Chapter 14: Question & Answers

1 Essential elements of legal systems

Question 1

Answer both parts in the context of the UNCITRAL Model law on Arbitration:

(1)What are the requirements of a valid arbitration agreement?

(5 marks)

(2)On what basis can an arbitrator be challenged?

(5 marks)

(Total: 10 marks)

2 International business transactions: formation of the contract

Question 2

A Ltd, a company registered and trading in Poland, received, on 1March, an offer by mail from B Ltd, a company based in USA to purchase100 tons of Soya beans. On 7 March A Ltd sent its acceptance of theoffer by post. However, on 5 March B Ltd had sent a revocation of itsoffer, which was received in Poland on 10 March. The acceptance from Awas received by B on 11 March.

Both Poland and USA are parties to the United Nations Conventions – CISG.


Explain the following under the United Nations Convention on Contracts for the International Sale of Goods.

ADid a contract come into existence?

(7 marks)

BFrom which day was the offer effective?

(1 mark)

CFrom which day was the acceptance effective?

(1 mark)

DWas the revocation valid?

(1 mark)

(Total: 10 marks)

3 International business transactions: obligations

Question 3

A Inc sells components for PVC toys to toy manufacturers worldwide.On 1 May 2000 they entered into a contract with B Ltd for sale of 5,000toys' clothes for the sum of US $200,000. The contract clearlystipulated that 'this agreement is subject to all rules of the 1980Vienna Convention on International Sale of Goods'. The clothes weredelivered as agreed on 5 May 2000, and used by B in their production butpayment was never made. After numerous patient reminders andcommunication to B Ltd, for which they received no reply, A Incinitiated proceedings requesting relief in the form of payment due plusall interests accrued. During the proceedings B Ltd claimed that the toyclothes in question were not of the expected quality and standard, andthat they required a reduction in price.



AWhat remedies are available to A Inc?

(4 marks)

BWould the party be entitled to interest?

(2 marks)

CWill the counter-claim succeed?

(4 marks)

(Total: 10 marks)

4 International business transactions: risk and payment

Question 4

Amanda is an exporter of children toys and she trades with largeand small companies all around the world. She normally sends her goodswith enclosed invoices and expects her purchasers to pay within 14 days.Recently, a few of her purchasers were unable to pay due to theirinsolvency. She came to you for advice about how to better structure thetransactions in order to protect her business from non-payment.


ADiscuss the various payment methods that are available in international trade transactions.

(8 marks)

BAdvise Amanda which method would best suit her circumstances.

(2 marks)

(Total: 10 marks)

5 International business forms – agency

Question 5

In relation to agency, explain how the following types of authoritymay arise and explain the extent of the authority arising under eachcategory.

AExpress authority.

(2 marks)

BImplied authority.

(4 marks)

CApparent/ostensible authority.

(4 marks)

(Total: 10 marks)

6 Partnerships

Question 6

Clare, Dan and Eve formed a partnership 10 years ago. Two years agothe partnership employed Frank as its manager and last year Dan retiredfrom the partnership. Eve and Clare subsequently left much of theday-to-day work to Frank who has let it be known generally that he hasbecome a partner, although he has not. In January of this year Frankentered into a large contract with a longstanding customer, Greg, whohad dealt with the partnership for some five years.

Greg believed Frank's claim that he was a partner in the business.

This contract has gone badly wrong leaving the partnership stillowing $50,000 to Greg and unfortunately the business assets will onlycover the first $25,000 of the total debt.


Consider and explain the potential liabilities of Dan, Clare, Eve and Frank.

(10 marks)

Question 7

Detail the grounds upon which a partnership can be terminated.

(10 marks)

7 Corporations and legal personality

Question 8

Explain what legal limitations there are on the names that may beadopted by companies, paying particular regard to the tort of 'passingoff'.

(10 marks)

Question 9

Explain the meaning and effect of a company's articles of association, paying particular attention to the following issues:

AThe operation of the model articles of association.

(2 marks)

BThe effect of the articles on both members and non-members.

(4 marks)

CThe procedure for altering the articles of association.

(4 marks)

(Total: 10 marks)

Question 10

Fran, Gail, Hannah and Ian have just been made redundant and havereceived payments of $50,000 each. They were highly skilled workers andbelieve that they could carry on their own business successfully.


Explain four advantages of the registered company over thepartnership as a form of business organisation and advise them as towhich form of business best suits their situation.

You are not required to consider the Limited Liability Partnership.

(10 marks)

8 Capital and financing

Question 11

The board of Wealthy plc is considering lending a substantial sumof money to Hardup plc. As part of the consideration for the loan,Hardup plc has offered a debenture containing a floating charge over theassets and undertaking of the company. To help the board of Wealthy plcreach a final decision regarding the loan, you have been asked toprovide certain information concerning the transaction.


AExplain what is meant by a 'floating charge'.

BExplain whether the floating charge will provide adequate security for Wealthy plc.

CWhat initial steps should Wealthyplc take to ensure that the assets and undertaking of Hardup plc are notalready the subject of a floating charge and how does it ensure thatits own charge is a valid security?

(10 marks)

9 Directors

Question 12

Julie was appointed director of ABC Ltd in 20X5. Her servicecontract provided that she should hold office for five years and thisterm was also stated in the articles of association of ABC Ltd.

The other directors have now decided that Julie should be removedfrom her directorship. They tabled a resolution that Julie be removedfrom office and it was duly passed. Julie attended the meeting and made astatement that she intended to take legal advice as she believed shecould not be removed in breach of the articles of association and of herservice contract. The directors of ABC Ltd have asked for your advice.


Advise the directors, explaining whether the shareholders had theauthority to pass the resolution and suggesting what legal redress Juliemight have.

(10 marks)

Question 13

Len is a director of Mod plc, but he also owns a majority interest in Nim Ltd.

Last year Mod plc entered into a contract to buy new machinery fromNim Ltd. Len attended the board meeting that approved the contract andvoted in favour of it, without revealing any link with Nim Ltd.

At the same meeting the board of Mod plc decided not to pursue thedevelopment of a new product that had been offered to them by itsinventor. Len, however, liked the new product and arranged for it to beproduced by Nim Ltd. It has proved to be a great success and Nim Ltd hasmade a great deal of money from its production.


Owen is a shareholder in Mod plc and has found out about Len'slinks with Nim Ltd. He seeks your advice on whether any action can betaken against Len in relation to either:

Athe purchase of the machinery from Nim Ltd, or

Bthe development of the new product by Nim Ltd.

(Adapted from ACCA June 2000 examination)

(10 marks)

Question 14

GLM plc's articles of association contain the following regulation:

'No single director is empowered to enter into contracts on behalfof the company in excess of $250,000 without written authorisation bythe chairman of the board of directors.'

Matthew, the managing director, has recently committed the company to acontract with PQR Ltd for the supply of equipment valued at $300,000.PQR Ltd demanded a copy of GLM plc's articles and asked Matthew whetherhe had obtained the consent of the chairman. Matthew stated that he had,which was untrue.


Explain whether the board of GLM plc can avoid the contract.

(10 marks)

10 Corporate administration

Question 15

AWhat are the statutory requirements for companies to hold annual general meetings?

(3 marks)

BWhat is a written resolution? When can it be used by a private company?

(7 marks)

(Total: 10 marks)

11 Insolvency

Question 16

In relation to company law explain:

Athe meaning of winding up

(3 marks)

Bthe procedures involved in:

Ia members' voluntary winding up

(3 marks)

II a creditors' voluntary winding up.

(4 marks)

(Total: 10 marks)

12 Corporate governance

Question 17

AWho are non-executive directors? Explain whether they play a useful role in company boards.

(5 marks)

BWhat guidance does the Higgs review give on the independence of NEDs?

(2 marks)

COutline the advantages and disadvantages of the system of self-regulation introduced by the Combined Code.

(3 marks)

(Total: 10 marks)

13 Fraudulent behaviour

Question 18

Mary has recently inherited $250,000 from her distant relative. Shewants to invest the funds in the shares but is not quite sure whichinvestment fund would be most appropriate. She did not tell anyone aboutthe inheritance. Her friend, Jane is a Managing Director of Winningplc. She invited her for a dinner to celebrate some great news that thecompany received. During the dinner, Jane told Mary that Winning plc hadwon a very lucrative tender with the Government of Cameroon which willresult in substantial profits for the company. She asked Mary to keepthis information confidential as the outcome of the tender had not yetbeen made public.

Next day, Mary invested the whole $250,000 in the shares of Winners plc.

