Icaew Law WB 2023
Icaew Law WB 2023
Icaew Law WB 2023
Law
Workbook
For exams in 2023
icaew.com
Law
The Institute of Chartered Accountants in England and Wales
ISBN: 978-1-0355-0151-9
Previous ISBN: 978-1-5097-4201-1
e-ISBN: 978-1-0355-0210-3
First edition 2007
Sixteenth edition 2022
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, graphic, electronic or
mechanical including photocopying, recording, scanning or otherwise, without the
prior written permission of the publisher.
The content of this publication is intended to prepare students for the ICAEW
examinations, and should not be used as professional advice.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
Contains public sector information licensed under the Open Government Licence
v3.0
© ICAEW 2022
Contents
Welcome to ICAEW iv
Law v
Key resources vi
Professional skills required by the ACA qualification vii
Terminology 385
Glossary of terms 391
Index 395
Questions within the Workbook should be treated as preparation questions, providing you with a
firm foundation before you attempt the exam-standard questions. The exam-standard questions are
found in the Question Bank.
Michael Izza
Chief Executive
ICAEW
Module aim
To provide you with an understanding of the principles of English law.
On completion of this module, you will be able to:
• explain the nature of contractual agreements, the agency relationship and the consequences of
negligence;
• understand the legal implications of incorporation, including the roles of shareholders and
directors, and the main implications of insolvency law;
• identify instances of criminal behaviour that may be encountered by professional accountants;
and
• identify other key areas in which the law affects the role and work of the professional accountant.
Method of assessment
The Law exam is 1.5 hours long. The exam consists of 50 questions worth two marks each, covering
the areas of the syllabus in accordance with the weightings set out in the specification grid. The
questions are presented in the form of multiple choice or multi-part multiple choice.
Specification grid
This grid shows the relative weightings of subjects within this module and should guide the relative
study time spent on each. Over time the marks available in the assessment will equate to the
weightings below, while slight variations may occur in individual assessments to enable suitably
rigorous questions to be set.
Exam support
A variety of exam resources and support have been developed to help you through your studies and
each exam. This includes expert guides, sample exams, hints and tips, webinars from our tutors, and
more.
Tuition
The ICAEW Partner in Learning scheme recognises tuition providers who comply with our core
principles of quality course delivery. If you are not receiving structured tuition and are interested in
doing so, take a look at ICAEW recognised Partner in Learning tuition providers in your area at
icaew.com/tuitionproviders
Errata sheets
These documents will correct any omissions within the learning materials once they have been
published. You should refer to them when studying.
Student Insights
Access our practical and topical student content on our dedicated online student hub, Student
Insights at icaew.com/studentinsights. You’ll find interviews, guides and features giving you fresh
insights, innovative ideas and an inside look at the lives and careers of our ICAEW students and
members. No matter what stage you’re at in your journey with us, you’ll find content to suit you.
Structuring problems and Structure information from various sources into suitable formats for
solutions analysis and provide creative and pragmatic solutions in a business
environment.
Applying judgement Apply professional scepticism and critical thinking to identify faults,
gaps, inconsistencies and interactions from a range of relevant
information sources and relate issues to a business environment.
The level of skill required to pass each exam increases as ACA trainees progress upwards through
each Level of the ACA qualification. The skills progression embedded throughout the ACA
qualification ensures ACA trainees develop the knowledge and professional skills necessary to
successfully operate in the modern workplace and which are expected by today’s forward-thinking
employers.
At Certificate Level, the ACA Professional Skills which you are expected to demonstrate in the exam
are summarised as follows:
Assimilating and using information
• Understanding the situation and the requirements
• Identifying and using relevant information
• Identifying and prioritising key issues
Structuring problems and solutions
• Structuring data
• Developing solutions
Applying judgement
• Applying professional scepticism and critical thinking
• Relating issues to the broader business environment, including ethical issues
Concluding, recommending and communicating
• Concluding and recommending
• Communicating
To help you develop your ability to demonstrate competency in each professional skills area, each
chapter of this Workbook includes up to four Professional Skills Guidance points.
Each Professional Skills Guidance point focuses on one of the four ACA Professional Skills areas and
explains how to demonstrate a particular aspect of that professional skill relevant to the topic being
studied. It is advised you refer back to the Professional Skills Guidance points while revisiting specific
topics and during question practice.
Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance
Learning topics
1 Types of law
2 International law
3 Islamic finance
4 UK law supporting the principles of sustainability
Summary
Further question practice
Technical references
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
Introduction
Learning outcomes
• Recognise the relationships and interaction between civil and criminal law, legal principles,
legislation, case law, ethics and ethical codes
• Recognise situations when laws and regulations other than English law may be applicable to an
organisation, including:
– international regulation of trade between organisations (International Chamber of Commerce
(ICC) Incoterms, the UN Convention on Contracts for the International Sale of Goods)
– Sharia law relating to Islamic finance
Specific syllabus references for this chapter are: 3a and 4i
1
Syllabus links
This chapter forms the basis of the rest of your law studies. It is important to understand the different
types of law and how case law and legislation will affect how business organisations operate and
form legally binding agreements between them (both nationally and internationally). Whilst most
agreements between organisations are successful, some end in dispute and the law is the main
method of resolving them.
ICAEW places great importance on sustainability. In this chapter we shall consider sustainability
within the legal context.
1
Assessment context
Questions on the topics in this chapter will be set as multiple choice, multi-part multiple choice or
multiple-response questions. Some questions may involve an analysis of a brief scenario and the
identification of an appropriate response, which may be in the form of providing advice, such as
applying ICC Incoterms in a particular context.
You can expect at least one question in your assessment to be set on the content of this chapter.
1
Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.
• Civil law deals with disputes involving private individuals and organisations.
• Criminal law deals with cases where one party is accused of committing a criminal offence.
• Primary legislation is in the form of Acts of Parliament.
• Secondary (or delegated) legislation is created when a specific body or individual creates laws in
accordance with an Act of Parliament.
• Case law (otherwise known as the common law) is law that has evolved over time as disputes
between parties are heard in the courts.
Within the English legal system there are two broad categories of law – civil law and criminal law.
Disputes between parties will fall under one or the other of these types of law and will be dealt with
by the civil court system or criminal court system accordingly.
Parties involved The party bringing the case is the claimant. The party they are
claiming has caused them a wrong is the defendant.
Burden of proof The burden of proof is with the claimant. This means it is up to the
claimant to prove their case.
Standard of proof The standard of proof is the balance of probability. This means the
claimant must prove that it is more probable than not that what they
are claiming is true.
Remedy or penalty The main remedy under the civil law is the award of damages. Other,
non-financial, remedies (such as injunctions) are also available.
There is no concept of punishment. Damages are designed to
compensate the claimant for losses or damage caused to them.
Parties involved The party bringing the case is the state (known as the prosecution).
The party they are claiming has committed the crime is called the
accused.
Burden of proof
Standard of proof The standard of proof is beyond reasonable doubt. This means the
prosecution must satisfy the jury that the accused is guilty. If the jury
has any doubt that the accused might be innocent of the crime then
they should acquit them.
Remedy or penalty There are no direct remedies available to the injured party if the
accused is found guilty of the crime. The purpose of the criminal law
system is to punish those found guilty of committing crimes, such as
by being put into prison or by paying a fine.
Remedies might be available under the civil law if the crime means the
accused also caused loss or damage that is recoverable under the civil
system.
1.4 Legislation
Laws are created by Parliament on a continual basis to address the needs of government and of the
country. Such laws are commonly known as legislation, statute law or statute. Parliament is said to be
sovereign and is free to make laws as it sees fit. There are two types of legislation – primary and
secondary.
Whilst the English legal system hears disputes concerning parties in England, where organisations
trade internationally it is not always clear which country’s laws apply.
Parties that enter into international contracts may agree in advance which laws will apply in the event
of a dispute. This is perfectly acceptable and is known as choice of laws. To aid international trade,
the United Nations (UN) and the International Chamber of Commerce have created rules of their
own which parties may choose to adopt as well.
Before applying the UNCISG to a particular scenario, you need to make sure that the situation falls
within the scope of the convention. To do this you will need to collect all the relevant facts regarding
the deal and decide whether the convention applies to it.
To pay the price for the goods and comply with To deliver the goods to the place and at the
any formalities to enable payments to be made time agreed in the contract
If either party fails to meet their obligations, then the other party can recover damages for any losses
suffered.
Carriage of goods included At the place indicated in the contract, or if not specified,
risk passes when the goods are transferred to the first
carrier for transmission to the buyer
Carriage of goods not included The time and place where the buyer takes over the goods,
or the goods are placed at their disposal
Goods sold in transit The moment when the contract is concluded, even if the
goods are still in transit
International trade involves the risk that the goods can be lost or damaged whilst in transit. To
minimise this risk, judgement is needed to determine the most appropriate point at which risk
should pass to ensure that there is no gap where the party responsible for the goods has no suitable
insurance cover.
3 Islamic finance
Section overview
• Islamic finance is governed by Sharia law, which is explicitly bound to the religion of Islam.
• The rule against usury (also known as riba) is the concept of unlawful gain. This has consequences
for financial arrangements because the charging or receiving of interest is not permitted.
• Usury can be avoided if contracts are based on making profit instead of charging interest.
3.1.1 Usury
An important rule in Sharia law which affects Islamic finance is the rule against usury. This is known in
Sharia law as riba.
Definition
Riba: The concept of unlawful gain. This is usually translated as interest.
3.2.2 Loans
Traditional loans work the opposite way to savings accounts. The bank lends money to the customer,
often to purchase an asset, such as property, and the customer repays the bank the capital loaned to
them plus an interest payment.
A similar loan under Islamic finance would see the bank purchase the asset from the seller for an
agreed price. The bank then sells the asset at a profit to the customer. Therefore, the customer pays
the bank a pre-determined price for the asset which consists of the price of the asset plus the bank’s
profit. If the customer pays the bank in instalments, then the bank owns the asset until the final
payment has been made. At this point, ownership of the asset is transferred to the customer.
When structuring finance in a Sharia-compliant way, it may not be easy to determine how best to
replace the interest element. It may help to think of the arrangement as an investment which is
designed to generate profit that can then be shared between the parties in a pre-arranged way.
UK legislation has increasingly introduced and supported laws that promote the principles of
sustainability. Throughout your study of ACA modules, you will encounter examples of UK laws that
cover the themes of sustainable business practices.
Legislation is now helping to ensure that companies meet sustainability targets and treat all
employees and prospective employees equally. It also aims to ensure that organisations and the
people who work for them apply legislative requirements (such as customer due diligence and
employee training) to prevent bribery, money laundering and the financing of terrorism, and have
procedures in place to report suspicious transaction.
The following are examples of significant UK legislation which is currently in place that supports the
principles of sustainability.
As a Chartered Accountant you should be aware of all relevant laws relating to sustainability and to
communicate how they might be applied within a particular organisation.
Legislation
Case law
• Also known as common law
• Built up historically through the courts
• Judicial precedent
• Linked to legislation as cases are heard
Scope
Commercial sales of goods, but not:
• where the supply of labour is a major part of the contract
• where the buyer provides most of the materials for the goods
• where the goods are bought for personal or household use
• where the goods are sold by auction
• where the sale relates to certain specific restricted products such as
electricity, aircraft and investments
Passage of risk
Incoterms for all modes of transport: Incoterms for transport by sea only:
• Ex-works (EXW) • Free alongside ship (FAS)
• Free carrier (FCA) • Free onboard (FOB)
• Carriage paid to (CPT) • Cost and freight (CFR)
• Carriage and insurance paid to (CIP) • Cost, insurance and freight (CIF)
• Delivered at place (DAP)
• Delivered at place unloaded (DPU)
• Delivered duty paid (DDP)
Islamic finance
Sustainability
1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following questions
having studied this chapter. If not, you are advised to revisit the relevant learning from the topic
indicated.
1. Do you know the different parties involved in civil and criminal law cases? (Topic 1)
2. Do you know the obligations of buyers and sellers under the UNCISG? (Topic 2)
3. Do you know the name given under Sharia law for the charging or receiving of interest?
(Topic 3)
4. Do you know the powers that the Environment Act 2021 gives to the government? (Topic
4)
• © International Chamber of Commerce (ICC) (2020) The Incoterms® rules. [Online]. Available
from: https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-2020/ [Accessed 11
May 2022].
• United Nations Convention on Contracts for the International Sale of Goods. (2010). New York, UN.
Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for
this chapter.
1 Damages to compensate for loss or damage suffered is the main remedy under the civil law.
2 Correct answer(s):
B False
The standard of proof in civil cases is the balance of probability. In criminal cases it is beyond
reasonable doubt.
3 Correct answer(s):
B No
As well as delivering the goods to the right place at the right time, the seller also has an obligation to
ensure the goods conform to the quantity, quality and description of the goods agreed in the
contract or as required by the convention, and to ensure they are packaged appropriately too.
4 Correct answer(s):
A CIF
CIF applies to maritime transport only. The other options apply to all forms of transport.
5 Correct answer(s):
B False
Riba is the concept of unlawful gain which translates into the charging or receiving of interest.
Earning and sharing profit is lawful under Sharia law.
Contract formation
Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance
Learning topics
1 The validity of a contract
2 Offer and acceptance
3 Intention to create legal relations
4 Consideration
5 The terms of the contract
6 Privity of contract
Summary
Further question practice
Technical references
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
Introduction
Learning outcomes
• Recognise when a legally binding contract exists between two parties and how a contract may be
enforced
The specific syllabus reference for this chapter is 1a.
2
Syllabus links
As seen above, the issue of contract formation could be relevant in many different areas of the
syllabus, for example accounting and auditing, employment, business and financial management.
Contracts are also important in assurance; for instance, a key contract is the engagement letter
between the client and the assurance provider.
2
Assessment context
Contract is an important part of the syllabus. Typically 7 out of 50 questions relate to contract law.
Understanding the basic precepts relating to contract is vital.
You are likely to be presented with scenarios and may have to conclude whether a valid contract has
been formed. Many cases are referred to in this and later chapters. They will not be assessed directly,
but illustrate points of law that could be.
2
of acceptance. newspaper is
treated in
contract law.
Stop and think
Could you identify
an offer and
acceptance from a
given scenario?
Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.
• A valid contract is a legally binding agreement, between two parties, which agreement may be
evidenced by writing, words or action.
• Three essential elements must be present, namely:
– agreement
– an intention to create legal relations
– consideration
It is almost invariably the case that the two parties to a contract bring with them differing levels of
bargaining power. A contract may be made between a large retail company and an individual, for
example. In such cases, the agreement is likely to be in the form of a standard form contract,
prepared by the dominant party and which the other party has no choice but to take or leave.
Generally speaking, the law will not wish to restrict or interfere with the ability of contractual parties
to decide whether or not to enter into a contract and, if so, upon what terms (‘freedom of contract‘).
However, it will often intervene where one party seeks an unfair advantage as a result of their
superior bargaining position.
Such intervention will be made by the courts or by legislation. Thus, for example, the Sale of Goods
Act implies terms into a contract which impose obligations on the business seller as to the quality
and fitness for purpose of the goods they sell. Likewise the Consumer Credit Act affords the
consumer protection where they enter into credit agreements. In respect of exclusion clauses, in
which typically the stronger party seeks to avoid liability, the Unfair Contract Terms Act may result in
such a clause being void outright or void if the court considers it to be unreasonable.
In order to be valid, three essential elements of a contract must be shown to be present. These are
dealt with in detail in sections 2–4. Suffice it to say here that those elements are:
• agreement between the parties
• an intention to create legal relations
• consideration
studies.
Void A void contract is not a contract at all. The parties are not bound by it and if
they transfer property under it they can generally recover their goods even
from a third party.
Voidable A voidable contract is a contract which one party may set aside. Property
transferred before avoidance is usually irrecoverable from a third party.
Deciding that a business contract is unenforceable is risky and may leave a business open to a claim
for breach of contract. Before making such a judgement it is important to identify and consider all
information that might be relevant.
Void/Voidable/Unenforceable
• As noted above, the first essential element in the formation of a valid and binding contract is
agreement. This is usually analysed and understood in terms of ‘offer’ and ‘acceptance’.
• It is a matter of interpretation whether something amounts to an offer.
• There are a number of rules which determine whether an offer has been validly accepted.
An offer does not have to be made to a particular person. It may be made to a class of persons or to
the world at large.
Carlill v Carbolic Smoke Ball Co 1893
The facts: The manufacturers of a medicinal carbolic smoke ball published an advertisement by
which they undertook to pay “£100 reward ... to any person who contracts ... influenza ... after having
used the smoke ball three times daily for two weeks”. The advertisement added that £1,000 had been
deposited at a bank “showing our sincerity in this matter”. Carlill read the advertisement, purchased
the smoke ball and used it as directed. She contracted influenza and claimed her £100 reward.
In their defence the manufacturers argued against this.
• The offer was so vague that it could not form the basis of a contract, as no time limit was specified.
• It was not an offer which could be accepted since it was offered to the whole world.
Decision: It was a valid offer capable of acceptance. It was not vague but clear that the smoke ball
must protect the user during the period of use. Further, it was accepted that an offer could be made
to the world at large (by analogy with reward cases where it was accepted that a notice offering a
reward could be accepted by anybody).
You should note that Carlill is an unusual case in that advertisements are not usually regarded as
offers. However, it established the principle that an offer can be made to the world at large and is
generally seen as a landmark case. You should be familiar with it.
Lapse of time An offer may be expressed to last for a specified time. If, however, there
is no express time limit set, it expires after a reasonable time.
Revocation by the The offeror may revoke their offer at any time before acceptance either
offeror expressly or by implication. Even if they undertake that their offer shall
remain open for acceptance for a specified time they may nonetheless
revoke it within that time, unless they have bound themselves to keep it
2.3 Acceptance
The offeree’s response must amount to an unqualified agreement to all the terms of the offer in
order to constitute a valid acceptance. Acceptance may be made by express words to that effect by
the offeree or their authorised agent, or it can be inferred from conduct.
Brogden v Metropolitan Railway Co 1877
The facts: For many years C supplied coal to D. D’s agent sent a draft agreement to C for
consideration and the parties applied the terms of the draft agreement to their dealings, but they
never signed a final version. C later denied that there was any agreement between them.
Decision: The conduct of the parties was only explicable on the assumption that they both agreed to
the terms of the draft.
There must be some act on the part of the offeree to indicate their acceptance. An offeror cannot
dictate that their offer shall be deemed to have been accepted unless the offeree actually rejects or
accepts it.
Felthouse v Bindley 1862
The facts: C wrote to his nephew offering to buy the nephew’s horse, adding, “If I hear no more
about him, I consider the horse mine”. The nephew intended to accept his uncle’s offer but did not
reply.
Decision: C had no title to the horse as the nephew’s silence could not constitute acceptance.
Similarly, in Carlill’s case (above), once Carlill began using the influenza product, this was a positive
act that constituted acceptance of the offer.
Applying technical knowledge, such as established case law, to a scenario will help you come to a
conclusion when deciding which answer is correct in exam questions.
True/False
Frankie is legally entitled to sell the boat to Mel on 13 July since she
revoked Xiao-Xiao’s offer.
Acceptance will only be effective to create agreement where the offeree is aware of the offer. Thus, if
A offers a reward to anyone who finds and returns their property and B, unaware of A’s offer, returns
the property, B cannot have ‘accepted’ A’s offer since they were unaware of it and there is no
agreement.
• The intention to create legal relations is the second essential element of a valid contract. It may be
completely obvious but, if not, one of two rebuttable presumptions may be applied.
Social, domestic and family It is presumed that social, domestic and family arrangements are
not intended to be legally binding unless there is clear evidence
which points to the contrary. All circumstances will be taken into
account, including whether husband and wife were separated at
the time of contract, the nature of the relationship between the
parties and the type of contract. For example, if the parties are a
husband and wife living apart or if the contract relates to property
matters, the presumption is more likely to be rebutted.
Care needs to be taken during the negotiation stage as to whether a contract is intended. Use of the
words ‘subject to contract‘ amounts to a strong presumption that no immediately binding contract is
intended.
RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH 2010
The facts: A letter of intent set out a draft contract which was not to become effective until signed
and executed by the parties. The contract was not signed but the parties proceeded with the project
of installing two production lines in the claimant’s factory.
Decision: The Supreme Court held, first, that it was unrealistic to conclude that major works would
have been carried out in the absence of a contract and, secondly, that there was evidence of an
agreement and an intent to create legal relations in this case. The court made it clear that it would not
always be the case, in circumstances where works commence before a contract is finalised, that the
contract that exists between the parties contains the same terms as those in the negotiated contract.
That would be a question of fact in all the circumstances.
Similarly, calling an agreement “a personal agreement until a fully legalised agreement, drawn up by
a solicitor and embodying all the considerations herewith stated, is signed”, was held to be a binding
agreement, notwithstanding that it was obviously intended to be replaced by a more formal contract
at a later date (Branca v Cobarro 1947).
4 Consideration
Section overview
• Consideration is the third essential element of a contract. Put simply, it is what each party gives or
agrees to give to the other, usually payment or a promise to do something in return.
Leases which last over three years Where a leasehold property (such as a flat) is
purchased, or retail units are leased.
Promises that are unsupported by consideration A promise to pay a regular amount to another
party (such as a charity) with nothing expected
in return.
Performance of existing Not consideration unless it can be shown that some extra service
statutory duty over and above the scope of the statutory duty is also being offered.
For example, if someone agrees to pay another a sum of money for
appearing in a court, when that other person has been subpoenaed
Performance of existing Not consideration unless it can be shown that the promisee is
contractual duty owed to actually giving or doing something over and above the scope of the
the promisor contractual obligation. The facts need to be examined closely in each
case to see whether what is being done or offered is actually over
and above the existing contractual (or statutory) duty and also to
ensure that the case is not actually one of duress. It may be enough
where the promisor obtains some extra practical benefit.
Performance of existing This can amount to valid consideration. Thus in Scotson v Pegg 1861,
contractual duty owed to Scotson contracted with a third party (X) to deliver cargo as X
a third party directed. X directed Scotson to deliver it to Pegg. Pegg contracted
with Scotson to unload the cargo himself if Scotson delivered it to
Pegg (which he was already bound to do under his contract with X). It
was held that Scotson’s obligation owed to X to deliver the cargo to
Pegg was sufficient consideration for Pegg’s promise to Scotson.
Solution
No. The 28 crew members are already contractually bound to complete the voyage and they would
be expected to deal with normal emergencies arising en route. The fact that they have to cover two
missing crew members does not amount to something over and above what they are bound to do
anyway.
If, on the other hand, many more had deserted, so as to make the continuation of the voyage
exceptionally hazardous, then their agreement to complete for an extra £500 each would amount to
Solution
The answer is no in each case. The arrangement between the creditors will bind each of them as the
law effectively imports a consideration to support the creditors’ agreement (although the exact legal
reasoning for this is far from clear). X cannot sue A for the original debt as they have now received
consideration from T, against whom they had no previous claim. Like the creditors’ agreement, this
instance is another exception to the rule in Foakes v Beer.
Determining whether a valid contract has been created requires you to understand the whole
situation from a number of different perspectives. You will need to identify the issues within each
scenario that are relevant to the decision regarding whether a contract exists.
True/False
By the time she raises the issue with Alice, the fact that Bev has cleaned
the inside of the car is past consideration and therefore she cannot
demand additional payment for it.
Alice has offered Bev additional consideration (extended loan of the car)
for his waiver of the other £5 and therefore, on acceptance by Bev, the
waiver will be binding.
• As a general rule, the parties to a contract may expressly include in the agreement whatever terms
they choose. This is part of the principle of freedom of contract.
• Terms may also be implied into the contract by the courts, by statute or by custom.
By reference to custom But not if that would produce an inconsistency with the express
terms.
By statute For example, by the Supply of Goods and Services Act 1982 (HMSO,
1982), which implies terms that work and materials should be of
satisfactory quality. Such implied terms often override any express
terms that do not offer as much protection to the weaker party.
Under Rome II (a piece of EU legislation which has been adopted by
the UK post-Brexit), if parties that are based in different European
countries have a commercial or civil dispute, and they had not
previously agreed which country’s law applies to their circumstances,
then the applicable law is the law of the country where the damage
occurs.
When considering a contractual issue, it may be helpful to identify any gaps in the express terms,
which may then be filled by implied terms.
• As a general rule, only a person who is a party to a contract has enforceable rights or obligations
under it. This is the doctrine of privity of contract.
• The Contracts (Rights of Third Parties) Act 1999 has had a fundamental effect on the doctrine.
The law requires that consideration must move from the promisee and only a party to a contract can
enforce it. No one may be entitled to or bound by the terms of a contract to which they are not a
party.
Where A promises B that (for a consideration provided by B) A will confer a benefit on C, then C
cannot as a general rule enforce A’s promise since C has given no consideration for it.
There are a number of equitable and statutory exceptions to the privity of contract rule, for example
a person injured in a road accident may claim against the motorist’s insurers under the Road Traffic
Act 1972 (HMSO, 1972). However, the two principal exceptions of which you should be aware are as
follows:
• Where an agent enters into a contract with a third party on behalf of their principal, the resulting
contract is actually enforceable by and between the principal and the third party. The agent
cannot enforce it.
• The Contracts (Rights of Third Parties) Act 1999 (TSO, 1999) provides that a third party may
enforce a term of the contract provided:
– the contract expressly provides that they may; or
– the term confers a benefit on them, unless it appears that the contracting parties did not intend
them to have the right to enforce it.
The third party must be expressly identified in the contract by name, class or description, but need
not be in existence when the contract is made (for example, an unborn child or a future spouse). The
Act enables a third party to take advantage of exclusion clauses as well as to enforce ‘positive’ rights.
The Act does not apply to employment contracts, so, for example, a customer of an employer cannot
use this Act to enforce a term of a contract of employment against an employee.
True/False
Catherine and David have not formed a valid contract as they have
been unable to come to an agreement about price.
The three essential There are a number A contract contains Generally speaking it
elements of a of factors which may express terms and can only be enforced
contract are offer affect the validity of a additional terms by the parties to it.
and acceptance, contract. For a may be implied by Exceptions:
consideration and contract to be custom, statute or • Agency
intention to enter binding it must also the courts • Contracts (Rights
into legal relations satisfy various tests • Business efficacy of Third Parties)
relating to certainty, • Necessarily Act 1999
legality, form and incidental
the genuineness of
consent of the parties
A contract which is
not valid may be:
• void (neither party
is bound)
• voidable (the
contract is binding
unless and until
one party chooses
to avoid it)
• unenforceable (the
contract is valid
but its terms
cannot be enforced
in a legal sense
(although it may
be ratified)
1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following questions
having studied this chapter. If not, you are advised to revisit the relevant learning from the topic
indicated.
3. Do you know what is presumed about the intention of commercial organisations when
entering into a contract? (Topic 3)
5. Do you know the ways in which terms can be implied into contracts? (Topic 5)
6. Can you explain who may enforce a contract under the rules of privity? (Topic 6)
True/False
Void/Voidable/Unenforceable
• information
• rejection
• offer
• communicated
• invitation to treat
• offeror
True/False
True/False
True/False
True/False
True/False
16 What is the name of the EU law, which has been adopted by the UK, that deals with the situation
where parties that are based in European countries have not agreed which country’s law applies?
Void/Voidable/Unenforceable
The contract is made orally and provides for Graham to pay Unenforceable
Harry the debt owed to Harry by Imran.
True/False
Frankie is legally entitled to sell the boat to Mel on 13 July since she False
revoked Xiao-Xiao’s offer.
True/False
Alice’s consideration of £10 and a loan of her car is valid consideration True
for Bev’s promise to clean her car.
