CHAPTER
Contract 1 Contract
ACCA F4 Corporate and Business Law
Study Notes By: Shaista Aziz
(English) (English)
UPDATED FOR
2015 EXAMS
CHAPTER
1 Contract
ACCA F4 Corporate and Business Law
(English) (English)
By: Shaista Aziz
Study Notes
1 Contract
CHAPTER TABLE OF CONTENTS Chapter #
Title of Chapter
Page #
1
Contract
05
2
Formation of Contract
17
3
Terms of Contract
24
4
Breach of Contract
31
5
Law of Tort
34
6
Agency Law
42
7
Employment Law
48
8
Partnership
61
9
Companies
67
10
Company officers
97
11
Insolvency and Administration
122
12
Fraudulent Behaviour
138
13
Market Abuse
142
14
Fraudulent Trading
147
15
Wrongful Trading
151
16
Corporate Governance
156
17
English Legal System
170
CHAPTER
1 Contract
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CHAPTER
1 Contract
CHAPTER CHA PTER
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Contract
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1 Contract Formation of contract Contract is an agreement between two or more persons that is enforceable under legal framework. Contact = agreement + enforceability Contract creates legal responsibilities or obligations while the agreements which give rise to social responsibilities are not contracts. Example A father promises to pay this son 1000 every month as his pocket money. Later he refuses to pay. In this agreement as social obligation is involved and cannot be enforced within legal framework therefore, it was an agreement but not a contract. On the basis of validity, contracts can be divided into two categories:
Valid contract
Void contracts
Valid contract A contract which is perfect and correct with its all terms and conditions is called a valid contract. Essentials of a valid contract are as follows:
Agreement which is usually made by offer and acceptance
Lawful consideration consideration
Intention to create legal relationships
Capacity of parties
Free and genuine consent
Lawful object
Certainty and possibility of performance
Agreement Agreement is not declared void
Void agreement A contract which is not complete with all terms and conditions. Sometimes Sometimes situation makes it void later on. A contract to import goods from a foreign country may subsequently become void when war breaks out between two parties.
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1 Contract On the basis of formation, contract can be divided in two categories Express contracts Implied contracts Express contracts The terms of the contract are expressly agreed upon either by spoken, words or by writing at the time of formation. Example A agreed upon to buy car from B at 20,000. Having this contract written or verbally expressed between two parties, it is an express contract. Implied contract It is inferred from the acts or conduct of parties. No written or verbal means are used to express the acceptance of proposal of contract. contract. There are mostly hidden or the obvious terms. Example A person gets into public bus, now it is his implied duty to buy the ticket. Elements of contract There are three essential elements of contract Agreement Consideration Intention to enter into legal relations Agreement is a definite promise between two parties that is binding under legal framework. Agreement Agreement is usually made through offer and acceptance. Offer is an expression to another of willingness to be bound by the stated terms. e.g. Mr. A asks Mr. B either he is willing to purchase his car or not? The person who makes the offer is called offeror and to whom offer is made is called offeree.
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1 Contract Offer can be made to one person, to a group of persons or to public at large. Offer to public at large. An offer can be made to public at large Carllil Vs Carbolic smoke ball company What is not an offer? A vague offer is not an offer o ffer A statement which is vague cannot be an offer. A vague v ague statement contains contains ambiguity and some uncertainty. e.g. Gunthing Vs Lynn but apparently vague offer can be made certain by reference to previous dealing. Hillas and Co Ltd Vs Arcoss Ltd Offer should be distinguished distinguished from
Supply of information
Invitation to treat
Supply of information is simply a statement which only seeks out possible terms of the contract. It is not more than a request for further information. So it cannot become an offer unless it is clearly indicated through certain terms and conditions. Harvey Vs Facey 1893
Invitation to treat An inclination that person is prepared to receive an offer. It is simply a technique used by a party who induce/wishes another party to make an offer. It is also not capable of acceptance. For example display of goods at a shop. Other notable examples of invitation to treat are as follows: for Auction sales Advertisements Exhibition of goods for sale An invitation tenders
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1 Contract Auction sales
An auction is defined as a contract of sale of o f property under which offers are made by potential buyer/bidders buyer/bidders stating their prices at which they are prepared to buy and acceptance takes place by the fall of auctioneer’s hammer.
So auction is considered an invitation to treat on the part of auctioneer. Bid itself is an offer so auctioneer is free to accept or reject the offer or he may cancel the auction altogether without incurring any liability from potential bidders. E.g. Harris Vs Nickerson Case law: Payne Vs Cave 1789
Advertisements
Advertisements are also considered as invitation to treat because advertisements of goods for sale are usually an attempt to induce offers. Advertisements can be made through commercials on TV, internet and news papers. Through advertisements customers are attracted to make an offer. A circulation of price list is also known as invitation to treat. Case Law: partridge Vs Crittenden
In this case law it was decided, those advertisements are invitation to treat, which cannot be accepted. Exhibition of goods for sale.
Exhibition of good or displaying of goods in a shop window, for sale is normally considered as invitation to treat that is not capable of acceptance. As in case law: Fisher Vs Bell It was decided in this case law that displaying of an article with a price on it in a shop window is merely an invitation to treat. Invitation for tenders.
Tender is an estimate price list document submitted in response to a prior request. Advertisements Advertisements for tenders will generally the same as an advertisement for an auction each tender will b considered as an offer, which cannot be accepted.
CHAPTER
1 Contract Statement of intention
Termination of an offer
The offer which comes to an end is considered as termination of an offer. In order for there to be a valid acceptance, there must be an offer to which that acceptance is a response. This principle requires not only that an offer has been made but is should remain in existence at the time of acceptance. Offer may come to an end in a number of ways. Rejection Counter offer Laps of time Revocation by the offeror Death of one of parties Failure of conditions
1. Rejection When an offer is rejected by the offeree ,it brings to an end.Offree cannot change his mind later on and cannot require the oferor to carry out his terms.
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1 Contract 2. Counter offer Counter offer is final rejection of original offer and introduces new terms at the part of offeree towards offeror. Offeree cannot suggest different or new terms which constitute a counter offer. In this original offeree becomes the new offeror as in the case of
Hyde vs. wrench.
In this case law it was decided that original offer of £ 1000 had been terminated terminated by the counter offer of £950. A counter offer may of course be accepted accepted by original offeror, offeror, as in the case law of Butler machine tool co vs. Excel o crop. A counter offer should be distinguished from “request for further information” information” that is not a
counter offer. Example . what credit terms are you y ou offering? It is not a counter offer because such a request regarded regarded as only for further information not proposing new terms ,as stated in below example. Example. What would you say if I offered you £950 instead of £1000. Now above example clearly shows that offeree had made new terms, which itself is an offer and that type of offer at the part of offeree o fferee is called counter offer.
3. Laps of time An offer may not remain open for indefinite period of time. It comes to an end after the time specified in offer. If however there is no express time specified in offer then it will expire after a reasonable time period. What is a reasonable time? It will depend upon the nature of transaction and the circumstances circumstances as a whole as in the case law Ramsgate Victoria hotel co vs. Montefiore 1866 It was decided in this case law that offer was valid for a reasonable time and five month was too late.
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1 Contract 4. Failure of a condition The offer is not capable of acceptance if the terms and conditions specified in offer no longer met .So offer come to an end when there is any failure of condition as in the case law Financings ltd vs. Stimson 1962.
5. Death of one of parties If the offeree dies then the offer cannot be accepted by his personal representatives, it will simply terminate the offer. Offeror‘s death terminates the offer unless offeree accepts the offer in ignorance of the death
and the offer is commercial nature. Case law Bradbury v Morgan 1862.
6. Revocation of an offer The offeror may withdrew his offer at any time before acceptance even though the time limit has not expired as in the case law Routledge vs. Grant When offer is revoked the offree is no longer able to accept it. Revocation of an offer may be through Expressed statements Any act at the part of offeror which gives clear indication that offer has been revoked. Effective revocation
It requires that revocation is only effective when it is communicated to offeree that offer is no longer open. It can be communicated communicated directly from offeror to offeree OR It can be communicated communicated by any third party who is sufficient and reliable informant. And after receiving sufficient reliable information about revocation, afferee cannot accept it.
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1 Contract As in case law Dickinson vs. Dodds 1876 Revocation would also be effective only when it was revoked by the person who has actual authority to do that. Exception
Revocation initially takes effective when it is communicated to offeree but postal rule does not apply here . According to this, letter of revocation revocation would not take effective as soon as it was posted until it is received. As in case law Byrne v Tienhoven 1880
Acceptance Second element of agreement. Acceptance can be defined defined as “A positive act in response to offer OR an unqualified agreement
to all the terms of offer. The contract comes into effect once the offeree has accepted the terms presented in offer. This is the point of no return, after that the offeror cannot withdraw their offer and both parties will be bound by the terms that they have agreed . Acceptance can be made through following. Verbal acceptance by express words Written acceptance through signature on formal document Acceptance by actions that is inferred from conduct of both parties e.g. case law Borden vs. Metropolitan Railway co
Silence
Silence does not constitute acceptance. There must be some act at the part of offeree to indicate acceptance. An offeror cannot dictate that his offer shall be deemed to have been accepted unless the offeree actually rejects or accepts it. Case law Felthouse vs. Bindley 1862
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1 Contract it should be differentiated from counter offer and request for information because they are not capable of acceptance.
Communication Communic ation of acceptance . General rule of acceptance “it must be communicated to offeror and it is not effective until this has bee n done” .However
this rule does not apply in all cases.
1. Prescribed mode of communication.
In this the method of communication communication of acceptance is specified or prescribed by offeror and it is required that acceptance would be effective when communicated through the method that was specified. However offeree could use other method but the other method should be equally effective as was prescribed. prescribed. Case law Yates building co vs. R J Pulleyn and sons
2. No mode of communication communication prescribed.
If there is no mode of communication prescribed, parties should use reasonable mode. e.g. Mr. A offers to Mr. B through email and then Mr.B accepted it through letter. it is not not acceptable because because it is not reasonable reply as Mr. A requires immediate immediate reply. Telephone call will be a reasonable reply. Postal rule
it states that “ when the use of post is within the expectation of both parties ,the
acceptance is complete and effective as soon as the letter is posted even though it may be delayed or lost altogether. Case law Adams vs. Lindsell 1818
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1 Contract Postal rule does not apply where one party expecting immediate response or specified the the mode of communication and other party made acceptance through post. Case law Holwell securities vs. Hughes
Unilateral contracts These are the contracts where one party makes a promise and other party has to perform some act. In these contracts consideration is executed and they are one sided contracts. The best example for unilateral contracts is reward cases. No revocation once offer has been made. Case law carlill vs. carbolic smoke Ball co 1893
Collateral contracts Collateral contract is second agreement that pertains to original agreement so the consideration of collateral contract is the promise to enter into original agreement. agreement. These are three parties relationship agreement. There is no clear offer and acceptance in these cases . Case law shanklin pier Ltd vs. Detel products Ltd 1951.
CHAPTER
2
Formation of Contract
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Formation of Contract
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Formation of Contract
2. Consideration Consideration is second essential element of contract. Simply it is stated that each party gives or agrees to give another party, usually payment or promise in return for another promise. We can say that each party of agreement must receive something of value. In more legal language it can be defined as “a valuable consideration in the sense of o f law may consist either in some right ,interest ,profit or
benefit accruing to one party or some forbearance ,detriment ,loss or responsibility given ,suffered or undertaken by the other”
Types 1. Executed consideration 2. Executory consideration 3. Past consideration Executed consideration
a performed or executed act in return for promise. E.g. in a contract for the sale of goods, consideration is executed if the price is paid at the same time that goods are delivered. Case law carlill vs. carbolic smoke ball co In this case law claimant’s act in response to the smoke ball company’s promise of reward was
executed consideration. Executed consideration takes place at the present time. 2. Executory consideration
The consideration in support of each promise is the other promise, not a performed act. e.g. A promise to pay for goods which are are to be delivered and paid for at a later date. Executory consideration takes place at some future date.
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Formation of Contract
Invalid considerati consideration on 3.Past consideration
Past consideration is something which has already done at the time when promise is made. e.g where works had been carried out and later on promise is made to pay for them. Case law Re McArdle 1951 Exception to past consideration
If there was an implied promise before the works were carried out that they would be paid for at a later date then it is considered as valid consideration. consideration. In this situation works were requested by promiser and the parties must have understood and assumed that they would have to pay for them. Case law Lampleigh vs. Braithwaite.
Adequacy and sufficiency of consideration consideration According to law every promise will not be enforceable under legal framework if it has no consideration. So every promise must have some identifiable value to be paid/received in return. There are two rules. 1. Consideration need not be adequate. 2. Consideration must be sufficient. sufficient. Adequacy it means that it is not compulsory that it must have equal value to the consideration received in return. it can be higher or lower but ,there is no remedy at law for someone who simply makes a poor bargain. Sufficiency it means that consideration must have some identifiable identifiable value in order to be capable in law of being regarded as valid consideration.
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Formation of Contract
Adequacy and sufficiency It is presumed that each party is capable of serving his own interest and court will not seek to weigh up comparative value of promises or acts exchanged. exchanged. Case law Thomas vs. Thomas It was decided in this case that nominal rent of £ 1 per anum was considered to be of sufficient consideration.
In order to be sufficient, consideration must contain some element that can be seen as the price of other party’s promise. Because law only requires an element of bargain not necessarily that it
should be a good bargain. Case law Chappell and co vs. Nestle co
It was decided in this case law that even used chocolate wrappers which had some commercial value are considered as sufficient consideration. consideration.
You should familiarize yourself with the following. 1. Performance of existing contractual duties. Performance of existing contractual duty that was required or imposed by statute is not considered as sufficient consideration. Example if someone agrees to pay a sum of money to another person for appearing in court, when that person has been subpoenaed/summoned to attend in any event then there is no consideration to support the promise to pay.
2. Performance of additional duty. There is consideration when promisee is actually giving or doing something over and above the scope of contractual obligations. this case is carefully examined that what is actually over and above the existing contractual duty and also to ensure that the case is not actually one of duress. Case law Williams v Roffey Bros and Nicholls Ltd 1990 3. Performance of existing statutory duty owed to third party.
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Formation of Contract If A promises to B a reward that if B will perform his existing contract with C there is consideration for A’s promise and B assumes no obligations.
Case law Shadwell vs. Shadwell
Intention to create legal relationshi relationship p Intention to create legal relation is a third essential element of the contract . It can be defined as “An agreement agreem ent will only become a legally binding contract when the parties
entering in the contract intended to be bound on legal terms. There are two general rebuttable assumptions that means the situation that is assumed in general way can be disproved in some specific situation. 1. Domestic arrangements. It is presumed that social, domestic and family relations are generally not considered as binding unless there is clear evidence which points to the contrary. 2. Commercial arrangements. It is presumed that arrangements related with business arrangements and commercial nature agreements are generally considered as legal agreements.
Domestic arrangements Domestic arrangements has following three situations . i) ii)
Husband and wife Relatives
iii)
Other domestic arrangements.
Husband and wife If parties are husband and wife, it is assumed that their intention is away from entering in any legal contract in normal circumstances.
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Formation of Contract
Case law Balfour Balfour.
But it does not mean that husband and wife cannot enter in any legal agreement .it is decided from the situation and the nature of relationship between the parties at the time of agreement . The agreement will become binding if normal circumstances does not exist at the time of agreement. Case law Merritt vs. Merritt
Relatives These are the relationships between family members. The agreements made between family members can also b considered as simple agreements or promises having no legal status in normal circumstances. circumstances. Case law Jones vs. padavatton
Other domestic arrangemen arrangements ts These are the relationships between the people who are not family members but they have close relationship. The nature of agreement agreement resulted in legal relationship. Case law Simpkins v pays
Commercial arrangements The agreements that are related with business arrangements are normally considered as there is an intention to enter into legal relations unless circumstances indicate contrary. Case law Rose and Frank v Crompton
It is not easy to rebut this presumption as in case law Edward v Skyways Ltd.
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Formation of Contract
Care needs to be taken during the negotiation stage to determine the intention of contract. As the words “Subject to contract” amounts to a strong presumption that no immediately binding contract is intended.
CHAPTER
3
Terms of Contract
CHA HAPTER PTER
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Terms of Contract
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Terms of Contract
Terms of contract Statements made during the course of negotiations could amount to a contractual term or a representation. It is important to know whether a particular statement is a contractual term or if it is a representation as this will determine the appropriate cause of action and remedy available.
Contractual terms and representatio representation n it may be difficult to establish which statements made in negotiating the contract amount to terms and which statements are merely representations
Representation Representation is something which induces others to enter in the contract but does not become a part of the contract. Case law Rout ledge v grant 1954
Term Term is the condition which is explicitly stated in an agreement and it becomes the part of a valid contract. Example Condition to pay £500 to purchase car, now in this payment of £500 is the term of the contract to purchase car.
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Terms of Contract
Case law Bannerman v white 1861
Difference between term and representation
it is important to distinguish between term and representation because different remedies of damages are available for the breach of contract or the breach of mere representation representation In deciding whether a statement amounts to a term or representation the courts look at four factors 1. Relative knowledge of expertise 2. Reliance or importance of the statement 3. Evidence or strength of the statement 4. Timing Relative knowledge of expertise
Does one party have expert knowledge of the subject matter? In our example, if a car dealer tells you something about a car, it’s more likely to likely to be a
; but if you tell the dealer
something, it’s more likely to be a
Reliance or importance of the statement
Did one party obviously rely on o n what was said when they entered into the contract? Evidence or strength of the statement If it’s strong, it’s more likely to be a term (unless both parties understood that it wasn’t!).
Timing
Did the statement immediately precede the making of the contract?
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Terms of Contract
Types of the terms There are two broad categories of terms 1. Expressed terms 2. Implied terms i) ii)
Implied by custom Implied by statute
iii)
Implied by courts
Expressed terms The terms that are expressed or stated clearly by the parties to a contract called expressed terms. An expressed term if not fulfilled the innocent party may bring an action for breach of contract case law Scammell v Ouston
Implied terms These are the hidden terms and obvious terms. Implied terms are imposed by the court or statute.
Terms implied by statute Terms those are imposed by statute (law) under specific circumstances. Example Sale of Goods Act 1979.
According to this act, it is imposed by statute that goods must be of satisfactory quality.
Terms implied by courts Some terms are generally included at the order of courts. Case law The Moorcock 1889
.
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Terms of Contract
Implied by custom
Some terms are generally known to be included in contracts in a particular trade or locality. Case law Hutton v warren 1836
Classification Classificat ion of term Terms may be further classified into three categories. 1. Condition 2. Warranty 3. Innominate terms It is important to distinguish between condition and warranty because the remedies available under law are different if breached. Effect of the breach is also different in both cases. Breach of condition: high losses Breach of warranty: low losses
Condition Some of the terms in a contract are major and have vital importance, called condition. We can also say that the basic or the fundamental term of the contract is condition. The effects of the breach of condition are harsh. After the beach of condition the injured party may have right to terminate the contract at all.
Case law Poussard v Spiers 1876
Expressed and implied condition Conditions are express when they are willingly inserted in the contract by the parties and implied when the law presumes their existence in the contract automatically.
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Terms of Contract
Warranty Warranty is the term of a contract which is minor as compared to condition and subsidiary to the main purpose of the contract. The effect for the breach of the warranty is also not vital. After the breach of warranty, the injured party must continue performance and may have right to claim only for damages. Case law Bettini v Gye 1876
Innominate terms An implied term of a contract which is neither classed as a condition or a warranty but somewhere in between calledan intermediary or innominate term. Case law Hong Kong Fir Shipping Co Ltd v Kawasaki Kisa Kaisha Ltd 1962
Exclusion clauses Exclusion clause is the clause which may be inserted into the contract which aims to exclude or limit one party's liability for breach of contract or negligence Example Exclusion clause added during parking ‘’Park at your own risk’’
This clause excludes liability for damage of car and theft of car altogether. Rules for exclusion clauses Law has protected consumers from the harsher effects of exclusion clauses through two ways. There are two essential rules for exclusion clauses to make those clauses valid and complete. 1. Exclusion clause must be incorporated validly into the contract. 2. Exclusion clauses clause s must be interpreted completely ( what exactly the meaning of exclusion clause) They are sometimes sometimes referred to as exemption clause. Incorporation of exclusion clauses
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Terms of Contract
Exclusion clauses must be incorporated, it means other party must be informed of the clause otherwise it will have no worth. Case law Chapelton v Barry UDC 1940 Signed contracts
In a formal contracts making through signature, have binding terms and conditions and exclusion clauses even though other party had not read all the information regarding those terms and conditions. Case law L Estrange v Graucob Unsigned contracts
Some contracts are informally made through general agreements; in this each party must be informed of all the terms and conditions and exclusion clauses also clearly to make it binding. Case law Olley v Marlborough Court 1949 Onerous terms
Some terms and conditions or even exclusion clauses have very harsh impact so they must be highlighted highlighted to make it clear to other party before the contract. Case law Interfoto picture Library Ltd v Stiletto Visual Programmes Ltd 1988
Interpretation of exclusion clauses Exclusion clauses must be explained clearly to the other party so that other party is aware the exact meaning and possible impact of that clause. If the other party is misleading through vague statement statement using in exclusion clause then that exclusion clause will have no worth. Case law Alderslade v Hendon Laundry 1945
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Terms of Contract The unfair contract terms Act 1977
The unfair contract terms Act 1977 aims to protect consumers from harsher effects of exclusion clauses. The Act mainly applies to commercial contracts. There must be balance between freedom of contract and protection of public from unfair exclusion clauses. This Act considers followings aspects to protect general public. 1. It applies to clauses that attempt to escape from liability of negligence. 2. It applies to clauses that attempt to escape from liability of breach of contract. According to this UCTA, some clauses are automatically void and all other clauses must pass through test of reasonableness. reasonableness. The clause that attempts to escape or exclude liability for death or personal injury resulting from negligence considered as void. The one cannot exclude liability for defective goods in the sale of goods Act 1979. UCTA also protect to not exclude implied terms given in the sale of goods Act 1979. Example
condition relating to description, quality and fitness.
