BLP - Summary Business Law and Practice PDF

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Summaries of key blp concepts...

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Partnerships Partnership Act 1890 S1: a partnership is legally formed when two or more persons carry on a business in common (share responsibility for the business and for decisions which affect the business) with a view to making a profit. S2 PA: Details rules for determining partnerships existence Partners share the right to take part in making business decisions, share asset ownership, share business profits, share unlimited liability for the debts Partnership are advantageous because of the informal nature of partnerships, the commercial secrecy that is possible, and the ability for the partners to claim tax relief for start-up losses. They are disadvantageous because of the unlimited liability. It is possible for a limited liability partnership to be formed, but at least one partner must have unlimited liability

The partnership agreement should detail:  Name  Financial input  Share of profits/losses (in a suitable ratio, with salary considerations for harder-working/sleeping partners  Monthly limit on how much each partner can withdraw, perhaps with provision for periodic review and consequences of exceeding the stated limit  Shares in increase/decrease in asset values  Place and nature of business  Specific agreements as to ownership of assets  Degree of commitment expected from each partner  Work input/hours, roles and functions of each partner  Limitations of each partner  Decision-making  Retirement (only provided for dissolution of entire partnership by PA)  Provision for expulsion, how it will take effect (not provided for by PA)

S24(1) PA: Partners are entitled to equal share in profit/loss, unless otherwise stated S24(2) PA: Partners must indemnify partners who bear more than they are supposed to, financially, as agreed S26 PA: Where no fixed term has been agreed upon for the duration of the partnership, any partner may end the partnership at any time on giving notice of his intention so to do to all the other partners S32 PA: Partnership can be dissolved at the end of an agreed fixed term, or at the end of undertaking it was entered for, by notice to other partners (S26) S33 PA: Indefinite partnership until death or bankruptcy of a partner causes automatic dissolution of the entire partnership (unless otherwise stated) S35 PA: allows court order for dissolution to prevent a partner being “locked into” a partnership S42 PA: if a person ceases to be a partner and others continue in partnership but there is delay in final payment of the former partner’s share, the former partner or his estate is entitled to receive either interest at 5% on the amount of his share or such share of the profits as is attributable to the use of his share. No implied term under PA preventing partner who leaves from competing with the partnership unless restraint of trade clauses is in place. To be valid, the clause must protect a legitimate interest as well as be reasonable and limited to its geographic area. ‘Non-dealing’ and ‘non-solicitation’ clauses are also enforceable. SS28-30 PA: partners must act in utmost good faith, and divulge to one another all relevant information connected with the business and their relationship, be prepared to share with their fellow partners any profit or benefit they receive that is connected with or derived from the partnership without the consent of the other partners; and they must be prepared to share with their fellow partners any profits they make from carrying on a competing business without the consent of the other partners.

Liability within a Partnership:

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If a debt is entered during the course of the firm’s business, partners are liable, under S5 PA. The action must be authorized, through partners jointly making the contract, expressly instructing a partner to make the contract, impliedly accepting the contract, or a partner who has apparent authority to an outsider making a contract (where the transaction is one which relates to the type of business in which the firm is apparently engaged, the transaction is one for which a partner in such a firm would usually be expected to have the authority to act, the other party to the transaction did not know that the partner did not actually have authority to act; and the other party deals with a person whom he knows or believes to be a partner) SS10 and 12 PA: A partner who acts without authority causes his partner(s) to be jointly and severally liable Those who joined after the breach are not liable, unless they are found to have been ‘holding out’, which means a creditor will have relied on representation that a particular person was a partner in that firm. The representation can be oral, in writing or by conduct S12(2) PA: Partners remain liable for debts incurred while they were partners and therefore the terms of purchase of his share in the partnership should include an indemnity clause for debts upon his exit. Therefore, under S36 PA when a partner leaves, he must give notice of leaving – this can be actual notice or an advertisement in the London Gazette. If the reason for ceasing to be a partner is death or bankruptcy (rather than retirement or expulsion), no notice of the event is required (S35(3)) A novation agreement is a tripartite contract involving the creditor of the firm, the partners at the time the contract with the creditor was made and the newly constituted partnership, under which it may be agreed that the creditor will release the original partners from their liability under the contract and instead the firm as newly constituted will take over this liability. A creditor can sue the firm as a group of persons or can sue individually any of the persons who are liable as partners. If the creditor has obtained judgment against a partner individually and that partner cannot pay, the creditor is then at liberty to commence fresh proceedings in order to obtain judgment against the firm. Even if the firm cannot pay out of its assets, either because it cannot raise the cash to do so or because its assets in total are insufficient to meet its liabilities in total, judgment against the firm can be enforced against the private assets of any person liable as a partner. If the claim of the creditor cannot be

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satisfied in any of these ways, it follows that the firm is insolvent and all of the individuals liable as partners are also insolvent, so that insolvency proceedings are likely to follow.