Explain whether Mary and Jane have done anything illegal.

(10 marks)

Test your understanding answers

Question 1

(1)Arbitration is a voluntaryprocess by which parties to a contractual transaction agree to refertheir disputes to an arbitral tribunal instead of referring the matterto a national court for resolution. By doing so, the parties relinquishtheir right to have their dispute decided by a national court. Thisright has been granted to everyone by Art.6 of the Human Rights Act1998. Art.6 provides that 'in the determination of his civil rights andobligations or of any criminal charge against him, everyone is entitledto a fair and public hearing within a reasonable time by an independentand impartial tribunal established by law'. Jurisdictions of the courtscan only be ousted by a clear voluntary agreement. Once the agreement isheld to be valid and effective, the party to the agreement will beprevented from applying to the national court for a remedy. In case ofany application to the national court, despite the existence of a validarbitration agreement, the court is required to stay the proceedings andrefer the parties to arbitrate as has been agreed by them in theircontract. It is therefore crucial for parties to be able to establishwith certainty whether their agreement is valid and enforceable.

Art. 7(2) of the UNCITRAL model law on arbitration requires theagreement to be made in writing. This requirement is also stated in theNew York Convention on the Recognition and Enforcement of ForeignArbitral Awards (1958). However, the definition of what constitutes'writing' differs from State to State. For example, an oral agreementunder English Arbitration Act 1996 will be sufficient provided it isevidenced in writing. The model law defines an agreement to be inwriting if it is contained in a document signed by the parties or inexchange of letters, telex, telegrams or other means oftelecommunication which provide a record of the agreement, or in anexchange of statement of claim and defence in which the existence of anagreement is alleged by one party and not denied by the other. Thereference in a contract to a document containing an arbitration clauseconstitutes an arbitration agreement provided that the contract itselfis in writing and the reference is such as to make that clause part ofthe contract. The model law definition of 'writing' allows for emailcommunication to be treated as 'writing' and also allows oral agreementto suffice provided neither party claims that no agreement was everentered into.

The arbitration agreement must satisfy both requirements as tothe form and also requirements as to its substantive validity. 'Writing'satisfies the formal requirements. Substantive validity means that theagreement is able to generate legal consequences. For the agreement tobe substantively valid, both parties to the agreement must havecontractual capacity and must have agreed to it without being subject toany duress or misrepresentation. The agreement must also be clear andspecific to indicate the parties' intention to exclude the jurisdictionof national courts in unequivocal terms. To make the agreement operativeit is advisable for it to contain certain essential ingredients. Theclause should specify:

  • whether the arbitration should be institutional or ad hoc
  • whether there are any preconditions before the arbitration could be commenced
  • the subject matter which can be referred to arbitration
  • number of arbitrators and how they should be appointed
  • arbitration rules which should apply to the proceedings
  • seat of arbitration and place of hearings.

UNCITRAL drafted a model clause which may be utilised by theparties who wish to include an arbitration clause in their contract. Theuse of a model clause gives the parties the certainty that the clausewill be valid, enforceable and effective. The model arbitrationagreement reads as follows:

'Any dispute, controversy or claim arising out of or relating tothis contract, or the breach, termination or invalidity thereof, shallbe settled by arbitration in accordance with the UNCITRAL ArbitrationRules as at present in force. Parties may wish to consider adding:

Athe appointing authority shall be [name of institution or person).

Bthe number of arbitrators shall be [one or three].

Cthe place f arbitration shall be [town or country].

Dthe language(s) to be used in the arbitral proceedings shall be [ ].'

(2)The arbitrators are appointed bythe parties to the arbitration agreement or by the arbitral institutionchosen by them. Normally, if there are three arbitrators each partynominates one arbitrator and the arbitrators selected in that waynominates the third one. An arbitrator can be challenged prior to theappointment or at any time in the course of the proceedings. After theproceedings have ended, the parties cannot challenge the arbitrator assuch but may be able to challenge the final award. The Model lawspecifies that the arbitrators may be challenged if circumstances existwhich give rise to justifiable doubts as to the arbitrator'simpartiality or independence or if he does not possess the qualificationthat has been agreed by the parties. It means that the arbitrator canbe challenged if it is considered that he is either not impartial or notindependent or his qualifications do not match the agreement.

Impartiality is a state of mind. It means that the arbitratordoes not favour one party over the other; that he is not biased againstone party and that he is not predisposed as to the relevant question orissues in the dispute. For example, in the case of Re Owners of theSteamship 'Catalina' and the owners of the Motor Vessel 'Norma' thearbitrator was overheard saying that all Portuguese are liars and oneparty to the arbitration was of Portuguese nationality. This was a clearcase of partiality and the arbitrator was removed from his office.However, such cases of actual partiality are rare.

Independence is an external factor and it means that thearbitrator has no actual or past dependent relationship which couldaffect the arbitrator's freedom of judgment. The arbitrator willnormally be considered not to be independent if he has or has had anyfinancial interests in a company which is a party to the proceedings orhe has or has had a personal or professional relationship with eitherparty.

Impartiality is needed to ensure that justice is done whereas independence is needed to ensure that justice is seen to be done.

The parties are free to agree on a procedure for challenging anarbitrator. If the parties do not agree on any procedure, the model lawrules will apply. Under the rules, a party who wishes to challenge thearbitrator must send a written statement of the reasons for thechallenge within 15 days of becoming aware of who is on the tribunal.Under Art.12(2), if a party wishes to challenge the arbitrator they havethemselves appointed, they can only do so if they become aware of thefacts that give rise to the challenge after the appointment has beenmade. Once the challenge is made it is determined by the arbitrator ifhe resigns from the tribunal; or the parties to the dispute if they bothagree to the challenge; or the arbitral tribunal if the arbitrator doesnot withdraw and the parties do not agree to the challenge.

Question 2

The existence of the contract must be determined in accordance withthe provisions of the Convention. Under Art. 23 of the CISG, aninternational contract of sale comes into existence when the acceptanceof an offer becomes effective in accordance with the relevantprovisions. Before a contract may be concluded it must be establishedthat there a valid offer was made and that this offer has been acceptedby the second party.

An offer is a definite expression of the party's intention to bebound by the terms of the contract upon acceptance. An offer is definedin Art. 14 which provides that a proposal for concluding a contractaddressed to one or more specific persons constitutes an offer if it issufficiently definite and indicates an intention of the offeror to bebound in case of acceptance. An offeror is the person who makes theoffer while an offeree is the person to whom an offer is made. An offermust be addressed to one or more specific persons. The sending of pricelists, catalogues or placing an advertisement does not constitute anoffer. If a proposal is not addressed to a specific person it willnormally be treated as an invitation to treat unless it clearlyindicates that the proposal is intended to be an offer. The proposalmust be sufficiently definite. It means that it must indicate the goodsand expressly or implicitly fix or make provisions for determining thequantity and the price. An offer is effective as soon as it reaches theofferee. An offer may be withdrawn if the withdrawal reaches the offereebefore or at the same time as the offer even if the offer was declaredto be irrevocable. After the offer has reached the offeree, the offermay still be revoked but only if the revocation reaches the offereebefore he dispatches his acceptance. It cannot be revoked if it statesthat it is irrevocable.

An acceptance is a statement made by the offeree indicating assentto an offer. Acceptance may be expressly given or may be implied fromconduct but acceptance cannot be inferred from silence or inactivity.Actions of the acceptor, such as dispatch of goods or payment of theprice, may indicate an implied acceptance. This may be the case when theoffer expressly allows for this possibility; when the impliedacceptance by parties has become customary or when it is in conformitywith any trade usage. Acceptance becomes effective as soon as it reachesthe offeror.

The CISG does not require the price to be fixed for a contract tocome into existence. An offer must have either express or impliedprovision to determine the price but a contract with no price specifiedwill be valid. This is due to Art. 55 which determines the consequencesfor a contract in circumstances where no price was agreed between theparties. Art. 55 provides that where a contract has been validlyconcluded but does not expressly or impliedly fix or make provisions fordetermining the price, the parties are considered, in the absence ofany indication to the contrary, to have impliedly made reference to theprice generally charged at the time of the conclusion of the contractfor such goods sold under comparable circumstances in the tradeconcerned.