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Breach of Contract
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Breach of Contract
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Breach of Contract
Breach of contract Contract can be discharged through following four ways. 1. Agreement 2. Frustration 3. Performance 4. Breach Breach of contract Breach of contract can be defined as ‘’ if the party entered in the contract failed to meet its
contractual obligations obligations without any lawful reason ,then that party is in a position of breach of contract “
Repudiation
After the breach of contract by one party, the injured party (other party of the contract) may have right to terminate the contract all together, that is called repudiation. Anticipatory breach
When one party declares in advance that he will not perform his contractual obligations at due time, called anticipatory breach. Damages can be claimed in both cases. Where the breach is sufficiently serious, the injured party may choose either to:
Treat the contract as discharged immediately and injured party can claim damages.
Allow the contract to continue until there is an actual breach and injured party can claim heavy damages.
Damages Damages can be defined as remedy in monetary or non monetary form to restore the injured party to the position he would have been in if the contract had been performed. performed. Damages can be claimed under I)
Common law
II)
Equity law
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Breach of Contract
Damages under common law When injured party claims damages then under common law the two tests applied. 1. Remoteness of damages 2. Measure of damages Remoteness of damages
Damages are only recoverable when they are not too remote (far away) from the actual breach of contract. Two rules must be applied to measure the remoteness of damages. 1. The loss suffered by injured party should purely relate with the breach of contract or we can say that the loss suffered by the injured party must be the actual consequence of the breach of contract. 2. Damages are recoverable when the loss suffered by the injured party is within the defendant’s actual or constructive knowledge when he formed the contract.
The leading case law related with remoteness of damages. Hadley v Baxendale 1854
The above two rules are also applied in this case law Case law The Heron II 1969 Measure of damages
After deciding to award damages to injured party, it is estimated that how much money should be awarded in respect of the breach, which is called measure of damages.
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Law of Tort
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Law of Tort
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Law of Tort
What is law of tort? Tort is a type of civil wrong which deals with the situation of person’s behaviour causing harm
or loss to others According to McCarthy and Cambron-McCabe, 1992 tort law offers remedies to individuals harmed by the unreasonable actions of others
Main elements of tort Following conditions must be satisfied in order to be successful for tort
There must be an act or omission by the defendant.
The act or omission directly caused the damage to the claimant
The court must able to established est ablished legal liability and source should not be remote ‘i.e.
loss should be caused by the direct action of defendant and easily identifiable
Types of tort There are following types of tort.
Trespass to the land Trespass is a use of property or land without permission permission of owner of property. e.g. Mr. A is trying to pocess the land of mister B without any legal implications.
Trespass to the person.
Battery It is intentionally harm or offensive contact with person having close relationship. e.g. when someone hit or kick to another person.
Assault Assault is an intentional act of threatening someone. e.g. Putting gun on the head of another person.
False imprisonment Restraint someone in any bounded place for no or false reason.
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Law of Tort
Defamation It is a tort which causes to hurt someone’s reputation. e.g. politicians
Nuisance It is a type of tort which causes to irritate someone through noise, smell and music.
Negligence It is simply defined as carelessness or when someone failed to meet his duties to which he is responsible. Negligence is the breach of duty to take care which cause losses or damages to others. Claimant has to prove following, for action against negligence to be successful
The duty of care was owed by defendant.
Defendant breached that duty
Loss has suffered as a result of that breach
Damage was not too remote.
Duty of care
Every person owes a duty of care to another person. Case law Donoghue v Stevenson Stevenson 1932
Four test was laid down by The Nicholas to determine whether a duty of care exist
Was the damage foreseeable by the defendant at the time of omission?
Is there neighborhood principle between the parties?
Should the law impose duty of care between parties
Is there a matter of public policy exists for the duty of care? Example
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Law of Tort For example A was given an ipad on his birthday by his uncle. Due to some technical defect ipad set fire to his bedroom and cause damaged to his furniture .A made ill by inhalation .A can claim for the damages from ipad manufacturer for;
Pain and suffer caused by smoke inhalation
Loss of income during the period of illness.
Cost of replacing furniture and redecoration. But he cannot claim for the ipad which is pure financial loss.
Breach of duty of care The claimant has not only to prove that duty of care exist but also has to prove that duty of care breached by the defendant.
Was there a breach? Each case must view separately on its fact for establishing whether there there has been breached. Facts of case speak s peak for themselves in many instances; this is the principle of res ipsaloquitor Claimant has to prove that duty of care was breached by the defendant and defendant has to prove that he was not negligent in his actions.
The standard of care Claimant has to show that defendant failed to take the degree of care which a reasonable man would have taken in this situation If a person acts in a particular profession, profession, he must show care of that profession The following principles have been established by case law
Particular Skill Generally all reasonable reasonable persons have have to possess same same kind of skills but if someone someone acts to have particular skills, then standard of care expected from that particular skill. Like standard of care from accountant is expected from his particular skills
Lack of skill The same standard of care excepted from experienced and inexperienced person from particular skills
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5
Law of Tort
Lack of hindsight This test based on the defendant knowledge at the time of act , therefore any Following factors should be considered when determining the breach of duty of care.
Probability of injury
Seriousness of the risk
Issues of practicality and cost
Common practice
Social benefits
Loss caused by the breach A claimant has to prove that he has suffered loss as a direct result of the breach. Causal link must be established by the claimant be tween the defendant’s conduct and the loss occurred by the defendant’ conduct loss
There will be no liability on defendant, if damage caused by somebody and something else. Loss has been caused by regardless of defendant’s conduct, then he has not caused t he loss above two points can be descried in the case of Jeb Fasteners Ltd V Mark Bloom& Co 1982. In Jeb v marks case the defendant prepared audit report negligently, but claimant cannot claim to defendant’s auditor even auditors have obligation to take care during audit because defendant
company taking the services of their directors not of accountant or auditor Something happened after the defendant‘s breach that contributed to the loss, then defendant is not liable for the damage. Following damages are normally recoverable -
Damage as a result of personal injury
-
Damage to property
-
Financial losses linked with personal injury. Pure financial loss is rarely recoverable recoverable
If the loss was too remote and claimant is able to show that loss suffered by the defendant, s breach court will not recover the loss.
CHAPTER
Law of Tort
5
The Effect of Hedley Byrne Hedley Byrne case created new duty situation of a special relationship between parties by recognizing recognizing liability for negligent misstatement misstatement causing economic loss cases usually concerned with whether or not duty arises and it is difficult to established clear principal to apply as law established on case by case basis
The meaning of special Relationship There must be a special relationship for action against negligent misstatement misstatement to be successful, Nicholas case consideration is still relevant for special relationship. Liability on defendant arises in situation when he gives his professional advice on business and statement is made especially for business occasion not for social occasion or publicly. The context of loss occurred should be considered in the relationship of parties for example account prepared prepared for shareholders or potential takeover
Where there is no special relationship In Jeb Fastener claimant claim for damages cannot be successful because claimant was taking services of directors not of auditors or accountants accountants but court express that accountants accountants have duty of care to prepare accounts properly as it can be foreseeable easily that potential bidder relies on accounts. Accountants have duty of care to all shareholders not on some bidders. The example of this is case of Caparo Industries Industries Plc V Dickman and others court set following criteria in order to give rise a duty of care for special relationship. relationship.
The standard of foreseeability foreseeability
The proximity concept whether statement made for individuals or group and kind of
Transaction and degree of relying of claimant on transaction
Look for the purpose of statement and knowledge of statement at that time
Imposing duty of care should not be public policy
These criteria can be seen in the case of James paper group V Anderson 1991 In the case JMP was entering in the negotiation with MK Paper .The MK chairman asked his accountant HA to prepare draft accounts quickly for the negotiation .After the negotiation was made JMP found some errors in the accounts .JMP sued MK, s accountant for negligence but JMP claim failed as account were prepared for MK not for JMP and draft accounts cannot be relied if they were final accounts
Where is a special relationship Duty of care exists only to those for whom statement was made special relationship example can be seen in Morgan V Hill Samuel Bank
CHAPTER
Law of Tort
5
Factors to consider the duty of care Following factors should be considered whether duty of care exists or not
Purpose for making of statement statement
Relevant professional skills
Knowledge at the time of statement
Responsibility Responsibility of defendant to claimant
Class of claimant
Degree of reliance on advice
Is fair to impose duty of care
Is it foreseeable that advice given is acted by claimant
Company act on th e liability of auditor’s report
According to the s507 company act 2006 it is offence for auditor to recklessly
Causing auditor, s report to contain any false matters which is material , then offence can be punished by a fine
According to the s534 company act 2006 liability of auditor can be limited with agreement with company for whom he was giving services
According to s532 company act 2006 provision of exempting auditors liability indemnify them against negligence in relation to provide accounts
Remedies and defenses in negligence Damages can be recoverable if can be foreseeable by the defendant at the time of negligence These some cases are the example of remedies and defenses in negligence which are described earlier In the case of Oversea Tankship V Morts Dock and Engineering Co due to d efendant’s negligence oil was spilled and accumulated around claimant‘s wharf and get fire on wharf but claim for damages cannot be successful because damage done by fire cannot be foreseeable at that time In case of Hughes V Lord Advocate defendant telephone engineers left an inspection hole covered by tent and lighted by paraffin lamps. A child fell down badly injured and claim of child‘s
injury can be successful because children attracted by lights which caused injury to child
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5
Law of Tort
Defenses to a claim in negligence There are following three defenses for fo r defendants
contributory negligence
volenti non fit injuria
exclusion clause
Contributory Contributor y negligence If claimant contributed to the negligence then defendant may request the court to reduce the damages rewarded by court to claimant
Volenti non fit injuria If agreement made between claimant and defendant to exempt defendant for his negligence and awarded damages.
Exclusion clause It is a provision within a contract to exclude or limit liability for negligence
The tort passing off Tort passing off arises in following situations 1. When business use similar names 2. Misleads person that they are from same business 3. If cause serious damage to that business If tort passing of proved court may restrain business name from defendant and can also order to pay damages to claimant business
CHAPTER
6 Agency Law
CHAPTER CHA PTER
6
Agency Law
CHAPTER
6 Agency Law Agency law Agency relationship relationship Any relationship between two legal persons in which one person (agent) makes an agreement to third party on the behalf of another person (principal) Agent
Any person willing to do or authorized to act on behalf of another person (principle) Principle
Any person who authorizes another person to act o n his behalf is called principal. Therefore an agent is the connecting link between the principal and the agent. Elements of agency
Principal must be competent to the contract
Principal must have contractual legal capacity to enter in contract with third party
Any person may become an agent
No consideration is necessary for agency relationship
Types of agents
There are many types of agency relationships relationships depending on the nature of agents. General agents:
these are the agents who act generally for many functions on the behalf of principals. Example Directors working on the behalf of shareholders Employees working on the behalf of employer
Partners working in partnership the behalf of principal for particular particular Special agents: these are the agents who act on the function. Example Auctioneer: Working as agents to sell property on the behalf of property owner
(principal) Brokers: They operate in trade on behalf of principals in return of commission.
CHAPTER
6 Agency Law Estate agents: An estate agent is an intermediary who is responsible to find buyer for the principal’s property.
Commercial agents: The agent who has continuing authority in relation with sale and
purchase on the behalf of principal.
Formation or creation of agency relationshi relationship. p. Agency relationship is very simple to establish because it needs no formal process but only mutual consent of agent and principal. Agency relationship may be formed through following ways:
By express agreement By implied agreement ratification By ratification By estoppels
By necessity
Agency through express agreement agreement Agency relationship is created when principal appointed an agent to work o n behalf of him through expressed word orally or in written. In this relationship principal gave authority to agent and agent must have to work under the terms of agreement. Example Employer and employee relationship, in which employer gave authority to production manager to purchase raw material up to £ 1000 through formal agreement in written document. Or Auctioneer is appointed orally by the principal (owner of property) to organize auction and sell his property.
CHAPTER
6 Agency Law By implied agreement Agency relationship is created sometimes due to nature of relationship or the duties of job between two persons. Or we can say also when agent has implied authority then nature of relationship is implied agency relationship. Example Directors of the company, they are appointed by the shareholders (principals) (principals) ,they have implied authority to take all decisions in favor of shareholders and company also.
By ratification What is ratification? Ratification means when one party that is confirming party accepts the unauthorized unauthorized acts of another person. In agency relationship, when principal confirms the unauthorized acts of an agent called ratification. Conditions for ratification However there are some situations or conditions that must present to make ratification valid.
The agent must have acted on behalf of the principal
The principal must have legal capacity to enter in the contract
The contract must be legal and valid
The principal should ratify the whole or entire contract
Ratification must be within reasonable time by the principal
Principal should communicate his ratification to 3 rd party.
Agency by estoppel estoppel Agency relationship is formed when principal creates an impression by words or conduct to others that someone is his agent. Later on principal is estopped from denying his apparent authority. However there are some important points to consider
It must not be in the knowledge of third party that agent has no actual authority
Agent must act within his apparent authority
Agent himself cannot create an impression of apparent authority to create agency by estoppel ,only principal have right.
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6 Agency Law Case law Freeman & Lockyer v Buckhurst Park Properties Ltd
Agency relationship relationship by necessity necessity Agency relationship is formed when duty is imposed upon a person in emergency situation to act on behalf of another apart from the contract. There are three points to consider before this agency relationship
There must b a genuine reason or emergency Case law
Great Northen Railway Co v Swaffield
There must be no any source to contact with principal for further instructions Case law
Springer v Great Western Railway Co
The agent must act in the good faith of principal Case law
Sachs v Miklos
Authority of an agent An agent is authorized by principal in the following ways.
Expressed authority
Implied authority
Apparent authority / ostensible authority
Revocation of an authority Principal has right to revoke his authority given to agent at any time. But revocation will be only effective when communicated to third party. After effective revocation revocation principal will not liable for any actions of agent.
CHAPTER
6 Agency Law Termination Terminati on of agency Agency relationship may comes to an end in the following ways
Death of any party
Principal or agent become insane
Principal become bankrupt
Termination of agency by the mutual agreement
By frustration
Duties of agents
Perform business according to the direction of principal
Duty to perform with skill and care
Duty to perform actions within authority given by principal
Duty to avoid conflicts of interest
Duty to perform work honestly and not to make secret profits
Duty to perform personally
CHAPTER
7
Employment Law
CHA HAPTER PTER
7
Employment Law
CHAPTER
7
Employment Law
Employment contract Employee “An employee is someone who is employed under a contract of services ”
Independent Contractor “Independent contractor is someone who works under a contract for services .” The distinction between these two terms is necessary because each type of contract has different rules for taxation, health and safety, provisions, protection of contract and different liability in tort and contract.
Factors that distinguish Employee and independent contractor A contract of service is distinguished from a contract for services usually because the parties express the agreement to be one of service. This does not always mean that an employee will not be treated as an independent contractor by the court, however; much depends on the three tests.
Control test
Integration test
Economic reality test
Control test The court will consider whether the employer had control over the way in which employee perform his duties or not. Case law
“Mersey Docks & Harbour Board v Coggins & Griffiths (Liverpool) 1947 Another example of this test is i n Walker v Cry stal Palace FC 1910
Where it was held that professional footballer was an employee as the club hold control over the form of training, pay and discipline.
Integration test The courts consider whether the employee is so skilled that he cannot be controlled in the performance of his duties. Lack of control indicates that an employee is not integrated into the employer's
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7
Employment Law
Organization, and therefore not employed.
Case law
Cassidy v Ministry of Health 1951
Economic reality test Courts also consider whether the employee was working on his own account and require numerous factors to be taken into account.
Case law “Ready Mixed Concrete (South East) v Ministry of Pensions &
National Insurance 1968”
Agency Workers Workers There are two factors that determined agency worker whether they are employee or independent Contractor They are not employees of client rather employees of agency (principal) (a) Length of services
Case law Case law “Franks v Reuters Ltd 2003” (b)
Control over the worker
Controll over the worker
Where the client of agency have sufficient control over agency worker, it could be held that they are in fact the true employer. Case law “Motorola v Davidson and Melville Craig 2001”
Relevant Factors Significant factors that can be used to distinguish between between an employee or self employed
Does the employee use his own tools and equipment or does the employer provide them? If worker is using his own tools then it will be considered as an employee. Does the alleged employer have the power to select or appoint its employees, and may it dismiss them? Payment of salary is a fair indication of there being a contract of employment.
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7
Employment Law
Working for a number of different people is not necessarily a sign of selfemployment. A number of assignments may be construed as 'a series of employment.
Significance of distinction between employee and independent Significance contractor is given below:
Social security
Employment Protection
Tortious act
Implied terms
Health and safety legislation
Employed
Self Employed
Employer must pay class 1 secondary NIC Employee made contribution in class 1 primary
Independent contractor pay both class 2 and 4 contribution
There is also difference in sick pay leaves There is legislation which provide protection and benefits upon employees,i.e Minimum period of notice Remedies for unfair dismissal
Employer are generally liable for the tortious acts of employees,commited in the course of employment There are rights and duties implied by statute for employers and employees. this will affect thing such as copy right and patent Employers has significant duties of health and safety for employees under common law and legislation governing employers
Independent contractor does not have such rights
In this case liability is severely limited unless there is strict liability These implied right and duties does not apply to such an extent
Common law and much of the legislation governing employer also apply in this case
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7
Employment Law
Employment Contract An employment contact is as simple straight forward agreement. Just like other contract, employment contract must have four elements of offer, acceptance consideration and legal framework. It may express or implied or it can be oral or written.
Implied Term Implied terms usually arise out of custom and practice in a certain profession and industry.
Requirements of implied terms (a) The term must be reasonable, certain and clear (b) It represents the willingness of both parties (c) The relying party must have knowledge of the custom and practice.
Common Law Duties “The employer has an implied duty under common law to take reasonable care of his
employees; he Must select proper staff, materials and provide a safe working environment. On the other hand employees must have duty to work honestly with reasonable skill and care. Case law Hivac Ltd v Park Royal Scientific Instruments Ltd 1946.
Employees Duties. There are following implied duties of employees. 1. Employees have fundamental duty of faithful service toward his employer. 2. They have duty to work with competence. 3. Employees have duty to obey all the instructions given by his employer. Case law Pepper v Webb 1969 4. Employees have duty to work with care because employers are not liable against the personal negligence of employees. 5. Employees have duty to disclose all their accounts, income and property earned during the course of employment.
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7
Employment Law
Case law Boston Deep Sea Fishing and Ice CO v Ansell 1888
6. Employees have duty to perform all the work on their own so they cannot delegate their duties to anyone else. 7. Employees have duty to comply all the legal and ethical requirements relating with occupation, health and safety.
Employers Duties. There is an overriding duty of mutual trust and confidence between employer and employee.
Employer has following duties under common law,
To pay reasonable remuneration remuneration or salary to employees To indemnify indemnify the losses or expenses expenses incur in course of employment by the employees and then reimburse those expenses. To provide safe and healthy working environment To provide reasonable work to employees and avoid work load.
Case law
William Hill Organization v Tucker 1998.
Statutory Duties Terms implied by statue and which is not usually overridden. Statutory duties applied to employers in following areas:
Pay and Equality Time off Work Maternity Rights and balance work life Health and safety Work time
Continuous Employment
Many rights of employee under Employment Right Act 1996 can only be available if employee has specific period of continuous employment Continuous Employment period is usually the period of twelve month. Transfer of Undertaking:
When business transfer from one person to another and same employee work for new employer, this change represent no break in the continuous service
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7
Employment Law
Termination Terminati on of Employment Contract The employment contract may come to an end by notice but the notice period must not be less than the statutory minimum period. There are following rules for the termination of employment contract.
There must be reason behind it otherwise it may not acceptable
The notice period must not be less than the statutory minimum period.
Notice period
The minimum statutory period depends upon the continuous service of employee.
If a person is employed for continuous service of one month or more but below one year then one week notice of termination is sufficient and there will be no breach of contract.
If person is employed for continuous service of one year of more but below twelve years then one week notice of termination for each year of continuous employment is sufficient. If a person is employed for twelve years of continuous employment employment or more then less than twelve week notice will never be acceptable.
Dismissal
If employees are dismissed or terminated from their job by the employer without notice is called dismissal. In case of dismissal employee has right to ask reason of dismissal from his employer. And employer also has responsibility to provide written statement of the reason for dismissal within fourteen days. Types of dismissal
Summary dismissal : when employer terminated his employee without giving him
notice, called summary dismissal. Employee Employee may do this at the serious breach of contract by the employee. Example In employment contract of two years employee was agreed that during his job here he will never join any other company for part time job but before the completion of employment contract employee accepted the job offer from another company. Here the employer has right to terminate the employee without notice.
Constructive dismissal : is opposite to summary dismissal in which employer creates a
situation that may affect employee in such a way that he has no other o ther option but to resign. So in this employee terminates the contract at the breach of contract by employer.
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7
Employment Law
Wrongful dismissal : in which employee is terminated at the behalf of employer when
employee has no fault. E.g. if an employer imposed some illegal conditions that are not acceptable by employee and terminated after that ,so in this case employee may have right to claim under common Law due to wrongful dismissal.
Unfair dismissal: is closely related with wrongful dismissal but it is handled through statutory concept. In this employee is terminated by employer without any reason or fair reason. Statutory concept introduced employment protection legislation that gave specific procedure to terminate the employee otherwise it will be considered as unfair dismissal.
Termination Terminati on of employment by the breach of contract Employment contract is terminated by breach in following circumstances
Summary dismissal
Constructive dismissal
Summary dismissal
Summary dismissal occurs when employer terminates employee without giving him notice at the serious breach of contract by employee. In this case employee may justify himself that employer is liable for breach of contract, if it is proved then employee may claim a remedy for wrongful dismissal Case law Wilson v Racher
Constructive dismissal
Constructive dismissal occurs at the breach of contract by employer. In this case employer wants to carry on employment contract but changed some conditions that are not acceptable by the employee so he resigned from the job. In order to claim for constructive dismissal employee employee may have to prove following
There must be serious breach breach of contract only at the behalf of employer ,no other other party or an employee is liable Employee left the job due to the breach only not due to another reason
If breach is not serious then there will be no dismissal Case law Western Excavating (ECC) Ltd v Sharp 1978
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7
Employment Law
There are some reasons that are not acceptable by the employee which leads to resignation.
