Contract

C05Delivered by Catherine Gregory

ContractLegally binding agreementEssential elements are:Offer & AcceptanceConsiderationIntention to create legal relationsVitiating FactorsSometimes may not be legally bindingDepends on FormTermsConsentLegalityCapacityContractsVoidVoidableUnenforceableMost contracts now have a standard formFormSimple contracts -Oral contracts can be made but some contracts have to take a certain formSpeciality contracts -Deed Leases, covenants and conveyances in landWriting transfer of shares, Bills of Exchange

OfferAn unequivocal statement of willingness to be bound on the specific terms.Offer can be made to the world at large Carlill v Carbolic SmokeballInvitation to treatAn offer is different from an I.T.T which is merely an invitation to make an offer such as advertisements, auctions, exhibition of goodsBoots v Pharmaceutical Society of Great BritainFisher v BellPartridge v CrittendenAn inbe accepted just an indication that a person is willing to receive offersTerminationAn offer can be terminated at any time before it is accepted:RejectionCounter offer Hyde v WrenchRevocation Routledge v Grant, Byrne v Van Tienhoven (postal rule)Lapse of timeDeathFailure of conditionAcceptancePositive act which brings into effect a binding contract.Can be express, by action or inferred.Silence does not amount to an offer Felthouse v BindleyNormally has to be communicated but exception is postal rule if use of post was in contemplation of both parties Adams v LindsellAcceptanceEntores v Miles Far East Corporation acceptance by telexE mail offer is delivered when an e mail is accessed.Considerationexchange of something of economic value for goods or a service. One party may give a promise to pay (consideration) and in return the other party gives goods or a service (also consideration) Payment does not have to be cash!ConsiderationPromise in return for an act two sided bargainExecuted Act at the timeExecutory promise for a promise at a point in the futurePast consideration is no consideration Re McArdleNeed not be adequate but must be sufficient Chappell v Nestle doesnt have to reflect the value of benefit received.ConsiderationPerformance of an existing contractual duty is not consideration Collins v GodefroyStilk v Myrick additional reward may not be enforceableExtra service may be sufficient Williams v RoffeyPart payment of a debtThe rule in Pinnels case states that where a lesser sum is accepted instead of the full amount of the debt it has to be supported by consideration.Otherwise not enforceable.There are some exceptions composition of creditors, accord and satisfaction, third party.Promissory estoppelWhere someone has made a promise they may be stopped from enforcing their legal rights.

High Trees caseCentral London Property Trust LTD v High Trees House Ltd (1947) In 1937, CLP granted a lease on the property (a new block of flats) at a rent of 2,500 per year. Due to the impact of the war that soon followed, it was impossible to find tenants for the flats except at lower rents. In 1940 CLP and High Trees therefore agreed a lower annual rent for the property. By 1945 the property was fully let and a claim was made by CLP to revert to the old rent. The court held that agreement for reduced rent between 1940 and 1945 was not supported by consideration of High Trees; therefore the agreement was in principle not a contract. However, under the doctrine of estoppels, the landlords would be stopped from denying that they had made a promise to accept lower rent and so would not have been able to claim for this higher rent. PrivityOnly a person who is party to a contract can sue and be sued on it.Consideration must move from the promisee the price must be paid by the person who seeks to enforce the promise.Dunlop v SelfridgeCase: Dunlop v Selfridge (1915) Dunlop supplied tyres to Dew and Co. A term of the agreement was that the tyres would not be re-sold by Dew at below a minimum specified price set (or if sold below that price then a penalty of 5 per tyre would be payable to Dunlop). It was recognised in the agreement that Dew could sell the tyres on to other retailers, but only on the same terms, that the tyres should not be sold below the minimum specified price. Dew and Co sold the tyres to Selfridge who then sold them at a price below the minimum price set by Dunlop. Dunlop sued Selfridge to recover the 5 per tyre penalty. The court held that Dunlop could not recover damages from Selfridge because there was no contract between them. Selfridge was a third party as regards the contract between Dunlop and Dew. The contract for the sale of the tyres was between Dew and Selfridge. (Dew might have been able to take legal action against Selfridge, but chose not to do so.) The Doctrine of Privity: Only those who are party to the contract have the rights or liabilities under the contract and therefore the right to enforce it = -tExceptionsContract (Rights of third Parties) Act 1999.Insurance claimsIntentionMust be an intention that the contract is binding.Social and domestic agreements do not tend to be enforceable.Commercial agreements generally are.Husband and wife arrangementsUnless property involved, not binding.Balfour v Balfour payment of maintenanceHowever Merrit v Merrit wofe paid off balance on mortgage but husband refused to transfer the propertyBUT Simpkins v Pays Lottery syndicates!Binding in honour only express intention for it not to be a contract.MisrepresentationMisrepresentation is a false statement or fact made by one party to the other before entering the contract with the view to tempt the other party into entering. To be voidable, must showThe statement made is false or untrue (perhaps not included in the written contract)misleading the other party