By the time she raises the issue with Alice, the fact that Bev has cleaned True
the inside of the car is past consideration and therefore she cannot
demand additional payment for it.
Alice has offered Bev additional consideration (extended loan of the car) True
for his waiver of the other £5 and therefore, on acceptance by Bev, the
waiver will be binding.
(1) Consideration does not have to be adequate but must be sufficient. In other words, it must have
identifiable value. In this case, Alice is offering both £10 and the loan of her car, both of which
have identifiable value and thus constitute valid consideration.
(2) True on the face of it, since anything that has been done before a promise in return is given is
past consideration. However, if it can be argued that the parties must have assumed that there
would be payment for this extra work, then it may be valid consideration.
(3) Alice cannot afford to pay Bev the £10 she agreed and asks her to waive her right to it. This
request is accompanied by additional and alternative valuable consideration (the extension of
the loan period to a week) and if she accepts those terms, the waiver is binding.
True/False
Catherine and David have not formed a valid contract as they have False
been unable to come to an agreement about price.
1 Correct answer(s):
A A document put forward for the customer’s signature by a supplier of goods in which pre-
printed contractual terms are set out.
2 A valid contract is a legally binding agreement. The three essential elements of a contract are
offer and acceptance , consideration , and intention to create legal relations .
True/False
Void/Voidable/Unenforceable
5 Correct answer(s):
C Invitation to treat
6 As a general rule, acceptance must be communicated to the offeror and is not effective until
this has been done.
An offer is a definite promise to be bound on specific terms and must be distinguished from a
supply of information and from an invitation to treat .
True/False
True/False
True/False
14
True/False
15
True/False
16 Rome II
Termination of contract
Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance
Learning topics
1 Discharge of the contract
2 Remedies
3 Exclusion clauses in contracts
Summary
Further question practice
Technical references
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
Introduction
Learning outcomes
• Recognise when a legally binding contract exists between two parties and how a contract may be
enforced
• Identify the circumstances under which a contract can be terminated and possible remedies for
breach of contract
Specific syllabus references for this chapter are: 1a, b.
3
Syllabus links
You will have learnt about liabilities and provisions in your Accounting paper. It is helpful to see how,
in practice, such liabilities of companies might arise.
3
Assessment context
You should expect several questions on contract termination. They are likely to be a mixture of
application ‘scenario’ questions and definition questions.
3
Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.
1.1 Performance
Performance is the normal method of discharge of a contract: each party fulfils or performs their
contractual obligations and the agreement is then ended. Although it is commonly said that
complete and exact performance of all the contract terms is required to discharge the contract, in
fact the courts will apply an important qualification to this rule. This is that so long as there is
substantial performance of a party’s contractual obligations, that will be a sufficient discharge,
although the other party will be entitled to seek redress for that part of the performance that did not
completely and exactly match the contract terms.
While partial performance cannot discharge the contract as a whole, most contracts are treated as
‘severable’ which means that they consist of a number of obligations and can be ‘severed’ or
discharged through performance of only part of those obligations, leaving the remaining obligations
to be performed. For example, employment contracts usually provide for payment each week or
month and building contracts usually provide for payment at various stages of the contractor’s
progress. Each of these payment dates or stages represents a point at which the contract can be
severed or, effectively, divided into smaller contracts.
If one party prevents performance, the offer of performance by the other party is sufficient discharge
of their obligations and they will be entitled to sue for damages for breach of contract, or
alternatively bring a quantum meruit (literally ‘as much as they deserve’) action to claim for the
amount of work already completed.
Planché v Colburn 1831
The facts: Planché had agreed to write a book on costumes and armour for Colburn’s ‘Juvenile
Library’ series. He was to receive £100 on completion. He did some research and wrote part of the
book. Colburn then abandoned the series.
Decision: Planché was entitled to 50 guineas (a little over £50) as reasonable remuneration on a
quantum meruit basis.
Example
Destruction of the A hall was let to a musician for a series of concerts but before the date
subject matter of the first concert, the hall was accidentally destroyed by fire (Taylor v
Caldwell 1863).
Personal incapacity to A drummer was contracted to perform seven nights a week in a pop
perform a contract of group. Due to ill health the drummer was only able to perform four
personal service nights a week (Condor v Barron Knights 1966).
Non-occurrence of an A room was let for the sole purpose of overlooking the coronation
event which is the sole procession of a king, whose illness caused the procession to be
purpose of the contract postponed (Krell v Henry 1903).
(Note that the contract would not have been frustrated if the room had
been let for several days or for some other purpose also.)
Whether a contract has been frustrated is often a matter for professional judgement. It can be a
cause of significant uncertainty that a working professional will actively need to appreciate when
deciding how to proceed.
2 Remedies
Section overview
• Contractual disputes may be resolved by civil litigation in the courts or by other means.
• Damages are the main remedy awarded by the courts for breach of contract and are designed to
compensate the claimant by putting them in the position they would have been in, if the contract
had been performed.
• In some cases, a more appropriate remedy might be awarded, such as specific performance or an
injunction.
In this section, you will learn about the remedies available in the courts in an action for breach of
contract. However, you should be aware that the majority of contractual disputes will not reach the
courts and may be resolved by negotiation, arbitration or some other means such as mediation,
adjudication or expert determination. These alternatives to litigation are usually referred to as
‘alternative dispute resolution’ (or ‘ADR’) and are actively encouraged by the courts, even once court
proceedings have been commenced.
2.1 Damages
In a claim for damages the first issue is remoteness of damage. Here the courts consider how far
down the sequence of cause and effect the consequences of breach should be traced before they
should be ignored.
Under the rule in Hadley v Baxendale (see below) damages may only be awarded in respect of those
losses that may fairly and reasonably be considered as, either:
• arising naturally (ie, according to the usual course of things) from such breach of contract; or
• such as may reasonably be supposed to have been in the contemplation of both parties, at the
time of making the contract, as the probable result of the breach.
Hadley v Baxendale 1854
In real life, deciding whether losses are too remote is often a judgement call based on technical
knowledge and experience. When facing a scenario question on losses, it is important to focus on
just the facts that you are given and to apply only case law that is relevant to the situation.
The second issue to be considered is how much money (what ‘measure of damages‘) is needed to
put the claimant in the position they would have achieved if the contract had been performed. This is
sometimes referred to as protecting the expectation interest of the claimant. A claimant may
alternatively seek to have their reliance interest protected; this refers to the position they would have
been in had they not relied on the contract. In such cases, they are claiming for wasted expenditure
and the onus is on the defendant to show that the expenditure would not have been recovered if the
contract had been performed.
Anglia Television Ltd v Reed 1972
The facts: The claimant engaged an actor (the defendant) to appear in a film they were making for
television. The actor pulled out at the last moment and the project was abandoned. The claimant
sought compensation for the preparatory expenditure, such as hiring other actors and researching
suitable locations.
Decision: Damages were awarded as claimed. It is impossible to tell whether an unmade film will be
a success or a failure and, had the claimant sought compensation for loss of profits, they would not
have succeeded.
In a recent case, the court confirmed that a claim for wasted expenditure was also subject to the
general principle that an award of damages should not put a claimant in a better position than they
would have been in if the contract had been performed. Reliance damages will not be awarded
regardless of the anticipated profit to be made by the claimant, but would only be awarded where
their gross profits were likely to exceed their expenditure (Omak Maritime Ltd v Mamola Challenger
Shipping Co 2010).
Generally speaking, damages will only be awarded for actual financial loss. In very rare cases,
damages have been recovered for mental distress where that is the main result of the breach. It is
uncertain how far the courts will develop this concept.
Jarvis v Swan Tours 1973
The facts: The claimant entered into a contract for holiday accommodation at a winter sports centre.
What was provided was significantly inferior to the description given in the defendant’s travel
brochure. Damages on the basis of financial loss only were assessed at £32.
Decision: The damages should be increased to £125 to compensate for disappointment and distress
because the principal purpose of the contract was the giving of pleasure.
Mitigation of loss
In assessing the amount of damages, it is assumed that the claimant will take all reasonable steps to
reduce or mitigate their loss. They are not required, however, to take discreditable or risky measures
as these are not ‘reasonable’. The burden of proof is on the defendant to show that the claimant
failed to take a reasonable opportunity of mitigation.
Payzu Ltd v Saunders 1919
The facts: The parties had entered into a contract for the supply of goods to be delivered and paid
for by instalments. When the claimant failed to pay for the first instalment on the due date, the
defendant declined to make further deliveries unless the claimant paid cash in advance with their
orders. The claimant refused to accept delivery on those terms. The price of the goods rose, and they
sued for breach of contract.
Decision: The defendant had no right to repudiate the original contract and was therefore liable in
damages. However, the claimant should have mitigated their loss by accepting the defendant’s offer
of delivery against cash payment. Damages were limited to the amount of their assumed loss, had
the claimant paid in advance, ie, interest over the period of pre-payment. The judge commented that
“in commercial contracts, it is generally reasonable to accept an offer from the party in default”.
• An exclusion clause in a contract is one that purports to restrict or exclude liability for breach of
contract or negligence.
• An exclusion clause must have been properly incorporated in the contract if it is to be effective.
• It will be interpreted strictly against the party seeking to rely on it.
• An exclusion clause in a business-to-business contract may be rendered void or subject to the test
of reasonableness by the Unfair Contract Terms Act 1977.
When deciding whether an exclusion clause has been validly incorporated into a contract, it is
important to consider only the information that is relevant to the decision. For example, where a
document that has been signed is relevant but the precise wording of the clause is not.
Once an exclusion clause can be shown to be an incorporated term, the courts will interpret any
ambiguity in the clause against the person who relies on the exclusion.
Many legal issues are not clear-cut or easy to decide. Very often a professional’s experience will be
needed, in addition to evidence, if a conclusion is to be reached.
Contract in operation
Remedies
1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following questions
having studied this chapter. If not, you are advised to revisit the relevant learning from the topic
indicated.
2. Do you know the consequences of frustration under the Law Reform (Frustrated
Contracts) Act 1943? (Topic 1)
3. Can you explain the rule on remoteness of damages from the Hadley v Baxendale case?
(Topic 2)
4. Can you explain the difference between liquidated damages and a penalty clause?
(Topic 2)
5. Can you explain the rules on whether exclusion clauses are enforceable in commercial
and consumer contracts? (Topic 3)
A loss outside the natural course of events will only be compensated if the
circumstances are within the ‘s knowledge at the time of making the contract.
4 Name three types of event or change in current circumstances that will give rise to a contract being
frustrated.
5 Indicate whether the following statement is true or false.
True/False
A claimant must do all that they can to reduce the amount of the loss they
suffer.
7 When an anticipatory breach occurs, the injured party has two options. List these two options.
8 Name two types of Alternative Dispute Resolution (other than negotiation).
9 What is the rule set out in Hadley v Baxendale concerning remoteness of damage?
10 The amount awarded as damages is what is needed to put the claimant in the position they would
have achieved if the contract had been performed.
Requirement
What interest is being protected here?
A Expectation
B Reliance
11 Indicate whether the following statement is true or false.
True/False
12 Will a clause in a standard form contract that excludes or restricts liability for the following be
rendered void or subject to the reasonableness test under UCTA?
Void/Test
Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for
this chapter.
1 Correct answer(s):
D Performance has become substantially more expensive than was originally anticipated.
An increase in cost does not lawfully excuse non-performance of a contract.
2 Damages are a common law remedy designed to restore the injured party to the position they
would have been in had the contract been performed .
A loss outside the natural course of events will only be compensated if the exceptional
circumstances are within the defendant ‘s knowledge at the time of making the contract.
In assessing the extent of recoverable losses, the claimant is expected to mitigate their loss.
3 If a party is prevented from completing performance of their obligation by the other party, they may
bring a Quantum meruit action to claim for the amount of work already done.
True/False
When a contract is frustrated, under the Law Reform (Frustrated Contracts) False
Act 1943, any monies paid to the other party before frustration can be
recovered but expenses incurred by that other party cannot be recovered
or offset.
Expenses incurred in the performance of the contract before frustration may be recovered or offset
in the court’s discretion.
6
True/False
A claimant must do all that they can to reduce the amount of the loss they False
suffer.
They are only required to take all reasonable steps to mitigate their loss.
7 Two options when an anticipatory breach occurs:
• Treat the contract as discharged forthwith
• Allow the contract to continue unless and until there is an actual breach
10 Correct answer(s):
A Expectation
11
True/False
A court will never enforce a liquidated damages clause, as any attempt to False
prevent the injured party from pursuing a remedy through the courts is
void.
Void/Test
For other loss or damage arising from breach of contract or Subject to the
negligence reasonableness test
Agency
Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance
Learning topics
1 Agency and agents
2 Creation of agency
3 Duties and rights of an agent
4 Authority of the agent
5 Liability of the parties
Summary
Further question practice
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
Introduction
Learning outcomes
• Identify the role of agents, their duties and rights, and their authority to enter contracts on behalf
of a principal
Specific syllabus references for this chapter are: 1c.
4
Syllabus links
As outlined above, agency is the basis of partnership, which we will go on to look at later in this
syllabus.
4
Assessment context
This is an important area for your assessment. The sample paper contained five questions on agency
law. It is likely to be assessed in the context of partnerships.
Questions on the topics in this chapter will be set as multiple choice, multi-part multiple choice or
multiple-response questions. Some questions may involve an analysis of a brief scenario and the
identification of an appropriate response, which may be in the form of providing advice.
4
Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.
• Agency is a very important feature of modern commercial life and describes the relationship that
exists where one party, the agent, acts on behalf of another, the principal.
• We are concerned with the law of agency insofar as it relates to the agent purporting to enter into
a contract with a third party, on behalf of the principal.
• The basic principles of agency are relevant to the actions and liabilities of (among others) partners
and company directors.
Where an agency relationship exists, the agent, by entering into a contract, establishes privity of
contract between the principal and the third party. The contract is thus enforceable both by and
against the principal and third party. Generally speaking, the agent effectively drops out of the
picture and has no rights or liabilities in respect of it, provided they have acted within their authority.
It is as if the principal had made the contract themselves in the first place. The questions of authority
and liability are addressed in sections 4 and 5.
Section 2 describes the various ways in which an agency relationship may come into existence. The
question sometimes arises whether someone has acted as an agent or as an independent contractor
in their own right. For example, there are conflicting views (and much will depend on the
circumstances) in the case of a dealer who sells goods to a finance company, which then lets them on
hire-purchase: to what extent is the dealer the agent of the finance company? The test of whether
someone is an employee or independent contractor in relation to employment law is considered in a
later chapter. Similarly, there may be ambiguity over which party is the principal, for example in the
case of someone employed by an insurance company to solicit business: are they always the agent
of the insurance company or can they sometimes be said to be the agent of the insured?
In practice, there are many examples of agency relationships to which you are probably accustomed,
such as estate agents and travel agents. For the purposes of this course, you should appreciate, in
particular, how a director may be held to be an agent of the company and bind the company by their
acts and also how a partner is an agent of the partnership and may bind the firm by their acts.
Directors’ and partners’ authority is discussed in more detail in later chapters.
2 Creation of agency
Section overview
The agent does not form contracts with third parties on their own behalf and so it is not necessary
that they have full contractual capacity. The principal, however, must have full contractual capacity.
The business context is a very important consideration when determining the type of agency being
created. For example, agency by necessity is becoming less and less relevant as modern
communications improve.
2.4 Ratification
In certain circumstances, the relationship of principal and agent can be created or extended with
retrospective effect, that is, once the contract has been entered into by the agent and third party.
Ratification only validates past acts of the purported agent. It gives no authority for the future.
Thus, where A makes a contract on behalf of P at a time when A has no authority from P, P may later
ratify the contract. This will have the retrospective effect of establishing an agency as at the time the
contract was made. All parties are then in the same position as if the principal had been the original
contracting party, ie, the principal may sue or be sued by the third party and the agent no longer has
any liability.
The principal may only ratify if the following conditions are satisfied:
• The principal must have been in existence at the time of the agent’s act.
• The principal must have the legal capacity to make the contract themselves, both at the time the
act was carried out and at the time of the purported ratification.
• The agent must, at the time of making the contract, either name or sufficiently identify the
principal on whose behalf they are making the contract.
The principal must ratify the contract within a reasonable time and a ratification of part of the
contract will operate as a ratification of the entire contract (ie, the principal cannot just select such
parts of the contract as they consider to be to their advantage). In order to ratify the contract, the
principal must communicate a sufficiently clear intention of ratifying, either by express words or by
conduct, such as refusing to return goods purchased for them by an agent who lacked authority.
Mere passive inactivity will not amount to ratification.
The principal must exist at the time of the Clearly Esther does exist.
contract.
The principal must have legal capacity. There is no indication to the contrary.
The agent must name or sufficiently identify There appears to be no reason why David
the principal. wouldn’t tell Farouk that he is acting on behalf of
Esther.
Therefore, David can go ahead and make the contract with Farouk for Esther to ratify later, if Farouk is
happy to contract with Esther. If Esther does not want the goods, she will not ratify the contract.
Law, if it is a necessity
Ratification
The courts have always sought to ensure that a person does not abuse the confidence of another for
whom they are acting.
The position of principal and agent gives rise to particular and onerous duties on the part of the
agent, and the high standard of conduct required from him springs from the fiduciary relationship
between his employer and himself. His position is confidential; it readily lends itself to abuse. A strict
and salutary rule is required to meet the special situation (Armstrong v Jackson 1917).
When an agent agrees to perform services for their principal for reward there is a contract between
them. However, even if the agent undertakes their duties without reward (but provided there is some
consideration to make the contract valid), they have obligations to their principal.
The law implies the following duties into any contract of agency:
Accountability An agent must provide full information to their principal of their agency
transactions and account for all monies arising from them.
If they accept from the other party any commission or reward as an
inducement to make the contract with them, it is considered to be a bribe
and the contract is fraudulent. The principal who discovers that their agent
has accepted a bribe may dismiss the agent and recover the amount of the
bribe from them.
Boston Deep Sea Fishing & Ice Co v Ansell 1888
The facts: A, who was managing director of the claimant company, accepted
commissions from suppliers on orders that he placed with them for goods
supplied to the company. He was dismissed and the company sued to
recover from him the commissions.
Decision: The company was justified in dismissing A and he must account to
it for the commissions.
No conflict of The agent owes to their principal a duty not to put themselves in a situation
interest where their own interests conflict with those of the principal.
The agent who agrees to act as agent for reward has a contractual
Performance obligation to perform their agreed task. (An unpaid agent is not bound to
carry out their agreed duties unless there is other consideration.) Any agent
may refuse to perform an illegal act.
Obedience The agent must act strictly in accordance with their principal’s instructions
insofar as these are lawful and reasonable. Even if they believe
disobedience to be in their principal’s best interests, they may not disobey
instructions (unless they were asked to commit an illegal or unreasonable
act).
Personal The agent is usually selected because of their personal qualities and owes a
performance duty to perform their tasks themselves and not to delegate it to another.
(However, they may delegate in certain circumstances, for example a
solicitor acting for a client would be obliged to instruct a stockbroker to buy
or sell listed securities on the Stock Exchange.)
Confidence The agent must keep in confidence what they know of their principal’s affairs
even after the agency relationship has ceased.
Conversely, an agent has the following rights (or duties owed by the principal):
Remuneration The agent is also entitled to be paid any agreed remuneration for their
services by their principal. The entitlement to remuneration may have been
expressly agreed or may be inferred from the circumstances, for example by
reference to trade or professional practice. If it is agreed that the agent is to
be remunerated but the amount has not been fixed, the agent is entitled to a
reasonable amount.
Lien The agent has the right to exercise a lien over property owned by the
principal, ie, a right to retain and hold goods pending payment of sums
owed to them.
Agent/Principal
A duty of confidence
If you are not sure about what the duties of an agent are, think about what they need to do to act
ethically on behalf of their principal.
The contract made by the agent is binding on the principal and the other party only if the agent was
acting within the limits of their authority from their principal. In analysing the limits of an agent’s
authority, three distinct sources of authority can be identified:
• Actual express authority
• Actual implied authority
• Ostensible or apparent authority
The extent of the agent’s express authority will depend on the construction of the words used on
their appointment. If the appointment is in writing, then the document will need to be examined. If it
is oral, then the scope of the agent’s authority will be a matter of evidence.
An agent’s implied authority is often a matter of judgement. Base your decision on case law and your
practical experience.
Whether an agent has authority is a common problem in agency law. To help resolve the issue, you
will need to identify all the relevant information and base your decision on all the evidence you have.
True/False
• As mentioned earlier, generally speaking, a contract entered into by an agent and a third party
binds the principal and the third party but not the agent, who effectively drops out of the picture.
• There are, however, instances where this general rule will not apply and these are noted in this
section.
5.2 Where the agent has authority, but is not known to be an agent
In these cases, where a principal becomes known at a later date:
• either the agent or the principal may sue on the contract (but the agent’s rights are subordinate to
the principal’s); and
• either the agent or the principal may be sued on the contract (but the third party must choose
which one).
These rules will only apply where the agent’s authority existed at the time of making the contract and
the contract cannot be said to have been intended to operate only between the contracting parties
(on the basis of their express or implied intentions).
P P
Privity
(Contract enforceable by P + TP) Unless P ratifies
Authority No authority
A Contracts TP A Contracts TP
privity
Agency created,
giving agent authority
Ostensible/apparent (TP
Actual
acts on representation by P)
(Implied) incidental
Express
(Implied) usual
Rights • Indemnity
• Remuneration (‘reasonable’ if unspecified)
• Lien
1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following questions
having studied this chapter. If not, you are advised to revisit the relevant learning from the topic
indicated.
5. Do you know the circumstances where an agent will be personally liable on a contract?
(Topic 5)
True/False
A principal may, in certain circumstances, ratify the acts of the agent, which
has retrospective effect.
True/False
Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for
this chapter.
Yes/No
Ratification Yes
Agent/Principal
A duty to pay agreed remuneration, even if no benefit has been derived Principal
from their acts
True/False
As Michelle is employed in the purchasing department, she has implied authority to enter into
contracts on Natalia’s behalf.
Natalia has told Oliver that Michelle “deals with buying” so he is entitled to assume that she has the
authority to enter into this contract on Natalia’s behalf.
1 Agency is the relationship that exists between two legal persons, the principal and the
agent, in which the function of the agent is to form a contract between their principal and a
third party .
3 Correct answer(s):
C The agent must have the principal’s permission.
4
True/False
A principal may, in certain circumstances, ratify the acts of the agent, which True
has retrospective effect.
5 Correct answer(s):
A The authority that the principal represents to other persons they have given to the agent
6
True/False
An agent may disobey the instructions of the principal if they believe False
disobedience to be in the best interests of the principal.
True/False
Provided an agent has authority and is known to be an agent, they can False
never have any personal liability under the contract and only the
principal can be liable.
Generally speaking, the contract is only enforceable by the principal and the third party but this rule
is subject to a contrary intention being express or implied.
Negligence
Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance
Learning topics
1 The law of tort
2 The tort of negligence
3 Professional advice and negligent misstatement
4 Defences and damages
5 Vicarious liability
Summary
Further question practice
Technical references
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
Introduction
Learning outcomes
• Identify instances and consequences of negligence (particularly negligent misstatement) in a
given scenario
• Identify instances and consequences of vicarious liability in a given scenario
Specific syllabus references for this chapter are: 1e, f.
5
Syllabus links
Some of the issues relating to employees in this chapter will be looked at in more detail later in this
Workbook when it focuses on employment law.
Negligent misstatement will be a relevant factor when looking at the risks an assurance firm faces
and the quality processes put into place to combat them in your Audit and Assurance studies.
5
Assessment context
Being an important practical issue for accountants, you might expect around five questions relating
to negligence and vicarious liability in your assessment. Questions will be set as multiple choice,
multi-part multiple choice or multiple-response questions. Some questions may involve an analysis of
a brief scenario and the identification of an appropriate response, which may be in the form of
providing advice on liability for negligence.
5
The calculation of
damages is fairly
straightforward but
remember that the
losses must not be
‘too remote’.
Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.
• The law of tort includes negligence, which is considered in detail in this chapter.
• In a situation involving a breach of contract or crime, the law of tort may also be relevant.
1.1 Tort
The law of tort is a vast subject dealing with various wrongs done to an individual. The law protects
certain personal interests and where these are infringed, the law might offer redress, typically in the
form of damages or (in exceptional cases) an injunction.
Thus where personal security is infringed, for example, the torts of assault or false imprisonment
might apply and where a person’s property is infringed or damaged, the torts of trespass or nuisance
might apply.
In tort, no previous transaction or contractual relationship need exist. Indeed it is quite likely that the
parties involved will be complete strangers. Where the parties are in a contractual relationship and
there has been both a breach of contract and a tort committed, the claimant may prefer to proceed
in contract rather than tort (or vice versa) for reasons associated with the measure of damages or
limitation periods. The measure of damages in contract will be such amount as would put the
claimant in the position they would have been in had the contract been performed, whereas in tort,
the award will reflect the position they would have been in had the tortious act not taken place.
Broadly speaking, the limitation period (during which an injured party must take proceedings) is six
years from a breach of contract or six years from the damage caused by the tortious act being
suffered (or three years in the case of personal injury).
Robinson v P E Jones (Contractors) Ltd 2011
The facts: Defects in two chimney flues were discovered 12 years after the contractor built a house
for Robinson. Since a contractual claim was statute-barred, Robinson sued the contractor in tort.
Decision (Court of Appeal): Where a contractual duty of care is owed, it does not necessarily follow
that a duty of care is owed in tort also. Whether or not a tortious liability arose in this case depended
on the facts and the relationship between the parties, but was excluded in any event by a clause in
the contract which restricted liability to that set out in the National House-Building Council standard
agreement.
This clause satisfied the reasonableness test in UCTA and excluded any potential tortious liability for
economic loss. The following example illustrates how the same event can easily give rise to more
than one legal liability.
• The terms ‘negligence’ and ‘negligent’ may refer to the careless way in which an act is carried out,
or to the tort that arises when a person is in breach of a legal duty of care that they owe to
another, thereby causing that person harm or loss.
• Negligence is the most important modern tort. To succeed in an action for negligence, the
burden of proof is on the claimant to prove, on a balance of probabilities, that:
– the defendant owed a duty of care to the claimant to avoid causing injury, damage or loss;
– there was a breach of that duty by the defendant; and
– in consequence the claimant suffered injury, damage or loss.
Test Meaning
3 Fair, just and reasonable Is it fair, just and reasonable that the law should
impose a duty on the defendant on the facts of the
case?
In applying these tests, the court is essentially looking at the relationship between the claimant and
the defendant in the context of the damage suffered. The Nicholas H case was concerned with
economic loss, but the court held that the requirements would be equally applicable in cases of
physical damage to property.
Applying the four tests above is a good way to structure the problem of determining whether a party
owes another a duty of care.
Principle Explanation
Particular skill If the defendant professes a particular skill, the standard is that of a reasonable
person with that skill, ie, a reasonable accountant or reasonable electrician.
Lack of skill Peculiarities or disabilities of the defendant are not relevant, so the standard for
a learner driver is that of a reasonable driver and for a trainee accountant, that of
a reasonable accountant.
No hindsight The test is one of knowledge and general practice existing at the time, not
hindsight or subsequent change of practice.
Roe v Minister of Health 1954
The facts: A doctor gave a patient an injection taking normal precautions at that
time. The drug became contaminated in a way that was not understood at the
time and the patient was paralysed.
Decision: It was held that the proper test was normal practice based on the state
of medical knowledge at the time. The doctor was not at fault in failing to
anticipate later developments.