Separate Legal Personality

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This principle dictates that a company has separate legal personality and the members of a limited company have limited liability. The company incurs debts in its own name and if it cannot pay off its debts, creditors will not be paid. The directors have limited liability to the amount they put in and cannot be sued personally or held personally liable. A company is born on incorporation via the Companies Act 2006 and lives until it is wound up or liquidated

Liability can be obtained through assurance of a guarantee on the directors’ personal assets, which sidesteps the veil through use of contract law During liquidation, according to the Insolvency Act 1986, directors can be ordered to pay money to the company if they continue trading when they know they should not be – this is also sidestepping the veil Because of the limited liability, companies are obligated to make info such as shareholder identity, director identity, constitution, accounts, publicly available A group of companies may be used to lessen the risks of a business failure by taking advantage of separate legal personality despite the fact that they are ultimately all owned by the same shareholders, i.e. the shareholders who own the parent company also indirectly own the subsidiary companies. This means that one company failing will not lead to more than that one company suffering. In Chandler v Cape plc [2012] a parent company was held liable for the asbestos-induced illness of an employee of its subsidiary company. The Court of Appeal established a number of principles for deciding the circumstances in which a parent company will be liable for the subsidiary’s actions in health and safety matters.

Company Constitution

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Articles of association lay out rules on how company is to be run. The Companies Act allows some of the provisions of the Model Articles to be excluded/amended. If no AOA is provided, the model articles are followed Directors are appointed upon incorporation. They must be at least 16. If they continue to act as one after disqualification, it is a criminal offence The shareholders cannot amend the articles so as to conflict with a mandatory provision of the CA 2006 21 states that all shares must be fully paid upon purchase 14 states that directors with personal interest in transactions cannot vote/participate in board meetings they have personal interest in. S175 CA also prevents conflict of interest – this can be amended via model articles Some companies may wish to amend model articles to allow for: more than one director as minimum, protocol in the event of the absence of a director, detailed powers of a company secretary, removal of pre-emption rights 33 provides a means for a shareholder to take action against the company or against another shareholder for breach of his contractual rights as set out in the articles S31 CA states that a company has unrestricted powers unless the shareholders specifically choose to place a restriction in the articles, such as that the company shall not borrow more than £50,000 Shareholders must pass a special resolution (passed by a majority of 75% or more) to change the articles, and the Registrar of Companies must be sent an amended copy no later than 15 days after the amendment takes effect as well as the special resolution itself, 15 days after it has passed. Generally, the shareholders can make a change to the articles only if it is ‘bona fide for the benefit of the company as a whole. However, objectively, there may be amendments to the articles which cannot be said to benefit the company as a whole. Usually such cases involve the situation where the intention behind amending the articles was to discriminate against minority shareholders rather than to benefit the company as a whole

An ordinary resolution requires 50% or more

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S355(2) of the CA 2006 requires a company to keep a record of the proceedings of shareholders’ meetings for 10 years. An attempt by the shareholders to include a provision in the company’s articles reducing this period to one year would be void and would in fact be a criminal offence under S355 CA.

S22 CA allows for entrenched articles – this makes the article harder to overturn. However, S22(3) permits an entrenched article to be amended by agreement of all the company’s shareholders, or by order of the court, even if the conditions in that article are not met.

Shareholders

Under the Register of People with Significant Control Regulations 2016, there are three different levels of significant control which need to be notified and which need to be included in the PSC register: (1) where the person holds more than 25% but not more than 50% of the shares in the company (2) where the person holds more than 50% but less than 75% of the shares in the company (3) where the person holds 75% or more of the shares in the company. S790E(5) the company must include this information on the PSC register within 14 days from the day after it becomes aware of a change or has reasonable cause to believe there has been a change.

If the secretary is appointed upon registration, she must be named on the statement of proposed officers. New secretaries will be appointed through a directors’ board resolution. The directors may remove the secretary at any time, depending on her contract. Secretaries may also resign. Private companies do not have to have a secretary, but public companies do. The company secretary of a public company has to be qualified as specified in S273 CA – this includes having the requisite knowledge and experience. The duties commonly assigned to a company secretary are to write up the minutes of board meetings and general meetings to keep up to date the company’s

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internal registers and to send the necessary returns to the Registrar of Companies.