CISG contracts do not have to be in writing and do not need tocomply with any formalities. This is specified in Art. 11 -12 of theConvention. However, Art.11 may be disapplied where a State takes outArt.96 reservation. Art. 96 provides that a contracting state whoselegislation requires contract of sale to be concluded in or evidenced bywriting may at any time make a declaration in accordance with Art.12that any provision of art.11, art.29 or Part II of this Convention, thatallows a contract of sale or its modification or termination byagreement of any offer, acceptance, or other indication of intention tobe made in any form other than in writing, does not apply where anyparty has his place of business in that State. This reservation was theresult of the demands made at the diplomatic conferences from theprevious Soviet Union and Eastern block countries which imposed strictrequirements regarding formality in international contracts of sale.

AIn order to determine whether thecontract came into existence it is necessary to decide whether theletter from B Ltd to A Ltd constituted an offer and whether the offerhas been validly accepted before the revocation reached A Ltd. Itappears initially that the letter will constitute a valid offer. It isdirected at a specific person, A Ltd, and it seems to indicate a clearwillingness to be bound by the offer. However, the question remainswhether the proposal is sufficiently definite. The proposal specifiesthe goods and the amount ordered but it does not contain any referenceto the price or any method by which the price could be determined. Ifthe offer contains the price, it is a valid offer, otherwise there is nooffer capable of acceptance. If the price could be determined, thesecond question that must be answered is whether the acceptance waseffective. Acceptance is effective when it reaches the offeror. For thepurpose of the Convention, an offer, declaration of acceptance or anyother indication “reaches” the addressee if it is made orally to himor delivered by any other means to him personally, to his place ofbusiness or mailing address, or if he does not have a place of businessor mailing address, to his habitual residence. The acceptance wasreceived on 11 March – this is the date when the acceptance becameeffective.

However, B Ltd attempted to revoke the offer. The offer may berevoked at any time if the revocation reaches the offeree before he hasdispatched acceptance. The acceptance was dispatched from A Ltd to B Ltdon 7 March – before the revocation was received by A Ltd andaccordingly was ineffective. The contract has therefore been validlyconcluded.

BThe offer was effective on 1 March – this is when the offer reached A Ltd in Poland.

CThe acceptance was effective on 11 March – this is when the acceptance reached the offeror.

DThe revocation was ineffective.Once an offer reached the offeree it cannot be revoked if thecommunication of revocation reaches the offeree after he dispatched hisacceptance.

Question 3

ACISG regulates the obligations and remedies of the seller and the buyer in Chapters II and Chapter III respectively.

Under Art.35 the seller is under an obligation to deliver thegoods which are of the quantity, quality and description required by thecontract and which are contained or packaged in the manner required bythe contract. The seller must fulfil three obligations: he must deliverthe goods within the time stipulated; the goods must conform to theterms of the contract and the goods must be free of 3rd party rights.Delivery is the physical hand-over of the goods to the buyer at theplace and time stipulated in the contract. If the contract does notstipulate the place or time the seller must make the goods available at aplace where he has the place of business at the time of concluding thecontract. Conformity means that the goods are exactly the ones that theparties stipulated and are of satisfactory quality.

The scenario in question clearly indicates that the sellerdelivered the relevant goods within the required timeframe and the goodswere used in production of the toys by B Ltd. It therefore appears thatthe seller discharged his part of the obligations under the CISGConvention.

Under Art.53 the buyer's obligation is to take delivery and paythe price as required by the contract. The buyer's obligation to pay theprice includes taking such steps and complying with such formalities asmay be required under the contract to enable the price to be paid.

In our scenario the buyer refused to pay the price despite many reminders being sent by the seller.

There are a few remedies open to A Inc. They are listed inSection III of Chapter III of the Convention. If the buyer fails toperform any of his obligations under the contract, usually the paymentof the price, the seller may exercise all his rights provided inarticles 62 to 65 and the seller may also claim damages as provided inarticles 74 to 77. The seller is not deprived of any rights he may haveto claim damages by exercising his right to other remedies. Under Art.62, the seller may require the buyer to pay the price, take delivery orperform his other obligations, unless the seller has resorted to aremedy which is inconsistent with this requirement. Under Art.63, theseller may fix an additional period of time of reasonable length forperformance by the buyer of his obligation.

Under Art. 64 the seller may declare the contract avoided if thefailure by the buyer to perform any of his obligations under thecontract or this Convention amounts to a fundamental breach of contractor if the buyer does not pay the price after a reminder has been sent bythe seller. Fundamental breach is defined in Art. 25. A breach ofcontract committed by one of the parties is fundamental if it results insuch detriment to the other party as to substantially deprive him ofwhat he is entitled to expect under the contract, unless the party inbreach did not foresee and a reasonable person of the same kind in thesame circumstances would not have foreseen such a result. Refusal to paythe price will clearly amount to a fundamental breach under thisdefinition.

A Inc has made various patient reminders to B Ltd for the paymentof the price but despite the reminders B Ltd has refused to pay. A Incis able to resort to the remedy under Art.62 and sue B Ltd for theprice; they may also treat this refusal as repudiation of the contractand declare the contract avoided. In practice, however, they will onlybe able to sue B Ltd for damages because the goods have already beenutilised in the production and restitution is not possible.

BThe payment of interest isdetermined by Art. 78. If a party fails to pay the price or any othersums that are in arrears, the other party is entitled to interest on it,without prejudice to any claim for damages recoverable under Art. 74.This provision does not specify how the interest is to be calculated. Itonly provides that interest will be payable but the exact calculationand determination of the rate will be determined by the relevantnational court. There are several approaches to determine which rate ofinterest should be payable. The courts can look at the generalprinciples and apply the principle of full compensation. A secondapproach is to use the relevant rules of Private International Law todetermine the law which should be applied to calculate the interest. Athird way is to determine the problem by using objective and neutralcalculation method, e.g. apply UNIDROIT principles. Most commonly, thecourts calculate the interest by applying their relevant domestic law.

CThe buyer made a counter-claimspecifying that the goods provided were not of the expected quality andstandard and therefore wishes to have a reduction in price. It hasalready been stated in part (a) that the seller is under a legalobligation to deliver the goods which are in conformity with thecontract. However, there is a related obligation on the part of thebuyer to either examine the goods or caused them to be examined, withinas short a period as it is practicable in the circumstances. Examinationmay only be deferred if the goods are in transit but they must beexamined when they arrive at the port of destination.

This requirement is specified in Art.38 of the Convention. Uponinspection, the buyer is required, under Art.39 to give notice of anylack of conformity within a reasonable time after he has discovered, orought to have discovered the relevant defects. The notice must specifythe nature of the lack of conformity. If the buyer does not give noticewithin reasonable time he loses the right to any remedies.

The examination must be detailed but it does not require any technical or chemical analysis.

The notice must be given within a reasonable time. What is areasonable time will depend on the circumstance of each case and thenature of the goods. Perishable goods will usually require nearimmediate notice while other goods may allow for a slightly longerperiod of time. The definition of 'reasonable time' varies greatly fromcountry to country and a substantial case law has been built around thisarea. Civil jurisdictions usually impose short, tight deadlines on suchnotices and many rulings adhere to this principle. In common lawjurisdictions courts tend to look at the individual circumstances ofeach case and determine the reasonableness of the notice.

For example in the case between German and French parties for thesale of fibreglass fabrics (OLG Koblenz, dated 18.11.1999, 2 U 1556/98)it was held that any discernable defects should be discovered within aweek of delivery. Similarly, in a case between Swiss and Italian partiesfor the supply of furniture, the buyer waited for customers to complainabout the defects – Pretura di Locarno-Campagna, 27/04/1992, 6252.This was not sufficient as the purchaser should examine the goods andnot rely on customers. Latent defects will always be afforded extra timeif the defects could only be discovered during the usage of theproducts but the convention specifies that the maximum period which canbe treated as reasonable is two years.

The scenario in this question does not specify whether the goodswere examined and whether any notice was given prior to thecounter-claim in the proceedings. If the goods were not examined and nonotice was given the buyer will not be able to succeed on thecounter-claim as the consequences of lack of giving a proper notice is acomplete and total lack of remedy. The buyer will not, therefore, beable to claim a reduction in price. The buyer may attempt to argue thatthe counter claim in the proceedings itself should be treated as therelevant notice. This argument is unlikely to succeed as it will mostlikely be treated as not being given within a reasonable time. B Ltd hadmany opportunities to inform A Inc about the defects and they have notdone so. The counter claim therefore will not succeed.

Question 4

AMost international tradetransactions involve transportation of valuable goods from place A toplace B at high cost and frequently high prices. Both the buyer and theseller want to protect themselves against the risks of the other partyrefusing to pay or deliver the goods or against the case of insolvency.Under most regulatory frameworks the buyer has no legal obligation topay until he knows that the goods will be delivered to him, and theseller has no legal obligation to deliver or ship the goods until he hascontrol of the payment. This results in what is often called a payment'Mexican standoff'. To overcome it either one party has to extend thecredit to the other party and accept risk which is inherent in such atransaction or the contract may not come into existence.