Body of In broad terms, a claim against a professional person will fail if they can point to
opinion a body of professional opinion that supports the approach taken and which the
court considers to be reasonable.
Advantage and In deciding what is reasonable care, the balance must be struck between
risk advantage and risk. (For example, a driver of a fire engine may exceed the
normal speed on their way to the fire but not on the way back.)
Emergency If a defendant acts negligently in an emergency situation, this will be taken into
account – the test is that of a reasonable person in the defendant’s situation.
Vulnerability If A owes a duty of care to B and A knows that B is unusually vulnerable, a higher
standard of care is expected.
Paris v Stepney Borough Council 1951
The facts: Paris was blind in one eye and was employed by the defendant on
vehicle maintenance. It was not the normal practice to issue protective goggles
since the risk of eye injury was small. A chip of metal flew into Paris’s eye and
blinded him.
Decision: There was a higher standard of care owed to Paris because an injury to
his remaining good eye would blind him.
To understand whether a party has breached a duty of care requires you to assimilate information
from a number of sources. You will need to consider the issue from a variety of different perspectives.
Where an adviser (such as an accountant, banker, solicitor or surveyor) makes a statement in some
professional or expert capacity, and where it is likely that others would rely on what they said, then
they may owe a duty of care in addition to their contractual commitments. This means a potential
liability in tort if their statement or advice turns out to be negligently made.
We shall now take a look at how the situation developed in this area historically, by examining some
important cases that changed things for those giving professional advice, before looking at how the
tort of negligent misstatement has developed in more recent times.
As noted earlier, pure economic or financial loss (in the absence of physical damage) used not to be
recoverable unless there was a liability in contract or evidence of fraud or deceit. The neighbour
principle laid down in Donoghue v Stevenson was restricted to tortious acts or omissions that
resulted in physical damage.
In negligence cases, the question of damage or loss being caused is rarely the decisive issue of the
case. In most cases, the point of law at stake is whether or not the defendant owed the claimant a
duty of care, and we shall see a number of cases that created the principles used to determine
whether professionals owe others a duty of care.
The turning point for negligence came in 1963 when the following landmark case ushered in a new
judicial approach to cases involving negligent misstatement.
Hedley Byrne & Co Ltd v Heller and Partners Ltd 1963
The facts: Hedley was an advertising agent acting for a new client, Easipower Ltd. The company
requested information from Easipower’s bank (Heller), on its financial position. Heller returned
noncommittal replies, which expressly disclaimed legal responsibility, and which were held to be a
negligent misstatement of Easipower’s financial resources.
Decision: While Heller was able to avoid liability by virtue of its disclaimer, the House of Lords went
on to consider whether there ever could be a duty of care to avoid causing financial loss by
negligent misstatement where there was no contractual or fiduciary relationship. It decided that, had
it not been for the disclaimer, Heller would have been liable for negligence, having breached the
duty of care, because a special relationship did exist.
In coming to the decision, one of the Law Lords made the following statement:
If someone possessed of a special skill undertakes … to apply that skill for the assistance of
another person who relies on that skill, a duty of care will arise … If, in a sphere in which a person
is so placed that others could reasonably rely on his skill … a person takes it on himself to give
information or advice to … another person who, as he knows or should know, will place reliance
on it, then a duty of care will arise.
Essentially, the judgment means that if a professional provides a special skill to somebody who then
relies on that skill, or if the professional knows or should know they would rely on it, then this creates
a special relationship between them and therefore a duty of care exists.
It is important to remember that liability can only arise where the defendant is in the business of
giving professional advice (such as practising as an accountant) and the statement is made within
that context. They will not be liable for advice given informally or on a social occasion.
One consequence of courts considering the context in which statements are made is that the
outcome of cases really depends on the specific circumstances involved. For example, if the
circumstances involve the preparation of accounts for shareholders or for a potential takeover
bidder. The Court of Appeal has recently made it clear that it will be very difficult to prove that a duty
3.4 Summary
As the Court of Appeal made clear in the James MacNaughton case, there is no single overriding
principle that can be applied to the complexities of every case. Rather, as you will have seen from the
cases mentioned in this chapter, there are a number of factors that the court will take into account
and some will assume a greater significance than others.
The factors with the greatest significance are:
• the purpose for which the statement is made and communicated
• the relationship between the professional, the recipient and any relevant third party
• the state of knowledge of the professional
• whether the professional could be said to have assumed responsibility to the claimant
• the size of any class to which the recipient belonged
• whether the third party was identified and known to the professional
• the extent of reliance by the claimant and whether that was foreseeable
• whether it is fair and equitable (and not an offence to public policy) to impose a duty of care
It is worth noting that the increasing litigation against professionals, particularly during the takeover
boom period of the late 1980s, led accountants to find ways to limit their potential liability. KPMG, for
example, incorporated its audit practice in 1995. Several large audit firms, for example Ernst & Young
LLP, have incorporated as Limited Liability Partnerships.
Negligence cases are often very complex and require judgment when applying the factors described
above. Be wary of any inconsistencies and contradictions in the information you are given, because
they may indicate that some information cannot be trusted.
3.5 Companies Act liability for auditor’s report and audited accounts
In addition to any liability in tort, an auditor also commits an offence under the Companies Act 2006
(TSO, 2006) if they recklessly cause an auditor’s report to contain any matter that is misleading or
false to a material extent (s.507). Such an offence is punishable by fine.
Also relevant to this question of professional liability are the following provisions of that Act:
• Any provision which exempts an auditor of a company (to any extent) from, or indemnifies them
against, liability for negligence (among other things) in relation to providing audited accounts is
void (save for an indemnity for costs against successfully defending proceedings or where a
liability limitation agreement applies) (s.532).
• A company may enter into a liability limitation agreement with an auditor, limiting their liability for
negligence (among other things) in the course of auditing accounts to a fair and reasonable
amount (s.534).
She was merely a trainee and therefore the objective standard of care
required is lower.
Yes/No
Claudia
Claudia’s firm
4.1 Defences
The three defences particularly relevant to a case involving negligence are:
Defence Application
Contributory negligence Where the defendant can show that the damage or loss suffered
was partly due to the claimant’s fault, the claimant’s damages will
be reduced by the court in proportion to their degree of fault. For
example, if a claimant would have received £100,000 but is found
to be 40% contributorily negligent, the damages awarded will be
£60,000. (Where there is concurrent liability in tort and contract,
this defence will also apply to reduce contractual liability.) The
defence is governed by the Law Reform (Contributory Negligence)
Act 1945 (HMSO, 1945).
Volenti non fit injuria This applies where the claimant voluntarily (ie, exercising free
(literally “to a willing person choice) agrees to undertake the legal risk of loss or damage at their
no injury is done”) own expense. Effectively it amounts to an agreement by the
claimant to exempt the defendant from a duty of care which
otherwise would be owed. The fact that a person knows that there
is a risk, or even consents to run that risk, does not mean volenti
Exclusion clauses Where there is an agreement between the parties that contains a
provision seeking to exclude or limit liability for negligence, it may
be subject to UCTA. Insofar as it relates to business liability for
death or personal injury caused by negligence, it will be void.
Provisions limiting liability for other types of damage caused by
negligence will be subject to the reasonable test. UCTA specifically
provides that a person’s agreement to, or awareness of, the clause
does not necessarily amount to voluntary acceptance of any risk.
4.2 Damages
Damages for negligence are compensatory and are intended to put the claimant in the same
position they would have been in had they not suffered any loss. They are normally awarded in a
single lump sum. As in contractual claims, damages will not be recovered to the extent that they are
considered to be too remote. When a person commits a tort with the intention of causing loss or
harm that in fact results from the wrongful act, that loss can never be too remote.
The loss is too remote unless it can be said that the type of damage that actually did occur was
reasonably foreseeable. Provided the kind of damage suffered was reasonably foreseeable, it does
not matter that it came about in an unforeseeable way, nor that it was more extensive than could
have been foreseen.
The Wagon Mound 1961
The facts: A ship was taking on oil in Sydney harbour. Due to negligence, oil was spilled onto the
water and it drifted to a wharf 200 yards away where welding equipment was in use. The owner of
the wharf carried on working because he was advised that the sparks were unlikely to set fire to
furnace oil. Safety precautions were taken. A spark fell onto a piece of cotton waste floating in the oil,
thereby starting a fire that damaged the wharf. The owners of the wharf sued the charterers of the
ship.
Decision: The claim must fail. Pollution was the foreseeable risk, fire was not.
Any conclusion on the amount of potential damages payable must take into account the possibility
of claiming contributory negligence, and may therefore be a ‘worst case’ scenario with damages
subject to a reduction in future.
• An employer may be liable for the tortious acts of their ‘employee’ provided there is a close
connection between the relevant act and the employee’s employment.
• A principal may be liable for the tortious acts of their agent where they are committed in
furtherance of an agency relationship.
• Partners in an ordinary partnership may be vicariously liable for the tortious acts of their fellow
partners where they are committed in furtherance of the partnership business.
Vicarious liability is a legal doctrine under which one person can be held legally responsible and
liable for the tortious acts of another person. Thus a person may be liable in tort in two ways:
• Primarily, if they commit a tort
• Vicariously, if their employee or agent commits a tort
Vicarious liability is a legal liability that may be imposed on a person even though they are free from
blame and in addition to the personal liability of the other person who committed the tort.
The doctrine has the advantage of providing an innocent tort victim with recourse against a
financially responsible defendant, but at the same time it does impose an additional burden on the
business or person held vicariously liable. In the context of employment, for example, this imposition
of liability in the absence of fault is a pragmatic recognition of the fact that the employer is likely to
have a greater ability to pay damages than the employee, is the best insurer against liability and is
able to pass the costs of such liability, or potential liability, to their customers. It has far less to do with
any argument that the employer should accept losses alongside the benefits of the employee’s work
or that they were careless in selecting the employee.
The law gives various Employers may be held Principals may be held Parners may be held liable
rights to persons. When liable for the tortious liable for the tortious act for the tortious acts of
such a right is infringed acts of employees of their agents their fellow partners
the wrongdoer is liable in
tort
To succeed in an action for negligence and claim damages the claimant must
prove that: The defendant might be
• the defendant has a duty of care to avoid causing injury, damage or loss able to rely on volenti or
• there was a breach of that duty by the defendant exclusion clause or
• in consequence the claimant suffered injury, damages or loss contributory negligence
In the landmark case of Donoghue v Whether there is a breach Finally the claimant must
Stevenson 1932 the House of Lords of the duty of care is a demonstrate that he
ruled that a person might owe a duty question of fact. The suffered injury or loss as a
of care to another with whom they standard applied is result of the beach
had no contractual relationship at generally the reasonable
all. The doctrine has been refined in person:
subsequent rulings, but the principle is • with D's skill The loss must be of a kind
unchanged • ignoring D's disabilities that was reasonably
forseeable in order not to
• without the benefits of
be too remote
hindsight
• taking into account
any emergency
• taking account of
victim's vulnerability
1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following questions
having studied this chapter. If not, you are advised to revisit the relevant learning from the topic
indicated.
2. Do you know the three things that a claimant must prove in order to be successful in a
claim for negligence? (Topic 2)
3. Can you explain the circumstances where a professional accountant will be liable for
negligence? (Topic 3)
4. Do you know the defences that a defendant can use against a negligence claim? (Topic
4)
5. Can you explain the circumstances where an employer will be vicariously liable for the
acts of an employee? (Topic 5)
True/False
When the court applies the maxim res ipsa loquitur, it is held
that the facts speak for themselves and the defendant does not
have to prove anything, since the burden of proof is on the
claimant.
5 What was the leading case on negligent misstatement that allowed recovery of non-physical
damage?
6 Which of the following would prevent a claim for negligence from being successful?
A The claimant followed a course of action regardless of the acts of the defendant.
B The defendant caused the harm to the claimant.
C The defendant was not yet fully qualified.
D The parties were proximate and the harm suffered was reasonably foreseeable.
E An intervening act broke the ‘chain of causation’.
F The duty of care was restricted by public policy.
7 Is the following statement true or false?
True/False
8 Name four of the matters to be taken into account by the court in considering cases of professional
negligence.
9 In order for the employer to be vicariously liable, under which circumstances must the tort have been
committed?
10 Is the following statement true or false?
Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for
this chapter.
Yes/No
She was merely a trainee and therefore the objective standard of care No
required is lower.
Daniel had intended to do as she advised anyway, so was not affected by Yes
her advice.
(1) The objective standard of care is the same for a trainee as a qualified accountant.
Yes/No
Claudia Yes
Claudia’s firm No
(1) If he can prove that the loss was due to her advice.
(2) Claudia’s firm will not be vicariously liable, as although she researched the matter at work, she
gave the advice in her own time and away from work premises and therefore not in the course of
her employment.
(3) Because of the answer to the above point.
1 Correct answer(s):
A True
2 Correct answer(s):
C Donoghue v Stevenson 1932
3 Three essential elements for a negligence claim:
• Duty of care
• Breach of that duty
• Consequential damage, injury or loss
4
True/False
When the court applies the maxim res ipsa loquitur, it is held False
that the facts speak for themselves and the defendant does not
have to prove anything, since the burden of proof is on the
claimant.
Res ipsa loquitur means “the facts speak for themselves” and will lead to an inference that the
defendant was in breach of the duty of care.
5 Hedley Byrne v Heller 1963
6 Correct answer(s):
A The claimant followed a course of action regardless of the acts of the defendant.
E An intervening act broke the ‘chain of causation’.
F The duty of care was restricted by public policy.
7
True/False
8 Any four:
• The purpose for which the statement was made and communicated
• The relationship between the parties
• The size of any class to which the recipient belonged
• The state of knowledge of the maker
• The reliance by the recipient
• Whether the professional assumed responsibility
9 Tort must have been committed:
• by an employee; and
• the employee must have been acting in the course of their employment (in a way that had a close
connection with the scope of their employment).
True/False
The principal’s liability is in addition to the agent’s liability and exists regardless of the agent’s ability
to satisfy the claimant.
Types of trade
Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance
Learning topics
1 Sole traders
2 Ordinary partnerships
3 Limited liability partnerships
Summary
Further question practice
Technical references
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
Introduction
Learning outcomes
• Identify the nature of a partnership and the authority given to partners
• Identify the differences between unincorporated businesses (sole traderships and partnerships),
limited liability partnerships and companies, show the advantages and disadvantages of
incorporation and recognise the circumstances when the veil of incorporation can be lifted
• Identify the procedures required to form a registered company or a limited liability partnership,
including any practical considerations, and the nature and contractual force of a company’s
memorandum and articles of association and identify the advantages and disadvantages of off-
the-shelf companies
• Identify the administrative consequences of incorporation or the formation of a limited liability
partnership including requirements regarding statutory books, accounts, meetings and the role of
the company secretary
• Identify the rights and duties which a member of a limited liability partnership possesses
Specific syllabus references for this chapter are: 1d, 2a, b, c and j.
6
Syllabus links
The practical effects of partnership will be relevant when looking in detail at audit firms and their
liability in the Audit and Assurance paper.
6
Assessment context
Partners’ authority will be assessed in the context of agency law. The law on partnerships may also be
assessed by requiring a comparison with companies. Questions in this chapter will be set as multiple
choice, multi-part multiple choice or multiple response. Some questions may involve an analysis of a
brief scenario and the identification of an appropriate response, which may be in the form of
providing advice, such as whether a partner or partners have a liability for the debts of the firm.
6
Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.
• In a sole tradership, there is no legal distinction between the individual and the business.
1.1 Introduction
In this chapter we shall study two types of unincorporated entity before we look at incorporated
entities and company law in the chapters that follow. There are two types of unincorporated entity
which we will consider – sole traders and partnerships. We shall begin by looking at sole traders.
A sole trader owns and runs a business. They contribute capital to start the enterprise, run it with or
without employees, and earn the profits or stand the losses of the venture. Sole traders are found
mainly in the retail trades (local newsagents), small scale service industries (plumbers), and small
manufacturing and craft industries.
Sometimes a sole trader is the best form of business for a client in terms of the business context and
their personal needs. Don’t assume that the best form of business is always going to be a partnership
or company.
2 Ordinary partnerships
Section overview
• A partnership is “the relation which subsists between persons carrying on a business in common
with a view of profit”.
• A partnership can be an informal arrangement or it can be formalised and regulated by a written
partnership agreement.
• A partnership can be termed an ‘ordinary’ (or traditional) partnership in order to distinguish it
from a limited liability partnership (see section 3).
• The Partnership Act 1890 governs ordinary partnerships.
Partnership is a common form of business association. It is flexible, because it can be either a formal
or informal arrangement, thus suiting both large organisations and small operations.
Some professions prohibit their members from carrying on practice through limited companies and
therefore operate as partnerships. However, some permit their members to trade as ‘limited liability
partnerships’ that share many characteristics with companies (and which are described in section 3 of
this chapter). Businesspersons are not so restricted and generally prefer to trade through a limited
company for the advantages this can bring.
2.1 Definition
A partnership is “the relation which subsists between persons carrying on a business in common with
a view of profit” (s.1 Partnership Act 1890 (HMSO, 1890)). This definition can be further explained as
follows:
Relation which subsists A partnership does not have a separate legal personality, it is merely a
relationship between persons.
Between persons ‘Person’ includes companies. There must be at least two partners.
In common Ie, as joint proprietors (normally evidenced by the sharing of profits). For
example, where a shop owner employs a shop assistant, they are both
concerned with running a business at a profit but they cannot be said to
With a view of profit The test is one of intention, so if partners plan to make a profit but
actually make a loss, that does not stop the arrangement being a
partnership. However, if the purpose of the common endeavour is
actually to gain business experience, for example, there is no
partnership (Davies v Newman 2000).
The word ‘firm‘ is correctly used to denote a partnership. It is not correct to apply it to a registered
company (though newspapers often do so). The word ‘company’ may form part of the name of a
partnership (for example, ‘Smith and Company’) but the words ‘limited company’ and ‘registered
company’ can only be applied to a registered company.
True/False
In England and Wales, an unlimited partnership has no existence distinct from the
partners.
Profits and losses These are shared equally in the absence of contrary agreement. If the
partnership agreement states that profits are to be shared in certain
proportions but is silent as to losses, then losses are to be shared in the
same proportions.
Management Every partner is entitled to take part in managing the firm’s business;
ordinary management decisions can be made by a majority of partners.
Change in business Any decision on changing the nature of the partnership’s business must
be unanimous.
Indemnity The firm must indemnify any partner against liabilities incurred in the
ordinary and proper conduct of the partnership business or in doing
anything necessarily done for the preservation of the partnership
property or business.
Variation The partnership agreement may be varied with the consent of all the
partners.
Records and accounts These must be kept at the main place of business and must be open to
inspection by all partners.
New partners New partners must only be introduced with the unanimous consent of
existing partners.
Capital deficiency The remaining partners share a capital deficiency (what a partner owes
but cannot pay back) not as a loss but in ratio to the amounts of capital
which they originally contributed to the firm.
In addition to the rights and duties set out in the Partnership Act, partners also owe fiduciary duties to
the partnership by reason of being fiduciaries (in the same way that some directors’ duties are
fiduciary in nature). These duties arise out of general principles of equity. For example, it is a breach
of the duty to act in good faith, to exercise a legal right (eg, to expel a partner) for an improper
motive. The fiduciary nature of their relationship also prohibits partners from keeping profits derived
from the partnership without the consent of the other partners and requires them to avoid conflicts
of interest without full disclosure. Breach of these fiduciary duties may render the partner responsible
liable to account to the partnership for any monies received or to make good any other loss suffered.
Following the basic laws of agency is a good basis for any decision on whether a partner is liable for
the debts of their firm.
• A limited liability partnership (LLP) is a corporate body, which combines the features of an
ordinary partnership with limited liability.
• It is governed by the Limited Liability Partnerships Act 2000.
• Its members are agents of the LLP.
• An LLP is wound up like a company, rather than being dissolved on a change of membership.
• Particular documents must be sent to the Registrar of Companies on and subsequent to
incorporation.
Despite being a relatively new type of business organisation, most professional partnerships are
formed as a Limited Liability Partnership (LLP). As a Chartered Accountant, it is highly likely that you
will be employed by an LLP and will deal with other LLPs throughout your career.
The concept of the Limited Liability Partnership was introduced by the Limited Liability Partnerships
Act 2000. This Act allowed partnerships to incorporate themselves and gain a number of advantages
that previously only companies enjoyed.
One of these advantages is the limited liability of partners in an LLP for the debts of the organisation
and from being personally liable to pay damages for any professional negligence claims made
against the firm. This limited liability comes from the fact that the LLP has its own identity in law (a
separate legal personality) that we shall study further when we look at companies. However, there are
also a number of other benefits from operating a partnership as a limited liability partnership instead
of an ordinary partnership that we shall consider as well.
Therefore, essentially an LLP is an incorporated partnership that has a legal personality separate
from that of its partners. This means that the LLP has unlimited liability for its debts, but the liability of
members for the debts of the partnership is limited to the amount of capital they have contributed to
the firm.
LLPs are regulated and have similar rules on governance and accountability as limited companies.
They are generally set up by firms of professionals – such as accountants and lawyers – who are
required by the rules of their professions to operate as partnerships, but nevertheless wish to have
the protection of limited liability.
An LLP should not be confused with a limited partnership registered under the Limited Partnership
Act 1907 (HMSO, 1907). A limited partnership requires at least one general partner who has control
of the management of the business and whose liability must be unlimited. The other partners are not
entitled to participate in management and cannot bind the partnership and their liability is limited to
the amount of capital they invested in the business.
You should apply professional scepticism to situations where an LLP says that they told a third party
that an individual was no longer a member. You should obtain relevant information (such as a letter
to the third party) that confirms what they say.
Recommending that an LLP is wound up is a serious decision because it affects all of the members.
Any such recommendation should be supported by evidence and reasoning.
Yes/No
1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following questions
having studied this chapter. If not, you are advised to revisit the relevant learning from the topic
indicated.
4. Do you know the one rule on the admission of new partners? (Topic 2)
5. Can you explain what happens to a limited liability partnership when a member leaves?
(Topic 3)
True/False
In England and Wales, an unlimited partnership has no existence distinct from the True
partners.
Ordinary partnerships are not incorporated and therefore have no separate existence from the
partners. The partners share equally in the venture’s profits subject to any contrary agreement.
Yes/No
1 Partnership is the relation which subsists between persons carrying on a business in common with a
view of profit.
2 Correct answer(s):
A True
3 Any five:
• To be involved in decision making
• To share in profits
• To examine accounts
• To insist on openness and honesty
• To veto new partners
• To be indemnified by fellow partners
4 Partnership property is assets beneficially owned by the partners (the firm). It does not have to
be in equal shares.
5 Correct answer(s):
D provided the third party doesn’t know that they lack actual authority and knows or believes them
to be a partner
6 Correct answer(s):
A True
7 Correct answer(s):
A Name of LLP
B Location of registered office
D Names of all members of the LLP
F Names of designated members
8 Correct answer(s):
B False
Members of an LLP are agents of the LLP but not of each other.
9 Correct answer(s):
B Audited accounts
C Confirmation statement
10 Correct answer(s):
A Yes
Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance
Learning topics
1 Characteristics of a company
2 Types of company
3 Formation of a company
4 A company’s name
5 Articles of association
6 Administrative consequences of incorporation
7 Accounts and audit requirements
8 Comparison between ordinary partnerships and companies
Summary
Further question practice
Technical references
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
Introduction
Learning outcomes
• Identify the differences between unincorporated businesses (sole traderships and partnerships),
limited liability partnerships and companies, show the advantages and disadvantages of
incorporation and recognise the circumstances when the veil of incorporation can be lifted
• Identify the procedures required to form a registered company or a limited liability partnership,
including any practical considerations, and the nature and contractual force of a company’s
memorandum and articles of association and identify the advantages and disadvantages of off-
the-shelf companies
• Identify the administrative consequences of incorporation or the formation of a limited liability
partnership including requirements regarding statutory books, accounts, meetings and the role of
the company secretary
• Identify the requirements of the Companies Act 2006 in respect of companies’ statutory accounts
and audit, including the exemptions for small and medium-sized companies and micro-entities
Specific syllabus references for this chapter are: 2a, b, c, e.
7
Syllabus links
As companies are fundamental in the business world, this chapter is relevant to most papers in your
syllabus. Elsewhere, you will study the audit of companies, corporation tax, financial companies,
managing companies and preparing company accounts, for example.
7
Assessment context
You might expect around 6 or 7 questions to address the areas covered by this chapter. Questions
on the topics in this chapter will be set as multiple choice, multi-part multiple choice or multiple-
response questions. Some questions may involve an analysis of a brief scenario and the identification
of an appropriate response, which may be in the form of providing advice.
7
Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.
• A company has a separate legal identity from its members and is, in law, a person in its own right.
This is one of the fundamental cornerstones of company law.
• The liability of the members of a company for the debts of the company may be limited. The
liability of the company itself is always unlimited.
• The ‘veil of incorporation’ said to be drawn between the company and its members may be lifted
in certain circumstances.
For the purposes of this Workbook, a company is an entity registered under the Companies Act
2006 (TSO, 2006) (‘CA’06’) or any earlier Companies Act. References to ‘the Act’ are to the
Companies Act 2006 unless otherwise stated.
The single largest piece of legislation ever made, the CA’06 is intended to be a comprehensive code
of company law, restating and replacing most of the relevant companies legislation that went before
it (principally the Companies Acts 1985 and 1989) and also introducing new law. Many of the
changes in law were designed to lighten the regulatory and bureaucratic burden on companies
(simplifying decision-making processes and capital maintenance provisions, for example), although it
remains to be seen whether the burden may actually be increased in some areas, such as
communication with nominated holders and the new duty on directors to promote the success of the
company (which could lead to differences in the way they conduct their business).
References to ‘the Act’ are to this statute and section numbers are given for ease of reference only
(the assessment will not require you to know section numbers).
1.2 Liability
As mentioned above, one of the key consequences of the fact that the company is distinct from its
members is that its members may enjoy limited liability. This means that, in the event of business
failure, the members will only be asked to contribute identifiable amounts to the assets of the
business, even though they are, essentially, the ones who own the business. Not surprisingly, most
companies are registered with limited liability. The amount members will be asked to contribute will
be any amount that is unpaid on their shares (including any premium). This means that their total
liability is the value of the share capital that they own.
However, some lenders may require directors and/or members to agree to repay a loan out of their
personal wealth should the company default on the debt. This is known as requesting a personal
guarantee, which is a promise by a person (the directors or shareholders) to assume a debt
obligation in the event of non-payment by the borrower (the company). Personal guarantees are a
means of protecting the lender by preventing the shareholders/members from hiding behind the
protection of limited liability. It is commonly used where the lender is very powerful (such as a bank)
and the borrower has no other source of funds available to it (such as a new or small company).
It is important that you understand that the company itself, on the other hand, is liable without limit
for its own debts. In an unlimited company, there is no limit on the company’s or the members’
liability. Thus, the question of limited liability is important when a limited company is unable to satisfy
all its debts. The amounts that members may be required to pay, in the event of a winding up,
depend upon the type of limited company, as follows:
Company limited by Any outstanding amount of the nominal value of any share that has not
shares been paid either by the original or a subsequent holder of the shares. If
the member’s shares are fully paid, there is no further liability to
contribute. Any premium (over the nominal value) that was agreed to
be paid for the share will also be owed to the extent that it has not
been paid, unless the shareholder at the time is not the original
shareholder (since the amount of premium is a debt that does not pass
with the shares).
Company limited by The amount they guaranteed to pay in the event of a winding up.
guarantee
A company, as a separate legal entity, may also have liabilities in tort and crime. However, it is
currently extremely difficult to prosecute a company successfully for a criminal offence.