The statement must have been directly made by one of the contracting parties or an agent acting on his behalf

The given statement must have resulted in the receiving party being tempted into the contract

To noteA false statement if it is opinion is not misrepresentation

A statement made after the contract is made in not misrepresentation

Slight over exaggeration (e.g. advertisements) are not misrepresentation

Silence is not misrepresentation

Types of misrepresentationFraudulent statement in the knowledge it is untrueNegligent Believe it to be true but without reasonable grounds of beliefInnocent No faultWill escape liability if prove you had reasonable grounds to believe the statement is true.TermsMany statements made during negotiations.Some amount to terms others are mere representationsTerms express or implied by law, custom or statute i.e. if you buy food, it is fit to eat!If implied it goes without saying.Conditions v warrantiesConditions go to the root of the contract, if breached the contract cannot be performed.Warranties are secondary or subsidiary terms which if breached, contract can still continue.Remedy for breach Discharge / damagesCondition Poussard v SpiersWarranty Bettini v GyeInnominate termsDifficult to construe as a warranty or condition.Court must decide and in doing so will look at the nature and effect of the breachSale of Goods Act 1979Implied termsTitle Seller has a right to sell s12Description goods correspond with description s13.Satisfactory quality s14 fit for purpose, safe, free from defects (Grant v Australian cotton mills underpants!)Acceptance of goodsA buyer is not deemed to have accepted the goods until he has had a reasonable opportunity to examine them.Once accepted only damages for breach can be claimed, not discharge.Supply of Goods and Services Act 1982Extends the principles to supply of services. For accountants it is expected that:Demonstrate level of skill they have professed to haveHonestyGood faithObedientProper recordsConfidentialityReasonable careExclusion clausesAttempt by one party to restrict, limit or exonerate from liability.Unfair Contract Terms Act 1977 protects consumersNeeds to actually be incorporated into a contract, but interpreted strictly by the courts.

IncorporationNot usually disputed if already in a document which has been signed.Both parties must be aware of it.Must be an integral part of the contract, put forward before the contract was made i.e. reasonable notice must be given. Chapleton v Barry deckchair exclusion on receipt.SigningIf a document has been signed, then clause will be incorporated, but must be specific Curtis v Chemical Cleaning Company.Disclaimer too late on back of hotel door Olley v Marlborough Court.Personal injury cannot be excluded Thornton v Shoe Lane ParkingException consistent dealings and prior terms.IncorporationIf previous dealings but not consistent then there must be sufficient awareness. Hollier v Rambler Motors.InterpretationIn deciding exactly what an exclusion clause means courts interpret ambiguity against person at fault contra proferentem rule.UCTA 1977 depending upon consumption.Unfair Contract Terms Regulations 1999If a term or clause in the contract is deemed to be unfair then it will become void Does not protect two business but instead the consumer in dealings with a business

If the term in the contract is unfair it will not be binding for the consumer

An injunction can be used against a business to stop them using the unfair term

Not limited to exemption clauses but will look at penalty clauses as well leading to damages

Quick TestContract DischargeNormal way to end or discharge a contract is through performance or payment.Exceptions substantial performancePartial, prevention or severable contractsFrustrationDischarge by Frustration