If salary of employee is reduced by his employer Case law Industrial Rubber products v Gillon 1977
If employer is not providing safe working environment to his employees.
If nature of job is changed
If employer is involved in illegal business and employee came to know about it.
If employer is imposing some personal duties outside o utside his job obligations.
Wrongful dismissal Wrongful dismissal occurs when employer terminates employee without any lawful reason. In this case employee may have right to claim for wrongful dismissal under common Law but employee will have to prove that he has been terminated without any reason. In this case if employer justify himself by arguing that employee has conducted some serious mistakes then it will never be considered as wrongful dismissal. These are given as follows.
Serious disobedience that is beyond his authority also.
Disclosure of confidential information without employer’s employer’s permission
Dishonesty at the behalf of employee
If employee is negligent at his work
If employee is incompetent incompetent and failed to meet professional requirements requirements
Drunkenness Case law William v Royal institute of Chartered Surveyors 1997
Remedies for wrongful dismissal
Employee may have right to claim damaged that are equal to the loss of earning.
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7
Employment Law
Unfair dismissal When employee is terminated without any fair reason known as unfair dismissal. The employer must have to follow certain procedure to terminate an employee otherwise employee may have right to claim through Employment Rights Act 1996. But employee also must have satisfied certain criteria. Scope of unfair dismissal
Employees under Employment protection legislation legislation can claim for unfair dismissal but its scope is limited to only to Great Britain and the employees working outside it are excluded from this right. Specific criteria to meet before claim
There are following rules that must be followed by the employees in order to claim.
There must be continuous employment of minimum one year although there are some exceptions o o
Where the employee is pregnant Where the employee is being denied a statutory right e.g. unlawful deduction from wages.
There must be an unfair reason behind this dismissal
Employee have been dismissed
Procedure for claim of unfair dismissal
There are following four steps that must be followed for successful claim Step 1: employee must apply for compensation compensation within three months of dismissal Step2: employee must have to prove that he is qualifying employee and that he has In fact been dismissed by unfair reason. Step 3: employer may also have right to prove if there is any other reason of fair reason for dismissal. Step 4 : after employee and employer evidences ,employment tribunal must decide whether the employee or employer was in fact right.
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7
Employment Law
Standard statutory procedure
There are three steps.
Statement of reason for action and invitation to meeting
Nature of the meeting
Appeal stage
For above procedure the timing and location of the meeting should be reasonable and in meeting employee and the employer both should have right to explain their case. Warnings
In some situations, it is not reasonable for an employer to dismiss an employee without first warning. Case law Newman v T H White Motors 1972
Fair reasons for dismissal Employer can justify himself through following fair reasons
Capability :If the employee is incompetent with knowledge, aptitude and skills that is required according to the job designation designation and if employee lacks physical and mental quality
Qualification: if employee lacks technical knowledge knowledge or education that is necessary for job continuity. Misconduct : if employee shows some misconduct or illegal activity e.g. fraud or theft that is not allowable under Employment Law
Redundancy : if the employer has no work to assign his employees there are two fair situations in redundancy o o
If the employer has ceased to carry on business The requirement of employee for specific job or project has diminished
If the employee has taken part in some unofficial industrial action e. g Strike
Unfair reasons for dismissal There are some reasons that are considered as unfair and employees may justify themselves that they are dismissed unfairly by following reasons.
Pregnancy and other materiality related issues
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7
Employment Law
If employee taking steps to avoid serious danger or risk
If employee refused to accept Sunday working (public holiday)
Trade union membership or activities
If an employee seeking to defend the rights related with national minimum wage
Remedies available for unfair dismissal If an employee claim for unfair dismissal within three months of dismissal and meet the criteria also then after successful claim employment tribunal may give following remedies.
Reinstatement
Re engagement
Compensation
Reinstatement After successful claim employee may be reinstated means returned to his same job without any gap. So there will be no loss suffered by the employee instead of mental disturbance during dismissal period.
Reengagement In this case employee is employed again at new job but it is equal and comparable to the old one. In this case employee contracts again with new terms and conditions with employer.
Compensation If employment tribunal does not order for reinstatement or reengagement then tribunal may award following compensation
Basic award
Compensatory award
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7
Employment Law
Redundancy Dismissal of employees from their job by the employer when he has ceased to carry on business or we can say that business no longer needs employees to carry on that work. This type of dismissal is categorized categorized into redundancy. In case of redundancy employee employee may have right to claim for redundancy payment but only in case of genuine redundancy. Case law High Table Ltd v Horst and Others 1997
If employees are dismissed not due to redundancy but some other reason, then they cannot claim for redundancy payment Case law North Riding Garages v Butte wick 1967
Reasons of redundancy
There are following two circumstances in which employees may be redundant A. If the employer has ceased business or employer may have no funds to carry on business B. If the requirement of employee for specific job or project is completed now and employer have no other work to assign that employee. Calculation of redundancy payment
Redundancy payment is equal to basic compensation compensation of unfair dismissal Exception to the right of redundancy payment
In following situations redundancy payment cannot be claimed
If employee is dismissed at any other reason or misconduct Case law Sanders v Neale 1974
If the employee does not fit in the definition of employee
If they are not employed for continuous employment of two years
Claim is made after six months of dismissal
When employee leaves before actual redundancy takes place
If employee refused an alternative employment employment
CHAPTER
8
Partnership
CHA HAPTER PTER
8
Partnerships
CHAPTER
8
Partnership
1 Partnership Law There are separate rules for partnerships governed under the UK law.
1.1 Partnership definition Partnership is simply a business combination in which more than two persons come together to perform activities with same objective to earn profit. If we go back before partnership, sole proprietorship proprietorship exists in which only o nly one person is involved (one man ownership) and responsible for all activities and ultimately he has rights for whole profits and loss. But in partnership more than two persons are involved with more investments and activities, so in this ownership is divided between persons who invest money that’s why it is called partnership (more complicated complicated as compared to sole proprietorship) proprietorship)
2 Forming a Partnership Partnership is simply formed when more than two persons decided to perform some work with an intention to earn some money. Partnership is formed for any type of occupation but all the partners must be responsible to work together because they all (if more than two) are owners.
2.1 Partnership agreement A written Partnership agreement is not legally required but it is considered beneficial to avoid future conflicts. On written agreement following terms are mentioned , partners can add additional rules if they all agree i.e. profit sharing ratio otherwise partnership act 1890 will applied(all partners have equal profit shares)
Name of the firm (used to denote partnership) Nature of business or its activities, performed performed by partners Name of banks at which firm will maintain its accounts Authorities of partners Responsibilities Responsibilities or duties of partners Profit sharing ratios
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8
Partnership
To govern partners, partnership acts are made in which all rules and regulations mentioned They are given as follows: 1. Partnership Act 1890 2. Limited Partnership Act 1907 3. Limited Liability Partnership Act 2000 From above acts, each act has separate rules for separate partnership. So in one time only one act is applicable but these partnerships can change their acts also.
3 Partnership act 1890 According to partnership act 1890, partnership definition is same as in simple partnership and known as traditional partnership. Other rules are given as follows
All partners must be active , they must involve in performing activities (management) Minimum partners are two and maximum are allowed to unlimited. All profits and losses should be equally distributed. All partners are equally liable for sudden loss or danger (natural disaster) except in case of personal negligence. All business liabilities are paid by all partners, no one can avoid it. Partnership ends up at the death of any partner. There must be joint partnership account There may be written or oral agreement and sometime conduct of the partners also makes is an agreement.
3.1 TERMINATION OF PARTNERSHIP UNDER 1890 Act There are some conditions in which partnership is terminated
If partners mutually agree to ends it up Order from court If duration of partnership partnership expires Death of any partner or bankruptcy
4 Partnership Act 1907 According to partnership act 1907, when two or more than two persons come together to perform business activities activities with an objective to earn profit and partners are liable for debts of business up to the extent of their investments, known as limited partnership.
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8
Partnership
4.1 Rules and regulations of partnership act 1907
Minimum two partners and maximum should not exceed from twenty partners. There must be one general partner (the partner who has unlimited liability) who will be responsible for all the debts and liabilities of the firm beyond his investment. investment. Limited partners (having limited liability liability of debts up to their investments) investments) cannot withdraw any amount from their investments. Limited partnership partnership does not end up at the death of any partner. Limited partnership dissolved under legal framework and the general partner acts as leading partner to resolve all the affairs. General partner must be considered as active partner ( takes part in all activities of management ) ,if any limited partner takes part in management then he will be responsible for all debts and liabilities in which he involves through management ( beyond his investment ).
5 Partnership act 2000 According to partnership act 2000 , limited liability partnership is developed through written document Of “ incorporation document “ and unlike limited partnership ,all members of LLP
have limited liability towards their investment.
5.1 Rules and regulation There are following rules and regulations of LLP under partnership act 2000.
LLP is legal body separate from its partners so it is just like company and most of the issues are dealt under the company law. Partnership is dissolved or ends up by mutual agreement and by giving notice to all other partners. Liabilities of all partners are limited and LLP will be liable for the debts and all other payments of parties. There are more legal documentary requirements as compared to limited partnership so all these requirements must be fulfilled as they needed and most of the requirements are similar to companies Minimum two and maximum unlimited partners are allowed
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8
Partnership
5.2 Formation LLP be formed with more rules and regulations as compared to traditional partnership and limited partnership (more formal) formal) ,they are given as follows,
Name Incorporation document Statement of compliance Location of its registered office (England and Wales) Address of the registered office. Name of all partners/members with address. There must be two designated members(who update registrar for the publicity requirements), with name and address LLP will be bund to the acts of all partners (agents) if they work within their authorized authorized limits. A written partnership agreement with clear description about rights and duties of all partners. LLP provide more protection and benefits to their members as compared to traditional partnership and limited partnership
6 Authority of partners When we talk about the authority of partners we must remember the concept of agency because partners are considered considered as agents of the firm and agent/principal to their co-partners. So according to principal of agency, each partner (agent) is accountable to the work permitted by the firm and when partner perform acts beyond the authorized limits then firm will not liable so partner is personally liable for his acts if he takes decision by himself. Usually authority of partners is categorized into two;
6.1 Express authority When firm allows partners very clearly or in written agreement (partnership deed) that, you have to perform following work up to that extent then it is called express authority. Examples Enter in the contract on the behalf of partnership when all partners mutually agree to authorize that partner.
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8
Partnership
6.2 Implied authority In this, authority is not described in agreement or not delegated but some time partners take decisions in favor of firm then the firm will be liable for the acts of that partners. Implied authority also known as apparent authority.
7 Rules for new and retiring partners If one partners joined the partnership after its formation the new partner is liable for the acts of other partners or firm from the time he joined partnership and will not held responsible for any act before his joining. Same rule applied to leaving or retiring partner ,leaving partner held responsible for the debts or any other outstanding liability liability of his work at his time with partnership until all his acts and decisions cleared.
7.1 Some other rules for partnership There are no statutory rules and for the regulation of partnership No need to prescribe its accounts There is no requirement of external or internal audit Unlike companies general public has no right to inspect the accounts of firm. They are required to make a return of profits for income tax and for registration of VAT.
CHAPTER
9
Companies
CHA HAPTER PTER
9
Companies
CHAPTER
9
Companies
1 Company After the concept of partnership ,when business grows its activities become more complicated. People want to earn more and more so when greater number of people invest money then there may be more chances to expand the limit of profit. So according to concept of company , it is more formal business enterprise for profit where investment is collected through issuing shares to number of people (members of company) and also to general public (shareholders).
1.1 Company a separate legal entity Unlike partnership and sole readership, company is a separate legal entity it means it has its own identity with individual rights and obligations given as follows
Companies can be registered through t heir own names as “corporate Groups”
Companies are separate from its members and shareholders. Companies can enter individually into a contract with other company or any other party at the name of company. Companies are individually held responsible toward the debts and liabilities of creditors. creditors.
2 Types of companies Companies can be divided into different types on the basis of ownership, formation, formation, liability and control.
2.1 Ownership On the basis of ownership companies companies may be of two categories
Government oriented companies Non-government Non-government oriented companies
When more than 51% shares are subscribed by government, these companies are known as government oriented companies and if less than 51% then known as non-government (public or private) oriented companies
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9
Companies
2.2 Formation On the basis of formation, companies can be divided into following types
Public company Private company
2.3 Private company
A company which prohibits the right to issue shares to general public Its minimum paid up share capital is one lak rupees. Maximum number of members limited to 50 only employees of the company These are generally small entities There are no strict rules for its formation and further regulation.
2.4 Public company
A company which is not private known as public company Public companies registered through registration process and its shares are publically traded. Its minimum paid up share capital is five lakh rupees Minimum seven members required for its registration The public company must hold a registrar trading certificate. There must be one member and two directors.
3 Differences between private and public companies Differences
Capital
public company
Public company
Capital can be raised by
Private companies are
offering its shares to general
prohibited to offer its shares
public
to general public
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Companies Names and identification
Listing
Plc denotes public limited
Ltd denotes private limited
company
company
Shares of public companies
These companies are not
are listed on stock exchange
allowed for listing on stock exchange
Accounts
Public companies are required to produce its annual accounts within six months after the financial year end.
Private companies are required to produce its accounts within nine months after the year end.
Public companies are strictly required for external audit of financial statements. Audit
3.1 Liability On the basis of liability companies may be
Limited liability companies Companies in which liability of members is restricted to specific limit in case of liquidation or to pay debts when business ceased
Unlimited liability companies Companies in which liability of members is unlimited i.e. they have to pay all the debts and other payments in any case. if limit of debts crossed from the total investments investments of members than they have to pay from their personal wealth.
Further we categorized limited companies into:
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Companies limited by shares Companies limited by guarantee
The companies in which liability of members is limited to the amount of value equal to the nominal value of shares owned, known as companies limited by shares Example A member has 5000 shares having face value of each 2$ then the amount 10000$ will be considered as the maximum amount paid by the members in case of liquidation or in any other case of business ceased. While the companies in which liability of members limited to the fixed amount agreed by them known as companies limited by guarantee. Example They all agreed to pay 20,000$ for the debts of company although they poses 50000 shares then in case of liquidation members will only responsible up to the extent of 20000$ and if any other amount remaining will be paid by the company itself because company as a separate legal entity has personal wealth and personal liability(unlimited). liability(unlimited).
3.2 Control On the basis of control companies may be divided into;
Parent companies Subsidiary companies
The company which is holding other companies or we can say company has subscribed shares to other companies that holding company is called parent company Company A controlling company B and C and company A holds 20% and 50% shares in company B and C. So from above company A acts as parent company and Company B & C are subsidiary companies.
3.3 Size Size is another factor which may categorize the companies into three different types below; a.
Small size companies
b. Medium size companies c.
Large size companies
Small and medium sized companies are categorized on the basis of some factors l ike;
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Companies a. Number of employees b. Limit of revenue c. Limit of profit d. Ownership structure e. Complexity Complexity of operations and activities
Generally fewer employees work in small sized companies. It ranges from fewer to 10 employees but for medium sized companies it may range from 10-100 employees and for large sized companies employees are more than 100 to unlimited. In accounting and auditing purposes small and medium sized companies may have following limitations. Revenue should not exceed from £ 6.5m and total of balance sheet must remain in the extent of £ 3.26m and the numbers of employees are generally 50 or fewer on average. In auditing third requirement is not strictly required. These factors are not fixed or same in all over the world. For different regions revenue, profit and employees ranges are different
Large Companies (multinational companies) The companies which are operating in more than one o ne country (regions) simply knew as multinational companies and they fall in the category of large (big) companies as their size is increased due to the factors above in the SMEs. Those above factors become unlimited for large companies. The companies are registered under more than one country and in each country branch office is maintained with whole staff to operate its all activities. All these branches in different countries are controlled under the main head office in one country. Its products are marketed and sold in many countries so these companies play a good role in globalization. Examples of multinational companies
Wall mart McDonalds Dell Toyota Shell
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Features a. Multinational companies fall under large size companies so range of employees and balance sheet range is so high. b. Its operations and activities activities are complex and lengthy procedures. c. Products manufactured in one country, marketed in another and may sell in another country so it gives globalization. d. It may enhance communication channel. e. Standard and quality of products and services is maintained at high level in all over the world.
3.4 Listed/Unlisted companies Another name of listed company is known as quoted company. Its shares can be accepted for trading (buying and selling) on stock exchange. So it’s easier to raise capital for quoted
companies. Examples: Public companies
4 Differences between company and partnership Differences
Company
Partnership
Formality
Company is a formal arrangement arrangement of people may or may not work together.
Partnership is an informal arrangement arrangement of people working together but some formalities exist in it.
Legal position or existence
Size
Addition of member
Company is a separate legal
Partnership has no legal
entity separate from its
existence outside the
members or owners.
boundary of its members.
Unlimited number of members so size is from small
Generally traditional partnership has limited
to high.
number of members.
When new member enters in the company then no effect
Usually partnership dissolved when new partner enters.
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Companies on ownership structure. structure.
Assets
Monitory benefit
Company has its own assets
While assets in partnership
as it has its separate identity.
are jointly owned by the members.
Monitory benefit is given in
Benefit is given in the form of
the form of dividend to
profits.
members in company Liability
Management
Constitution
Capital
Withdrawal of capital
limited.
Members liability is usually unlimited.
In company mostly owners/members are separate from management
In partnership all the partners can participate in the management.
(two directors for public Co) A company must have written
Partnership has a written
constitution.
partnership agreement of
Company can raise capital by
deed. Partners have their own
issuing shares to its members.
investment.
There are more strict rules for
It is easier to withdraw
withdrawal of capital and its repayment.
capital/investment in partnership.
Members’ liability is usually
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Companies
5 Promoters and pre-incorporation pre-incorporation contracts As we know about the promoters before, the one who forms company known as promoter. They must act with reasonable skill and care and in the good faith of company.
5.1 Types of promoters 1. Professional promoters-------they are the experts of their promotion work and take all necessary steps to promote the company. 2. Occasional promoters-------they do not work on regular basis but they take interest in floating company and once it is i s over they may go to their original profession. i.e. lawyers and engineers etc. 3. Entrepreneur promoters------they are both promoters and entrepreneurs. For example when a person wants to do a business and do all the groundwork from scratch to end and later on takes part in management. 4. Financier promoters-----they are the financial institutions like investment banks. If promoter is the owner also then there will be no conflict of interest but if promoters sell all or some of the shares then they becomes the agents of the company and then they have to follow all the customary duties of the agent and following fiduciary duties. 1. General duty of care and reasonable skill. 2. Duty of accountability
a. A promoter must have to disclose all the transactions and the income from these transactions b. They must have to disclose profit or any other benefit obtained through acting as a promoter. 3. Duty of fiduciary relationship -------They must act in the good faith of company and do not put themselves in a position where conflict of interest arise between company and themselves. Promoters have right to obtain personal benefits or profits but they can only make legitimate profits while they may be liable for the wrongful profits. The promoters have to give full disclosure about their personal profits.
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5.2 Remedies for the breach of fiduciary duty by promoter If the promoters actions resulted in secret profits then there may be following remedies
Damages
Recovery of undisclosed profits or benefits
Rescission
Retention of promoter’s property
6 Pre incorporation of expenses and contracts 6.1 Pre incorporation contracts Pre incorporation contracts are the contacts made by the promoters on the behalf of company that does not exist (before its formation). Promoters are liable for the pre incorporation contracts contracts and company is totally free from all the liabilities of pre incorporation contracts because these contracts contracts are not legally binding upon the company so cannot be enforced. The company could not ratify the contract however it may form a new contract with may or may not same terms and conditions after its incorporation.
6.2 Promoters can avoid their liabilities through following ways
Contract remains as a draft until company is formed
If promoters are the directors then after the formation of company, directors take the office and company enters into the contract.
Novation-----if the original contract contains a clause that liability of promoters ceased after the formation of company and it enters into the contract with same terms and conditions.
If a person contracts on the behalf of new company before it is bought then the company is able to ratify the contract.
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6.3 Pre incorporation expenses All the expenses e xpenses incurred at the time of company’s formation before its incorporation
are considered as pre incorporation expenses. Pre incorporation expenses recovered by the promoters after its incorporation Examples
Drafting expenses for documents
Legal expenses
Professional fee
7 Statutory books and records Statutory books are official records of companies related with all legal and statutory matters. Every company is required to keep the statutory books and records for a fixed time period. These books and records give true picture of company history with all matters and issues necessary to keep in safe. These records kept in safe at companies’ house (registrar office). These records are generally kept in hard form prepared by company secretary or directors but now a day’s all the records are ar e easily available in computerized form and some of the books and
records are available for inspection by the general public.
7.1 Statutory books i.
Register of members ( shareholders)
ii.
Register of directors
iii. iv.
Register of company secretaries
v. vi.
Register of director’s service contract Register of debenture holders
vii.
Register of charges
viii.
Register of minutes and resolutions
Register of director’s interest
7.2 Register of members (shareholders) When company needs any information about any shareholder then it may be provided by the registrar at the Companies House. The register of members contain following information.
The names and addresses of all the members
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The date at which each member entitled to become a shareholder of the company
The date at which any member ceased to be a shareholder
The number of shares held by each member
The class of shares (ordinary or preference shares) held by each member
All others members have access to view these records free of cost ,general public public have also access but they have to pay before inspection.
7.3 Register of directors The register of directors contain following information; information;
The names and official addresses of all the directors
The present and the former surnames and forenames
Some personal detail with date of birth, their home address and nationality as the directors have legal obligations. And government agencies and interested third parties may be aware of the names and address in order to serve a statement of claim on corporation.
The date of joining and resigning of all directors
Business occupation
All the members have access to view these records records free of cost, general public have have also access but they have to pay before inspection.
