May

COMPANY LAW - LECTURE NOTES-LLB

3
COMPANY LAW - LECTURE NOTES
I. INTRODUCTION TO INCORPORATION
1. Definition of a "Company"
A company is a "corporation" - an artificial person created by law.
A human being is a "natural" person.
A company is a "legal" person.
A company thus has legal rights and obligations in the same way that a natural person
does.
2. Companies and Partnerships Compared
(a) A company can be created only by certain prescribed methods - most
commonly by registration under the Companies Act 1985. A partnership is
created by the express or implied agreement of the parties, and requires no
formalities, though it is common to have a written agreement.
(b) A company incurs greater expenses at formation, throughout its life and on
dissolution, though these need not be excessive.
(c) A company is an artificial legal person distinct from its members. Although
in Scotland a partnership has a separate legal personality by virtue of s.4(2) of
the Partnership Act 1890, this is much more limited than the personality
conferred on companies.
(d) A company can have as little as one member and there is no upper limit on
membership. A partnership must have at least two members and has an upper
limit of 20 (with some exceptions).
(e) Shares in a company are normally transferable (must be so in a public
company). A partner cannot transfer his share of the partnership without the
consent of all the other partners.
(f) Members of a company are not entitled to take part in the management of
the company unless they are also directors of it. Every partner is entitled to take
part in the management of the partnership business unless the partnership
agreement provides otherwise.
(g) A member of a company who is not also a director is not regarded as an
agent of the company, and cannot bind the company by his actions. A partner in
a firm is an agent of the firm, which will be bound by his acts.
(h) The liability of a member of a company for the debts and obligations of the
company may be limited. A partner in an ordinary partnership can be made
liable without limit for the debts and obligations of the firm.
(i) The powers and duties of a company, and those who run it, are closely
regulated by the Companies Acts and by its own constitution as contained in
the Memorandum and Articles of Association. Partners have more freedom to
alter the nature of their business by agreement and without formality, and to
make their own arrangements as to the manner in which the firm will be run.
(j) A company must comply with formalities regarding the keeping of registers
and the auditing of accounts which do not apply to partnerships.
(k) The affairs of a company are subject to more publicity than those of a
partnership - e.g. companies must file accounts which are available for public
inspection.
(l) A company can create a security over its assets called a floating charge,
which permits it to raise funds without impeding its ability to deal with its
assets. A partnership cannot create a floating charge.
(m) If a company owes a debt to any of its shareholders they can claim
payment from its assets rateably with its other creditors. A partner who is owed
money by the partnership cannot claim payment in competition with other
creditors.
(n) A partnership (unless entered into for a fixed period) can be
dissolved by any partner, and is automatically dissolved by the death or
bankruptcy of a partner, unless the agreement provides otherwise. A
company cannot normally be wound up on the will of a single member,
and the death, bankruptcy or insanity of a member will not result in its
being wound up.
3. History
4. Types of Company
A company can be formed in a number of ways:
(a) By Royal Charter (Chartered Companies)
Formed by grant of a charter by the Crown.
Promoters of the company petition the Privy Council attaching draft of proposed
charter to the petition.
Still used to incorporate learned societies and professional bodies.
No longer used to incorporate trading companies.
(b) By Act of Parliament (Statutory Companies)
Formed by private Act of Parliament.
Formerly used to incorporate public utilities such as gas, electricity and railways.
(The privatised public utilities have been incorporated as registered companies).
(c) By Registration (Registered Companies)
Formed by registration under the Companies Act 1985 (as amended) or one of the
preceding Companies Acts.
Registration is the most commonly used means of forming a company and virtually
the only method now used to form a trading company.
CA 1985, s.1(1): "Any two or more persons associated for a lawful purpose may, by
subscribing their names to a memorandum of association and otherwise complying
with the requirements of this Act in respect of registration, form an incorporated
company, with or without limited liability."
Classification of Registered Companies
Important Note
"Limited Liability" - this refers to the liability of the members, not the liability of the
company. The company will always be liable to the full extent of its debts.
The liability of the members, whether limited or unlimited, is to the company, not to
the individual creditors of the company.
(a) Unlimited Companies
(i) Members have unlimited liability (If company is being wound up,
members can be made to contribute to the company’s assets without
limit to enable it to pay its debts.)
(ii)Cannot be public companies.
(iii)Can be set up with or without a share capital.
(iv)Not subject to the same restrictions on alteration of capital as other
types of company, and do not normally have to file annual accounts.
(b) Companies Limited by Guarantee
(i) Members agree to contribute a specified amount to the company’s
assets in the event of the company being wound up. (Total amount
payable by all members is called the "guarantee fund")
(ii) Members do not have to pay anything as long as company is a going
concern - so company has no contributed capital.
(iii) Companies limited by guarantee are not usually formed for business
ventures.
(iv) Prior to 1980, a company could be registered as a company limited
by guarantee, but also have a share capital - these are called "hybrid
companies".
(c) Companies Limited by Shares
(i) The most common kind of registered company.
(ii)Members of the company take shares issued by the company.
Each share is assigned a nominal value - the amount that must be
paid to the company for the share. Members may also agree to pay
an extra amount - called a premium.
(iii)When the company is registered, its memorandum must state
the total nominal value of all the shares it is going to issue (called
the registered capital, or nominal capital or authorised share
capital).
The memorandum also states the number of shares to be issued:
e.g. 10,000 shares of £1 each = registered capital of £10,000.
(iv)Liability of a member (shareholder), when the company is
wound up is limited to the amount, if any, of the nominal value of
his shares which has not been paid.
( Shareholder is also contractually bound to pay any premium
which has not been paid).
(v) Shares are normally partly or fully paid for when issued, so
company will have a contributed capital.
Companies Limited by Shares may be Public or Private
(i) Public Companies
CA 1985, s.1(3): "a company limited by shares which has a memorandum stating that
it is to be a public company and which complies with the requirements of the Act for
registration as a public company."
Main requirements:
- A company cannot be registered as a public company unless it has a minimum
allotted share capital of £50,000, at least one quarter of which has actually been
paid.
- A public company must have at least two shareholders and at least two
directors.
(ii) Private Companies
CA 1985 defines a private company as "any company that is not a public company".
Private companies have no authorised minimum share capital.
A private company is only required to have one director and, since 1992, it can be
formed with only one member.

Only Public Companies can have their shares listed on the Stock Exchange - but
Public Companies are regulated much more strictly than Private Companies.
II. FORMATION OF A COMPANY
1. Promoters
Promotion of a company is concerned with taking the steps necessary for
incorporation.
(a) Definition
"Promoter" is not defined in the Companies Act.
Some attempts at definition have been made by the courts:
Twycross v Grant (Case 1)
Whaley Bridge Printing Co v Green (Case 2)
Whether someone is acting as promoter of a company is a question of fact rather than
a question of law.
(b) Duties of Promoters
In the 19th century, it was common for promoters to sell their own property to a
newly formed company at an inflated price, or to acquire assets for the company and
receive a commission from the seller.
The courts then began to impose a fiduciary duty on promoters similar to that imposed
on agents. A promoter must disclose any profit or potential conflict of interest to
either:
(i) an independent board of directors, or
(ii) existing or intended shareholders.
(c) Remedies for Breach of Promoters Duty
(i) Where promoter has sold his own property to the company, without disclosing this
- the company can rescind the contract and recover the purchase price:

Erlanger v New Sombrero Phosphate Co (Case 3)

Right of recission is lost if restitutio in integrum is not possible.
(ii)The promoter may have to account to the company for any profit he has
made.
Gluckstein v Barnes (Case 4)
(iii)The company may be able to sue the promoter for damages for breach of
fiduciary duty.
Re Leeds & Hanley Theatre of Varieties (Case 5)
(d) Payment of Promoters
A company cannot enter into a contract before incorporation - so a promoter has no
legal claim against the company for fees and expenses.
In Scotland, memorandum or articles of the company can be drawn up with a
provision that the company will pay fees and expenses incurred in promoting the
company.
(e) Suspension of Promoters
Company Directors Disqualification Act 1986, s.2(1)
The court can make a disqualification order against a person who has been convicted
of an indictable offence in connection with the promotion, formation or management
of a company.
The order can be for a maximum of 15 years - a person who is disqualified is
prohibited from directly or indirectly taking part in the promotion or formation of a
company.
2. Pre-Incorporation Contracts
A company has no contractual capacity prior to incorporation - so contracts cannot be
made on its behalf.
(a) Effect of Pre-Incorporation Contract on the Company
Company cannot be bound to the contract because it had no contractual capacity.

Company cannot ratify the contract because it was not in existence at the time the
contract was made.
Company cannot sue or be sued on the contract.
(b) Effect of Pre-Incorporation Contract on Person Purporting to Contract on Behalf
of the Company
At Common Law:
- if third party knew company was not yet in existence, he could make the
purported agent liable on the contract. (Kelner v Baxter).
- if it appeared that the contract was with a company already in existence, the
court might hold there was no contract at all, and neither the company nor the
purported agent could enforce it.
Newborne v Sensolid (GB) Ltd (Case 6)
This was unsatisfactory and was first changed by legislation in 1972. Provisions are
now in s.36C of the Companies Act 1985:
"A contract which purports to be made by or on behalf of a company at a time when
the company has not been formed has effect, subject to any agreement to the contrary,
as one made with the person purporting to act for the company or as agent for it, and
he is personally liable on the contract accordingly."
This means the "agent" will always be personally liable on the contract unless there is
agreement to the contrary.
Exceptions:
(i) Companies Bought "Off the Shelf"
s.36C does not apply where promoter makes contract on behalf of existing company
he later buys. The company can then ratify the contract.
(ii) Companies Struck Off the Register
s.36C does not apply where a company has been in existence but has been struck off
the register. The section only applies where the company has never been in existence.
Cotronic (UK) Ltd v Dezonie (Case 7)
(c) Avoiding Personal Liability

(i) s.36C does not apply if the parties have agreed that the promoter will not be
personally liable.
This requires express agreement - courts will not infer it.
Phonogram Ltd v Lane (Case 8)
(ii)Promoter and third party could make an agreement for novation. (novation =
substitution of a new obligation for an old one)
Promoter could agree with third party that promoter’s liability will end when the
company, once formed, enters new contract on same terms.
III. REGISTRATION OF A COMPANY
1. The Registrar of Companies
A company is registered by filing certain documents with the Registrar - he is a public
official appointed by the Secretary of State. Duties include registering new
companies, maintaining company files and supervising compliance with the
administrative and disclosure requirements of the Companies Act. The Companies
Act 1985 (Electronic Communications) Order 2000 allows most documentation to be
submitted in electronic form.
2. Documents Required for Registration
These are listed in CA 1985, s.10:
(a) Memorandum of Association
(b) Articles of Association
These are the documents which make up the constitution of the company. The
Companies (Tables A - F) Regulations 1985 give suggested forms for memoranda and
articles for different kinds of company.
A public company’s memorandum must be in accordance with Table F of the
Regulations.

Public and Private companies limited by shares can adopt the articles in Table A of
the Regulations - Table A will also apply automatically so far as not modified or
excluded by the company’s own articles.
The Memorandum must be signed (subscribed) unless submitted in electronic form,
and must show the number of shares each subscriber is taking.
(c) A statement giving the address of the company’s registered
office and the details (name, address, nationality, occupation and
date of birth) of the company’s first directors and secretary.
Statement must be signed by the subscribers to the memorandum
and include a written consent to act signed by those named as
directors/secretary.
(d) Statutory Declaration of Compliance - a statement that all the
requirements of the 1985 Act with regard to registration have been
complied with.
The statutory declaration must be signed by a solicitor involved in
the formation of the company or by one of the persons named as
director or secretary.
(e) Registration Fee - this is presently £20.
3. Certificate of Incorporation
If Registrar is satisfied that requirements of the Act have been met, he registers the
documents and issues a certificate of incorporation. This is the company’s "birth
certificate".
The Registrar publishes the issue of the certificate in the London or Edinburgh
Gazette.
Certificate is conclusive evidence that registration requirements have been met. It is
also conclusive evidence as to the date of incorporation.
Registrar is entitled to refuse to register a company where it has been formed for an
unlawful purpose:
R v Registrar of Joint Stock Companies, ex p Moore (Case 9)

The court may also be petitioned to cancel a registration if it appears that the company
has been registered for purposes which are unlawful or contrary to public policy:
R v Registrar of Companies, ex p Attorney-General (Case 10)
Trading Certificates
Private companies can begin to trade as soon as the certificate of incorporation has
been issued.
Public companies require a further certificate - called a s.117 certificate or trading
certificate.
Registrar will only issue s.117 certificate if satisfied that minimum capital
requirements for a public company have been met.
A public company which begins to trade without a trading certificate commits a
criminal offence - the company and any director responsible for the default can be
convicted.
(This does not affect the validity of any contracts entered into by the company).
IV. CONSEQUENCES OF INCORPORATION
1. Separate Legal Personality
A company is a separate person in law from its members. This has several important
consequences:
(a) Company is liable for its own debts
The shareholders are not liable for the debts and liabilities of the company and cannot
be sued by the company’s creditors. A shareholder can be a debtor or creditor of the
company and can sue or be sued by the company.
Salomon v A Salomon & Co Ltd (Case 11)
Lee v Lee’s Air Farming Ltd (Case 12)
(b) Limited Liability
The fact that the company is a separate person from its shareholders makes limited
liability possible.

Remember: the company’s liability is always unlimited - it is the members’ liability

that is limited and that liability is to the company, not to the individual creditors.)
(c) Company Property
A company owns its own property - the shareholders have no direct right to this or
any share of it.
Person who no longer wishes to be a member is only entitled to whatever price he can
get for his shares.
A shareholder has no legal interest in the company’s property and cannot insure it
against theft, damage, etc.
Macaura v Northern Assurance Co (Case 13)
(This may not apply to someone who is a secured debenture holder.)
(d) Contractual Capacity
A company has full contractual capacity - and only the company can enforce its
contracts.
(Companies may also be liable in negligence - shareholder cannot be made liable for
the negligence of the company, unless he was also personally negligent).
(e) Crimes
A company can be convicted of a crime, regardless of whether its directors are also
convicted.
Some limitations:
- it has been held that a company cannot be convicted of a crime which requires
the physical act of driving a vehicle:
Richmond on Thames Borough Council v Pinn & Wheeler (Case 14)
- a company cannot be convicted of any crime for which the only available
sentence is imprisonment.
There are particular problems with crimes which require mens rea ("a guilty mind") -
most common law crimes require mens rea, while many statutory offences involve
strict criminal liability.

In order to convict companies of common law crimes, courts may regard the mens rea
of those individuals who control the company to be the mens rea of the company.
However, the courts have been very restrictive in their use of this approach:
Tesco Supermarkets v Nattrass (Case 15)
R v P&O European Ferries (Dover) Ltd (Case 16)
R v Kite and OLL Ltd (Case 17)
Transco plc v HM Advocate (No 1) (Case 18)
Crimes Against the Company
A company can be the victim of crime.
It is theft to steal from a company, even if those accused of the theft are also the
company’s only shareholders:
R v Philippou (Case 19)
(f) Perpetual Succession
Separate personality means that the existence of a company does not depend on the
existence of its members. Membership may change or members may die - the
company continues in existence until wound up.
(g) Borrowing
A company can borrow money and grant a security for a debt. Only a company can
create a floating charge.
Floating charge = a kind of security for a loan. The charge "floats" because is does not
attach to any particular asset, but floats over the company’s assets as they exist from
time to time. Certain events cause the charge to "crystallise" and attach to whatever
assets the company has at the time.
2. Veil of Incorporation
Separate legal personality of company operates as a shield - the courts will not
normally look beyond the façade of the company to the shareholders who comprise it.
The screen separating the company from its individual shareholders and directors is
commonly referred to as "the veil of incorporation".
3. Piercing the Corporate Veil
Sometimes the law is prepared to examine the reality which lies behind the company
façade - this is described as "lifting" or "piercing" the corporate veil.
(a) Statute
Some statutory provisions have the effect of piercing the corporate veil to make
directors personally liable.
Presumption is in favour of separate personality and courts will not normally infer that
legislation is intended to pierce the corporate veil.
Dimbleby & Sons Ltd v NUJ (Case 20)
Situations where "veil is lifted" by Statute
(i) Companies Act 1985 s.24 - where membership of a company falls below two for
more than six months. Member who knows he is the sole member but continues to
trade will be jointly and severally liable with the company for company debts
contracted after the six month period has elapsed. (s.24 no longer applies to private
limited companies)
(ii) Companies Act 1985, s.117(8) - where public company trades without obtaining a
trading certificate. If the company fails to comply with any obligations under a
transaction within 21 days of being called on to do so, the directors of the company
are jointly and severally liable to indemnify the third party against any loss.
(iii) Companies Act 1985, s.349 - if person acting on behalf of a company signs or
authorises the signing of a bill of exchange, cheque, order for goods or similar
document in which the company’s name is not correctly stated, the person signing will
be personally liable if the company fails to pay.
This provision is rigidly enforced:
Durham Fancy Goods v Michael Jackson (Fancy Goods) Ltd (Case 21)
(iv) Insolvency Act 1986, ss.213 & 214
s.213 applies where company is being wound up and it appears
that business has been carried on with intent to defraud creditors.
s.214 applies where company is in insolvent liquidation and the
director(s) should have known this, but did not take sufficient
steps to minimise losses to creditors.

In either case, the court can order that those involved make a
contribution to the companies assets for the benefit of creditors.
(v) Insolvency Act 1986, s.216 & 217
The director of a company which has gone into insolvent liquidation cannot become a
director of another company with the same name within a five year period. If he does
he can be made personally liable for all the debts of the new company.
(vi) Company Directors Disqualification Act 1986, s.15
A person will be jointly and severally liable with the company for all the company’s
debts if he takes part in the management of the company while he is under a
disqualification order.
NB: For the purposes of these provisions, "person" includes legal as well as natural
persons.
(b) Common Law
The courts are willing to pierce the veil of incorporation in some circumstances:
(i) Fraud, Façade or Sham
Courts will examine the reality behind the company where the company was set up
purely to evade a legal obligation, or to allow someone to do something he would not
be allowed to do as an individual:
Gilford Motor Co v Horne (Case 22)
Jones v Lipman (Case 23)
Re Bugle Press Ltd (Case 24)
(ii) Agency
Court may lift the veil on the basis that one company is merely carrying on business
as the agent of another - so that transactions entered into by the subsidiary can be
regarded as transactions of the holding company:
Smith, Stone & Knight v Birmingham Corporation (Case 25)
Firestone Tyre & Rubber Co v Lewellin (Case 26)

But see: Adams v Cape Industries Ltd (Case 27)

(iii) Single Economic Unit
In the past, courts have been willing to lift the veil on the basis that a group of
companies was not a group of separate persons, but a single economic unit:
DHN Food Distributors v Tower Hamlets (Case 28)
Later cases have doubted this principle:
Woolfson v Strathclyde Regional Council (Case 29)
Adams v Cape Industries Ltd (Case 27)
(iv) State of Hostility
In times of war, courts may regard a British company as an enemy alien if the
company is controlled by nationals of an enemy country:
Daimler Co Ltd v Continental Tyre and Rubber Co (GB) Ltd (Case 30)
(v) Justice and Equity
Courts have sometimes been prepared to pierce the corporate veil where they feel this
is in the interests of justice:
Re a Company (Case 31)
Creasey v Breachwood Motors Ltd (Case 32)
But see: Adams v Cape Industries Ltd (Case 27)
Ord v Belhaven Pubs Ltd (Case 33)
Yukong Lines Ltd v Rendsburg Investment Corp (Case 34)
V. THE CORPORATE CONSTITUTION
The constitution of a company consists of its memorandum of association and its
articles of association.
1. The Memorandum of Association
For a company limited by shares, the memorandum must contain the following:

(a) Name Clause

CA 1985, s.25 - the name of a public limited company must end with the words
"public limited company", the name of a private limited company must end with the
word "Limited". Abbreviations may be used instead: "plc" or "Ltd".
It is an offence to carry on business under a name which uses these words or
abbreviations when not entitled to do so - the penalty is a fine.
Under CA s.26, it is not possible to register a company name which includes the
words "public limited company", "limited", "unlimited" or their abbreviations
anywhere except at the end of the name.
There are also other restrictions on the use of names:
(i) Under s.26, a company cannot be registered under a name which is identical to a
name already registered.
(ii) A company cannot be registered under a name which is regarded as offensive or
where the use of the name would constitute a criminal offence.
(iii) A company cannot be registered under a name which suggests that the company
is connected with the government or a local authority - or under any name including a
word listed in the Company and Business Names Regulations 1981 - unless the
Secretary of State gives permission for the name to be used.
(iv)s.26 does not prevent the registration of a name very similar to that of another
company - but if the similarity is deceptive and likely to lead to confusion, the
established business may bring an action to restrain the new company from using the
name. This is called a "passing-off" action.
Court will take into account:
- scope of pursuer’s reputation
- similarity of kind of business
Ewing v Buttercup Margarine Co Ltd (Case 35)
Dunlop Pneumatic Tyre v Dunlop Motor Co (Case 36)
Aerators Ltd v Tollitt (Case 37)
Exxon Corpn v Exxon Insurance (Case 38)

(v) A company must have its name printed on all business documents and it must be
displayed at the registered office and all business premises.
A company which wishes to trade under a name other than its registered name comes
within the provisions of the Business Names Act 1985.
(vi) Insolvency Act 1986, s.216 prevents the director of a company which has gone
into insolvent liquidation from taking part in the management of any business trading
under the same name as the insolvent company.
(vii) A company can change its name by special resolution (requires approval of
holders of 75% of the company’s shares).
The Secretary of State can order a compulsory name change within 12 months of
registration if he discovers the name is the same as or too like one previously
registered.
The Secretary of State can order a compulsory name change at any time if he
discovers that the name gives a misleading impression of the activities of the
company.
(b) Registered Office Clause
CA 1985 s.2 - the memorandum states whether registered office is to be in England
and Wales or in Scotland.
This establishes company’s nationality and its domicile, but not its residence.
Registered office is important because:
- it determines the jurisdiction in which the company can be sued.
- it is the address at which notices and documents must be served on the
company.
- it is the address at which the company’s registers and records must be kept
and made available for inspection by the public.
Address of registered office can be changed by ordinary resolution (simple majority
vote of shareholders), provided this does not also change the domicile.
(c) Objects Clause

Company’s memorandum must contain an objects clause - a clause which states the
purpose or purposes for which the company was incorporated.
(i) The Ultra Vires Rule
If the company does something beyond the scope of its objects clause, this is said to
be ultra vires (beyond the powers of the company).
Previously this was of great importance - transaction entered into beyond the
company’s powers was void and could not be enforced by or against the company,
and it could not be ratified. This was called the ultra vires rule.
Ashbury Carriage and Iron Co v Riche (Case 39)
(ii) Abolition of the Rule
The Rule has been abolished by statute as far as third parties are concerned.
s.35(1) CA 1985 - the validity of an act done by a company shall not be called into
question on the grounds of lack of capacity by anything in the company’s
memorandum.
The rule still operates internally of the company - a shareholder can bring an action to
restrain the company from carrying out an ultra vires act.
(The court will not restrain the company from doing anything it is already under a
legal obligation to do)
A director may be liable to the company for any costs incurred by the company on an
ultra vires transaction.
Potential problems can be avoided: CA 1985 s.3A allows a company to state in its
memorandum that its object is to carry on business as a general commercial company.
It can then carry on any trade or business whatsoever.
(iii) Change of Objects Clause
Under CA 1985, s.4 a company can change its objects clause by special resolution.
Members (holding at least 15% of the nominal issued share capital) who did not
consent to the change can apply to the court to have the alteration set aside. (s.5)
Application must be made within 21 days of the resolution being passed. The
alteration will not then come into effect unless it is confirmed by the court.