A contract is deemed frustrated when it cannot be performed due to uncontrollable circumstances or events therefore the intervening event brings the contract to an end

Coronation casesKrell v Henry rent of a room on coronation routeContrast to Herne Bay Steamboat v HuttonIf an alternative mode of performance is possible, contract is not frustrated.Codified in legislation The Law Reform (Frustrated Contracts) Act 1943.Law ReformOffers some protection:Any money paid by one party must be repaidAny sums due then ceaseMoney for expenses may be recoveredIf valuable benefit may have to be paid to other partyDestruction of subject matterHall destroyed by fire Taylor v Caldwell.Personal incapacityGovernment intervention or illegalityBreach of contractNot performing the contractual obligations precisely.May have lawful excuse if frustrated, impossible, rejection.Primary obligation to perform the contracts terms remains unless: repudiation or fundamental breachRepudiatory breachWhere party indicates by word or conduct that he does not intend to honour his contractual obligations.Does not automatically end the contract, injured party can recover damagesOccurs once the contract has startedAnticipatory breachOne party indicates in advance he will not perform his duties under the contract.Hochester v De La TourRemediesDamages restore the party to the position he would have been in if breach had not occurred.They are not considered to be a punishmentTwo important considerations remoteness and measure.RemotenessHadley v Baxendale loss must arise naturally from the breachA loss outside the normal course of events will only be compensated if the exceptional circumstances which caused it were within the defendants actual knowledge and control.RemotenessA defendant will only be liable if he knew of the special circumstances from which abnormal consequence of breach could arise.Victoria Laundry v Newman.Amount of loss can be limited by an exclusion clauseMeasureObjective to put the claimant in position he would have been if contract had been performed.Compensate for actual financial lossDamages can be recovered for mental stress Jarvis v Swann Tours, inferior holiday accommodationMitigationIt is expected that the claimant will take reasonable steps to reduce or mitigate his loss.Liquidated damages are sometimes invoked an agreed fixed price for damages at the time of the contract genuine pre estimate.Penalty clauses to discourage breach are void and unenforceable.Other remediesAction for the price contractually agreed priceQuantum meruit value of the work done it is a form of restitutionSpecific performance order by court i.e. sale of landInjunction personal service contracts Warner Bros v Nelson. To stop someone doing somethingOther remediesRescissionLimitation period is 6 years or 12 if by deed. Can be extended in some circumstances.Quick testPg 31 topic 14Qns 1,3,4,5,7,8,9Law of EmploymentEmployees v Independent ContractorsDismissal wrong and unfairLook at legislation which is designed to protect employeesEmployeesIf you are employed under a contract of service you are an employeeRights of statutory protectionIf you are employed under a contract for services, you are an independent contractorCourts often make the decisionThree main tests which are used to decide:Control TestIntegration TestEconomic reality & multiple testControlCourts will consider whether the employer has control over way in which employee performs his duties.