However, such a situation would clearly be unsatisfactory andcommercial people developed many more secure methods by which paymentmay be made. The direct payment by a banker, at the buyer's instructionto the seller either upon the receipt of the goods or prior to shipmentis the simplest and least expensive one. The payment can be made bytelegraphic or electronic transfer of funds, by banker's draft or bycash or acceptance of bill of exchange against valid documents. However,the main disadvantage of this method of payment is the lack of securityor certainty that the payment will be made according to the terms ofthe contract. Because of the inherent risk involved, this method is onlyused when the party is confident of the integrity and solvency of histrading partner.

The most frequently used financed methods in international tradetransactions are the bills of exchange and documentary letter of credit.

Section 3 (1) of the Bills of Exchange Act, 1882, defines a billof exchange. 'A bill of exchange is an unconditional order in writing,addressed by one person to another, signed by the person giving it,requiring the person to whom it is addressed to pay on demand or at afixed or determinable future time a sum certain in money to the order ofa specified person, or to bearer.' It is essentially a paper which isused to transfer money from one person to another. The person identifiedin the bill as the person to or to whose order the money is to be paidis called the payee.

If a bill is payable to order it will be negotiable meaning thatit can be transferred by endorsement of the payee and completed bydelivery of the bill. The person endorsing the bill is called the'endorser' and the person to who it is endorsed, the endorsee. The payeeor an endorsee of a bill who is in possession of it, or the bearer, iscalled the 'holder'.

The bill of exchange must comply with the requirements of s.3 (1)of the Bills Exchange Act. The bills must be unconditional, must be inwriting and must be addressed by one person to another.

The person who gives bills of exchange must sign it. The billsmust be payable on demand or at a fixed or determinable future time andthe sum payable must be certain. The main advantage of bills of exchangeis transferability. Bills may be sold at a discount or premium andthere are strict enforcement measures provided by the Act to ensure thatperson signing or endorsing the bill is strictly liable to make apayment under it.

Documentary letters of credits are the most secure method ofobtaining payment in international sale transactions. Nearly alldocumentary credits are subject to the terms of the ICC's 'UniformCustoms and Practice for Documentary Credits' (now UCP 600).

Documentary credit is defined in Art.2 of the UCP 600 as 'anyarrangement, however named or described, whereby a bank (the issuingbank) acting at the request and in accordance with the instructions of acustomer (the applicant for the credit) is to make payment to or to theorder of a third party (the beneficiary) or is to pay, accept ornegotiate bills of exchange (drafts) drawn by the beneficiary, orauthorises another bank to effect such payment, or to pay, accept ornegotiate such bills of exchange (drafts), against stipulated documents,provided that the terms and conditions of the credit are compliedwith.'

To establish a letter of credit, this method of payment must beagreed by the parties in their contract. The buyer then instructs hisbank to open a credit in the seller's name. In his instruction he mustspecify the documents that the seller must provide before payment can bemade. The buyer's bank is called the issuing bank. The bank normallyinstructs a correspondent bank in the seller's country and thecorrespondent bank notifies the seller of the opening of the credit. Ifthe correspondent bank only advises the seller that the credit has beenopened, the bank will be called an advising bank. If the correspondentbank adds its own confirmation that the payment will be made uponpresentation of the valid documents the bank will be called a confirmingbank.

The seller will only be able to draw under the credit upon thepresentation of the correct shipping documents to the bank as specifiedby the buyer. The bank is under a duty to examine presented documentsand should only pay if the documents conform exactly to the buyer'sspecifications.

The use of a letter of credits allows the seller to avoid therisk of the buyer becoming insolvent before the payment is made as theseller it not required to act until the credit has been set up and theyhave received notification of this. If the credit is confirmed, theseller is also able to sue the bank for non payment within his ownjurisdiction rather than having to sue the buyer in a foreign country.The seller may use the security of the credit to raise money from hisown bank. There are also advantages of the letter of credit to the buyerwho also benefits because the bank provides liquidity for thetransaction as the buyer is often not required to repay the bank untilthe goods are resold.

BIt appears that letter of creditswill best suit Amanda's circumstances. The letter of credit will provideher with the desired security and certainty that the payments will bemade. However, Amanda will need to consider the additional costimplication of utilising this method of payment as the banks usuallycharge high fees for this service.

Question 5

An agent is a person who is empowered to act on behalf of anotherlegal party, called the principal and to commit the third party to anycontractual relationship with a third party. Any contract entered intobetween the principal and the third party may be enforced against eachof them. As the agent acts on behalf of the principal he normally doesnot have any liability himself for the contracts he enters into.

The authority of an agent is a central issue in the concept ofagency. The question of authority deals with the powers and duties thatthe agent has on behalf of the principal and it will determine when andfor which acts the Principal will be liable and will have to indemnifythe agent. If the agent exceeds his powers, the principal may still beliable to the third party but he may have rights against the agent forbreach of contract.

The relationship of agency can arise in a number of ways. It isusually contained in an express agreement between the agent and theprincipal but express contract is not required. The agreement may beimplied, may arise by necessity or an act of a person who acts as agentbut is not in fact an agent may be ratified by the principal. The agentdoes not normally have unlimited power. If a party wishes to grantunlimited power to the agent they usually effect what is called a powerof attorney. Normal agent powers are usually restricted to specifictypes of contract or other specific transactions.

The authority can take a number of distinct forms.

AExpress authority is given whenthe principal actually appoints the agent and specifies expressly whattypes of contracts the agent is able to enter into on his behalf. Thismeans that the agent is actually entitled to do those acts by virtue oftheir agreement. The liability of the principal will be co-terminus withthe duration of express authority. It is not relevant whether the thirdparty is aware of the specific terms of express authority or not.

BImplied authority arises when therelevant task in question has not been expressly authorised but isreasonably necessary or incidental to the performance of an act whichhas been expressly authorised by the principal. The agent must occupy aposition which usually would afford such authority to act in thatmanner. The particular act in question must be not expressly prohibitedby the principal.

For an implied authority to exist there must be an existingagency relationship and the agency must be of a character that allowsfor identification of the usual powers of the agent. This type ofimplied authority usually attaches to the particular type of work beingdone by the agent and therefore is designated as a usual authority. Theextent of the agent powers in such circumstances will be a question offacts. In the case of Watteau v Fenwick (1893) 1QB 346 a mancalled Humble had a beer house called Victoria Hotel. The business wassold to Fenwick & Co, who continued to employ Humble as the manager.Under the agreement with Fenwick & Co, the manager had no authorityto purchase any goods except bottled ales and mineral waters. Despitethis agreement, Humble entered into a contract with Watteau for thesupply of cigars and Bovril. Watteau sued on the contract and it washeld by the county court and upheld by the High Court judge that thecompany was liable on the contract. Implied authority may also arisefrom a place of work rather than a type of work which is being done.This will give effect to any customs of a particular place of work andthe third party will be entitled to rely on that particular custom. Forexample in Scott and Horton v Godfrey (1901) 2 KB 726 it was heldthat a custom of the Stock Exchange to permit stockbrokers to buyshares for several principals at the same time and bind them in contractfrom a single seller was valid.

CApparent authority is sometimescalled ostensible authority or authority by estoppel. Such authorityarises where A is held out by P as having the relevant authority. Thisrepresentation may arise from either the appointment of A to aparticular office or position by P or by previous dealings. Therequirements for apparent authority to be effective were stated in Rama Corporation Ltd v Proved Tin and General Investment Ltd (1952) 1 QB 147 by Slade Justice. He established that the following three conditions must be satisfied. There must be:

  • a representation
  • reliance on the representations
  • alteration of a position resulting from such reliance which is often otherwise called a detriment.

The nature of the representations was discussed by Lord Justice Diplock in the case of Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964)2QB 480. He stated that the representations must be made by theprincipal to the third party and the principal must have intended orhave known that the third party will rely upon this representation toenter into the transaction. Any representations made by the agent willnot suffice. The agent must clearly act in his capacity as agent and hemust not purport to act as the principal himself.

The third party must rely on the representations. It means that athird party will not be able to make the principal liable on thecontract on the basis of apparent authority if:

  • the third party was not aware of any representations being made, or
  • the third party did not believe that the agent had authority to act on behalf of the principal, or
  • the third party ought to have known that the agent's authority has been limited.

