares in a company fluctuates in relation to the underlying performance
of the company and the expectations of investors. Amongst other things, good company results will
lead to an increase in the value of the shares. Since share prices fluctuate on the stock market, the
possibility arises for individuals to make large profits, or losses, by speculating in shares. It can
also provide people with the opportunity to take advantage of their close relationship with particular
companies in order to make profits from illegal share dealing. Such illegal trading in shares, known
as insider dealing, occurs when someone trades on the basis of price sensitive information before
the general public has access to that information. Insider dealing is governed by Part V of the
Criminal Justice Act 1993.
Section 52 of the Criminal Justice Act 1993 states that an individual, who has information as an
insider, is guilty of insider dealing if he deals in securities that are price-affected securities in
relation to the information. An individual is also guilty of an offence if he encourages others to deal
in securities that are linked with this information, or if he discloses the information otherwise than in
the proper performance of his employment, office or profession. R v Asif Nazir Butt [2006]
Section 56 makes it clear that securities are price-affected in relation to inside information if the
information, when made public, would be likely to have a significant effect on the price of those
securities.
Section 57 defines an insider as a person who knows that he has inside information and knows
that he has the information from an inside source. This section also states that inside source refers
to information acquired through being a director, employee or shareholder of an issuer of
securities, or having access to information by virtue of his employment. Additionally, individuals
Page 7 of 8
LW270: Corporate & Business Law (MS)
June 2015
who acquire their information from those primary insiders (those previously mentioned) are also
insiders.
There are a number of defences to a charge of insider dealing. For example, s53 makes it clear
that no person can be so charged if he did not expect the dealing to result in any profit or the
avoidance of any loss.
On summary conviction an individual found guilty of insider dealing is liable to a fine not exceeding
the statutory maximum and/or a maximum of six months' imprisonment. On indictment the penalty
is an unlimited fine and/or a maximum of seven years' imprisonment. There is also the possibility
that the person who benefits from the information, which belongs to the company, will be required
to account to the company for any profit made. This would certainly be the case with regard to
directors who engaged in insider dealing, as they would have breached their duty to the company.
Applying the law to the situation in the question, it can be seen that, as an employee of Dome plc,
Ewan is an insider under s57, and the information he has is certain to affect the price of the
company's shares. It therefore follows that when he buys the shares in Dome plc, Ewan is liable to
a charge of insider dealing under s52(1) of the Criminal Justice Act 1993. Ewan is also liable for
the separate offence, under s52(2), of disclosing the information to Frank otherwise than in the
proper performance of his employment.
Because he received the information from an insider, Frank is treated as an insider under s57 and
is liable for trading on the basis of the information under s52.
The information given to Tony is not specific and precise, Tony may have a defence under s53
CJA 1993 that he would have done what he did anyway and did not expect the dealing to result in
a profit, but Ewan would be guilty of encouraging another to deal.
Page 8 of 8
LW270: Corporate & Business Law (MS)
June 2015