IntegrationLooks at the employees skills and whether he is controlled and integrated into employers business.Cassidy v Ministry of HealthEconomic RealityWas the employee working on his own account. Numerous factors need to be taken into consideration.Ready Mixed Concrete v Ministry of PensionsMackenna J laid down three principlesAgreement that service will be provided in exchange for payWorker agrees that master can exercise controlOther factors such as appointment of replacementsRelevant FactorsTools and equipmentPayment of salaryWorking for a number of different peopleDelegationWhy does it matter?TaxBenefitsStatutory Protection for dismissalVicarious liabilityInsolvency wages now preferential creditorsNational InsuranceContracts of EmploymentExpress Terms Expressly stated in contractImplied terms by courts and by statuteA contract of employment should be provided within 2 months of the employee starting work. Any changes should be given 1 month noticeWhat should be includedNames of employer and employeeDatePayContinuous serviceHours and place of workHoliday entitlement and paySick leavePensionsJob titleNotice periodEmployees are protected under statuteMiscellaneous rights Health & Safety ERA 1996Discrimination Sex Discrimination Act 1986Race Relations Act 1976Disability Discrimination Act 1995Pay RightsEqual Pay Act 1970TUPE 1981National Minimum Wage Act 1998Working Time Regulations 1998 48 hours maximum timeCommon Law duties of employerProvide safe and healthy workplaceTo pay remunerationGive reasonable noticeCo operationCover expensesCommon law duties of employeeProvide personal serviceObedienceReasonable skill and careCo operationGood faith and honestyDismissal RightsUnfair dismissal statutoryWrongful contractualRedundancy have to be continuously employed for 2 years before an action can be brought.DismissalsSummary dismissal without notice, usually gross misconductConstructive dismissal forces an employee to resign by varying terms of the contract. Must show breach and left because of the breach.Wrongful DismissalE.g insufficient notice breach of contract, so can claim damages under common law rulesSix years to bring a claimET 3 months to bring a claimUnfair dismissal Totally unreasonable in breach of statute i.e on grounds of sex or pregnancy.3 months to bring a claim have to be employed continuously for one yearEmployee has to show there has been a dismissalEmployer rebuttalMust prove a valid reason for dismissal May be fairFair reasons for dismissalCapabilityConductRedundancyLack of qualificationUnfair dismissalAutomatically unfair includePregnancyTrade UnionTransfer of UndertakingHealth and SafetyWorking Time RegsDont have to be continuously employed for one year in these circumstancesRemediesReinstatement Go back to same jobRe-engagement similar jobCompensation basic award of maximum 400 per week up to 20 yearsCompensatory - 68,400Additional awardQuick testPg 41 topic 18Q1, 4, 5, 6, 7, 8Topic 19 q1, 3, 9Company FormationDifferent ways in which a business can be runSole Trader Catherine GregoryPartnership Catherine & Neil Gregory various types ordinary and limited and LLPCompany Catherine Gregory LtdPartnershipGeneral definition is where 2 or more people set up with a view to making a profit.Ordinary Partnerships have unlimited liability. Regulated by Partnership Act 1890.Often called a firm. Partnership can be a very informal arrangement.Written partnership agreement not required by law but includes rules on profit share, type of trade, responsibilities.

PartnershipA partnership can come to an end when one of the partners dies.Partnerships are joint and severally liable.Partners can bind the partnership if they transact with a third party and that third party genuinely believe the partner is acting with authority.New partners are liable for debts only after they join.Retiring partners are liable for all outstanding debts which were in existence whilst they were part of the partnership.Limited PartnershipIntroduced by Limited Partnership Act of 1907.Partners are limited to the amount of capital they contributed.One partner must still have unlimited liabilityLimited Liability PartnershipsLegally separate from owners KPMG LLP, PWC LLPPartners are limited to the amount of their capital contribution.More regulated and more governance.Must have an incorporation document and a statement of complianceIncorporation documentNameLocation and registered officeAddressName of membersDesignated members (2) who take responsibility for the publicity of the partnership.CompanyIn law recognised as a separate legal entity and is separate from its members.It owns property in its own name, can sue and be sued, has perpetual existence.It is an artificial legal person.Financed by shares and run by DirectorsMust comply with Companies Act 2006IncorporationThe separate legal personality was established in Salomon v Salomon and Lee v Lees Air Farming.Directors claiming from company.Macaura v Northern Life Assurance Insurance policy needed to be in companys name in order to make a claim.Lifting the veilA company can hide behind the veil of incorporation.However, the veil will be lifted i.e the company and its members will be treated as one or the members will be personally liable.