COURTS
• To reduce tax liability Firestone Tyre & Rubber Co Ltd v Lewellin 1957: English
subsidiary (S) deemed to be agent of American holding
company (H) (thus rendering H liable to UK tax) where H
entered into agreement with distributors under which the
distributors should place orders with H, to be carried out by
S. In fact, S received orders direct, handled business
completely (free from control of H) and forwarded money
(less a percentage) to it.
• To give entitlement to Smith, Stone & Knight Ltd v Birmingham Corporation 1939:
compensation Compensation for compulsorily acquired premises was
payable to an owner-occupier (H in this case) but not a
tenant-occupier (S). Held that S occupied the premises as an
agent of H since it was wholly owned and the directors of H
and S were the same.
• To prevent evasion of excise ReH and others 1996: Where evasions were alleged to have
duty been committed by H, the court also allowed restraint of S’s
assets, refusing to recognise the companies as separate.
It is important to note, however, that cases such as these do not mean that groups of companies
will generally be regarded as a single entity. There are numerous examples of where the courts
have refused to lift the veil between companies within a group, including cases where creditors of
an insolvent subsidiary are not paid in full even though the holding company remains solvent or
where a claimant proceeds against a subsidiary company that is not as asset-rich as its holding
company.
To reveal true national identity and Daimler Co Ltd v Continental Tyre & Rubber Co (GB) Ltd
expose illegality 1916: A company was registered and had its registered
office in England. However, since all of its members with
control of the company (except one) were German, the veil
could be lifted to expose the company as an enemy alien.
Therefore trading with this company was against the law (in
wartime).
• To reveal national identity Re F G Films Ltd 1953: An English company was formed to
make an English film. In fact, the staff and finance were
American, the film was produced in India and there were
neither premises nor employees in England. The veil was
lifted to expose a ‘sham’ company with the result that the
marketing and other advantages available to British films
were not available in this case.
In addition to the courts sometimes exercising their discretion to lift the veil, legislation can also
provide for the veil to be lifted, usually in order to confer a personal liability on those who run a
company for breach of obligations imposed on the company. You should note that the following
examples are only legitimate illustrations of the veil being lifted if the directors or others (upon whom
liability is imposed) are also members of the company:
STATUTE
Trading without a trading certificate A public company must obtain a certificate from the
(s.767) Registrar before it commences to trade. Failure to do so
leads to personal liability for the directors for any loss or
damage suffered by a third party to a transaction entered
into by the company in contravention of this section.
Applying the rules of lifting the veil of incorporation in an assessment question requires you to use
your judgement to decide whether any of the situations in which the veil may be lifted can be
applied.
2 Types of company
Section overview
• Public companies are companies limited by shares and registered as public companies.
• Private companies may be unlimited, or limited by shares or guarantee.
• Public companies may re-register as private and vice versa.
• Limited companies may re-register as unlimited and vice versa.
Limited by shares Liability is limited to the amount of the nominal value, if any, unpaid on
(public or private) members’ shares held by them (including any premium payable by the
current owner in respect of them).
Unlimited (private There is no limit on the members’ liability. They can be compelled to
only) contribute as much as may be necessary to pay the company’s debts in full.
An unlimited company does not need to file annual accounts, subject to
certain conditions (for example, that it is not a subsidiary or a parent of a
limited company (s.448)).
Ability to commence Must have trading certificate May commence trading once
trading before it can commence trading incorporated.
(s.761).
Public offers Can offer its securities to the Prohibited from offering its
public (and may obtain a listing securities to the public (s.755).
from the stock exchange or other
investment exchange).
Name Must end with ‘public limited Must end with ‘limited’ or ‘Ltd’ (or
company’ or ‘plc’ (or Welsh Welsh equivalent) although
equivalent) (s.58). certain companies (including
Loans etc Loans to persons connected with These rules do not apply (unless
directors and quasi-loans and the company is associated with a
credit transactions to directors or public company). Only loans
connected persons need made directly to directors need
members’ approval (ss.198–202). members’ approval.
Directors Must have at least two directors Must have at least one.
(s.154).
Company Secretary Must have one (s.271). Need not have one (s.270).
Accounts and reports Must lay these before general Need not do so.
meeting.
Must file within six months Must file within nine months
(s.442). (s.442).
Appointment of auditors Must appoint auditors each year Existing auditors may be deemed
if necessary (s.489). to be re-appointed, subject to
conditions (s.487).
Reduction of capital Needs special resolution Needs only special resolution and
confirmed by the court (s.641). directors’ solvency statement
(s.642).
In addition, special rules apply to quoted companies with regard to publication of details on the
company website and directors’ remuneration reports. Quoted companies are also known as listed
companies. This is because their shares are listed (or quoted) on public stock exchanges.
A private company may apply to the Registrar of Companies to be re-registered as a public company
(or a public company as a private company) provided certain conditions and procedures are satisfied
(ss.90–101).
Choosing an appropriate corporate form for a given situation requires you to appreciate the context
in which the business operates, not just the desires of the client. For example, a client may desire the
status that owning a plc brings, but that choice might not be appropriate given their circumstances.
3 Formation of a company
Section overview
Document Description
Memorandum of A memorandum in the prescribed form stating that the subscribers (a) wish
association to form a company and (b) agree to become members of the company
and, in the case of a company with a share capital, agree to take at least
one share each. It must be authenticated by each subscriber.
Statement of It must state the maximum amount which each member undertakes to
guarantee contribute to the net assets of the company if the company is wound up
(applicable to a while they are a member or within one year thereafter.
company limited by
guarantee)
Statement of This is a statement that the requirements of the Act have been complied
compliance with.
Articles of association may also be submitted, but if none is supplied, the default articles will apply
(see section 5).
If the Registrar is satisfied that the registration requirements of the Act have been complied with, they
will register the documents and issue a certificate of incorporation, naming and describing the
company and giving its date of incorporation and registered number.
This certificate is conclusive evidence that the company is registered in accordance with the Act and
is a body corporate. If irregularities in formation procedure or an error on the certificate are later
discovered, it is nonetheless valid and conclusive (Jubilee Cotton Mills Ltd v Lewis 1924).
Note that a public company also needs to obtain a trading certificate before it can commence
trading. It must submit:
• an application stating (amongst other things) that the nominal value of the company’s allotted
share capital is not less than the ‘authorised minimum’; and
• a statement of compliance (s.762).
Any transaction in contravention of this provision will render any company officer in default liable to
a fine but the transaction will remain valid. Failure to obtain a trading certificate within a year of
incorporation may result in a compulsory winding up (s.122 Insolvency Act 1986).
• There are rules that restrict a company’s freedom to choose any name.
• A company’s name may be changed either through the company’s choice or as directed by the
Registrar.
• A company’s name must be disclosed in accordance with the Act.
The Act sets out rules that provide for certain company names to be prohibited, for a name to be
changed and requiring disclosure of a company’s name and business name (exceptions are set out in
ss.60–62).
Using the rules covering which company names are prohibited will help narrow down the possible
names that can be chosen for a new company.
5 Articles of association
Section overview
• Every company is required to have articles of association (‘articles’) and model articles apply
where a company does not register its own.
• Articles prescribe regulations governing the management of the company’s affairs, the rights of
the shareholders and the powers and duties of the directors.
• Articles form part of the constitution of a company and bind the company and its members.
• Articles may be altered by the company in general meeting.
A company’s articles form part of its constitution, along with all special resolutions and other relevant
resolutions and agreements (s.17). Sometimes a power conferred on a company by the Act is
expressed to be subject to any restriction or prohibition contained in the company’s articles (for
example, the power of a private limited company to reduce its capital). Where the Act prohibits
something permitted by the articles, the Act will prevail.
• Incorporation also requires a company to file statutory accounts that may be subject to audit. The
requirements for accounts and audit are dependent on the type and size of the company
concerned.
Every company must comply with Companies Act 2006 rules requiring the keeping of accounting
records and to file accounts that may or may not be subject to audit. The rest of this chapter focuses
on what these requirements are and how the rules differ depending on the type and size of the
company concerned.
Document Notes
Accounting records ‘Adequate accounting records’ must be kept that are sufficient to show
the company’s financial position at any time with reasonable accuracy,
including:
• daily entries of income and expenditure
• record of assets and liabilities
• (if applicable) statements of stock and stock takings
A company’s underlying accounting records must be kept for three years
in the case of a private company, and six years in that of a public one.
Annual accounts Under the Companies Act 2006, these are a balance sheet and profit and
(including group loss account. However, accounts produced under international
accounts) accounting standards are also permitted.
Consolidated group accounts are also required where the company is a
parent company.
The accounts must give a ‘true and fair view’ of the company’s financial
position in respect of its financial year. Notes to the accounts must deal
with employee numbers and costs and directors’ benefits.
The accounts must be approved by and signed on behalf of the board of
directors.
Directors’ report This must contain, in respect of the financial year, the:
(including • names of directors
consolidated report)
• principal activities of the company
• statement that the auditor is not unaware of any relevant audit
information
A recommended dividend and business review, (including principal risks
and uncertainties facing the company) are usually included although not
always (for example small companies).
(A consolidated report should be produced where group accounts are
prepared.) The directors’ report must be approved by and signed on
behalf of the board of directors.
Directors’ This applies to quoted companies only and is subject to the members’
remuneration report approval.
Strategic report Under the Companies Act 2006 (Strategic Report and Directors’ Report)
Regulations 2013 (TSO, 2013), large and medium-sized companies must
prepare a strategic report as part of their financial statements.
The purpose of the strategic report is to inform members of the
company and help them assess how the directors have performed their
duty to promote the success of the company.
The strategic report must contain a fair review of the company’s business,
and a description of the principal risks and uncertainties facing the
company.
The review required is a balanced and comprehensive analysis of the
development and performance of the company’s business during the
financial year, and the position of the company’s business at the end of
that year, consistent with the size and complexity of the business.
Companies (Directors’ This Act introduced additional directors’ report disclosure requirements
Report) and Limited concerning company emissions, energy consumption and energy
Liability Partnerships efficiency. It only applies to quoted companies, large unquoted
(Energy and Carbon companies and to large LLPs.
Report) Regulations
2018 (TSO, 2018)
Non-compliance with these provisions may render the company and any relevant officer liable to a
fine and, in some cases, imprisonment.
When answering a scenario question that requires you to apply the thresholds for company types
and exemptions from reporting and audit, you should focus on just applying the rules you have been
given to the facts in the scenario. Avoid basing your conclusion on non-relevant information.
• The key difference between a company and an ordinary partnership is that a company has a
separate legal personality, distinct from its members, whereas an ordinary partnership does not.
• There are many other differences, some incidental to this key difference and some arising from
specific statutory provisions.
The principal differences between a registered company and an ordinary partnership are given in the
tables below; the first noting the differences which are commonly seen as advantages of
incorporating a business, the second noting those commonly seen as disadvantages, or conversely,
advantages of running a business as a partnership.
Legal entity Separate legal entity distinct from its Has no independent existence
members
Liability Company liable on its contracts Partners (personally) are jointly and
severally liable on partnership
contracts
Ownership Company owns assets and ownership Partners own assets jointly
not affected by change of members
Transferability Members’ shares freely transferable A partner may assign their interest but
of ownership (subject to articles) the assignee does not become a
partner as a result
Administrative A company must file accounts and A partnership does not have to
consequences documents with the Registrar of comply with such formalities
Companies
Privacy A number of the company accounts Only partners have a right of access to
and documents must be open to the partnership accounts
public inspection
Formation
Promoters Mem & arts Off-the-shelf Name?
Application: name, But changes Not offensive
• Owe fiduciary
address, public? to name, directors, Approval if sensitive
duties
Limited? share capital & Not mislead as to form
• Liable on transfer of shares?
Statement of Not same/virtually same
pre-incorporation
capital or guarantee Change –
contracts
Statement of Compulsory
proposed officers NAME Voluntary
Business name?
Minimum 1 Minimum 2
Minimum members and
Perpetual succession Change = dissolution
change of membership
Freedom to transfer Assignee not partner
Publicity Privacy
1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following questions
having studied this chapter. If not, you are advised to revisit the relevant learning from the topic
indicated.
1. Do you know the principle of law that was decided by the Salomon v Salomon case?
(Topic 1)
2. Can you list five differences between a private and public company? (Topic 2)
6. Can you list five records that companies must keep? (Topic 6)
7. Do you know the criteria that companies must meet in order to be classified as micro,
small and medium? (Topic 7)
8. Can you explain the main advantages and disadvantages of ordinary partnerships versus
limited companies? (Topic 8)
True/False
4 Give three examples of where the courts might lift the veil of incorporation.
5 Give three examples of where statute provides for the veil of incorporation to be lifted.
6 True or false?
True/False
Response
a private company?
a public company?
True/False
13 True or false?
True/False
True/False
Small companies and dormant companies are not required to have their
accounts audited.
19 Name four differences between companies and ordinary partnerships that make incorporation
advantageous.
20 Name five differences between companies and ordinary partnerships that make partnership
advantageous.
Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for
this chapter.
1 A company is an entity registered under the Companies Act 2006 or any earlier Act.
2 Salomon v Salomon & Co Ltd 1897
3
True/False
An unlimited company has unlimited liability. A limited company has limited False
liability.
Any company has unlimited liability for its debts. In a limited company, the liability of the members
(not the company) is limited to the amount outstanding on their shares or the amount of any
guarantee.
4 Any three of the following:
• Where a subsidiary company can be regarded as an agent of the holding company
• To reveal the true national identity of a company
• Where the company is a quasi-partnership
• Where a company is a sham
5 Any three of the following:
• Where a public company trades without a trading certificate
• In cases of fraudulent or wrongful trading
• Where a director carries on business when they are disqualified
• Where directors form a new company with a name identical or similar to that of an insolvent
company
6
True/False
This is true in the case of private companies but a public company must have a company secretary.
7
Response
Ability to commence Must have trading certificate May commence trading once
trading before it can commence trading incorporated
(s.761)
Public offers Can offer its securities to the Prohibited from offering its
public (and may obtain a listing securities to the public (s.755)
from the stock exchange or other
investment exchange)
Name Must end with ‘public limited Must end with ‘limited’ or ‘Ltd’ (or
company’ or ‘plc’ (or Welsh Welsh equivalent) although
equivalent) (s.58) certain companies (including
charities) may be exempt from this
requirement (ss.59–62)
Loans etc Loans to persons connected with These rules do not apply (unless
directors and quasi-loans and the company is associated with a
credit transactions to directors or public company). Only loans
connected persons need made directly to directors need
members’ approval (ss.198–202) members’ approval
Directors Must have at least two directors Must have at least one
(s.154)
Company Secretary Must have one (s.271) Need not have one (s.270)
Accounts and reports Must lay these before general Need not do so
meeting Must file within nine months
Must file within six months (s.442)
(s.442)
Appointment of auditors Must appoint auditors each year Existing auditors may be deemed
if necessary (s.489) to be re-appointed, subject to
conditions (s.487)
Reduction of capital Needs special resolution Needs only special resolution and
confirmed by the court (s.641) directors’ solvency statement
(s.642)
9 Correct answer(s):
C valid and the directors are punishable by a fine
True/False
(1) Since the company was not in existence at the time of the contract.
(2) The Act provides that the original parties remain liable on the contract.
13
True/False
Where articles are not registered, model (‘default’) articles prescribed by the Secretary of State will
apply.
14 By special resolution, unless there is provision for entrenchment, in which case unanimous consent or
a court order is required.
15 The Act
16 Correct answer(s):
D Register of debentureholders
17 Adequate accounting records, that are sufficient to show the company’s financial position at any time
with reasonable accuracy, including daily entries of income and expenditure, a record of assets and
liabilities and (if applicable) statements of stock and stocktakings.
18
True/False
Small companies and dormant companies are not required to have their True
accounts audited.
Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance
Learning topics
1 Directors
2 Members
3 Majority rule and minority protection
4 Meetings and resolutions
Summary
Further question practice
Technical references
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
Introduction
Learning outcomes
• Identify the administrative consequences of incorporation or the formation of a limited liability
partnership including requirements regarding statutory books, accounts, meetings and the role of
the company secretary
• Recognise how a shareholder can influence the management of a company through meetings
and resolutions, including shareholders’ rights to requisition a meeting
• Identify the various statutory rights of shareholders to challenge the management of the company
under the Companies Act 2006 and the Insolvency Act 1986
• Identify the ways in which a director may be appointed and removed
• Identify directors’ duties, explaining the consequences of any major breach
• Identify the powers of directors and in what circumstances they will bind the company in a
contract with third parties
Specific syllabus references for this chapter are: 2c, h, i, k, l, m.
8
Syllabus links
The issue of a director’s authority to bind the company relates to agency, which you studied
previously.
You will come across references to the members of a company passing resolutions in many areas of
company law, including insolvency and in relation to share capital. This chapter explains how such
resolutions come to be passed, whether in general meeting or otherwise.
8
Assessment context
Questions on the topics in this chapter will be set as multiple choice, multi-part multiple choice or
multiple-response questions. Some questions may involve an analysis of a brief scenario and the
identification of an appropriate response, which may be in the form of providing advice, such as
whether or not a director has breached any of their statutory duties.
8
IQ4: Directors’
disqualification
This question
helps you learn
the various
disqualification
periods for
directors.
up could be used
by a minority
shareholder.
Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.
References to ‘the Act’ and section numbers refer to the Companies Act 2006 (TSO, 2006) (‘CA’06’)
unless otherwise stated. Section numbers are given for reference only.
De facto director ie, anyone who acts as a director, although not validly appointed as one.
(literally ‘director in They become a director (and subject to all provisions concerning directors)
fact’) by virtue of their conduct, rather than by formal appointment. They have the
same powers as a properly appointed director.
Shadow director ie, someone “in accordance with whose directions or instructions the
directors are accustomed to act” save where that person is merely giving
advice in a professional capacity, for example lawyers and accountants.
Whether someone is a shadow director is a question of fact.
Alternate director The articles usually provide that a director may appoint an alternate director
to attend and vote at board meetings which they are unable to attend. The
alternate director may be another director or an outsider. Some articles
provide for such an appointment to be subject to the approval of the board.
Executive director ie, a director who is also charged with performing a specific role, eg, a
finance director, usually as an employee of the company. The articles usually
provide for the directors to appoint one or more of their number to any
executive function and on such terms as to remuneration and powers as they
see fit. If an executive director ceases to be a director, their office will also
terminate, but without prejudice to any claim they may have for breach of
Non-executive ie, a director (appointed or otherwise as above) who does not have a
director particular function but generally just attends board meetings. Directors’
duties apply to non-executive directors in the same way as to executive
directors.
Many directors of public companies are non-executive and it is generally
regarded as a great strength for a company to have a board consisting of
both executive and non-executive directors. They are seen as helpful in
contributing an independent view to the board’s deliberations and ensuring
the continuing effectiveness of the executive directors and their
management of the company’s affairs.
A company normally appoints a chair of the board of directors who also acts
as chair at general meetings. They are usually regarded as a non-executive
director.
Managing director The articles usually provide for the directors to appoint one or more of their
(MD) number to be managing director(s), charged with carrying out day-to-day
management functions.
A director’s actions are valid even if their appointment is subsequently found to have been defective
or void (s.161).
Any change in the directors of a company should be recorded in the company’s register of directors
and notified to the registrar within 14 days.
Section 1 of the Company Directors Disqualification Act 1986 provides that a court may formally
disqualify any person from being (without leave of the court) a director (including a shadow director),
liquidator, administrator, receiver or manager of a company’s property or in any way directly or
indirectly being concerned or taking part in the promotion, formation or management of a company.
Disqualification is considered in section 1.8.
In addition, the articles may provide that a director must vacate office if they become bankrupt or of
unsound mind, or if they are absent from board meetings for, say, six consecutive months and the
directors resolve that they should vacate office on that account.
Restriction Explanation
Statutory (general) The directors are statutorily bound to exercise powers only “for the purpose
for which they are conferred” (see section 1.5).
Statutory (specific) For example alteration of the articles and reduction of capital need a special
resolution, which the directors must secure from the shareholders in general
meeting before they can act. Directors’ actions which expressly require
members’ approval are detailed in section 2.3.
Articles For example the articles may set a maximum amount that the directors are
entitled to borrow, any greater amount needing approval of the company in
general meeting. (As to whether such a restriction will be effective against a
third party, see section 1.4 below.)
Members The members can exercise control over the directors’ powers:
• by passing a special resolution to alter the articles, thereby re-allocating
the powers between the board and the general meeting
• ultimately by removing directors from office
The directors’ powers are vested in them as a collective body and are exercised by the directors in
board meetings. Generally speaking, it is considered sufficient if the directors are in communication
with each other, usually by telephone, rather than necessarily being in one place at the same time
and articles may make such provision. Equally, even if the directors are assembled together, there
can be no board meeting if any of the directors object to a meeting being held in those
circumstances.
Authority Explanation
Express Binding
Implied Binding. Managing directors, and to some extent other executive directors
(such as sales directors or finance directors), are much more likely to bind the
company by their actions, since greater powers are usually delegated to them.
Thus a managing director has implied usual authority to make general business
contracts on behalf of the company (in addition to any actual authority given to
them by the board).
There is little guidance from statute or case law, on the other hand, on what
authority might be deemed to attach to non-executive directors or directors in
lower or middle management, but it will not be as wide ranging as that
attaching to a managing director. (Indeed, such case law as there is suggests
that it is very limited indeed.)
Ostensible Binding. If the board permits a director to behave as if they were a managing
director or give the impression that they are one, that director will have the
apparent or ostensible authority to enter into all commercial contracts relating
to the business as a managing director would have and to bind the company in
respect of them.
It might be helpful to revise the principles of agency that you studied previously, and in particular the
case of Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd 1964 in respect of managing
directors. Where a director would have authority but for a restriction placed on it, the position is
governed by s.40. This provides that “in favour of a person dealing with a company in good faith, the
power of the directors to bind the company or authorise others to do so, is deemed to be free of any
limitation under the company’s constitution” (s.40).
Note in particular:
• The section relates to any transaction or dealing between the company and a third party (ie, not
just to contracts).
• The other party is deemed to be acting in good faith unless the contrary is proved (and will not
be deemed to be acting in bad faith just because they know of the limitation).
• The limitations to be disregarded include any imposed on the directors by resolution or
agreement of the members.
Section 41 provides that s.40 will not apply where the person dealing with the company is a director
or person connected with a director. In such cases, the transaction becomes voidable at the instance
of the company and that party is liable to account for any gain and to indemnify the company against
any loss.
Duty Explanation
If the majority approve what has been done (or have authorised it in advance)
however, that decision is treated as a proper case of majority control to which the
minority must normally submit (see section 3).
To promote A director must act in the way they consider, in good faith, would be most likely to
the success promote the success of the company for the benefit of its members as a whole.
of the They should have regard to:
company
(s.172) • the likely long-term consequences of any decision
• the interests of the company’s employees
• the need to foster the company’s businesses relationships with suppliers,
customers and others
• the impact of the company’s operations on the community and the
environment
• the desirability of the company maintaining a reputation for high standards of
business conduct
• the need to act fairly as between members of the company
The duty is expressed to be subject to any legal rule or provision that requires
directors, in certain circumstances, to have regard to the interests of creditors.
What will promote the success of the company is a matter for the directors’ good
faith judgement.
To exercise It does not mean that they are not exercising independent judgement where they
independent act in accordance with:
judgement • an agreement duly entered into by the company that restricts the future
(s.173) exercise of discretion by its directors; or
• the company’s constitution.
To exercise ie, the care, skill and diligence that would be exercised by a reasonably diligent
reasonable person with:
care, skill and • the general knowledge, skill and experience that may reasonably be expected
diligence of a person performing their functions as director
(s.174)
• their actual general knowledge, skill and experience
Thus it is no excuse for a director to say that they lacked expertise if a reasonable
director in their position would have that expertise. Furthermore, their actual
expertise may result in a higher standard than that of the reasonable director. The
courts have held, for example, that a director who signs an insurance proposal
without reading it may be liable in negligence.
An executive director with expertise in a particular area, or even a non-executive
director who is qualified or experienced in a relevant discipline, will be expected
to show a higher standard of care than simply attending board meetings. Even
someone with no commercial or business experience or qualification is required
(by the Act) to demonstrate the care that may be expected of a person fulfilling
their director’s role. Simply attending board meetings and not attending to the
company’s interests in between meetings is unlikely to be sufficient (unless it can
be shown that a director’s failure to prevent a fellow director’s wrongdoing did not
cause or contribute to the loss suffered).
Lexi Holdings plc (in administration) v Luqman 2009
The facts: Two sisters and their brother were directors of a company. The brother
had convictions for offences of dishonesty in the past. The sisters knew this but
played no part in the company, demanded no explanations from their brother of
his business dealings and did not advise the other directors, auditors and the
bank of his convictions. The brother took nearly £60 million in fictitious loans, false
facility letters and by misappropriation of company funds.
Decision: The Court of Appeal held that the sisters were, or ought to have been,
aware of various matters in relation to the fraud perpetrated on the company by
their brother. As a result, they were liable as they were in breach of their fiduciary
and common law duties of care owed to the company.
To avoid A director must avoid a situation in which they have or can have a direct or
conflict of indirect interest that conflicts or possibly may conflict with the interests of the
interest company or another duty. This duty is particularly applicable to the exploitation of
(s.175) any property, information or opportunity, (regardless of whether the company
could actually take advantage of it) but is expressly stated not to apply to any
conflict arising in relation to a transaction or arrangement with the company
(where ss.177 and 182 apply, see below).
Towers v Premier Waste Management Ltd 2012
The facts: A company director accepted a personal loan of equipment from a
customer without charge and without disclosing the transaction or seeking
approval of it. The customer then invoiced the company, which sued the director
for breach of duty.
Decision: The Court of Appeal held that the director had gained an advantage
from a potential conflict and had disloyally deprived the company of the
opportunity to object to an opportunity being diverted from the company to the
director personally. It was irrelevant that the company had suffered no loss or that
the director had no corrupt motive.
The duty is not infringed if the matter has been authorised by the directors. This
may happen:
• in a private company, provided the company’s constitution does not invalidate
such authorisation; or
• in a public company, provided the company’s constitution expressly allows
such authorisation.
In each case, the relevant director cannot be counted towards a quorum and their
votes will not be included in determining whether the authorisation is given.
If such authorisation is given there is no need for further approval by the members
unless the company’s constitution so provides.
If the case falls within the statutory provisions for matters requiring members’
approval (and these provisions are satisfied), then the director does not also need
to comply with this duty.
Not to accept A director must not accept a benefit from a third party by reason of their:
benefits from • being a director; or
third parties
(s.176) • doing (or not doing) anything as director.
Unless the acceptance of the benefit cannot reasonably be regarded as likely to
give rise to a conflict of interest.
If the case falls within the statutory provisions for matters requiring members’
approval (and these provisions are satisfied), then the director does not also need
to comply with this duty.
To declare Provided the director is, or ought reasonably to be, aware of the situation, they
interest in must declare the nature and extent of any such interest (direct or indirect) to the
proposed other directors, unless it cannot reasonably be regarded as likely to give rise to a
transaction or conflict of interest.
arrangement The notice may be made:
(s.177)
• at a board meeting;
• by notice in writing; or
• by a general notice, ie, that they have an interest in the third party and is
therefore to be regarded as interested in any transaction or arrangement with
that third party (in which case they should take reasonable steps to ensure that
such general notice is brought up at the next board meeting).
Provided such declaration is made, there is no need for approval by the members
or the board, unless the company’s constitution so provides or unless it is an
arrangement between a director and the company for the transfer of a ‘substantial
non-cash asset’ (see section 2.3).
