BLP PMR 2020-21 - pre module reading PDF

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LPC: BUSINESS LAW AND PRACTICE

PRE-MODULE READING

LEGAL PRACTICE COURSE

BUSINESS LAW AND PRACTICE PRE-MODULE READING

2020

LAW SCHOOL

LPC: BUSINESS LAW AND PRACTICE

PRE-MODULE READING

Contents

Page

89

1. 2.

Introduction: Contract law in context Key elements for formation of a contract

90 91

3.

Terms of a contract: express and implied

98

8

4. 5.

Misrepresentation How a contract comes to an end

99 99

5 5

Section 1 - Considerations when Starting a Business

7

1. 2.

Finance

3. 4.

Business media overview Factors influencing the choice of business medium

5. 6.

PRE-MODULE READING

Section 3 - Contract Law

Introduction An introduction to this text

Why businesses are set up

LPC: BUSINESS LAW AND PRACTICE

8

6.

Remedies available to contracting parties

102

9 17

7. 8.

Principal / agent relationship Commercial contracts - specific issues

105 106

Commercial risk

19

9.

Limitation of actions and execution of agreements

111

Multiple-Choice Questions

21

10. 11.

Further reading Multiple-Choice Questions

113 114

Section 2 - Introduction to Company Law

23

1. 2.

Ownership Management of companies

24 29

Solutions to Self-Assessment Exercises and Multiple Choice Questions

3. 4.

Constitution of a private company limited by shares Formation of a company

30 33

5.

Private, public and listed companies

37

6. 7.

Articles of association Officers of a company

40 45

8.

Duties of directors

56

9. 10.

Board and shareholder resolutions Company procedure

66 73

11.

Summary of main points in relation to meetings

82

12. 13.

Why is it important to follow the correct procedures? Multiple-Choice Questions

83 84

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LPC: BUSINESS LAW AND PRACTICE

PRE-MODULE READING

INTRODUCTION

The areas covered by this workbook are as follows: Considerations when Starting a Business

Section 2:

Introduction to Company Law

Section 3:

Contract Law

These areas form the foundation required for studying Business Law & Practice (‘BLP’) in the Core Practice Areas. It should take you around 12 hours to complete the reading and exercises contained in this workbook. You are required to have completed the reading and exercises contained in this workbook prior to enrolling on the LPC. There is a Solutions section at the end of this workbook which contains solutions to the exercises. You will be required to take a BLP Pre-Module Reading test in the early weeks of the programme. The test will take the form of multiplechoice questions and will have a pass mark of 50%. You will be given further information about completion of this test upon your enrolment. You will be referring back to this workbook throughout your study of BLP, and much of its contents will be examinable for the purposes of the final assessment.

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PRE-MODULE READING

Sections 1 and 2

Please read this. It will help. It puts what is to come into perspective.

Section 1:

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Sections 1 and 2 are designed to give you a broad overview of fundamental corporate principles, so that when you enrol on the LPC you can ‘hit the ground running’ in the first week of your BLP module (as you will be expected to do in the first week of your training contract!). At the same time, the text is designed to be a useful sourcebook to which you can return at appropriate points on the BLP module. After starting the module, you will find it useful to re-read this text in conjunction with other materials, particularly key statutory sources such as the Companies Act 2006 (‘CA 2006’). You will receive your own copies of all relevant statutory material upon enrolment. The statutory references in this text are provided to enable you to look up the statutory provisions later in the module.

Section 3 The contract law reading and exercises in Section 3 are intended to assist you in your revision and application of the contract law principles that you have already studied at degree/GDL level. On the LPC, it will be assumed that you understand the basic contractual principles. Contract law underpins many areas of business law. Every type of business entity enters into contracts in the course of trading. You will also need to understand the contractual relationships within a business itself, particularly between the owners (shareholders) and managers (directors) in a company, and between business partners in a partnership. As you will see if you take certain elective modules (e.g. Debt Finance and/or Private Acquisitions), almost every deal is based on a contract, and other electives (e.g. Commercial Law and Intellectual Property and International Trade and Transactions) look at commercial contracts that clients enter into in the course of trading day-to-day. The principles of contract law will also be relevant to the Civil Litigation and Property Law and Practice Core Practice Areas.

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LPC: BUSINESS LAW AND PRACTICE

PRE-MODULE READING

LPC: BUSINESS LAW AND PRACTICE

PRE-MODULE READING

SECTION 1:

1.