Finally, the third party must have altered its position inreliance on the representations. This condition is usually easilysatisfied as it has been held that merely entering into a contract onthe basis of the representations will be sufficient.

Apparent authority allows a third party to sue the principal onthe contract if he defaults. However, as this type of authority isdesigned to protect the third party it is not applied in the same way infavour of the principal. Accordingly, the principal will not be able tosue for breach of contract entered on the basis of ostensibleauthority.

Question 6


The rules relating to the residual responsibility of retiredpartners for partnership debts depend on when the debts were contractedand the action taken by the former partner to announce their retirementfrom the business.

A retired partner remains liable for any debts or obligationsincurred by the partnership prior to retirement. Thus the date of anycontract determines responsibility: if the person was a partner when thecontract was entered into, then they are responsible, even if thecontract is completed after their retirement. It is possible for theretiring partner to be discharged from existing liability though as aconsequence of a contract of novation.

Novation is essentially a tripartite contract involving theretiring partner, the remaining members of the continuing partnershipand the existing creditors. Under such an agreement any liability of theretiring partner is passed to the remaining partners. As creditorseffectively give up rights against the retiring partner, their approvalis required. Such approval may be express or it may be implied from thecourse of dealing between the creditor and the firm.

Where someone deals with a partnership after a change inmembership, they are entitled to treat all the apparent members of theold firm as still being members until they receive notice of any changein the membership.

In order to avoid liability for future contracts, a retiringpartner must ensure that individual notice is given to existingcustomers of the partnership; and advertise the retirement in the LondonGazette. This serves as general notice to people who were not customersof the firm prior to the partner's retirement, but knew that thatperson had been a partner in the business. Such an advert is effectivewhether or not it comes to the attention of third parties.

It follows from this that Dan could be liable for any debts towardsthe longstanding customer, Greg, unless he has taken steps to notifyGreg of his retirement from the partnership, which does not appearlikely.


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 anddid nothing to deny it, then they would be estopped subsequently frominsisting 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 bindthe partnership (s.5 Partnership Act 1890). However, the partnershipwould be liable for the contracts even if the other partners were notaware of Frank's claim to be a partner. The question states that Eve andClare left much of the day to day running of the business to Frank andit can be seen that, on that basis alone, he had the authority to managethe business irrespective of the question as to whether he was a memberof the partnership or not. Third parties are entitled to assume thatagents holding a particular position have all the powers that areusually provided to such an agent. This is referred to as implied actualauthority and means that, without actual knowledge to the contrary,outsiders may safely assume that an agent has the usual authority thatgoes with their position (Watteau v Fenwick (1893)). Enteringinto ordinary trading contracts, such as the one with Greg, would comewithin Frank's implied actual authority as the business manager.

As for Frank's liability, anyone who represents themselves, orknowingly permits themselves to be represented, as a partner is liableto any person who gives the partnership credit on the basis of thatrepresentation. The partners would be estopped from denying Frank'smembership if they knew of his claim to be a partner. Frank would alsobe estopped from denying that he was a partner. Frank therefore wouldalso 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 debtsor contracts is joint and several. The effect of joint liability usedto be that, although the partners were collectively responsible, aperson who took action against one of the partners could take no furtheraction against the other partners, even if they had not recovered allthat was owing to them. That situation was remedied by the CivilLiability (Contributions Act) 1978. This act effectively states that ajudgment against one partner does not bar a subsequent action againstthe 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 actionis taken will be able to claim a proportionate indemnity from theothers.

Question 7

Grounds for dissolution

Partnerships are created by agreement and may be brought to an endin the same way. However, subject to any provision to the contrary inthe partnership agreement, the PA 1890 provides for the dissolution of apartnership on the following grounds:

The expiry of a fixed term or the completion of a specified enterprise

It is possible for a partnership to be established for a statedperiod of time and at the end of that time the partnership will come toan end and the partnership will be dissolved. Alternatively it ispossible for the partnership to be established in order to achieve aparticular goal and again once that goal has been attained thepartnership will come to an end.

The giving of notice

If the partnership is of indefinite duration, then it can bebrought to an end by any one of the partners giving notice of anintention to dissolve the partnership.

The death or bankruptcy of any partner

As in English law the ordinary partnership has no legal personalityin its own right, but merely exists as a collection of individuals, itis apparent that the death of a member will bring about the end of thepartnership (n.b. this of course is not the case with limitedpartnerships formed under the Limited Liability Partnerships Act 2000which does provide legal capacity to such partnerships formed under itsprovisions). The bankruptcy of a partner has the same effect.

Although the occurrence of either of these events will bring theoriginal partnership to an end, it is usual for partnership agreementsto provide for the continuation of the business under the control of theremaining/solvent partners who will constitute a new partnership.


The occurrence of events making the continuation of the partnershipillegal will bring it to an end. This is illustrated by the case of Hudgell, Yeates and Co v Watson (1978).Practising solicitors are legally required to have a practicecertificate. However, one of the members of a three-person partnershipforgot to renew his practice certificate and thus was not legallyentitled to act as a solicitor. It was held that the failure to renewthe practice certificate brought the partnership to an end, although anew partnership continued between the other two members of the oldpartnership.

By court order

In addition to the provisions listed above, the court may, mainlyby virtue of s35 of the PA 1890, order the dissolution of thepartnership under the following circumstances:

IWhere a partner becomes a patient under the Mental Health Act 1893.

II Where a partner suffers some other permanent incapacity.

This provision is analogous to the previous one. It should benoted that it is for the other partners to apply for dissolution andthat the incapacity alleged as the basis of dissolution must bepermanent.

IIIWhere a partner engages in activity prejudicial to the business.

Such activity may be directly related to the business, such asthe misappropriation of funds. Alternatively, it may take place outsidethe business but operate to its detriment. An example might be acriminal conviction for fraud.

IVWhere a partner persistently breaches the partnership agreement.

This provision also relates to conduct which makes itunreasonable for the other partners to carry on in business with theparty at fault.

V Where the business can only be carried on at a loss.

This provision is a corollary of the very first section of the PA1890 in which the pursuit of profit is part of the definition of thepartnership form. If such profit cannot be achieved, then the partnersare entitled to avoid loss by bringing the partnership to an end.

VIWhere it is just and equitable to do so.

The courts have wide discretion in relation to the implementationof this power. A similar provision operates within company legislation(s.122 Insolvency Act 1986) and the two provisions come together in thecases involving quasi-partnerships (Re Yenidje Tobacco Co Ltd (1916) and Ebrahimi v Westbourne Galleries Ltd (1973)).

Question 8

Except in relation to specifically exempted companies, such asthose involved in charitable work, companies are required to indicatethat they are operating on the basis of limited liability. Thus privatecompanies are required to end their names, either with the word'limited' or the abbreviation 'ltd', and public companies must end theirnames with the words 'public limited company' or the abbreviation'plc'. Welsh companies may use the Welsh language equivalents (CompaniesAct (CA) 2006 ss58, 59 & 60).

Although there is no longer an official Business Names Registry,the Registrar of companies maintains a register of business names, andwill refuse to register any company with a name that is the same as onealready on that index (CA06 s66(1)). This control is less rigorous thanthat exercised under the previous legislation and has led to an increasein the use of the tort of 'passing off', as a means of protecting thegoodwill attached to particular business names (see (b) below).

Certain categories of names are, subject to the decision of the Secretary of State, unacceptable per se, as follows:

  • Names which in the opinion of the Secretary of State constitute an offence (s53(a)). As an example, it is illegal for non-designated businesses to claim to be banks, but the powers of the Secretary of State are wide enough to control names which might be considered as inciting race hatred.
  • Names which in the opinion of the Secretary of State are offensive (s53(b)).
  • Names which are likely to give the impression that the company is connected with either government or local government authorities (s54(1)).
  • Names which include a word or expression specified under the Company and Business Names Regulations 1981 (s55(1)).

This category requires the express approval of the Secretary ofState for the use of any of the names or expressions contained on thelist, and relates to areas which raise a matter of public concern inrelation to their use.

Under s67 of the Companies Act 2006 the Secretary of State haspower to require a company to alter its name under the followingcircumstances:

  • Where it is the same as a name already on the Registrar's index of company names.
  • Where it is 'too like' a name that is on that index.

The name of a company can always be changed by a special resolutionof the company so long as it continues to comply with the aboverequirements (s77).