Note that a specific duty exists likewise in relation to existing transactions or
arrangements as soon as is reasonably practicable (s.182). This duty applies (like
the other duties of directors) also to shadow directors (s.187). Breach of this
specific duty is punishable by fine.)
A person may continue to be subject to the duties in ss.175 and 176 even after they cease to be a
director, in certain circumstances (s.170 (2)).
One or more of the general duties may overlap, in which case each will apply. For example, taking a
bribe from a third party would contravene the duty not to accept benefits from third parties (s.176). It
might also amount to a failure to promote the success of the company for the benefit of its members
(s.172) and/or a failure to exercise independent judgement (s.173).
Solution
Poppy is under a duty to avoid any situation in which she has an interest that, even potentially,
conflicts with the company’s interests, even if the company is not actually prejudiced as a result (it
may even fare better as a result). However, this duty does not apply to a conflict of interest arising in
relation to a transaction with the company, as is the case here. The relevant duty, with which Poppy
must comply, is a duty to disclose her interest to the other directors pursuant to s.177. She should
make such disclosure at a board meeting or in writing. She could provide a general disclosure of the
nature and extent of her interest in the firm, so that she is to be regarded as interested in any
transaction with it. Such general notice should be given at a board meeting or brought up at the next
meeting following it. If she fails to do so, the contract will be voidable at the instance of the company
and she could be liable to indemnify the company against any loss.
A disqualification order for Where a person has been persistently in default in relation to
up to five years may be provisions of company legislation (and three convictions for
made: default in five years are conclusive evidence of persistent default).
A disqualification order must Where a person has been a director of a company which has at
be made, for a minimum of 2 any time become insolvent (whether while they were a director or
years and a maximum of 15 subsequently) and their conduct as a director of that company
years: makes them unfit to be concerned in the management of a
company. (The courts may also take into account their conduct as
a director of other companies, whether or not these other
companies became insolvent.) Directors can be disqualified under
this section even if they take no active part in the running of the
business. In uncontested cases, and where it is considered
expedient in the public interest, the Secretary of State may accept
a disqualification undertaking instead of seeking a disqualification
order (ie, an undertaking that the director will not act as a director
etc, or be concerned in the management etc, of a company).
Note that a bankruptcy order made against a person automatically disqualifies them from acting as
a director of a company or being concerned in the management or promotion of a company (s.11).
Offences for which directors have been disqualified include the following:
• insider dealing
• failure to keep proper accounting records
• failure to read the company’s accounts
• loans to associated companies on uncommercial terms to the detriment of creditors
The courts’ approach has been to view ‘ordinary commercial misjudgement’ as insufficient to justify
disqualification.
Re Uno, Secretary of State for Trade and Industry v Gill 2004
The facts: A group consisting of two furniture companies carried on trading while in serious financial
difficulties, while the directors tried to find a way out of the situation. Uno continued to take deposits
from customers for furniture to fund its working capital requirements.
Decision: The directors were not disqualified for acting in this way as their behaviour was not
dishonest or lacking in commercial probity and did not make them unfit to manage a company. They
had been trying to explore realistic opportunities to save the businesses and were not to blame for
the eventual collapse of the businesses and the subsequent loss of customers.
A lack of commercial probity, or gross negligence or total incompetence, however, might render
disqualification appropriate.
Scenario Period
Fraudulent trading
Wrongful trading
Where the court considers that their conduct makes them unfit to be considered
in the management of a company
• Shareholders, being members of a company with a share capital, effectively own the company.
• The members exercise control over the directors where required by law and the company’s
articles.
Any subscriber of a company’s memorandum and any person entered on the company’s register of
members is a member of the company. A company may be formed with a single member, however, if
it is the company must include a statement on its register that there is only one member. Subject to
limited exceptions, a company cannot be a member of its holding company. Where a member owns
shares in a company, they are called a ‘shareholder’.
Service contracts (s.188) Approval is required if the service The provision is void and
contract provides for a director’s the contract is thereafter
employment to be a guaranteed term of deemed to include a term
two years or more (ie, not terminable by entitling the company to
the company in a lesser period or only in terminate it at any time on
specified circumstances). giving reasonable notice.
A written memorandum setting out the
proposed contract must be provided to
the members prior to the resolution
being passed.
Substantial property Approval is required for any arrangement The company faces no
transactions (s.190) where a director is to acquire from the liability for failure to obtain
company (or the company from the approval. The transaction is
director) a substantial non-cash asset, ie, voidable at the instance of
one (or more) whose (aggregate) value: the company except in
• exceeds 10% of the company’s asset specified circumstances,
value and is more than £5,000; or unless the members give
approval within a
• exceeds £100,000. reasonable period.
The section does not apply to The director (and possibly
transactions permitted under a relevant others) is liable to account
service contract or to payments for loss of to the company for any
office. gain and to indemnify the
There are other exceptions applicable to company against any loss
group companies, companies in winding or damage.
up or administration and to transactions
on recognised investment exchanges.
Loans to directors etc Approval is required for any loan by a The transaction is voidable
(s.197) company to a director or for any at the instance of the
guarantee or security by a company in company, except in
connection with a loan made by another specified circumstances,
party to a director. A written unless it is approved by the
memorandum setting out the details of company within a
the transaction proposed must be given reasonable period.
to the members. The director (and possibly
There are similar There are exceptions for: others) is liable to account
provisions dealing with to the company for any
• expenditure on company business, gain and to indemnify the
quasi-loans to directors defending proceedings or regulatory
and loans and quasi- company against any loss
action or investigation or damage.
loans to persons
connected with • minor transactions or ones in the
directors, credit ordinary course of business
transactions (public • intra-group transaction
companies only) and • money-lending companies
transactions related to
any of the above
Payments for loss of Approval is required for payments or The payment is held on
office (s.217) benefits to be made on loss of office or trust for the company.
retirement. Any director who
A written memorandum of the proposed authorised the payment is
payment (or other benefit) must be sent liable to indemnify the
to all members. company for any loss.
Note that directors still owe their general duties even if one of the above provisions apply (s.180).
This means that directors should only approve a loan to another director if they are confident that it
will not offend the duty to promote the success of the company. On the other hand, if members’
approval is sought for a loan to a director, then the duties to avoid conflicts of interest and not to
accept benefits from third parties will not apply. This is because the members have approved the
transaction, so even if there is a conflict of interest, they have agreed that they are happy with the
arrangement.
• Generally speaking, the company is controlled by the will of the majority. If the minority objects to
the majority’s actions, the basic rule is that it has no recourse because the company is the proper
claimant.
• However, the minority is given the right by statute to object in certain circumstances.
• Any member may also bring an action against the directors (on behalf of the company) for breach
of duty or negligence against the directors.
• Any member may apply to the court for relief where the affairs of the company have been
conducted in an unfairly prejudicial manner.
• Any member may, as a last resort, petition the court to wind up the company on the ground that it
is just and equitable to do so.
To advise a minority shareholder of their rights firstly requires you to appreciate the context they are
in; that is, it is the majority that control a business. This means the minority will have to accept that
they will not always be happy with the decisions that the business makes.
Subject Required
Variation of class rights Holders of ≥ 15% of class of shares (or ≥ 15% of members
where no share capital) can apply to court for cancellation
(s.633)
Payment out of capital by Any member (or creditor) can apply to court to prohibit the
private company for the transaction (s.721)
redemption or purchase of its
shares
The bullet points above concerning the factors that courts will consider when deciding whether to
accept permission for a derivative action claim can be used as a checklist by the client to determine
whether to proceed in the first place.
When a client is seeking relief for unfairly prejudicial conduct, you need to exercise professional
scepticism. Remember that they are likely to be angry and upset and therefore are seeing things
from a biased perspective. You will need to come to your own conclusion of whether the conduct
was truly unfairly prejudicial.
Yes/No
Advising a client to seek a just and equitable winding up should be the last resort as it will mean the
end of the company. You should make sure that any such decision is based on sound reasoning and
all of the available evidence.
• Decisions affecting the existence, structure, and constitution of a company are reserved to the
company in general meeting, rather than the directors.
• Certain matters to be carried out by the directors also require a decision in general meeting.
• A decision of a company in general meeting is only valid and binding if the meeting is properly
convened by notice and if the business of the meeting is fairly and properly conducted. Therefore
the statutory rules on notice, quorum, proxies and voting need to be followed.
• The decision may need to be passed by an ordinary or a special resolution (depending on the
subject matter).
• Private companies are permitted to pass written resolutions, which means that they do not need
to hold general meetings except in very limited circumstances.
• There are also rules governing class meetings and single member companies.
Note that there are special rules in relation to ‘traded companies’, ie, companies with shares that
carry voting rights and are admitted to trading on a regulated market in an EEA state by or with the
consent of the company. (These rules are found in the Companies (Shareholders’ Rights)
Regulations 2009 (TSO, 2009).)
For an AGM
Power
subject to
Appointment by Removal by ordinary resolution
ordinary resolution Death/winding up
Articles or Resignation
question of fact Directors Disqualification
Duties
Act within Promote Independent Care and skill Avoid Not accept Disclose interest
powers success judgement and diligence conflict benefits in transactions
Breach?
s.260
Fraudulent trading
Wrongful trading
Personal Criminal
Disqualification
liability sanctions
Discretionary Mandatory
Shareholders'
agreement Members Rights
Articles Majority
rule
APPROVAL
ACTION
over directors
Service s.260
Loans etc Personal s.122
contracts derivative
rights winding up
action
Substantial
Payments for Specific s.994 unfairly
property
loss of office statutory prejudicial
transactions
circumstances conduct
1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following questions
having studied this chapter. If not, you are advised to revisit the relevant learning from the topic
indicated.
3. Can you state three matters involving directors that require the approval of members?
(Topic 2)
A public company must have at least directors. A private company must have at
least director.
True/False
4 Name two ways which indicate that the power of the directors is subject to the will of the members in
general meeting.
5 List six of the general duties imposed on directors by CA’06.
6 Indicate if the following statement is true or false.
True/False
The test of whether a director exercised reasonable care, skill and diligence
is partly objective, ie, the standard reasonably to be expected of someone
performing their role as director, but also partly subjective if having regard
to their actual general knowledge, skill and experience would require a
higher standard.
True/False
The offences of wrongful trading and fraudulent trading only apply when a
company goes into insolvent liquidation and may give rise to a personal
liability on the part of a director.
8 In what circumstances might the Secretary of State accept a disqualification undertaking instead of
seeking a disqualification order?
A Where the director has participated in wrongful trading
B Where the director is considered unfit to be concerned in the management of a company
C Where the director has been in persistent default of company law filing requirements
9 What is the principal advantage of a shareholders’ agreement?
10 Name three matters that concern directors but require approval of the members in a general
meeting and state briefly the consequences of breach.
11 State the rule in Foss v Harbottle.
12 What are the three possible actions available to a minority who is unhappy with the action of the
majority?
Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for
this chapter.
Scenario Period
Fraudulent trading 3
Wrongful trading 3
Where the court considers that their conduct makes them unfit to be considered 1
in the management of a company
Yes/No
1 A public company must have at least two directors. A private company must have at least one
director.
2 A shadow director is someone in accordance with whose directions or instructions the directors are
accustomed to act.
3
True/False
True/False
The test of whether a director exercised reasonable care, skill and diligence True
is partly objective, ie, the standard reasonably to be expected of someone
performing their role as director, but also partly subjective if having regard
to their actual general knowledge, skill and experience would require a
higher standard.
True/False
The offences of wrongful trading and fraudulent trading only apply when a False
company goes into insolvent liquidation and may give rise to a personal
liability on the part of a director.
Fraudulent trading applies whether or not a company has been or is in the course of being wound
up. It is true, however that the commission of both offences can lead to a personal liability to
contribute to the company’s debts.
Service contracts Provision is void and contracts deemed to include provision for
termination on reasonable notice
Substantial property Contract is voidable, director liable to account for any gain and
transactions indemnify against any loss
Loans to directors etc Contract is voidable, director liable to account for any gain and
indemnify against any loss
Payments for loss of Payment is held on trust for the company, director liable to indemnify
office for any loss
11 In order to redress a wrong done to a company or its property or to enforce its rights, the proper
claimant is the company itself and not a member or members of the company.
12 Three possible actions:
• Derivative action under s.260 (if majority represented by directors)
• Derivative action under s.994 for unfairly prejudicial conduct
• Petition for the winding up of the company on the just and equitable ground (s.122 IA ‘86)
13 The following two circumstances are correct:
(1) An AGM every year
(2) Wherever its net assets are half or less of its called-up share capital
14 The following three instances are when a written resolution cannot be used:
(1) In a public company
(2) To remove an auditor
(3) To remove a director
15 Correct answer(s):
D 28 days
16 The vote on a poll. If a poll is taken, the result of the previous show of hands is disregarded.
Companies: finance
Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance
Learning topics
1 Shares
2 Share capital
3 Loan capital and charges
Summary
Further question practice
Technical references
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
Introduction
Learning outcomes
• Identify the procedures for the issue of shares, including issues at a premium and pre-emption
rights
• Identify aspects of capital maintenance including
– reduction of capital
– redemption and purchase of a company’s own shares
– financial assistance for the purchase of a company’s own shares
– distribution of profits
• Identify share transfer requirements and disclosure requirements
• Identify the nature of fixed and floating charges, the rationale for the selection of a particular type
of charge, and the procedures for registering them
Specific syllabus references for this chapter are: 2d, f, g and n.
9
Syllabus links
In the previous chapter, you learned about companies limited by shares and this chapter now
explores the financing of such companies. You will learn about loans and charges over companies’
assets and, in the next chapter, consider further what happens when a company defaults on such
arrangements.
9
Assessment context
You can expect around four or five questions on the subject matter of this chapter on your
assessment. Questions on this chapter will be set as multiple choice, multi-part multiple choice or
multiple-response questions. Some questions may involve an analysis of a brief scenario and the
identification of an appropriate response, which may be in the form of providing advice, such as
which charge will take priority if the borrower cannot repay their debts.
9
you understand
what pre-emption
rights are? What are
the rules on issuing
shares at a premium
and discount?
Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.
• The most common types of share are ordinary shares and preference shares. A company may also
issue redeemable shares (which may take the form of ordinary or preference shares).
• Shares that have certain rights not enjoyed by other shares in the company are grouped in a class
and are said to have class rights.
• Generally speaking, shares may be allotted provided authority is given in the articles or by
ordinary resolution and they must first be offered to existing shareholders in proportion to their
existing holdings.
• Shares must be paid for in money or money’s worth. They can be issued at a premium but not, as
a general rule, at a discount.
• Shares are generally freely transferable and may be transferred in a paper or paperless format.
A share is a transferable form of personal property, carrying rights and obligations, by which the
interest of a member of a company limited by shares is measured. A member of a company who
holds one or more shares is a shareholder. References to ‘the Act’ are to the Companies Act 2006
(TSO, 2006) unless otherwise stated.
Share Feature
Ordinary Ordinary shareholders have an automatic right to have their capital repaid and to
shares participate in the distribution of profit, when the company is wound up, provided
the company has surplus assets once creditors have been satisfied.
Dividends are payable to ordinary shareholders only according to declarations
made by the directors and they are not cumulative (whereas dividends payable on
preference shares are normally cumulative).
It is the ordinary shareholders who are normally offered the benefit of rights issues
and bonus issues.
All ordinary shareholders have statutory pre-emption rights (see section 1.4).
Preference Preference shareholders also have a right to have their capital repaid on a winding
shares up (unless the articles provide otherwise). If there is a surplus after repayment of
capital, ordinary and preference shareholders will share equally. Where preference
shares are expressed to carry a priority or preferential right to return of capital, the
amount paid up on each preference share is to be repaid before anything is
repaid to ordinary shareholders. In these circumstances, however, if there is a
surplus after repayment of capital, the preference shareholders will have no right
to share in that surplus.
Typically, preference shares will carry a prior right to a fixed dividend, in which
case:
• It is not a right to compel payment of a dividend, simply to receive a dividend
at the specified rate before any other dividend is paid or declared.
Redeemable A redeemable share is one that is issued on terms that it can be bought back by
shares the company at the option of the company or the shareholder (see section 2.4).
To issue redeemable shares, a public limited company’s articles must give the
authority to issue them. The articles of private companies may specifically exclude
or restrict their issue (s.684). The directors’ authority to determine the terms,
conditions and manner of redemption may also be given by an ordinary resolution
(even if it has the effect of amending the company’s articles). Redeemable shares
can only be issued when there are other shares issued that are not redeemable.
Ordinary/Preference
Reason Explanation
Exceptions The Act provided that the provisions do not apply to allotments of:
• bonus shares
• securities to be wholly or partly paid up otherwise than in cash
• securities relating to an employees’ share scheme
Exclusions A private company may exclude all or any of the provisions in its articles,
either generally or in relation to allotments of a particular description.
Disapplication Directors of a private company with only one class of shares may be
authorised to allot equity securities as if s.561 did not apply by either:
• the articles; or
• special resolution.
Where directors are given authority by the company to allot shares, they may
also be given the power to allot equity securities as if s.561 did not apply by
either:
• the articles (where a general authority is given); or
• special resolution.
That amount so transferred may be used to write off the expenses of the issue of those shares and
any commission lawfully paid on the issue. The account may also be used to pay up new shares to be
allotted to members as fully paid bonus shares. There are also special rules for group reconstruction
relief and merger relief, which relieve companies from the requirement to transfer any premium to a
share premium account. Thus if an acquiring company secures at least 90% of the equity capital of
another company as consideration for an allotment of its shares, any premium obtained from the
excess of the other company’s assets over the nominal value of its shares need not be transferred to
the share premium account.
Otherwise, the share premium account is treated as part of the company’s paid-up share capital and
is subject to rules on the reduction of capital set out in the Act. For example, a company cannot
distribute part of its share premium account:
• as a dividend;
• to write off expenses incurred in connection with the formation of the company; or
• to write off expenses incurred in connection with an issue of debentures.
Rule Explanation
1/4 paid up (s.586) Shares must be paid up at least as to one-quarter of the nominal value plus
the whole of any premium payable (except for shares allotted in pursuance
of an employees’ share scheme).
Long-term Shares cannot be allotted as fully or partly paid up otherwise than in cash if
undertaking (s.587) the payment is or includes an undertaking which may be performed more
than five years after the allotment.
Valuation of non- Any payment otherwise than in cash must be independently valued
cash consideration (subject to certain exceptions concerning mergers or an arrangement with
(s.593) another company).
Generally speaking, where an allotment is made in contravention of these provisions, the allottee is
liable to pay an amount equal to the nominal value of the allotted shares together with interest. They
may apply to the court for relief from such liability and the court may grant relief where it considers it
just and equitable to do so.
Yes/No
(1) Can the company amend its articles of association to incorporate a provision
excluding the statutory rights of pre-emption?
(3) Can any of the shares be sold for £4.50 each on a fully paid-up basis
2 Share capital
Section overview
• The capital that is invested in a company limited by shares by shareholders is called its share
capital.
• A company’s share capital can be increased and altered in a number of ways, but there are strict
controls on any reduction of capital.
• In certain circumstances a company may acquire its own shares, by redemption or purchase, and
private companies may be permitted to fund such an acquisition out of capital.
• Private companies may give financial assistance for the acquisition of their shares but public
companies are prohibited from doing so, save in certain circumstances.
• Dividends represent a return on capital invested and, generally speaking, must be paid out of
distributable profits only.
It is a fundamental principle of company law that limited companies should use their share capital
only for the purposes of the business and should not be allowed to diminish or return any part of that
capital to the detriment of company creditors or minority shareholders. This maintenance of capital
principle is upheld by various provisions in the Act that limit capital reduction schemes, restrict the
freedom of a company to purchase its own shares and give financial assistance to aid share
purchases, strictly control the circumstances in which capital may be used for the redemption and
Term Meaning
A company A company that has power under its constitution to issue shares (s.545).
having a share
capital
Issued or Shares that have been issued or allotted as the case may be (s.546) (including
allotted share shares taken by the subscribers on the formation of the company).
capital A company need not issue all its share capital. Any part of it not issued is called
unissued share capital.
Called-up share So much of the share capital as equals the aggregate amount of the calls made
capital on its shares plus share capital that is paid up without being called and share
capital to be paid at a specified future date under the articles or terms of
allotment of the relevant shares (s.547).
Equity share The issued share capital excluding any part of it that, neither as respects
capital dividends nor as respects capital, carries any right to participate beyond a
specified amount in a distribution (ie, usually a company’s ordinary share
capital, since preference shares usually carry a right to a fixed return).
Reducing the liability of Company X has £1 nominal The shares become fully paid
shareholders on partly paid value shares of which 60p has shares of 60p and the
Cancelling paid-up share Company Y has £1 nominal The company’s negative net
capital that is not represented value shares but has negative assets value is eliminated, and
by assets net assets so that assets are the business can begin paying
only supported by 60p of dividends if profitable.
nominal value. The company Shareholders own fully paid-up
reduces the nominal value of shares that have a nominal
the shares to 60p per share. value of 60p each.
Repaying share capital that is Company Z has £1 nominal Company assets (cash) are
surplus to the company’s value shares and surplus profit reduced by 40p per share. The
needs and cash which equates to 40p shareholders own fully paid-up
per share. The company shares that have a nominal
reduces the nominal value of value of 60p each.
the shares to 60p and returns
40p per share to the
shareholders.
Example: Company Y
Example: Company Z
To protect the interest of creditors, companies are only permitted to reduce their share capital in
accordance with the two procedures prescribed by the Act (s.641) and described below. These
procedures are designed to reassure creditors that the business has sufficient capital invested, while
giving directors some flexibility in managing the business effectively and the ability to return unused
capital in an appropriate manner.
Essentially these procedures mean that a public company has to go to court to achieve a reduction
in share capital, but a private company can choose not to go to court if they do not want to.
A private company can seek to reduce its share capital by supporting its application with a solvency
statement. You should consider whether such statements are accurate given the true financial
situation of the company, rather than accepting just what the directors say.
Alteration Rule
(Note that a company’s share capital may also be altered as a result of a redenomination from one
currency to another (s.622). Such a redenomination may also result in a reduction of capital in order
(250)
(400) shares
redeemed +
Share capital 1,000 150 new shares 750
£1,500m
Share premium 250 £1,450m 250
Revaluation
reserve 150 150
200
Capital Transfer from
redemption retained
reserve 100 earnings 300
(200)
Transfer to
capital
Retained redemption
earnings 200 reserve –
Shareholders’
funds 1,700 1,450
Such a payment of capital can only be made where the directors’ statement and auditor’s report
support the payment and it is approved by a special resolution (disregarding the voting rights of
(200)
200m shares
Share capital 300 purchased 100
£850m
Share premium 250 £800m 250
Revaluation
reserve 200 200
150
Capital Transfer from
redemption retained
reserve 100 earnings 250
(150)
Transfer to
capital
Retained redemption
earnings 150 reserve –
Shareholders’
funds 1,000 800
The net effect of the above transaction has been a reduction in the creditors’ buffer, or permissible
capital payment (PCP), of £50 million.
The permissible capital payment is an important calculation to get right. You should structure your
calculation carefully, perhaps using a pro forma like the one in the example above.
Any recommendation to offer financial assistance to purchase shares should be based on what is
permitted technically in the Companies Act 2006.
Public Private
company company
2.7 Dividends
A dividend is one type of distribution of a company’s assets to members of the company. The
general rule is that any distribution can only be made out of profits that are available for the purpose
and not out of capital.
Profits available for distribution are accumulated realised profits (which have not been distributed or
capitalised) less accumulated realised losses (which have not been previously written off in a
reduction or reorganisation of capital).
A dividend is a debt only when it is declared and due for payment. A shareholder (ordinary or
preference) is not entitled to a dividend unless it is declared in accordance with the procedure
prescribed by the articles and the declared date for payment has arrived. The directors may decide
to withhold profits and cannot be compelled to recommend a dividend.
If a distribution is made in contravention of the Act and the receiving member knows or has
reasonable grounds for believing that the distribution is made unlawfully, that member will be liable
to repay it (or a sum equal to its value where the distribution is made otherwise than in cash) (s.847).
The directors may also be liable to repay the amount of the dividend as a result of the breach of
directors’ duties which will have occurred.
In Bairstow v Queens Moat Houses plc 2000, nearly £27 million of dividend was authorised by
directors when there were insufficient distributable profits. The directors were held to be in breach of
their fiduciary duties and liable to repay the amount of the dividends to the company. Members with
actual or constructive knowledge of the unlawful payments were also liable to repay the dividends
received.
• A company may choose to raise loan capital rather than share capital. A debenture is the
document that records the terms of any loan.
Return Dividends are only paid out of Interest must be paid when it is due
distributable profits and when
directors declare them
Liquidation Shareholders are the last people to Debentures must be paid back
be paid in a winding up before shareholders are paid
From the investor’s standpoint, debenture stock is often preferable to preference shares since the
former offers greater security and yields a fixed income.
From the company’s standpoint, raising capital by borrowing has obvious advantages but it has to
bear in mind also the disadvantages of the rate of interest payable and, in particular, the liability
imposed by any charge that is created in order to secure the loan.
Charges are an encumbrance upon real or personal property granted by one party (the chargor) that
gives another party (the chargee) certain rights over that property, usually as security for a debt owed
to the charge holder. The most common form of charge is by way of legal mortgage, used to secure
the indebtedness of borrowers in house purchase transactions. In the case of companies, charges
over assets are most frequently granted to persons who provide loan capital to the business. The
charge is secured over a company’s assets and gives to the creditor a prior claim over unsecured
creditors (and may give them priority over other secured creditors) to payment of their debt out of
those assets. Charges are of two kinds, fixed and floating.
• liquidator;
• administrator; and
• creditor
of the company. The money secured by the (void) charge is then immediately payable.
Shares
Allotment of shares
needs authority
Rights of pre-emption
Payment
General not at discount
Premium goes to share premium
account
Public companies: special rules
Unlisted Listed
Stock transfer form CREST
Company two months to
register of refuse with reason
Alteration
• Subdivision
Share capital
• Consolidation
• Redenomination
Decrease Dividends
Generally prohibited but • Available profits only
permitted exceptions • Public company
Loan/Debenture
Loan capital
Charge as security
Register within 21 days
Fixed Floating
Chargeholder needs to consent to dealing Freedom to deal without chargeholder's consent
Priority over floating charges Crystallisation (eg, liquidation, receiver, specified event)
Invalid as preference: 6 months period Invalid as preference: 12 months period
1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following questions
having studied this chapter. If not, you are advised to revisit the relevant learning from the topic
indicated.
3. Can you explain the difference between issued and called-up share capital? (Topic 2)
5. Can you explain the difference between a fixed and floating charge? (Topic 3)
Yes/No
A bonus issue
Yes/No
at a discount?
at a premium?
10 A share premium account can be used for discounts on the issue of debentures.
A True
B False
11 When a company receives an instrument of transfer, it must register the transfer or give notice of
refusal within what time period?
12 Name two ways in which a private company may lawfully reduce its share capital.
13 Name three ways in which a company’s share capital can be altered (but not reduced).
14 What type of resolution is required to authorise the redemption of shares?
15 Name three safeguards that are required for a private company to be authorised to redeem or
purchase its shares out of capital.
16 What restrictions, if any, apply to a private company providing financial assistance for the purchase of
its shares?
17 Can a private company purchase its own shares where they are partly paid up, provided it has
sufficient distributable profits?
18 Fill in the blanks in the statements below.
A public company cannot make a distribution if it would reduce the company’s net assets to below
the aggregate of its and .