Situations where veil will be liftedFraudulent trading intent to defraud creditors. Civil and criminal liability (statute)Wrongful trading trading when no reasonable prospect of avoiding insolvency. (statute)Gilford v Horne restraint of trade clause.Plc trading without trading certificate. (statute)Different types of companyPrivate companyLimited by shares or guaranteePublic company limited by shares.Protection against debtsTypesCorporation sole official position normally Treasury SoliciotorChartered Corporations Charities or CIMARegistered Companies Ltd / plcCommunity interest companies beneficial to community companies special situationsRulesPrivate company can have one director, public company must have 2Private company, a company secretary is not needed, for a public company it is.No minimum share capital for private companies. For Public, minimum is 50,000 of which 25% must be paid up.Private company cannot sell shares to public, but private companies can.Public cos need a trading certificateCannot have the same name as a company already in existence tort of passing offRulesAccounts after end of accounting period, company has 6 months to produced statutory audited accounts, private is 9 months.Plcs must lay their accounts before an AGM annually.Not all plcs sell their shares on the stock exchange.Formation of a companyPromoters form a companyThey have a fiduciary duty (legal obligation of one party to act in the best interests of another) not to make a profit from promotion activities.Reasonable skill and careMust be disclosed. Can make a legitimate profit providing they disclose it.Gluckstein v Barnes any secret profit must be returned to a company.Pre incorporation contractA contract made by a promoter before the company is formed.A company cannot ratify the contract a new contract must be created.The promoter will be personally liable on the contract.Avoidance of liabilityDraftA new contract is formed on identical terms to the old one. (Novation)Buy an off the shelf companyRegistrationOnce formed a company needs to be registered with the registrar.Must have a :Memorandum of Association states founders want to form companyArticles of Association Day to day running how directors are appointed, who the shareholders are etc. Model articles if dont provide own.Statement of capitalStatement of proposed Officers Details of directors and company secretaryStatutory Declaration of ComplianceFeeNominal value of sharesRegistration certificateOnce documents are filed, a certificate of incorporation is issuedTrading certificate only issued to plc, once all the requirements are met.Sanctions if company trades without a certificate.Statutory books and records Public accountabilityA company should maintain:A register of membersA register of chargesRecord of directors and secretariesResolutions and meetingsDebentures (nearly always but no statutory compulsion)Any disclosed interests in sharesCompanies HouseEvery company has to provideCertificate of incorporationPublic trading certificateAnnual accounts and returnsResolutionsArticlesNotice of changes.Company ConstitutionMemorandum wish to form a companyArticles includes resolutions and agreementsCopies of resolutions and agreements should be filed with Registrar within 15 daysArticlesContain the internal rules and regulations of a company.Members are bound to the company and the company to its members and shareholders.Articles can be altered by special resolution 75% shareholder vote.Articles contain objects clauseDo not bind third partiesCan buy off the shelf companiesArticlesContain:Appointment and dismissal of directorsPowers and responsibilitiesMeetingsDividendsTransfer of sharesModel ArticlesInstead of drafting their own, cos can adopt the model articles. Detail:Appointment of directorsDividendsMeetings and VotingAdmin arrangements pg 256Alteration75% majority to change the article. Any change must be for the benefit of a company as a whole.Minority shareholders are entitled to protection if there is unjustified discrimination.Sometimes changes are valid the benefit of the company as a whole Sidebottom v Kershaw. But Dafen Tinplate protection of minority.Companies Act wins if there is conflict in changeObjectsAims and purposes used to be stringently interpreted.Ultra vires where company acts outside its capacity.Now unrestricted objectsArticles as a contractThey are a contract between:Members and the companyThe company and its membersMembers and members.Articles do not bind a company to third parties.Eley v Positive LifeQuestionWhich ONE of the following statements is incorrect? A A private company limited by shares must have at least one director. B A public company limited by shares must have at least two directors. C A private company must have authorised share capital of at least 30,000. D A public company must have an authorised share capital of at least 50,000 QuestionThe articles of association of Dee Ltd, a property development company, states that the company has power to borrow in furtherance of its objects and that the directors have authority to borrow up to 200,000. The board has resolved to purchase a piece of land for 300,000. The Midwest Bank plc has agreed to make a loan of 250,000 to Dee Ltd to acquire the land. Which ONE of the following is correct? A The loan is void as Dee Ltd has acted ultra vires. B As the directors have exceeded their authority, the bank cannot enforce the loan against Dee Ltd. C As the directors have resolved to obtain the loan, the transaction is lawful. D The loan is ultra vires the directors who will be personally liable for any loss caused to the company unless their actions are ratified by the shareholders QuestionA business has been registered under the name "The Mark Jones Partnership Co Ltd". What type of business organisation must this be? A A partnership. B A private limited company. C A public limited company. D Any of the above as this is a business name QuestionWhich of the following is correct? (i) Purchasing a shelf company enables business to commence more quickly. (ii) It is generally cheaper to purchase a shelf company than to arrange for a solicitor or accountant to register a new company. (iii) Incorporating a company by registration enables the companys documents to be drafted to the particular needs of the incorporators. A (i) and (ii) only. B (ii) and (iii) only. C (i) and (iii) only. D (i), (ii) and (iii). Quick TestTopic 22Questions 1,2,3,5,6,8,10.Administration & ManagementDirectors exercise powers by holding Board MeetingsPowers are given to the board as a collective body.Directors are responsible for running the companyCompany MeetingsAGM public companies have obligation to hold within 6 months of year end21 days notice needs to be given to members.Normally includes:AccountsDividendsElecting DirectorsRe appointing AuditorsOther meetingsDirectors can call other meetings whenever they see fit.Members can ask for meetings to be convened plcs members with 10% of the paid up capital. Ltd cos 5% is last meeting was more than 12 months ago or 10% if under 12 monthsResolutionsMeetings can pass various resolutions Ordinary simple majority (14 days notice)Special 75% (14 days notice) major changes such as name, alteration of articles, reduction of share capital.Written ResolutionIn private cos, not necessary for a meeting to be held.Can be done in writing except removal of director or auditor before term has expired.Members holding 5% of voting rights can request written resolutionCan be electronic 28 days notice and 75% majorityOther meetingsSpecial notice (28 