(d) Limitation of Liability Clause

If members’ liability is to be limited, memorandum must have a clause to this effect.
(e) Capital Clause
Limited company with share capital must have a clause stating the total amount of
share capital with which it proposes to be registered and the division of that capital
into shares of a fixed amount.
No minimum capital for private companies; £50,000 minimum for public companies.
(f) Association Clause
This is a clause stating that the subscribers are desirous of being formed into a
company in pursuance of the memorandum. This is followed by signatures of
subscribers (attested by one witness) and the number of shares each has agreed to
take.
(g) Other Clauses
Public company must have clause stating it is to be a public company.
No other clauses are necessary but it is possible to have others.
(h) Alteration of Memorandum
CA 1985, s.2(7) - a company cannot change its memorandum except in the
circumstances and manner expressly provided for in the Act.
Memorandum can be altered to change company from public to private and vice versa
- requires special resolution of shareholders.
Company can be changed from unlimited company to limited by special resolution -
change from limited to unlimited requires written consent of all the members.
Reduction of share capital requires special resolution.
CA 1985, s.17 - any provision in the memorandum which could have been contained
in the articles can be altered by special resolution.

CA 1985, s.16 - no member of a company can be bound to an alteration which makes

him liable to take more shares or which increases his liability in any other way unless
he consents in writing.
When company resolves to alter its memorandum, a copy of the resolution, and the
amended memorandum, must be sent to the Registrar within 15 days - failure to do
this is a criminal offence punishable by a fine.
2. Articles of Association
(a) Articles Generally
The articles govern the internal management and organisation of the company.
The articles are secondary to the memorandum - if there is conflict between the
articles and the memorandum, the memorandum prevails.
Re Duncan Gilmore & Co Ltd (Case 40)
Companies (Tables A - F) Regulations 1985 provides a model set of articles for a
company limited by shares.
A company has three options:
(i) It may adopt Table A in full.
(ii) It may adopt Table A with modifications.
(iii) It can exclude Table A entirely and write its own articles.
(Table A has existed in various forms since 1862 - a company which adopts Table A
will be bound by the Table A existing at the time it was incorporated, not a later
version).
Articles must be: (i) Printed
(ii)Set out in numbered paragraphs
(iii)Signed by the subscribers to the
memorandum
(b)Alteration of Articles
CA 1985, s.9 - articles can be altered by special resolution, which must be notified to
the Registrar of Companies within 15 days.

Any provision in the articles which would have the effect of making them unalterable
is void.
There are certain restrictions on the company’s power to alter its articles:
(i) Express Statutory Restrictions
s.16 - cannot alter articles to increase a member’s liability without
his consent.
s.369(1) sets out notice periods for calling meetings and states this
cannot be shortened by a provision in the articles.
(ii) General Law and Public Policy
A provision in the articles which is contrary to public policy is void.
St Johnstone Football Club Ltd v SFA (Case 41)
The same would apply to any provision which was inconsistent with the companies
legislation.
(iii) Court Order
Certain sections of the 1985 Act give the court power to order that no alteration be
made to the articles.
(iv) Memorandum
An alteration to the articles which conflicts with the memorandum would be
effectively void.
(v) Improper Use of Power to Alter Articles
The Power to alter the articles must be exercised bona fide for the benefit of the
company as a whole.
A member cannot challenge an alteration carried out in good faith for the benefit of
the company, even if the alteration adversely affects his own rights.
Allen v Gold Reefs of West Africa Ltd (Case 42)
Greenhalgh v Arderne Cinemas Ltd (Case 43)

The courts will usually allow the alteration, but have sometimes found that it is not
bona fide for the benefit of the company as a whole:
Brown v British Abrasive Wheel (Case 44)
Dafen Tinplate Co Ltd v Llanelly Steel Co (Case 45)
3. Legal Effect of Memorandum and Articles
The legal effect is described in s.14 CA 1985. The memorandum and articles operate
as a contract between the company and its members, which both parties are bound to
honour.
The effect of this is:
(a) Each member, in his capacity as a member, is bound to the
company as if he personally had signed the memorandum and
articles.
Hickman v Kent or Romney Marsh Sheep Breeders Association
(Case 46)
(b)The company is bound to each member in his capacity as a
member.
Wood v Odessa Waterworks Co (Case 47)
(c)The memorandum and articles do not constitute a contract
binding the company or any member to an outsider - or to a
shareholder in any other capacity than as a member.
Eley v Positive Government Life Assurance Co Ltd (Case 48)
Beattie v E & F Beattie Ltd (Case 49)
(d) Provisions of the memorandum or articles can sometimes form
part of an extrinsic contract between the company and an outsider.
This can happen in one of three ways:
(i) Where provisions of the memorandum or articles
are expressly incorporated into an express contract
between the company and the outsider.

(ii) Where there is no express contract but a

provision in the memorandum/articles is
incorporated by implication from the conduct of the
parties.
(iii) Where there is an express contract which is
silent on a particular matter, and relevant provisions
in the articles or memorandum are used to fill in any
gaps.
The company is not actually liable to the outsider on the basis of
the articles, but under the extrinsic contract.
Re New British Iron Co, ex parte Beckwith (Case 50)
(e) A member has a right to compel the company to act according
to the articles even if not enforcing a right which is personal to
himself as a member.
Salmon v Quinn & Axtens Ltd (Case 51)
(f) The memorandum and articles constitute a contract between
each member and every other member.
Rayfield v Hands (Case 52)
VI. CAPITAL AND SHARES
1. Nature of Shares and Share Capital
(a) What is a Share?
A share is the unit of measure for determining a member’s interest in the company.
The memorandum states the nominal value for each share - members must contribute
at least this amount.
(b) Share Capital
There are different aspects to this:
Authorised Share Capital

Total value of shares the company is allowed to allot - also known as nominal or
registered capital.
Allotted Share Capital
Value of shares the company has actually allotted to members.
Paid-up Share Capital
Amount that members have paid on their shares, excluding any premium.
Called-up Share Capital
Paid-up capital + any amount members have been called on to pay.
Uncalled Capital and Reserve Capital
Uncalled capital is the amount owing on partly paid shares which members have not
yet been called on to pay.
Reserve capital is uncalled capital the company has resolved not to call unless the
company is wound up.
2. Classes of Shares
(a) Typical Rights of Shareholders
Member’s rights are detailed in the Articles, but the following are typical:
- right to control company through voting at meetings
- right to participate in distribution of profits
- right to participate in surplus assets in a winding up.
(b) Preference Shares
Give preferential right to a dividend of fixed amount or fixed percentage per share -
this dividend is paid before anything is paid to ordinary shareholders. Right to
dividend is normally cumulative.
Preference shares usually give a preferential right to repayment of capital on a
winding up.

Preference shareholders normally have restrictions placed on their power to vote at

general meetings.
(c) Ordinary Shares
Dividend depends on company profits and there is no automatic right to a dividend.
3. Issue and Allotment of Shares
Issuing is the process by which members take shares in the company.
A share is allotted when someone acquires an unconditional right to be entered in the
register of members.
(a) Allotment Contracts
Usual rules of contract apply. There must be an offer met by an acceptance. A
prospectus is not an offer to sell shares, it is an invitation to treat.
It is possible to have a conditional contract which gives an option to demand the
allotment of shares at a later date. These option can be traded like shares.
(b) Authorisation of Allotment
CA 1985, s.80 - Directors cannot allot shares without authority given by the existing
shareholders or the articles.
The authority must state the maximum number of shares to be allotted. It is a criminal
offence to allot shares without proper authorisation, but the allotment remains valid.
(c) Pre-emption Rights
CA 1985, s.89 - existing shareholders must be offered the opportunity to buy any new
issue of shares before they are offered elsewhere. Shareholder must be given 21 days
to decide whether to buy. Private companies can avoid pre-emption rights.
4. Transfer of Shares
CA 1985, s.182 - shares must be transferable.
Private companies usually restrict members’ rights to transfer shares.
(a) Transfer of Unlisted Shares

- transferor signs stock transfer form

- form is given to transferee with share certificate.
- if only part of shareholding is being transferred, form and certificate are sent
to the company instead, for certification.
- transferee sends form and certificate to company, which enters him on register
of members. New share certificate is issued after two months.
(b) Transfer of Listed Shares
- can be done as for unlisted shares.
- companies that support CREST can transfer listed shares electronically -
records are computerized and no share certificate is issued.
(c) Transmission of Shares
Transmission is the automatic transfer of shares by operation of law. It takes place in a
number of circumstances.
(i) Death of Shareholder
Shares of deceased shareholder transmit to his executor to deal with as directed by the
will or the rules of intestacy.
(ii) Insanity of Shareholder
If shareholder becomes a patient under the Mental Health Acts and a public guardian
is appointed, the shares transmit to the public guardian.
(iii) Bankruptcy of Shareholder
Shares held by a bankrupt transmit to his trustee in bankruptcy.
Holder of shares through transmission has the same rights and benefits as a member
even if not registered as a member - but he cannot vote. He can choose to be
registered and can then vote.
5. Capital Maintenance
Members are entitled to a dividend out of profits. A company cannot return capital to
the members. This provision operates to protect creditors.

CA 1985 sets out some legal methods by which the capital of a company can be
returned to the members.
(a) Reduction of Capital
CA 1985 ss.135-141
A company can reduce its capital if this is authorized by the articles and the reduction
is confirmed by the court. It also requires alteration of the share capital as stated in the
memorandum - this needs a special resolution.
The court will only confirm the reduction if satisfied that the company’s creditors
have been paid or have consented to the reduction.
(b) Redeemable Shares
CA 1985 s.159(1)
A company can issue redeemable shares if power to do so is given by the articles.
The shares give a temporary membership of the company - the nominal value (and
sometimes a premium) is paid to the shareholder at the end of the period.
When shares are redeemed they must be cancelled by the company. The company
must make up its capital by issuing new shares or transferring funds from the profit
and loss account to the capital redemption reserve account.
Any premium payable on redemption must be paid out of profits.
Private companies can pay for redemption completely out of capital - this needs a
special resolution and a declaration from the directors that the assets will exceed
liabilities after the payment is made.
(c) Company Purchasing its own Shares
Generally this is prohibited by s.143(1), but s.162 allows a company to buy its own
shares in the circumstances provided by the Act and if authority is given in the
company’s articles.
(i) Market Purchase

Must be authorised by ordinary resolution, which must state maximum number of

shares to be purchased and minimum and maximum price to be paid. The authority
cannot last more than 18 months.
(ii) Off-Market Purchase
This requires a special resolution approving the specific purchase contract. If the
company is a public company, the authority to buy must expire within 18 months.
When a company has bought its own shares it must cancel them and compensate for
lost capital by a new share issue or a transfer of profits to the capital redemption
reserve.
VII. MEETINGS AND RESOLUTIONS
1. Shareholders and Shares
Day to day management of a company is in the hands of the directors, not the
shareholders - but the shareholders retain some important powers - many decisions
require a resolution of the shareholders and cannot be decided by the directors alone.
(a) Who is a "Member"
(i) Anyone who subscribes the memorandum.
(ii)Any other person who agrees to become a member and whose
name is entered on the register of members.
(b) Register of Members
CA 1985, s.352 requires every company to keep a register of its members. The
register must show:
- name and address of each member.
- date person became a member and, where applicable, the date he ceased to be
a member.
- the number of shares held by each member and the amount paid on them.
2. Kinds of Meetings

(a) Annual General Meeting

Most companies must hold an AGM.
(i) CA 1985 s.366 provides that an AGM must be held every calendar year with not
more than 15 months between meetings. A newly incorporated company must hold its
first AGM within 18 months of incorporation.
(ii) CA 1985 s.367 - if a company does not hold an AGM as required, any member
can apply to the Secretary of State to call or to direct the calling of the meeting.
(iii) CA 1985 s.366A - members of a private company can choose to dispense with the
holding of an AGM by elective resolution - but any member of such a company can
require that an AGM be held in a particular year by giving notice at least 3 months
before the end of the year.
(iv) CA 1985 s.371 - if it is impracticable to call a meeting or conduct a meeting in the
manner prescribed by the company’s articles, any member or director who would be
entitled to vote can apply to the court which can order the meeting to be called or
held.
Re Sticky Fingers Restaurant Ltd (Case 53)
(b) Usual Business of an AGM
(i) Directors lay before the company annual accounts and reports for t the most recent
financial period.
(ii) Auditor's term of office ends at AGM, so they must be re-appointed or new
auditors must be appointed.
(iii) Director's recommendation for the dividend to be paid to shareholders will be
voted on.
(iv) The Articles may provide that directors are to retire in rotation. Some directors
will retire at the AGM and must be re-appointed or replaced.
(v) Resolutions may be required to pay directors’ and auditors’ fees. (Now normally
fixed by contract).
(vi) Shareholders may have their own resolutions placed on the agenda.
(c) Extraordinary General Meetings

Any meeting which is not an AGM. Table A provides that only directors can call an
EGM, unless there are too few directors in the UK to make up a quorum - then any
member can call one.
CA 1985, s.368 - directors must call an EGM if requisitioned by holders of 10% of the
paid up capital of the company.
CA 1985, s.371 - power of the court to order the holding of an AGM also applies to
EGMs.
CA 1985, s.142 - public company must hold an EGM if the company’s net assets have
fallen to less than half of its called up capital. Meeting must be called within 28 days
of the directors becoming aware of the loss of capital, and must be held within 56
days of that date.
CA 1985, s.392A - where auditor has resigned and has made a statement of
circumstances he thinks should be brought to the attention of creditors and
shareholders - the auditor can requisition the directors to hold an EGM so that he can
explain the circumstances of his resignation.
3. Convening Meetings
(a) Notice of Meetings
(i) Authority to Call a Meeting
Authority normally rests with the directors.
If person without authority issues notice of a meeting the notice is void.
(ii) Who must be notified?
Depends on the Articles. Table A provides that notice must be given to all
shareholders, directors and auditors.
Failure to notify someone entitled to notice will invalidate the meeting unless the
failure was purely accidental:
Young v Ladies Imperial Club (Case 54)
Re West Canadian Collieries Ltd (Case 55)
(iii) Method of Service

Articles can provide for any method - Table A requires written notice to be delivered
personally or by post.
Bradman v Trinity Estates Ltd (Case 56)
The Companies Act 1985 (Electronic Communications) Order 2000 allows notice to
be given by electronic means such as
via a website provided the member agrees to being given notice in this way.
(iv) Length of Notice
Articles can set any length of notice, but by s.369, notice must be at least 21 days for
an AGM, or 14 days for an EGM - unless all members agree shorter notice period.
(v) Contents of Notice
Set out by articles. Table A requires notice to specify date, time and place of meeting
and a general indication of business to be dealt with. Notice must state if meeting is an
AGM.
If meeting is being convened to pass a special or extraordinary resolution, or a
resolution for which special notice is required, these resolutions must be set out in full
in the notice.
Notice will be invalid unless it contains enough detail to allow a reasonable
shareholder to judge whether he needs to attend the meeting.
Baillie v Oriental Telephone & Electric Co Ltd (Case 57)
(vi) Special Notice
Some kinds of resolution require special notice to be given:
- resolution to dismiss a director
- resolution to appoint replacement director at same meeting as dismissal.
- appointment or retention of public company director aged 70 or over.
- resolutions concerning dismissal or appointment of auditors.
Special notice = at least 28 days notice to the company of the intention to move the
resolution. The company must then give the members at least 21 days notice of the
meeting.

4. Conduct of Meetings
(a) Quorum
"Quorum" = the minimum number of persons who must be present before the meeting
will be valid.
Articles can provide for any quorum:
Table A requires two members entitled to vote, or their proxies.
If Table A has been excluded without providing an alternative, CA 1985 s.370
requires two members personally present.
Single Member Private Companies - one member will form a quorum,
notwithstanding anything in the articles.
A meeting held without a quorum cannot validly transact any business:
Sharp v Dawes (Case 58)
(b) Chairman
Usual to have a chairman to preside over a meeting - Table A provides this should be
the chairman of the board or another director nominated by the board.
Chairman’s role is to keep order - he/she has no power to adjourn or dismiss a
meeting unless this is specified in the articles.
Chairman has no casting vote unless given one by the articles. (Table A gives a
casting vote.)
(c) Minutes
Companies must keep minutes of general meetings at the registered office for
inspection by members.
Chairman signs the minutes - they then become prima facie evidence of what occurred
at the meeting.
(d) Voting and Proxies
CA 1985 s.372 - all companies must allow a member who cannot attend a meeting to
allow a proxy to vote in his place.

Appointment of proxy must be in writing and lodged with company at least 48 hours
before meeting.
There are two methods of voting at company meetings:
(i) Show of Hands
Voting can be by show of hands unless articles provide otherwise.
Each member has just one vote regardless of number of shares he has - hands are
counted and the result declared by the chairman. Result is conclusive once recorded in
the minutes.
Proxies cannot vote on a show of hands unless the Articles allow this.
(ii) Voting by Poll
A company cannot refuse a demand for a poll made by:
- at least 5 members having the right to vote, or
- any member/members representing one-tenth or more of the total voting
rights.
Members normally have one vote per share in a poll.
Members are entitled to exercise their votes according to their own interests.
Northern Counties Securities Ltd v Jackson & Steeple (Case 59)
5. Resolutions
(a) Special Resolutions
Requires vote of 75% of members present in person or by proxy, who are entitled to
vote and do vote.
Meeting at which resolution is proposed must have had at least 21 days notice, unless
shorter period was agreed by majority in number of members holding at least 95% of
the shares.
Certain matters can only be decided by special resolution and the articles cannot
provide to the contrary.

Printed copy of special resolution must be sent to Registrar within 15 days of it being
passed.
(b) Extraordinary Resolutions
Same requirements as for special resolution except for notice period required, which
depends on type of meeting. (21 days for AGM, 14 days for EGM - shorter notice
possible by agreement).
Extraordinary resolution must be used:
- for voluntary winding up when company cannot pay its debts (IA 1986
s.84(1))
- to authorise a liquidator to make an arrangement with creditors in members’
voluntary winding up (IA 1986 s.165(2))
(c) Elective Resolutions
Apply only to private companies. s.379A CA 1985 lists circumstances - e.g. election
to dispense with AGM.
Requires 21 days notice of meeting - resolution must be supported by all members
entitled to attend and vote.
Must be filed with Registrar within 15 days of being passed.
An elective resolution can be revoked by an ordinary resolution - which must also be
filed with the Registrar within 15 days.
(d) Ordinary Resolutions
Most matters can be decided by ordinary resolution and some must be (e.g. decision to
remove a director).
Ordinary resolution requires simple majority - 50% + 1 vote of members present in
person or by proxy.
(e) Written Resolutions
CA 1985 s.381A - allows private company to pass resolutions without holding
meetings.

Written resolution is passed by being signed by or on behalf of all members who

would be entitled to attend and vote at a meeting.
Companies cannot be restricted from using s.381A procedure by anything in the
articles.
Resolutions to remove a director or an auditor before his term of office has expired
cannot be taken by written resolution.
VIII. DIRECTORS
1. Appointment of Directors
CA 1985 s.282 - public companies must have at least two directors, private companies
at least one.
(a) First Directors
Persons named in the statement of first directors and secretary submitted on
registration are deemed to be appointed as directors as soon as company is
incorporated.
(b) Subsequent Directors
Appointed in manner laid down by Articles - usually ordinary resolution.
(c) Persons Who cannot be Appointed Directors
(i) Share Qualification
If the articles provide for a share qualification, director must
obtain this within two months.
(ii) Over-age Persons
No upper age limit for private company unless articles so provide.
Person cannot be appointed as director of a public company if he
has reached the age of 70 (CA 1985 s.293)
(iii) Undischarged Bankrupts
CDDA 1986, s.11 - criminal offence unless permission given by
the court.
Applications for Permission are usually refused:
Re Altim Pty Ltd (Case 60)
Acting in contravention of s.11 is a strict liability offence:
R v Brockley (Case 61)
(iv) Persons Disqualified by the Court
CDDA 1986 - it is a criminal offence to act as director of a
company while under a disqualification order.
Court may make a disqualification order where:
- Where a person is convicted of an indictable offence in relation to the
company (Maximum period - 15 years).
- Person has been in persistent default in filing returns or documents with the
Registrar (Maximum 5 years).
- Company is being wound up and person has apparently committed fraud in
relation to the company (Maximum period - 15 years.)
- DTI requests a disqualification order in the public interest after and
investigation. (Maximum 15 years.)
- Person has been found liable for wrongful trading under s.214 Insolvency Act
(Maximum 15 years)
The court must make a disqualification order where:
- a person is director of a company which has become insolvent and that
person’s conduct makes him unfit to be concerned in the management of a
company.
(Minimum 2 years, Maximum 15 years)
R v Austen (Case 62)
Re Sevenoaks Stationers (Retail) Ltd (Case 63)
Re Firedart Ltd (Case 64)
(v) Auditors and Secretaries
- Auditor of a company cannot also be a director of it.
- Secretary of a company cannot also be the sole director of it.
2. Proceedings of Directors
(a) Meetings

(i) Notice
No prescribed notice period - directors are entitled to reasonable notice of board
meetings.
Re Homer District Gold Mines (Case 65)
Browne v La Trinidad (Case 66)
Bentley Stephens v Jones (Case 67)
Shaw v Tati Concessions Ltd (Case 68)
(ii) Quorum for Board Meetings
Whatever the articles provide. A director with a personal interest in the matter being
discussed does not count toward the quorum:
Re North Eastern Insurance Co Ltd (Case 69)
(iii) Minutes
Minutes must be recorded, but shareholders have no right to inspect them.
3. Powers of Directors
Directors have sole power to manage the business of the company, but power vests in
the shareholders if the directors are unable or unwilling to act:
Barron v Potter (Case 71)
A director who exceeds his powers may be liable for any loss the company suffers,
unless the shareholders ratify his actions:
Bamford v Bamford (Case 72)
Shareholders can now also ratify ultra vires transactions, unless this amounts to a
fraud on the minority.
Third parties are protected by CA ss.35A and 35B - can enforce transactions even if
directors exceed their powers.
4. Duties of Directors
(a) Fiduciary Duties

Director’s fiduciary duties are owed only to the company, not to the individual
shareholders.
Percival v Wright (Case 73)
Allan v Hyatt (Case 74)
The Fiduciary Duties are:
(i) A duty to act bona fide for the benefit of the company as a whole:
Re W & M Roith Ltd (Case 75)
(ii) A duty to use powers only for the purpose for which they were
conferred:
Howard Smith v Ampol Petroleum (Case 70)
(iii) A duty to avoid a conflict between his own interests and those of the
company.
Aberdeen Railway Co v Blaikie Bros (Case 76)
A director cannot vote on any matter in which he has a personal interest, and, by CA
s.317 a director with any interest in a proposed contract must disclose this to the
board:
Guinness plc v Saunders (Case 77)
Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald (Case 78)
(iv) A duty not to make a personal profit out of his connection with the
company.
If he does he must account for the profit to the company:
Boston Deep Sea Fishing Ltd v Ansell (Case 79)
Regal (Hastings) Ltd v Gulliver (Case 80)
IDC Ltd v Cooley (Case 81)
The shareholders can vote to permit the director to keep the profit
- unless there is a fraud on the minority:
Cook v Deeks (Case 82)
(b) Duty of Care and Skill

Relates to director’s competence in managing the company. Traditionally, the duty

has been minimal - director is judged according to his own knowledge and
experience:
Re City Equitable Fire Insurance Co Ltd (Case 83)
Re Brazilian Rubber Plantations & Estates (Case 84)
Dorchester Finance Co Ltd v Stebbing (Case 85)
More recent cases suggest a move to a tougher standard - the level of skill reasonably
to be expected from a person undertaking the same duties.
Norman v Theodore Goddard (Case 86)
Re D’Jan of London Ltd (Case 87)
5. Vacation of Office by Directors
(a) Age
A director of a public company must normally retire when he reaches the age of 70,
unless:
- Articles of the company provide otherwise, or
- Shareholders approve his continued appointment.
(b) Retirement under the Articles
Table A, Art 81 - a director must vacate office if:
- he becomes bankrupt or insane
- he becomes disqualified
- he is absent from board meetings for more than six months without
permission.
Director can also resign by giving notice.
(c) Dismissal