19 Which of the following are correct statements about the relationship between a company’s ordinary
shares and its debentures?
A Debentures do not confer voting rights, while ordinary shares do.
B The company must pay interest on debentures and dividends on ordinary shares.
C A debenture holder takes priority over a member in liquidation.
20 What are the principal characteristics of a floating charge?
21 Company law requires a company to maintain a register of charges and to make it available for
inspection by the public, not just members and creditors.
A True
B False
22 In which of the following situations will crystallisation of a floating charge occur?
A Liquidation of the company
B Disposal by the company of the charged asset
C Cessation of the company’s business
Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for
this chapter.
Ordinary/Preference
Yes/No
(1) Can the company amend its articles of association to incorporate a provision No
excluding the statutory rights of pre-emption?
(3) Can any of the shares be sold for £4.50 each on a fully paid-up basis No
Public Private
company company
1 Correct answer(s):
B False
The company may decide not to pay any dividend, or may be unable to because it does not have any
distributable profits. What the preference shareholders have is a right to receive their dividends
before other dividends are paid or declared.
2 Correct answer(s):
A The right to receive a dividend is cumulative.
E Preference shareholders have equal voting rights to ordinary shareholders.
A and E are implied rights; the others have to be stated explicitly.
3 A company’s called-up share capital is so much of the share capital as equals the aggregate amount
of the calls made on its shares plus share capital that is paid up without being called and share
capital that is to be paid at a specified future date.
4 Correct answer(s):
B 75%
A special resolution of the relevant class or written consent from at least 75% in nominal value of the
issued shares of that class.
5 Correct answer(s):
C 15%
The holders of at least 15% of the issued shares of the class in question (who have not themselves
consented to the variation).
6 An ordinary resolution, even though an alteration in the articles takes place (which would normally
require a special resolution). Remember that authority to allot need not be given in the articles, it can
be given by ordinary resolution.
A bonus issue is an allotment of additional shares to existing members where the consideration is
effectively paid by using the company’s reserves.
8
Yes/No
A bonus issue No
Yes/No
at a discount? No
at a premium? Yes
However, note that the non-cash consideration must be independently valued in the case of a public
company.
10 Correct answer(s):
B False
11 Two months
12 Two ways a private company can lawfully reduce its share capital:
(1) By a special resolution approved by the court
(2) By a special resolution supported by a directors’ solvency statement
13 Three ways a company’s share capital can be altered:
(1) Allotment of more shares
(2) Subdivision
(3) Consolidation
14 An ordinary resolution
15 Any three:
(1) A directors’ statement
(2) An auditors’ report
(3) A special resolution
(4) Public notice of the proposed payment
16 None
17 No, a company can only purchase its own shares when they are fully paid.
18 A public company cannot make a distribution if it would reduce the company’s net assets to below
the aggregate of its called-up share capital and undistributable reserves .
19 Correct answer(s):
A Debentures do not confer voting rights, while ordinary shares do.
C A debenture holder takes priority over a member in liquidation.
While the company has a contractual duty to pay interest on debentures, there is no necessity for it to
pay dividends on shares. B is therefore incorrect.
20 A floating charge can be described as:
• a charge on a class of assets, present and future
• which class is in the ordinary course of the company’s business changing from time to time
• until the holders enforce the charge, the company may carry on business and deal with the assets
charged
21 Correct answer(s):
A True
23 Correct answer(s):
C 21 days
24 The following particulars must be sent:
• A copy of the charge
• The amount of the debt that it secures
• The property to which the charge applies
• The person entitled to it
25 Main remedies to enforce security:
• Take possession of the asset subject to the charge and sell it
• Appoint a receiver of it
Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance
Learning topics
1 Administration
2 Charges and receivership
3 Company voluntary arrangements
4 Liquidation
5 Individual voluntary arrangements
6 Bankruptcy
Summary
Further question practice
Technical references
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
Introduction
10
Learning outcomes
• Identify the nature and function of:
– company voluntary arrangements
– administration orders
– receivership
– compulsory and voluntary liquidation (including relevance of secured debt)
• Identify the main implications of insolvency law, including:
– the principal means of termination of companies or other business entities
– the priorities on a liquidation of the distribution of assets including rights of creditors and
employees (including secured assets)
– bankruptcy and other responses to personal insolvency
Specific syllabus references for this chapter are: 2o and p.
10
Syllabus links
This chapter looks at the termination of a company by winding-up and dissolution (but also
compulsory voluntary arrangements and administration, which are both designed to avoid
termination). In discussing the rights of secured and unsecured creditors, it is also related to your
studies on debentures and company charges.
10
Assessment context
The legal issues discussed in this chapter could be assessed in conjunction with other areas of
company law, for example the incorporation of a company, fraudulent and wrongful trading and
financing by loan capital. You might be asked to advise on appropriate courses of action available to
members or creditors in a scenario involving a company in financial difficulties. An awareness of
personal bankruptcy and individual voluntary arrangements may be needed in the context of
discussing partners’ liabilities.
When a company is in financial difficulties, there are several courses of action open to its members
and creditors. Some are aimed at rescuing the company as a going concern, others are aimed at
bringing the life of the company to an end, whether insolvent or not. Thus, administration is
designed to rescue the company as a going concern or, at least, to secure a better result for the
company’s creditors as a whole than would be likely on a winding-up. A secured creditor may
appoint a receiver to realise the charged assets and satisfy the debt secured. Company voluntary
arrangements are also designed to rescue the company and prevent it from being wound up.
Liquidation, on the other hand, is the act of terminating the company’s life and winding up its
business.
10
• Administration is relevant where a company is in financial difficulties but not necessarily insolvent
or close to insolvency.
• Administration results in a moratorium on actions against the company.
• An administration order is an order of the court that puts an insolvency practitioner in control of
the company, principally to insulate the company from its creditors and with a view to rescuing the
company as a going concern.
• statutory declarations
that the company is
likely to become
unable to pay its
debts and as to the
appointment being
lawfully and properly
made
• statement from
administrator that
purpose of
administration
reasonably likely to be
achieved and that
they consent to the
appointment
Qualifying Floating Must show that: Must give two days’ prior
Charge Holder (QFCH) • the floating charge is a notice to any prior QFCH
(ie, at least one floating qualifying floating before any appointment
charge which on its own charge; and is made
or together with other • it is enforceable. Must file in court:
fixed or floating charges • notice of appointment
amounts to a charge over A QFCH may apply even if
the whole or substantially the company is in • statutory declaration
the whole of the liquidation as to lawfulness of
company’s property. The Must notify any other QFCH appointment and
floating charge must enforceability of the
contain power to appoint charge
an administrator (or • statement by
administrative receiver).) administrator that
purpose of
administration likely
to be achieved and
that they consent to
the appointment
No appointment can be
made out of court if the
company is in liquidation
or administration (or
administrative
receivership).
Timescale Event
Within 7 days File notice of their appointment with the Registrar of Companies.
Require any of the company’s officers and employees to provide a statement
of affairs (who have 11 days to comply with any such request).
Within 8 weeks Submit a statement of their proposals for achieving the aim of administration
to:
• the Registrar
• the company’s creditors
• the company’s members
The administrator should seek creditor acceptance of their proposals by the
deemed consent procedure or another authorised consent method (see
section 4.2 on creditor’s voluntary liquidation). The administrator is also
required to invite creditors to form a creditor’s committee and to ask for
nominations to such a committee.
One year after The administrator’s appointment is terminated unless extended by the court
appointment or (once only) by a prescribed majority of the creditors.
Assets subject to a The administrator can sell property that is subject to a floating charge and
floating charge use the proceeds for the business without obtaining the chargee’s consent
(§ 70 Sch B1 IA’86).
Assets on HP or The administrator can sell such assets with approval of the court and
subject to fixed proceeds must be used to pay off the owner or chargee (§ 72 Sch B1 IA’86).
charge
Directors Directors’ powers are suspended but they remain in office. The
administrator may choose to remove existing directors or appoint new
ones.
Employees Employees are not automatically dismissed (since the administrator is the
agent of the company, which continues to be the employer) but the
administrator may terminate contracts of employment.
Any person acting as an administrator must not only be technically competent, but they also need to
be able to understand the context that each business operates in so that they can make decisions in
the company’s best interest.
• A secured creditor with a charge over land usually has the power to appoint a receiver in the
event of the borrower’s default.
• A receiver will realise the charged asset in order to pay off the chargeholder’s debt.
• With some exceptions, administrative receivers can no longer be appointed by floating
chargeholders.
The term ‘receiver’ has, somewhat confusingly, come to be used to denote two types of office, one of
which was virtually abolished by changes made to the Insolvency Act 1986 by the Enterprise Act
2002, while the other remains.
• Company voluntary arrangements (CVAs) were introduced by the Insolvency Act 1986 and are
intended to avoid a company being wound up.
• A CVA is an agreement between the company and its creditors, which sets out how the company’s
debts are to be paid and in what proportions.
• A company is entitled to continue trading for the duration of the CVA.
A CVA may comprise either one or both of a ‘composition of debts’ (where the company agrees to
pay a limited proportion of its total debt, eg, 60p in the pound) or a ‘scheme of arrangement’ (where
the company agrees to pay its debts over a defined period, typically 3–5 years). A CVA may result in
one or more creditors taking an interest in the company by way of a debt-equity swap.
Scenario questions could test your ability to recommend the most appropriate solution to the
situation in hand (for example choosing between administration, CVA or liquidation). In such cases,
you will need to consider the facts of the case and the relevant insolvency rules, as well as how
particular stakeholders might respond given their own perspectives. For example, a creditor might
not agree to a CVA if it does not leave them significantly better off than administration or liquidation.
3.2 Moratorium
By important changes introduced by the Insolvency Act 2000 (TSO, 2000), where the directors of a
small company wish to propose a CVA, they may apply for a short moratorium, during which they can
prepare and submit a proposal to their creditors. (This gave small companies the significant
advantage of a ‘breathing space’ which, otherwise, was only available by entering into
administration.)
Prescribed documents must be submitted to the court, including the proposed CVA, a statement of
the company’s affairs and confirmation that the nominee believes the proposal to have a reasonable
prospect of being approved and implemented. Once these documents are filed, a moratorium of 28
days will come into effect, subject to extension of up to two months with the agreement of both the
members and creditors’ meetings. The existence of the moratorium must be advertised and stated
on all business documents. It should also be notified to the Registrar of Companies.
The effects of the moratorium include:
• No winding up or other insolvency proceedings can be commenced during the moratorium
period.
• No security over the company’s property be enforced, or any legal process undertaken.
• Any winding-up petitions presented before the moratorium will be stayed and a floating charge
cannot crystallise.
• The company cannot requisition or hold any meeting without the consent of the nominee or
court.
• Other than in the ordinary course of business, the company can only sell property or pay off pre-
moratorium debts, with the approval of the nominee or creditors’ committee (if there is one) and,
if the property is charged, the consent of the chargeholder or court.
• The nominee must monitor the company’s affairs during the moratorium and the moratorium will
be terminated if the nominee withdraws their consent to act, provided they do so properly and on
specified grounds.
4 Liquidation
Section overview
• Winding up, or liquidation, is the process of terminating the life of a company and is carried out
by a liquidator.
• A company is most likely to be wound up where it has become insolvent.
• Liquidation may proceed as a members’ voluntary winding up (where the company is solvent) or
as a creditors’ voluntary winding up.
• Alternatively, liquidation may be imposed compulsorily on the company by the court.
• The liquidator is bound to realise the company’s assets and apply the proceeds in a particular
order, including distributing any surplus to contributories once creditors have been satisfied.
Company directors may be criminally liable for making a false declaration of solvency and are likely
to request that an accountant is involved in deciding whether one can be made. The severity of the
punishment means that such decisions should be made very carefully, without bias and having
thoroughly tested any assumptions before making any judgement.
Ground Explanation
That the company is unable A creditor must (in petitioning on the grounds that the company is
to pay its debts (s.122 (1)(f)) unable to pay its debts) show either:
• that they are owed more than £750 and has served on the
company at its registered office a written demand for payment
and the company has neglected, either to pay the debt or to
offer reasonable security for it within 21 days;
• that they have attempted to enforce a judgment against the
company by execution on the company’s property but it has
failed to satisfy the debt; or
• that, taking into account the contingent and prospective
liabilities of the company, it is unable to pay its debts as they
fall due or that its assets are less than its liabilities.
That it is just and equitable to This ground is usually relied on by a member who is dissatisfied
wind up the company with the directors or controlling shareholders over the
(s.122(1)(g)) management of the company (for example, where there is
A member’s petition to wind up the company on the grounds that it is just and equitable to do so,
will only be considered if the company is solvent (otherwise they have nothing to gain from it) and
they have been a registered shareholder for at least 6 of the last 18 months before the petition
(subject to some exceptions).
The BEIS (Department for Business, Energy and Industrial Strategy) may petition for the compulsory
winding up of a company:
• if a public company has not obtained a trading certificate within one year of incorporation
• following a report by BEIS inspectors that it is in the public interest and just and equitable for the
company to be wound up
On a compulsory winding up, the court will usually appoint the official receiver (an officer of the
court) as liquidator, although they may be replaced by an insolvency practitioner at a later date. The
official receiver must investigate (s.132) the causes of the failure of the company, and generally, its
promotion, formation, business dealings and affairs.
The liquidation is deemed to have commenced at the time (possibly several months earlier) when
the petition was first presented, with the following consequences:
• Any disposition of the company’s property and any transfer of its shares subsequent to the
commencement of liquidation is void unless the court orders otherwise.
• Any legal proceedings in progress against the company are halted (and none may be
commenced) unless the court gives leave.
• Any seizure of the company’s assets after commencement of liquidation is void.
• The employees of the company are automatically dismissed and the liquidator assumes the
powers of management previously held by the directors.
• Any floating charge crystallises.
• The assets of the company may remain the company’s legal property but under the liquidator’s
control, unless the court orders the assets to be vested in the liquidator.
• The business of the company may continue, but it is the liquidator’s duty to continue it with a view
only to realisation, for instance by sale as a going concern.
Solution
A can petition the court for the compulsory winding up of the company because the company has
failed to satisfy its demand for a debt of over £750 within 21 days. They will petition on the ground
that the company is unable to pay its debts.
Transaction Explanation
Charges Charges not registered within 21 days are void against the liquidator and creditors
(and the chargee becomes an unsecured creditor).
Transactions A transaction ‘at an undervalue’ is a gift or a transaction in the two years before
at an liquidation (or administration), by which the company gives consideration of
undervalue greater value than it receives, for instance a sale at less than full market price
(s.238 IA ‘86), unless the company enters into it:
• in good faith
• for the purpose of carrying on its business
• believing on reasonable grounds that it will benefit the company
Floating A floating charge created within 12 months before winding up (or two years if
charge given to a connected person) may be void or voidable.
You will recall that if the liquidator can show that the directors are guilty of wrongful or fraudulent
trading the court may order that they be personally liable for some or all of the company’s debts.
Solution
The gifting of the company vehicle to Bhindi’s mother was a transaction at an under value because
less than the market price of the vehicle was received, and the transaction occurred less than two
years ago. There were no business grounds for the transaction and the company did not benefit from
it (in fact it was in a worse position because if the vehicle had been sold to a third party instead it
might have eased the company’s financial situation).
The business gave a preference to Bhindi’s father by settling his loan early less than two years ago.
This benefited him at the expense of the other creditors. If the early repayment was not made, then
he would have been in the same situation as the other creditors when the company went into
liquidation. Instead, he has not lost out financially. The fact he is Bhindi’s father means he is
connected to the company.
Yes/No
A floating charge in favour of Adam plc for £100,000 created in March 20X1
A sale of 10 cars in March 20X2 for £80,000. Anna and Didi knew that they were
probably worth over £90,000 but they honestly believed that the sale would be in
the best interest of keeping the company afloat
A purchase in August 20X3 of some car spares for £10,000 which Anna made as a
bit of a favour for the vendor. She suspected that they were only worth £7,500
A loan that Didi made to the company a few years previously was paid off in June
20X2
Priority Explanation
1 Costs Including the costs of getting in the assets, liquidator’s remuneration and
all costs incidental to the liquidation procedure
3 Secondary HMRC. Taxes collected from employees and customers that are held
preferential temporarily by the business and due to be paid over to HMRC (for
creditors example income tax and VAT)
4 Floating charges Subject to an amount ring-fenced (protected for unsecured creditors, see
below)
6 Deferred debts For example dividends declared but not paid and interest accrued on
debts since liquidation
7 Members Any surplus is distributed to members according to their rights under the
articles or the terms of issue of their shares
Note that secured creditors with fixed charges (and indeed floating charges) may appoint a receiver
to sell the charged asset, passing any surplus to the liquidator. In the event of a shortfall they must
prove for the balance as unsecured creditors.
Also, remember that floating chargeholders are secured creditors. This means that a floating charge
holder who faces a shortfall on their debt cannot share in the amount protected (ring-fenced) and
available to unsecured creditors. However, they are still entitled to priority over any amounts left after
the prescribed part has been paid to the unsecured creditors.
Assessment questions may require you to decide who will be paid from the proceeds of a
liquidation. Coming to this conclusion requires precise application of the technical rules you have
studied.
Sole traders and partners may well wish to pursue the option of an IVA in order to protect the survival
of their business. An IVA normally provides for the debtor to pay reduced amounts towards their
total debt over a period of, usually, five years. Once approved, an IVA binds all of the debtor’s
creditors and none may petition for bankruptcy.
Advantages
For the individual • The sole trader or partner is permitted to continue in business and to
operate a normal bank account (but without an overdraft facility).
• There is flexibility in drawing up the proposals to suit their personal
and financial circumstances.
For the creditor • It is essential that an IVA is considered as it is likely to give greater
satisfaction to creditors than bankruptcy would.
• The costs of administering an IVA are significantly less than
bankruptcy, thus enabling a higher return to creditors.
6 Bankruptcy
Section overview
• A person may become bankrupt either by applying online themselves, or by a creditor petitioning
the court for their bankruptcy.
• Bankruptcy is effectively the equivalent for a sole trader or partnership (or other individual) of a
compulsory winding up in the case of a company.
• It should be considered as a last resort after IVAs.
Debt Explanation
1 Costs The costs of realising the estate, the remuneration of the trustee and
incidental expenses
4 Secondary HMRC. Money owed by the individual to HMRC (for example for
preferential income tax and national insurance contributions)
creditors
5 Ordinary debts Where the fund is insufficient to pay all unsecured creditors they rank
equally
6 Interest Creditors may prove for interest up to the date of bankruptcy (and
therefore only if all preferential and ordinary creditors have been
paid in full)
Corporate
Appointment
Charges
• Unregistered
By Out of within 21 days
court court
Transactions at an
Duties undervalue
• File notice of appointment • 2 years
• Require statements of affairs • Exceptions
• Submit proposals
Prefer
• Hold creditors' meeting
• 6 months/2 years
Powers
• Directors' power Floating charges
• Anything 'necessarily expedient' • 12 months/2 years
• Sch. 1 IA '86
Moratorium
• No winding up
• No enforcement of fixed charge
without consent
• No recovery of HOP property
• No legal proceedings
IVAs Bankruptcy
Member/nominee
Online Creditor's
application petition
Proposal to court
Moratorium Undischarged
bankrupt
restrictions
Distribution
Discharge BRO/undertaking
Discharge
1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following questions
having studied this chapter. If not, you are advised to revisit the relevant learning from the topic
indicated.
3. Do you know the effects of a moratorium under the Insolvency Act 2000? (Topic 3)
4. Do you know the two main circumstances under the Insolvency Act 1986 where a
company may be put into compulsory liquidation? (Topic 4)
5. Can you give one advantage for the individual and one for a creditor of an individual
voluntary arrangement? (Topic 5)
6. Do you know the minimum amount that a creditor must be owed in order to petition for
bankruptcy of the debtor? (Topic 6)
Response
Transaction at an undervalue
10 Put the following six points in order to represent the correct priority in a distribution of assets on a
compulsory winding up:
(1) Floating charges
(2) Deferred debts
(3) Preferential debts
(4) Members
(5) Costs
(6) Unsecured ordinary creditors
11 Name four effects of a compulsory liquidation order.
12 Can an individual who is subject to an IVA still act as a director of a company?
4.2 No. The supplier is an unsecured creditor with no floating charge, so appointing an
administrator is not an option open to it. However, it may apply to the court to appoint an
administrator.
Yes/No
A floating charge in favour of Adam plc for £100,000 created in March 20X1 No
A sale of 10 cars in March 20X2 for £80,000. Anna and Didi knew that they were No
probably worth over £90,000 but they honestly believed that the sale would be in
the best interest of keeping the company afloat
A purchase in August 20X3 of some car spares for £10,000 which Anna made as a Yes
bit of a favour for the vendor. She suspected that they were only worth £7,500
A loan that Didi made to the company a few years previously was paid off in June Yes
20X2
(1) Floating charges created within the previous 12 months can be avoided.
(2) It is a transaction at an undervalue within the past two years but it will not be avoided where the
company entered into it in good faith for the purposes of carrying on the business and believing
it to be in the company’s best interests.
(3) This is a transaction at an undervalue within the previous two years.
(4) This is a preference given to a connected person and within the two years before liquidation.
1 A creditor with no minimum value of debt (if they are not also a qualifying floating charge holder)
2 An administrator must:
(1) file notice of their appointment with the Registrar
(2) submit a statement of their proposals to the Registrar and the company’s members and creditors
3 Company voluntary arrangement
4 Correct answer(s):
B 3–5 years
5 Two grounds for compulsory liquidation:
(1) Company is unable to pay its debts.
(2) It is just and equitable to wind up the company.
6 Correct answer(s):
A True
7 Criteria for a compulsory winding up:
• They are owed more than £750 and the company has failed to satisfy their written demand for
payment within 21 days.
• Their attempts to enforce a judgement order by execution have failed.
• The company is unable to pay its debts.
8 The official receiver
9
Response
10 5, 3, 1, 6, 2, 4
11 Any four:
• Official receiver appointed as liquidator
• Liquidation deemed to have commenced at time when petition first presented
• Disposition of company property since commencement of liquidation deemed void
• Legal proceedings against the company are halted
• Employees are dismissed
• Any floating charge crystallises
12 Yes
Criminal law
Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance
Learning topics
1 Money laundering
2 Bribery
3 Fraud
4 Law and ethics
5 Whistleblowing
Summary
Further question practice
Technical references
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
Introduction
11
Learning outcomes
• Identify offences and their consequences under the anti-money laundering legislation, identify
the obligations on professional accountants to detect and help prevent money laundering, and
select appropriate courses of action to protect professional accountants from criminal liability
• Identify instances and consequences of bribery
• Identify instances and consequences of fraud in a given scenario, including:
– the effect of the Fraud Act 2006
– threats to consumers through cybercrime
– offences created under the Computer Misuse Act 1990
– fraudulent trading
– insider dealing
• Identify circumstances where accountants will be protected from dismissal and victimisation if
they raise concerns about malpractice in the workplace
Specific syllabus references for this chapter are: 3b, c, d and e.
11
Syllabus links
There are links with directors’ duties, which we have already considered, since directors can be in a
position to carry on fraudulent trading for example. Your Assurance and Audit and Assurance studies
will also address professional ethics generally and, in particular, the obligation and authority of an
auditor or assurance provider to make a protected disclosure.
11
Assessment context
Questions on the topics in this chapter will be set as multiple choice, multi-part multiple choice or
multiple-response questions. Some questions may involve an analysis of a brief scenario and the
identification of an appropriate response, which may be in the form of providing advice, such as how
to deal with suspected money laundering.
Students can expect about five questions on criminal law in the assessment.
11
consumers from
cybercrime?
Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.
• Money laundering is the process by which the proceeds of crime (either cash or other property)
are converted into assets which appear to have a legitimate (rather than illegal) origin.
• ‘Relevant persons’, including accountants in practice, are required by law to report any knowledge
or suspicion of money laundering to the authorities (currently the National Crime Agency (NCA).
• The primary legislation on money laundering is the Proceeds of Crime Act 2002 (POCA 2002),
supplemented by the Money Laundering Regulations 2017 (‘the Regulations’).
As an accountant and future member of ICAEW, money laundering is not an issue that will disappear
after passing your exam. ICAEW is a supervisor under the money laundering regulations that you will
be studying shortly, and the organisation supports the Economic Crime Plan for the UK. This plan
was developed by the Economic Crime Strategic Board (ECSB), an organisation that has both the UK
Home Secretary and Chancellor in joint control.
While the plan is targeted at supervisory bodies, such as ICAEW, there will be increased attention on
the activities of accountants in preventing and reporting money laundering, and therefore the rules
on money laundering are going to have significant impact on your future career.
Before covering the money laundering rules, we will seek to answer four key questions that, as a
future ACA, you are going to have to be aware of as part of your day-to-day job. The questions are:
• What is money laundering?
• What criminal offences create proceeds of crime?
• What are the ‘red flags’ for money laundering?
• How, as a Chartered Accountant, could you be implicated in money laundering?
Do not assume that these red flags are proof that money laundering is happening. To come to any
conclusion, you need to step back and use all of your experience and the available evidence.
Tipping off Disclosing to a third person that a The person did not Two years’
disclosure or report has been made know or suspect that imprisonment
to the NCA or other appropriate the disclosure was Unlimited fine
person, where that disclosure is likely to prejudice
likely to prejudice any investigation the investigation.
that might be carried out as a result The person had
of the report lawful authority or
reasonable excuse
Disclosing that an investigation is to make the
being contemplated or carried out, disclosure.
where that disclosure is likely to
prejudice such an investigation
You should note that this is a specific legislative provision which means that certain information
received by an accountant in specific circumstances need not be disclosed. It is not the same as the
broader ‘legal professional privilege’ which, as a matter of law, attaches to all communications
between a person and a solicitor or barrister where those communications are in respect of litigation
or the giving of legal advice. That general privilege does not extend to accountants, even where
accountants give advice on tax or other legal matters.
R (on the application of Prudential plc) v Special Commissioner of Income Tax 2013
The facts: The Prudential was served with notices during a tax investigation by HMRC, requiring it to
disclose documents concerning its tax liability. The Prudential argued that the documents contained
tax advice from accountants and were therefore protected by legal advice privilege.
Decision: The Supreme Court held that legal advice is privileged only where it is given by solicitors,
barristers and appropriately qualified overseas lawyers, unless specific legislation provided
otherwise.
2 Bribery
Section overview
The Bribery Act 2010 (TSO, 2010) came into force on 1 July 2011. The Act is intended to simplify the
previous law on bribery and corruption, which was to be found in common law and a number of
statutes.
When thinking about the various bribery offences it is important to consider not just the information
you are given, but also what information you are missing (information gaps). This will help you to
avoid jumping to the wrong conclusions about a particular situation.
Yes/No
Jack offers a HMRC inspector a sum of money to turn a blind eye to a minor
irregularity in his financial records, but the inspector refuses to accept it.
• We shall address fraud as a basic criminal offence as well as in the context of fraudulent trading
and insider dealing.
• Fraud can be committed by an abuse of position or failing to disclose information as much as by
deliberately making false representations.
• Directors and others can be guilty of fraudulent trading where they carry on a business with an
intent to defraud creditors or for any fraudulent purpose.
• Insider dealing is the criminal offence of dealing in securities while in possession of sensitive
information as an insider.
3.1 Fraud
Fraud is essentially an activity that leads to gain for oneself and a loss for a victim. Historically,
prosecutions for fraud were made under various common law and statutory offences relating to
defrauding and deception. The Fraud Act 2006 (TSO, 2006) has now established a single statutory
offence of fraud, which offence can be committed in three ways:
Fraud by failing to Dishonestly failing to disclose to another person information which they
disclose information are under a legal duty to disclose thereby intending to make a gain for
themselves or another or to cause another party loss or expose that
party to the risk of making loss.