250(1) CA defines ‘director’ as including any person occupying the position of director by whatever name called. An executive director has a service contract and works for the company fulltime. The BOD may delegate their powers by appointing a Chief Executive Director/Managing Director, who will act as if they were a whole board of directors Art 5 allows directors to delegate powers to positions as they see fit, which allows for appt of MD A non-executive director is a type of director who does not participate in dayto-day business and merely votes/attends board meetings. He does not have a contract of employment and receives renumeration in directors’ fees – this role is suitable to shareholders with no business experience. They can however still be liable to the companies for breaches such as directors’ duties Directors have power under the articles to appoint themselves as chairman – they will then lead the board meetings/shareholders GMs. Chairman powers are defined by articles. Model articles give Chairman the casting/deciding vote in the event of deadlock. The Chairman is appointed by passing a board resolution – this may be taken away at any time Shadow directors are people who give instructions to the directors of a company where those directors are accustomed to act in accordance with his directions or instructions (S251(1) CA) – they have not been formally appointed, but they influence the director’s decisions. However, directors’ duties (S171-177 CA) also apply to shadow directors. In Smithton Ltd v Naggar and others [2014] the Court of Appeal held that re: determining the existence of a shadow director: • The question is whether he has assumed responsibility to act as a director • The question whether or not he acted as a director must be determined objectively. It does not matter whether the individual thought he was acting as a director

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• Whether the company considered the individual to be a director and held him out as such, and whether third parties considered that he was a director, are, however, relevant factors • The court must look at the acts in their context and determine their cumulative effect • The fact that a person is consulted about directorial decisions, or is asked for approval, does not in general make him a director because he is not making the decision. Corporate directors are company that acts as a director. In practice, of course, for this system to work a human must act on behalf of the corporate director. However, because of S155(1) CA, which requires every company formed under the CA 2006 to have at least one human appointed as a director, a corporate director can be appointed only in private companies with at least two directors or in a public company. A director disqualified under the Company Directors Disqualification Act 1986 will commit a criminal offence under S13 of that Act if he acts a director of a company during the period of the disqualification. S11 CDDA: An undischarged bankrupt cannot act as a director of a company If a company appoints a director by director BM, then he only remains director until the next AGM, at which point he must be re-appointed, only if the shareholders pass an Ordinary Resolution. This must be notified to Companies House within 14 days Art 17 states appointing a new director involves passing either an ordinary resolution of the shareholders in general meeting, or a board resolution of the existing directors. The company must make a statement on behalf of a person seeking appointment as a director, indicating his consent to act as a director (CA 2006, s 167(2)(b))

The practical impact of the directors’ management role as stated in the company’s articles is that the shareholders do not generally get involved in the day-to-day running of the company. Once the directors have been given a certain power, that power then belongs to the board and it cannot generally be exercised by the shareholders instead.

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Art 7 calls for BM for directors’ decisions, however art 8 states that this is unnecessary in the case of unanimous decision-making, making this decision communication as potentially informal as a text. Shareholders only need to become involved in decision-making (through a GM) when they are needed, e.g. to change company articles. The power under art 3 given to directors to exercise all power in the company is made subject to the remaining articles, e.g. under art 4, where shareholders have the power to direct directors on what to do by special resolution. Directors may be removed by ordinary resolution.

A company must keep adequate accounting records under S386(1) CA, otherwise it commits an offence. It is the directors’ responsibility to ensure that full accounts are produced for each financial year S394 CA. These accounts must give a ‘true and fair view of the state of affairs of the company as at the end of the financial year’ 396(2)) CA. The directors must not approve the accounts unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position, and profit and loss of the company S393(1) CA. By S415 CA, every company must prepare a directors’ report for each financial year to accompany the accounts. The accounts, directors’ report and, if required, auditors’ report must be circulated to every shareholder in accordance with S423(1) CA. This is the directors’ responsibility. S417 CA requires the directors’ report to include a business review which contains a balanced and comprehensive review of the development and performance of the company’s business, the risk and uncertainties faced, and the position of the business at the end of the financial year. This does not apply to ‘small’ companies.

Under S441 CA, companies must also file the accounts and directors’ report for each financial year at Companies House. However, so-called ‘micro-entities’, ‘small’ and ‘medium-sized’ companies may file an abbreviated version of the year-end accounts (Small Companies (Micro-Entities’ Accounts) Regulations 2013, CA2006, S444 and S445 respectively).

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A micro-entity is defined in S384A CA as one which satisfies at least two of the following requirements: (a) annual turnover: not more than £632,000 (b) balance sheet total: not more than £316,000 (c) number of employees: not more than 10.

A small company is defined in s 382(3) CA as one which satisfies at least two of the following requirements: (a) annual turnover: not more than £10.2 million (b) balance sheet total: not more than £5.1 million (c) number of employees: not more than 50.

A medium-sized company is defined in s 465(3) of the CA 2006 as one which satisfies at least two of the following requirements: (a) annual turnover: not more than £36 million (b) balance sheet total: not more than £18 million (c) number of employees: not more than 250. 124 The time limit for filing accounts is nine months from the end of the accounting reference period for a private company (CA 2006, s 442(2)).

Appointing a director:

The board of directors will be empowered under the company’s articles to enter into a service contract with a director on behalf of the company.

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Art 3 allows directors to exercise all power in the company and therefore the board will decide the terms of each directors’ service contract, including the director’s responsibilities, any authority the director is to have to act on behalf of the board, and the amount of salary and benefits to be paid. When a service contract is being discussed and voted upon at a board meeting, if the director who is to be awarded the service contract has already taken up office, although a formal declaration to the board of a personal interest will not normally be necess...