7.3.1 Register of director’s interest This register gives following detail;
The number of shares held by each director
The class of shares (ordinary shares, preference shares or debentures) held by them
The number of shares held by their spouse and their children under the age of 18
Only the members and directors are entitled to view these record and general public have no access on these records.
7.3.2 Register of directors’ service contract This register is basically about the contracts between company and one of its directors including the copies of the service contracts between company and the director under which the directors’ employment is not less than one year.
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This register also contains the copies of any other contract made between company and the directors related with any provision, third party guarantee, and other matters or responsibilities responsibilities of companies. Only the members can view the records of directors’ service contracts with no fee but for copy of these contracts they have to pay for the set fee.
7.4 Register of company secretaries All the related information about the company secretaries must be kept in record with following detail;
Listing all the names of company secretaries since its formation as the company secretary may be changed after some period.
Listing the full name, address, nationality and profession profession of of each secretary
Must contain all the contracts made between the company secretary and the company.
The required information related with register is available free of cost to members and at charge of nominal fee to general public.
7.5 Register of debenture holders This register is not compulsory required by the statute. This register contains information about all the debenture holders that to whom and how many debentures are issued.
7.6 Register of charges This register is compulsory required by the statute even if the companies have no charges. This register contains following other detail.
Description of charge either floating or foxed undertaking the company’s property
Nature of the asset (current or non-current asset) with brief description undertaking the charge
The amount of the charge
Copies of the instruments creating charge
The name of person entitled to the charge
The required information related with this register is available free of cost to members m embers and creditors and at charge of fee to general public.
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7.7 Register of minutes and resolutions This register contains all the board resolutions and minutes of all meetings by the directors and shareholders. Generally Generally following types of board resolutions and minutes are included and kept in record at Companies House.
Minutes of general meeting
Minutes of AGM
Minutes of EGM
Documents related with directors first board meeting
Board resolution passed for applying and accepting bank facilities (leasing, loan, pledge)
Board resolution passed for purchasing non-current assets (building, vehicles)
From this book only the minutes of general meeting are available to shareholders
8 Accounting records For any business in an organization or company, there is a system of accounting which must be recorded in hard copy or in computerized form. All the sources of information and evidences related with the business transaction, financial position and performance in a prescribed form simply known as accounting record. record. Each type of of accounting record gives different detail or information about the business and each is used for different purpose. Some of the accounting records are given below, these maintained with day to day transactions of the business.
Simple accounting records
General ledgers
Trial balance
Receipts and invoices
Statement of assets and liabilities
Statement of stock held by the company
Statement of business contracts and agreement
Bank statement
Litigations and statements of claims
Loan statements and agreements
Statements of provisions and liabilities
Annual accounts
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Accounting records must be carefully carefully maintained at the registered office and and only the company officers(senior director , manager and secretary) are permitted to inspect them while other employees and members shareholders) have no right to view or inspect these records. Public companies are required to keep these records for six years and for private companies the limit of time period is reduced to three years only.
9 Annual accounts Annual accounts are the detail accounts covering 12 months period having detail of all the business transaction during the financial year. In other words we can say a formal record of financial activities of business during the financial year. These annual accounts are prepared from the source documents of simple accounting records and prepared by the directors and accountants in the company. These accounts are prepared according to the companies Act format or International reporting standards of accounting
Following are most important and compulsory required annual accounts by the public company. 1. Balance sheet an alternative name of statement of financial position and it gives the position of business through assets, liabilities and equity. 2. Income statement alternative names of statement of comprehensive income or trading and profit & loss account and it gives the detail of revenue and expenses and ultimately ultimately gives the final figure of profit and loss. 3. Statement of cash flows it gives the detail of total cash inflows and cash outflows through operating, investing and financing activities. After the preparation of annual accounts, these accounts approved by the board of directors and company secretary and finally from the CEO before publication. After the annual general meeting these accounts are published and also send to the all members for their satisfaction. All the members have right to inspect these accounts. Now a day’s these accounts are available in electronic form also so a link can be send t he
member so the accounts via internet but if member ask for a hard copy then a company have responsibility responsibility to send the accounts in hard copy free of cost.
Features of annual accounting records or financial statements
These accounts must be prepared with due diligence and care which give true picture of the financial position and performance of the business.
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Accounts must be audited before publication and available to members. Must be prepared with summarized form and easily understandable by the general public and members Covering a period of not less than twelve months
10 Annual return This is the statutory document required by all the registered companies. Annual return is prepared each year and gives essential information information of business core activities, business position and investment composition. composition. Some of the important points are given below;
Address of company’s registered office.
Name and address of all the members (shareholders and debenture holders), directors and secretaries
Type of company with its objective (mission statement) statement) and core business activities Total nominal value of issued share capital with paid and unpaid nominal value of total shares Rights of shareholders at each class and the total number of shares for each class Listing the members who ceased to be a member and the number of shares transferred to other members.
Detail of dividend ,interest ,interest and capital gains/losses
Copy of latest financial statements (annual accounts)
11 Constitution of a company Constitution is a formal document which is drafted by the person wants to register the company. It is basically a set of rules which forms the bases that how an entity operates in a legal world. The two documents join tly form company’s company’s constitution: 1. Memorandum of association 2. Article of association
The above composition was much used before oct-2009 but after 0ct-2009 according to companies’ act 2006 a new composition of company’s constitution is as follows: 1. Article of association 2. Resolutions and agreements agreements
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Companies
As we know about the memorandum of association before, old document in which members state their willingness to form a company and also agree to become a member of a company. Members also agree to take one share each from the company’s
share capital.
11.1 Resolutions and agreements We can simply define as resolution is prescribed decision to do or not to do something. Resolution is more formal decision made by the company directors and senior officers. Before taking any big decision a resolution must be passed Let’s take an example;. Company want to take loan facility from a bank , so all the
directors meet together in the presence of company secretary and chairman chairman and decide the amount of loan ,its purpose ,benefits and total expense versus outcome and then finally all mutually agree to take the loan facility. After it company secretary prepare a document o which it is stated that a meeting is held and following directors and chairman mutually agree to take loan facility from the bank with following terms a conditions and then all directors and chairman sign the document and finally approved by the company secretary. Now this is called cal led resolution. Now these resolutions and agreements may or may not affect the company’s
constitution as the agreements and resolutions propose new terms and rules and sometime change the provisions in the articles. That’s why these are the part of
company’s constitution. To make these resolutions and agreements more effective the copies of resolutions and agreements must send to the registrar within 15 days of being passed and agreed. If company fails to send the copy of resolution and agreement to registrar within 15 days then every person signed on the resolution will be punishable.
11.2 Article of association As we have discussed before about the article of association, a set of documents with rules and regulations about company administration, management and its core operations. There are following important areas on which article contains rules and regulations.
Appointment and dismissal of directors
Powers, responsibilities and liabilities of directors
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Directors meeting
Company secretary
General meetings and class meetings
Shareholders rights and dividends
Issue and transfer of shares
Provisions and claims
Winding up conditions
Confidentiality of matters
To consider above areas, companies made their own rules and follow them but it is not right for all companies because model articles are also available that companies can adopt.
11.2.1 Model articles Model articles are the standard articles with all necessary specifications needed in the company. Different model articles available for different companies, so companies are free to use any model articles and also amend some terms of the articles according to the specific needs of the companies. If companies failed to adopt any article at the time of incorporation incorporation then by default model articles must be followed but members have right to amend the article according to their own wish later on Before the alteration of article following points must remember
To pass special resolution
75 % majority
Alteration must be in favor of company
But alteration will be void if it conflicts with the companies Act To make this effective a copy of special resolution sends to the registrar within 15 days of its being passed.
11.2.2 Restrictions to amend the article Sometimes article may be restricted to amend for the following reasons;
To protect the interest of minorities
To be in good faith of company
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To protect the rights attached with shares if other class of shares varies these rights
If amendment is not under the legal framework and not according to companies Act
If subscriber is not willing to accept more liability on shares
12 Company objects and capacity For every work to perform there may be a reason behind it, this reason become its purpose and aim which is achieved after the completion completion of work. Same is the case with companies, companies are formed for some purposes and different people work together and put their efforts to achieve that purpose. They perform all those activities which they assume to be helpful to achieve their purpose. So these overall purposes and aims or goals are the company objects and extent of these objects known as capacity. Before the companies act 2006, company objects are included in the memorandum of association by including a paragraph named objects clause which sets out everything a company can do or perform. This object clause fixed and if companies try to enter in any agreement or work which is not included in the object clause then this activity is considered as ultra vires. All the activities must be in accordance accordance to the object clause and all the directors and and company officers are also binding to do so. Let’s take an example of a person who has a company to manufacture shoes and it is also
included in its company object clause that they can manufacture shoes but after some time they decided to start manufacturing ladies hand bag, now it is considered as ultra vires. So company has now no capacity to enter into new activity.
Case law To understand it more clearly, in history a well-known case Ashbury Railway carriage and iron Co ltd v Riche about it. According to this case law company had the object clause ‘’ to make or o r sell,
to lend or hire, railway carriages’’. But after it directors of the company decided to gave out loan
for construction of Railway in Belgium. Later on House of Lords held and simply the act was ultra vires. This policy was introduced to protect the investment of shareholders and creditors. By introducing this policy lot of benefits and secured investment plans built but with all its positive signs some are its drawbacks also. The prominent one is, this policy restricts the variety of work and flexibility of business to expand and grow. So to overcome this drawback a new constitution introduced according to the companies act 2006 in which memorandum of association was omitted and objects are included in article of association with no fixed object clauses.
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According to it companies can can do everything which is lawful. So now companies no needed to draft longer object clauses but to restrain from difficult situations the Act 20 06 clarified the legal position of companies. And also gave the rights to shareholders shareholders that they can sue on directors for any loss or disagreements by t he directors.
13 Company constitution with contracts According to company constitution there may be three types of contracts
Company and members
Members and the company
Members and members
According to company’s constitution, above three types of contract are binding while the
constitution does not allow the contract between company and the third party.
14 Company names 14.1 Rules for selecting the name of companies The name of companies or any businesses show their identity. With all other regulations practiced in the companies for any activity or decision, the rules are also available for choosing the name of companies. Choosing the name of company is a sensitive area so there are following statutory statutory rules which must be followed by the companies at the time of incorporation. incorporation. The name of each company must end with a specific word according to the type of company i.e for public companies the name must show (plc) public limited company and if company is private then show limited at the end. A company cannot choose a name which is already available in the statutory index at the Companies House. As we know that a separate register is maintained at the Companies House which contains all names of companies, private or public. So when a new company takes registration and provide name that name must be easily distinguished from others. So it is not possible for Companies House to issue two registration numbers for two companies with identical names. Lots of difficulties and issues may arise a rise in this case.
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The name would not be acceptable by the registrar which is offensive or leads to show criminal activity. So the proposed name must be in the legal framework. The Act also prohibits the name which shows a connection to the government sector or local authority. And sometimes sometimes a official approval needed for relevant profession. For example the companies wishing to use the word of ‘’Bank, Banking or Deposit ‘’ must submit the approval
from Financial Service Authority.
14.2 Publication of the company names 1. After registering the name of company at Companies House the companies must publish its name at following fo llowing places and documents. 2. Outside the registered Head Office and all other places related to the company. 3. A full name must be available at the website of company. 4. On all letter heads (business letters) , forms and notices and official publications. 5. On all invoices and receipts raised by the companies. 6. On all bills of exchange, letter of credit, promissory notes, cheques and orders for money.
14.3 Disputes about company names As we have discussed before that some difficulties may arise if statutory rules are not followed by the companies in choosing their names. One of it discussed here that is passing off action
14.3.1 Passing-off action Passing off action is treated under the civil crime in which one person try to infringe the rights of others by misleading or misrepresentation. misrepresentation. This issue is relevant at choosing company names for example; a business try to trade under the similar name of other business or company (may be a well-known and customers trusted fully) that confuses customers and other related parties. In this way, customers and other related parties believes that both companies are same.
Case law Awing v Butter Cup Margarine Co Ltd In this case the issue arises between Buttercup Margarine Co established in 1916 and Buttercup Dairy Co since 1904. Buttercup Dairy Co claimed to restrain the business of Buttercup Margarine Co when they decided to expand business in South of England where defendant Co established newly. So it was decided to restrain the business of defendant Co (Buttercup Margarine Co) because there could be confusion between two businesses.
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if two businesses have similar names but there is no possibility of confusion or misleading then both can continue with their original names as in the case law Dunlop pneumatic Tyre Co Ltd v Dunlop Motor Co Ltd.
14.3.1.1 Effects of passing-off action Passing of action is treated under common law remedies and if it occurs it has following effects.
Loss of customers
Loss of good will because quality may reduce by the passing off business and customers believe it by the trusted business
Loss of revenue and income
14.3.1.2 Remedies
Take legal action against it and court may order for injunction
The victim party can claim for compensation of cost equal to loss of income and good will
14.4 Changing company’s names Companies may change their names by a prescribed method
Pass a special resolution in which all directors and company secretary meet together and decided the proposed name.
Send a copy of resolution to registrar within 15 days of being held.
Change should be according to the article
A certificate of incorporation is issued at the proposed name
But after the change of name, company is still a same legal entity as before.
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15 Financing Companies In this section we will discuss in more detail about the matters of companies. Here we will discuss that how companies cope operations through personal money or how raise funds from public. How capital is maintained and through which procedures it is improved and later on we will talk about the dividend law also in the last of this section. This section is categorized in three parts; 1. Share capital 2. Borrowing and loan capital 3. Capital maintenance and dividend law
15.1 Share capital Authorized capital :
The amount of capital with which a company is registered with the registrar of companies (body responsible for registration of companies). It is the maximum amount of capital which a company can raise through shares i.e. shared capital can be maximum up to the authorized capital and not beyond. Due to this reason companies are registered with such authorized capital which is well above their current needs of financing so that if more is needed in future then it is easily possible. Authorized capital is also called Registered capital or Nominal capital. Subscribed capital:
The amount of capital (out of authorized authorized capital) for which company has received applications from the general public who are interested in buying shares. If this term is too technical to be understood then subscription is simply an application in which investors expresses his interest to buy shares in the company. Usually only that much shares are subscribed which company intends to issue later. But sometimes, if company is in good shape then t hen more and more people will be interested in buying shares and in this case over-subscription will be the result. But if company’s financial position is not sound or due to other factors it may be possible that
subscriptions are received for lesser then intended shares in which case there will be undersubscription. Issued capital:
The amount of capitals (out of subscribed capital) that is issued by the company to the subscribers (that are now shareholders).
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Called-up capital:
In some jurisdictions, company is permitted to ask for only part of the total issued capital i.e. company will require shareholders shareholders to pay only part of the amount of the shares they hold and not to pay fully. The partial amount (out of issued capital) so asked by the company from the shareholders out of the total value of o f shares is called-up capital. Paid-up capital: The amount of capital (out of called-up capital) against which the company has
received the payments from the shareholders so far.
Authorised share capital Unisshued share capital
Issued share capital
Called up capital Paid up capital
Uncalled capital
Unpaid capital
Example: Examp le: ABC Ltd was registered with registrar with a registered capital of Rs. 20,000,000 where each share is of Rs. 10. In response to the advertisements made by the company to buy shares in the company applications have been received for 1,000,000 shares but company actually issued 700,000 shares where company has called for Rs. 8 per share. All the calls have been met in full except three shareholders who still owe for their 6000 shares in total. Solution:
Authorized capital = Rs. 20,000,000
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Subscribed capital = 1,000,000 x Rs. 10 = Rs. 10,000,000 Issued capital = 700,000 x Rs.10 = Rs. 7,000,000 Called-up capital = 700,000 x Rs. 8 = Rs. 5,600,000 Paid-up capital = 5,600,000 – (6000 x Rs. 8 ) = Rs. 5,552,000 All of these types are basically types of share capital so, they are usually stated as following also:
authorized share capital
subscribed share capital
issued share capital
called-up share capital
paid-up share capital
Types of Shares Before going on the types of shares we have to define share. Share
The unit of share capital is share. Share is a written document document purchased for a nominal value in return carrying right of ownership in company, dividend and some obligations and the owner of share is called shareholder. In other way we can say that share is the form of property owned by someone else (shareholder) but it could be transferred from one person to another. We can define it in another way also that share is the interest of shareholder in a definite portion of the capital, so it shows a proprietary relationship between the company and the shareholder. When shares are allotted it must be paid for, the selling party (company) receives cash or sometimes services and the other party receive the right of ownership in the company. Shares are paid fully, or sometimes in two or more installments. The share holders receive long term benefit in the form of dividend. So shareholders are the proportionate owner of the company.
Value of share The value of share can be can in the following ways; Nominal value-----the nominal value can also be termed as face value or the par value. It is that
price which is defied the share certificate and also specified in the memorandum of association. For example 50,000 shares with each carry £1, so the nominal value of each share is £1.
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Exchange value--------when shares are allotted to shareholders, they may be allotted at different
prices at different time. The share having nominal value value £1 can be issued at £ 2.5 or £3.5. This shows its exchange value Transfer price/value---------sometimes shares of private companies transferred from one person
(actual owner) to another person at the price which they mutually agree. This price is known as transfer price. Market value------as we know the shares of public companies are listed on stock exchange. The
price of share changes every moment relevant to the market. This price is known as market value of the share.
16 Types of shares Shares may be of three types
Ordinary shares
Preference shares
Redeemable shares
Cumulative preference shares
Deferred shares
Bonus shares
From the above types of shares, two of them are most important and discussed below in detail; Ordinary shares
Ordinary shares are also called as equity shares. These are the most common types of shares and come of the companies categorized ordinary shares into two classes, one is class ‘’A ‘’ordinary shares and class ‘’B ‘’ordinary shares.
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Companies
16.1 Features of ordinary shares There are following rights attached with the ordinary shares.
shareholders are entitled to receive dividend which is, a Right of dividend ----ordinary shareholders definite share from the profits of company. But they can only receive when it is announced by the directors that dividend is proposed at the following date to ordinary o rdinary shareholders.
Dividend is paid to ordinary shareholders after the preference preference shareholders.
The dividend of ordinary shareholders is not fixed but it depends on the company’s
performance. As the performance is good the dividend is increased.
Right of vote------ordinary shareholders are entitled to vote at the AGM ( annual general meeting ) and other meetings and one share attached one voting right.
Right of payment after preference shareholders-----at the time of winding up company, ordinary shares will be paid for their capital at the last when all preference shareholders and creditors paid fully.
Right to appoint or remove Directors and Auditors--------Ordinary Auditors--------Ordinary shareholders have right to appoint or remove directors directors and auditors.
Ordinary shareholders have right to call meeting and may propose resolutions.
They are entitled to approve company’s final accounts and proposed dividend.
All the shares having common features grouped together in one class.
16.2 Preference share Preference shares are superior than ordinary shares because they carry more befit and fewer risks as compared to o ordinary rdinary shares. Preference Preference shares are also divided into two classes, cumulative preference preference shares and hybrid shares.
16.2.1 Features of preference shares Following are the features attached with preference preference shares.
Prior right of dividend-------preference dividend-------preference shareholders shareholders are entitled to receive divided very first. A fixed dividend is paid to preference shareholders for example if company issue 500,000 shares with 10% preference right then 50,000 will be paid each year.
Ordinary shareholders never pay a high dividend if company’s progress well as their dividend is fixed and irrelevant with company’s perfo rmance.
They will be paid first for dividend and capital return before ordinary shareholders. shareholders.
They have no voting right in any meeting.
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Companies
They will not be paid any dividend if company’s profits are nil or suffers loss except in
the case of cumulative preference share.
17 Allotment of shares and issue of shares As we have discussed before that companies may be financed through different ways but the most popular way is by issuing shares. Public companies can easily raise finance through this way.
There may be a slightly difference between ‘’allotment of shares’’ and ‘’issue of shares’’ Allotment of shares is the first step before the shares issue in which a potential shareholder gets an unconditional right to be a member in the company’s register of members in respect of
shares according to companies Act 2006. When shares are allotted to a specific person it becomes the allotee of shares and that person has now contractual right to receive that shares. The next step is to issue shares to allotee having contractual right to have it and when shares are issued a legal title of ownership is transferred to allotee through a certificate and then name of the allotee is entered in the companies’ register of shareholder.
So it is concluded that allotment of shares is simply ‘’the creation of shares’’ and issue of shares is then ‘’transferring shares to subscriber’’
17.1 Purpose Why shares are allotted and issued? Generally we all know that shares are issued to finance the companies but here are some benefits and purposes in more detail than to just say ‘’financing of companies’’. Money is collected from shares issue which could be used for the following purposes; To enable companies to trade through borrowed money from public To meet all other expenses and repayment of short term borrowings from creditors New funds through issue of shares also enable the business to grow and expand its operation. It may be used to purchase another company (subsidiary) To enhance the financial position of business
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Companies
An option share is made to director or any other employee of the company More shares also issued in return of dividend to existing shareholders
How shares are allotted and issued Shares are allotted and issued through a specific procedure procedure that is separate for public and private companies
In private companies As we know that private companies cannot trade shares publically as it is restricted under the article of association. In private companies shares are simply transferred by a private agreement and shares are only transferred to close family members, friends and relatives and not to general public. Before allotment an application must be send to the director of a company and a nd then shares allotted and issued to the potential shareholder. shareholder.
In public companies In public companies, shares can be traded publically so there are easier ways for public companies to sell shares in general public. They can sell shares through prospectus in public offer in which all information information related to buying is given and the person who wants to purchase shares can easily apply to purchase them Placing is another method in which some people or institutions purchase shares in a small number of large blocks through a predefined agreement and price.