CA 1985, s.303 - a director can be dismissed at any time by an ordinary resolution of

the company - this cannot be overridden by the articles or director’s service contract.
Special notice must be given of a resolution to remove a director and the director has
the right to make representations at the meeting.
The articles may give a director’s shares special voting rights - this may defeat the
operation of s.303:
Bushell v Faith (Case 88)
IX. MAJORITY RULE AND MINORITY PROTECTION
The general rule in company law is that the wishes of the majority will prevail.
1. The Rule in Foss v Harbottle
Foss v Harbottle (Case 89)
When a wrong is done to a company, it is for the company to decide what action to
take.
The courts will not usually hear an action brought by a member or members of the
company.
(a) Reasons for the Rule
(i) The Proper Plaintiff Principle
The company is the proper plaintiff (pursuer) in any action to right a wrong against it.
(ii) The Internal Management Principle
The courts will not interfere with the internal management of a company. It is for the
company to decide whether it is being properly managed.
(iii) Irregularity Principle
A member cannot sue to rectify a mere informality where the act would be within the
company’s powers if done properly and the wishes of the majority are clear.
(b) Problems with the Rule

The majority of shares often belong to directors.The majority are in the best position
to prejudice the company - then decide that the company will not bring an action
against them.
There is thus a need for minority protection - enforcement of minority rights falls into
three main categories.
2. Exceptions to the Rule in Foss v Harbottle
(a) Preliminary Points
A number of matters must be established first:
(i) The company is entitled to the remedy - shareholder cannot have a
wider right to bring an action than the company itself would have had.
(ii) It is not possible to petition under CA s.459 or IA 1986 s.122(1)(g)
(these will usually be easier).
(iii)The action falls within one of the recognised exceptions to the Rule
in Foss v Harbottle.
(iv) It is not possible to obtain authority to bring an action in the
company’s name (i.e. must show the company has decided not to sue).
(b) The Recognised Exceptions
Edwards v Halliwell (Case 90) identified four exceptions:
- Fraud on the minority by wrongdoers in control
- Invasion of members personal rights
- Ultra vires acts
- Material procedural irregularities
In reality, only the first of these is a true exception to Foss - the others are cases where
the Rule has no application.
(i) Fraud on the Minority by Wrongdoers in Control

"Control" = voting control (50% + 1 vote) - but some suggestion that de facto control
is enough:
Prudential Assurance v Newman Industries (Case 91)
"Fraud" = unconscionable use of majority power resulting in loss to or discrimination
against the minority.
Negligence is not enough to amount to fraud:
Pavlides v Jensen (Case 92)
But "self-serving" negligence might be:
Daniels v Daniels (Case 93)
Oppression of the minority will be regarded as fraud:
Menier v Hooper’s Telegraph Works (Case 94)
Cook v Deeks (Case 82)
Also conduct which is an abuse of majority powers:
Estmanco v GLC (Case 95)
(ii) Invasion of Personal Rights
Invasion of the shareholder’s personal rights is not really an exception to the rule in
Foss v Harbottle - because the shareholder would be the proper person to bring the
action:
Wood v Odessa Waterworks Co (Case 47)
Salmon v Quinn & Axtens Ltd (Case 51)
(iii) Illegal or Ultra Vires Acts
Any shareholder is entitle to bring an action to restrain the company from doing
something which is outside the company’s objects.
(iv) Material Procedural Irregularities
General rule that the courts will not interfere with the internal management of a
company when an action is brought by a shareholder does not apply if the act done by
the company was one which required a special majority which was not obtained.
If this exception did not exist, the company would be able to act in breach of its own
constitution.

Edwards v Halliwell (Case 90)

3. Unfairly Prejudicial Conduct
(a) Companies Act 1985 s.459
This allows a shareholder to petition the court where the company is being managed
in a way that is unfairly prejudicial to the interests of some of the members. (but only
to his interests in his capacity as a member).
(b) Meaning of "Unfairly Prejudicial"
The Act does not define this, but:
(i) Test is concerned with effect of conduct, not motive:
Re Bovey Hotel Ventures Ltd (Case 96)
(ii) The conduct must be both unfair and prejudicial.
Re Saul Harrison & Sons plc (Case 97)
(iii) The words are flexible in meaning.
(c) Clean Hands
No bar to petition that the pursuer’s own conduct has not been beyond reproach - no
requirement for "clean hands".
Re London School of Electronics (Case 98)
(d) Irregularity Principle
The court will not hear a petition under s.459 brought on the basis of a procedural
irregularity that could easily be rectified. (As in Browne v La Trinidad (Case 66) and
Bentley Stephens v Jones (Case 67))
(e) Grounds for a s.459 Petition
(i) Exclusion from Management
Dismissing a member of a quasi-partnership from the office of director may amount to
unfairly prejudicial conduct:
Re a Company (Case 99)
Re Ghyll Beck Driving Range Ltd (Case 100)
(ii) Diversion of Business
Where majority diverts business of the company elsewhere to benefit the majority but
prejudice the minority.
Re London School of Electronics Ltd (Case 98)
(iii) Non-Payment of Dividends
Majority pay themselves high directors’ salaries but the company pays no or very low
dividends.
Re Sam Weller & Sons Ltd (Case 101)
(iv) Dilution of Minority
Majority allots shares to dilute percentage of shares and thus voting power held by
minority.
Re D & R Chemicals Ltd (Case 102)
(v) Serious Mismanagement
Bad management would not normally be grounds for a s.459 petition - but there is
some suggestion that it might be if serious enough:
Re Elgindata Ltd (Case 103)
Limits to the s.459 petition:
The concept that members have a legitimate expectation that the company will be run
in a was that differs from the articles of association will not normally apply to a public
company:
Re Astec BSR plc (Case 104)
The concept that breach of a legitimate expectation could give rise to a petition based
on s.459 was given a more restricted interpretation by the House of Lords in:
O'Neill v Phillips (Case 105)
(f) Remedies
The court has wide discretion - it can grant any order it thinks fitting in the
circumstances. In particular, it can:
- regulate the future affairs of the company.
- order the company to bring civil proceedings.
- order the purchase of the aggrieved shareholder’s shares. (The most common
remedy).
4. Just and Equitable Winding Up

Insolvency Act 1986, s.122(1)(g) - a company may be wound up by the court if the
court is of the opinion that this would be just and equitable.
(a) Locus standii (Who can petition)
Any shareholder provided he has had his shares for at least 6 months during the
eighteen months prior to bringing the petition, or have inherited them, or have
obtained them by direct allotment from the company.
(b) "Just and Equitable"
This is not defined by the Act - the courts have described it as a broad and flexible
concept. "Clean hands" are essential for a s.122(1)(g) petition.
(c) Grounds for Granting the Petition
(i) Breakdown of Mutual Trust and Confidence
Most s.122(1)(g) petitions are brought by members of quasi-partnerships. Court will
probably grant the petition if it is evident that the members have lost confidence in
each other and can no longer work together:
Re Yenidje Tobacco Co Ltd (Case 106)
(ii) Exclusion from Management
This also applies only to quasi-partnership companies, where the members have a
legitimate expectation of taking part in the management of the company.
Ebrahimi v Westbourne Galleries Ltd (Case 107)
(iii) Lack of Probity of Directors
Where shareholders have joined a small family company or quasi-partnership on the
basis that it will be managed in a certain way and this has not been done, the petition
may be granted where the shareholders have lost confidence in the management.
Loch v John Blackwood (Case 108)
Jesner v Jarrad Properties Ltd (Case 109)
The court is unlikely to grant a winding up order if the petitioner could have had an
equally viable remedy under s.459. Winding up is a drastic remedy.
(d) Effect of Presentation of Petition
(i) Presentation of the petition freezes the companies affairs while the
matter is decided.
(ii) The company can apply for a validating order, which will allow it to
carry in business pending a decision.
(iii) The company can take out a cross-undertaking for damages against
the petitioner - the petitioner would then be liable for any loss suffered
by the company because of the petition if the petition eventually fails.

PAERTNERSHIP LAW

May
9

COMPANY LAW - LECTURE NOTES-LLB

3
COMPANY LAW - LECTURE NOTES
I. INTRODUCTION TO INCORPORATION
1. Definition of a "Company"
A company is a "corporation" - an artificial person created by law.
A human being is a "natural" person.
A company is a "legal" person.
A company thus has legal rights and obligations in the same way that a natural person
does.
2. Companies and Partnerships Compared
(a) A company can be created only by certain prescribed methods - most
commonly by registration under the Companies Act 1985. A partnership is
created by the express or implied agreement of the parties, and requires no
formalities, though it is common to have a written agreement.
(b) A company incurs greater expenses at formation, throughout its life and on
dissolution, though these need not be excessive.
(c) A company is an artificial legal person distinct from its members. Although
in Scotland a partnership has a separate legal personality by virtue of s.4(2) of
the Partnership Act 1890, this is much more limited than the personality
conferred on companies.
(d) A company can have as little as one member and there is no upper limit on
membership. A partnership must have at least two members and has an upper
limit of 20 (with some exceptions).
(e) Shares in a company are normally transferable (must be so in a public
company). A partner cannot transfer his share of the partnership without the
consent of all the other partners.
(f) Members of a company are not entitled to take part in the management of
the company unless they are also directors of it. Every partner is entitled to take
part in the management of the partnership business unless the partnership
agreement provides otherwise.
(g) A member of a company who is not also a director is not regarded as an
agent of the company, and cannot bind the company by his actions. A partner in
a firm is an agent of the firm, which will be bound by his acts.
(h) The liability of a member of a company for the debts and obligations of the
company may be limited. A partner in an ordinary partnership can be made
liable without limit for the debts and obligations of the firm.
(i) The powers and duties of a company, and those who run it, are closely
regulated by the Companies Acts and by its own constitution as contained in
the Memorandum and Articles of Association. Partners have more freedom to
alter the nature of their business by agreement and without formality, and to
make their own arrangements as to the manner in which the firm will be run.
(j) A company must comply with formalities regarding the keeping of registers
and the auditing of accounts which do not apply to partnerships.
(k) The affairs of a company are subject to more publicity than those of a
partnership - e.g. companies must file accounts which are available for public
inspection.
(l) A company can create a security over its assets called a floating charge,
which permits it to raise funds without impeding its ability to deal with its
assets. A partnership cannot create a floating charge.
(m) If a company owes a debt to any of its shareholders they can claim
payment from its assets rateably with its other creditors. A partner who is owed
money by the partnership cannot claim payment in competition with other
creditors.
(n) A partnership (unless entered into for a fixed period) can be
dissolved by any partner, and is automatically dissolved by the death or
bankruptcy of a partner, unless the agreement provides otherwise. A
company cannot normally be wound up on the will of a single member,
and the death, bankruptcy or insanity of a member will not result in its
being wound up.
3. History
4. Types of Company
A company can be formed in a number of ways:
(a) By Royal Charter (Chartered Companies)
Formed by grant of a charter by the Crown.
Promoters of the company petition the Privy Council attaching draft of proposed
charter to the petition.
Still used to incorporate learned societies and professional bodies.
No longer used to incorporate trading companies.
(b) By Act of Parliament (Statutory Companies)
Formed by private Act of Parliament.
Formerly used to incorporate public utilities such as gas, electricity and railways.
(The privatised public utilities have been incorporated as registered companies).
(c) By Registration (Registered Companies)
Formed by registration under the Companies Act 1985 (as amended) or one of the
preceding Companies Acts.
Registration is the most commonly used means of forming a company and virtually
the only method now used to form a trading company.
CA 1985, s.1(1): "Any two or more persons associated for a lawful purpose may, by
subscribing their names to a memorandum of association and otherwise complying
with the requirements of this Act in respect of registration, form an incorporated
company, with or without limited liability."
Classification of Registered Companies
Important Note
"Limited Liability" - this refers to the liability of the members, not the liability of the
company. The company will always be liable to the full extent of its debts.
The liability of the members, whether limited or unlimited, is to the company, not to
the individual creditors of the company.
(a) Unlimited Companies
(i) Members have unlimited liability (If company is being wound up,
members can be made to contribute to the company’s assets without
limit to enable it to pay its debts.)
(ii)Cannot be public companies.
(iii)Can be set up with or without a share capital.
(iv)Not subject to the same restrictions on alteration of capital as other
types of company, and do not normally have to file annual accounts.
(b) Companies Limited by Guarantee
(i) Members agree to contribute a specified amount to the company’s
assets in the event of the company being wound up. (Total amount
payable by all members is called the "guarantee fund")
(ii) Members do not have to pay anything as long as company is a going
concern - so company has no contributed capital.
(iii) Companies limited by guarantee are not usually formed for business
ventures.
(iv) Prior to 1980, a company could be registered as a company limited
by guarantee, but also have a share capital - these are called "hybrid
companies".
(c) Companies Limited by Shares
(i) The most common kind of registered company.
(ii)Members of the company take shares issued by the company.
Each share is assigned a nominal value - the amount that must be
paid to the company for the share. Members may also agree to pay
an extra amount - called a premium.
(iii)When the company is registered, its memorandum must state
the total nominal value of all the shares it is going to issue (called
the registered capital, or nominal capital or authorised share
capital).
The memorandum also states the number of shares to be issued:
e.g. 10,000 shares of £1 each = registered capital of £10,000.
(iv)Liability of a member (shareholder), when the company is
wound up is limited to the amount, if any, of the nominal value of
his shares which has not been paid.
( Shareholder is also contractually bound to pay any premium
which has not been paid).
(v) Shares are normally partly or fully paid for when issued, so
company will have a contributed capital.
Companies Limited by Shares may be Public or Private
(i) Public Companies
CA 1985, s.1(3): "a company limited by shares which has a memorandum stating that
it is to be a public company and which complies with the requirements of the Act for
registration as a public company."
Main requirements:
- A company cannot be registered as a public company unless it has a minimum
allotted share capital of £50,000, at least one quarter of which has actually been
paid.
- A public company must have at least two shareholders and at least two
directors.
(ii) Private Companies
CA 1985 defines a private company as "any company that is not a public company".
Private companies have no authorised minimum share capital.
A private company is only required to have one director and, since 1992, it can be
formed with only one member.

Only Public Companies can have their shares listed on the Stock Exchange - but
Public Companies are regulated much more strictly than Private Companies.
II. FORMATION OF A COMPANY
1. Promoters
Promotion of a company is concerned with taking the steps necessary for
incorporation.
(a) Definition
"Promoter" is not defined in the Companies Act.
Some attempts at definition have been made by the courts:
Twycross v Grant (Case 1)
Whaley Bridge Printing Co v Green (Case 2)
Whether someone is acting as promoter of a company is a question of fact rather than
a question of law.
(b) Duties of Promoters
In the 19th century, it was common for promoters to sell their own property to a
newly formed company at an inflated price, or to acquire assets for the company and
receive a commission from the seller.
The courts then began to impose a fiduciary duty on promoters similar to that imposed
on agents. A promoter must disclose any profit or potential conflict of interest to
either:
(i) an independent board of directors, or
(ii) existing or intended shareholders.
(c) Remedies for Breach of Promoters Duty
(i) Where promoter has sold his own property to the company, without disclosing this
- the company can rescind the contract and recover the purchase price:

Erlanger v New Sombrero Phosphate Co (Case 3)

Right of recission is lost if restitutio in integrum is not possible.
(ii)The promoter may have to account to the company for any profit he has
made.
Gluckstein v Barnes (Case 4)
(iii)The company may be able to sue the promoter for damages for breach of
fiduciary duty.
Re Leeds & Hanley Theatre of Varieties (Case 5)
(d) Payment of Promoters
A company cannot enter into a contract before incorporation - so a promoter has no
legal claim against the company for fees and expenses.
In Scotland, memorandum or articles of the company can be drawn up with a
provision that the company will pay fees and expenses incurred in promoting the
company.
(e) Suspension of Promoters
Company Directors Disqualification Act 1986, s.2(1)
The court can make a disqualification order against a person who has been convicted
of an indictable offence in connection with the promotion, formation or management
of a company.
The order can be for a maximum of 15 years - a person who is disqualified is
prohibited from directly or indirectly taking part in the promotion or formation of a
company.
2. Pre-Incorporation Contracts
A company has no contractual capacity prior to incorporation - so contracts cannot be
made on its behalf.
(a) Effect of Pre-Incorporation Contract on the Company
Company cannot be bound to the contract because it had no contractual capacity.

Company cannot ratify the contract because it was not in existence at the time the
contract was made.
Company cannot sue or be sued on the contract.
(b) Effect of Pre-Incorporation Contract on Person Purporting to Contract on Behalf
of the Company
At Common Law:
- if third party knew company was not yet in existence, he could make the
purported agent liable on the contract. (Kelner v Baxter).
- if it appeared that the contract was with a company already in existence, the
court might hold there was no contract at all, and neither the company nor the
purported agent could enforce it.
Newborne v Sensolid (GB) Ltd (Case 6)
This was unsatisfactory and was first changed by legislation in 1972. Provisions are
now in s.36C of the Companies Act 1985:
"A contract which purports to be made by or on behalf of a company at a time when
the company has not been formed has effect, subject to any agreement to the contrary,
as one made with the person purporting to act for the company or as agent for it, and
he is personally liable on the contract accordingly."
This means the "agent" will always be personally liable on the contract unless there is
agreement to the contrary.
Exceptions:
(i) Companies Bought "Off the Shelf"
s.36C does not apply where promoter makes contract on behalf of existing company
he later buys. The company can then ratify the contract.
(ii) Companies Struck Off the Register
s.36C does not apply where a company has been in existence but has been struck off
the register. The section only applies where the company has never been in existence.
Cotronic (UK) Ltd v Dezonie (Case 7)
(c) Avoiding Personal Liability

(i) s.36C does not apply if the parties have agreed that the promoter will not be
personally liable.
This requires express agreement - courts will not infer it.
Phonogram Ltd v Lane (Case 8)
(ii)Promoter and third party could make an agreement for novation. (novation =
substitution of a new obligation for an old one)
Promoter could agree with third party that promoter’s liability will end when the
company, once formed, enters new contract on same terms.
III. REGISTRATION OF A COMPANY
1. The Registrar of Companies
A company is registered by filing certain documents with the Registrar - he is a public
official appointed by the Secretary of State. Duties include registering new
companies, maintaining company files and supervising compliance with the
administrative and disclosure requirements of the Companies Act. The Companies
Act 1985 (Electronic Communications) Order 2000 allows most documentation to be
submitted in electronic form.
2. Documents Required for Registration
These are listed in CA 1985, s.10:
(a) Memorandum of Association
(b) Articles of Association
These are the documents which make up the constitution of the company. The
Companies (Tables A - F) Regulations 1985 give suggested forms for memoranda and
articles for different kinds of company.
A public company’s memorandum must be in accordance with Table F of the
Regulations.

Public and Private companies limited by shares can adopt the articles in Table A of
the Regulations - Table A will also apply automatically so far as not modified or
excluded by the company’s own articles.
The Memorandum must be signed (subscribed) unless submitted in electronic form,
and must show the number of shares each subscriber is taking.
(c) A statement giving the address of the company’s registered
office and the details (name, address, nationality, occupation and
date of birth) of the company’s first directors and secretary.
Statement must be signed by the subscribers to the memorandum
and include a written consent to act signed by those named as
directors/secretary.
(d) Statutory Declaration of Compliance - a statement that all the
requirements of the 1985 Act with regard to registration have been
complied with.
The statutory declaration must be signed by a solicitor involved in
the formation of the company or by one of the persons named as
director or secretary.
(e) Registration Fee - this is presently £20.
3. Certificate of Incorporation
If Registrar is satisfied that requirements of the Act have been met, he registers the
documents and issues a certificate of incorporation. This is the company’s "birth
certificate".
The Registrar publishes the issue of the certificate in the London or Edinburgh
Gazette.
Certificate is conclusive evidence that registration requirements have been met. It is
also conclusive evidence as to the date of incorporation.
Registrar is entitled to refuse to register a company where it has been formed for an
unlawful purpose:
R v Registrar of Joint Stock Companies, ex p Moore (Case 9)

The court may also be petitioned to cancel a registration if it appears that the company
has been registered for purposes which are unlawful or contrary to public policy:
R v Registrar of Companies, ex p Attorney-General (Case 10)
Trading Certificates
Private companies can begin to trade as soon as the certificate of incorporation has
been issued.
Public companies require a further certificate - called a s.117 certificate or trading
certificate.
Registrar will only issue s.117 certificate if satisfied that minimum capital
requirements for a public company have been met.
A public company which begins to trade without a trading certificate commits a
criminal offence - the company and any director responsible for the default can be
convicted.
(This does not affect the validity of any contracts entered into by the company).
IV. CONSEQUENCES OF INCORPORATION
1. Separate Legal Personality
A company is a separate person in law from its members. This has several important
consequences:
(a) Company is liable for its own debts
The shareholders are not liable for the debts and liabilities of the company and cannot
be sued by the company’s creditors. A shareholder can be a debtor or creditor of the
company and can sue or be sued by the company.
Salomon v A Salomon & Co Ltd (Case 11)
Lee v Lee’s Air Farming Ltd (Case 12)
(b) Limited Liability
The fact that the company is a separate person from its shareholders makes limited
liability possible.

Remember: the company’s liability is always unlimited - it is the members’ liability

that is limited and that liability is to the company, not to the individual creditors.)
(c) Company Property
A company owns its own property - the shareholders have no direct right to this or
any share of it.
Person who no longer wishes to be a member is only entitled to whatever price he can
get for his shares.
A shareholder has no legal interest in the company’s property and cannot insure it
against theft, damage, etc.
Macaura v Northern Assurance Co (Case 13)
(This may not apply to someone who is a secured debenture holder.)
(d) Contractual Capacity
A company has full contractual capacity - and only the company can enforce its
contracts.
(Companies may also be liable in negligence - shareholder cannot be made liable for
the negligence of the company, unless he was also personally negligent).
(e) Crimes
A company can be convicted of a crime, regardless of whether its directors are also
convicted.
Some limitations:
- it has been held that a company cannot be convicted of a crime which requires
the physical act of driving a vehicle:
Richmond on Thames Borough Council v Pinn & Wheeler (Case 14)
- a company cannot be convicted of any crime for which the only available
sentence is imprisonment.
There are particular problems with crimes which require mens rea ("a guilty mind") -
most common law crimes require mens rea, while many statutory offences involve
strict criminal liability.