CONSIDERATIONS WHEN STARTING A BUSINESS

Businesses are generally set up to make a profit. A business generates income by selling products and/or services. In order to sell the products and/or services the business will incur certain expenses. Provided the income generated exceeds the expenses of the business, it will make a profit. Once a business has made a profit a proportion of that profit is likely to be given to the owners of the business, and the rest will be retained in the business in order to help it grow.

Legal Practice Course

Learning Outcomes

Why businesses are set up

After completing this Section you should have an appreciation of: 1. 2.

why businesses are set up; the requirement for a business to raise finance;

2.

Finance

3.

the different ways of carrying on a business, including some of the factors influencing the choice of business medium; and the concept of commercial risk.

2.1

Why do businesses need to raise finance?

4.

Answers to the Multiple-Choice Questions are at the back of this workbook.

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A business is likely to need to raise finance for a number of reasons including the following: 

to purchase premises from which to operate, stock, plant and machinery, and computer hardware and software in order to be able to manufacture and sell goods, or provide a service;



to employ staff to make the goods and/or provide the services to customers;



to obtain the advice of professional advisers from time to time, particularly accountants; and



to expand and grow, which it may do by acquiring other businesses, carrying out marketing activities and investing in new premises and equipment.

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LPC: BUSINESS LAW AND PRACTICE

2.2

PRE-MODULE READING

LPC: BUSINESS LAW AND PRACTICE

How do businesses raise finance?

There are four basic ways in which a business can raise money:

Example



the owners of the business may invest in it by making contributions of capital to the business;



outside investors may be prepared to make a capital contribution to the business in order to share in its future profits;



the business may borrow money, for instance, from a bank; and



as already mentioned, a proportion of the profit that the business has generated is likely to be retained within the business to help it grow, rather than being distributed to the owners and investors in the business.



Business media overview



3.

PRE-MODULE READING

You open a newsagent called Daily News. Although you trade as ‘Daily News’, this is merely a name which you use to refer to the shop. There is no legal entity with that name, and each customer enters into a contract with you, in your personal capacity.

Relevant legislation

Unlike partnerships or companies, there is no specific legislation regulating sole traders. They are subject merely to relevant commercial and tax legislation, accounting rules and the common law. Liability to third parties

There are several basic ways in which businesses can be structured. We will look at the most common of these business media in turn below.

Sole traders have unlimited personal liability to third parties.

3.1

Section 1 Partnership Act 1890 defines a partnership as "... the relation which subsists between persons carrying on a business in common with a view of profit.” This is a very wide definition since it applies irrespective of contrary intention. Your client may therefore be conducting business as a partnership without even knowing it.

Sole trader

The simplest business medium is where a sole trader conducts business personally. 

3.2

Partnership

Legal status

The sole trader and the business are one and the same entity, and therefore the business has no legal status or identity of its own. Thus, when a contract is entered into, the sole trader will enter into it in his personal capacity and have unlimited personal liability under it.

There are many different types of partnership. Some involve an informal association between two persons to carry on a business without any express agreement; many family businesses are run in this manner. Others are very large professional and business partnerships with many partners and an elaborate partnership deed. The most common example of this would be a solicitors’ firm.

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LPC: BUSINESS LAW AND PRACTICE



PRE-MODULE READING

Legal status

Whilst partnerships are defined by statute, they have no separate legal identity. The partnership is therefore technically unable to own property or enter into contracts. Instead, where a partnership seeks to do any of the above, it is actually the individual partners who will conduct the legal action in their own name, own the property jointly, and enter into contracts jointly. This means that if the partnership becomes insolvent, the creditors are entitled to satisfy those debts by enforcement against the personal assets of each of the partners themselves.

You and a business associate open a newsagent called Daily News, agreeing (perhaps just orally) to share the profits. You have a partnership. Though the two partners together trade as ‘Daily News’, this is only a name they use to refer to the shop - each customer enters into a contract with the firm (i.e. with both of the partners). Relevant legislation

Partnerships are governed by the provisions of the Partnership Act 1890 together with all other relevant legislation and the common law. 

Liability to third parties

personal liability. A limited partnership requires the involvement of at least two partners: at least one ‘limited’ partner and at least one ‘general’ partner. On 6 April 2017 a new sub-category of limited partnership called a private fund limited partnership was created whereby there is a list of permitted activities in which the limited partners can be involved without being deemed to be involved in management. 

Legal status



Relevant legislation

Limited partnerships are governed by the Limited Partnerships Act 1907 together with all other relevant legislation and the common law. 