Director’s power and authority in relation to share issue Directors are the stewards of company and they are responsible in all regulation all major functions and activities so a share allotment is a big function maintained by the companies. In private companies this function is more straightforward straightforward because there is a one class of shares (but not always) so directors directors have authority to allot the shares in one class. But when shares are divided in more than one class of shares like in public companies then directors have no power to allot shares without authority from members due to pre-emption rights
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Companies
Pre-emption rights As we know about the pre-emption rights in which, an existing shareholder holder have statutory right to acquire new shares of same class before offering to another person. Pre-emption right is also called as subscription right. According to the companies Act 2006 through pre-emption rights a company must have to follow following terms before general offer of shares;
Offer has been made to existing shareholders shareholders of the same class
The time limit has been expired to accept the offer given to existing shareholders
The time limit must not less than 14 days of the offer
Right issue The right of existing shareholder to subscribe for more shares in the same class. In right issue, companies offer their existing shareholders to buy more shares as it is in preemption rights and this agreement may be underwritten. In right issue, shares are offered to members and then offer remains open for 21 days for acceptance but if it is not accepted within 21 days then this offer can be made to the public. But sometime this rule of pre-emption right can be cancelled, known as disapplication of preemption rights.
Bonus issue In bonus free shares are issued to existing shareholders mean without consideration from shareholders but equal to the shares issue, company reserved changed into share capital. For example a company issued 1 bonus share for 2 existing shares. It means one free share is issued to a person having two shares already. If a shareholder has 6000 shares shares already then in bonus issue, 3000 (1*6000/2) shares will be offered to him/her.
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10 Company Officers
10
CHA HAPTER PTER
Company Officers
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10 Company Officers 1 Company directors and other officer In this chapter we will discuss about the company officers like Directors, Auditors and company secretary.
Directors
Auditors
Secretaries
Directors Before going into more detail of director’s responsibilities and powers, we define director generally ‘’any person who is responsible for the overall direct ion of an activity or department.
When we talk about the companies, they are the persons who are responsible to manage and direct the overall functions of the company according to its objects. According to the section 250 of company act, director is the person who occupying the position of director. The decision as someone is a director based on their function not on their title.
Board of directors Board of directors is the elective representative representative of shareholders to control and manage company affairs collectively in a group, commonly known as board of directors. When we categorize anything or person then its nature depends on the role, so according to the roles of directors we can give following names to directors to differentiate them by their roles.
Shadow directors According to section 251 of Company Act 2006, a director who is not technically a director but other directors and employees have to follow their instructions due to its position (major shareholder). Shadow directors are not involved in day to day matters of organization
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10 Company Officers De facto directors A person who is not appointed as a director but acts like a director because of the nature of work assigned to him/her. De facto directors perform all functions of directors even if they do not fulfill the qualification of directors and then they enjoy the benefits of directors also.
Alternative director The director who is appointed temporarily at the place of another director to attend or vote in the board meetings. If article permits, directors can appoint alternative director to attend and vote for them in board meeting in their absence. Alternative director have vote of absence and their own, mostly alternative directors are from outside the company.
Executive director A person who performs specific role in company on daily basis and involved in management. Executive director is a full time employee involved in management. Executive director may be employee and director both, but in this situation article prohibits him from voting at board meeting. Executive director may have two possible positions
A member of board of director
An employee involved in management
Like finance director who is on board of directors as well as responsibility responsibility of financial management
The Chief Executive Officer (Managing Director) A person who is appointed to carried carried out overall day to day functions , CEO is also known as Managing Director. CEO appointed by the board of directors and they can delegate some powers to whom they see fit.
Non -executive director A director who involved in organ ization’s governance but have no function in day to day management .They are usually part time officers and worked at more than one place so bring outside expertise to the board and exerts controls over executive directors. According to the UK Corporate Governance guidelines, listed companies could be more effective if they have strong executive directors and independent NEDs
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10 Company Officers Number of directors in private and public companies Private company needs minimum one director and public company needs at least two. There is no statutory maximum numbers of directors but article specifies the limits.
How directors are appointed? Appointment of directors, their rotation and co-option is briefly described in company article. As it is discussed before that at the time of company formation the names of first directors must be proposed later on they appointed legally according to the article. If director appoints expressly they are called de-jure directors. If a person acts like a directors without actually appointment but they have obligation and powers of proper directors like of de-facto and shadow directors.
Appointment Appointment of first director During submitting application for registration of a company to a Registrar, include the particulars of first directors with their powers and obligation. After formation of company those persons become first directors.
Appointment Appointment of subsequent directors After the formation of company more directors can be appointed either on the place of present directors or as a additional directors directors More directors are appointed by the following possible ways
By ordinary resolution of shareholders
By a decision of directors
However article may impose different methods on company. Separate resolution should be proposed for election of each director during the general meeting of public company for the proposal of appointing directors. Giving notice of first director, company must give notice of other directors to the registrar within 14 days, this include any changes to the register of directors like residential addresses.
Age limit for appointments of director The minimum age limit to be a director must not less than 16 years.
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10 Company Officers Director’s remuneration The salary of director termed as salary including some other monitory benefits. The directors’
remuneration remuneration composed of basic salary, fee, and bonuses ad incentives. It should be disclosed in the directors’ remuneration report in which all detail must be provided
and should not exceed the amount that is disclosed in the article. Directors may be entitled to fee and other expenses as per article and compensation for office according to their service contract
Directors’ expense Directors are entitled to reimbursement of reasonable expense for carrying out their duties as director. Most directors have written service contract for compensation compensation and losses. An ordinary resolution must passed by members, if service contract guarantee for more than two year employment.
Compensation for loss of office Directors can receive non contractual compensation compensation for the loss of office by the approval of members after proper disclosure in the general meeting. Payment paid to director for compensating the loss of office o ffice is distinguished from any payment paid to directors as employee.
Director remuneration report Listed companies required to include directors’ remuneration re port in the annual report .
Report must include followings
Detail of each directors’ remuneration package
Company remuneration policy
Role of board and remuneration
According to section 421(3), directors have duty to provide any information necessary for producing report. Listed company should vote by members on remuneration report. A negative vote would signals that member not happy with remuneration level. As we know that an audited report re port of director’s remuneration must be provided along with
audited financial statements. statements.
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10 Company Officers Items not subject to the audit
Consideration by the director
Statement of company remuneration remuneration policy
Performance graph
Directors’ service contract
Items subject to audit
Salary of each director
Bonus paid
Expenses
Any benefit received
Pension
Excess retirement benefits
Compensations Compensations to past directors
Paid compensation for loss of office
Paid amount to third party in respect of direc tors’ services
Service agreements At the time of appointment an agreement is formed between company directors and company relating to their service. The contract of employment (service) between company and director must available by members for inspection. That contract includes all the services that directors provide, including the services that are outside the role of director. Contract must retained at registry office or any place permitted by Sectary of State for 1 year after expiry. Director s’ pension, particulars of compensation for loss and director s emoluments must be
given in accounts.
Vacation of office Director may vacate office for the following possible reasons and at this time their employment contract cancelled immediately.
Resignation
Death
Not offering him/her for re election after ending of time that was defined.
Removed from office at some serious issue
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Disqualification
Dissolution of company
Retirement and re-election of directors Model article provide following rule for retirement and re-election of directors
All directors shall retire at first AGM
At each AGM one third of NEDs retire .They can be re-elected
Casual vacancies must filled filled by board. Until new directors directors stands for election in next next AGM
Directors, who are retired by rotation, can offer themselves for re-election. Mandatory retirement provides control over their performance. After every three years members have opportunity to dispose underperforming director by not electing them.
2 Removal of Director According to section 168 of CA06, company can remove the director through resolution before expiration of his period of office not withstanding anything in its article and any agreement. agreement. Hence director can be removed despite any provision available in service contract but director can sue for damages if removal purely shows a breach contract. Following possible steps to remove a director
Special notice within 28 days required of the resolution by person want to remove a director
Company must forward the resolution to the director concerned Notice of meeting goes to all members and all members have to attend the meeting and to give vote The Director in question can require the company to circulate written representation to the members
Director can read out representations at he meeting ,if there was no time for prior circulation
Director must allowed to attend and speak to the meeting
An ordinary resolution required to removed the director
The power of members to remove director may be limited.
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10 Company Officers There are following four possible ways 1. Shareholder must have 10% paid up capital shares or 10% voting rights to purpose a removal of director. 2. According to section 338 ,100 members having £100 of share capital each may purpose a resolution to remove director 3. A director who has some weighted voting rights under company constitution can defeat any motion to remove director. This situation can be seen in case of Bushell v Faith 1970. 4. Class right agreement states that members members having each class of shares must be present at general meeting, hence member having certain class of shares can prevent removal of director by not attending the general meeting. The situation for removal of director may be limited can be seen in case of Southern Foundries v Shirlaw 1940
In this case S made a contract with Shirlaw to serve S as a managing director, in 1936 F Co take the control of company, in 1937 F Co changed the article by using vote power. Now F Co has power to remove any director according to the present situation of company article. In 1937 F Co removed Shirlaw as a director by using his power. Shirlaw sued company. High court made a decision that alteration of article was not a breach of service contract but exercise of power is breach of contract and court ordered the company to pay £ 12,000 for breach of contract
3 Disqualification of Director A person cannot be a director if he disqualified on the grounds of article or statuary rules, then he has to vacate the office. There are following possible reasons for disqualification
Director become bank corrupt
If ,he absent from meetings for six months
If , they disqualified by statue or law
Notice of written resignation
They show unprofessional unprofessional behavior
3.1 Disqualification under statue Disqualification under statue may be explained by Disqualification Act 1986 . First we see purpose of disqualification act, an act by court relating to disqualification of company directors and other company affairs.
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10 Company Officers The terms of disqualification act are very wide and it acts like a consultant for company. This act is just not for the disqualification of directors, it may be for any employee ,if he falls in grounds for dis qualification Article may also provide grounds for disqualification and director may vacate office, if he was absent from the board meeting and usually absence period is 3 months. 3 months absence period starts from last meeting attended by director. If director voluntarily absent from meeting due to illness and submit application for leave due to illness or other matters from last attended meeting If they fail to obtain leave, later on directors give reasonable explanation explanation for leave but this cannot resolve the matter and directors will have to vacate the office. The purpose of this rule is to impose plenty for negligence of directors. Directors Directors have duty to attend board meeting, when they are able to do attend the meeting.
3.2 Reasons for Disqualification There are following possible reasons for disqualification
Continuous breach of CA06 like fail to return files to the registrar regarding different company matters as stated in section 3 of o f CA06.Maximun CA06.Maximun period for this offence is 5 years disqualification. disqualification.
Fraudulent and wrongful trading, this means doing work with intention of defraud creditors or other fraudulent purpose. Maximum disqualification for this period is 15 years as stated in section 4
Serious offence convicted by director in management of company, like in matters of formation of promotion, liquidation of company or management of company property. Maximum disqualification disqualification period is 15 years as stated in section 2.
When Department for Business, Enterprise and Regulatory Re form‘s reports states that director’s conduct is unfit to be in a management of company. Maximum
disqualification period is 15 years as stated in section 8.
If liquidator’s report states that Director is unfit for management of company due to
involvement in wrongful trading. Minimum disqualification period is 2 years and maximum disqualification disqualification period is 15 years as stated in section 10.
3.3 Disqualification period Two to 5 years disqualification ,if offence is not too serious, but six to ten years if conduct was serious and over 10 years disqualification period for more serious cases.
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10 Company Officers According to Griffith’s 1997 case, disqualification does not mean disqualification from all involvement in management. According to Rebarrings plc case Director may continue his services as unpaid director
Mitigation of directors Directors may have low disqualification period in following possible circumstances
If director has lack of dishonesty as stated in case of Re Burnham Marketing Services Services 1993 If director lost his own money in company as stated in case of Re GSAR Realisations Realisatio ns Ltd 1993
If director gained nothing like extra money as stated in case of Re GSAR Realisations Ltd 1993
If director ready to pay for his offence as stated in case of Re Grayan Building Services 1995
If proceedings are taken by director for a long time as stated in case of Re AldermanburyTrust1995.
3.4 Procedure for disqualification Company administrators administrators or liquidators have statutory duty to report disqualified directors to the government, if they see fit.
3.5 Acting as a director whilst disqualified Following possible consequences consequences may be occur by action of disqualified director
Acting as a director after disqualification disqualification is a serious criminal offence which may be punished by fine. Disqualified director is personally liable for debt of company while acting as a director during disqualification period.
4 Powers of directors Article authorized the directors to manage company and allow them to exercise authorized power to manage the company affairs. Directors may take any decision, they see fit for managing company either article or law requires taking these decisions by members. members.
Director should use their power in the best interest of company.
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10 Company Officers
Director may use their power for proper purpose, the purpose for which these powers allowed.
4.1 Restriction on director’s power Director’s power may be restricted by law or article
If directors use their power in wrong way, then their powers can be challenged
Statutory Restrictions Directors’ power may be restrict ed in some situations like in reduction of capital and removal of
auditors. Change of company article or reduction of capital requires special resolution, resolution, hence special resolution may be proposed by members in general meeting.
Restriction imposed by article Some restrictions also imposed by the article like in case of borrowing money. Article set maximum amount for director to borrow, if any director wants to exceed this amount, he has to get permission from the general meeting.
5 Power of Chief Executive officer (Managing Director) The chief executive officer (CEO) is the most senior person in the organization, has authority and power to run the board of executive officer. In most of the organizations CEO is also termed as managing director but in some companies there may be two persons one is CEO and other is managing director ( senior from CEO) managing all functions and running the whole board of directors so chief executive officer and all other officers are accountable towards managing director (MD). CEO or MD has three attributes in one time like decision maker, leader or manager. Article provides CEO apparent authority to take all strategic decisions and make commercial contracts on the behalf of company but actual authority is given by members in general meeting CEO is the special person who has more authority than any other director whether other directors work full time.
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10 Company Officers Although CEO or MD has special status but they can be terminated at any time by the members through resolution by members but they transferred to the ordinary position of director.
5.1 Agency and CEO or MD CEO are the agents of company, they have some actual and usual authority to bind company .Director have also apparent authority provided through holding out. Holding out is a basis rule of agency law. According to this rule, if principal appoints appoints any person as an authorized agent then principal cannot deny that particular person is not an authorized agent. They are bound by their contract made on company behalf. If board of directors is permit to act as CEO or MD but he is not CEO or MD, then company may bound by their action. The apparent authority of CEO or MD may be explained by case of Freeman & Lockyer v Buckhurst Park Property Ltd 1964
A company done business as property developer, developer, article provides a power to appoint a MD but this has never done. One of director acts like a managing director without having express authority. He bought some property and appointed architect to make a plan, later on other directors refused to pay for property and architect‘s fee by pointing that he has no actual or
apparent authority. But in fact they are liable to pay because, he was acting like a managing director. Four conditions must be satisfied claiming under Holding out rule 1. It was made clear to them that agent has authority to enter in contract on the behalf of company through presentation. presentation. 2. Particular representation representation made by a person who has actual authority. 3. They were relied on this presentation. 4. Article has nothing to prevent company from giving any authority to agent for binding contract on company behalf.
5.2 Powers of individual directors There may be following possible power of individual directors. directors.
Other directors have no apparent authority to bind company in a general contract but they have apparent authority on their management position.
Removal of director may be a breach of service contract, if they have condition of employment as status of director stated in their service contract.
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10 Company Officers 5.3 Duties of director by companies Act 2006 Company law sets some major duties, which develop day by day through operation of common law or equity which make the clearer. 1. Duty to act within power 2. Duty to promote the success of the company 3. Exercise independent judgment 4. Exercise reasonable skill, care and diligence 5. Avoid conflicts of interest 6. Not to accept benefits from third parties 7. Declare the interest or benefit in a proposed transaction Court consider Company Act 2006 to decide whether duty has been broken and help other by including previous cases before 2006 to understand different types of situation that arise, how the law interpreted and applied by court in future Fiduciary duty is imposed on some particular persons who have trust and confidence in each other relation. Fiduciary duty has more obligations than contract or tort law. Section 170 of CA 06 clearly states that directors owed duty to the company not to any member. Hence company can take action itself on directors but member can take action on directors on behalf of company. Director have owed every duty to company that could apply in every situation like ,if director refused to accept bribe from 3 rd party , then he is breaching of duty by not promoting his company for benefit of company members. Any person acting as a director has some duties as stated in Company Act. Court also applied some duties on shadow directors through common law. All time directors have to take care of all others law and regulation. No authorization is given to break any law for performing their duties.
5.3.1 Duty to act with in power Directors must exercise their power properly for the purpose which were given as stated in section 171 of CA 06, use of power for proper purpose can be seen in case of Hogg v Cramphorn 1967
In this case directors issued further share and gave financial assistant for purchase in attempt to take over the bid honestly and in best interest of company. The directors were in breach of duty to act with in power but members can ratify which they did.
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10 Company Officers Director has fiduciary duty to use their power honestly and for proper purpose as stated in Bamford v Bamford 1969
5.3.2 Duty to promote the success of company Directors must have act in good faith to promote the success of company and benefit for members as stated in section 172 of CA O6 Director should consider these matters during exercising his duty
Result of long term decisions
Interest of company’s employees
Needs to establish company business relationship with customers, suppliers and others.
Effect of company operation on different people and environment
Need to act fairly between company members
Seeking reputation for maintaining standards of business conduct
5.3.3 Duty to exercise Independent Judgment Director should Exercise independent judgment as stated in section 173.Directors should not transfer their power of independent judgment to others. Director may transfer functions to others but he must continue to make independent decisions. This duty is not violated by director if he acts in authorized way according to company’s
constitution.
5.3.4 Duty to take reasonable care , skills and diligence Director must show reasonable care and skills and act like a careful director.
The general knowledge, skills and experience expected of a reasonable person must be in the director going to carry out functions.
Director must have actual knowledge, skills and experience.
This duty can be seen in case of Dorchester Finance Co Ltd v Stebbing 1989 Company was money-lending company which had three directors Hamilton, Parson and Stebbing. All three had accountancy knowledge, no board meeting was held and matters was left to Stebbing, however two other directors turn up from time to time and signed blank cheques and laid the matter to Stebbing to deal with. Stebbing deal them without following any regulation .All three were liable in negligence because they have a skills of accountancy but no one is using them.
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10 Company Officers 5.3.5 Duty to avoid conflict of interest Director must avoid from any situation which cause conflict of interest between him and company as stated in section 175 of CA 06 If article authorize the director, then conflict of interest can not violate his position as a director
5.3.6 Do not accept benefit from other company Director must not accept any benefit or gift from third party for reason to act as a director or performing at the position of director as stated in section 176 of CA 06.
5.3.7 Duty to declare interest in proposed transaction Director must declare nature and extent of such interest to other director as stated in section 177 of CA 06. Declaration is made in written to the board at general meeting that he has interest in third party. This situation can be seen in the following case law. IDC V Cooley 1972
In this case director Cooley entered into the contract on behalf of company but third party want to give this contract personally to Cooley not to company, without disclosing this matter to company, Cooley resign from company to take contract personally. Cooley is breach in fiduciary duty, he is accountable to company for getting profit from directorship.
5.3.8 Duties by the article Article provides easy regulation than Ac but they may not decrease the level of duty expected unless it is in the following situation;
Directors cannot be in breach of duty for making independent judgment, if they acted according to article director’s duty statement.
Independent director have permission for some conflicts of interest through article. If some provision is available in article for conflict of interest, then director director is not causing breach of duty regarding conflict of interest, if it is lawful. Company may authorize anything through article.
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10 Company Officers 6 Breach of director’s duties Directors are liable regarding all duties imposed by the company because of the agreement between directors and the company. If directors failed to meet their duties then they are in the breach of their duties. As it is discussed before those directors have seven major responsibilities so it is required to meet all these duties by directors. As we know that every breach results in damage of loss to innocent party and under the law remedies are available to reimburse that damage or loss. Breach of duty may cause following possible effects to directors di rectors
Director may require to pay the monitory value of damage or loss to the company
If director still holding some property of company then those property may be taken from director. Property may be recovered directly from third party in case if party aware about the director’s position of breach.
If directors have made some secret profits then they may be recovered from the directors immediately
The contracts made by the directors will be cancelled automatically if those contracts are not in the good faith of company or contracts are personal and company did not aware about it.
Injunction may be best way to relieve where breach has not occurred.
Section 232 of CA06 provides provision to exempt director or protect them from any action against liability for negligence. Section 239 states that company can approve the action of director by passing a special resolution.
7 Other Controls on director There are following possible other controls on directors.
If director’s service contract is more than two year , then his contract must be approved by members as stated in section 188 of CA06
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10 Company Officers
Director may not take any non cash asset without approval from members. Those assets which has value of £ 5000 or equal to the 10% of company assets as stated in section 190 of CA06.
Loan given to director must be approved, if its value is £10,000 as stated in section 197 of CA06.
In section 198 expands section 197 to prevent un approved loan of £ 10,000
Section 201 prevents the un approved credit transaction of £15,000 for benefit given to director.
Director must need approval for the loan more than £15,000 in course of business as stated in section 204 of CA 06.
Non contractual payment for the loss of office must be approved by director as stated in section 217 of CA06.
8 Directors’ liability for act of other directors As we know that directors are the stewards of the assets of the company so they have duty to in the good faith of company but they have no liability for the acts of fellow directors if they did not aware about their activities. And if they are aware of serious offence of other director, then they must have to report those breaches to the members. Directors are liable for what they allow to act to others directors not for their personal misconduct.
8.1 Directors’ personal liability Directors are liable for their personal acts in following f ollowing conditions
Director is liable for lifting veil of incorporation.
Director shall have unlimited liability on debts of company for limited company.
Director may be liable to creditors in some circumstances.
Situation for personal liability can be understood through following case law;
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10 Company Officers Williams and another v Natural Life Food Health Ltd 1998 Through this case law it was concluded that director is only personally liable if he/she accepted personal responsibility and claimant have strong evidence about it.
9 Auditors Generally we know about the auditor that a qualified person who is officially appointed to perform a planned activity to examine financial statements and to give an opinion (whether true or fair or not) on them Every company except small companies must appoint auditor for each financial year as stated in section 175
9.1 Eligibility as an auditor Auditor must be qualified member of professional body like ICEAW and ACCA. Auditor having overseas qualification must be authorized authorized by Department Department for Business, Enterprise and Regulatory Reform.