In order to convict companies of common law crimes, courts may regard the mens rea
of those individuals who control the company to be the mens rea of the company.
However, the courts have been very restrictive in their use of this approach:
Tesco Supermarkets v Nattrass (Case 15)
R v P&O European Ferries (Dover) Ltd (Case 16)
R v Kite and OLL Ltd (Case 17)
Transco plc v HM Advocate (No 1) (Case 18)
Crimes Against the Company
A company can be the victim of crime.
It is theft to steal from a company, even if those accused of the theft are also the
company’s only shareholders:
R v Philippou (Case 19)
(f) Perpetual Succession
Separate personality means that the existence of a company does not depend on the
existence of its members. Membership may change or members may die - the
company continues in existence until wound up.
(g) Borrowing
A company can borrow money and grant a security for a debt. Only a company can
create a floating charge.
Floating charge = a kind of security for a loan. The charge "floats" because is does not
attach to any particular asset, but floats over the company’s assets as they exist from
time to time. Certain events cause the charge to "crystallise" and attach to whatever
assets the company has at the time.
2. Veil of Incorporation
Separate legal personality of company operates as a shield - the courts will not
normally look beyond the façade of the company to the shareholders who comprise it.
The screen separating the company from its individual shareholders and directors is
commonly referred to as "the veil of incorporation".
3. Piercing the Corporate Veil
Sometimes the law is prepared to examine the reality which lies behind the company
façade - this is described as "lifting" or "piercing" the corporate veil.
(a) Statute
Some statutory provisions have the effect of piercing the corporate veil to make
directors personally liable.
Presumption is in favour of separate personality and courts will not normally infer that
legislation is intended to pierce the corporate veil.
Dimbleby & Sons Ltd v NUJ (Case 20)
Situations where "veil is lifted" by Statute
(i) Companies Act 1985 s.24 - where membership of a company falls below two for
more than six months. Member who knows he is the sole member but continues to
trade will be jointly and severally liable with the company for company debts
contracted after the six month period has elapsed. (s.24 no longer applies to private
limited companies)
(ii) Companies Act 1985, s.117(8) - where public company trades without obtaining a
trading certificate. If the company fails to comply with any obligations under a
transaction within 21 days of being called on to do so, the directors of the company
are jointly and severally liable to indemnify the third party against any loss.
(iii) Companies Act 1985, s.349 - if person acting on behalf of a company signs or
authorises the signing of a bill of exchange, cheque, order for goods or similar
document in which the company’s name is not correctly stated, the person signing will
be personally liable if the company fails to pay.
This provision is rigidly enforced:
Durham Fancy Goods v Michael Jackson (Fancy Goods) Ltd (Case 21)
(iv) Insolvency Act 1986, ss.213 & 214
s.213 applies where company is being wound up and it appears
that business has been carried on with intent to defraud creditors.
s.214 applies where company is in insolvent liquidation and the
director(s) should have known this, but did not take sufficient
steps to minimise losses to creditors.

In either case, the court can order that those involved make a
contribution to the companies assets for the benefit of creditors.
(v) Insolvency Act 1986, s.216 & 217
The director of a company which has gone into insolvent liquidation cannot become a
director of another company with the same name within a five year period. If he does
he can be made personally liable for all the debts of the new company.
(vi) Company Directors Disqualification Act 1986, s.15
A person will be jointly and severally liable with the company for all the company’s
debts if he takes part in the management of the company while he is under a
disqualification order.
NB: For the purposes of these provisions, "person" includes legal as well as natural
persons.
(b) Common Law
The courts are willing to pierce the veil of incorporation in some circumstances:
(i) Fraud, Façade or Sham
Courts will examine the reality behind the company where the company was set up
purely to evade a legal obligation, or to allow someone to do something he would not
be allowed to do as an individual:
Gilford Motor Co v Horne (Case 22)
Jones v Lipman (Case 23)
Re Bugle Press Ltd (Case 24)
(ii) Agency
Court may lift the veil on the basis that one company is merely carrying on business
as the agent of another - so that transactions entered into by the subsidiary can be
regarded as transactions of the holding company:
Smith, Stone & Knight v Birmingham Corporation (Case 25)
Firestone Tyre & Rubber Co v Lewellin (Case 26)

But see: Adams v Cape Industries Ltd (Case 27)

(iii) Single Economic Unit
In the past, courts have been willing to lift the veil on the basis that a group of
companies was not a group of separate persons, but a single economic unit:
DHN Food Distributors v Tower Hamlets (Case 28)
Later cases have doubted this principle:
Woolfson v Strathclyde Regional Council (Case 29)
Adams v Cape Industries Ltd (Case 27)
(iv) State of Hostility
In times of war, courts may regard a British company as an enemy alien if the
company is controlled by nationals of an enemy country:
Daimler Co Ltd v Continental Tyre and Rubber Co (GB) Ltd (Case 30)
(v) Justice and Equity
Courts have sometimes been prepared to pierce the corporate veil where they feel this
is in the interests of justice:
Re a Company (Case 31)
Creasey v Breachwood Motors Ltd (Case 32)
But see: Adams v Cape Industries Ltd (Case 27)
Ord v Belhaven Pubs Ltd (Case 33)
Yukong Lines Ltd v Rendsburg Investment Corp (Case 34)
V. THE CORPORATE CONSTITUTION
The constitution of a company consists of its memorandum of association and its
articles of association.
1. The Memorandum of Association
For a company limited by shares, the memorandum must contain the following:

(a) Name Clause

CA 1985, s.25 - the name of a public limited company must end with the words
"public limited company", the name of a private limited company must end with the
word "Limited". Abbreviations may be used instead: "plc" or "Ltd".
It is an offence to carry on business under a name which uses these words or
abbreviations when not entitled to do so - the penalty is a fine.
Under CA s.26, it is not possible to register a company name which includes the
words "public limited company", "limited", "unlimited" or their abbreviations
anywhere except at the end of the name.
There are also other restrictions on the use of names:
(i) Under s.26, a company cannot be registered under a name which is identical to a
name already registered.
(ii) A company cannot be registered under a name which is regarded as offensive or
where the use of the name would constitute a criminal offence.
(iii) A company cannot be registered under a name which suggests that the company
is connected with the government or a local authority - or under any name including a
word listed in the Company and Business Names Regulations 1981 - unless the
Secretary of State gives permission for the name to be used.
(iv)s.26 does not prevent the registration of a name very similar to that of another
company - but if the similarity is deceptive and likely to lead to confusion, the
established business may bring an action to restrain the new company from using the
name. This is called a "passing-off" action.
Court will take into account:
- scope of pursuer’s reputation
- similarity of kind of business
Ewing v Buttercup Margarine Co Ltd (Case 35)
Dunlop Pneumatic Tyre v Dunlop Motor Co (Case 36)
Aerators Ltd v Tollitt (Case 37)
Exxon Corpn v Exxon Insurance (Case 38)

(v) A company must have its name printed on all business documents and it must be
displayed at the registered office and all business premises.
A company which wishes to trade under a name other than its registered name comes
within the provisions of the Business Names Act 1985.
(vi) Insolvency Act 1986, s.216 prevents the director of a company which has gone
into insolvent liquidation from taking part in the management of any business trading
under the same name as the insolvent company.
(vii) A company can change its name by special resolution (requires approval of
holders of 75% of the company’s shares).
The Secretary of State can order a compulsory name change within 12 months of
registration if he discovers the name is the same as or too like one previously
registered.
The Secretary of State can order a compulsory name change at any time if he
discovers that the name gives a misleading impression of the activities of the
company.
(b) Registered Office Clause
CA 1985 s.2 - the memorandum states whether registered office is to be in England
and Wales or in Scotland.
This establishes company’s nationality and its domicile, but not its residence.
Registered office is important because:
- it determines the jurisdiction in which the company can be sued.
- it is the address at which notices and documents must be served on the
company.
- it is the address at which the company’s registers and records must be kept
and made available for inspection by the public.
Address of registered office can be changed by ordinary resolution (simple majority
vote of shareholders), provided this does not also change the domicile.
(c) Objects Clause

Company’s memorandum must contain an objects clause - a clause which states the
purpose or purposes for which the company was incorporated.
(i) The Ultra Vires Rule
If the company does something beyond the scope of its objects clause, this is said to
be ultra vires (beyond the powers of the company).
Previously this was of great importance - transaction entered into beyond the
company’s powers was void and could not be enforced by or against the company,
and it could not be ratified. This was called the ultra vires rule.
Ashbury Carriage and Iron Co v Riche (Case 39)
(ii) Abolition of the Rule
The Rule has been abolished by statute as far as third parties are concerned.
s.35(1) CA 1985 - the validity of an act done by a company shall not be called into
question on the grounds of lack of capacity by anything in the company’s
memorandum.
The rule still operates internally of the company - a shareholder can bring an action to
restrain the company from carrying out an ultra vires act.
(The court will not restrain the company from doing anything it is already under a
legal obligation to do)
A director may be liable to the company for any costs incurred by the company on an
ultra vires transaction.
Potential problems can be avoided: CA 1985 s.3A allows a company to state in its
memorandum that its object is to carry on business as a general commercial company.
It can then carry on any trade or business whatsoever.
(iii) Change of Objects Clause
Under CA 1985, s.4 a company can change its objects clause by special resolution.
Members (holding at least 15% of the nominal issued share capital) who did not
consent to the change can apply to the court to have the alteration set aside. (s.5)
Application must be made within 21 days of the resolution being passed. The
alteration will not then come into effect unless it is confirmed by the court.

(d) Limitation of Liability Clause

If members’ liability is to be limited, memorandum must have a clause to this effect.
(e) Capital Clause
Limited company with share capital must have a clause stating the total amount of
share capital with which it proposes to be registered and the division of that capital
into shares of a fixed amount.
No minimum capital for private companies; £50,000 minimum for public companies.
(f) Association Clause
This is a clause stating that the subscribers are desirous of being formed into a
company in pursuance of the memorandum. This is followed by signatures of
subscribers (attested by one witness) and the number of shares each has agreed to
take.
(g) Other Clauses
Public company must have clause stating it is to be a public company.
No other clauses are necessary but it is possible to have others.
(h) Alteration of Memorandum
CA 1985, s.2(7) - a company cannot change its memorandum except in the
circumstances and manner expressly provided for in the Act.
Memorandum can be altered to change company from public to private and vice versa
- requires special resolution of shareholders.
Company can be changed from unlimited company to limited by special resolution -
change from limited to unlimited requires written consent of all the members.
Reduction of share capital requires special resolution.
CA 1985, s.17 - any provision in the memorandum which could have been contained
in the articles can be altered by special resolution.

CA 1985, s.16 - no member of a company can be bound to an alteration which makes

him liable to take more shares or which increases his liability in any other way unless
he consents in writing.
When company resolves to alter its memorandum, a copy of the resolution, and the
amended memorandum, must be sent to the Registrar within 15 days - failure to do
this is a criminal offence punishable by a fine.
2. Articles of Association
(a) Articles Generally
The articles govern the internal management and organisation of the company.
The articles are secondary to the memorandum - if there is conflict between the
articles and the memorandum, the memorandum prevails.
Re Duncan Gilmore & Co Ltd (Case 40)
Companies (Tables A - F) Regulations 1985 provides a model set of articles for a
company limited by shares.
A company has three options:
(i) It may adopt Table A in full.
(ii) It may adopt Table A with modifications.
(iii) It can exclude Table A entirely and write its own articles.
(Table A has existed in various forms since 1862 - a company which adopts Table A
will be bound by the Table A existing at the time it was incorporated, not a later
version).
Articles must be: (i) Printed
(ii)Set out in numbered paragraphs
(iii)Signed by the subscribers to the
memorandum
(b)Alteration of Articles
CA 1985, s.9 - articles can be altered by special resolution, which must be notified to
the Registrar of Companies within 15 days.

Any provision in the articles which would have the effect of making them unalterable
is void.
There are certain restrictions on the company’s power to alter its articles:
(i) Express Statutory Restrictions
s.16 - cannot alter articles to increase a member’s liability without
his consent.
s.369(1) sets out notice periods for calling meetings and states this
cannot be shortened by a provision in the articles.
(ii) General Law and Public Policy
A provision in the articles which is contrary to public policy is void.
St Johnstone Football Club Ltd v SFA (Case 41)
The same would apply to any provision which was inconsistent with the companies
legislation.
(iii) Court Order
Certain sections of the 1985 Act give the court power to order that no alteration be
made to the articles.
(iv) Memorandum
An alteration to the articles which conflicts with the memorandum would be
effectively void.
(v) Improper Use of Power to Alter Articles
The Power to alter the articles must be exercised bona fide for the benefit of the
company as a whole.
A member cannot challenge an alteration carried out in good faith for the benefit of
the company, even if the alteration adversely affects his own rights.
Allen v Gold Reefs of West Africa Ltd (Case 42)
Greenhalgh v Arderne Cinemas Ltd (Case 43)

The courts will usually allow the alteration, but have sometimes found that it is not
bona fide for the benefit of the company as a whole:
Brown v British Abrasive Wheel (Case 44)
Dafen Tinplate Co Ltd v Llanelly Steel Co (Case 45)
3. Legal Effect of Memorandum and Articles
The legal effect is described in s.14 CA 1985. The memorandum and articles operate
as a contract between the company and its members, which both parties are bound to
honour.
The effect of this is:
(a) Each member, in his capacity as a member, is bound to the
company as if he personally had signed the memorandum and
articles.
Hickman v Kent or Romney Marsh Sheep Breeders Association
(Case 46)
(b)The company is bound to each member in his capacity as a
member.
Wood v Odessa Waterworks Co (Case 47)
(c)The memorandum and articles do not constitute a contract
binding the company or any member to an outsider - or to a
shareholder in any other capacity than as a member.
Eley v Positive Government Life Assurance Co Ltd (Case 48)
Beattie v E & F Beattie Ltd (Case 49)
(d) Provisions of the memorandum or articles can sometimes form
part of an extrinsic contract between the company and an outsider.
This can happen in one of three ways:
(i) Where provisions of the memorandum or articles
are expressly incorporated into an express contract
between the company and the outsider.

(ii) Where there is no express contract but a

provision in the memorandum/articles is
incorporated by implication from the conduct of the
parties.
(iii) Where there is an express contract which is
silent on a particular matter, and relevant provisions
in the articles or memorandum are used to fill in any
gaps.
The company is not actually liable to the outsider on the basis of
the articles, but under the extrinsic contract.
Re New British Iron Co, ex parte Beckwith (Case 50)
(e) A member has a right to compel the company to act according
to the articles even if not enforcing a right which is personal to
himself as a member.
Salmon v Quinn & Axtens Ltd (Case 51)
(f) The memorandum and articles constitute a contract between
each member and every other member.
Rayfield v Hands (Case 52)
VI. CAPITAL AND SHARES
1. Nature of Shares and Share Capital
(a) What is a Share?
A share is the unit of measure for determining a member’s interest in the company.
The memorandum states the nominal value for each share - members must contribute
at least this amount.
(b) Share Capital
There are different aspects to this:
Authorised Share Capital

Total value of shares the company is allowed to allot - also known as nominal or
registered capital.
Allotted Share Capital
Value of shares the company has actually allotted to members.
Paid-up Share Capital
Amount that members have paid on their shares, excluding any premium.
Called-up Share Capital
Paid-up capital + any amount members have been called on to pay.
Uncalled Capital and Reserve Capital
Uncalled capital is the amount owing on partly paid shares which members have not
yet been called on to pay.
Reserve capital is uncalled capital the company has resolved not to call unless the
company is wound up.
2. Classes of Shares
(a) Typical Rights of Shareholders
Member’s rights are detailed in the Articles, but the following are typical:
- right to control company through voting at meetings
- right to participate in distribution of profits
- right to participate in surplus assets in a winding up.
(b) Preference Shares
Give preferential right to a dividend of fixed amount or fixed percentage per share -
this dividend is paid before anything is paid to ordinary shareholders. Right to
dividend is normally cumulative.
Preference shares usually give a preferential right to repayment of capital on a
winding up.

Preference shareholders normally have restrictions placed on their power to vote at

general meetings.
(c) Ordinary Shares
Dividend depends on company profits and there is no automatic right to a dividend.
3. Issue and Allotment of Shares
Issuing is the process by which members take shares in the company.
A share is allotted when someone acquires an unconditional right to be entered in the
register of members.
(a) Allotment Contracts
Usual rules of contract apply. There must be an offer met by an acceptance. A
prospectus is not an offer to sell shares, it is an invitation to treat.
It is possible to have a conditional contract which gives an option to demand the
allotment of shares at a later date. These option can be traded like shares.
(b) Authorisation of Allotment
CA 1985, s.80 - Directors cannot allot shares without authority given by the existing
shareholders or the articles.
The authority must state the maximum number of shares to be allotted. It is a criminal
offence to allot shares without proper authorisation, but the allotment remains valid.
(c) Pre-emption Rights
CA 1985, s.89 - existing shareholders must be offered the opportunity to buy any new
issue of shares before they are offered elsewhere. Shareholder must be given 21 days
to decide whether to buy. Private companies can avoid pre-emption rights.
4. Transfer of Shares
CA 1985, s.182 - shares must be transferable.
Private companies usually restrict members’ rights to transfer shares.
(a) Transfer of Unlisted Shares

- transferor signs stock transfer form

- form is given to transferee with share certificate.
- if only part of shareholding is being transferred, form and certificate are sent
to the company instead, for certification.
- transferee sends form and certificate to company, which enters him on register
of members. New share certificate is issued after two months.
(b) Transfer of Listed Shares
- can be done as for unlisted shares.
- companies that support CREST can transfer listed shares electronically -
records are computerised and no share certificate is issued.
(c) Transmission of Shares
Transmission is the automatic transfer of shares by operation of law. It takes place in a
number of circumstances.
(i) Death of Shareholder
Shares of deceased shareholder transmit to his executor to deal with as directed by the
will or the rules of intestacy.
(ii) Insanity of Shareholder
If shareholder becomes a patient under the Mental Health Acts and a public guardian
is appointed, the shares transmit to the public guardian.
(iii) Bankruptcy of Shareholder
Shares held by a bankrupt transmit to his trustee in bankruptcy.
Holder of shares through transmission has the same rights and benefits as a member
even if not registered as a member - but he cannot vote. He can choose to be
registered and can then vote.
5. Capital Maintenance
Members are entitled to a dividend out of profits. A company cannot return capital to
the members. This provision operates to protect creditors.

CA 1985 sets out some legal methods by which the capital of a company can be
returned to the members.
(a) Reduction of Capital
CA 1985 ss.135-141
A company can reduce its capital if this is authorised by the articles and the reduction
is confirmed by the court. It also requires alteration of the share capital as stated in the
memoradum - this needs a special resolution.
The court will only confirm the reduction if satisfied that the company’s creditors
have been paid or have consented to the reduction.
(b) Redeemable Shares
CA 1985 s.159(1)
A company can issue redeemable shares if power to do so is given by the articles.
The shares give a temporary membership of the company - the nominal value (and
sometimes a premium) is paid to the shareholder at the end of the period.
When shares are redeemed they must be cancelled by the company. The company
must make up its capital by issuing new shares or transferring funds from the profit
and loss account to the capital redemption reserve account.
Any premium payable on redemption must be paid out of profits.
Private companies can pay for redemption completely out of capital - this needs a
special resolution and a declaration from the directors that the assets will exceed
liabilities after the payment is made.
(c) Company Purchasing its own Shares
Generally this is prohibited by s.143(1), but s.162 allows a company to buy its own
shares in the circumstances provided by the Act and if authority is given in the
company’s articles.
(i) Market Purchase

Must be authorised by ordinary resolution, which must state maximum number of

shares to be purchased and minimum and maximum price to be paid. The authority
cannot last more than 18 months.
(ii) Off-Market Purchase
This requires a special resolution approving the specific purchase contract. If the
company is a public company, the authority to buy must expire within 18 months.
When a company has bought its own shares it must cancel them and compensate for
lost capital by a new share issue or a transfer of profits to the capital redemption
reserve.
VII. MEETINGS AND RESOLUTIONS
1. Shareholders and Shares
Day to day management of a company is in the hands of the directors, not the
shareholders - but the shareholders retain some important powers - many decisions
require a resolution of the shareholders and cannot be decided by the directors alone.
(a) Who is a "Member"
(i) Anyone who subscribes the memorandum.
(ii)Any other person who agrees to become a member and whose
name is entered on the register of members.
(b) Register of Members
CA 1985, s.352 requires every company to keep a register of its members. The
register must show:
- name and address of each member.
- date person became a member and, where applicable, the date he ceased to be
a member.
- the number of shares held by each member and the amount paid on them.
2. Kinds of Meetings

(a) Annual General Meeting

Most companies must hold an AGM.
(i) CA 1985 s.366 provides that an AGM must be held every calendar year with not
more than 15 months between meetings. A newly incorporated company must hold its
first AGM within 18 months of incorporation.
(ii) CA 1985 s.367 - if a company does not hold an AGM as required, any member
can apply to the Secretary of State to call or to direct the calling of the meeting.
(iii) CA 1985 s.366A - members of a private company can choose to dispense with the
holding of an AGM by elective resolution - but any member of such a company can
require that an AGM be held in a particular year by giving notice at least 3 months
before the end of the year.
(iv) CA 1985 s.371 - if it is impracticable to call a meeting or conduct a meeting in the
manner prescribed by the company’s articles, any member or director who would be
entitled to vote can apply to the court which can order the meeting to be called or
held.
Re Sticky Fingers Restaurant Ltd (Case 53)
(b) Usual Business of an AGM
(i) Directors lay before the company annual accounts and reports for t the most recent
financial period.
(ii) Auditor's term of office ends at AGM, so they must be re-appointed or new
auditors must be appointed.
(iii) Director's recommendation for the dividend to be paid to shareholders will be
voted on.
(iv) The Articles may provide that directors are to retire in rotation. Some directors
will retire at the AGM and must be re-appointed or replaced.
(v) Resolutions may be required to pay directors’ and auditors’ fees. (Now normally
fixed by contract).
(vi) Shareholders may have their own resolutions placed on the agenda.
(c) Extraordinary General Meetings

Any meeting which is not an AGM. Table A provides that only directors can call an
EGM, unless there are too few directors in the UK to make up a quorum - then any
member can call one.
CA 1985, s.368 - directors must call an EGM if requisitioned by holders of 10% of the
paid up capital of the company.
CA 1985, s.371 - power of the court to order the holding of an AGM also applies to
EGMs.
CA 1985, s.142 - public company must hold an EGM if the company’s net assets have
fallen to less than half of its called up capital. Meeting must be called within 28 days
of the directors becoming aware of the loss of capital, and must be held within 56
days of that date.
CA 1985, s.392A - where auditor has resigned and has made a statement of
circumstances he thinks should be brought to the attention of creditors and
shareholders - the auditor can requisition the directors to hold an EGM so that he can
explain the circumstances of his resignation.
3. Convening Meetings
(a) Notice of Meetings
(i) Authority to Call a Meeting
Authority normally rests with the directors.
If person without authority issues notice of a meeting the notice is void.
(ii) Who must be notified?
Depends on the Articles. Table A provides that notice must be given to all
shareholders, directors and auditors.
Failure to notify someone entitled to notice will invalidate the meeting unless the
failure was purely accidental:
Young v Ladies Imperial Club (Case 54)
Re West Canadian Collieries Ltd (Case 55)
(iii) Method of Service

Articles can provide for any method - Table A requires written notice to be delivered
personally or by post.
Bradman v Trinity Estates Ltd (Case 56)
The Companies Act 1985 (Electronic Communications) Order 2000 allows notice to
be given by electronic means such as
via a website provided the member agrees to being given notice in this way.
(iv) Length of Notice
Articles can set any length of notice, but by s.369, notice must be at least 21 days for
an AGM, or 14 days for an EGM - unless all members agree shorter notice period.
(v) Contents of Notice
Set out by articles. Table A requires notice to specify date, time and place of meeting
and a general indication of business to be dealt with. Notice must state if meeting is an
AGM.
If meeting is being convened to pass a special or extraordinary resolution, or a
resolution for which special notice is required, these resolutions must be set out in full
in the notice.
Notice will be invalid unless it contains enough detail to allow a reasonable
shareholder to judge whether he needs to attend the meeting.
Baillie v Oriental Telephone & Electric Co Ltd (Case 57)
(vi) Special Notice
Some kinds of resolution require special notice to be given:
- resolution to dismiss a director
- resolution to appoint replacement director at same meeting as dismissal.
- appointment or retention of public company director aged 70 or over.
- resolutions concerning dismissal or appointment of auditors.
Special notice = at least 28 days notice to the company of the intention to move the
resolution. The company must then give the members at least 21 days notice of the
meeting.