days) must be given if:Removal of auditorRemove a directorRoleDirectors are officers of the companyA chairman leads the board and meetingsManaging Director leads the executive management CEOsVarious types of directorExecutive Directors service contracts, day to day managementNon Executive dont have a role in the running of the company, more concerned with governance.Shadow Director outside advisersDirectors are appointed by ordinary resolutionRemunerationDirectors can be reimbursed for reasonable expenses.Salary is often in service contractThere has to be a directors remuneration reportA company must make available for inspection by members directors contracts of employmentVacation of officeDirectors can be:Removed (28 days notice)ResignDeathNot wanting to be re-electedRotatedDisqualified - QuestionWhich of the following is correct? (i) Directors may vote themselves such salary payments as they think fit, irrespective of anything in the companys Articles of Association. (ii) Directors are only entitled to be paid for their services if the constitution of the company so provides. (iii) Directors must be paid a salary. A (i) only. B (ii) only. C (i) and (ii) only. D (iii) only. PowersDefined by articlesDirectors are agents of the companyPowers must be exercised in the best interests of the company for the purpose the power is given power is collective for the board.Pg 130 of class notesManaging Director powersHas apparent authority to bind the companyDuties7 principle duties in CA2006Act within powerPromote success of companyExercise independent judgementReasonable skill, care and diligenceAvoid conflicts of interestNot to accept benefits from third partiesDeclare any interest in proposed transactions or arrangementsBreach of dutiesMay have to account for personal gain and indemnify the companyCompany can ratify the contractRescind the contract but director may be:Personally liable if veil is liftedMay be liable against creditorsCompany SecretaryChief admin officerEvery public company required to have one, private cos do notA plc has to have a qualified company secretary who is a solicitor, barrister or advocate or membership of an accountancy body.Powers have been very limited but can enter into administrative contractsQuestionWhich of the following can enforce the fiduciary duties owed by a director? (i) The majority shareholders. (ii) The company. (iii) Individual directors. A (i) and (ii) only. B (ii) only. C (ii) and (iii) only. D (iii) only. Quick TestTopic 32Questions 1, 3, 8MinorityDirectors owe duties the company, not to individual members.If a breach of duty arises, it is the company which has an action.Some protection to minority though to prevent the majority unfairly prejudicing them.Protection of the minorityS994 CA 2006 Any shareholder can apply to the court if the companies affairs have been conducted in an unfairly prejudicial manner.No definition but normally:Exclusion form boardImproper allotment of sharesFailure to call a meetingPayment of excessive bonusPetition to the courtWhere the court agree that an action is unfairly prejudicial they can make a court order under s996 to regulate future conduct.Winding upA member can petition to the court for a company to be wound up if there are just and equitable grounds to do so.This is very rare and will only be done if the company was formed for an illegal or fraudulent purpose or the relationship between members and directors has broken down.Company FinanceShares bundle of rights given to individual shareholders to vote to attend meetings.No automatic right to take part in management.Share capital Allotment is amount, number and type, issued is amount which is actually in issue. The difference between the two is unissued. Share CapitalCalled up Amount called up for payment nowPaid up is the amount actually paid.Nominal and market value of a share is different.Types of shareOrdinary / equity Not guaranteed a dividendUsually carry a right to voteIn liquidation paid up after preferential creditors and preference shares.Types of sharePreferenceSecureFixed %CumulativeDont normally carry voting rightsHolders of sharesShareholders have vested rights which can only be varied followed a strict procedure variation of class rights.All companies have a statement of capital which details the total number of shares, amount paid up and allotted.Issuing of sharesDirectors of companies who have one class of share can allot the shares unless the articles restrict.Normal time period is 5 years.Different ways in which shares can be allottedPublic Offer Members of the public subscribe for shares directly to the companyOffer for sale an offer direct to members of the public from info contained in the share prospectus.Placing Shares offered in blocks to people at a pre determined price.Rights issue right of pre emptionBonus issue / scrip issue - FreeCapital MaintenanceCompanies must look after their share capitalThey cannot pay out of company reserves to the detriment of creditorsDividends can only be paid out of profits.A company can recover unlawful dividends back from membersProfits available for distribution are accumulated realised profits accumulated realised losses.Shares can never be allotted at a discountUndistributable reservesShare premiumRevaluation reserve.Share capital can be reduced by extinguishing liability on partly paid shares or repayment to members.BorrowingDebentures or loan capital.Can be singleSeriesStockRegister of debentureholders is often keptDifference to shareholderShareholder is a member. Debentureholder is a creditorShareholders can vote. Debentureholders cannot.Shareholders get dividends, Debentureholders get interestShareholders are last to be paid on winding up, Debentureholders are preferential.ChargesFixed charge specific assetsFloating charge Series of assets. Crystallisation of floating charges on liquidation.Priority to fixed charges but if had notice of floating charge priorty.EthicsA framework of rules which regulates behaviourLooks at what is right and wrong.Rules developed throughout the agesMain focus of our syllabus has been on Law, Regulations and Codes of ConductProfessional bodies such as CIMA have Regulations and Codes of Practice.EthicsMoral principles to guide behaviour.Tax avoidance Not illegal but its immoralLooks at what is right and what is wrong.Morals derive from an individuals beliefProfessional ethics are the views and rules of the professional organisation that the individual is a member of.CIMAs ethical code applies to membersEthics in businessThere are norms and standards of behaviour expectedBusiness presents lots of ethical dilemmasI, DO, BESTExpectation that organisations will act ethically supermarket clothes and sweat shopsEthical dilemmas Enron, Parmalat, MaxwellCorporate ResponsibilityCompanies now have CSR policies looks at how company behaviours affects local communities, charities, i.e green policies, impacts of expansionThe accountancy profession has developed a code of ethics regulates conduct and behaviourConsequences are that disciplinary action can be taken.Ethical enforcementFRC (Financial Reporting Council) taken a lead role in ethical reporting. Monitors accountability of professional accountants.POD (Professional Oversight Board) regulates specific activity:Registration and monitoringTraining and educationCPD, Conduct and disciplineContinuedAPB Auditing Practices Board Regulates auditing and assurance.Issues ethical standards independence, objectivity, integrity.IFAC (International Federation of Accountants) oversees the worldwide accountancy profession