9.2 Appointment of auditor Appointment of first auditor for public companies First auditor is appointed by director until the first general meeting. Subsequent auditors can take the position when previous auditors leave the office at the end of next financial year or next accounts meeting.
Who can appoint auditors? There may be three categories of persons having authority to appoint auditors
Members/shareholders
Directors
Secretary of the state
Members appoint auditors in general meeting by passing a special resolution and then auditors hold office within 28 days from the general meeting. Sometimes members also appoint auditors in general meeting to fill a casual vacancy.
Directors also have authority to appoint auditors by resolution in general meeting and sometimes appoint to fill a casual vacancy.
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When directors and members failed to appoint auditors then company must notify secretary of the state to appoint auditor within 28 days of the general meeting.
9.3 Ineligibility as auditor Auditor is ineligible for appointment due to following reasons
An officer or employee of the company cannot be eligible to appoint auditor, they must be from outside o utside the organization
The partner of officer or company.
A partnership in which such person is a partner
Auditor is ineligible in above mentioned points like partnership or subsidiary, where exist above connection between company and auditor then auditor is ineligible as the rules laid by secretary of state.
9.4 Effect of lack of independence No person can be act as an auditor, if he has lacks independence. If auditor finds lack of independence or ineligibility, he must resign from the auditor’s position from the c ompany by
notifying reasons of resignation. If auditor continues to work as an auditor after losing eligibility, he may be punished by fine; however they can prove themselves that they were not aware of ineligibility. The Legislation does not disqualify auditors in limited companies in following situations
If auditor is shareholder of company
A debtor or creditor of company
Close relation with officer or employee of company
But in all above mention situations regulatory regulatory body of auditors disqualify them as auditors.
9.5 Appointment of auditor for private companies Auditors generally appointed by shareholders but directors can appoint company’s first auditors and fill casual vacancy.` Present auditor cannot take the office until office left by previous auditor. Auditor will automatically appointed appointed at the end of his term unless;
He was appointed by director.
Company article provides provides rule of actual re-appointment re-appointment
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There has been the resolution that auditor should not be re- appointed.
Member having 5% voting right give notice of actual re-appointment of auditor at the end of financial year.
If company fails to appoint auditor within 28 days after ended period of previous auditor, then they should inform to secretary of state. In these circumstances Sectary of state has power to appoint auditor.
9.6 Exemption of Audit Some companies are exempt from audit under following suitable conditions
A company is totally exempted, if its turnover for financial year is less than £6.5 million and balance sheet balance is less than £ 3.26 million. Exemption does not apply for public company, banking or any company with statue regulation.
Non public or nonprofit companies may be exempt from audit. Members having 10% or more capital may have veto power to exempt company from audit. Company with no trading activity and no accounts record exempt from audit.
9.7 Remuneration of auditor Person who appoints auditor have power to fix their remuneration for period of appointment, generally directs have power to set remuneration for auditor after appointment in general meeting. Usually they have fixed remuneration but auditors are required to not accept any other benefits from the company because their independence may be compromised. compromised. Auditor’s remuneration is a critical point so it should be se t carefully and must be disclosed also in auditors’ remuneration report.
9.8 Duties of Auditors Auditors have statutory duty to report to the shareholders whether company gives true and fair view and financial statements are according to accounting rules and regulations. Auditors have following possible duties
State whether director’s report is consistent with accounts.
Remuneration is properly recorded in accounts for listed companies.
Examination of all financial statements to prepare an audit report and give an opinion on the audit report
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Evaluate the controls established by the directors and recommend advice to improve the company’s controls
Recommend steps to minimize the risks in the organization To ensure that all accounting treatments are according to the international accounting standards Signature of auditor which shows the address of auditor and if auditor is a firm, auditor must use their signature on behalf of firm.
Auditor must carry out some investigations to full fill their duties which are as follow
Accounts are according to their accounting records.
Proper accounting record is maintained and adequate records received from branch.
The information of director’s remuneration is consistent with accounts
9.9 Liability of Auditor Auditor has an agreement with company that he is liable for his own negligence and breach of duties. As stated in section 532, however auditor’s liability can be limited by making agreement
with company. Such liability agreement is for one financial year, this agreement changes annually. Liability limited to a reasonable level on the grounds of responsibilities, obligation and standard of care excepted from auditor. Such limitation of liability approved by members and disclosed in director’s report.
9.10 Right of auditors Companies Act 2006 provides statutory rights to carry out their duties. There are following statutory rights of auditor
Auditors have right to access all books of accounts necessary for audit.
Auditor can take any explanation from any officer or employee which they think necessary to perform their duties as stated in section 499(1).
Auditor can attend general meetings or take notice of meetings necessary to perform their duties as stated in section 502(2).
Auditor has right to speak at general meeting of concern meeting as an auditor as stated in section 502(2). Auditors have right to receive copy of written resolution proposed as stated in section 502(2). Right of remuneration according to their work
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10 Company Officers 9.11 Termination of Auditors Appointment When auditors are required to cease their work, generally termed as termination of the auditors. They can be terminated in the following fo llowing situation. situation.
Auditor can resign their appointment by giving written notice to the registrar.
Auditor may refuse for reappointment.
Auditors can be removed by members through special resolution proposed in general meeting before expiration of their period. Private companies cannot remove auditors by resolution.
When auditor’s office expires, they have no reappointed themselves. Usually auditors
reappoint themselves. themselves. Special notice should be given of resolution to appoint auditor which was not appointed on last resolution.
They become ineligible due to their lack of independence or due to some fraudulent activities
When private company want to appoint replacement of auditor through resolution, then company has to forward resolution to proposed and outgoing auditor then outgoing auditor forward the statement of reasonable length to members within 14 days. Usually the termination of auditor can be possible due to following two ways
In one case if auditor themselves decided to resign from the company
In second case if company (directors, members) decided to remove auditor from the company
9.11.1 Resignation of auditor Auditor can leave office either stating that no circumstances for resignation to the members and directors or whether states the circumstance for his resignation. There are following suitable procedure for resignation of auditor
Statement of Circumstances Auditor must deposit a statement of circumstances along with the resignation letter. In the statement of circumstanced auditor explains the reasons that due to following reasons it is not possible for him/her to continue work in the company.
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10 Company Officers Company’s action After the resignation from the auditors, company must send a copy of statement of circumstances to every person who is entitled to receive accounts and also send a notice to the registrar of the company about the auditor’s resignation.
Auditor’s right When every person knew about the reasons then auditors have right to held a meeting and then speak for the reasons also.
9.11.2 Removal of the auditor from the office If it is decided to remove the auditor from the office due to some reasons then company must have to follow below procedure to make it effective.
Auditor’s representation
Company’s action to notify members about the repre sentations
Attendance of auditor at meeting
Statement of circumstances
10 Company secretary Company secretary a natural person but in the organization/company, organization/company, a senior officer who is responsible for the efficient administration of the company and typically termed as corporate secretary Public companies must have one qualified secretary as it is statutory requirement but there is no such requirement for private companies unless it is required to do so. Sectary is usually removed and appointed by directors
10.1 Who can be the company secretary? The person who is going to appoint for the position of company secretary must have following qualification and capacity to meet all responsibilities otherwise the person will not be considered eligible.
They must have held office of company sectary for three years out of their last five years at public company (plc).
They must have professional degree like ACCA, ICEAW, ICCAS and CIMA or may be barrister or advocate within UK. They must be able to discharge the functions by virtue of their qualification.
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They must be competent and efficient
9.2 Duties and roles Secretary has following duties decided by board the board of directors
Secretary has to check that documentation is in order and filling accurate returns with the registrar. Duty to maintain company’s statutory registers for example register of members,
directors, secretaries, secretaries, register of charges, register of minutes and resolutions and etc.
Duty to give notice and keep minutes of meeting.
Signing documents which are authenticated by company.
Keep checking on the annual and quarterly accounts according to the statutory requirements and international reporting framework. Monitoring overall statutory requirements of the company and deal the legal matters related with provisions and claims
Communication Communication with shareholders and auditors and ensure that dividends paid to members if residual profits available.
Company secretary must have a major role in corporate governance They are the primary source of advise in corporate matters like governance and legal issues Report on directors and other company officers to chairman
9.3 Breach of duties if secretaries are in breach of duties or investigated in any fraudulent activity then their power or authority can be ceased immediately. They may be fined or imprisoned according to the intensity of illegal act
9.4 Power and authority of secretary In past there was little authority to secretaries in all matters but later on both authorizes gave to the secretaries so they can use their power more efficiently. 1. They have actual authority given by the board. 2. They have apparent authority to bind contract on administrative administrative matters.
Case law Panorama developments v Fidelis furnishing fabrics 1971
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10 Company Officers a company sectary ordered cars, apparently for customers service but later on it was clear that they purchased for his own for his own use now company is binding to pay for services as contract states that company secretary may have apparently authority to enter into contract related with company administration. But two cases describes the limit of authority
Case laws Re Maidstone Building provision 1971 In this case law it was decided that Secretary has not enough power to make a commercial contract
Cleadon Trust Ltd 1938 This case law describes that usually secretary has no power to borrow money.
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Insolvency and Administration
CHAPTER CHA PTER
11
Insolvency and Administration
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Insolvency and Administration
1 Insolvency and administration In this chapter we will discusses that how company affairs may be ceased in different conditions through understanding following topics in detail. 1. Winding up 2. Liquidation 3. Dissolution 4. Solvency and insolvency And at the end we will discuss that companies may be saved from dissolution in crises through a process of administration.
1.1 Winding-up Winding up is the process in which all the affairs, business dealings and core activities of the company ceased or brought to an end.
1.2 Liquidation Liquidation is also closely matched with winding up in which all the assets of the company put into sale (disposed off or realized) and then the money received from liquidation may be used to pay off all the creditors, after paying them the remaining money distributed between the shareholders.
1.3 Dissolution The process of liquidation is also called dissolution but some time it may be slightly different. Dissolution is the last step in liquidation in which the company name also removed from the register at the registered office of companies’ house.
1.4 Solvent or insolvent condition of the company If company is able to pay its creditors from the proceeds of liquidation (disposing off assets) then the company is said to be in the solvent condition condition but on the other hand if company is unable to pay its debts from the proceeds of the company assets by disposal then the company is insolvent. The process of winding up is different for both solvent companies and insolvent companies. companies.
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2 Liquidation and winding up Usually the company goes into liquidation in crises or financially difficult situations and directors well know about the position of company so they can decide the right time for liquidation. Secondly the creditors also aware about the difficult situations of the company if their invoices did not paid on time. So liquidation process following persons may be involved to wind up the company operations and functions. 1. Directors 2. Creditors 3. Members
2.1 Types Liquidation may be of two types
Compulsory liquidation
Voluntary liquidation
Compulsory liquidation is usually occurred at the order of court to wind up the company. In this case mostly creditors may apply to the court to give petition of winding up because company is unable to pay its debts. In other words we can say that in compulsory liquidation, liquidation, all the affairs forced to close by the creditors usually. Voluntary liquidation is the process of closing company’s affairs which results at the mutual willingness or agreement of inside members of the company. It may be of two types
Creditors’ voluntary winding up
Members’ voluntary winding up
Creditors voluntary winding up occurs if company is an insolvent position while in case of solvent position(meet creditors obligations) of company then members voluntary winding up may occurs.
Differences between creditors and members voluntary winding up There may be following major differences between two
Appointment of liquidator Liquidator is appointed by the members in members voluntary winding up while in creditors voluntary winding up, the creditors have right to appoint liquidator but he must be reasonable to members also.
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Liquidator’s actions A general meeting is organized in case of members voluntary winding up in which all the members and decided the power authority and obligations of liquidator during liquidation process while in case of creditors voluntary winding up a liquidation committee is held to decide all above.
Representatives In creditors voluntary winding up there may be five representatives representatives at the behalf of liquidation committee while in case of members voluntary winding up there are no representatives.
Position of company The major difference is the state of company. In members voluntary winding up/liquidation (MVL) the company is in solvent sate (able to pay all its debts) while in case of CVL the company is in the insolvent state (u nable to pay its debts) that’s why company forced into liquidation.
2.1.1 Process of members voluntary liquidation There are following steps in this process
Calling a general meeting Calling a general meeting in which directors decided to windup the company and discuss the matters rose during its procedure
Resolution An ordinary or sometime special resolution passed in which winding up begins and all the members and directors agreed at this. After passing a resolution, chairman sign on it and copy of resolution send to the registrar at the companies’ house within 15 days of the general meeting.
Declaration of solvency Declaration of solvency through a solvency statement in which it is declared clearly that company have sufficient assets to pay full debts After realization. Solvency statement is declared by the directors of the company because they better know about the financial position of the company. The statement must contain full detail of all assets and liabilities. The solvency statement must not more than five weeks ago the resolution passed to wind up the company.
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The copy of solvency statement also sends to the registrar within 15 days of the meeting along with the resolution.
Appointment of liquidator Appointment of liquidator by calling a meeting who started liquidation process to realize all the assets and then pay off the creditors
Liquidation report A liquidation report is prepared by the liquidator on which detail of all assets with their carrying value and disposal value is given and then total of all assets which must be greater than the liabilities. This report should be send to all the members. The remaining funds after paying creditors must be distributed between the shareholders/members.
Last meeting After the completion of liquidation process a meeting is called by the liquidator to show the account of liquidation transactions and then
Dissolution of company name After three months from liquidation process the name of company is also dissolved from the register of company names at companies’ house.
3 Compulsory Winding Up This process is followed if the company is solvent but for the companies being insolvent must call creditors to liquidate the company. In members voluntary winding up if the liquidator found that company have no sufficient assets to meet the obligations then directors or company itself may be fined or imprisoned to give inappropriate declaration of solvency statement. After that liquidator may call creditors in a meeting to discuss about the issue and then convert members’
voluntary liquidation into creditors voluntary liquidation.
3.1 Creditors’ voluntary liquidation If the company is insolvent ( unable to pay its debts) and directors are not able for statutory declaration of solvency then the liquidation is creditors’ liquidation in which all assets of th e
company realized to raise cash to pay the due debts of the company. Therefore in creditors voluntary winding up, creditor play major role to bring the existence existence of company into an end.
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Procedure for creditors’ voluntary liquidation This process is also s imilar to the members’ voluntary winding up but creditors play major role. Calling a meeting for passing extraordinary resolution in which shareholders approve the creditors to liquidate the company. After passing a resolution company must call creditors meeting within 14 days of the resolution and also appoints liquidator. Directors may provide the statement of affairs about the company transactions with full detail of assets to the creditors. Company may also provide the detail of all creditors with their out standings so that they can be paid according to their priority after complete liquidation. Creditors also have right to appoint the liquidator and the liquidation committee to facilitate the work of liquidator at the subsequent meeting of creditors. The selected liquidator started work to liquidate the assets of the company. After it a final meeting is called to present the liquidation report with explanation. The copy of resolution along with liquidation report send to the re gistrar at the companies’
house and then finally the name of company also dissolved from the register of companies after three months.
3.2 Compulsory winding up In compulsory liquidation a court order is in place to wound up the company due to the creditors request or other reasons. There may be following reasons in which court may order company for liquidation (compulsory liquidation).
If company is unable to pay its debts (insolvent) (insolvent) and creditors are not able to liquidate the company.
It is in the best interest of company or in the public interest to liquidate the company
It is just and equitable way to liquidate the company
If company is unable to meet statutory obligations
If business is suspended for one year
If the company is established for some illegal purpose and fraudulent objective
If the company did not commence business by getting trading certificate
If the company has no members
If stewards of the company not competent and members are dissatisfied with the administration administration of company
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Company is insolvent If creditors or members apply for compulsory winding up the company then court may require some proofs so that it is concluded that company must be wound up.
Evidence which shows that company owed £750 to creditors, in this regard a written demand statement by the creditor for payment which is ignored by the company may be sufficient.
A commercial insolvency test which shows clearly that company is unable to pay debts within a given time period A balance sheet test which shows that total assets are less than the total liabilities If the above criterion is meet by the creditors or members than after inspection the court may order for compulsory liquidation.
Just and equitable way to wound up the company Members’ dissatisfaction If members are dissatisfied and proved that directors are negligent and not working in the best interest of company than court may also give petition for winding up.
Case law Re German Date Coffee Co 1882 In this case law the company was formed only to serve a specific patient. patient. So it was decided that company has no objective other than this so it must be wound up.
Fraudulent trading If there is some fraud in the company and there is no option to control it as in the case law
Re Yenidji Tobacco Co In this case law two partners merged their business into a company but after some time they quarreled and one partner (owner) sued another for fraud and stopped all dealings so the defendant owner requires compulsory compulsory winding up in fraud action.
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3.2.1 Process for compulsory liquidation There are following steps in this process.
Unlike voluntary liquidation liquidation there is no meeting and no need for resolution to pass but a court order is sufficient to begin the winding up procedure
Copy of court order send to the registrar for compulsory winding up and informed to all members and directors also.
No legal action could be taken against company until it is intervened by a court.
An official receiver (liquidator) is appointed for realizing the assets of company.
Any person who is officially appointed as liquidator must be a qualified insolvency insolvency practitioner. Members and creditors also can appoint liquidator and after the approval from court an official receiver may hand over all work to the liquidator.
All the property and business dealings ceased by the liquidator.
All the employees working in the company dismissed automatically.
The floating charge may be crystallized.
A meeting of creditors and members must be held by the liquidator to discuss the matters about the winding up process. A liquidation committee also established by the creditors and members to facilitate the work of liquidator
The liquidator reports to the court about the cause of failure of company and generally about the company’s affairs.
The liquidation process started and liquidator took control of all a ll assets and then realized them. The collected money from realization used to pay the creditors and remaining money distributed between the members.
A final meeting is held by the liquidator in which liquidation report described the full detail of realization process. After this the liquidator released from the office and also report to the government and court to examine all accounts of receipts and payments and apply to the court for dissolution.
Registrar is informed and liquidation report sent to the registrar also and after three months the name of company removed from the register.
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3.3 Order of payment in compulsory liquidation In order to pay debts from realization of assets, liquidator must follow the prescribed prescribed manner given below. Two types of assets held by the company 1. Unsecured assets 2. Secured assets
Unsecured assets
First of all unsecured assets sold and the money collected used to pay the expenses of liquidation process which include the cost (remuneration) (remuneration) of official receiver and later on the expenses of liquidator.
The cost incurred during the selling process of assets also paid primarily before paying any other debts of the company. Preferential debts paid like the wages of employees including overtime and holiday payments and the pension funds schemes.
If funds remaining then unsecured creditors paid fully.
Secured assets
Secured assets sold by the liquidator and sometime by the secured creditors themselves assets automatically transferred transferred into their custody when condition of payment did not meet by the company.
After selling assets, the cost of selling must be paid and all other expenses during sale.
Secured creditors paid fully if funds are sufficient.
If funds remaining then the dividend declared must be paid and the interest also if any.
Any surplus remaining after paying debts and dividend, distributed between shareholders/members according to their right.
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3.4 Differences between voluntary and compulsory liquidation We have discussed in detail about the all liquidation process, after complete understanding we are able now to distinguish between between voluntary liquidation and compulsory liquidation by some major points.
Differences
Compulsory liquidation Voluntary liquidation liquidation
Time of liquidation
Liquidation begins when court receives petition and give order to wind up company
Control of liquidation
The whole process is under the control of court and no other intervention.
Role of liquidator
In this process an official receiver is appointed by the court which is the officer of of court and play major role in winding up and later on hand over all work to liquidator selected. In this all the employees may be dismissed automatically.
Position of employees
Power of management
Solvency statement
The official receiver takes the position of directors and ceased their power. No need to require this statement by the court.
The liquidation begins when company has no other option the only inevitable way is to liquidate and passed resolution for this. Members control the process in MVL (members voluntary liquidation) and creditors control the process if CVL (creditors voluntary liquidation). Liquidator play major role which is selected by the members or creditors depends on the type of liquidation.
Employees may retain their position during the liquidation process or informed them before the liquidation process starts. Director and other management may support the work of liquidator. Solvency statement must be declared by the directors in case of MVL.
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4 Administration As we know that in difficult situations (financial difficulties) company goes into liquidation. But some time it may be saved at the behalf of administrator, this process of saving company from liquidation is known as administration process.
4.1 Administrator Administrator is the person who is appointed under an insolvency act 1986 to control company affairs in such a manner to rescue the company from being it dissolved.
Roles and responsibilities of administrator There may be following roles during administration process.
Rescuing company from financial difficulties by taking control and putting extra effort to manage the processes more efficiently Obtain the list of all creditors, members and directors and then send them the letter of appointment so that they aware that company is under the control of administrator.
Within seven days of appointment the administrator must send the notice of appointment to the registrar also.
Require statement of affairs from the concerned people, they are mostly directors.
Understanding Understanding all affairs of the company, take some decisions and prepare proposals for improvement improvement in weak areas and send these proposals to the registrar and creditors for their agreement and approval.
Ensure that all business documents contain the identity of administrator.
A statement must be published which clearly describes t hat now all company’s property
and business affairs managed by the administrator.
Realizing some assets of the company to pay secures creditors.
Create the situation which may avoid the creditors to give petition of winding up to the court.
Statement of affairs This statement is required by the administrator at early stage of administration because it contains following details which is very helpful for administrator. administrator.
Details of company assets
Complete description description of liabilities and debts
Detail of creditors and debtors with their amounts
Details of short term or long term loans and if any other securities
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The statement of affairs must be provided to the administrator within eleven days of being requested. The statement of affairs must be prepared by the directors or any other officer who has authority to do so with correct details. Any detail which is inappropriate inappropriate or may not be correct leads to the fine or imprisonment.
4.2 Powers and authority of administrator The power and authorities of administrator are defined by the insolvency act 1986 which are given as follows. Administrators may have the same powers those are granted to the directors of the company because administrator takes the position of directors directors and acted as the managing director of the company.
Authority to enter into any agreement of sale or o r purchase which is beneficial in favour of company
Authority to take all general decisions and manages the affairs of business dealings.
Authority to realize some assets of the company to pay secured creditors.
Authority to pay unsecured creditors but before this he may have to apply to the court for approval.