4. Conduct of Meetings
(a) Quorum
"Quorum" = the minimum number of persons who must be present before the meeting
will be valid.
Articles can provide for any quorum:
Table A requires two members entitled to vote, or their proxies.
If Table A has been excluded without providing an alternative, CA 1985 s.370
requires two members personally present.
Single Member Private Companies - one member will form a quorum,
notwithstanding anything in the articles.
A meeting held without a quorum cannot validly transact any business:
Sharp v Dawes (Case 58)
(b) Chairman
Usual to have a chairman to preside over a meeting - Table A provides this should be
the chairman of the board or another director nominated by the board.
Chairman’s role is to keep order - he/she has no power to adjourn or dismiss a
meeting unless this is specified in the articles.
Chairman has no casting vote unless given one by the articles. (Table A gives a
casting vote.)
(c) Minutes
Companies must keep minutes of general meetings at the registered office for
inspection by members.
Chairman signs the minutes - they then become prima facie evidence of what occurred
at the meeting.
(d) Voting and Proxies
CA 1985 s.372 - all companies must allow a member who cannot attend a meeting to
allow a proxy to vote in his place.

Appointment of proxy must be in writing and lodged with company at least 48 hours
before meeting.
There are two methods of voting at company meetings:
(i) Show of Hands
Voting can be by show of hands unless articles provide otherwise.
Each member has just one vote regardless of number of shares he has - hands are
counted and the result declared by the chairman. Result is conclusive once recorded in
the minutes.
Proxies cannot vote on a show of hands unless the Articles allow this.
(ii) Voting by Poll
A company cannot refuse a demand for a poll made by:
- at least 5 members having the right to vote, or
- any member/members representing one-tenth or more of the total voting
rights.
Members normally have one vote per share in a poll.
Members are entitled to exercise their votes according to their own interests.
Northern Counties Securities Ltd v Jackson & Steeple (Case 59)
5. Resolutions
(a) Special Resolutions
Requires vote of 75% of members present in person or by proxy, who are entitled to
vote and do vote.
Meeting at which resolution is proposed must have had at least 21 days notice, unless
shorter period was agreed by majority in number of members holding at least 95% of
the shares.
Certain matters can only be decided by special resolution and the articles cannot
provide to the contrary.

Printed copy of special resolution must be sent to Registrar within 15 days of it being
passed.
(b) Extraordinary Resolutions
Same requirements as for special resolution except for notice period required, which
depends on type of meeting. (21 days for AGM, 14 days for EGM - shorter notice
possible by agreement).
Extraordinary resolution must be used:
- for voluntary winding up when company cannot pay its debts (IA 1986
s.84(1))
- to authorise a liquidator to make an arrangement with creditors in members’
voluntary winding up (IA 1986 s.165(2))
(c) Elective Resolutions
Apply only to private companies. s.379A CA 1985 lists circumstances - e.g. election
to dispense with AGM.
Requires 21 days notice of meeting - resolution must be supported by all members
entitled to attend and vote.
Must be filed with Registrar within 15 days of being passed.
An elective resolution can be revoked by an ordinary resolution - which must also be
filed with the Registrar within 15 days.
(d) Ordinary Resolutions
Most matters can be decided by ordinary resolution and some must be (e.g. decision to
remove a director).
Ordinary resolution requires simple majority - 50% + 1 vote of members present in
person or by proxy.
(e) Written Resolutions
CA 1985 s.381A - allows private company to pass resolutions without holding
meetings.

Written resolution is passed by being signed by or on behalf of all members who

would be entitled to attend and vote at a meeting.
Companies cannot be restricted from using s.381A procedure by anything in the
articles.
Resolutions to remove a director or an auditor before his term of office has expired
cannot be taken by written resolution.
VIII. DIRECTORS
1. Appointment of Directors
CA 1985 s.282 - public companies must have at least two directors, private companies
at least one.
(a) First Directors
Persons named in the statement of first directors and secretary submitted on
registration are deemed to be appointed as directors as soon as company is
incorporated.
(b) Subsequent Directors
Appointed in manner laid down by Articles - usually ordinary resolution.
(c) Persons Who cannot be Appointed Directors
(i) Share Qualification
If the articles provide for a share qualification, director must
obtain this within two months.
(ii) Over-age Persons
No upper age limit for private company unless articles so provide.
Person cannot be appointed as director of a public company if he
has reached the age of 70 (CA 1985 s.293)
(iii) Undischarged Bankrupts
CDDA 1986, s.11 - criminal offence unless permission given by
the court.
Applications for Permission are usually refused:
Re Altim Pty Ltd (Case 60)

Acting in contravention of s.11 is a strict liability offence:

R v Brockley (Case 61)
(iv) Persons Disqualified by the Court
CDDA 1986 - it is a criminal offence to act as director of a
company while under a disqualification order.
Court may make a disqualification order where:
- Where a person is convicted of an indictable offence in relation to the
company (Maximum period - 15 years).
- Person has been in persistent default in filing returns or documents with the
Registrar (Maximum 5 years).
- Company is being wound up and person has apparently committed fraud in
relation to the company (Maximum period - 15 years.)
- DTI requests a disqualification order in the public interest after and
investigation. (Maximum 15 years.)
- Person has been found liable for wrongful trading under s.214 Insolvency Act
(Maximum 15 years)
The court must make a disqualification order where:
- a person is director of a company which has become insolvent and that
person’s conduct makes him unfit to be concerned in the management of a
company.
(Minimum 2 years, Maximum 15 years)
R v Austen (Case 62)
Re Sevenoaks Stationers (Retail) Ltd (Case 63)
Re Firedart Ltd (Case 64)
(v) Auditors and Secretaries
- Auditor of a company cannot also be a director of it.
- Secretary of a company cannot also be the sole director of it.
2. Proceedings of Directors
(a) Meetings

(i) Notice
No prescribed notice period - directors are entitled to reasonable notice of board
meetings.
Re Homer District Gold Mines (Case 65)
Browne v La Trinidad (Case 66)
Bentley Stephens v Jones (Case 67)
Shaw v Tati Concessions Ltd (Case 68)
(ii) Quorum for Board Meetings
Whatever the articles provide. A director with a personal interest in the matter being
discussed does not count toward the quorum:
Re North Eastern Insurance Co Ltd (Case 69)
(iii) Minutes
Minutes must be recorded, but shareholders have no right to inspect them.
3. Powers of Directors
Directors have sole power to manage the business of the company, but power vests in
the shareholders if the directors are unable or unwilling to act:
Barron v Potter (Case 71)
A director who exceeds his powers may be liable for any loss the company suffers,
unless the shareholders ratify his actions:
Bamford v Bamford (Case 72)
Shareholders can now also ratify ultra vires transactions, unless this amounts to a
fraud on the minority.
Third parties are protected by CA ss.35A and 35B - can enforce transactions even if
directors exceed their powers.
4. Duties of Directors
(a) Fiduciary Duties

Director’s fiduciary duties are owed only to the company, not to the individual
shareholders.
Percival v Wright (Case 73)
Allan v Hyatt (Case 74)
The Fiduciary Duties are:
(i) A duty to act bona fide for the benefit of the company as a whole:
Re W & M Roith Ltd (Case 75)
(ii) A duty to use powers only for the purpose for which they were
conferred:
Howard Smith v Ampol Petroleum (Case 70)
(iii) A duty to avoid a conflict between his own interests and those of the
company.
Aberdeen Railway Co v Blaikie Bros (Case 76)
A director cannot vote on any matter in which he has a personal interest, and, by CA
s.317 a director with any interest in a proposed contract must disclose this to the
board:
Guinness plc v Saunders (Case 77)
Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald (Case 78)
(iv) A duty not to make a personal profit out of his connection with the
company.
If he does he must account for the profit to the company:
Boston Deep Sea Fishing Ltd v Ansell (Case 79)
Regal (Hastings) Ltd v Gulliver (Case 80)
IDC Ltd v Cooley (Case 81)
The shareholders can vote to permit the director to keep the profit
- unless there is a fraud on the minority:
Cook v Deeks (Case 82)
(b) Duty of Care and Skill

Relates to director’s competence in managing the company. Traditionally, the duty

has been minimal - director is judged according to his own knowledge and
experience:
Re City Equitable Fire Insurance Co Ltd (Case 83)
Re Brazilian Rubber Plantations & Estates (Case 84)
Dorchester Finance Co Ltd v Stebbing (Case 85)
More recent cases suggest a move to a tougher standard - the level of skill reasonably
to be expected from a person undertaking the same duties.
Norman v Theodore Goddard (Case 86)
Re D’Jan of London Ltd (Case 87)
5. Vacation of Office by Directors
(a) Age
A director of a public company must normally retire when he reaches the age of 70,
unless:
- Articles of the company provide otherwise, or
- Shareholders approve his continued appointment.
(b) Retirement under the Articles
Table A, Art 81 - a director must vacate office if:
- he becomes bankrupt or insane
- he becomes disqualified
- he is absent from board meetings for more than six months without
permission.
Director can also resign by giving notice.
(c) Dismissal

CA 1985, s.303 - a director can be dismissed at any time by an ordinary resolution of

the company - this cannot be overridden by the articles or director’s service contract.
Special notice must be given of a resolution to remove a director and the director has
the right to make representations at the meeting.
The articles may give a director’s shares special voting rights - this may defeat the
operation of s.303:
Bushell v Faith (Case 88)
IX. MAJORITY RULE AND MINORITY PROTECTION
The general rule in company law is that the wishes of the majority will prevail.
1. The Rule in Foss v Harbottle
Foss v Harbottle (Case 89)
When a wrong is done to a company, it is for the company to decide what action to
take.
The courts will not usually hear an action brought by a member or members of the
company.
(a) Reasons for the Rule
(i) The Proper Plaintiff Principle
The company is the proper plaintiff (pursuer) in any action to right a wrong against it.
(ii) The Internal Management Principle
The courts will not interfere with the internal management of a company. It is for the
company to decide whether it is being properly managed.
(iii) Irregularity Principle
A member cannot sue to rectify a mere informality where the act would be within the
company’s powers if done properly and the wishes of the majority are clear.
(b) Problems with the Rule

The majority of shares often belong to directors.The majority are in the best position
to prejudice the company - then decide that the company will not bring an action
against them.
There is thus a need for minority protection - enforcement of minority rights falls into
three main categories.
2. Exceptions to the Rule in Foss v Harbottle
(a) Preliminary Points
A number of matters must be established first:
(i) The company is entitled to the remedy - shareholder cannot have a
wider right to bring an action than the company itself would have had.
(ii) It is not possible to petition under CA s.459 or IA 1986 s.122(1)(g)
(these will usually be easier).
(iii)The action falls within one of the recognised exceptions to the Rule
in Foss v Harbottle.
(iv) It is not possible to obtain authority to bring an action in the
company’s name (i.e. must show the company has decided not to sue).
(b) The Recognised Exceptions
Edwards v Halliwell (Case 90) identified four exceptions:
- Fraud on the minority by wrongdoers in control
- Invasion of members personal rights
- Ultra vires acts
- Material procedural irregularities
In reality, only the first of these is a true exception to Foss - the others are cases where
the Rule has no application.
(i) Fraud on the Minority by Wrongdoers in Control

"Control" = voting control (50% + 1 vote) - but some suggestion that de facto control
is enough:
Prudential Assurance v Newman Industries (Case 91)
"Fraud" = unconscionable use of majority power resulting in loss to or discrimination
against the minority.
Negligence is not enough to amount to fraud:
Pavlides v Jensen (Case 92)
But "self-serving" negligence might be:
Daniels v Daniels (Case 93)
Oppression of the minority will be regarded as fraud:
Menier v Hooper’s Telegraph Works (Case 94)
Cook v Deeks (Case 82)
Also conduct which is an abuse of majority powers:
Estmanco v GLC (Case 95)
(ii) Invasion of Personal Rights
Invasion of the shareholder’s personal rights is not really an exception to the rule in
Foss v Harbottle - because the shareholder would be the proper person to bring the
action:
Wood v Odessa Waterworks Co (Case 47)
Salmon v Quinn & Axtens Ltd (Case 51)
(iii) Illegal or Ultra Vires Acts
Any shareholder is entitle to bring an action to restrain the company from doing
something which is outside the company’s objects.
(iv) Material Procedural Irregularities
General rule that the courts will not interfere with the internal management of a
company when an action is brought by a shareholder does not apply if the act done by
the company was one which required a special majority which was not obtained.
If this exception did not exist, the company would be able to act in breach of its own
constitution.

Edwards v Halliwell (Case 90)

3. Unfairly Prejudicial Conduct
(a) Companies Act 1985 s.459
This allows a shareholder to petition the court where the company is being managed
in a way that is unfairly prejudicial to the interests of some of the members. (but only
to his interests in his capacity as a member).
(b) Meaning of "Unfairly Prejudicial"
The Act does not define this, but:
(i) Test is concerned with effect of conduct, not motive:
Re Bovey Hotel Ventures Ltd (Case 96)
(ii) The conduct must be both unfair and prejudicial.
Re Saul Harrison & Sons plc (Case 97)
(iii) The words are flexible in meaning.
(c) Clean Hands
No bar to petition that the pursuer’s own conduct has not been beyond reproach - no
requirement for "clean hands".
Re London School of Electronics (Case 98)
(d) Irregularity Principle
The court will not hear a petition under s.459 brought on the basis of a procedural
irregularity that could easily be rectified. (As in Browne v La Trinidad (Case 66) and
Bentley Stephens v Jones (Case 67))
(e) Grounds for a s.459 Petition
(i) Exclusion from Management
Dismissing a member of a quasi-partnership from the office of director may amount to
unfairly prejudicial conduct:
Re a Company (Case 99)
Re Ghyll Beck Driving Range Ltd (Case 100)
(ii) Diversion of Business
Where majority diverts business of the company elsewhere to benefit the majority but
prejudice the minority.
Re London School of Electronics Ltd (Case 98)
(iii) Non-Payment of Dividends
Majority pay themselves high directors’ salaries but the company pays no or very low
dividends.
Re Sam Weller & Sons Ltd (Case 101)
(iv) Dilution of Minority
Majority allots shares to dilute percentage of shares and thus voting power held by
minority.
Re D & R Chemicals Ltd (Case 102)
(v) Serious Mismanagement
Bad management would not normally be grounds for a s.459 petition - but there is
some suggestion that it might be if serious enough:
Re Elgindata Ltd (Case 103)
Limits to the s.459 petition:
The concept that members have a legitimate expectation that the company will be run
in a was that differs from the articles of association will not normally apply to a public
company:
Re Astec BSR plc (Case 104)
The concept that breach of a legitimate expectation could give rise to a petition based
on s.459 was given a more restricted interpretation by the House of Lords in:
O'Neill v Phillips (Case 105)
(f) Remedies
The court has wide discretion - it can grant any order it thinks fitting in the
circumstances. In particular, it can:
- regulate the future affairs of the company.
- order the company to bring civil proceedings.
- order the purchase of the aggrieved shareholder’s shares. (The most common
remedy).
4. Just and Equitable Winding Up

Insolvency Act 1986, s.122(1)(g) - a company may be wound up by the court if the
court is of the opinion that this would be just and equitable.
(a) Locus standii (Who can petition)
Any shareholder provided he has had his shares for at least 6 months during the
eighteen months prior to bringing the petition, or have inherited them, or have
obtained them by direct allotment from the company.
(b) "Just and Equitable"
This is not defined by the Act - the courts have described it as a broad and flexible
concept. "Clean hands" are essential for a s.122(1)(g) petition.
(c) Grounds for Granting the Petition
(i) Breakdown of Mutual Trust and Confidence
Most s.122(1)(g) petitions are brought by members of quasi-partnerships. Court will
probably grant the petition if it is evident that the members have lost confidence in
each other and can no longer work together:
Re Yenidje Tobacco Co Ltd (Case 106)
(ii) Exclusion from Management
This also applies only to quasi-partnership companies, where the members have a
legitimate expectation of taking part in the management of the company.
Ebrahimi v Westbourne Galleries Ltd (Case 107)
(iii) Lack of Probity of Directors
Where shareholders have joined a small family company or quasi-partnership on the
basis that it will be managed in a certain way and this has not been done, the petition
may be granted where the shareholders have lost confidence in the management.
Loch v John Blackwood (Case 108)
Jesner v Jarrad Properties Ltd (Case 109)
The court is unlikely to grant a winding up order if the petitioner could have had an
equally viable remedy under s.459. Winding up is a drastic remedy.
(d) Effect of Presentation of Petition
(i) Presentation of the petition freezes the companies affairs while the
matter is decided.
(ii) The company can apply for a validating order, which will allow it to
carry in business pending a decision.
(iii) The company can take out a cross-undertaking for damages against
the petitioner - the petitioner would then be liable for any loss suffered
by the company because of the petition if the petition eventually fails.

CONTRACT LAW

CHAPTER 2: Introduction to the Law of

Contract
[2.10]

At the heart of the law of contract - (certain) agreements will be enforced by courts

Contracts allow us:
o
To secure expectations
o
To facilitate planning
o
To establish market value for goods and services
o
To allocate risk
o
To provide for a formal dispute-resollution process
THE EVOLUTION OF THE LAW OF CONTRACT:
[2.20]

Law of contract - became the main tool that facilitated and concluded market transacons

The law of contract that emerged during the 19th century
o
Re%ected the individualisc, self-reliant ethic of the me

Courts stressed the virtues of freedom and sancty of contract
o
Pares had the freedom to negoate and consent to the terms of their contract

Mass product of goods during the 20th century - signalled a growing gap between those with
bargaining powers and those without such power

Responding to the demands for protecon of the vulnerable - courts and legislatures have
made laws designed to protect individuals and small businesses from conduct that is unfair,
misleading etc
o
Eg: Compeon and Consumer Act 2010
DEFINITION OF A CONTRACT:
[2.30]

Every contract involves an element of agreement
o
However not every agreement is a contract

Contract: an agreement between two or more pares under which legal rights and
obligaons are created which are enforceable in the courts
o
Is a promise or a set of promises that the law will enforce

It is the possibility of enforcement - that disnguishes a contract from other kinds of
agreements

Law of contract - concerned with the principles applicable to the formaon, performance,
interpretaon and breach of contracts
ESSENTIAL ELEMENTS OF A CONTRACT:
[2.40]

For there to be a contract - certain elements must be present

One or more of these elements is absent - the agreement between the pares will not
constute a contract

Essen)al elements of a contract:
o
An o0er by one party and its acceptance by the other indicang the pares have
reached agreement
o
The intenon of the pares to create legal relaons
o
Valuable consideraon (unless the promise is made by deed)
o
Legal capacity of the pares to act
o
A genuine consent by the pares
Chapter 6 Contracts: Nature, Classification,
Agreement and Consideration.
Presentation on theme: "Chapter 6 Contracts: Nature, Classification, Agreement and
Consideration."— Presentation transcript:
1 Chapter 6 Contracts: Nature, Classification, Agreement and Consideration
2  What is a contract? What is the objective theory of contracts?  What are the four basic
elements of a valid, enforceable contract?  What are the various classifications of contracts? 
What are the requirements of an offer?  How can an offer be accepted?  What are the elements
of consideration?  What is a contract? What is the objective theory of contracts?  What are the
four basic elements of a valid, enforceable contract?  What are the various classifications of
contracts?  What are the requirements of an offer?  How can an offer be accepted?  What are
the elements of consideration? Learning Objectives
3 Contracts  Function of Contracts Fundamental to business. Creates rights and duties between
parties. Provides stability and predictability.  Parties: Promisor (makes the promise) and
Promisee (accepts the promise). Good faith in commercial agreements  Function of Contracts
Fundamental to business. Creates rights and duties between parties. Provides stability and
predictability.  Parties: Promisor (makes the promise) and Promisee (accepts the promise).
Good faith in commercial agreements
4 Contracts  Definition of a Contract Agreement that can be enforced in court. Formed by two
or more parties Failure to perform results in breach and damages.  Objective Theory
Reasonable person standard Circumstances surrounding contract formation  Definition of a
Contract Agreement that can be enforced in court. Formed by two or more parties Failure to
perform results in breach and damages.  Objective Theory Reasonable person standard
Circumstances surrounding contract formation
5 Requirements of a Contract  A valid, enforceable contract includes: Agreement Consideration
Capacity Legality  Defenses to formation include: Genuineness of Assent Form  A valid,
enforceable contract includes: Agreement Consideration Capacity Legality  Defenses to
formation include: Genuineness of Assent Form
6 Types of Contracts  Every contract has at least 2 parties: the Offeror (Promisor) and the
Offeree (Promisee).  Bilateral Contracts Offeror and Offeree exchange promises to each other.
A contract is formed when Offeree promises to perform.  Every contract has at least 2 parties:
the Offeror (Promisor) and the Offeree (Promisee).  Bilateral Contracts Offeror and Offeree
exchange promises to each other. A contract is formed when Offeree promises to perform.
7 Types of Contracts  Unilateral Contracts Offeror wants performance in exchange for his
promise. Contract is formed when Offeree performs. Contests and lotteries are examples.
Revocation of Offer: modern view is that offer is irrevocable once the Offeree substantially
performs.  Unilateral Contracts Offeror wants performance in exchange for his promise.
Contract is formed when Offeree performs. Contests and lotteries are examples. Revocation of
Offer: modern view is that offer is irrevocable once the Offeree substantially performs.
8 Types of Contracts  Express vs. Implied Contracts Express: terms of contract are set forth
either in writing or orally. Implied-in-Fact: based on conduct. Plaintiff furnished service or
product Plaintiff expects to be compensated Defendant had a chance to reject and did not.
Implied-in-Law (Quasi Contract) Fictional, created by court to avoid unjust enrichment. 
Express vs. Implied Contracts Express: terms of contract are set forth either in writing or orally.
Implied-in-Fact: based on conduct. Plaintiff furnished service or product Plaintiff expects to be
compensated Defendant had a chance to reject and did not. Implied-in-Law (Quasi Contract)
Fictional, created by court to avoid unjust enrichment.
9 Types of Contracts  Formal vs. Informal Contracts Formal: require special form or method to
be enforceable, e.g., under seal. Informal: all other contracts.  Executed vs. Executory Contracts
Executed: fully performed by both sides. Executory: at least one of the parties has not performed.
 Formal vs. Informal Contracts Formal: require special form or method to be enforceable, e.g.,
under seal. Informal: all other contracts.  Executed vs. Executory Contracts Executed: fully
performed by both sides. Executory: at least one of the parties has not performed.
10 Types of Contracts  Valid Contract Four Elements: Agreement, Consideration, Legal
Purposes, Parties have legal capacity.  Voidable Contract Valid contract that is legally defective
and can be avoided (rescinded) by one of the parties.  Void Contract No contract at all.  Valid
Contract Four Elements: Agreement, Consideration, Legal Purposes, Parties have legal capacity.
 Voidable Contract Valid contract that is legally defective and can be avoided (rescinded) by
one of the parties.  Void Contract No contract at all.
11 Agreement: Offer  Agreement = Offer and Acceptance.  An offer is the Offeror’s promise
to perform. An offer requires: Serious, objection intention Opinions are not offers Good
Intentions are not offers Preliminary Negotiations are not offers Agreements to Agree are not
offers  Agreement = Offer and Acceptance.  An offer is the Offeror’s promise to perform. An
offer requires: Serious, objection intention Opinions are not offers Good Intentions are not offers
Preliminary Negotiations are not offers Agreements to Agree are not offers
12 Offer  An offer requires (continued): Reasonably definite terms Communication to Offeree 
Termination of Offer By Act of the Parties Revocation by Offeror (unless irrevocable) Rejection
by Offeree (or counteroffer) Operation of Law (destruction, death)  An offer requires
(continued): Reasonably definite terms Communication to Offeree  Termination of Offer By
Act of the Parties Revocation by Offeror (unless irrevocable) Rejection by Offeree (or
counteroffer) Operation of Law (destruction, death)
13 Agreement: Acceptance  Voluntary act by Offeree that shows assent to terms of original
offer.  Unequivocal Acceptance: “Mirror Image” Rule Offeree must unequivocally accept offer.
Additional terms may be considered a counteroffer.  Acceptance by Silence  Voluntary act by
Offeree that shows assent to terms of original offer.  Unequivocal Acceptance: “Mirror Image”
Rule Offeree must unequivocally accept offer. Additional terms may be considered a
counteroffer.  Acceptance by Silence
14 Acceptance  Communication of Acceptance Authorized Means of Communication is either
express or implied by form of offer (e.g., U.S. mail, fax, email) “Mailbox Rule”: Offeree accepts
offer when the acceptance is dispatched to Offeror in the form it was received, unless offer
requires a different method (e.g., Fed-Ex, or receipt by Offeror).  Communication of
Acceptance Authorized Means of Communication is either express or implied by form of offer
(e.g., U.S. mail, fax, email) “Mailbox Rule”: Offeree accepts offer when the acceptance is
dispatched to Offeror in the form it was received, unless offer requires a different method (e.g.,
Fed-Ex, or receipt by Offeror).
15 Consideration  Consideration is value given in return for a promise.  Elements: Something
of legally sufficient value given in exchange for a promise and A bargained-for-exchange
between the parties.  Consideration is value given in return for a promise.  Elements:
Something of legally sufficient value given in exchange for a promise and A bargained-for-
exchange between the parties.
16 Adequacy of Consideration  Contracts that Lack Consideration Pre-Existing Duty
Unforeseen Difficulties Past Consideration Illusory Promises  Settlement of Claims Accord and
Satisfaction Release Covenant Not to Sue  Contracts that Lack Consideration Pre-Existing Duty
Unforeseen Difficulties Past Consideration Illusory Promises  Settlement of Claims Accord and
Satisfaction Release Covenant Not to Sue
17 Promises Enforceable Without Consideration  Promissory Estoppel Promissory Estoppel
(“detrimental reliance”) doctrine applies when a person relies on the promise of another to her
legal detriment. Promisor is “estopped” (precluded) from revoking the promise. There must be:
Clear and definite promise with substantial reliance Justice is served by enforcement of the
promise.  Promissory Estoppel Promissory Estoppel (“detrimental reliance”) doctrine applies
when a person relies on the promise of another to her legal detriment. Promisor is “estopped”
(precluded) from revoking the promise. There must be: Clear and definite promise with
substantial reliance Justice is served by enforcement of the promise.