Codes of ConductProtect public interestCIMA A set of standards governing the conduct of members of certain profession by specifying expected standards of competence, professional behaviour and integrity.Two approaches Compliance based approach (rules based)Ethics based (Framework based approach)Compliance-based approachCIMA anticipates ethical situations which may arise and lay down specific rules effectively members are legally bound.Some advantages Rules laid down, consistency, consequences of breach are identifiable.Disadvantages long and lengthy rules, members cannot learn all ruleEthics / Framework based approachPrinciples set out at a high level describing the fundamental values and qualities expected.Not prescriptiveVoluntary guidelines which are examples of good practice.Advantages encourages members to be proactive, best suited to complex situations butCan lead to long disciplinary hearings, get built on over timeIFAC Code of ethicsLooks at who the code applies to, Accountants in Public Practice, Accountants in businessCIMAs ethical guidelinesIntroduced in 2006Fundamental principles Must know them and apply them.It is a framework based approachIf a complaint is made against a member, failure to follow the ethical code will be taken into considerationPrinciplesIntegrity honesty and straightforward must treat everyone the sameObjectivity impartiality, freedom from conflict of interest e.g hospitalityProfessional competence and due care technical abilityConfidentiality unless there is a professional or legal duty to disclose such as Money LaunderingProfessional behaviour not doing anything to discredit the professionThreats and safeguardsSelf interest or conflictSelf reviewAdvocacyFamiliarityIntimidationPersonal QualitiesReliabilityResponsibilityTimelinessCourtesyRespectProfessional QualitiesIndependenceScepticismAccountabilitySocial ResponsibilityEthical ConflictConsequences of acting in breach of ethical code is being fined, struck off, discipline, losing your job, criminal sanctions, being sued.Actions have consequences for you, the profession as a wholeEthical conflicts arise where two sets of values are incompatibleA conflict of interest is where you have a duty to two parties