Fraud by abuse of Occupying a position in which they are expected to safeguard, or not to
position act against, the financial interest of another person, and dishonestly
abusing that position, thereby intending to make a gain for themselves
or another, or to cause another party loss or expose that party to the risk
of suffering loss. It is likely that ‘abuse’ will be widely construed.
The maximum penalty for fraud under the Act is 10 years’ imprisonment and an unlimited fine.
A person also commits an offence if they possess, make or supply any ‘article’ that is used in fraud.
Under the Act, ‘articles’ include any program or data held in electronic form and so also applies to
cybercrimes.
Electronic financial fraud Online banking frauds where individuals are persuaded to
transfer money out of their bank account, or via internet-
enabled card-not-present fraud. In this case, funds are taken
out of a bank account without the knowledge of the
cardholder. The perpetrator is able to do this without the bank
card by entering the card details manually.
E-commerce fraud is related to these types of fraud, but are in
relation to retail sales transactions that take place online.
Fraudulent sales through online In this type of fraud, bogus websites are set up which appear
auction or retail sites to be selling goods and services. Such goods and services are
not provided once paid for. Some websites may sell
counterfeit goods or tickets, which lead consumers to believe
that what they are buying is a genuine item (such as a
particular brand) when they are not.
Mass-marketing frauds and These scams persuade individuals to part with their money
consumer scams because they are told it will go to charities or for disaster relief,
for example. Other examples are pyramid schemes and fake
lotteries where the individual believes they will receive a larger
sum of money in future.
Pharming Users are directed to a fake website that looks legitimate (such
as the individual’s bank) to obtain their personal details.
Online romance (or social A more long-term fraud, individuals are targeted and form an
networking/dating website) fraud online relationship with the fraudster. After a period of time,
the victim is persuaded to part with their money or personal
information.
When receiving emails and using the internet it is important to remember where information and
messages come from and why you have been given them. Taking time to think about things carefully,
rather than trusting everything you see will help protect yourself and your employer from
cybercrime.
Firewalls to secure internet Boundary firewalls can help secure a consumer’s internet
connections connection and are often built into operating systems.
Specialist software, known as internet gateways, can also
be used. This software intercepts network traffic in and out
of a system.
Applying the most secure settings Consumers can apply secure configuration settings that
for devices and software ensure their devices are set up with cyber security as a
priority.
Control who has access to devices Consumers can apply a form of access control – a range of
and software physical and network procedures that restrict access to
devices and software, such as through passwords and
touch and voice ID.
Protect against viruses and other Virus and malware protection software prevents and
malware removes unwanted programs from a system.
Keep devices and software up to Consumers should apply patch management – ie, ensuring
date (also known as ‘patching’) the latest updates to software are installed.
These controls are often very effective against cyber threats from malicious software (such as key
logging, webcam manager, screenshot manager and file hijacking). However, they are less effective
when a human is involved, such as in phishing scams or ad clicker. In these cases, controls might flag
up that an action is particularly risky but may not be able to prevent the individual becoming a victim.
Securities Securities include shares, debt securities and warrants and must be
regulated on a regulated market such as the stock exchange. Unlisted
securities or face-to-face transactions are not included.
Insider A person has information as an insider if it is (and they know it is) inside
information, and if they have (and know they have) it from an inside
source, that is:
• through being a director, employee or shareholder of a company or by
having access to it because of their employment, office or profession
(eg, as auditor); or
• through a source within either category.
Defences
The individual has a defence regarding dealing and encouraging others to deal if they can show
that:
• they did not expect there to be a profit or avoidance of loss;
• they had reasonable grounds to believe that the information had been disclosed widely; or
• Chartered accountants accept the responsibility of acting in the public interest and also the role
of being at the forefront of the fight against domestic and international corruption in all its forms.
• Accountants must have regard to ethical codes from ICAEW and other relevant bodies in addition
to the legal requirements of statute and regulations already discussed in this chapter.
The commission of the criminal offences which you have just studied causes a major distortion of
trade, undermines the development of emerging markets and impacts upon a company’s reputation
and ability to secure investment.
Of course, accountants should conduct themselves at all times with the utmost integrity in providing
their services, but over and above this, they are encouraged to play a role proactively in upholding
5 Whistleblowing
Section overview
• UK law gives people at work protection when they raise genuine concerns about criminal or civil
offences, danger to health and safety or the environment, a miscarriage of justice or the cover up
of any of these.
• A disclosure must be a qualifying disclosure, made in good faith to the appropriate person in the
appropriate manner, and the person making it must have a reasonable belief that the information
is valid.
When considering making a disclosure under the Public Interest Disclosure Act, you need to think
about what is in the public interest.
Minister To a Minister of the Crown (where the worker is in a public body such as the
NHS)
Prescribed person/ To bodies prescribed by the Secretary of State (and in respect of subject
regulator categories also prescribed), such as the Health and Safety Executive, HMRC
or the Financial Conduct Authority. Normally the matter disclosed will need
to be something in which there is a serious public interest.
5.4 Protection
A worker has the right not to be subjected to “any detriment by any act, or any deliberate failure to
act” by their employer as a result of having made a protected disclosure. The right not to suffer a
detriment covers a number of issues, such as lack of promotion, lack of training or opportunity,
unjustified disciplinary action, pay issues or failure to renew contracts as a result of having made a
protected disclosure. In addition, an ‘employee’ who is dismissed or selected for redundancy
principally for having made a protected disclosure shall be regarded as having been automatically
unfairly dismissed. A worker who is not an ‘employee’ and is dismissed may rely on the general right
not to suffer a detriment.
An employment tribunal may award compensation to any worker who has been victimised for
making a protected disclosure. The amount of such compensation will be whatever the tribunal
considers to be just and equitable, having regard to the loss suffered and the nature of the
complaint.
Compensation may include an amount for injury to feelings and it is not subject to a maximum limit.
(In January 2009, for example, a railworker was awarded £200,000 for whistleblowing after he was
pressurised to lie about an accident he witnessed.)
Money laundering
'Knowledge'
'Suspicion'
Report to NCA/MLRO
Employer's procedures
Bribery
Unlimited fine
10 years and/or fine Make good company debts 7 years and/or fine
(director) disqualification
10 years and/or fine
1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following questions
having studied this chapter. If not, you are advised to revisit the relevant learning from the topic
indicated.
1. Do you know the three money laundering offences covered by the Proceeds of Crime
Act 2002? (Topic 1)
2. Do you know the four bribery offences covered by the Bribery Act 2010? (Topic 2)
3. Do you know the three types of fraud that can be committed under the Fraud Act 2006?
(Topic 3)
4. Can you state the five fundamental principles in the ICAEW’s Code of Ethics for
members? (Topic 4)
5. Can you explain what a qualifying disclosure is under the Public Interest Disclosure Act?
(Topic 5)
Fraud by false
Fraud by information
Fraud by position
6 Can a person be found guilty of fraudulent trading only once the company is in liquidation?
A Yes
B No
7 Dealing in securities while possessing inside information as an insider is an offence. What are the
other two principal offences of insider dealing?
8 Would the following statement constitute an offence under the Criminal Justice Act 1993? If so,
which offence?
“I can’t tell you why, but now would be a good time to buy shares in Bloggs plc.”
11 A person who accepts a bribe is guilty of an offence as well as the person who pays it.
A True
B False
True/False
14 Indicate which of the following statements are true and which are false.
True/False
15 Where an accountant gives advice on matters of revenue law, their advice is said to be protected by
legal professional privilege and need not be disclosed under any circumstances.
A True
B False
Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for
this chapter.
Yes/No
Jack offers a HMRC inspector a sum of money to turn a blind eye to a minor Yes
irregularity in his financial records, but the inspector refuses to accept it.
(1) Such corporate hospitality is likely to be regarded as entirely proper and will not constitute an
offence under the Bribery Act 2010.
(2) The offer of a financial advantage constitutes an offence of bribery, regardless of whether or not
it is accepted.
While the disclosure relates to a matter in the public interest (a criminal offence), it was not made
to the appropriate person. Even though he did not think he would have been taken seriously, he
should have raised the matter internally first (there is no evidence that he would have been
victimised for doing so). If no one took any notice of him then he could have raised the matter
outside of the organisation (such as with the media).
2 Correct answer(s):
B False
The disclosure must be made in the reasonable belief that it is true.
3 Correct answer(s):
B No
This is generally desirable but not compulsory.
4 Correct answer(s):
C The worker may claim damages.
A: This is in the discretion of the court.
B and D: The Act affords protection to the worker rather than imposing sanctions on the employer.
6 Correct answer(s):
B No
Civil liability (IA 1986) depends upon the company being in liquidation but the criminal offence (CA
2006) can be committed regardless of whether or not the company is in liquidation.
7 Two principal offences of insider dealing:
• Encouraging another to deal
• Disclosing inside information other than in the proper performance of one’s employment, office
or profession
8 Yes. The offence of encouraging another to deal. It is immaterial whether the person actually deals.
9 Seven years’ imprisonment and/or an unlimited fine.
11 Correct answer(s):
A True
The Bribery Act 2010 contains an offence of being bribed.
12 Money laundering is the term given to attempts to make the proceeds of crime appear respectable.
It covers any activity by which the apparent source and ownership of money representing the
proceeds of crime are changed so that the money appears to have been obtained legitimately.
True/False
14
True/False
The maximum prison sentence for an accountant failing to make a report True
of a suspicion of money laundering is five years.
There is no prison sentence for the offence of tipping off, this is False
punished by fine only.
15 Correct answer(s):
B False
Although an accountant may not be required to report information concerning the commission of a
money laundering offence by their client, which they receive in such circumstances, the more general
‘legal professional privilege’ extends only to solicitors, barristers and suitably qualified foreign
lawyers and not to accountants, even if they advise on tax laws.
Employment law
Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance
Learning topics
1 ‘Employee’ status and its significance
2 The employment contract
3 Unfair dismissal
4 Wrongful dismissal
5 Redundancy
Summary
Further question practice
Technical references
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
Introduction
12
Learning outcomes
• Identify who is an employee and the main legal consequences of employment status
• Identify the key features of employment contracts and recognise circumstances in which an
employment contract may be terminated and the consequences arising
• Identify when dismissal constitutes:
– a wrongful dismissal
– an unfair dismissal
• Identify the circumstances where an employee can claim a statutory redundancy payment
• Identify employers’ obligations under social security law
• Identify the responsibilities of employers under the Equality Act 2010
Specific syllabus references for this chapter are: 4c, d, e, f, g and h.
12
Syllabus links
The practical effects of accounting for employees are looked at in Accounting, and auditing payroll
systems are addressed in Assurance.
12
Assessment context
You may expect several questions on employee status and the contents of an employment contract.
Redundancy, wrongful dismissal and unfair dismissal are particularly important assessment topics.
12
An employee is someone who is employed under a contract of service, ie, a contract of employment,
which can be express or implied and oral or in writing. An independent contractor is someone who
works under a contract for services and is also described as ‘self-employed’. A traditional equity
partner with a capital stake in the firm, involvement in management decisions and a share in profits
and losses is not an employee. Nor is a fixed share equity partner (Tiffin v Lester Aldridge LLP 2012).
Whether so-called ‘partners’ are employees will depend on the facts of each case. A salaried partner,
for example, is likely to be an employee for employment law purposes.
The courts are often faced with determining whether someone is an employee or an independent
contractor. In doing so, the wording of any contract will not be conclusive (but may be relevant) and,
instead, the courts will apply a multiple test, taking into account a number of factors described
below. None of these factors is conclusive and the weight attached to each may vary. This multiple
test looks at the economic reality underpinning the employment relationship and asks whether, on
balance, the person can be said to be working ‘on their own account’ or is better described as an
‘employee’.
There are three essential elements, or conditions, that must be present in order for the contract of
service (and thus the employer/employee relationship) to exist, namely:
Condition Explanation
Personal service The employee must have agreed to provide their own work and skill in the
performance of a service for their employer. However, the fact that an employee
is able to delegate that performance in limited circumstances (for example
when they are sick or only with permission) will not mean that this condition is
not met.
Control There must be some element of control exercisable by the employer over the
employee. This means that there must be a contractual right of control over the
employee, it is not simply about who controls their day-to-day work (Troutbeck
SA v White and Todd 2013).
Mutuality of There must be an obligation on the employer to provide work and an obligation
obligations on the employee to do that work. Thus a ‘casual worker’ who works as and when
required, even if in preference to others, cannot be an employee because there
is no ‘mutuality of obligations’.
If these factors are not present there can be no contract of service. The fact that they are present,
however, does not mean that there will be a contract of service. The level of service and degree of
control will be taken into account along with the other factors listed below:
Personal Can they delegate or subcontract the The greater the freedom to delegate,
performance task to another person if they so the less likely someone will be
choose and, if so, to what extent? considered to be an employee (and
total freedom will mean that the
condition of personal service is not
satisfied).
Degree of Ie, if and to what extent the employer The greater the degree of control, the
control can tell the employee not only what to more likely someone will be
do but also how and when to do it. Are considered to be an employee.
there any restrictions on where they
work or for how long they work, for
example?
Contractual The courts will consider the terms of Contractual terms may not be
provisions any contract between the parties. conclusive but, for example, including
provisions as to holiday and sick pay
will make it more likely that the
contract will be treated as a contract of
service.
Tools and Who provides and maintains the tools To the extent that such matters are the
equipment and equipment needed for the job? responsibility of the employer, the
more likely someone will be
considered to be an employee.
Uniform Do they wear any uniform or display If so, they are more likely to be
any logo belonging to the ‘employer’? considered to be an employee.
Employer’s Can they use the employer’s support If so, they are more likely to be
support staff staff? considered to be an employee.
Payment of tax, Are they paid gross or is tax deducted Deduction of tax and national
NI at source? insurance by the employer suggest a
contract of employment.
Financial Do they undertake any financial The more they assume responsibility
responsibility responsibility for investment or risk for such matters (and profits from
(for example as a result of delays in the good performance) the less likely they
performance of services they have will be considered to be an employee.
agreed)? Likewise, to what extent can
they profit from sound management in
the performance of their task?
Sole ‘employer’ Do they work for more than one To the extent that the person is able to
person? work for more than one employer,
they are less likely to be considered as
an employee.
Length of For how long has there been a The longer the relationship, the more
service working relationship between the likely they will be considered to be an
parties? employee.
It is fair to say that the nature of the claim brought before the court may influence its deliberations.
For example, if the claim relates to a breach of health and safety obligations, there will be a real
public interest in recognising an employer/employee relationship because of the statutory and
common law duties owed by an employer to an employee. Similarly, an employment tribunal might
conclude that someone is an employee, notwithstanding that the tax authorities treat them as a self-
employed person.
To decide whether someone is an employee or independent contractor you will need to interpret a
range of information from different sources.
However, there are several other practical reasons why the distinction between a contract of service
(employed) and a contract for services (self-employed) is important.
Employee Self-employed
Employee Self-employed
• remedies for unfair dismissal to which term the legislation applies, for
• health and safety protection example, statutory protection against
unfair dismissal applies to ‘employees’,
(Sometimes the protection is but working time protection applies to
subject to the employee having ‘workers’. Note, too, that statutory health
completed a certain amount of and safety obligations on employers
continuous service.) often relate to both employees and
independent contractors.
Implied terms There are rights and duties implied These implied rights and duties do not
in an employment contract by generally apply to a contract for services.
common law and statute, for
example a mutual duty of trust and
confidence.
Taxation Deductions for income tax must be The self-employed are taxed under the
made by an employer under PAYE self-assessment system and are directly
(pay as you earn) from salary paid responsible to HMRC for tax due.
to employee. The employer is
responsible for paying the
deductions to HMRC.
Social security Employers must pay secondary Independent contractors pay Class 2 and
Class 1 contributions on behalf of 4 contributions.
employees.
Employees make primary Class 1
contributions.
There are also differences in
statutory sick pay and levies for
industrial training purposes.
Yes/No
The company for which they work is required to declare and administer their
income tax under PAYE.
The company will not be vicariously liable for any tort committed by them.
They may be entitled to claim unfair dismissal in the event of their dismissal.
1.1 Workers
As well as employees and independent contractors, UK law recognises a third category of
employment – the worker. Workers are a group that fall short of being recognised as employees, but
nonetheless provide work for an organisation, so they do not fall into the independent contractor
category either.
The law provides some protection to workers (such as payment of at least the minimum wage and to
be given the minimum amount of paid leave) but not all of the benefits that are given to employees
(such as protection against unfair dismissal and the right to request flexible working).
The case of Uber BV and others (Appellants) v Aslam and others (Respondents) 2021 demonstrated
how those employed in the gig economy could be categorised as workers rather than as
independent contractors. In this case, the fact that Uber assigned rides to Uber drivers, set rates paid
to them and disciplined them based on their ratings was enough to achieve worker status. This
affected Uber’s business model as it meant that, for example, Uber drivers have to be paid for the
time they are logged onto the app regardless of whether they are needed for rides.
An employment contract needs agreement between the parties, consideration and an intention to
create legal relations just like any other contract. It may be written or oral. A written contract is likely
to contain a number of express terms as to pay, hours, place of work and any special agreements
between employee and employer going beyond legally required employment rights (such as
maternity pay offered in excess of the statutory minimum).
The case of Methodist Conference v Preston 2013 demonstrates the importance of intention to create
legal relations in an employment contract. In this case, a Methodist church minister was held not to
be an employee because the arrangements, such as the lifelong commitment to the church by the
minister, and the payment of maintenance and support, rather than a salary, was inconsistent with an
intention to be legally bound.
Generally speaking, a change in contract terms can only be made with the consent of both parties to
the contract. Also, a new piece of legislation may result in a change to a term in an employment
contract. Sometimes, an express term in the contract can give rights of variation, for example where a
‘mobility clause‘ allows an employer to require an employee to work at a different location. In such
cases, the employer must exercise the power reasonably since the courts will imply terms of trust and
respect which have the effect of overriding a strict application of contractual obligations.
United Bank Ltd v Akhtar 1989
Duty of faithful service The employee has a fundamental duty of faithful service or fidelity to
(fidelity) their employer. Thus an employee who works for an employer’s
competitor in their spare time, or who frustrates the commercial
objectives of their employer, is in breach of this duty. Similarly, where
an employee accepted personal commissions from suppliers on
orders that they placed with them for goods supplied to their
employer, they were justifiably dismissed and liable to account to the
employer for the commissions.
To obey lawful and The employee must show obedience to the employer’s instructions
reasonable orders unless they require them:
• to do an unlawful act;
• to expose themselves to personal danger (not inherent in their
work); or
• to do something outside their contract.
To exercise reasonable The employee must demonstrate reasonable competence, care and
care and skill skill in the performance of their work, bearing in mind the degree of
skill and experience that the employee professes to have.
Personal service The contract of employment is a personal one and so the employee
may not delegate their duties without the employer’s express or
implied consent.
Trust and confidence This is a mutual obligation imposed on both parties and is based on
respect and consideration for each other. An employee should not, for
example, make unjustifiable complaints or false accusations about
their employer.
To pay reasonable This duty is subject to any express provision, for example to pay a
remuneration rate fixed by the parties, or to pay nothing during a lay-off.
To indemnify employees To indemnify the employee against expenses and losses incurred in
the course of employment.
Health and safety This is normally expressed as a duty to protect the employee against
reasonably foreseeable risks to their health, safety and welfare at
work. Health and safety obligations are also imposed by statute.
This common law duty is three-fold and incorporates the obligations
to provide:
• safe plant and appliances
• a safe system of work
• reasonably competent fellow employees
To provide work To provide work. Generally speaking, an employer will not be liable
for failing to provide work as long as they continue to pay wages (so
liability is more likely to arise where someone is paid on a
commission basis).
To provide accurate An employer does not have a duty to provide a reference (but if they
reference (where one is do provide one, they must exercise reasonable care and skill to
provided) ensure that the information contained in it is accurate and gives a fair
impression of the employee. In particular, an employer cannot
divulge information that is not known to the employee (for example
customers’ complaints against the employee).
Not to disclose The employer must not divulge confidential information about the
confidential information employee to a third party without the employee’s consent.
To maintain mutual trust The employer must treat the employee with due respect and
and confidence consideration. They must not, for example, conduct their business in
a disreputable fashion, thereby damaging the employee’s reputation
and future employment prospects.
Legislation also imposes a number of implied duties on employers. Many of these duties are
concerned with ‘family-friendly’ employment and the ‘work–life balance’, for example provisions
regarding maternity and paternity rights, flexible working arrangements and time off work. The
principal duties implied by statute are as follows:
Subject Duty
Health and safety The Health and Safety at Work Act 1974 (HMSO, 1974) imposes general
duties on employers, including a duty to ensure the continuing good
health, safety and welfare of their employees, as far as is practicable. This
general duty includes the following obligations:
• To provide and maintain plant and systems of work that are safe and
without risk
• To make arrangements to ensure safe use, handling, storage and
transport of articles/substances
• To provide adequate information, instruction, training and supervision
• To maintain safe places of work and ensure that there is adequate
access in and out
• To provide a safe and healthy working environment
Equality Not to discriminate on certain grounds such as race, sex, disability, religion
or belief, sexual orientation or age (see Equality Act below).
2.4 Employer’s duties under social security law and work-life balance
The following table summarises the main duties of employers regarding social security and work-life
balance rules.
Flexible working Employees have the right to apply for a change in terms and
conditions of employment in respect of hours, time and place of
work and not to be unreasonably refused.
Ante-natal care Employees have the right not to be unreasonably refused time
off for antenatal care during working hours.
Maternity pay Employees are entitled to statutory maternity pay which is paid
for 39 weeks during statutory maternity leave.
It is only paid if the employee has at least 26 weeks’ service at
the time of giving notice and earns more than a statutory
minimum.
The amount of maternity pay received is based on the
employee’s salary and is subject to a statutory maximum.
Paternity leave Employees who have been with their employer for at least 26
weeks before the 15th week before the baby is due can claim
paternity leave.
Eligible employees are entitled to take either one week or two
consecutive weeks paid paternity leave.
Paternity pay As with maternity pay, paternity pay is based on salary and
subject to a statutory maximum.
Shared parental leave and pay Employees who are entitled to maternity leave must take a
minimum of two weeks’ leave after the birth of their baby (four
weeks for factory workers) but they have the option to share the
balance of their maternity leave and pay allowance with their
partner if they wish. This is known as shared parental leave and
statutory shared parental pay.
Adoption leave and pay Employees who have adopted a child have a right to statutory
adoption leave and statutory adoption pay.
The rules for qualifying for this, and the amounts of leave and
pay, are the same as for statutory maternity leave and pay.
Parental bereavement leave Parents who lose a child under the age of 18 (including
stillbirths after 24 weeks) are entitled to two weeks’ paid leave
under the Parental Bereavement (Pay and Leave) Act 2018
(TSO, 2018).
Definitions
Direct discrimination: Treating people less favourably than others because of a protected
characteristic.
Indirect discrimination: Applying a policy or practice which disadvantages people with a protected
characteristic.
Harassment: Any unwanted conduct related to a relevant protected characteristic.
Victimisation: Being treated badly because of performing a protected act.
Solution
Alana has a case for indirect discrimination. The oil rig company’s choice of equipment clearly
discriminates against people with smaller hands, a characteristic most likely to found amongst female
candidates. The company should re-instate Alana and either change the equipment or provide a
suitable alternative for her to use instead.
Solution
Raj has been the subject of direct discrimination because his application has been refused on the
basis of his sex. However, the employer will not be liable because the nature of the work means that
this discrimination is necessary.
≥2 years but < 12 years Not less than 1 week per year of continuous employment
Either party may waive their entitlement to notice or accept a sum in lieu of notice.
During the period of notice an employee is entitled to pay at a rate not less than the average of their
earnings over the previous 12 weeks.
• Employees covered by the statutory provisions for unfair dismissal have the right not to be
unfairly dismissed.
• Breach of this right allows an employee to bring a claim for unfair dismissal to an employment
tribunal.
• Reasons for dismissal are considered to be either automatically unfair or potentially fair.
• Remedies include re-instatement, re-engagement and compensation.
Legislation has widened the scope of protection to employees and increased the range of remedies
available in the event of dismissal. Unfair dismissal is governed by the Employment Rights Act 1996
as amended by the Employment Act 2008 (TSO, 2008).
3.2 Dismissal
Dismissal for the purposes of an unfair dismissal claim may occur in one of three situations:
• the non-renewal of a contract for a fixed term or specific task;
• a termination by the employer, with or without notice; or
• a constructive dismissal.
Constructive dismissal occurs where the employer repudiates some essential term of the contract,
for example by the imposition of a complete change in the employee’s duties, and the employee
resigns.
To establish constructive dismissal, an employee must show that:
• their employer has committed a serious breach of contract
• they left because of the breach
Constructive dismissal can be problematic to prove but could be tested in a scenario question. The
best approach is to consider the facts of the scenario and then to apply the basic rule on constructive
dismissal; did the employee leave because the employer repudiated their employment contract?
Reason
Capability or If the employer dismisses for want of capability on the part of the employee, the
qualifications employer has to establish that the lack of capability at the time of dismissal was
of such a nature and degree as to justify a dismissal, taking into account:
• what the contract requires
• the general standard of performance of their employees in this trade
• the previous standard of performance of the dismissed employee themselves
The lack of capability or qualification must be sufficiently serious and it may arise
from one particular incident or a series of incidents. Thus, for example, a shop
manageress who left her shop dirty and untidy, who failed to maintain cash
registers and who did not put stock away was fairly dismissed.
In another case, an airline pilot who landed his plane negligently on one
occasion was held to have been fairly dismissed. It was recognised that the
degree of professional skill was so high in his case that even small departures
from that standard could be sufficiently serious as to justify dismissal.
Employee’s It is not necessary to prove that the employee is guilty of the alleged
misconduct misconduct, only that the employer genuinely and reasonably believes them to
be. Various types of misconduct have been held to justify dismissal, including
abusive language, drink and drug abuse, theft and dishonesty, violence,
downloading pornography, racial and sexual harassment and persistent lateness
or absenteeism.
Statutory This applies where there is a legal prohibition or restriction on either the
restriction employer or the employee which prevents the employment from being
continued lawfully (for example, if a doctor or a solicitor employed as such is
struck off the relevant professional register, or an employee loses their driving
licence, which they need to be able to do their job).
Some other Ie, some other substantial reason that could justify the dismissal of an employee
substantial holding the position that the employee held. Thus, dismissal has been
reason considered fair where, for example:
• The employee was married to one of their employer’s competitors.
• The employee refused to accept a change of shift working, made in the
interests of the business and with the agreement of a large majority of other
employees.
• The employee’s alleged paedophile activity substantially risked the
reputation of their public sector employer (even though the employee was
not convicted of any offence).
Following the abolition of the default retirement age, an employer who wishes
to dismiss an employee on retirement grounds will need to satisfy this ground of
‘some other substantial reason’. They will need to show that the retirement age is
proportionate and objectively justified and also that a fair procedure has been
followed.
Yes/No
3.5 Reasonableness
Once the employment tribunal is of the view that the dismissal occurred for a potentially fair reason,
it is then required to review the circumstances and to decide whether ‘on the basis of equity and the
substantial merits of the case’, the employer acted reasonably in dismissing the employee. Whether
the employer has acted reasonably or unreasonably is a question of fact depending on all the
circumstances, including the size and resources of the business. The tribunal will consider:
• Have relevant procedures been followed? These may include internal procedures, contractual
provisions or a code of practice relevant to the employment. In particular, the tribunal will have
regard to the Acas code of practice in this area (see 3.6 below) in deciding whether the employer
behaved reasonably.