Liability to third parties

‘Limited’ partners have limited liability, but only if they are not involved in the day-to-day management of the partnership. If they do become so involved, they lose their limited status and become ‘general’ partners, thereby incurring the usual unlimited personal liability. Example

Partners have unlimited personal liability on either a joint, or a joint and several, basis determined by the nature of the liability. 3.3

PRE-MODULE READING

Like ordinary partnerships, limited partnerships have no separate legal identity.

Example



LPC: BUSINESS LAW AND PRACTICE

Limited partnerships

You and a business associate open a newsagent called Daily News and agree that a partnership structure best suits your needs. Your business associate is providing finance for the venture but will play no part in the management of the business, as such he will be the limited partner and will not be liable for the debts and other

In a limited partnership some partners are not liable for the debts and other liabilities of the partnership. Such partners are known as ‘limited partners’ as distinct from ‘general partners’ who will have unlimited LAW SCHOOL

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LPC: BUSINESS LAW AND PRACTICE

liabilities of the business, while you agree to be the general partner and will have unlimited personal liability.

Example Many law firms have converted from traditional partnerships to LLP structures in recent years.

Please note that this example is used merely to demonstrate the structure of limited partnerships. In practice they are most commonly used as a vehicle for establishing private equity and venture capital funds.

3.4

Limited liability partnership ('LLP')

An LLP is a hybrid as it has the flexibility of a partnership with the added advantage of limited liability for its members. 

Legal status

Legally, the LLP is a body corporate and is treated as a separate legal entity from its members. The LLP may therefore own property, enter into contracts, sue and be sued in its own name. However, for tax purposes, it is treated as a partnership and the members will be taxed as partners, each being liable to pay tax on his/her share of the income or gains of the LLP. 

Relevant legislation

LLPs are governed by the provisions of the Limited Liability Partnerships Act 2000 together with all other relevant legislation and the common law. 

Liability to third parties

The liability of the members of an LLP to third parties is limited to the amount that they have agreed to pay under the terms of their partnership agreement.

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PRE-MODULE READING

3.5

Company limited by shares



Legal status

Like an LLP, a company is an artificial legal person with a separate legal identity from that of its owners. The company may therefore own property, enter into contracts, sue and be sued in its own name. The owners of shares in the company are known as shareholders or members. 

Relevant legislation

Companies limited by shares are governed by the CA 2006 together with all other relevant legislation and the common law. 

Liability to third parties

The shareholders’ liability to third parties is limited to the amount, if any, unpaid on their shares (see example at paragraph 1.5 of Section 2). Example You and a business associate want to open a newsagent called Daily News. Together you incorporate a company called Daily News Limited, in which you each hold shares. This time, each customer will enter into a contract with the company, Daily News Limited, which is a legal person in its own right. Customers will have no contract with the directors or shareholders.

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LPC: BUSINESS LAW AND PRACTICE

3.6

PRE-MODULE READING

Company limited by guarantee



Instead of holding shares, the members of a company limited by guarantee will guarantee that if the company is ever in financial difficulties and is wound up, they will each contribute a certain amount (commonly £1) to the funds to be distributed to creditors. The members’ liability to third parties is limited to the amount guaranteed. As these companies are relatively rare, we will not study them on the LPC. 3.7

Unlimited company

This type of business medium is rare. The fundamental feature of an unlimited company is that the liability of its members is unlimited. We will not be looking at this further on the LPC. 3.8

Joint ventures

A joint venture (‘JV’) is a collaborative, commercial arrangement entered into by two or more parties in order to work together to pursue a common business goal. It is commonly used where one party alone would not have the resources to achieve a goal. It is not strictly a distinct type of business medium since a JV may be structured in one of several ways. The three main ways are: 1.

a limited liability company (‘JVC’);

2. 3.

a partnership, limited partnership or LLP (‘Partnership JV’); or a contractual co-operation agreement (‘Contractual JV’).

In the UK there is no body of law which is applicable exclusively to JVs. Instead, we must look to various sources of law. Depending upon the type of vehicle chosen, company or partnership law will be relevant.

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JVC

The parties to the JV set up a separate limited liability company in which the objects of the JV are to be pursued, the parties each taking shares in the new company. The parties are thus shareholders in the JVC, and are likely to sign a shareholders’ agreement dealing with the establishment of the JVC and their ongoing relationship. The JVC may be owned equally by each of the participants (a ‘deadlock’ company), or it may be controlled by one or more of the participants. If the JV involves a number of parties, a limi...