Authority to put forward reconstruction proposals.
Authority to appoint or remove directors, employees and other managers.
Authority to call meetings of members and creditors.
Authority to examine all the statutory reports and accounts.
After delegating all these authorities, the administrator must perform their duties within the scope of their powers. If members and creditors feel that administrator is not doing well in favour of company than they may apply to the court for his dismissal.
4.3 Appointment of administrator The administrator is appointed when the order of administration has been passed by the court, once it is passed then no petition will be acceptable by the court to wind up the company. The administrator may be appointment by following people
Directors
Company
Floating charge holders
Court
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4.3.1 Appointment by Court The court may appoint administrator when following person may apply for administration administration to the court and an individual person cannot apply to the court for administration. administration.
Company
Directors
Creditors
Justice or the chief executive of the Magistrates’ court
Before appointing administration the company may have to give order of administration if satisfied by the following conditions. But this order of administration administration lasts for 12 months. If administrator failed during this period then court may have to re order with an extended period of six months.
If company is unable to pay the debts
When it is noted that some reasonable basis are here that may achieve the purpose of administration
4.3.2 Floating charge holders Floating charges holders also have right to appoint the administrator so that company regained its financial position and become able to pay its creditors. But all this is controlled by the court. The following documents must be given to the court by the floating charge holders.
A notice of appointment and identifying the name of administrator An agreement letter which shows that the identified person is willing to be appointed as administrator The statement at the behalf of administrator administrator that purpose of the administration is likely to be achieved The administrator must be educated, experienced and competent so a statutory declaration must be here that he qualifies to make the appointment.
If the above criterion is meeting by the charge holders then the appointment will be co nsidered as valid. After appointment the administrator is introduced to all staff and directors and all necessary controls transferred to him.
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4.3.3 Appointment by company and directors Administrator can also be appointment by the company or its directors if they want to do this. Directors are the persons who better know about the financial position of the company so in difficult circumstances they are the first people to know it. They immediately apply to appointment administrator administrator so that company must be saved from worse condition and from being it dissolved. Company as a separate legal entity have right to take decision at its own behalf. So when company is unable to pay its debts then in that condition it is best reasonable way to appoint the administrator before any petition of winding up by the creditors or members. But company may appoint administrator only in the conditions given below.
There is no order of winding up previously.
No one is appointed as an administrator administrator before it by the charge holders.
Company is not in a state of liquidation.
Company is unable to pay its debts
4.4 General effects of the administrator after being it officially appointed When all the necessary steps taken and it results in an effective appointment of administrator then following effects on the company.
Legal commencement against the company
Repossession of hire purchase property
Office of previous receiver is vacated and next appointment is stopped until completion of administration administration process.
Outstanding petition petition of winding up is dismissed
Powers of managers and directors ceased and they have to work with the consent of administrator
4.5 Process of administration The administration process is initiated by the administrator after his appointment. To make this process effective the administrator must have to follow the given steps.
Notification Give notice of appointment to the registrar and to all creditors.
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Manages statement of affairs Immediately after appointment, the administrator requires statement of affairs which contains details of company assets, liabilities and creditors. It may be helpful to gain knowledge of the business and its drawbacks which should be improved.
Giving proposals Through deep understanding of statement of affairs, administrator becomes able to prepare proposals within 8 weeks of time period. These proposals are the solutions of problems or we can say the prescribed methods methods to resolve financial issues which make company as a going concern. The copy of proposals sends to the registrar and the creditors for acceptance. acceptance.
Meetings After giving proposals, the administrator calls meetings of creditors or members to negotiate with them about given proposals. If the creditors not agree with the proposals of administrator then he may change the proposals and recall their meetings with new or amended proposals. It may be held after 10 weeks and a notice of 14 days must be given to all creditors before meeting.
End of administration The administration process ends when it reaches at following conditions.
The purpose of administration achieves, it means when the company become going concern and starts successful trading.
The time period of 12 months completed. Because administration administration lasts for 12 months even if the purpose not achieved so the office of o f administrator vacated and company goes into liquidation (administration (administration failed).
If directors or creditors find another way for improving the financial position then this process can also be brought to an end.
Sometimes creditors creditors voluntarily apply to the court to end up this process if they are not satisfied.
Benefits of administration If administration process becomes successful successful then it may give benefits to following three parties
Creditors
Members
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Company
Company It provides temporary insulation to company from its creditors meanwhile the company prepares some rescue plans to save its existence as a going concern. Moreover a new direction of business is provided to the company to save it from liquidation. During administration administration process the charge of debt also stopped so extra cost saved. If creditors or members apply for administration then the fee and all other expenses of administration administration must be covered by the creditors and members and cost of company saved.
Members If administration process is successful then the share value may be enhanced which means favorable for shareholders and they also get a chance to restore their previous profits when company started to regenerate profits.
Creditors One of the most important benefits to the creditors is that they can get back their money from the realization of assets at the behalf of administrator. After successful administration the creditors continue their relationship with company and get a chance of improved business. It is a cheap source through which creditors get back their past debts.
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Fraudulent Behaviour
12
CHA HAPTER PTER
Fraud
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Fraudulent Behaviour
1 Fraudulent behavior in companies Fraudulent behavior is the behavior in which fraudster (the person who commits fraud) tries to deceive someone in getting financial or non financial benefit. In other o ther way we can say that this is a dishonest behavior. Under the framework of law this behavior is known as crime. This behavior can be seen in companies through many ways. 1. Insider dealing 2. Money laundering 3. Wrongful trading 4. Fraudulent trading 5. Market abuse 6. Bribery 7. General criminal activities in the business Now in this chapter the above topics will be discussed in full detail with their consequences.
Insider dealing This is one of the financial crime and fraudulent behavior. Insider dealing is an offence which is specifically related to the inside information. As we know that inside information must remain confidential and all the inside people are prohibited to disclose it. But sometime this information is used by the inside people directly or indirectly to get benefit in the securities of stock exchange while the price of these securities affected by that inside information. information. Insider dealing is dealt under the criminal justice Act 1993. So by understanding understanding above paragraph we can simply define that insider dealing is a financial crime in which people get benefit in securities of stock exchange while processing inside information.
Now what is inside information? Confidential information which is related to the price of securities (shares) or stock exchange and the investors do not have access to that information. For example the price of shares may be increased or decreased by the growth in profits. When the price of shares will go up, more investors want to buy it while in opposite situation investors try to sale them. If this information leaked intentionally then some people be enriched and get a significant benefit over the stock exchange while the interest of all people involved in it.
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Fraudulent Behaviour
This information is leaked through inside people. And these people get benefit directly or some time transfer the information to give benefits to others (close family members, friends and relatives)
Insiders Insider is the person having inside information. Mostly they are the company officers or employees. There may be two types of insiders.
Primary insiders: having direct information while working in the company like the directors, managers and employees. These may also include the individuals from outside the company by their professional involvement or contact with the company for example the solicitors, auditors and banks.
Secondary insiders: they are mostly not within the company but they get information through the primary insiders.
Identifying insider dealing After understanding insider dealing who we can identify or prove that someone is trading through inside information. information. We can prove this offence by identifying following acts.
Dealing in price affected securities over the stock exchange
Enforcing or encouraging others to deal in that price affected securities
Disclosing sensitive information which is prohibited to disclose
Generally the director or the employees get the secret information and used it. For example the director of the company is aware that price of the shares from subsidiary company will rise after some days. So he immediately purchased shares by himself and gets financial benefit after some days. So this is the direct dealing while processing inside information. To encouraged other people to deal in that securities also considered as offence of insider dealing.
Example A director processing inside information may transfer that information information to his brother to purchase those securities. This can be done weather the other person is aware that a reasonable dealing would take place or unaware altogether about it. If other person is not involved in it but generally recommended to purchase that securities than he is not involved in this crime but the person who gave sensitive information is in a position of crime.
CHAPTER
12
Fraudulent Behaviour
Third situation is also clear which is related to the insiders. There may be two situations in it. If they intentionally disclose the sensitive information then obviously they are commencing fraud but if they don’t have any intention then they have to prove that we are not involved in it.
They have to prove following situations.
They did not expect any profit or loss by exchanging these securities.
They would have to done even if they did not have any information.
They considered it as general information.
Penalties The people who are in an offence of insider dealing may be imprisoned for maximum seven years and unlimited fine also
CHAPTER
13
Market Abuse
13
CHA HAPTER PTER
Market Abuse
CHAPTER
13
Market Abuse
1 Market abuse Market abuse is an offensive behavior in relation to the stock market which may harm the position of investors. In general way we can say that market abuse is a false behavior created for investors or stock market. Market abuse is dealt under the financial services and market Act 2000. This behavior of market abuse created due to the following crimes or offences.
Insider dealing
Misuse of information
Improper disclosures
Manipulating transactions
Misleading behavior
Market distortion
We know about the insider dealing already in which some insiders disclose confidential information to the people (investors) who get benefit in the stock market or may use it by themselves. This may creates an unfair position of investors in the market.
Example A manager working in a company came to know that our company is going to make a takeover bid in some days. So he immediately purchased shares in his company because he knew that share price will go rise due to the potential bid. We all know that this is an insider dealing but this dealing also creates an unfair position in the market through which some people get benefit or some not. This situation also leads to a misuse of information and improper disclosure of information. For example an insider may use the information information to avoid from the potential loss. If he knew that share price will go down he immediately sold the shares in the market. Here he misuses the information to get the benefit while on the other hand the buyer would not buy the shares if he had that information. This is called market abuse where some people can get the benefit through misuse of information, wrong information and improper disclosure. Manipulation of transactions may also create a false impression in the stock market and people
may get benefit through an unfair or o r false impression. For example a big investor purchases number of shares creating the impression that market position are going up while this is an artificial up just to manipulate the minds of others. This ultimately leads to a wrong investment decisions.
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13
Market Abuse
This can is also termed as misleading behavior in which they encourage other people to invest through creating false impression. In last market distortion, an unstable condition of market at which price is distorted in current situation by intervention and different from the price that market would achieve in perfect conditions. Market distortion also leads to the market abuse because this may also change the reasonable condition of the market putting over it a false impression.
Money laundering This term of money laundering is widely used and in simple terms we can define it a process of cleaning dirty money into white money.
What is meant by dirty money and white money? The money that is obtained through illegal sources like distortion, insider trading, smuggling illegal goods, theft and tax evasion, known as dirty money. Using this money is prohibited under the legal framework due to its illegal source. To use this money into regular use it must be converted into clean money which appears to be derived from a legitimate source. Now this money is called white money. So we concluded that money laundering is an offence or financial crime because in this a legal source is substantiating over an illegal sources. So it becomes apparent that money is earned through a legal way and destroyed all crimes at its back. On other way money laundering is a process of converting illegitimate money into legitimate money.
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13
Market Abuse
Process of money laundering Money is laundered through a prescribed method in which three steps followed.
A three step washing cycle
placement
integration
Placement
Layering
Integration
layring
Placement: This is the first step in which illegal money is placed in number of financial systems by making into small parts. Banks are mostly used for this purpose. A large amount is transformed into small parts and then deposited into different banks. It may also be deposited into different countries to void from any investigation. This is the most risky stage in which launderers may be suspected by putting large amount of cash into number of financial systems.
Layering: Is the second step which is more complex. In this the original source of money is concealed through creating a complex structure of transactions into many layers. There is a fast movement of cash at this stage. Money is exchanged into many countries and then invested into different markets.
Integration: is the final stage in which money is returned to the criminal with legitimate sources. After passing through lots of transactions its original sources is destroyed so it can be used for any purpose.
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13
Market Abuse
Money laundering is dealt under the Money Laundering Regulations 2007 but its effects can be seen in other ac also.
Drug trafficking offence 1986
Criminal justice Act 1993
Terrorism Act 2000
Anti-terrorism crime and security Act 2001
Proceeds of Crime Act 2002
Money Laundering Regulations 2007 As we know that money laundering is an offense so this act regulates who to deal investigate and control this offense. According to this act different rules and regulations formed to control this offense which covers all the suspicions like investors, bankers, auditors, accountants, lawyers and tax advisors. This act covers all types of organizations so different procedures used to detect criminals for different organizations. Few of them are given here.
Awareness of employees
Record keeping procedures
Customer due diligence procedures
Internal reporting procedures
CHAPTER
14
Fraudulent Trading
14
CHA HAPTER PTER
Fraudulent Trading
CHAPTER
14
Fraudulent Trading
As we know that for every problem there must be a cause, if we try to reduce that cause or remove altogether then the chances of problems also reduced or removed. For this situation, according to the Act the employees of the companies must be aware about the causes of this offence its obligations, penalties and possible effects. They must know how to deal and avoid from this offence. In some of the organizations a proper training is given to employees about the law of money laundering. As we have discussed previously that money launderer try to destroy the original source of money in whole process of money laundering. So some procedures must be used by all companies or organizations which retain the complete data of customers, suppliers and all other company officers with their passports to avoid from the risk of money laundering. A complete history and full data of customers must be retained by the companies and the extent of their business relationship. In some of the organizations organizations an officer is appointed known as Money Laundering Reporting Officer (MLRO), he is an expert person to investigate or report to the authorities about the suspicions.
Role of financial service authorities in relation to Money laundering Financial service authorities provide anti-money laundering rules and regulations regulations to the investment firms as these firms are more sensitive to this offense. These regulations are also similar to the previous given but these are separate for investment firms which must be followed by them. FSA monitors the anti-money laundering regulations regulations in firms. They must ensure that;
MLRO money laundering reporting officer is appointed in the firms to ensure all necessary steps are taken by the management in relation to anti money laundering. Internal reporting procedures are put in place to identify suspicious transactions and dealings. A proper data is collected like name, address, photograph, passport from the stakeholders and copies of all other documents necessary in their dealings. These records then retained for five years even after the end of relationship. relationship.
Anti-money laundering training is given to all employees and senior managers.
Report of suspicions to MLRO by the employees and officers.
All the suspicious transactions must be investigated by MLRO.
Control systems and procedures are put in place and working efficiently in relation to anti-money laundering.
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14
Fraudulent Trading
The persons who are suspicions or under investigation must retain in the company on job until process process completed. completed.
Effects of money laundering in relation to other offenses Money laundering gives rise to some other offences which are also regulated under the money laundering regulations 2007. 1. Laundering 2. Failure to report 3. Tipping off
Laundering: during money laundering some other people also involved who gave assistance to this process at the behalf of person who actually want to conceal this money. So those assisting people also involved in laundering process and considered as criminals. They help the original criminals and assist them through concealing, transferring and retaining illegal money or property. Laundering offense is also punishable up to fourteen years of imprisonment of fine.
Failure to report: under the legal framework, all the employees or officers working in the organizations have duty to report any suspicious of money laundering to MLRO. If someone knew and failed to report, he commits an offence. This offence is punishable up to five years of imprisonment imprisonment and fine.
Tipping off : it is simply giving a hint to suspicion that may prejudice the investigation of money laundering. So it gives an opportunity for criminal to reduce the risk of investigation It is also a criminal offence so punished for five years of imprisonment and fine.
Fraudulent and wrongful trading Fraudulent trading Fraudulent trading is a civil offense as well as a criminal offence. Fraudulent trading occurs when business is developed specifically to defraud their creditors and other stakeholders or any other fraudulent purposes. It is very difficult to determine about the fraudulent trading Mostly directors and senior officers involved to carry out fraudulent trading.
CHAPTER
14
Fraudulent Trading
For example a director enters in a agreement to purchase vehicle knowingly that business financial position is not good. After it the business goes into liquidation and creditors claim for the payment. In this directors are liable because intention was to defraud creditors because unsecured creditors not surely paid after liquidation. In fraudulent trading only the persons who are involved to in it are punished and considered as liable for financial loss. This offence is mostly seen in the companies a little before liquidation. In addition to defraud creditors they take large deposits in advance by the customers and promised to deliver goods but before the delivery time business goes into liquidation. During liquidation process facts came to know by liquidator. So he can bring a case in court about the wrongful trading and the parties involved in it are punished. Under the civil law its penalty is financial in nature and under the criminal law it is difficult to prove, it requires evidences and after it the court decided the personal liability and fine.
Case law Morphites v Bernasconi 2001 In this case law directors are personally liable to pay the unpaid rent for lease payment and a fine for dishonesty also.
CHAPTER
15 Wrongful Trading
15
CHA HAPTER PTER
Wrongful Trading
CHAPTER
15 Wrongful Trading 1 Wrongful trading Unlike fraudulent trading, wrongful trading is not a criminal offence but a civil offence. The concept of fraudulent and wrongful trading introduced by the insolvency act 1986 and under the companies Act 2006. Fraudulent trading occurs when the management or directors of the company decided to continue business even they knew that it is impossible to avoid company from going into insolvent liquidation. Liquidator must have to prove that directors had knowledge about the insolvent position of the company and they knew that there are no reasonable ways to avoid it from insolvent liquidation. Then the directors will be liable for this offence under the civil law. Directors show irresponsible and negligent behavior in case of wrongful trading as the directors have responsibility to monitor the financial position of the company continuously and they have duty to inform the members when the worth of total assets falls below the certain value of liabilities. In case of financial difficulties they immediately immediately inform to the higher authorities authorities and consult from insolvent practitioner by giving maximum protection to their creditors otherwise they will be liable to contribute in the assets of the company. Directors are liable to contribute up to the extent of the loss or their negligence.
Case law Re produce Marketing Consortium 1989 In this case law it was proved that a wrongful trading occurred by the directors so they are liable to contribute in the assets of the company. Two directors jointly paid £75000 to the liquidator of the company plus an interest also.
Difference between wrongful trading and fraudulent trading According to the insolvency act 1986, the above two offences are different with their purpose, effects and penalties. In wrongful trading director continue to do business while they knew that company is unable to pay debts when they fall due. But here there is no intention to defraud creditors, they just carry on business with the hope that thing will improve in near future. In the same time we know that directors have duty to give maximum protection to their creditors so directors are negligent if they failed to report the authorities on time about the financial position of company.
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15 Wrongful Trading On the other hand in fraudulent trading the intention of directors is to defraud the creditors and they do business to collect maximum money money before liquidation. Only the liquidator can find the truth that directors are held responsible for fraudulent trading. So it is concluded that fraudulent trading is more serious offence (criminal offense) as compared to the wrongful trading (civil offence). And according to the nature of offence the liability of fraudulent trading is more severe than wrongful trading.
Other offences under insolvency Act 1986 Acting as director whilst disqualified According to company directors directors disqualification disqualification act 1986, a director may be disqualified by its wrongful acts or some other reason so he must stop from acting as director even in liquidation phase otherwise it will be considered as a crime and punished for it.
Creating phoenix companies Phoenix companies are those which are created at the similar name of liquidated companies by the directors of insolvent companies. It is a serious crime as it leads to dishonesty and misleading behavior in the society. Directors are personally liable for the debts of the company.
Other frauds and deceptions in the companies During liquidation phase or at the winding up phase all the systems and procedures distorted and collapsed so the chances of theft and frauds increased. Directors Directors and employees may involve in steeling the company assets and manipulating the systems data.
Omission of material information At the start of liquidation, a statement about the company affairs must be required by the liquidator which should be prepared correctly with full detail. Sometimes due to the negligence or voluntarily directors failed to put necessary information in that statement. So that a wrong decision may be taken by the liquidator due to lack of material information.
Misconduct during liquidation Although the directors power ceased during liquidation but they have to follow the instructions of the liquidator. When they failed to act as they required then they will be liable to their misconduct.
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15 Wrongful Trading Offences under companies act 2006 Under the companies act 2006 there are some regulations related with the company operations, its management and its records. In the same way provisions are also included to monitor these regulations. Following offences may create at the behalf of companies which the relevant officers are liable.
Company records
Accounting records
Filling account
Disclosures
Annual return
False information
Failure to keep Company records According to the companies’ act 2006, all the public listed companies required to
keep the company records for five years. So if i f they failed to do, the relevant officer (who assigned the duty to do so) will be considered as liable to the mistake. Failure to prepare and file accounting records on time
As we know that, it is statutory obligation to prepare and file accounting records on time. These accounting records include the financial statements and other financial reports. They must be prepared on time by the accountant and then file to the registrar at the companies house on time. Failure to make certain disclosures
Certain disclosures needed which must be published or repo rted in the auditor’s report. In the same way some disclosures also needed by the companies about its type, location and business and the concerned officers will be liable if they failed to do so. Failure to file annual return
It is statutory duty to file the annual return on time by the companies. And failure to file the annual return brings a fine or punishment to the relevant officer.
CHAPTER
15 Wrongful Trading Providing wrong or false information
Putting wrong or false information any document of the company or to make it public is also a serious offence because it leads to inappropriate or misleading behavior. And the punishment for this is imprisonment or fine.
CHAPTER
16 Corporate Governance
16
CHA HAPTER PTER
Corporate Governance
CHAPTER
16 Corporate Governance Corporate governance Corporate governance is a system in which companies are controlled and managed by the managing people. It basically control and direct the relationship between the company directors, its shareholders and other stakeholders. An overall structure is built between these three parties and this structure is maintained under the good corporate governance rules and codes. In companies, we know that ownership structure is separate from its management structure but there may exist a strong relationship between two. Shareholders are the actual owners of the company and they appoint directors to manage and deal the company affairs. Now the relationship between the directors and shareholders called ‘’agency relationship’’ under which shareholders are the principals and they appoint agents (directors) (directors) to carry out functions in the company. So day to day running of the business is the responsibility of directors and other managers. The shareholders have to rely on their agents (management). At this point there may be conflicts of interest between management and the shareholders if there is a breach of trust by management. To resolve this above problem there must be an alignment of interests and objectives between these two parties. And it can also be possible if companies follow the corporate governance rules and codes. It creates level of trust and integrity on the management by the shareholders.
Features of good corporate governance A good corporate governance system must have following features;
Fairness
Transparency
Independence
Honesty
Integrity
Responsibility
Accountability
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16 Corporate Governance Corporate governance system specifies some rights and responsibilities towards the participants of the corporation. And these participants may be the overall board and the stakeholders.