Contracts: Concepts, Terms, and the

Agreement
Published byJonah Cain Modified over 4 years ago
2

Presentation on theme: "Contracts: Concepts, Terms, and the Agreement"— Presentation

transcript:
1 Contracts: Concepts, Terms, and the Agreement
Chapter 7 Contracts: Concepts, Terms, and the Agreement
2 I. Promises
3 Promises Contract Law deals with a very ancient concept, the keeping of promises 2 Types of
Promises: Moral (Social) Promises Legal Contracts DAMAGES – may require the payment of
money or a specific performance as promised in the contract
4 Civil Code Expectations Essential Elements of a Contract
II. Defining a Contract Civil Code Expectations Essential Elements of a Contract
5 A. Civil Code California Civil Code section 1549 defines a contract as “…an agreement to do
or not do a certain thing.” Civil Codes 1428 and 1427 add further meaning by stating “An
obligation arises …from…the contract of the parties…” “An obligation is a legal duty, by which
a person is bound to do or not do a certain thing.” A simple definition of a contract would be: an
agreement to do or not do a certain thing, enforceable by the courts.
6 B. Expectations If two parties form a contract, the expectation is that both parties will perform
their obligations Without some procedure for enforcing these obligations, parties would be free
to change their mind at any time, break the promise and have no further obligation Our society
has developed a legal system that enforces contracts since they are an essential part of the market
economy
7 Essential Elements of a Contract
Parties Capable of Contracting Parties Must Each Consent to the Formation of the Contract
Object of the Contract Must be Lawful A Sufficient Cause or Consideration
8 III. Types of Contracts Express / Implied Quasi Executed / Executory
Bilateral / Unilateral Recap
9 A. Express and Implied Contracts
An EXPRESS CONTRACT is characterized by stating the terms in words [CC§1620]. Terms
can either be in spoken word, written word, or both. An IMPLIED CONTRACT is one, the
existence and terms of which are manifested by conduct [CC§1621]. An implied contract is
created by conduct, NOT spoken words.
10 B. Quasi Contracts A QUASI CONTRACT is one imposed by the courts to prevent unjust
enrichment Rescission Quantum Meruit Court will need to find: that the defendant received a
benefit from the plaintiff that the benefit was not gratuitously conferred that it would be unjust
for the defendant to retain the conferred benefit without compensating the plaintiff for its value
11 C. Executed and Executory Contracts
An EXECUTED CONTRACT is one, the object of which is fully performed. All others are
EXECUTORY [CC§1661].
12 D. Bilateral and Unilateral Contracts
An BILATERAL CONTRACT is one in which a promise is exchanged for another promise A
UNILATERAL CONTRACT is one in which a promise is given in exchange for the future
performance of an act
13 E. Recap EXPRESS CONTRACT : terms expressed orally or in writing
IMPLIED CONTRACT : terms implied from conduct QUASI CONTRACT : obligation implied
by law in absence of agreement in order to prevent unjust enrichment EXECUTED CONTRACT
: contract that is fully performed EXECUTORY CONTRACT : contract that is not yet performed
BILATERAL CONTRACT : promise exchanged for a promise UNILATERAL CONTRACT :
promised exchanged for an act
14 IV. How a Contract is Formed – Mutual Assent
Making the Offer Intention to Contract Definiteness and Certainty of the Offer
15 Mutual Assent - is formed when one party, the offeror, makes an offer to another party, the
offeree, and the offeree accepts the terms of the offer.
16 A. Making the Offer An offer must:
Show a present serious intention to enter into a contract; Be definite and certain in its terms, and
Be communicated to the offeree
17 1. Intention to Contract Words and Circumstances
Words or conduct must show serious intent to contract Reasonable person standard Statements of
Intention Not an offer in the present Invitations to Negotiate Not offers by themselves Writing
Contemplated Spoken words or writings to arrive at a contract
18 Definiteness and Certainty of the Offer
To be definite and certain, there are minimal terms that must be contained in the offer Implied
Terms If the parties intend to contract, a reasonable term will be implied to fill in the term left
open Open Price If the parties intended to contract, but failed to establish a sales price, a
reasonable price can be enforced Time for Performance, Delivery, and Payment If the parties
have not agreed otherwise, delivery of the goods must be made within a reasonable time [UCC§
2309(1)].
19 3. Communication of the Offer
Without communication of the offer to the offeree, there can be no contract
20 V. Termination of Offers
Revocation Irrevocable Offers Promissory Estoppel Rejection Termination by Operation of Law
21 A. Revocation The offeror may REVOKE an offer at any time prior to acceptance by the
offeree In California, revocations are effective to terminate offers when they are sent or ed [CC§
1587]
22 B. Irrevocable Offers THE OPTION CONTRACT FIRM OFFERS (Sale of Goods)
is a contract in which a potential buyer purchases the right to have an irrevocable offer FIRM
OFFERS (Sale of Goods) a firm offer is irrevocable even though the offeror did not receive
anything of value from the offeree in order to hold the option open
23 C. Promissory Estoppel Detrimental Reliance
The offeror will be prevented from revoking an offer, even though no consideration was given by
the offeree Promissory Estoppel will allow the contract to be formed ONLY if: The offeror made
the promise knowing that the offeree was likely to rely on it; The offeree did rely on the offer,
and The only way to avoid an injustice is to allow the formation of the contract and to enforce it
24 D. Rejection When the offeree rejects the offer, the rejection terminates the offer Rejections
are effective to terminate offers when they are received by the offeror
25 Termination By Operation of Law
LAPSE OF TIME –an offer will terminate after the stated time period in the offer has expired
INCOMPETENCE or DEATH OF EITHER THE OFFEROR or OFFEREE DEATH or
DESTRUCTION OF THE SUBJECT MATTER OF THE OFFER SUPERVENING
ILLEGALITY OF THE SUBJECT MATTER OF THE OFFER – after an offer is made, a court
decision or statute makes the subject matter of the offer illegal, the offer is immediately
terminated
26 F. Recap Offer – communicates power to accept by offeree
Acceptance – agree to all terms of offer, effective when sent Termination of the offer: Rejection
Counter Offer Revocation Operation of law Lapse of time Death or incompetence Destructions
of subject matter Supervening illegality- by statute or court
27 VI. Acceptance of Contract Offers
Who May Accept the Offer Acceptance of Unilateral Contracts The “Mirror Image Rule” The
Grumbling Acceptance UCC Sales Under Section 2207 Communication of the Acceptance
28 Who May Accept the Offer
The offeror is the master of the offer and can designate whomever the offeror desires to be the
intended offeree Individual Group of people General public
29 Acceptance of Unilateral Contracts
Since a unilateral contract offer is a promise for performance of an act, FULL COMPLETION of
the act constitutes the acceptance and forms the unilateral contract
30 C. The “Mirror Image Rule”
The acceptance must be unqualified, unequivocal and in absolute agreement with each and every
term of the offer [CC§ 1585]
31 D. The Grumbling Acceptance
An acceptance still mirrors the exact terms of the offer EVEN though the offeree grumbles about
the acceptance
32 UCC Sales Under Section 2207
Section 2207 of the UCC has completely altered the common law rule that an acceptance must
be the mirror image of the offer. Under this section, if the contract is for sale of goods, additional
or different terms may automatically become a part of the contract if both parties are merchants.
If the offer and the acceptance contain different or conflicting terms, a contract is formed.
However, the conflicting terms do not become part of the contract. The conflicting terms cancel
each other out and the blank is filled in as provided under the U.C.C.
33 F. Communication of the Acceptance
BILATERAL CONTRACTS – an acceptance must be communicated to the offeror in order to
show a present intention to contract with the offeror WHEN IS ACCEPTANCE EFFECTIVE? –
an acceptance of an offer is normally effective once it has been dispatched Mailbox Rule WILL
THE OFFEREE’S SILENCE CONSTITUTE ACCEPTANCE? – silence is rarely an effective
acceptance of an offer, because an acceptance must be communicated
34 F. Communication of the Acceptance (cont.)
UNSOLICITED MERCHANDISE – Civil Code Section provides, that silence does not
constitute acceptance for unsolicited merchandise sent by the offeror to the offeree, and that
merchandise can be kept without any obligation to pay for it UNILATERAL CONTRACTS – if
the offeror proposes acceptance by performance, then only performance can operate as an
acceptance
35 Chapter Summary How a Contract is Formed Promises Defining A Contract
Making the Offer Intention to Contract Definiteness and Certainty of the Offer Communication
of the Offer Termination of Offers Revocation Irrevocable Offers Promissory Estoppel Rejection
Termination by Operation of law Promises Defining A Contract Civil Code Expectations
Essential Elements of a Contract Types of Contracts Express and Implied Quasi Executed and
Executory Bilateral and Unilateral
36 Chapter Summary Acceptance of Contract Offers Who May Accept the Offer
Acceptance of Unilateral Contracts Mirror Image Rule Grumbling Acceptance UCC Sales under
Section 2207 Communication of the Acceptance

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Chapter 7 – Offer and Acceptance

Published byEthelbert Stevenson Modified over 4 years ago
2

Presentation on theme: "Chapter 7 – Offer and Acceptance"— Presentation transcript:

1 Chapter 7 – Offer and Acceptance
Business Law Chapter 7 – Offer and Acceptance
2 HOT DEBATE Celia had worked after school since she was 14 to save money for a car. When
she turned 18, she bought a VW. Two weeks later she was driving a group of friends to school.
The car stalled at a stop light and people behind her began honking. Celia became frustrated
when the car wouldn’t start and said, “I’ll sell this thing for $300 right now!” Joan gathered three
hundred dollars from her purse and handed it to Celia stating, “ I accept, here’s your money.”
Should Celia be bound because the literal meaning of her words suggest she intended to sell the
car? Should Celia not be bound to sell the car because the circumstances (new car stalls and
people are honking) suggest that she did not intend to sell?
3 Lesson 7-1 – Creation of Offers
GOALS… List the elements required to form a contract. Describe the requirements of an offer.
4 Lesson 7-1 – Creation of Offers
A contract is an agreement that courts will enforce. Contracts between two parties are the basis
for all economic activity. They are the legal links between the individuals and companies
producing and consuming goods and services. There are six major requirements that must be
satisfied before courts will treat transactions as contracts… These requirements are…
5 Lesson 7-1 – Creation of Offers
Offer and Acceptance – There must be a serious, definite offer to contract. The terms of the offer
must be accepted by the party to whom it was communicated. Genuine Assent – The agreement
(offer and acceptance) must not be based on one party’s deceiving another, or an important
mistake, or on the use of unfair pressure exerted to obtain the offer or acceptance. Legality –
What the parties agree to must be legal. So an agreement to pay someone to commit a crime or
tort cannot be a contract. Consideration – The agreement must involve both sides receiving
something of legal value as a result of the transactions. Capacity – To have a completely
enforceable agreement, the parties must be able to contract for themselves rather than being
obligated to use parents or legal representatives.
6 Lesson 7-1 – Creation of Offers
Writing – Some agreements must be placed in writing to be fully enforceable in court. In
contracts there is the offeror, and offerees (persons to whom the offer is made) An offer is a
proposal by an offeror to do something provided the offeree does something in return. If the
offeree accepts the proposal, a contract arises. Generally, to create a valid offer.. The offeror
must appear to intend to create a legal obligation. The terms must be definite and complete. The
offer must be communicated to the offeree.
7 Lesson 7-1 – Creation of Offers
EXPRESSION OF INTENT TO CREATE A LEGAL OBLIGATION.. –the law will only
regognize that an offer exists when the offeror appears serious about creating a legal obligation.
TEST OF REASONABLE PERSON – is an objective legal test used by jurors or judges rather
than a subjective test based on whay you say you were thinking. FACTS AND
CIRCUMSTANCES – PRELIMINARY NEGOTIATIONS – SOCIAL AGREEMENTS -
8 Lesson 7-1 – Creation of Offers
OFFERS MUST BE COMPLETE AND CLEAR… The terms of an offer must be sufficiently
complete and clear to allow a court to determine what the parties intended and identify the
parties’ legal rights and duties. COMPLETE – If a purported offer is missing essential
information, it is incomplete and legally ineffective. Nearly all offers must identify the price,
subject matter, and quantity, either directly or indirectly.
9 Lesson 7-1 – Creation of Offers
CLEAR – Each essential term must be identified clearly. IMPLIED TERMS –In some contracts,
a term might be implied by law or common business practice. ADVERTISEMENTS –
Adverstisements in newspapers and magazines, or radio or television, or in direct mailings are
generally not offers. Instead, courts treat them as invitations to customers to make offers.
OFFERS MUST BE COMMUNICATED TO THE OFFEREE
10 Lesson 7-2 – Termination of Offers
GOALS… Describe how an offeror can end an offer. Tell how an offeree an end an offer.
Explain how the parties can create offers that cannot be ended by the offeror.
11 Lesson 7-2 – Termination of Offers
Once made, an offer does not last forever. There are several methods used to terminate offers…
Revocation by the Offeror – After an offer has been made, the offeror can generally revoke it any
time before it is accepted by the offereee. The right to withdraw an offer before it is accepted is
known as the right of revocation.
12 Lesson 7-2 – Termination of Offers
Time Stated in the Offer – In making an offer, the offeror may state how and when the offer must
be accepted. Reasonable Length of Time – When nothing is in the offer about the length of its
life, it is alive for a reasonable length of time. What is a reasonable length of time depends on all
the surrounding circumstances. Rejection by the Offeree – When the offeree clearly rejects the
offer, the offer is terminated.
13 Lesson 7-2 – Termination of Offers
Counteroffer – Generally an offeree accepting an offer must accept it exactly as made. If the
offeree changes the offeror’s terms in important ways, a counteroffer result. HOW CAN AN
OFFER BE KEPT OPEN? Generally, an offeror is not obliged to keep an offer open for
specified time even if the offeror has promised to do so. Options - If the offeree gives the offeror
something of value in return for a promise to keep the offer open, this agreement is itself a
binding contract. It is called an option.
14 Lesson 7-2 – Termination of Offers
Firm Offers – A special rule applies to merchants (those who regularly deal in the goods bought
or sold). An offer by a merchant for the sale or purchase of goods stating in a signed writing how
long it is to stay open is called firm offer.
15 Lesson 7-3 – Acceptances GOALS…
Discuss the requirements of an effective acceptance. Determine at what point in time an
acceptance is effective.
16 Lesson 7-3 – Acceptances Acceptance occurs when a party to whom an offer has been made
agrees to the proposal. To create an enforceable contract, the acceptance must. be made by the
person or persons to whom the offer was made match the terms in the offer be communicated to
the offeror Who Can Accept an Offer – An offer made to one person cannot be accepted by
another. Acceptance Must Match the Offer – The offeror may specify the terms of the
acceptance, such as when and how the acceptance must be made.
17 Lesson 7-3 – Acceptances Mirror Image Rule – The mirror image rule requires that the terms
in the acceptance must exactly match the terms contained in the offer. Goods – For the sale of
goods, as with other types of contracts, if the offeror requires that acceptance must exactly match
the terms contained in the offer, then any variation is a counteroffer. Acceptance Must Be
Communicated to the Offeror – An acceptance must be more than a mental decision. It must be
18 Lesson 7-3 – Acceptances Silence as Acceptance – One is not obliged to reply to offers made
by others. An offeror’s attempt to word the offer so that silence would appear to be an
acceptance will not work. Unilateral Acceptance – In some offers, the offeror requires that the
offeree indicate acceptance by performing his or her obligations under the contract. Contracts
offered under these conditions are unilateral contracts. Bilateral Acceptance- Most offers are
bilateral. This means the offer implies that it can be accepted by giving a promise instead of
performing the contracted-for-act.
19 End of Chapter Work Pages 110- 112
Your Legal Vocabulary – In a document, or on paper, write the term that matches the definition.
Each is worth 2 points.

ACTS SUPPLEMENT No. 2 26th February, 2010. ACTS SUPPLEMENT to The Uganda Gazette Extraordinary
No. 13 Volume CIII dated 26th February, 2010.

Printed by UPPC, Entebbe, by Order of the Government.

Act 2 Partnerships Act 2010

THE PARTNERSHIPS ACT, 2010 –––––––––– ARRANGEMENT OF SECTIONS.

Section.

PART I—PRELIMINARY.

1. Interpretation.

PART II—NATURE OF PARTNERSHIP 2. Definition of partnership. 3. Rules for determining the existence
of partnership. 4. Mandatory registration.
PART III—RELATIONS OF PARTNERS TO PERSONS DEALING WITH THEM

5. Power of partner to bind firm. 6. Partners bound by act on behalf of firm. 7. Partners using credit of
firm for private purposes. 8. Effect of notice that firm not bound by acts of partners. 9. Liability of
partners. 10. Minor partner not personally liable for firm’s obligations. 11. Liability of minor partner on
attaining majority. 12. Liability of firm for wrongs of partners. 13. Liability for wrongs joint and several.
14. Misapplication of money or property received for or in custody of firm. 15. Improper employment of
trust property for partnership purposes. 16. Persons liable by holding out. 17. Admissions and
representations of partners. 18. Notice to acting partner to be notice to firm. 19. Liabilities of incoming
and outgoing partners. 20. Revocation of continuing guarantee by change in firm.

section.

PART IV—RELATIONS OF PARTNERS TO ONE ANOTHER

21. Variation by consent of the terms of partnership. 22. Partnership property. 23. Property bought with
partnership money. 24. Conversion into personal estate of land held as partnership property. 25.
Procedure against partnership property for partner’s separate judgment debt. 26. Rules as to interests
and duties of partners subject to special agreement. 27. Expulsion of partner. 28. Retirement from
partnership. 29. Presumption of continuance of partnership. 30. Duty of partners to render accounts,
etc. 31. Accountability of partners for private profits. 32. Duty of partner not to compete with firm. 33
Rights of assignee of share in partnership.

PART V—DISSOLUTION OF PARTNERSHIP AND ITS CONSEQUENCES

34. Dissolution by expiration or notice. 35. Dissolution by bankruptcy, death or charge. 36. Dissolution by
illegality of partnership. 37. Dissolution by court for incapacity, etc. 38. Rights of persons dealing with
firm against apparent members of firm. 39. Rights of partners to notify dissolution. 40. Continuing
authority of partners for purposes of winding up. 41. Rights of partners as to application of partnership
property. 42. Apportionment of premium where partnership prematurely dissolved. 43. Rights where
partnership dissolved for fraud or misrepresentation. 44. Right of outgoing partner in certain cases to
share profits made after dissolution. 45. Retiring or deceased partner’s share to be a debt.

Act 2 Partnerships Act 2010

Section.

46. Rules for distribution of partnership assets on final settlement of accounts.

PART VI—LIMITED LIABILITY PARTNERSHIPS

47. Limited liability partnership. 48. Registration of limited liability partnership. 49. Reservation of name.
50 Particulars of registration of limited liability partnership. 51. Registration of change in particulars of
liability limited partnership. 52. Management of limited liability partnership. 53. Winding up of limited
liability partnership. 54. Notice of arrangement or transaction to be advertised in Gazette. 55.
Inspection. 56. Conversion of partnerships. 57. Effect of conversion on pending court action. 58. Winding
up of partnership. 59. Postponement of share of profits in case of bankruptcy.

PART VII—MISCELLANEOUS

60. Existing rules applicable to partnerships. 61. Regulations. 62. Amendment of Schedule. 63. Repeal of
Cap.114.

SCHEDULE—Currency Point

Act 2 Partnerships Act 2010

THE PARTNERSHIPS ACT, 2010.

An Act to amend and consolidate the law relating to partnerships; to provide for the formation of
limited liability partnerships; to repeal the Partnership Act, Cap. 114; and to provide for other related
matters.

DATE OF ASSENT: 27th January, 2010.

Date of Commencement: 26th February, 2010.

BE IT ENACTED by Parliament as follows:

PART I—PRELIMINARY

1. Interpretation. In this Act, unless the context otherwise requires—

“business” includes every trade, occupation or profession;

“court” means the High Court;

“currency point” has the value assigned to it in the Schedule to this Act;

“firm” means persons who have entered into a partnership with one another;

“firm name” means the name under which the firm business is carried on;

“Minister” means the Minister responsible for justice;

Act 2 Partnerships Act 2010

“minor’’ means a person under the age of eighteen years;

“partnership” means a partnership referred to in section 2 and a limited liability partnership referred to
in section 47;

“professional” means a person who is a member of a profession regulated by the laws of Uganda;

“registrar” means the registrar of companies designated as such under the Companies Act;
“trustee” means one, who having legal title to property, holds it in trust for the benefit of another
person and owes a judicial duty to that beneficiary;

“trust property” means property subject to a trust normally held by trustees.

PART II—NATURE OF PARTNERSHIP

2. Definition of partnership. (1) Subject to subsection (2), a partnership is the relationship which subsists
between or among persons, not exceeding twenty in number, who carry on a business in common with
a view to making profit.

(2) Where a partnership is formed for the purpose of carrying on a profession, the number of
professionals, which constitutes the partnership shall not exceed fifty.

(3) The relationship between or among members of any company or association which is—

(a) registered as a company under the Companies Act or any other Act relating to the registration of
joint stock companies; or

Act 2 Partnerships Act 2010

(b) formed or incorporated by or in pursuance of any other written law,

is not a partnership within the meaning of this Act.