ConflictTensions between:Societal values and corporate valuesPersonal values and corporate valuesProfessional values and corporate valuesEthical dilemmas .pg 431Dealing with ethcisTransparencyFairnessEffectCorporate GovernanceSet of rules applies to companiesCadbury Committee system b which organisations are directed and controlledCompanies should have effective controls i.e cash, stock: businesses should be efficient and management are accountableCorporate failures Barclays, Enron, Liehmann Brothers damaged corporate confidenceGovernance problemsLack of control over directors bankers big bonusesAgency problem separation of control and ownership and managementStakeholders financial have a financial relationshipInterest are interested in how the organisation behavesShareholdersInterested in maximising their wealth so it could lead to conflict.Lots of institutional investors now following company law Myners review in 2001.Greater corporate governanceReasons Internationalism and globalisationFinancial reporting rulesCorporate scandals.USAActive management by shareholders is encouragedSarbannes Oxley Act 2002 introduced measures to protect investors from further corporate disastersPublic Company Accounting Oversight Board to stop closeness of auditors which influences objectivitySouth Africacomply and explain King Report and new Companies Act clarifying the standards which are expected from directors.UKThree main government committees sat, considered and reported: Cadbury, Greenbury and Hampel Pension fund scandal (Maxwell) motivated the need for these.The recommendations were incorporated into 1998 Combined Code listed companies have to complyThen further committee Turnbull, Higgs and Smith in the 2003 Combined Code pg 447Symptons of poor corporate governanceDomination of single individualLack of involvement of boardLack of adequate control functionLack of supervisionLack of independent scrutinyLack of contact with shareholdersEmphasis on short term profitabilityMisleading accounts and informationUKMain source of rules is the corporate governance codeStatement of compliance is needed by all listed companies that they have complied with it.Looks at imposing checks, control, risk minimisation, Senior Accounting Officer accountabilitySectionsLeadershipEffectivenessAccountabilityRemunerationRelationsLeadership A1Set aimsReview management performanceAct in best interestsDivision of responsibility (A2)Chairman leads (A3)Non-Executives (A4)Composition B1Mix of exec and non exe directors good balance of skills, experience, independence and knowledgeNEDs should be at least 50% of boardAppointments B2Commitment B3Re election B7 (ANNUAL)Accountability C1Should have audit committee and auditors (C3)Remuneration D1 should be remuneration committee and should consult chairmanRelations E1UK Principles based approachRole of the boardProvide entrepreneurial leadershipEstablish organisations corporate governance standardsDifferent types of Board All exec, majority exec, majority non execOffences in relation to running a businessFraudulent trading intent to defraud creditors imprisonment or fine criminal have to prove intentWrongful trading fine trading when there is no reasonable prospect of recovery