Although a company's name must not be the same as any alreadyregistered, the Business Names Act 1985 does not prevent one businessfrom using the same, or a very similar, name as another business.However, the tort of passing off prevents one person from using any namewhich is likely to divert business their way by suggesting that thebusiness is actually that of some other person or is connected in anyway with that other business. It thus enables people to protect thegoodwill they have built up in relation to their business activity. In Ewing v Buttercup Margarine Co Ltd (1917) the plaintiff successfully prevented the defendants from using a name that suggested a link with his existing dairy company.

Question 9

AModel articles of association areprescribed by the Secretary of State, although companies may alter themodels to suit their particular circumstances and requirements. It isusual for companies to draw up their own particular articles, but ifthey elect not to draw up their own, the model articles applyautomatically. The model articles also apply to the extent that thecompany's articles have not expressly excluded their provisions. Themodel articles cover such matters as the issue and transfer of shares,the rights attaching to particular shares, the rules relating to theholding of meetings, the powers of directors, and the payment ofdividends.

BSection 33 of the Companies Actprovides that the provisions of a company's constitution (i.e. itsarticles) 'bind the company and its members to the same extent as ifthere were covenants on the part of the company and each member toobserve those provisions'. This section has three effects.

IThe documents establish a contract which binds each member to the company. Thus in Hickman v Kent or Romney Marsh Sheep-Breeders' Association (1915),the company was able to enforce an article against a member thatprovided that disputes involving the member and the company should go toarbitration.

II The company is contractually bound to each of its members. On this basis in Pender v Lushington (1877) a member was able to sue in respect of the wrongful denial of his right to vote at a company meeting.

IIIThe articles constitute a contract between the members. In Rayfield v Hands (1960),the articles of the company provided that, where shareholders wished totransfer their shares, they should inform the directors of the company,who were obliged to take the shares equally between them at fair value.When the directors refused to purchase the plaintiff's shares, thecourt held that the directors were bound as members by the articles andtherefore had to comply with the procedure set out there.

Articles only operate as a contract in respect of membership rightsand obligations. Consequently it has been held that, although memberscan enforce them, non-members, or members suing in some other capacitythan that of a member, will not be able to enforce promises establishedin the company's articles. In Eley v Positive Government Security Life Assurance Co (1876),the articles of a company stated that the plaintiff was to be appointedas the company's solicitor. It was held that Eley could not use thearticles to establish a contract between himself and the company asthose articles only created a contract between the company and itsmembers. Although Eley was in fact a member, he was not suing in thatcapacity but in the capacity of solicitor, which was not a membershipright.

CSection 21 of the Companies Act2006 allows companies to alter their articles by passing a specialresolution. It is, however, possible to entrench certain provisions.This means that they can only be altered by following a specifiedprocedure, such as obtaining unanimous consent: s22.

Any attempt in the articles to provide that a particularprovision is unalterable is ineffective. The articles cannot be altered,however, in such a way as to conflict with any provision of theCompanies Act. In particular, no member can be bound by any alterationto subscribe for more shares or increase their liability in any way(s25).

Any alteration must be made 'bona fide in the interest of thecompany as a whole', although the exact meaning of this phrase is notaltogether clear. It is evident that it involves a subjective element inthat those deciding the alteration must actually believe they areacting in the interest of the company. There is additionally, however,an objective element. In Greenhalgh v Arderne Cinemas Ltd (1951) it was stated that any alteration had to be in the interest of the 'individual hypothetical member'.

In Brown v British Abrasive Wheel Co (1919) an alterationto the articles of the company was proposed to give the majorityshareholders the right to buy the shares of the minority. It was heldthat the alteration was invalid as it would benefit the majorityshareholders rather than the company as a whole. However, in Sidebottom v Kershaw Leese & Co (1920),an alteration to the articles gave the directors the power to requireany shareholder, who entered into competition with the company, totransfer their shares to nominees of the directors at a fair price. Itwas held that under those circumstances the alteration was valid as itwould benefit the company as a whole.

Question 10

As a consequence of the fact that it is a corporation, theregistered company form has the following advantages over thepartnership. (Note that only four advantages are required).

IPerpetual succession. This meansthat the company will continue regardless of any changes in themembership. Shareholders may transfer their shares, or be declaredbankrupt or even die, without in any way affecting the day-to-dayoperation of the company's business. A partnership does not benefit fromperpetual succession and exists only as long as the members agree thatit should continue. Any of the previous events could lead to the end ofthe partnership.

II Debts and Limited Liability.Within the limited company form, any business debts are owed by thecompany as a distinct legal person rather than the shareholders in thecompany. Shareholders in limited liability companies are only liable forthe amount remaining unpaid on their shareholding. Membership of apartnership, however, usually renders any partner jointly and severallyliable for the total debts of the partnership, and any such debt extendsto the full extent of the partner's personal wealth. This means that inorder to pay the debts of a partnership the individual members may berendered personally bankrupt, whereas the member of a limited companyhas a clearly established limit to the extent of his or her potentialliability. In relation to the above points, it should be remembered thatboth unlimited companies and limited partnerships do exist, but thatboth of these forms represent an exception to the general rule. It alsohas to be recognised that in private companies the members are usuallyrequired to give personal guarantees for any money borrowed from banks,so limited liability tends to be notional rather than actual in suchcases.

IIIProperty. The incorporatedcompany itself owns any business property. As a consequence of theproperty being legally vested in the company itself, there is never anyneed to alter the title deeds to any property owned by the business whenshares change hands. In partnerships, the members have a proprietoriallink with the assets of their business and as such title deeds mightrequire to be changed subsequent to any change in membership of thepartnership.

IVContracts. An importantadvantage of the company form is that individual members are at libertyto enter into contracts with their companies. Partners, on the otherhand, cannot enter into contracts with their business enterprisesbecause of the lack of separate personality: such a transaction would betantamount to contracting with themselves.

VTransferability of title and liquidity of investments.Shares in a company can be transferred to a new owner without the needto acquire the approval of the other members of the company, althoughthere are usually controls on transferability in private companies.Partners are not at liberty to transfer their interests without theapproval of the other partners.

VIMembership. In relation tocompanies there is no maximum number of members. In the case of apartnership, however, the number of members is limited to a maximum of20, except in the case of particular professional partnerships such asaccountants and lawyers which have been excluded specifically from thismaximum limitation. The effect of this limitation on numbers in relationto partnerships is that it constrains severely the ability ofpartnerships to raise large amounts of capital as they are restricted tosuch a small number of members.

VIILoan capital. A furtheradvantage that the company has over the partnership in raising capitalis the fact that the company is permitted to borrow capital viadebentures, or loan stock, which facility is not open to partnerships.Also with regard to borrowing, companies are in the advantageousposition of being able to secure debts by means of a floating charge,whereas partnerships cannot use floating charges to secure loans.

VIII Capacity of members. Incompanies, the power to make day-to-day decisions is in the hands of thedirectors and management, and only residual power is in the hands ofthe general meeting of shareholders. The directors and managers ofcompanies are therefore the agents of companies rather than theshareholders who are not agents and cannot bind their companies to anytransaction without specifically being authorised so to do. Everypartner, however, is an agent of their partnership and can act on itsbehalf and bind it in any transaction within the usual scope of itsbusiness activity, as established in the partnership agreement.

However, advantages are not all on the side of the company and incertain points the partnership may be a more suitable mechanism forcarrying out a business. The major advantage of a partnership is thelack of formality involved in forming and running the businessenterprise. Although it is usual for a formal Deed of Partnership to bedrawn up, which states the conditions of the partnership, such procedureis not compulsory, and partnerships can be formed on the basis of amere oral agreement. They can even be inferred from the conduct of theparties where otherwise there is no express agreement. In order to form acompany, however, it is necessary to comply with the procedure forregistration as set out in the Companies Acts, and to ensure that theappropriate documents are provided.

Informality also extends to other aspects of the operation of apartnership, as partnerships are not required to submit accounts or anannual return to the Registrar, as companies are required to do.Partnerships are also at liberty to alter their capital structures asand when they choose. Companies, once again, are required to comply withthe statutory procedure for altering their capital structure. Nor isthere any formality in relation to the meetings of the partnershipsimilar to the formalities required for general meetings held bycompanies.

In conclusion, it would seem that the individuals in the questionmight be best advised to form a private limited company as increasinglythat form provides the advantage of the incorporated company with thelack of formality of the partnership. Although they might not get thebenefit of limited liability as against institutional lenders, theywould enjoy such benefit as against other parties. They could also lendtheir redundancy money to their company in the form of
debentures so that it was not placed at risk if the business did not prove successful (Salomon v Salomon (1897)).