3. Rules for determining the existence of partnership. In determining whether a partnership does or
does not exist, regard shall be had to the following rules—

(a) joint tenancy, tenancy in common, joint property, common property or part ownership does not of
itself create a partnership;

(b) the sharing of gross returns does not of itself create a partnership, whether the persons sharing
those returns have or do not have a joint or common right or interest in any property from which, or
from the use of which, the returns are derived;

(c) the receipt by a person of a share of the profits of a business is prima facie evidence that he or she is
a partner in the business, but the receipt of such a share, or a payment contingent on or varying with
the profits of a business, does not of itself make a person a partner in the business; and in particular—

(i) the receipt by a person of a debt or other liquidated amount by installments or otherwise, out of the
accruing profits of a business, does not of itself make that person a partner in the business or liable;

(ii) a contract for the remuneration of a servant or agent of a person engaged in a business by a share of
the profits of the business does not of itself make the servant or agent a partner in the business or
liable;

(iii) a person, being the widow or child of a deceased partner and receiving by way of annuity, a portion
of the profits made in the business in which the deceased person was a partner, is not, by reason only of
that receipt, a partner in the business or liable;
Act 2 Partnerships Act 2010

(iv) the advance of money by way of a loan to a person engaged, or about to engage, in any business on
a contract with that person that the lender shall receive a rate of interest varying with the profits, or
shall receive a share of the profits arising from carrying on the business, does not of itself make the
lender a partner with the person carrying on the business or liable as such if the contract is in writing,
and signed by or on behalf of all the parties to the contract;

(v) a person receiving, by way of annuity or otherwise, a portion of the profits of a business in
consideration of his or her sale of the goodwill of the business is not, by reason only of the receipt, a
partner in the business or liable;

(d) the ordinary evidence of partnership, including—

(i) whether the accounts are prepared for internal use or for other purposes;

(ii) any admissions by the members of the partnership;

(iii) advertisements which include the alleged partners;

(iv) agreements or other documents, formal or otherwise, which disclose the partnership relationship;

(v) the manner in which bills of exchange have been drawn, accepted or endorsed;

(vi) judgments of courts of law in which a partnership has been held to exist;

Act 2 Partnerships Act 2010

(vii) meetings which partners attended or were expected to attend;

(viii) payment of money to courts of law for the liability of the partnership;

(ix) letters and memoranda which relate to admission of a person in the partnership or which give a
person a share in the profits as intended by the partners;

(x) any release executed by all the alleged partners; and

(xi) recitals in the agreement in which the partners are parties.

4. Mandatory registration. (1) A firm carrying on business in Uganda under a business name which does
not consist of the true surnames of all partners who are individuals and the corporate names of all
partners which are corporations without any addition other than the true first names of individual
partners or initials of the first names; and the corporate names of all partners which are corporations,
shall register its name under the Business Names Registration Act.

(2) Where any persons operate a business as a partnership in contravention of subsection(1), every
party to the business commits an offence and is liable on conviction, to a fine not exceeding twenty
currency points and to an additional fine not exceeding five currency points for each day for which the
offence continues after the expiration of fourteen days.
PART III—RELATIONS OF PARTNERS TO PERSONS DEALING WITH THEM

5. Power of partner to bind firm. (1) Every partner is an agent of the firm and his or her other partners
for the purpose of the business of the partnership.

Act 2 Partnerships Act 2010

(2) The act of a partner who does any act for the purpose of carrying on the ordinary course of business
of the firm binds the firm and his or her partners, unless the partner so acting does not have authority to
act for the firm in the particular matter, and the person with whom the partner is dealing—

(a) knows that the partner has no authority; or

(b) does not know or believe him or her to be a partner.

6. Partners bound by act on behalf of firm. (1) An act or instrument relating to the business of the firm
and done or executed in the firm name, or in any other manner showing an intention to bind the firm by
any person authorised to bind the firm, whether a partner or not, is binding on the firm and all the
partners.

(2) Subsection (1) does not affect any general principles of law relating to the execution of deeds or
negotiable instruments.

7. Partners using credit of firm for private purposes. Where a partner pledges the credit of the firm for a
purpose apparently not connected with the firm’s ordinary course of business, the firm is not bound,
unless that partner is in fact specially authorised by the other partners.

8. Effect of notice that firm not bound by acts of partners. Where it has been agreed between or among
the partners that a restriction shall be placed on the power of any one or more of them to bind the firm,
an act done in contravention of the agreement is not binding on the firm with respect to persons having
notice of that agreement.

9. Liability of partners. (1) A partner in a firm is liable jointly with the other partners for all debts and
obligations of the firm incurred while he or she is a partner.

Act 2 Partnerships Act 2010

(2) Where a partner dies, his or her estate is severally liable in due course of administration for the debts
and obligations of the firm so far as they remain unsatisfied but subject to the prior payment of his or
her separate debts.

(3) The estate of a partner who dies or who becomes bankrupt or of a partner, who, not having been
known to the person dealing with the firm to be a partner, retires from the firm, is not liable for
partnership debts contracted after the date of the death, bankruptcy or retirement respectively.

10. Minor partner not personally liable for firm’s obligations. A person who is a minor according to the
law to which he or she is subject may be admitted to the benefits of partnership, but cannot be made
personally liable for any obligation of the firm; but the share of that minor in the property of the firm is
liable for any obligation of the firm.

11. Liability of minor partner on attaining majority. A person who has been admitted to the benefits of
partnership while still a minor shall, on attaining the age of majority, be liable for all obligations incurred
by the partnership from the date of his or her admission, unless he or she gives public notice within a
reasonable time of his or her repudiation of the partnership.

12. Liability of the firm for wrongs of partners. Where, by any wrongful act or omission of any partner
acting in the ordinary course of the business of the firm, or with the authority of his or her co-partners,
loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm
is liable for the loss, injury or penalty to the same extent as the partner so acting or omitting to act.

13. Liability for wrongs joint and several. A partner is liable jointly and severally with his or her co-
partners for everything for which the firm becomes liable under section 14 while he or she is a partner in
the firm.

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10

14. Misapplication of money or property received for or in custody of firm. A firm is liable to make good
the loss—

(a) where one partner, acting within the scope of his or her apparent authority, receives the money or
property of a third person, and misapplies it; and

(b) where a firm in the course of its business receives money or property of a third person, and the
money or property so received is misapplied by one or more of the partners while it is in the custody of
the firm.

15. Improper employment of trust property for partnership purposes. Where a partner who is a trustee,
improperly employs trust property in the business or on the account of the partnership, no other
partner is liable for the trust property to the persons beneficially interested in it; except that—

(a) this section shall not affect any liability incurred by any partner by reason of his or her having notice
of a breach of trust; and

(b) nothing in this section shall prevent trust money from being followed and recovered from the firm if
it is still in possession or control of the firm.

16. Persons liable by holding out. (1) Any person who by words spoken, written or by conduct represents
himself or herself, or who knowingly suffers himself or herself to be represented as a partner in a
particular firm is liable as a partner to any one who has, on the faith of any such representation, given
credit to the firm, whether the representation has or has not been made or communicated to the
person so giving credit by or with the knowledge of the apparent partner making the representation or
suffering it to be made.

Act 2 Partnerships Act 2010

11
(2) A firm shall not be liable for the acts of any person who falsely holds out himself or herself as a
partner of a firm.

(3) Where, after a partner’s death, the partnership business is continued in the firm name, the
continued use of that name or of the deceased partner’s name as part of the firm’s name shall not of
itself make his or her executors or administrators of the estate or effects liable for any partnership debts
contracted after his or her death.

17. Admissions and representations of partners. An admission or representation made by any partner
concerning the affairs of the partnership in the ordinary course of its business is evidence against the
firm.

18. Notice to acting partner to be notice to firm. (1) Notice to any partner who habitually acts in the
partnership business of any matter relating to the affairs of the partnership operates as notice to the
firm.

(2) Subsection (1) does not apply in case of fraud on the firm committed by or with the consent of that
partner.

19. Liabilities of incoming and outgoing partners. (1) A person who is admitted as a partner into an
existing firm does not become liable to the creditors of the firm for anything done before he or she
became a partner.

(2) A partner who retires from a firm does not cease to be liable for partnership debts or obligations
incurred before his or her retirement.

(3) A retiring partner may be discharged from any existing liability by an agreement to that effect
between partners and the members of the firm as newly constituted, and the creditors of the firm.

(4) The agreement referred to in subsection (3) may be either express or inferred as a fact from the
course of dealing between the creditors and the firm as newly constituted.

Act 2 Partnerships Act 2010

12

(5) A retiring partner may, notwithstanding subsection (3), execute in writing an indemnity agreement
with the members of the firm as newly constituted, in which the members undertake to indemnify the
retiring partner of any existing liabilities.

20. Revocation of continuing guarantee by change in firm. A continuing guarantee given either to a firm
or to a third person in respect of the transactions of a firm is, in the absence of an agreement to the
contrary, revoked as to future transactions by any change in the constitution of the firm to which the
guarantee was given or any change in respect of the transaction for which the guarantee was given.

PART IV—RELATIONS OF PARTNERS TO ONE ANOTHER.

21. Variation by consent of the terms of partnership. The mutual rights and duties of partners, whether
ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and
that consent may be either express or inferred from a course of dealing.
22. Partnership property. (1) All property, rights and interests in property originally brought into the
partnership stock or acquired, whether by purchase or otherwise, on account of the firm and in the
course of the partnership business are, in this Act, referred to as “partnership property”.

(2) Partnership property must be held and applied by the partners exclusively for the purposes of the
partnership and in accordance with the partnership agreement; except that the legal estate or interest
in any land which belongs to the partnership shall devolve according to the nature and tenure of the
land and the general rules of law applicable to it.

Act 2 Partnerships Act 2010

13

(3) Where co-owners of an estate or interest in any land which is not partnership property are partners
to profits made by the use of that land or estate, purchase other land or estate out of the profits to be
used in similar manner, the land or estate so purchased belongs to them, in the absence of an
agreement to the contrary, not as partners but as co-owners for the same respective estate and
interests as are held by them in the land or estate first mentioned at the date of the purchase.

23. Property bought with partnership money. Unless the contrary intention appears, property bought
with money belonging to the firm is taken to have been bought on account of the firm.

24. Conversion into personal estate of land held as partnership property. Where land or any interest in it
becomes partnership property, it shall, unless the contrary intention appears, be treated as between the
partners (including the representatives of a deceased partner) and also as between the heirs of a
deceased partner and his or her executors or administrators, as personal and not real estate.

25. Procedure against partnership property for partner’s separate judgment debt. (1) Execution of a
decree shall not issue against any partnership property except on a judgment against the firm.

(2) The court may, on application by summons of any judgment creditor of a partner, make an order—

(a) charging that partner’s interest in the partnership property and profits with payment of the amount
of the judgment debt and interest on it;

(b) appointing a receiver of that partner’s share of profits whether already declared or accruing and of
any other money which may be coming to that partner in respect of the partnership; and

Act 2 Partnerships Act 2010

14

(c) directing all accounts, inquiries and giving other orders and directions which might have been
directed or given if the charge had been made in favour of the judgment creditor by the partner or as
the circumstances of the case may require.

(3) The other partner or partners shall be at liberty at any time to redeem the interest charged, or, in
case of sale being directed, to purchase it.
26. Rules as to interests and duties of partners subject to special agreement. The interests of partners in
the partnership property and their rights and duties in relation to the partnership shall be determined,
subject to any agreement, express or implied between the partners, by the following rules—

(a) all the partners are entitled to share equally in the capital and profits of the business, and must
contribute equally towards the losses whether of capital or otherwise sustained by the firm;

(b) the firm must indemnify every partner in respect of payments made and personal liabilities incurred
by the partner—

(i) in the ordinary and proper conduct of the business of the firm; or

(ii) in or about anything necessarily done for the preservation of the business or property of the firm;

(c) a partner making, for the purpose of the partnership, any actual payment or advance beyond the
amount of capital which he or she has agreed to subscribe is entitled to interest at the rate agreed upon
by the partners, and, in the absence of any agreement, the ruling treasury bill rate shall apply; except
that in determining the rate, due consideration shall be given to the period of repayment;

Act 2 Partnerships Act 2010

15

(d) a partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by
him or her;

(e) every partner may take part in the management of the partnership business;

(f) no partner shall be entitled to remuneration for acting in the partnership business;

(g) no person may be introduced as a partner without the consent of all existing partners;

(h) any difference arising as to ordinary matters connected with the partnership business may be
decided by a majority of the partners; but no change may be made in the nature of the partnership
business without the consent of all existing partners; and

(i) the partnership books are to be kept at the place of business of the partnership or the principal place
of business of the partnership if there is more than one; and every partner may, at all reasonable times,
have access to and inspect and copy any of the books.

27. Expulsion of partner. A majority of the partners have no power to expel any partner unless a power
to do so has been conferred by express agreement between or among the partners.

28. Retirement from partnership. (1) Where no fixed term has been agreed upon for the duration of the
partnership, any partner intending to dissolve the partnership shall—

(a) give reasonable notice to the other partners of his or her intention to do so; and

(b) obtain the consent of the other partners regarding the dissolution of the partnership.

Act 2 Partnerships Act 2010

16
(2) Where the other partners decline to give their consent to the dissolution under subsection (1)(b),
that partner has the option of retiring from the partnership.

(3) Where the partnership has originally been constituted by deed, a notice in writing signed by the
partner giving the notice in accordance with the deed shall be sufficient for the purpose of the notice
referred to in subsection (1)(a).

(4) Subject to this Act, the rights, benefits and duties of a retiring partner shall be as agreed between or
among the partners.

29. Presumption of continuance of partnership. Where a partnership entered into for a fixed term is
continued after the term has expired, and without any express new agreement, the rights and duties of
the partners remain the same as they were at the expiration of the term.

30. Duty of partners to render accounts, etc. Every partner is bound to render true accounts and full
information of all things affecting the partnership to any partner or his or her legal representatives.

31. Accountability of partners for private profits. Every partner must account to the firm for any benefit
derived by him or her without the consent of the other partners from any transaction concerning the
partnership, or from any use by him or her of the partnership property, name or business connection.

32. Duty of partner not to compete with firm. Where a partner, without the consent of the other
partners, carries on any business of the same nature as, and competing with, that of the firm, the
partner must account for and pay over to the firm all profits he or she made in that business.

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17

33. Rights of assignee of share in partnership. (1) An assignment by any partner of his or her share in the
partnership, either absolute or by way of mortgage or redeemable charge, does not, as against the other
partners, entitle the assignee, during the continuance of the partnership—

(a) to interfere in the management or administration of the partnership business or affairs;

(b) to require any accounts of the partnership transactions; or

(c) to inspect the partnership books.

(2) An assignment in subsection (1) entitles the assignee only to receive the share of profits to which the
assigning partner would otherwise be entitled; and the assignee must accept the account of profits
agreed to by the partners.

(3) In case of a dissolution of the partnership, whether in respect of all the partners or in respect of the
assigning partner, the assignee is entitled to receive the share of the partnership assets to which the
assigning partner is entitled as between himself or herself and the other partners, and, for the purpose
of ascertaining that share, to an account as from the date of the dissolution.

PART V—DISSOLUTION OF PARTNERSHIP AND ITS CONSEQUENCES.

34. Dissolution by expiration or notice. (1) Subject to any agreement between or among the partners, a
partnership is dissolved—

(a) if entered into for a fixed term, by the expiration of that term;

(b) if entered into for a single adventure or undertaking, by the termination of that adventure or
undertaking;

(c) if entered into for an undefined time, by the agreement of the partners to dissolve the partnership.

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18

(2) In the case mentioned in subsection (1) (c), the partnership is dissolved as from the date agreed by
the partners for the dissolution to take effect.

35. Dissolution by bankruptcy, death or charge. (1) Subject to any agreement between or among the
partners, a partnership may, at the option of the other partners, be dissolved by the death or
bankruptcy of any partner.

(2) A partnership may, at the option of the other partners, be dissolved if any partner suffers his or her
share of the partnership property to be charged under this Act for his or her separate debt.

36. Dissolution by illegality of partnership. A partnership is, in every case, dissolved by the happening of
any event that makes it unlawful for the business of the firm to be carried on or for the members of the
firm to carry on business in partnership.

37. Dissolution by court for incapacity, etc. On the application by a partner, the court may decree
dissolution of a partnership in any of the following cases—

(a) when a partner is shown, to the satisfaction of the court, to be of permanently unsound mind, in
which case the application may be made on behalf of that partner by his or her guardian ad litem or next
friend or person entitled to intervene as by any other partner;

(b) when a partner, other than the partner suing, becomes in any other way permanently incapable of
performing his or her part of the partnership contract;

(c) when a partner, other than the partner suing, has been guilty of such conduct as, in the opinion of a
court, regard being had to the nature of the business, is calculated prejudicially to affect the carrying on
of the business;

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19

(d) when a partner, other than the partner suing, willfully or persistently commits a breach of the
partnership agreement, or otherwise so conducts himself or herself in matters relating to the
partnership business, that it is not reasonably practicable for the other partner or partners to carry on
the business in partnership with him or her;

(e) when the business of the partnership can only be carried on at a loss; or
(f) whenever, in any case, circumstances have arisen which, in the opinion of the court, render it just
and equitable that the partnership be dissolved.

38. Rights of persons dealing with firm against apparent members of firm. (1) Where a person deals with
a firm after a change in its constitution, he or she is entitled to treat all apparent members of the old
firm as still being members of the firm until he or she has notice of the change.

(2) An advertisement in the Gazette by any partner shall be notice as to persons who had no dealings
with the firm before the date of the dissolution or change so advertised.

(3) The estate of a partner who dies or who becomes bankrupt or of a partner, who, not having been
known to the person dealing with the firm to be a partner, retires from the firm, is not liable for
partnership debts contracted after the date of the death, bankruptcy or retirement respectively.

39. Rights of partners to notify dissolution. On the dissolution of a partnership or retirement of a

partner, any partner may publicly notify the dissolution or retirement of that partner, and may require
the other partner or partners to concur for that purpose in all necessary or proper acts, if any, which
cannot be done without his or her or their concurrence.

Act 2 Partnerships Act 2010

20

40. Continuing authority of partners for purposes of winding up. (1) After the dissolution of a
partnership, the authority for each partner to bind the firm and the other rights and obligations of the
partners continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of
the partnership, and to complete transactions begun but unfinished at the time of the dissolution, but
not otherwise.

(2) Notwithstanding subsection (1), the firm is in no case bound by the acts of a partner who has
become bankrupt; but this section does not affect the liability of any person who has, after the
bankruptcy, represented himself or herself or knowingly suffered himself or herself to be represented as
a partner of the bankrupt.

41. Rights of partners as to application of partnership property. On the dissolution of a partnership,

every partner is entitled, as against the other partners in the firm and all persons claiming through them
in respect of their interests as partners—

(a) to have the property of the partnership applied in payment of the debts and liabilities of the firm,
and to have the surplus assets after such payment, applied in payment of what may be due to the
partners respectively after deducting what may be due from them as partners to the firm; and

(b) for the purposes of paragraph (a) any partner or his or her representatives may, on the termination
of the partnership, apply to the court to wind up the business and affairs of the firm.

42. Apportionment of premium where partnership prematurely dissolved. Where one partner has paid a
premium to another partner on entering into a partnership for a fixed term, and the partnership is
dissolved before the expiration of that term otherwise than by the death of a partner, the court may
order the repayment of the premium or of such part of it as it thinks just, having regard to the terms of
the partnership contract and to the length of time during which the partnership has continued, unless—
Act 2 Partnerships Act 2010

21

(a) the dissolution is, in the judgment of the court, wholly or mainly due to the misconduct of the
partner who paid the premium; or

(b) the partnership has been dissolved by an agreement containing no provision for a return of any part
of the premium.

43. Rights where partnership dissolved for fraud or misrepresentation. Where a partnership contract is
rescinded on the ground of the fraud or misrepresentation of one of the parties to it, the party entitled
to rescind is, without prejudice to any other right, entitled—

(a) to a lien on, or right of retention of, the surplus of the partnership assets, after satisfying the
partnership liabilities, for any sum of money he or she paid for the purchase of a share in the
partnership and for any capital he or she contributed;

(b) to stand in the name of the creditors of the firm for any payments he or she made in respect of the
partnership liabilities; and

(c) to be indemnified by the person guilty of the fraud or making the representation, against all the
debts and liabilities of the firm.

44. Right of outgoing partner in certain cases to share profits made after dissolution. (1) Where a
partner has died or ceased to be a partner and the surviving or continuing partners carry on the business
of the firm with the firm’s capital or assets without any final settlement of accounts as between the firm
and the outgoing partner or his or her estate, then, in the absence of any agreement to the contrary the
outgoing partner or his or her estate is entitled, at the partner’s option or that of his or her
representatives—

(a) to a share of the profits made since the dissolution as the court may find to be attributable to the use
of his or her share of the partnership assets; and

Act 2 Partnerships Act 2010

22

(b) to interest at the prevailing treasury bill rate.

(2) Notwithstanding subsection (1), where the partnership contract gives an option to surviving or
continuing partners to purchase the interest of a deceased or outgoing partner and that option is duly
exercised, the estate of the deceased partner or outgoing partner or his or her estate is not entitled to
any other share of the profits.

(3) Where a partner purporting to act in exercise of the option given under subsection (2) does not in all
material respects comply with its terms, he or she is liable to account as provided in this section.

45. Retiring or deceased partner’s share to be a debt. Subject to any agreement between the parties,
the amount due from continuing or surviving partners to an outgoing partner or the representatives of a
deceased partner in respect of the outgoing or deceased partner’s share is a debt accruing at the date of
the dissolution or death.

46. Rules for distribution of partnership assets on final settlement of accounts. In settling accounts
between or among the partners after dissolution of a partnership, the following rules shall, subject to
any agreement, be observed—

(a) losses, including losses and deficiencies of capital shall be paid, first out of profits, next out of
capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled
to share profits;

(b) the assets of the firm, including the sums, if any, contributed by the partners to make up losses or
deficiencies of capital, shall be applied in the following manner and order—

(i) in paying the debts and liabilities of the firm to persons who are not partners in it;

Act 2 Partnerships Act 2010

23

(ii) in paying to each partner, rateably, what is due from the firm to the partner for advances as
distinguished from capital;

(iii) in paying to each partner, rateably, what is due from the firm to the partner in respect of capital;

(iv) the ultimate residue, if any, shall be divided among the partners in the proportion in which profits
are divisible.

PART VI—LIMITED LIABILITY PARTNERSHIPS.

47. Limited liability partnership. (1) A limited liability partnership may be formed in the manner
prescribed by this Act.

(2) A limited liability partnership shall consist of not more than twenty persons, and shall have one or
more persons called general partners who shall be liable for all debts and obligations of the firm.

(3) A limited liability partnership shall, in addition to general partners have one or more persons called
limited liability partners who shall contribute a stated amount of capital to the firm, and shall not be
liable for the debts or obligations of the firm beyond the amount of capital so contributed.

(4) A limited liability partner shall not, during the continuance of the partnership, either directly or
indirectly, draw out or receive back any part of his or her contribution to the partnership, and if a limited
liability partner draws out or receives back any part of his or her contribution, he or she shall be liable
for the debts and obligations of the partnership up to the amount so drawn out or received back.

(5) A body corporate may be a limited liability partner.

Act 2 Partnerships Act 2010

24
48. Registration of limited liability partnership. (1) A limited liability partnership shall, subject to
subsection (2), be registered with the Registrar in accordance with section 50; and a limited liability
partnership that is not so registered shall be taken to be a general partnership and all its members’
general partners.

(2) A partnership registered as a limited liability partnership under section 50 shall, at the end of its
name, add the letters “(LLP)”.

49. Reservation of name. (1) The Registrar may, on written application under the Business Names
Registration Act, reserve a name pending registration of a limited liability partnership.

(2) The name reserved under subsection (1) shall remain in force for thirty days or such longer period,
not exceeding sixty days, as the Registrar may, for exceptional reasons permit.

(3) During the period when the name is reserved under subsection (2), the Registrar shall not register
any other business with the name so reserved.

(4) The Registrar shall not reserve a name or register any partnership which, in the opinion of the
Registrar, is undesirable or deceptive.