• Did the employer take all circumstances into consideration? For example, if an inexperienced
employee is struggling to do their work, the employer is expected to help by advice or
supervision in the hope that they may improve.
• What would any reasonable employer have done?
Except in the most flagrant cases, it is not reasonable for an employer to dismiss an employee
without first warning them that if they continue or repeat what has happened at least once they are
Yes/No/Maybe
Remedy Description
Re-instatement An order that the employee may return to the same job without any break of
continuity.
In deciding whether to exercise these powers, the tribunal must take into
account whether the complainant wishes to be re-instated and whether it is
reasonably practicable and just for the employer to comply. Such orders are in
fact very infrequent.
Re-engagement An order that the employee is given new employment with the employer (or
their successor or associate) on terms that are comparable with the old job or
otherwise suitable.
The Employment Appeal Tribunal has ruled that an order for re-engagement
should not be made if there has been a breakdown in confidence between the
parties. This was in a case where the employee was dismissed following
allegations of drug dealing on company premises and time-keeping offences.
Compensation Compensation may be ordered in three categories (in each case subject to
statutory maximums that are updated from time to time):
• A basic award, calculated by reference to the employee’s length of service
and age and which is subject to a prescribed maximum amount. It is liable
to be reduced where the employee unreasonably refuses an offer of re-
instatement or otherwise behaves unreasonably. The basic award is also
reduced by the amount of any redundancy payment made. However, the
basic award is made for unfair dismissal regardless of the loss suffered by
the employee and there is no duty on the employee to mitigate any loss.
• A compensatory award, being such amount as the tribunal considers to be
‘just and equitable in all the circumstances, having regard to the loss
sustained by the complainant in consequence of the dismissal in so far as
that loss is attributable to action taken by the employer’ (and taking account
of the basic award). This will be in respect of any additional loss of earnings,
expenses and benefits and will be assessed on common law principles of
damages for breach of contract, including a duty on the employee to take
reasonable steps to mitigate any loss. Note that the statutory maximum
does not apply to unfair dismissals on whistleblowing or reporting health
and safety grounds.
• An additional award, which can only be awarded if the employer does not
comply with an order for re-instatement or re-engagement and does not
show that it was impracticable to do so. It comprises between 26 and 52
weeks’ pay (subject to a prescribed maximum, as with the basic award).
In addition, a tribunal may order the employer to pay consequential losses to the employee to reflect
any financial loss suffered as a result of the employer making unauthorised deductions or failing to
make redundancy payments (s.7 Employment Act 2008).
• Wrongful dismissal is a common law action that applies where an employer dismisses an
employee in breach of contract.
• Summary dismissal may be justified in exceptional circumstances.
• The usual remedy for wrongful dismissal is damages but an injunction or declaration may be
awarded.
Yes/No
An employee who has worked for an employer for six years is given one
month’s notice of dismissal.
The contract between employer and employee states that the employee
cannot be dismissed during a three-month training period and the employer
dismisses the employee after two months.
In real-life, unfair and wrongful dismissal cases may not be clear cut and often need expert advice
before deciding how to proceed with a case. You should be conscious of the limits of your own
expertise and seek legal advice is appropriate.
5 Redundancy
Section overview
• Redundancy is a form of dismissal (and may be fair or unfair depending on the circumstances).
• Redundancy gives rise to a right to a statutory redundancy payment provided certain criteria are
met.
Redundancy payments are often an important calculation to make when a business is deciding
whether to close down or relocate an operation. It is important to clearly present calculations in a
format that is easy for others to understand and verify.
Not to disclose
confidential
information
Provide work Equal pay
Remuneration
Employer Not to
Indemnity Note some statutory duties discriminate
owed to 'employees', some
Health and Trust and
to 'workers'
Notice safety confidence
Statutory
minimum Mutuality of Contractual Tools and No. of
Tax
obligations? provisions equipment employers
Personal Restriction
service?
Employee on place
Financial Length of
Control? Delegation Uniform
responsibility service
Statement of
written particulars
NO
YES
'independent contractor'
Employment
Sch E Tax Sch D
contract
Class 1 Social security Class 2&4
Implied
duties Vicarious Tort X
liability
Fidelity
Apply Implied terms X
Personal
service
VAT Register
Trust and Employment
confidence Applies May apply if
protection 'worker'
Reasonable legislation
care and skill
Before Employee
Insufficient fixed Redundancy Any breach accepts
No notice
notice expiry in breach of contract employer's
repudiation
Justified?
Yes
(gross misconduct, gross or No
persistent neglect, Liable for wrongful
dishonesty, willful refusal) dismissal
Redundancy
'Employee' claim
within 3 months
Non renewal fixed contract
Show dismissed Termination by employer with
or without notice
Constructive dismissal
Employer shows
reason
Pregnancy
Capability/qualifications Spent conviction
Misconduct Employer Trade union
Legal prohibition acted Transfer (unless...)
Some other substantial reason reasonably Statutory rights
Averting danger
Protected disclosure
Unreasonable breach of
Yes disclipinary code unfair 25%
No
No liability increase/decrease in award
Remedies
Basic
Compensatory
Additional
1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following questions
having studied this chapter. If not, you are advised to revisit the relevant learning from the topic
indicated.
1. Can you explain the factors that you would use to decide whether an individual is
employed or self-employed? (Topic 1)
4. Do you know the difference between wrongful and unfair dismissal? (Topic 4)
Lack of qualification
Pregnancy
Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for
this chapter.
Yes/No
The company for which they work is required to declare and administer their Yes
income tax under PAYE.
The company will not be vicariously liable for any tort committed by them. No
If the company is liquidated, they will have preferential rights to payment of Yes
salary.
They may be entitled to claim unfair dismissal in the event of their dismissal. Yes
Yes/No
In both cases unfair dismissal may have taken place. Asif meets the continuous employment
requirement (of one year, because they were employed before April 2012) and has been dismissed,
so qualifies as a candidate for unfair dismissal if the circumstances surrounding the dismissal were
unfair. Although Beatrice has not been employed continuously for two years, this is irrelevant as she
has been dismissed for pregnancy.
Yes/No/Maybe
Yes/No
The employee has resigned as a result of their employer’s serious breach of Yes
contract.
An employee who has worked for an employer for six years is given one Yes
month’s notice of dismissal.
The contract between employer and employee states that the employee Yes
cannot be dismissed during a three-month training period and the employer
dismisses the employee after two months.
The employer is likely to incur liability for wrongful dismissal in all cases except the last, since gross
negligence on the employee’s part will justify summary dismissal.
2 Correct answer(s):
B False
3 Generally speaking, no (although a salaried partner, for example, maybe).
4 Correct answer(s):
A True
5 Any of the following:
• Social security
• Taxation
• Employment protection
• Tortious acts
• Health and safety
• Implied terms
• VAT
• Rights on insolvency
6 On or before the first day of the employment.
7 Correct answer(s):
A To ensure adequate access to places of work
D To provide a healthy working environment
8 Five weeks (one week for each year’s continuous service)
Pregnancy None
13 Correct answer(s):
A Compensation
14 Yes, in cases of serious breach of contract by the employee (for example gross negligence or wilful
refusal to obey lawful instructions).
15 Three remedies:
• Damages
• Injunction
• Declaration
16 Two years
Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance
Learning topics
1 The Data Protection Act 2018
2 Intellectual property
Summary
Further question practice
Technical references
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
Introduction
13
Learning outcomes
• Identify the key requirements of the Data Protection Act 2018, on the use of personal information
and how the Act can affect the manner in which information systems are used by businesses
• Recognise the requirements of protecting intellectual property, including digital contexts
Specific syllabus references for this chapter are: 4a and b.
13
Syllabus links
You will, or you may, have already dealt with information processing and security in Business,
Technology and Finance. The Data Protection Act is one of the reasons information must be kept
secure.
13
Assessment context
Although data protection and intellectual property are relatively minor areas of the syllabus, you
should be prepared for questions on their practical application.
13
Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.
ICAEW 2023 13: Data protection and intellectual property law 369
1 The Data Protection Act 2018
Section overview
• The Act is concerned with personal data (subject to some exemptions) held on computer-based
information systems and manual files.
• The purpose of the Act is to protect individuals from misuse of information held about them and
to give them more control and rights in relation to it.
• The Act provides a framework of rules which implements and supplements the EU’s General Data
Protection Regulation (GDPR).
• The Act requires all those who hold or process personal data to comply with data protection
principles in relation to that data.
• Individuals are given rights in relation to their personal data, such as rights of access and the right
to rectify inaccurate data.
The Data Protection Act 2018 (TSO, 2018) is an Act which sets out the UK’s approach to data
protection. The Act embodies the principles and rights of the EU’s General Data Protection
Regulation (GDPR) which came into force in May 2018. However, the Act goes further by setting out
a framework of rules which are wider in scope than the GDPR.
Data controllers determine the purpose and means of processing personal data.
Data processors are responsible for processing personal data on behalf of a controller.
Data subjects are identified or identifiable individuals (not companies) to whom personal data
relates.
It is important to note that although data controllers may delegate the processing of data to a data
processor, they are not relieved of the responsibility to ensure that the data is processed in
accordance with the Act.
Solution
Ensign plc’s customers are each a data subject. They are private individuals and the data collected
about them is personal.
Logan is the data controller. She determines the purpose and means of processing personal data.
Mila is a data processor. She is responsible for processing personal data on behalf of a controller.
When applying the Data Protection Act, it is important to identify which party is the data controller,
processor and subject. Carefully identify all the parties involved and from the facts available to you,
decide which party has which role.
1.2 Enforcement
Under the Act, the Information Commissioner is the UK’s regulator for data protection. The
Information Commissioner has statutory powers to enforce non-compliance with the Act. They must
be informed within 72 hours of a data breach that affects the rights and freedoms of individuals. In
high-risk cases, the individuals must be notified as well.
Non-compliance with the Act may result in:
• a criminal conviction where a criminal offence has been committed under the Act (for example for
the re-identification of data with an individual after it had been anonymised); or
• a fine of up to €20 million (approximately £18 million depending on the exchange rate) or 4% of
the organisation’s global turnover imposed by the Information Commissioner.
The principles
Lawfulness, fairness There must be valid grounds for holding the data. Data must be used
and transparency fairly and there must be clarity, openness and honesty in how the data is
used from the start.
Purpose limitation The purpose for recording the data must be recorded and made clear to
the data subject from the start. Under the Act, the purpose must be
specified, explicit and legitimate. If data is used for a new purpose then
consent must be obtained unless there are legal grounds for using the
data.
Data minimisation Under the Act, data must be adequate (sufficient to fulfil the purpose),
relevant (linked rationally to the purpose) and not excessive (limited to
what is necessary to fulfil the purpose).
Accuracy Reasonable steps must be taken to ensure the data is not incorrect or
misleading. Under the Act, ongoing processing must be accurate and
kept up to date. Data which is found to be inaccurate or misleading must
be corrected.
Storage limitation Under the Act, data should not be kept for longer than is necessary for
the purpose for which it was processed. There should be a retention
policy that can be justified. Data which is no longer needed should be
destroyed or anonymised.
Integrity and Under the Act, data processing must take appropriate security measures
confidentiality as regards risks that might arise. Appropriate technical and
(security) organisational measures should be in place to protect the data.
ICAEW 2023 13: Data protection and intellectual property law 371
1.4 The rights of data subjects
The Act also enacts the following rights of data subjects from the GDPR:
The right
The right to be Individuals have the right to be informed about the collection and use of
informed their personal data. Privacy information includes the purposes for which
data is collected, retention periods and who the information is shared
with. This must be given to the individual when the personal data is
collected or within a month if the data was collected from another
source.
The right of access Individuals have the right to access the information which is held about
them. They can request the information verbally or in writing and it must
be provided within one month, and in most circumstances, must be free
of charge.
The right to Individuals have the right for inaccurate information held about them to
rectification be rectified and incomplete information be made complete. They can
request the rectification verbally or in writing and it must be completed
within one month. In certain circumstances the right may be refused.
The right to erasure This is also known as the right ‘to be forgotten’. Individuals have the right
to have information held about them erased. They can request the
erasure verbally or in writing. The right only applies in certain
circumstances and the individual must be given a response within one
month.
The right to restrict Individuals have the right to have their data restricted or suppressed.
processing This means that the data can be held but not processed. They can
request the restriction verbally or in writing. The right only applies in
certain circumstances and the individual must be given a response within
one month.
The right to data Individuals have the right to obtain data that they have given to the data
portability controller and to reuse it in a different service. For example, data held by
an individual’s online banking app can be requested by that individual
and transferred to another bank or smartphone app provider.
The right to object Individuals have the right to object to the processing of their data. In
regard to direct marketing, the individual has an absolute right to object.
In other circumstances, the right can be refused if there is a compelling
reason to do so. They can object verbally or in writing and a response
must be given within one month.
Rights in relation to Individuals are granted rights where data held about them is used to
automated decision make automated decisions about them, or where data evaluation about
making and profiling them is automated (profiling). There are strict circumstances where these
processes can be used and the individual has a right to information
about the processing and to request human intervention or to challenge
decisions made following the processing.
Just like the ICAEW’s Ethical Principles, the application of the data protection principles requires the
exercise of professional judgement. What is important is your ability to justify how and why you
applied the principles as you did.
Yes/No
Does the bank face a fine for holding inaccurate data on Kylie?
Was the bank correct in charging Kylie £10 to see her data?
Must the bank respond within two weeks to Kylie’s demand that the marketing
emails cease?
2 Intellectual property
Section overview
• Intellectual property is an intangible asset that is created from the knowledge or skill of
employees.
• There are a number of methods available to protect intellectual property. Some are granted
automatically; others have to be applied for.
Intellectual property (IP) is a form of intangible asset that a company creates through the application
of skill and knowledge of its employees. Examples of intellectual property include:
• the names of products or brands (eg, brand names)
• inventions (eg, bagless vacuum cleaners)
• the design or look of products (eg, design of car engines)
• items that the employees wrote, made or produced (eg, digital products such as music, books or
film)
ICAEW 2023 13: Data protection and intellectual property law 373
2.1 Protecting digital intellectual property
Due to the nature of digital intellectual property, it is quite easy for unscrupulous parties to steal and
profit from it. Examples of misuse include:
• ripping or downloading music for redistribution
• copying DVDs for resale
• plagiarising written material, such as in textbooks, for inclusion in other publications
There are a number of methods that a company can use in order to legally protect its intellectual
property, whether digital or otherwise. However, to gain protection the owner of the IP must have
either created it or transferred ownership from the person or organisation that did. Examples of
protection include:
Method of IP Explanation
protection
Copyright Automatic protection is given for IP that is written, in the form of music, film, art
and internet content. This is of most relevance to digital products such as music
and film.
The protections offered are:
• written, dramatic, musical and artistic work – 70 years from the author’s
death
• sound and music recording – 70 years from when first published
• films – 70 years after the death of the director, screenplay author and
composer
• broadcasts – 50 years from when first broadcast
• layout of published editions of written, dramatic or musical works – 25 years
from when first published
Trademark Protection for product names, jingles and logos. This must be applied for and
granted.
Lasts for 10 years.
Registered Relates to the design of a product, such as its packaging, patterns, colours and
design decoration. Protection must be applied for and granted.
Lasts for 25 years.
Intellectual property law is a highly specialist area. As an accountant you are expected to have an
understanding of the main issues, but be careful when offering advice and making recommendations
in this area. Very often, the most appropriate course of action will be to recommend passing the
matter over to a lawyer with a great deal of experience in this area of law.
Copyright, Designs and Patent Criminal liability for making, dealing with or using illicit
Act 1988 (HMSO, 1998) recordings
Selling, hiring or exhibiting copyrighted material. For example,
the public performance of copyrighted music, such as a
business streaming music to its customers.
Registered Designs Act 1949 Offence of unauthorised copying etc, of design in course of
(HMSO, 1949) business
Creating a product using the exact or materially similar design
specifications of another product.
There are various ways that an organisation can protect its intellectual property. In some instances, it
might not be obvious at first glance which is the most appropriate law to use. To help make the
decision, carefully identify the asset to be protected and what exactly the organisation needs to
protect. Remember that more than one solution might be available.
ICAEW 2023 13: Data protection and intellectual property law 375
Summary
1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following questions
having studied this chapter. If not, you are advised to revisit the relevant learning from the topic
indicated.
1. Do you know the principles and rights of the Data Protection Act 2018? (Topic 1)
2. Can you state the five methods of protecting intellectual property? (Topic 2)
ICAEW 2023 13: Data protection and intellectual property law 377
Technical references
Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for
this chapter.
ICAEW 2023 13: Data protection and intellectual property law 379
Answers to Interactive questions
Yes/No
Does the bank face a fine for holding inaccurate data on Kylie? Yes
Was the bank correct in charging Kylie £10 to see her data? No
Must the bank respond within two weeks to Kylie’s demand that the marketing No
emails cease?
Must the bank correct the data it holds about Kylie? Yes
(1) A breach of the Act makes the bank liable for a fine.
(2) Data subjects should not usually be charged to see their data.
(3) The bank has a month to respond.
(4) Kylie has a right for inaccurate data to be rectified.
1 Correct answer(s):
A True
2 Correct answer(s):
B Personal data shall not be kept for longer than six years.
The principle is that data shall not be kept for longer than is necessary for the purpose for which it is
processed.
ICAEW 2023 13: Data protection and intellectual property law 381
382 Law ICAEW 2023
Appendix
384 Law ICAEW 2023
Terminology
Acceptance An unqualified agreement to the terms of the offer.
Agent A person authorised to act for another (the principal) and bring that other
into legal relations with a third party.
Annual general Every public company is required to hold a meeting of each its members
meeting (AGM) each year at which it is usual, but not obligatory, to transact the ‘ordinary
business’ of the company. Such business may include consideration of
the accounts, declaration of a dividend and appointment of auditors.
Articles of association Rules governing the internal conduct of a company’s affairs, such as
appointment, powers and proceedings of directors, alteration of capital
structure, dividends and so on.
Breach of contract Where a party does not perform their contractual obligation sufficiently.
Business name A name used by a company other than the registered one.
Capacity The ability or power of a person to enter into legal relationships or carry
out legal acts.
Care, duty of The care owed by one person to another which, if broken, may give rise
to an action for negligence.
Claimant The party who brings a claim in a civil court. They were previously known
as the plaintiff.
Company An entity registered under the Companies Act 2006 or any earlier
Companies Act.
Confirmation Statements that confirm to the Registrar that there have been no changes
statements to the information held by them about the company during the previous
12 months, or, if changes have been made, they record the changes that
have occurred.
Conflict of interest Where the personal interests of an individual clash with another party’s
interests that they have the power to control.
Consideration Consists either in some right, interest, profit or benefit accruing to one
party to a contract, or some forbearance, detriment, loss or responsibility
given, suffered or undertaken by the other. Broadly, the element of value
that each party contributes to the contract.
Creditors’ voluntary A form of liquidation where a company does not provide a declaration of
liquidation solvency. If no such declaration is made, the liquidation proceeds as a
creditors’ voluntary winding up even if in the end the company pays its
debts in full.
Crystallisation The point at which certain events cause a floating charge to be converted
into a fixed charge.
Damages The sum claimed or awarded in a civil action in compensation for the loss
or injury suffered by the claimant.
Defendant The person against whom a civil action is brought or who is prosecuted
for a criminal offence.
Director A person who takes part in making decisions and managing a company’s
affairs.
Express term A term that is clearly agreed to by the parties in a contract to be a term of
that contract. In examining a contract, the courts will look first at the terms
expressly agreed by the parties.
Fiduciary duty A duty imposed upon certain persons because of the position of trust
and confidence in which they stand in relation to another. This is
particularly relevant to company directors.
Fixed charge A charge attaching to a particular asset on creation. The asset in question
is usually a fixed asset, which the company is likely to retain for a long
period. If the company defaults in payment of the debt the holder can
realise the asset to meet the debt. Fixed charges rank first in order of
priority in a liquidation.
Floating charge A charge on a class of assets of a company, present and future which
changes in the ordinary course of the company’s business. Until the
holders enforce the charge the company may carry on business and deal
Fraud on the minority Discrimination by the majority shareholders against the minority. The
minority may have a remedy at common law.
Fraudulent trading Carrying on business and incurring debts when there is to the knowledge
of the directors no reasonable prospect that these debts will be repaid,
ie, with intent to defraud the creditors. Persons so acting may be liable for
the debts of the company as the court may decide.
Freedom of contract Principle that parties may contract on the terms which they choose.
Good faith Fair and open action without any attempt to deceive or take advantage of
knowledge of which the other party is unaware.
Implied term Term deemed to form part of a contract even though not expressly
mentioned by the parties.
Injunction An equitable remedy in which the court orders the other party to a
contract to observe contractual terms.
Insider A person has information as an insider if it is (and they know it is) inside
information, and if they have (and know they have) it from an inside
source through being a director, employee or shareholder of a company
or by having access to it because of their employment, office or
profession (eg, as auditor), or through a source within either category.
Intellectual property A form of intangible asset that a company creates through the application
of skill and knowledge of its employees.
Insolvency The inability to pay creditors in full after realising all the assets of a
business.
Invitation to treat Indication that someone is prepared to receive offers with a view to
forming a binding contract. It is not an offer in itself.
Lifting the veil (of A company is normally to be treated as a separate legal person from its
incorporation) members. ‘Lifting the veil’ means that the company is identified with its
members or directors or that a group of companies is to be treated as a
single commercial entity. An example of this is to prevent fraud.
Liquidated damages Fixed sum agreed by parties to a contract and payable in the event of a
breach.
Liquidator A person who organises a company’s liquidation or winding up. Their task
is to take control of the company’s assets with a view to their realisation
and the payment of all debts of the company and distribution of any
surplus to members.
Listed company A company whose shares are quoted on a recognised stock exchange.
Managing director One of the directors of the company appointed to carry out overall day-
to-day management functions.
Members’ voluntary A form of liquidation where the directors have made a declaration of
winding up solvency and the members have passed a resolution that the company be
wound up.
Memorandum of A memorandum in the prescribed form stating that the subscribers wish
association to form a company and agree to become members of the company and,
in the case of a company with a share capital, agree to take at least one
share each. It must be authenticated by each subscriber.
Minutes A written, indexed record of the business transacted and decisions taken
at a meeting. Company law requires minutes to be kept of all company
meetings. Minutes of general meetings should be available for inspection
by members.
Misrepresentation False statement made with the object of inducing the other party to enter
into a contract.
Mitigate An action by the injured party to limit the effect of any loss or damage
caused by the defendant.
Negligence This may refer to the way in which an act is carried out, that is carelessly,
or to the tort which arises when a person breaches a legal duty of care
that is owed to another, thereby causing loss to that other.
Off-the-shelf company A company that has been ‘ready-made’ and available to purchase by
those wishing to incorporate their business quickly.
Ordinary share A share which gives the holder the right to participate in the company’s
surplus profit and capital. The dividend is payable only when preference
dividends, including arrears, have been paid.
Past consideration Something already done at the time that a contractual promise is made.
Penalty clause A term in a contract that fixes a specific sum to be payable to the injured
party in the event of breach of contract. The objective is to penalise the
party in breach rather than to recover actual losses.
Perpetual succession The company continues to exist despite the death, insolvency, or insanity
of any member or director, any change in membership or any transfer of
shares.
Private company A company which may not offer shares to the public, and which has not
been registered as a public company.
Privity of contract A principle of contract law that states only parties to a contract may sue
on it.
Public company A company registered as such under the Companies Act. The principal
distinction between public and private companies is that only the former
may offer shares to the public.
Quasi-loan An agreement between two parties where one pays the other’s debts on
the condition that the second party agrees to reimburse them at some
later date.
Quantum meruit As much as they have deserved. A restitutory award that may be granted
in cases of breach of contract to reflect the value of the work done.
Ratification Occurs in agency law where the agent acts on behalf of the principal
before the agency agreement is created. The principal agrees to be
bound by those acts once the agency agreement is formed.
Registration Process by which a company comes into being, which involves the filing
of documents with the relevant authority and the issuance of a certificate
of registration.
Remoteness of Relationship between a wrongful act and the resulting damage which
damage determines whether or not compensation may be recovered. Different
principles apply in contract and in tort.
Sale of goods A contract whereby the seller transfers or agrees to transfer the property
in goods for a money consideration called the price.
Shadow director A person in accordance with whose instructions other directors are
accustomed to act.
Specific performance An equitable remedy in which the court orders the defendant to perform
their side of a contract.
Standard form A standard document prepared by many large organisations and setting
contract out the terms on which they contract with their customers.
Subsidiary company A company under the control of another company, its holding company.
Third party A party that does not have a legal connection with a contract but who
might be affected by it.
Tort A wrongful (but not necessarily criminal) act by one person to another.
No contractual relationship is needed between the parties for a liability to
be created.
Unenforceable A contract that will not be enforced by the court in the event of its breach.
contract
Unlimited liability Members do not have limited liability and in the event of liquidation
members are required to contribute as much as needed to repay the
company’s debt in full.
Void contract Not a contract at all. The parties are not bound by it and if they transfer
property under it they can sometimes recover their goods even from a
third party.
Voidable contract A contract which one party may avoid, that is, terminate at their option.
Property transferred before avoidance is usually irrecoverable from a
third party.
Wrongful trading The term used where directors of an insolvent company knew or should
have known that there was no reasonable prospect that the company
could have avoided insolvency and did not take sufficient steps to
minimise the potential loss to the creditors.
Indirect discrimination: Applying a policy or practice which disadvantages people with a protected
characteristic.
Executed, 34 Guarantee, 26
Just and equitable winding up, 210 Members’ voluntary liquidation, 273
Memorandum of association, 159
L Micro-entities, 170
Lack of commercial probity, 201 Misrepresentation, 26
Lapse of time, 29 Mistake, 25
Law of Property Act 1925, 270 Mitigation of loss, 63
Law Reform (Contributory Negligence) Act 1945, Mobility clause, 338, 353
111
Model articles, 164
Law Reform (Frustrated Contracts) Act 1943, 59
Money laundering, 297, 299
Legal personality, 152
Money Laundering Regulations 2017, 12, 300
Legislation, 6
Money or money’s worth, 233
Legitimate profit, 161
Moratorium, 272
Liability of the parties, 88
Mutuality of obligations, 334
Licensed insolvency practitioner, 280
Lifts the veil, 154 N
Limitation period, 101 Name, 157, 163
Limited by guarantee, 157 Negative pledge clause, 279
Limited by shares, 157 Negligence, 102, 199
Limited companies, 156 Negligent misstatement, 102, 106
Limited liability, 153 Net assets, 243
Limited liability partnerships, 134 New partner, 133
Limited Liability Partnerships Act 2000, 134 Nominal value, 233
Limited Liability Partnerships Regulations 2001, Non-cash consideration, 233
135 Non-executive director, 192
Limited Partnership Act 1907, 134 Not to accept benefits from third parties, 198
Liquidated damages, 64 Notice, 213
Liquidation, 244, 245, 273, 309 Notice provisions, 344
Liquidator, 202, 247, 276
Listed company, 203 O
Listed shares, 235 Objectivity, 312
Loan capital, 236, 243 Objects, 194
Remedies for unfair dismissal, 350 Special resolution, 157, 163, 273
Separate legal person, 205 Threats for accountants in public practice, 313
V
Variation of class rights, 206
Veil of incorporation, 154
Vicarious liability, 113
Vicarious liability and agency, 114
Vicarious liability and partnership, 114
Victimisation, 343