Question 11

AThe 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.

BFloating 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.

CWealthy should check the registerof charges at Hardup plc's registered office and Companies House. Inorder to be valid, all charges must be registered at Companies Housewithin 21 days of their creation. It is Hardup plc's duty to registerthe charge, but anyone interested (i.e. Wealthy plc) may affect theregistration. If unregistered, the charge is void as against theliquidator, i.e. Wealthy plc becomes an unsecured creditor if Hardup plcgoes into insolvent liquidation.

Question 12

S168 CA 2006 states that a director can be removed from office atany time by ordinary resolution (i.e. only a simple majority isrequired). The resolution requires special notice (28 days) and Juliecan require the company to circulate written representations to members.S168 therefore overrides the provision in ABC Ltd's articles andJulie's service contract. Provided the procedure was followed correctly,the members had the necessary authority to remove Julie.

As regards the provision in Julie's service contract, if thecontract has been properly approved by the members, she will have anaction against the company for breach of contract. However, if it hasnot been approved and the correct procedures under s168 have beencarried out, the contract has been properly brought to an end and noaction will lie for breach.

As regards the provision in the articles, s33 CA 2006 states thatthe articles are a contract between the company and its members in theircapacity as members. The situation is similar to Eley v Positive Government Security Life Assurance Co (1876)in which it was held that a provision in the articles stating that Eleywas to be the company's solicitor was not enforceable as it was not aright given to him as a member. Therefore, as Julie is affected by thebreach of the articles in her capacity as a director, she cannot sue thecompany for breach of the articles.

Question 13

AThe purchase of the machinery from Nim Ltd

Through his majority interest in Nim Ltd, Len has an interest in the contract with Mod plc.

This means that he should have declared his interest to the boardof Mod plc at the meeting at which the contract was discussed in orderto comply with s175 CA 2006. He should not have voted at the boardmeeting at which the contract was approved, nor should he have beencounted in any necessary quorum for the meeting. There is therefore aclear breach of duty by Len.

Accordingly, Owen is advised that Mod plc (rather than Owenpersonally) has grounds for an action against Len to make him accountfor any profit he made on the deal. It may also be possible to avoid thecontract with Nim Ltd.

A company is a connected person of a director if the directorcontrols more than 20% of its shares. Nim Ltd is therefore a connectedperson of Len. If the value of the machinery was more than $100,000, thecontract was substantial and this means that it should have been putbefore the members of Mod plc so as to comply with s190 CA 2006. If s190is applicable, breach of it renders the contract voidable. It alsorenders Len and Nim Ltd liable to account for any profit made or toindemnify Mod plc for any loss. Again, any such action must be broughtby Mod plc, not Owen personally.

BThe development of the new product by Nim Ltd

Under s177 CA06, Len is under a statutory duty to declare hisinterest in any proposed transaction or arrangement. He should thereforehave declared the extent and nature of his interest to the otherdirectors. This declaration can be made in writing, at a board meetingor by a general notice that he has an interest in a third party.

The situation is similar to that in the case of IDC v Cooley (1972),in which a director was made to account for the profit he made on acontract taken personally because the opportunity to take that contractarose through his directorship. It made no difference that the companywould not have been offered the contract by the other party. However,the facts here are not the same as IDC in that here the board ofMod plc has decided not to develop the new product and therefore Mod plcis not actively pursuing the opportunity.

In Peso Silver Mines v Cropper (1965) it was held that adirector was not in breach of duty where he took an opportunitypersonally after it had been rejected in good faith by his board. Theboard of Mod plc has rejected the opportunity. The difficulty is whetheror not this decision was reached in good faith. This will not be thecase if Len attempted to persuade the board to reject the opportunitybecause he wished to take it personally, or, indeed, if he did not usehis knowledge and experience for the benefit of Mod plc and thus failedto point out to the board why he liked the new product. If Len isaccountable, any action to recover the profit must be brought by Modplc, not Owen personally.

Question 14

The issue here is the agency position of directors (i.e.unauthorised contracts). When directors act for their company, they areacting as its agents. The company will be bound by their actions inaccordance with the principles of agency as applied to company law.

Where the directors act outside the scope of their authority, thecontract at common law is voidable at the company's option. Where thethird party has suffered loss as a result, he can sue the directorspersonally for breach of warranty of authority. The company may also suethe directors personally.

At common law an agent's authority may be actual or apparent. Adirector will have actual authority to commit the company to contractswithin the scope of powers expressly given to him either by the board orby the company's articles.

Apparent authority is the authority of a director as it appears toothers because of a representation by the principal. Apparent authoritycan arise from the appointment of an agent to a particular office orposition: in which case the principal will be estopped from denying tothe third party that the agent has authority usual to that position. In Freeman & Lockyer v Buckhurst Park Properties Ltd (1964)it was established that the office of managing director carries usualauthority to bind the company to commercial contracts connected with theday-to-day running of the business, e.g. the exercise of borrowingpowers.

S40 CA06 states that the power of the directors to bind the companywill not be limited by anything in the company's constitution providedthe other party is acting in good faith. S40 goes on to state that evenwhere there is actual knowledge of the lack of authority this is notenough to count as lack of good faith.

The contract for $300,000 made by Matthew was beyond his actualauthority as he did not have written authorisation of the chairman ofthe board as required by GLM's articles. However, since he has beenappointed to the office of MD and the contract falls within the usualauthority of an MD – the Buckhurst Park Properties case – GLMplc would appear to be bound at common law. Further, applying thestatutory presumption of good faith, s40 would appear also to protectPQR Ltd.

It would seem then that GLM plc is bound by Matthew's actions.However, since he has acted beyond his actual authority, the directorsare advised that GLM plc can sue him for damages for any loss that hehas caused.

Question 15

ARequirements for companies in respect of holding AGMs

S336 Companies Act 2006 requires every public company to hold an AGM within the six months following their financial year end.

If an AGM is not held in accordance with s336 CA06, the company and every officer in default are liable to a fine.

Private companies are not required to hold an AGM.

BWritten resolution

A private company can use a written resolution to pass any typeof resolution (ie, ordinary or special) which would otherwise need to bepassed at a general or class meeting.

This is subject to two exceptions: removal of directors andremoval of auditors – both require a meeting to be convened so thatthe person concerned can exercise his rights to attend and speak on theresolution.

The resolution is achieved once a copy has been signed by therequisite percentage of members who would be entitled to attend and voteat a meeting. The resolution takes effect from the date the last personsigns.

A copy of the proposed written resolution must be forwarded tothe company's auditor (if any). Failure to do so is a criminal offence,but failure does not affect the validity of the resolution.

All written resolutions must be recorded in the company's Register of written resolutions.

Question 16

AOne of the many consequences ofincorporation is that a registered company becomes a legal entity in itsown right having existence apart from its member shareholders. One ofthe attributes of this legal personality is that the company has notonly separate, but perpetual existence, in that it continuesirrespective of changes in its membership. Indeed the company cancontinue to exist where it has no members at all. Winding up, orliquidation, is the process whereby the life of the company is broughtto an end and its assets realised and distributed to its members and/orcreditors. The rules governing winding up are detailed in the provisionsof the Insolvency Act 1986 (IA) and the exact nature of the proceduredepends on the type of winding up involved, which in turn depends uponthe solvency of the company at the time when liquidation commences.Winding up can be conducted on a voluntary basis, in which case themembers of the company themselves determine that the time has come forit to come to an end. Alternatively the court may make an order that thecompany's life should come to an end. This question refers to the firstof these alternatives, voluntary winding up.

BSection 84 IA states that a company may be wound up voluntarily:

  • 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.
  • 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:

IMembers' voluntary winding up

This takes place when the directors of the company are of theopinion that the company is solvent and is capable of paying off itscreditors. The directors are required to make a formal declaration tothe effect that they have investigated the affairs of the company andthat in their opinion it will be able to pay its debts within 12 monthsof the start of liquidation. It is a criminal offence for directors tomake a false declaration without reasonable grounds. On appointment, byan ordinary resolution of the company, the job of the liquidator is towind up the affairs of the company, to realise the assets and distributethe proceeds to its creditors. On completion of this task theliquidator must present a report of the process to a final meeting ofthe shareholders. The liquidator then informs the Registrar of theholding of the final meeting and submits a copy of his report to it. TheRegistrar formally registers these reports and the company is deemed tobe dissolved three months after that registration.