50. Particulars of registration of limited liability partnership. (1) The registration of a limited liability
partnership shall be effected by delivering to the Registrar a statement signed by the partners
containing the following particulars—

(a) the name of the limited liability partnership;

(b) the general nature of the limited liability partnership’s business;

Act 2 Partnerships Act 2010

25

(c) the principal place of business of the limited liability partnership;

(d) the full names and address of each of the partners;

(e) the term, if any, for which the limited liability partnership is entered into, and the date of its
commencement;

(f) a statement that the partnership is limited;

(g) a description of the status of each partner, limited or general; and

(h) the sum contributed by each partner and the form in which it is so contributed.

(2) The Registrar shall, upon receiving the particulars referred to in subsection (1) and the prescribed fee
for the registration, issue a certificate of registration of the limited liability partnership.

51. Registration of change in particulars of limited liability partnership. (1) Where, during the
continuance of a limited liability partnership any change is made or occurs in—

(a) the name of the partnership;

(b) the general nature of the business of the partnership;

(c) the principal place of business of the partnership;

(d) the partners or the name and address of any partner;

(e) the term or character of the partnership;

(f) the sum contributed by any limited liability partner;

(g) the liability of any partner by reason of his or her becoming a limited liability partner instead of a
general partner or a general partner instead of a limited liability partner; or

(h) the number of shares held by each partner,

Act 2 Partnerships Act 2010

26

a statement signed by the firm, specifying the nature of the change shall, within ten days, be delivered
to the Registrar for registration, and the Registrar shall issue a certificate of change in particulars to the
firm.

(2) A limited liability partnership which contravenes of subsection (1) commits an offence, and each
general partner shall, on conviction, be liable to a fine not exceeding 0.5 currency points for each day
during which the contravention continues.

52. Management of limited liability partnership. (1) A limited liability partner shall not take part in the
management of the partnership business and shall not bind the firm.

(2) Without prejudice to subsection (1), a limited liability partner may, upon giving seven days notice to
the general partners, in person or by that partner’s agent, inspect the books of the firm and ascertain
the state and prospects of the partnership business.

(3) Where a limited liability partner takes part in the management of the partnership business, that
partner shall be liable for all debts and obligations of the firm incurred while he or she takes part in the
management as though he or she were a general partner.

(4) For the purposes of this section, a limited liability partner does not participate in the management
and control of the partnership business solely by doing one or more of the following—

(a) being a contractor for or an agent or employee of a limited liability partnership or of a general
partner, or being an officer, director or shareholder of a general partner in the limited liability
partnership, which is a corporation;

(b) consulting with and advising a general partner with respect to the business of the limited liability
partnership;

Act 2 Partnerships Act 2010

27
(c) acting as surety for the limited liability partnership or guaranteeing or assuming one or more specific
obligations of the limited liability partnership; or

(d) exercising a right or power permitted by or under this Act or which a shareholder in a company may
exercise.

(5) A limited liability partnership shall not be dissolved by the death or bankruptcy of a limited liability
partner, and the mental incapacity of a limited partner shall not be a ground for dissolution of the
partnership by the court unless the contribution of the limited liability partner who is mentally
incapacitated cannot otherwise be ascertained and realised.

(6) In case of the dissolution of a limited liability partnership, its affairs shall not be wound up by the
general partners unless the court directs otherwise.

(7) Subject to any agreement express or implied between or among the partners—

(a) any difference arising as to ordinary matters connected with the partnership business may be
decided by a majority of the general partners;

(b) a limited liability partner may, with the consent of the general partners, assign his or her contribution
in the partnership, and upon such assignment, the assignee shall become a limited partner with all the
rights of the assignor;

(c) partners shall not be entitled to dissolve the partnership by reason of any limited liability partner
suffering his or her contribution to be charged for his or her separate debt;

(d) a general partner may be introduced as a limited liability partner without the consent of the existing
limited liability partners; and

Act 2 Partnerships Act 2010

28

(e) a limited liability partner shall not be entitled to dissolve the partnership by notice.

53. Winding up of limited liability partnership. (1) Subject to this Part, a limited liability partnership may
be wound up under this Act, and all the provisions of this Act relating to winding up shall apply to a
limited liability partnership with the exceptions and modifications provided for in this section.

(2) A limited liability partnership shall not be wound up under this Act, voluntarily or subject to the
supervision of the court.

(3) The circumstances in which a limited liability partnership may be wound up are—

(a) if the partnership is dissolved, or has ceased to carry on business, or is carrying on business only for
the purpose of winding up its affairs;

(b) if the partnership is unable to pay its debts; or

(c) if the court is of the opinion that it is just and equitable that the partnership should be wound up.
(4) A limited liability partnership shall, for the purposes of this Act, be deemed to be unable to pay its
debts—

(a) if a creditor, by assignment or otherwise, to whom the partnership is indebted in a sum exceeding
one hundred currency points then due—

(i) has served on the partnership by leaving at its principal place of business; or

(ii) by delivering to a general partner; or

(iii) by otherwise serving in such manner as the registrar may approve or direct,

Act 2 Partnerships Act 2010

29

a demand under his or her hand requiring the partnership to pay the sum so due, and the partnership
has, for thirty days after the service of the demand neglected to pay the sum or to secure or compound
for it to the satisfaction of the creditor;

(b) if an action has been instituted against a partner for a debt due from the partnership and notice in
writing to that effect has been served on the partnership, in the manner prescribed in subsection(4)(a)
and the firm has not within fourteen days after service of the notice paid, secured or compounded for
the debt or demand, or procured the action or proceedings to be stayed or indemnified the defendant
to his or her reasonable satisfaction against the action or proceeding, and against all costs, damages and
expenses to be incurred by him or her by reason of the action or proceedings;

(c) if execution or other process issued on a judgment, decree or order obtained in any court in favour of
a creditor against the firm or any person authorised to be sued as nominal defendant on behalf of the
firm is returned unsatisfied; or

(d) if it is otherwise proved to the satisfaction of the court that the firm is unable to pay its debts.

54. Notice of arrangement or transaction to be advertised in Gazette. Notice of any arrangement or

transaction under which a general partner becomes a limited partner, or under which the contribution
of a limited partner in the firm is assigned to any person shall immediately be advertised in the Gazette
before any such arrangement or transaction comes into effect.

55. Inspection. (1) A person may inspect the statements filed with the Registrar by a limited liability
partnership under this Act upon payment of a fee, not exceeding 0.5 of a currency point as the Minister
may prescribe.

Act 2 Partnerships Act 2010

30

(2) A person may obtain a certified copy of the certificate of registration of a limited liability partnership
or an extract of the certificate from the registered statement of a limited liability partnership, upon
payment to the Registrar of a certification fee, not exceeding one currency point, as the Minister may
prescribe.
56. Conversion of partnerships. (1) A limited partnership may be converted into a general partnership by
surrendering the certificate of its registration to the Registrar for cancellation.

(2) The Registrar shall, within fourteen days after the surrender of a certificate of registration under
subsection (1), publish the conversion in the Gazette.

(3) A limited partner who becomes a general partner after the conversion shall continue to be liable for
any obligation incurred by the limited liability partnership before the conversion took effect; and shall
be liable for any obligations of the general partnership that are incurred by the general partnership after
the conversion.

(4) A general partnership may, subject to the provisions of this Act, convert to a limited liability
partnership under this Act by delivering to the Registrar a statement containing the particulars specified
in section 51.

(5) The Registrar shall, upon receipt of the statement delivered under subsection (4), and upon payment
of the prescribed fee, issue a certificate of registration to the person or firm delivering the statement.

(6) A general partner who becomes a limited liability partner shall, after the conversion to a limited
partnership, continue to be liable for any obligations incurred by the general partnership before the
conversion.

Act 2 Partnerships Act 2010

31

57. Effect of conversion on pending court action. Conversion from one form of partnership to another
under this Act shall not affect any action or proceedings pending in court for or against the converting
partnership; and the action or proceedings may be continued as if the conversion did not take place.

58. Winding up of partnership. The provisions of the law relating to the winding up of an unregistered
company under the Companies Act shall apply, with necessary modifications, to the winding up of a
partnership under this Act.

59. Postponement of share of profits in case of bankruptcy. Where—

(a) a person to whom money has been advanced by way of a loan upon a contract as mentioned in
section 3 (c) (iv); or

(b) a buyer of goodwill in consideration of a share of the profits of the business,

being adjudged a bankrupt, enters into an agreement to pay his or her creditors less than one-fifth of
one currency point, or dies insolvent, the lender of the loan shall not be entitled to recover anything in
respect of the loan, and the seller of the goodwill shall not be entitled to recover anything in respect of
the share of profits contracted for, until the claims of the other creditors of the borrower or buyer for
valuable consideration in money or money’s worth have been satisfied.

PART VII—MISCELLANEOUS
60. Existing rules applicable to partnerships. The rules of equity and common law applicable to
partnerships shall be deemed to apply to partnerships in Uganda, except insofar as they are inconsistent
with this Act.

Act 2 Partnerships Act 2010

32

61. Regulations. (1) The Minister may, by statutory instrument, make regulations prescribing any of the
following—

(a) the fees to be paid for anything required to be done under this Act;

(b) forms to be used for the purposes of this Act; and

(c) generally prescribing all matters that are required or permitted by this Act to be prescribed, or that
are necessary or convenient to be prescribed for carrying out or giving effect to this Act.

(2) Notwithstanding the Interpretation Act, regulations made under this section may prescribe, in
respect of a contravention of the regulations, that the offender is liable on conviction a fine not
exceeding forty eight currency points, or to imprisonment for a term not exceeding two years, or both.

62. Amendment of Schedule The Minister may, by statutory instrument with the approval of the
Cabinet, amend the Schedule to this Act.

63. Repeal of Cap. 114 The Partnership Act, Cap. 114, is repealed.

Act 2 Partnerships Act 2010

33

SCHEDULE

Sections 1 and 63.

Currency Point

One currency point is equivalent to twenty thousand shillings.

Cross References

Business Names Registration Act, Cap.109 Companies Act, Cap. 110 Interpretation Act, Cap. 3
Partnership Act, Cap. 114.

Act 2 Partnerships Act 2010

34
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Law of agency
From Wikipedia, the free encyclopedia

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The examples and perspective in this article may not represent a worldwide view of the
subject. You may improve this article, discuss the issue on the talk page, or create a new
article, as appropriate. (April 2017) (Learn how and when to remove this template message)

The law of agency is an area of commercial law dealing with a set of contractual, quasi-
contractual and non-contractual fiduciary relationships that involve a person, called the agent,
that is authorized to act on behalf of another (called the principal) to create legal relations with a
third party.[1] Succinctly, it may be referred to as the equal relationship between a principal and
an agent whereby the principal, expressly or implicitly, authorizes the agent to work under their
control and on their behalf. The agent is, thus, required to negotiate on behalf of the principal or
bring them and third parties into contractual relationship. This branch of law separates and
regulates the relationships between:
 agents and principals (internal relationship), known as the principal-agent relationship;
 agents and the third parties with whom they deal on their principals' behalf (external
relationship); and
 principals and the third parties when the agents deal.
In India, section 182 of the Contract Act 1872 defines Agent as “a person employed to do any act
for another or to represent another in dealings with third persons”.[2] However, this law only
applies to contractual law in India.

Contents
 1 Concepts
 2 Brief statement of legal principles
 3 Authority of Agency
o 3.1 Actual authority
 3.1.1 Express actual authority
 3.1.2 Implied actual authority
 o 3.2 Apparent authority
 3.2.1 Watteau v Fenwick in the UK
 4 Liability
o 4.1 Liability of agent to third party
o 4.2 Liability of agent to principal
o 4.3 Liability of principal to agent
 5 Duties
 6 Termination
 7 Partnerships and Companies
 8 Agency relationships
o 8.1 Agency relationship in a real estate transaction
 9 Applications in jurisdictions
o 9.1 In English law
 10 See also
 11 Notes
 12 References
Concepts
The reciprocal rights and liabilities between a principal and an agent reflect commercial and
legal realities. A business owner often relies on an employee or another person to conduct a
business. In the case of a corporation, since a corporation can only act through natural person
agents, the principal is bound by the contract entered into by the agent, so long as the agent
performs within the scope of the agency.
A third party may rely in good faith on the representation by a person who identifies himself as
an agent for another. It is not always cost effective to check whether someone who is represented
as having the authority to act for another actually has such authority. If it is subsequently found
that the alleged agent was acting without necessary authority, the agent will generally be held
liable.
Brief statement of legal principles
There are three broad classes of agent: [citation needed]
1. Universal agents hold broad authority to act on behalf of the principal, e.g. they may hold a
power of attorney (also known as a mandate in civil law jurisdictions) or have a professional
relationship, say, as lawyer and client.
2. General agents hold a more limited authority to conduct a series of transactions over a
continuous period of time; and
3. Special agents are authorized to conduct either only a single transaction or a specified series of
transactions over a limited period of time.
Authority of Agency
An agent who acts within the scope of authority conferred by their principal binds the principal
in the obligations they creates against third parties. There are essentially three kinds of authority
recognized in the law: actual authority (whether express or implied), apparent authority, and
ratified authority (explained here).
Actual authority
Main article: Actual authority

Actual authority can be of two kinds. Either the principal may have expressly conferred authority
on the agent, or authority may be implied. Authority arises by consensual agreement, and
whether it exists is a question of fact. An agent, as a general rule, is only entitled to indemnity
from the principal if they have acted within the scope of their actual authority, and if they act
outside of that authority they may be in breach of contract, and liable to a third party for breach
of the implied warranty of authority.
Express actual authority
Express actual authority means an agent has been expressly told they may act on behalf of a
principal.
Implied actual authority
Implied actual authority, also called "usual authority", is authority an agent has by virtue of being
reasonably necessary to carry out his express authority. As such, it can be inferred by virtue of a
position held by an agent. For example, partners have authority to bind the other partners in the
firm, their liability being joint and several, and in a corporation, all executives and senior
employees with decision-making authority by virtue of their position have authority to bind the
corporation. Other forms of implied actual authority include customary authority. This is where
customs of a trade imply the agent to have certain powers. In wool buying industries it is
customary for traders to purchase in their own names.[3] Also incidental authority, where an agent
is supposed to have any authority to complete other tasks which are necessary and incidental to
completing the express actual authority. This must be no more than necessary[4]
Apparent authority
Main articles: Apparent authority and Estoppel

Apparent authority (also called "ostensible authority") exists where the principal's words or
conduct would lead a reasonable person in the third party's position to believe that the agent was
authorized to act, even if the principal and the purported agent had never discussed such a
relationship. For example, where one person appoints a person to a position which carries with it
agency-like powers, those who know of the appointment are entitled to assume that there is
apparent authority to do the things ordinarily entrusted to one occupying such a position. If a
principal creates the impression that an agent is authorized but there is no actual authority, third
parties are protected so long as they have acted reasonably. This is sometimes termed "agency by
estoppel" or the "doctrine of holding out", where the principal will be estopped from denying the
grant of authority if third parties have changed their positions to their detriment in reliance on the
representations made.[5]
 Rama Corporation Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147, Slade J,
"Ostensible or apparent authority... is merely a form of estoppel, indeed, it has been termed
agency by estoppel and you cannot call in aid an estoppel unless you have three ingredients: (i)
a representation, (ii) reliance on the representation, and (iii) an alteration of your position
resulting from such reliance."
In the case of Watteau v Fenwick,[6] Lord Coleridge CJ on the Queen's Bench concurred with an
opinion by Wills J that a third party could hold personally liable a principal who he did not know
about when he sold cigars to an agent that was acting outside of its authority. Wills J held that
"the principal is liable for all the acts of the agent which are within the authority usually confided
to an agent of that character, notwithstanding limitations, as between the principal and the agent,
put upon that authority." This decision is heavily criticised and doubted,[7] though not entirely
overruled in the UK. It is sometimes referred to as "usual authority" (though not in the sense
used by Lord Denning MR in Hely-Hutchinson, where it is synonymous with "implied actual
authority"). It has been explained as a form of apparent authority, or "inherent agency power".
Authority by virtue of a position held to deter fraud and other harms that may befall individuals
dealing with agents, there is a concept of Inherent Agency power, which is power derived solely
by virtue of the agency relation.[8] For example, partners have apparent authority to bind the other
partners in the firm, their liability being joint and several (see below), and in a corporation, all
executives and senior employees with decision-making authority by virtue of their declared
position have apparent authority to bind the corporation.
Even if the agent does act without authority, the principal may ratify the transaction and accept
liability on the transactions as negotiated. This may be express or implied from the principal's
behavior, e.g. if the agent has purported to act in a number of situations and the principal has
knowingly acquiesced, the failure to notify all concerned of the agent's lack of authority is an
implied ratification to those transactions and an implied grant of authority for future transactions
of a similar nature.
Liability
Liability of agent to third party
If the agent has actual or apparent authority, the agent will not be liable for acts performed within
the scope of such authority, as long as the relationship of the agency and the identity of the
principal have been disclosed. When the agency is undisclosed or partially disclosed, however,
both the agent and the principal are liable. Where the principal is not bound because the agent
has no actual or apparent authority, the purported agent is liable to the third party for breach of
the implied warranty of authority.
Liability of agent to principal
If the agent has acted without actual authority, but the principal is nevertheless bound because
the agent had apparent authority, the agent is liable to indemnify the principal for any resulting
loss or damage.
Liability of principal to agent
If the agent has acted within the scope of the actual authority given, the principal must indemnify
the agent for payments made during the course of the relationship whether the expenditure was
expressly authorized or merely necessary in promoting the principal's business.
Duties
An agent owes the principal a number of duties. These include:
 a duty to undertake the task or tasks specified by the terms of the agency;
 a duty to discharge his duties with care and due diligence;
An agent must not accept any new obligations that are inconsistent with the duties owed to the
principal. An agent can represent the interests of more than one principal, conflicting or
potentially conflicting, only after full disclosure and consent of the principal. An agent must not
usurp an opportunity from the principal by taking it for himself or passing it on to a third party.
In return, the principal must make a full disclosure of all information relevant to the transactions
that the agent is authorized to negotiate.
Termination
The internal agency relationship may be dissolved by agreement. Under sections 201 to 210 of
the Indian Contract Act 1872, an agency may come to an end in a variety of ways:
1. Withdrawal by the agent – however, the principal cannot revoke an agency coupled with
interest to the prejudice of such interest. An agency is coupled with interest when the agent
himself has an interest in the subject-matter of the agency, e.g., where the goods are consigned
by an upcountry constituent to a commission agent for sale, with poor to recoup himself from
the sale proceeds, the advances made by him to the principal against the security of the goods;
in such a case, the principal cannot revoke the agent’s authority till the goods are actually sold
and debts satisfied, nor is the agency terminated by death or insanity (illustrations to s. 201);
2. By the agent renouncing the business of agency;
3. By discharge of the contractual agency obligations.
Alternatively, agency may be terminated by operation of law:
1. By the death of either party;
2. By the insanity of either party;
3. By the bankruptcy (insolvency) of either party;
The principal also cannot revoke the agent’s authority after it has been partly exercised, so as to
bind the principal (s. 204), though he can always do so, before such authority has been so
exercised (s. 203). Further, under s. 205, if the agency is for a fixed period, the principal cannot
terminate the agency before the time expired, except for sufficient cause. If he does, he is liable
to compensate the agent for the loss caused to him thereby. The same rules apply where the
agent, renounces an agency for a fixed period. Notice in this connection that want of skill,
continuous disobedience of lawful orders, and rude or insulting behavior has been held to be
sufficient cause for dismissal of an agent. Further, reasonable notice has to be given by one party
to the other; otherwise, damage resulting from want of such notice, will have to be paid (s. 206).
Under s. 207, the revocation or renunciation of an agency may be made expressly or implicitly
by conduct. The termination does not take effect as regards the agent, till it becomes known to
him and as regards third party, till the termination is known to them (s. 208).
When an agent’s authority is terminated, it operates as a termination of subagent also (s. 210).
This has become a more difficult area as states are not consistent on the nature of a partnership.
Some states opt for the partnership as no more than an aggregate of the natural persons who have
joined the firm. Others treat the partnership as a business entity and, like a corporation, vest the
partnership with a separate legal personality. Hence, for example, in English law a partner is the
agent of the other partners, whereas in Scots law "a [partnership] is a legal person distinct from
the partners of whom it is composed"[10] and so a partner is the agent of the partnership per se.
This form of agency is inherent in the status of a partner and does not arise out of a contract of
agency with a principal The Partnership Act 1890 of the United Kingdom (which includes both
England and Scotland) provides that a partner who acts within the scope of his actual authority
(express or implied) will bind the partnership when he does anything in the ordinary course of
carrying on partnership business. Even if that implied authority has been revoked or limited, the
partner will have apparent authority unless the third party knows that the authority has been
compromised. Hence, if the partnership wishes to limit any partner's authority, it must give
express notice of the limitation to the world. However, there would be little substantive
difference if English law was amended:[11] partners will bind the partnership rather than their
fellow partners individually. For these purposes, the knowledge of the partner acting will be
imputed to the other partners, or to the firm if a separate personality. The other partners or the
firm are the principal and third parties are entitled to assume that the principal has been informed
of all relevant information. This causes problems when one partner acts fraudulently or
negligently and causes loss to clients of the firm. In most states, a distinction is drawn between
knowledge of the firm's general business activities and the confidential affairs as they affect one
client. Thus, there is no imputation if the partner is acting against the interests of the firm as a
fraud. There is more likely to be liability in tort if the partnership benefited by receiving fee
income for the work negligently performed, even if only as an aspect of the standard provisions
of vicarious liability. Whether the injured party wishes to sue the partnership or the individual
partners is usually a matter for the plaintiff since, in most jurisdictions, their liability is.
Agency law in the United Kingdom is a component of UK commercial law, and forms a core set
of rules necessary for the smooth functioning of business. Agency law is primarily governed by
the Common law and to a lesser extent by statutory instruments.
In 1986, the European Communities enacted Directive 86/653/EEC on self-employed
commercial agents. In the UK, this was implemented into national law in the Commercial Agents
Regulations 1993.[12] Thus, agent and principals in a commercial agency relationship are subject
both to the Common law and the Commercial Agents Regulations.
The Commercial Agents Regulations require agents to act “dutifully and in good faith” in
performing their activities (Reg. 3); co-extensively, principals are required principals to act
“dutifully and in good faith” in their “relations” with their commercial agents (Reg 4). Though
there is no statutory definition of this obligation to act “dutifully and in good faith”, it has been
suggested that it requires principals and agents to act "with honesty, openness and regard for the
interests of the other party to the transaction". Two "normative precepts"[13] assist in concretising
this standard of conduct:
"Firstly, expressing honesty and openness, commercial agents and principals must mutually co-
operate in the performance of their agreement. Conduct in good faith requires that each party
proactively take action to assist the other in the realisation of their bargain, as opposed to mere
abstention from obstructive behaviour. However, whether a party has acted in good faith must
not be determined by reference to a moral or metaphysical notion of co-operation; this
assessment must be based on an objective appraisal of the actual commercial agency
relationship. Accordingly, the intensity of the required co-operation will vary, depending on the
terms of the contract and the pertinent commercial practices.
Secondly, commercial agents and principals must not exploit asymmetries in their agency
relationship in such a manner that frustrates the legitimate expectations of the other party. In this
respect, whether a conduct is in breach of the Obligation must be appraised holistically,
considering all aspects of the relationship; material facts will include the contractual and
commercial leverage of each party, their objective intentions as enshrined in the contract, and the
business practices of the sector in question. Nevertheless, the starting axiom of this investigation
must be that these are commercial relationships in which professionals are expected to be self-
reliant and must be free to pursue their self-interest. Critically, this will not be an estimation
aimed at achieving ontological fairness, a just bargain or equilibrium between the giving and
receiving of commercial agents and principals".[14]