Stakeholders Stakeholders are the persons, group or non human entity with an interest or concern in something (usually business here). So all the connected people with the corporations corporations are the stakeholders which may be as follows;
Directors and managers
Shareholders
Other employees
Customers
Suppliers
Auditors
Lenders
Competitors
Government
The public
Pressure groups
Trade union
Shareholders Shareholders are the key stakeholders of the company. They invest in the company by taking shares so their interest is to secure their stake (investment). They are not involved in day to day running of the business but there approval is necessary before taking any decision. They are the owners so corporate governance is developed for them if they are separate from the people who are responsible to manage the company.
Directors and managers They are the people who are managing the company at the behalf of shareholders. They involved in routine decision making and their implementation after approval. There interest is to secure their position in the company and other financial interests (remuneration, (remuneration, allowances ad bonuses). They use the investment of shareholders that’s why shareholders want to be assured that their
investment is using correctly.
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16 Corporate Governance As we know that shareholders are not involved in day to day running of the business so they lack information about the company’s position and performance.
This knowledge gap may be removed by following ways by the companies.
Making financial statements statements
Hold annual general meeting
Following corporate governance governance rules and codes
From the above points a topic of corporate governance codes will be discussed in detail as we know much more about the financial statements and general meetings. But here we illustrate that how financial statements and general meetings used to remove the knowledge.
Preparation of financial statements Financial statements are the statements which show that how company is performing and making profits. Through these statements shareholders can access the business position and came to know that their investment is using correctly. These all statements must be audited to enhance the credibility of these statements. These financial statements are as follows;
Statement of comprehensive income
Statement of financial position
Statement of cash flows
Statement of changes in equity and other notes
These above financial statements are prepared and audited under the corporate governance rules and other reporting framework. framework.
Annual general meeting AGM held annually by the directors and shareholders exercise their control at the meetings. In this meeting shareholders communicate with directors and mangers directly and discuss the issues and other matters. Financial statements are also presented to shareholders and they can ask questions about the company’s performance, its growth and further strategies and policies. Despite the financial matters other decisions like amendment of company objects and authorization of share capital also discussed on AGM. So it is concluded by this AGM a knowledge gap removed because shareholders shareholders communicate directly and know all whatever they want to know and get all the information through a prescribed way.
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16 Corporate Governance Corporate governance codes Under the corporate governance structure, codes of best practice were developed in many jurisdictions. jurisdictions. These codes codes provide all the companies companies to comply with higher standard standard of behavior behavior than local legislation requires. Major corporate governance governance codes are as follows;
UK corporate governance codes
Combined codes of corporate governance
South African king report under corporate governance
Singapore code of corporate governance
OECD principals international international
Combined codes of corporate governance First of all combined codes of corporate governance were developed which includes three reports.
Cadbury report
Greenbury report
Hampel report
According to Cadbury report the post of chairman and CEO held by separate people with clear rights and responsibilities. In the same way directors must be executive and non executive directors with independent judgment and there must be three independent non executive directors. An audit committee must be developed to review the relevant functions and disclosures of director’s remuneration in separate reports.
Greenbury report Greenbury report went beyond the Cadbury report and also recommends a remuneration committee which must determine the remuneration of executive and non executive directors. Greenbury report also includes the principals of directors pay and o ther disclosures which should be given in annual accounts and reports.
Hampel report Hampel report includes the matters raised in Cadbury and greenbury report and its main objective is to restrict the burden of rules on companies and changing it to follow the principals. As we that principals based approach is more demanded as compared to rules based approach
CHAPTER
16 Corporate Governance which contains strict and unchanging rules under the legal framework and companies must have to follow them.
UK corporate governance codes After the combined code, in UK various other reports developed like;
Turnbull report
Smith report
Higgs report
So after some revision a combined code changed into UK corporate governance codes with three other reports. Turnbull report focused on the management of risk and various other internal controls. Smith report focused on the roles and responsibilities of audit committee. Higgs reports focused on the roles of non-executive directors.
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16 Corporate Governance OECD principles The organization for economic co-operation and development (OECD) (OECD) has developed a set of principles that leads corporate governance in more than thirty countries. These principles also deal with governance issues and problems, issues of ethical concern and environmental environmental issues. These principles categorized into five broad areas.
Rights of shareholders
Equitable treatment of shareholders
Role of stakeholders
Disclosure and transparency transparency
The responsibilities of the board
Rights of shareholders According to these principles the shareholders of the company must have following rights;
Right to participate and vote in annual general meetings
Right to elect members of board
Right to appoint and remove auditors
Right to receive annual accounts and other material information
Equitable treatment of shareholders Shareholders of the company may participate from all over the world through financial markets by putting investment. It may create differentiation but it must be removed by treating all class shareholders equally including minority shareholders or overseas. The rights o f shareholders must be protected by the directors directors and managers protested against the variation of class rights.
Protection of stakeholders As we know about the stakeholders, according to these principles the rights of all stakeholders must be protected as they are important to develop corporate structure. In the companies a system must be developed in which all the employees from lower level had easy access towards their seniors to discuss their problems. It may enhance the better communication system in the organization.
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16 Corporate Governance Disclosure and transparency A disclosure is necessary in all material cases regarding regarding the company. For example disclosure must be given in case of financial issues, foreseeable risk factors, control systems, structure and policies of the companies. These disclosures may enhance the trust of investors and other stakeholders which leads to more investment and more business.
Responsibilities of the board Board which may consist of executive and non executive directors is responsible to control measure and monitor the performance of overall management. All the board members should maintain the relation of good faith with other employees and with the company also and take decisions in the best interest of shareholders. The board members must show independent judgment in all types types of decisions.
CHAPTER
16 Corporate Governance Other aspects of corporate governance under UK corporate governance codes Some other aspects of governance are discussed here;
Leadership
Effectiveness
Accountability
Director’s remuneration
Relations with shareholders
Leadership For completion of every task there is a need of leader to make it possible. In the companies also a system of leadership is maintained for the long term success of the company. The role of leadership is provided by the collective board consist of independent non-executive non-executive directors. Board is responsible to maintain the governance structure and giving overall direction to the company and setting the strategies for the business. The board may consist of following people with clear responsibilities. responsibilities.
Chairman
Non-executive Non-executive directors
Chairman The chairman is the leading person at the board and oversight the overall board including nonexecutive directors. The chairman has authority to precede all types of meetings and set the agenda to discuss in the meeting. All the strategic matters discussed with the chairman because strategies and policies are developed by the leading person in the board. The chairman must ensure that board must receive accurate and timely information by the management to take right decision making.
Non-executive directors After the chairman the non-executive directors challenge the strategy and oversight the overall board and report to the chairman.
CHAPTER
16 Corporate Governance They play significant role in decision making and determining the actions of executive directors. Their roles are more significant with an independent judgment. They should monitor the performance of management against the objectives of the company. So from above it is concluded that the responsibilities of chairman and non executive directors directors must be separate with persons of power.
Effectiveness An effective system of corporate governance developed developed if the overall board works under an accurate system with following aspects.
Composition of Board As it is discussed before that the board is composed of executive and non-executive directors, so there must be a balance between NEDs and EDs to make it sufficient for managing the operations. Half of the board members must be independent non-executive non-executive director for public listed companies. All the board members must have unique skills, experience, independence and knowledge of the company.
Induction and development An ongoing process of induction and development must must be maintained in the companies and should be updated regularly to refresh the skills and knowledge of board members.
Appointments of the board There must be a formal system of appointment for the board. All the directors and other senior officers should be appointed on merit against the due objectives. For this purpose a nomination committee should be established so to make this process more effective and easy.-election should be developed which the members have to follow before re-election.
Re-election process Directors and auditors are entitled to re-elect in the companies though voting or applying for reelection in annual general meetings. So a proper system of r
Commitment to the board All the board members should be committed to their work and discharge their duties on regular basis. The behavior of seniors leads the other management to be committed regularly and ultimately objectives objectives of the company will be achieved.
CHAPTER
16 Corporate Governance Information system The board should be supported with an accurate and timely information system so that all the board members discharge their duties with an efficient manner. This system provides a source of knowledge about all the transactions, decisions and functions of the business. From this a good communication system is flowed between seniors and lower management.
Evaluation system As we know that when we implement any control then we monitor the whole process to get better results. Is the same way an evaluation system should also be maintained in the companies which measure the performance of all systems, procedures and the individuals also so that it is get ensured that an effective board system is working.
Accountability Accountability is the factor which makes the person to be answerable against the duty or responsibility responsibility towards the individuals who have assigned the responsibility or duty. In any corporate sector this factor is seen with the hierarchy maintained maintained in the companies. We all know that in all organizations and companies the juniors are accountable towards their seniors against the work assigned by them. They are answerable weather they have completed their duty or not. Despite of this individual reporting an overall system of corporate reporting reporting is also maintained through following aspects;
Financial reporting
Risk management and internal control reporting
Audit committee and audit reporting
Financial reporting The overall company’s position and performance is shown through financial reports annually or
quarterly. In these reports directors are reporting about their duties and explain the basis on which they have achieved the objectives of the business and discuss also about the future prospects. Directors also report on the going concern status of the business.
CHAPTER
16 Corporate Governance Risk management and internal control reporting The board is responsible to determine the factors which may create risks through establishing risk committee which measure risks and implement controls to reduce the level of risk. All the directors are responsible to maintain good and sound system of controls and monitoring risk management and then report to the shareholders that they have done their duties successfully in this matter.
Audit reporting Under the corporate governance system an audit committee should be developed which monitor the accounts, internal controls and functions independently because audit committee consist of independent NEDs. All the internal systems are checked by the internal auditors and they make recommendation to improve the systems which are weak or not achieving the overall objectives. They also help the external auditors by giving correct reports so that they can easily review the whole systems and finally prepare audit reports which clearly explain that weather the accounts are giving true picture or not.
Director’s remuneration The remuneration of directors is another main and subjective matter in all of the companies and organizations where there is separation of ownership and management. The companies must follow a formal system in which remuneration packages are decided. A remuneration committee must be established for executive remuneration which consists of independent non-executive directors. Directors are avoided to set their own remuneration. And the remuneration of non-executive directors set by the shareholders and the chairman of the board. A remuneration package may be consisting of basis salary, incentives, bonuses, bonus issues (shares) and the other non monitory benefits. The remuneration remuneration must be sufficient to retain and motivate them because they are precious to the company if they are competent. The remuneration committee should set the package with and independent judgment and according to the performance of directors.
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16 Corporate Governance Relations with other shareholders The board must keep a good communication system with all of the company’s shareholders and
especially the major shareholders to understand their problems and issues. Different types of meetings can be organized for this purpose like the annual general meetings (AGM) and extraordinary general meetings (EGM). In annual general meetings all the investors are invited to share the knowledge and agenda set by the directors. The chairman of the meeting proposes a resolution for each separate issue in the organization and requires the willingness of shareholders. All the necessary steps are taken by the permission of shareholders because they are the actual owners. It is concluded that all the above aspects must be followed in all the companies to achieve better results.
Structure of board The board structure may be of following forms in different companies. Board is entirely composed of directors so it is called board of directors in which directors have following duties.
Act in the best interest of companies
Develop strategies and plans to achieve the objectives of the business.
Direct and supervise the all management.
Propose the resolutions of the company.
Develop and monitor the control systems.
The board structure may be of two types
Unitary board
Two-tier board
Unitary board of directors
Unitary board is made up of single board of directors in which all the directors have responsibility responsibility to manage the operations of the company. This board consist of mixture of executive and non-executive directors and usually there no distinction between the roles of executive and non-executive directors.
CHAPTER
16 Corporate Governance In this board all the directors have dual responsibility to manage the operations as well as to supervise them. Benefits of unitary board system
It increases consensus as all directors mutually involved involved to develop strategies strategies and plans.
Faster decision making as the single board presents to approve the proposals.
It may create close relationship between the directors and enhance the information system.
It may reduce knowledge gap between directors and managers.
Executive and non executive directors have equal power and responsibility so it avoids conflicts.
Two-tier board structure Two-tier board system is composed of two board systems;
Supervisory board
Management board
Supervisory board is composed of independent non-executive directors and they have
responsibility responsibility to oversight the functions of executive directors directors and all other functions of the business. The members of supervisory board are elected by the shareholders on the basis of their knowledge and experience.
Management board is usually made up of executive directors and they involved in day to day management of functions directed by the supervisory board. So the board members are accountable towards the supervisory board against their actions.
Advantages of two-tier board structure
There may be following advantages;
It may enhance independence as the roles of executive and non executive directors directors are distinct from each another. Clear line of responsibility responsibility and accountability accountability exist between between the supervisory and management board.
Management board is more competent as they are accountable for every act.
It increases transparency. transparency.
CHAPTER
17
English Legal System
17
CHA HAPTER PTER
English Legal System
CHAPTER
17
English Legal System
1 Essentials of English legal system This is the most important part of the syllabus in which we will discuss that how the law developed and administered in the UK jurisdiction. We discuss all its crucial aspects covering the civil law and criminal law and duties of individuals in relation to these laws. This part is divided into three sub-parts
English legal system
Sources of English law
Human rights
1.1 English legal system In this part we will start from the origin of law and discuss the following topics one by one.
About law
Types of law
Courts system
Tribunal system
What is law?
We define it simply as a formal system of rules and regulations in which a particular country country or society is bound to act under that rules and regulations so we can say it as a formal mechanism of social control. Why we need law/ the history of law
To determine the need of law we have to read the history where the human life was very simple with social disorder because there was no system to control them. People were seen to quarrel at food and place. They were not aware about their rights and obligations. Due to this disorder there was a fine line between life and death. For example a stealing of food from one party, put the other party into death. They started to live at the behalf of power. The persons having great power, ruled at that time. At this point there was a need of system to control this disorder and at that time a set of rules were developed through which disputed were resolved and punishment for the cruel people and that system of rules knows as Law. Legal history is closely matched with human civilization. Law evolved and changed into its modern form by the passing of time.
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17
English Legal System
Now in this modern world a proper legal system is working in each country and society. English legal system is generally a legal system of England and Wales.
Under the English legal system we discuss the following types of law through which we also determine that how the English law evolved and changed into current system law.
Common law
Equity law
Statute law
Private law
Public law
Civil law
Criminal law
Common law was an earliest system of law that was prevailed in England and United states. This system was developed by the custom and judicial precedent. Common law system was rigid and composed of strict rules, made by the judges and people
must have to follow that rules. People were punished harshly under that system and damages were paid in monitory value. People were unhappy about the rules and they criticized criticized it on o n large scale. So after two to three hundred years, a new system of rules developed in fact a common law system amended with more fairness and justice. This new system of fairness and justice is known as equity law. Under this system people were treated equally with equal rights and obligations. The disputed were resolved more fairly and monitory and non-monitory damages were available for loss. Statute law
Statute law id developed by the parliaments in a set of prescribed rules and regulations. For example the government passed acts so these are the written rules according to which disputes can be resolved. This suitable is suitable for unique and complicated systems. Private law Private law is the law which deals t he individual’s personal matters with relations like disputes
related with divorce, children, marriage and personal property. The effects of the disputes can be seen on one person or group of people (usually family) and not the whole society that is why it is called private law.
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Example Civil law Public law
Unlike private law this covers the whole society that usually concerned with the matter of state. For example the crimes which affect the whole society and public may demand to punish the person who commits that that wrong act. Example Criminal law Civil and criminal law
The law which is similar to private law is known as civil law. Under this law the disputes of personal dealings and issues are resolved. Both parties have to prove the fairness in the court through verbal arguments and court decides the compensation of punishment which is minor as compared to the remedies of criminal law. On the other hand the conduct which is prohibited under the law and affect on the whole public is dealt under the criminal criminal law. The guilty persons persons who have broken the laws may be punished by fines or imprisonment. Court’s system
A courts system is structured for the civil and criminal cases. Courts are developed from where the people get justice and equity. Judges are there to hear the arguments from both parties and take the decision at last. Separate courts are developed to deal the civil and criminal issues.
Civil and criminal court structure Civil court structure comprises the following courts.
Magistrates’ court deals small domestic matters.
County court deals the matters of property under the law of contract and tort.
Crown courts deals with unresolved matters from magistrates’ court.
High court is divided into three divisions;
Queen bench
Family division
Chancery division
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Court of appeal : As the name shows this court is developed to hear the appeal from high court
and county court. Because some people are not ready to accept the decision and want to appeal for more fairness and justice. Supreme Court for the United Kingdom :
Is the highest court from all the previous and
deals with large matters and issues and also hears appeals from high court and court of appeal. Criminal court structure
Criminal court structure is developed to deal the criminal offenses under the criminal law. It is also composed of following courts and people may apply to the courts according to the nature of issue or case. Magistrates’ court deals with the summary offenses and the mistakes which are not so much
serious. Crown court deals with the more serious issues and crimes and also hears the appeal from the magistrates’ courts.
The divisional court of QBD is developed to hear the appeal from the previous two courts if the
nature of offense becomes more serious. Court of appeal hears appeal from crown court. Supreme Court of united Kingdome is the largest court developed to hear appeal from all other
courts and takes the final decision which is binding. The supreme court of United Kingdom
The supreme court of United Kingdom was developed under the Constitutional reform Act 2005. And its personnel consist of 12 judges known as justices of the Supreme Court. Its main function is to serve for both appeals of civil courts as well as criminal courts. The case is discussed and then groups of justices give their views and finally take the decision which is binding because there is no court to hear the appeal of Supreme Court. But some other courts are developed for United States to protect them from injustice. Tribunal system
We can define tribunal as a local group of judges to resolve the issue at a specific place. In other words we can say that tribunal system is a traditional system of resolving issues in comparison to the courts system. But now in United Kingdom this system developed with ore formal regulations of administrative justice.
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So tribunals are the other source for the people who want to resolve their issues with justice. This system was developed under the courts and enforcement act 2007. Composition
Tribunals are composed of two parts usually which is known as two-tier system each with a panel of three judges. One is mostly a qualified lawyer and other two are not so qualified but experienced. The decisions of upper tiers are binding which are finally taken after the review of decisions by first tier. Scope
Tribunals are usually developed for the issues regarding employment law in which disputes of employees with employers employers or vice versa may be solved. Moreover some disputes regarding the government cases and social security are also heard and solved. Following are some examples of disputes resolved under employment tribunal system.
Complaints of unfair and wrongful dismissal
Issues about trade union membership
Complaints about the discrimination discrimination of work and duties at job
Disputed about the equal pay and other monitory benefits and allowances
Health and safety issues at work
Employment appeal tribunal
Employment appeal tribunal (EAT) is developed to hear the appeal from different employment tribunals. The status and purpose of EAT is same like the High Court. In this tribunal a qualified lawyer takes the final decision after hearing the facts from both parties. But if the matter remains unresolved then the parties may have to go to the high court where the matter discussed and resolved under the legal framework.
Advantages and disadvantages of tribunal system Advantages
This system is cheap and less costly as compared to courts system.
They allow flexibility in their decisions.
Senior tribunal members have more experience and knowledge.
This system reduces the workload of judges.
Prompt decision making.
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Disadvantages
There may be some drawbacks also by using this tribunal system
Judges may have low independence. Some judges who are not qualified also involved in it so it may increase the chances of wrong decision making. Lack of legal aid.
Sources of English law In this chapter we will discuss that how the legal system is working and on which basis this system regulates. As we have discussed before about the elements of legal system now we determine how these elements originates. There are following two major sources for developing the laws or legal system.
Case laws or precedents
Legislation
Case law and precedent Case laws are the laws which are developed through the decisions of specific cases. This is the first sources within the legal framework to develop or create laws in the United States. These laws become precedent when in future a similar case occurs and the judges follow the principles or decisions of case laws in past. Precedents are binding under the legal framework to all the courts but precedent should be developed by the court of sufficient seniority so that other courts have to follow it in future for similar cases. The precedents are flexible and can be changed by the next higher court. The doctrine of binding precedent
The doctrine of binding precedent is that the judge who is presiding over the case must establish that the facts of the current case are similar to the previous case in which precedent was established. So the decision of subsequent case should be according to the binding precedent but if situation is not similar then a new precedent may be created. When judges have to follow the binding precedent in similar situation then it is known as judicial precedent which is based on three elements.
Reports There must be sufficient and reliable reports of previous decisions by the judges.
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Rules There must be some rules which may be sufficient to apply on the currents facts of the case extracted from previous case facts.
Classification The precedents must be classified and categorized into binding and persuasive precedents.
The law reports contains following detail of information.
The names of both defendant and claimant parties
The name of judges hearing the case
The facts of the case
Date and pint of hearing
Order of the court
When the binding precedent is applying in the subsequent cases then there must be following consistency of events and facts.
The decision must be based on the proposition of law and not on o n the question of facts.
It must be part of the ration decidendi of the case. The ration decidendi is the statement of the judge in the previous case and its alternative name is obiter dicta.
The material facts of the subsequent case must be similar to the previous one.
The presiding court must have the superior position when deciding precedent so that the later courts follow it.
Advantages and disadvantages of precedent There are number of strengths of judicial precedents precedents on the other hand some drawback also discussed here.
Advantages
There is more certainty in the decisions because these are based on the real facts of the previous case.
The decisions are more clear and fair following the ration of ration decidendi.
They may be flexible and can be changed if the situation differs.
These precedents contain more detail of real facts and situations and lead the other cases also.
Time may be saved in the decisions of subsequent cases as it follows the previous rules.
Disadvantages
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Although the precedents are flexible but these are rigid decisions and cannot be changed easily.
Sometimes there may be inconsistency in the thoughts of judges which leads to disagreement. It may create complexity when number of precedents similar or to finding the exact ration decidendi.
The precedents may become unfair in later time but the courts have to follow even these unfair precedents if they are not in the superior position to the previous courts that have made these precedents.
2. Legislation Another source of developing legal system is the legislation. This is also known as statute law. Statute law is defined as a law (set of rules) which is made by the parliament (which governs the city, state or country). In UK the legislation of statute law may be of two forms. Primary legislation: This is developed from the Acts of parliament Secondary legislation: this is known as delegated legislation