II Creditors' voluntary winding up

This takes place when the company is insolvent when it is decidedto wind it up. The essential difference between this and the former typeof winding up is that, as the name implies, the creditors have anactive role to play in overseeing the liquidation of the company.Firstly a meeting of the creditors must be called within 14 days of theresolution to liquidate the company at which the directors must submit astatement of the company's affairs. The creditors have the final say inwho should be appointed as liquidator and may, if they elect, appoint aliquidation committee to work with the liquidator. On completion of thewinding up the liquidator calls and submits his report to meetings ofthe members and creditors. The liquidator then informs the Companies'Registry of the holding of these final meetings and submits a copy ofhis report to it. The Registrar formally registers these reports and thecompany is deemed to be dissolved three months after that registration.

Question 17

AThe Cadbury Committee examinedboardroom accountability issues and one of its solutions was themonitoring role of non-executives directors.

Cadbury recommended that there should be sufficient independentNEDs in number and quality to carry significant weight in boarddecisions. These NEDs should be independent of the company.

The NEDs should sit in sub-committees of the board to coverissues concerning appointments of directors, remuneration of directorsand the audit process. The role of the NEDs is to bring judgement andexperience to the board that the executive directors might lack. Incontrast to executive directors, NEDs do not usually have a fulltime-relationship with the company. They are not employees and onlyreceive directors' fees. They are expected to exert a measure of controlover the executive directors to ensure that they run the company in thecompany's best interest. NEDs should scrutinise the performance ofmanagement in meeting goals and objectives, and monitor the reporting ofperformance. As far as company law is concerned there is no distinctionbetween the executive directors and NEDs; both are subject to the samecontrol and liabilities.

The following are evidence in favour of the presence of NEDs on boards.

There is evidence that non-executive directors perform animportant corporate governance function. Without the monitoring functionof NEDs, it would be more likely that executive directors would be ableto manipulate their position by gaining complete control over their ownremuneration packages and securing their jobs.

Without NEDs, executive directors can become excessively cohesive.

The addition of the NEDs brings new information and ideas and allows the entire board to make sound decisions.

NEDs provide an independent and fresh review of long termdecisions, effectuate impartial, uncontaminated audits of managerialperformance and counterbalance the influence of top management.

NEDs' independent influence has led to the removal of ineffective chief executives.

However, there is also a perception that the involvement ofnon-executive directors can damage corporate governance by reducingentrepreneurship in the business and weakening board unity.

This was certainly the view expressed by many board directors intheir initial response to the Higgs recommendations to broaden the roleand effectiveness of non-executive directors in the UK. Higgsrecommended that a senior independent director should be identified andthis senior NED should be available to shareholders if their concernshave not been met through normal channels of contact.

There was also potential for the appointment of non-executivedirectors to result in more cronyism and a more comfortable network ofclose ties and cosy relationships between the directors of leadingcompanies.

Accusations were made that the new level of non-executivedirectors provides just more 'jobs for the boys' and the opportunity foreven firmer golden handshakes than retiring directors receive already.Nonetheless despite these criticisms, the presence of independentnon-executive directors is necessary to improve the quality ofgovernance in listed companies.

BThe Higgs review has provided detailed guidance on the role of the NEDs.

It specified the number of independent NEDs on a main board and crucially gives a good definition of independence.

Below are the key recommendations of Higgs to ensure the independence of NEDs.

(1)At least half the board, excluding the chairman, should be independent NEDs.

(2)Higgs sets out a definition ofindependence. A NED is considered independent when the board determinesthat the director is independent in character and judgement and thereare no relationships or circumstances which could affect, or appear toaffect, the director's judgment. Such relationships and circumstancesarise where the director is or has been an employee of the company, hasor had a business relationship with the company, is being paid by thecompany other than a director's fee and certain other payments; hasfamily ties to the company or its employees; holds cross-directorshipsor has significant links with other directors through involvement inother companies or bodies; represents a significant shareholder, hasserved on the board for 10 years.

(3)The board should identify inits annual report the NEDs it determines to be independent. The boardshould state its reasons if a director is considered independentnotwithstanding the existence of relationships or circumstances whichmay appear relevant to its determination.

Higgs contribution is significant. Its key weakness is perhapscompanies get to say who is independent or not according to the Higgscriteria without additional external scrutiny.

CThe Combined Code is a set ofprinciples, rather than a set of rules. It requires the directors todescribe in their own words the way in which they have applied thegeneral principles of corporate governance.

Self-regulation: advantages

  • Legislation may be too rigid and difficult to change to keep pace with corporate change. A 'one size fits all' piece of legislation may be based on the 'lowest common denominator' and hinder rather than improve good governance because of the diversity amongst corporations.
  • The present system is flexible and provides for responsiveness to change. This means that the Combined Code can be updated to respond to changing conditions and changing expectations of shareholders and others.
  • Because the directors report on the actual circumstances of their own company, the report should be more meaningful than one based on specific detailed requirements.
  • A principles-based approach encourages the directors to follow the spirit of the Code; whereas a rules-based approach may result in tick-box mentality. This means that, under a rules-based approach, the directors may follow the letter of the rules rather than their spirit.

Self-regulation: disadvantages

  • Bias – favouring the interest of members at the expense of other interests.
  • Prevents coherent reforms by government as self-regulatory practices will have developed and been relied upon.
  • Enforcement problems – insufficient investigatory and enforcement powers and difficulties of co-ordination.

Question 18

Dealing in shares, on the basis of access to unpublished pricesensitive information, can lead to criminal conviction for an offencecalled 'insider dealing' under the Criminal Justice Act 1993. The Actcreates the offence in order to protect the integrity of the stockmarkets and to ensure that the public confidence in the accuracy ofinformation relating to relevant securities is maintained. The offenceis established in s.52(1) which provides that an individual who has aninformation as an insider is guilty of insider dealing if he deals withprice affected securities in the circumstances mentioned in s.52(3). Thedealing must result in the acquisition or disposal of securities on aregulated market or if the person relies on professional intermediary oris himself acting as a professional intermediary. Before anyone can beguilty of the offence it must be proved that the person is an insider,has inside information and either encourages another person to deal insecurities that are price-affected securities or discloses theinformation, otherwise than in proper performance of the functions ofemployment, office or profession to another person.

The definition of 'insider' is provided in s.57 which states thatfor the purposes of this section, a person has information as an insiderif and only if it is, and they know that it is inside information, andthey have it, and they know that they have it, from an inside source. Aperson has information from an inside source if and only if they have itthrough being a director, employee or shareholder of an issuer ofsecurities; or having access to the information by virtue of employment,office or profession; or the direct or indirect source of theinformation is a person mentioned above. S.57 deals with the meaning of"inside information". The information will be treated as insideinformation if it related to particular securities or to a particularissuer of securities and not to securities generally; is specific orprecise; has not yet been made public and if it were made public itwould likely have a significant effect on the price of any securities.Insider dealing is a criminal offence which means that the prosecutionmust prove the offence beyond reasonable doubt.

Applying the above law to the facts of the question, it is clearthat Jane is an insider and she has inside information. She is amanaging director of Winning plc and she was told about the successfultender prior to official announcement being made. This clearly satisfiesthe definition of an insider given in s.57 of CJA 1993. She is clearlyaware that it is price sensitive information within the meaning of s.56CJA 93. This can be assumed from her request to Mary to keep theinformation confidential. If the information was not price sensitive,there would be no need for any secrecy. Jane has not encouraged Mary todeal with the securities; however, she disclosed the information incircumstances which could not be described as "in the proper performanceof the functions of her employment, office or profession". Jane,however, may have a defence under s.53(3) of the CJA 93.

The section provides a defence to a person who improperly disclosesthe information if she can show that she did not at any time expectMary to deal in the relevant securities. Jane told Mary about thesuccess of the tender in her excitement at the potential profits thather company may make and she was not aware of the inheritance. It is notpossible to determine with certainty whether her defence would succeedbut if this is so she will not be guilty of the offence. If her defencedoes not succeed she may be prosecuted and if found guilty she will befined or imprisoned for up to 7 years.

Similarly, Mary satisfies the definition of an insider as she is aperson who obtained the information directly from the director of theWinning plc. She is also aware that the information is price sensitiveas Jane made it clear to her that the outcome of the tender has not yetbeen made public. She dealt in securities in circumstances clearlyenvisaged by s.52(3) and it is unlikely that she could utilise any ofthe available defences. It appears that she is clearly guilty of theoffence of insider dealing and she may be fined or/and imprisoned for upto 7 years.

Created at 5/24/2012 2:52 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
Last modified at 5/25/2012 12:54 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London

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